<PAGE>
As filed with the Securities and Exchange Commission on September 6, 2000
Registration No. 333-447772
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CATALYTICA COMBUSTION SYSTEMS, INC.
(Exact Name of Corporation as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 3629 77-0410420
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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Catalytica Combustion Systems, Inc.
430 Ferguson Drive
Mountain View, Ca 94043-5273
(650) 960-3000
(Address, including zip code, and telephone number, including area code,
of Catalytica Combustion Systems, Inc.'s principal executive offices)
CRAIG N. KITCHEN
President and Chief Executive Officer
Catalytica Combustion Systems, Inc.
430 Ferguson Drive
Mountain View, CA 94043-5273
(650) 960-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
August J. Moretti
Kyle Guse
Heller Ehrman White & Mcauliffe
2500 Sand Hill Road, Suite 100
Menlo Park, California 94025-7063
Telephone: (650) 234-4229
Facsimile: (650) 234-4299
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Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness 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 of 1933, please check the
following box and list the Securities Act registration 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 of 1933, 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: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Offering Amount of
Title of Securities to be Registered Price(1) Registration Fee(2)
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<S> <C> <C>
Common Stock, par value $0.0005........ $65,586,000 $17,315
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(f) under the Securities Act of 1933,
as amended. In accordance with SEC Staff Legal bulletin No. 4 dated
September 16, 1997, the proposed maximum aggregate offering price is based
on the pro forma book value of the assets of the registrant as of June 30,
2000.
(2) Amount previously paid. --------------
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 or until the registration statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(A), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be distributed until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This preliminary prospectus is not an offer to sell nor does it seek an offer +
+to buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION. DATED SEPTEMBER 6, 2000.
Catalytica Combustion Systems, Inc.
15,000,000 Shares
Common Stock are being distributed
to the Stockholders of Catalytica, Inc.
-----------
Prior to the distribution there has been no public market for our common
stock. We have applied to list our common stock on the Nasdaq National Market
under the symbol "CATX".
Neither we nor Catalytica will receive any proceeds from this distribution.
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9 to read about factors you should consider.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
Delivery of the common stock will be made on or about , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Business Summary......................................................... 4
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 15
The Distribution......................................................... 16
Reasons for the Distribution............................................. 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Selected Combined Financial Data......................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Unaudited Pro Forma Combined Financial Information....................... 41
Management............................................................... 44
Material United States Federal Income Tax Considerations................. 54
Related-Party Transactions............................................... 57
Arrangements Between Us and Catalytica................................... 59
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 66
Validity of Common Shares................................................ 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 67
Index to Financial Statements............................................ F-1
</TABLE>
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these 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.
<PAGE>
PROSPECTUS SUMMARY
You should rely only on the information contained in this document regarding
the distribution. We and Catalytica have not authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. Catalytica is not
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects
may have changed since that date.
Unless otherwise indicated, all references in this prospectus to "we,"
"our," "us," "Combustion Systems" and "CCSI" are to Catalytica Combustion
Systems, Inc. All references to Catalytica and "parent" are to Catalytica, Inc.
Unless otherwise noted, all references to shares and per share amounts assume
that a two-for-one stock split is effectuated prior to the distribution. Unless
otherwise noted, all information in this prospectus assumes that all of our
outstanding preferred stock is converted into common stock on a one-for-one
basis prior to the distribution.
Why This Prospectus Was Sent to You
In March 2000, our largest stockholder Catalytica, announced its intention
to conduct an initial public offering of our stock as the first step in our
becoming an independent public company. Subsequently, as part of Catalytica's
strategic plan to maximize value for its stockholders, the board of Catalytica
agreed to sell Catalytica to Synotex Company, Inc., a subsidiary of DSM N.V.
Prior to the Catalytica merger, Catalytica Advanced Technologies, a wholly
owned subsidiary of Catalytica, will be combined with us. Immediately prior to
the Catalytica merger, all of our shares of common stock owned by Catalytica
will be distributed to its stockholders. This prospectus describes the
relationship between us and Catalytica, our business, and also provides other
information to assist you in evaluating the benefits and risks of holding or
disposing of your shares of our common stock.
This prospectus is being delivered by Catalytica to you because you were an
owner of Catalytica common stock on the record date set by Catalytica for its
stockholder meeting to consider the Catalytica merger. This prospectus will
also be sent to Catalytica stockholders as of the record date for the
distribution of our common stock as described in this prospectus. As described
in the proxy statement related to the merger, you are entitled to receive cash
and a distribution of [ ] share of the common stock of Catalytica Combustion
Systems, Inc. for each share of Catalytica common stock owned by you on that
date. Although no action is required on your part to cause this to happen, the
distribution of this cash and these shares to you will have important tax and
other consequences, so please read the information in this document carefully.
The distribution and the merger will occur concurrently so that following the
distribution and merger your shares of Catalytica common stock will be
cancelled and you will receive our common stock and cash.
You should read the following summary together with the more detailed
information about our company, our common stock and our financial statements
and notes to those statements appearing elsewhere in this prospectus.
Summary of the Distribution
Relationship Between us and Catalytica
Catalytica owns approximately 15 million, or approximately 85%, of our
outstanding shares of common stock. See "Principal Stockholders." Prior to the
distribution, Catalytica currently intends to purchase an additional $50
million of our common stock, which would result in Catalytica owning 85% to 88%
of our common stock at the time of the distribution. The merger agreement with
Synotex requires the distribution of
3
<PAGE>
our common stock immediately prior to and in connection with the merger.
Catalytica will have no ownership interest in us after the distribution. After
thorough consideration, the board of directors of Catalytica determined that
the overall transaction including the distribution of our shares is in the best
interest of the stockholders of Catalytica.
The Distribution
All shares of our common stock held by Catalytica are being distributed pro-
rata to the Catalytica stockholders as described in this prospectus. We
currently estimate that you will receive between .25 and .29 of a share of our
common stock for every share of Catalytica common stock held. The number of
shares of our common stock to be distributed to each Catalytica stockholder
will be based upon the number of shares of Catalytica common stock outstanding
on the record date for the distribution. Since the precise record date is
expected to be the closing date of the Catalytica merger, which will not be
determined until immediately prior to the merger, the number of shares that you
will receive cannot be established until that date.
Distribution and Transfer Information. Synotex will designate a bank or
trust to act as paying agent. The paying agent will mail a letter of
transmittal to Catalytica stockholders beginning as soon as possible after the
date of the merger. The letter of transmittal will outline the procedure by
which the Catalytica stockholders will surrender their stock certificates for
their cash merger consideration and shares of our common stock.
Record Date for the Distribution. The record date for the distribution will
be the close of business on , 2000.
No Fractional Shares. We will not distribute fractional shares of common
stock. Fractional shares will be aggregated and sold by the distribution agent
to provide cash to holders in lieu of such fractional shares.
Trading Market. We have applied to have our common stock included for
quotation on the Nasdaq National Market under the symbol "CATX."
Tax Treatment of the Distribution
The distribution and the merger will be taxable transactions to you for
United States federal income purposes and possibly state, local and foreign
purposes as well. A summary of the material United States federal income tax
consequences of the distribution and the merger appears at pages 54 of the
prospectus.
Investor Contact
If you have questions about the distribution you should contact Jackie
Cossmon,Vice President of Investor Relations for Catalytica, at Catalytica's
principal executive offices at 430 Ferguson Drive, Mountain View, California
94043; telephone (650) 960-3000.
Business Summary
Catalytica Combustion Systems' Business
We develop proprietary technologies that use catalysts to essentially
eliminate the formation of harmful pollutants and improve the performance of
hydrocarbon combustion systems such as gas turbines. Catalysts enhance the rate
and thoroughness of chemical reactions, such as combustion, but are themselves
unchanged. We have developed Xonon (pronounced "Zo non") Cool Combustion, a
breakthrough combustion technology that achieves stable combustion at lower
temperatures to avoid the formation of chemical pollutants without diminishing
combustion efficiency. We have now begun to manufacture and market products
that incorporate this technology.
4
<PAGE>
We are initially applying our technology in gas turbines used for electric
power generation and gas pipeline compression. We are targeting the gas turbine
market because we believe that it offers the greatest potential for commercial
sales growth. We believe the changes under way in the electric power industry
will result in increased demand for the benefits offered by the Xonon
combustion system.
Prior to the distribution, Catalytica Advanced Technologies, Inc., a wholly
owned subsidiary of Catalytica, will be merged into us. Catalytica Advanced
Technologies is primarily in the business of developing new catalytic
technologies in a number of areas. Areas of current focus are fuel processing
technology for fuel cells, including the reforming of gasoline and natural gas,
and improved catalytic processes employing high throughput testing and computer
learning technologies.
Our Product
In conventional combustion systems, a flame is used to combust the fuel. The
temperature required to sustain a stable flame is significantly higher than the
temperature at which the turbine is designed to operate. This excessive
temperature causes the nitrogen and oxygen in the air to react, forming
nitrogen oxides (NOx), a major contributor to air pollution.
Our Xonon Cool Combustion technology combusts fuel flamelessly. This process
releases the same amount of energy as flame-based combustion systems, but at a
lower combustion temperature. Importantly, this temperature is below the
threshold at which NOx is produced. The Xonon combustion system is the only
operating catalytic combustion system for gas turbines and the only gas turbine
combustion system demonstrated to achieve near-zero emissions.
We collaborate with gas turbine original equipment manufacturers, called
OEMs, to adapt their combustion systems to incorporate Xonon Cool Combustion
technology. We believe that we and the OEMs can design the Xonon combustion
system to suit any size and type of gas turbine. For each turbine model that an
OEM agrees to pursue, we would design a catalytic Xonon module, the key
component of the Xonon combustion system, to fit directly into the turbine
combustor(s). We then would manufacture the custom-designed Xonon modules which
the OEMs incorporate as an integral part of their product. The Xonon modules
would have an expected life of approximately one year of continuous operation
and would be replaced during regular, scheduled maintenance over the life of
the turbine. We expect to derive our revenue principally through the sale of
Xonon modules to OEMs for use in both new and previously installed gas turbines
as original equipment and for routine replacement.
The Market Need
Gas turbines have emerged as the solution of choice for new power generation
due primarily to their inherent operating flexibility, high efficiency,
relatively low capital and installation costs, and overall cleanliness relative
to other generation alternatives. Cambridge Energy Research Associates, an
independent industry research firm, estimates that gas-fired generation will
account for 97% of all U.S. generation capacity additions between 1999 and
2004. We believe that a portion of these electric generation projects may
require a "dual fuel" option, meaning the ability to be powered either by
natural gas or by an alternative liquid fuel.
Despite the advantages of gas over other fuel alternatives, emissions from
gas-fired generation remain a concern. In order to reduce emissions, gas
turbine manufacturers have developed improved flame-based combustion systems,
the most advanced of which is the lean pre-mix (LPM) system. However, in some
cases these measures have contributed to premature component failure and
reduced gas turbine reliability. Even the most effective LPM systems cannot
achieve near-zero emissions levels, and additional devices such as exhaust
cleanup systems are often required. Exhaust cleanup systems add significant
capital and operating costs, reduce overall project performance and efficiency
and can create incremental health risks through secondary emissions
5
<PAGE>
and the transportation and storage of toxic reagents. In addition, exhaust
cleanup systems cannot be used in all gas turbine applications.
We believe that the introduction of a technology that can cost-effectively
achieve near-zero emissions across all turbine applications will create
significant value for turbine end-users by enabling them to better respond to
the demands of the changing energy industry.
The Xonon Cool Combustion Solution
Xonon Cool Combustion technology has several key benefits when compared to
conventional gas turbine combustion and emissions reduction systems. Xonon Cool
Combustion technology:
. Essentially eliminates the formation of NOx;
. Reduces emissions of carbon monoxide and unburned hydrocarbons;
. Avoids the use of costly exhaust cleanup systems;
. Maintains gas turbine combustion efficiency;
. Reduces the potential for premature component failure; and
. Broadens the range of gas turbine applications.
As a result, Xonon Cool Combustion technology should significantly increase
flexibility in siting, permitting, and operating gas turbines. Xonon-equipped
turbines can be put into service in densely populated areas where environmental
concerns may have previously prevented gas turbines from being used.
Strategic Relationships
General Electric. GE Power Systems, an operating division of General
Electric Company, is the leading manufacturer of gas turbines in the world. We
have been working with GE Power Systems to develop Xonon-equipped gas turbines
since 1991. In November 1998, we signed an agreement under which we and GE will
develop the Xonon combustion system components for selected models of GE gas
turbines and we are required to supply Xonon modules for initial turbine
installation and periodic replacement. The agreement also requires GE to market
the Xonon combustion system under the Xonon brand. This agreement is initially
being applied to the 10 MW GE10 turbines manufactured by GE's Nuovo Pignone
subsidiary and GE Power Systems' 170 MW 7FA turbines. We are now developing and
are testing Xonon modules for incorporation into GE's E class gas turbines such
as the GE10. We are also undertaking development and testing of enabling
technology required to facilitate the incorporation of Xonon into GE's F class
turbines, such as the 7FA, which operate at a higher firing temperature.
Enron Corp. In January 1998, Enron announced that it would evaluate the use
of the Xonon combustion system in certain of its future wholesale power
generation, distributed power generation, and pipeline compressor projects. At
the same time, Enron Ventures, a wholly-owned subsidiary of Enron, purchased
approximately 1.3 million shares of our Series B preferred stock (2.6 million
on an as-converted to common stock basis) for $30.0 million, representing a 15%
equity interest. Enron also received a three-year option to purchase up to an
additional 1,071,430 shares (on an as-converted to common stock basis). As part
of Enron's investment, Thomas E. White, Vice Chairman of Enron Energy Services,
joined our Board of Directors.
Other OEMs. We currently have development agreements with Solar Turbines (a
subsidiary of Caterpillar, Inc.) and Rolls Royce. We are in discussions with a
number of additional turbine OEMs including Kawasaki and Pratt & Whitney
Canada.
6
<PAGE>
Orders to Date. In April 2000, Alliance Power, an independent project
developer, entered into a preliminary agreement for the purchase of six Xonon-
equipped GE10 10 MW gas turbines from Nuovo Pignone, a subsidiary of GE. In May
2000, Kawasaki and Enron Energy Services announced their intent to furnish
three Xonon-equipped Kawasaki M1A-13X 1.5 MW gas turbines for a distributed
generation project. In December 1999, Enron North America ordered four GE 7FA
170 MW gas turbines specifying Xonon as the preferred emissions control system.
None of these four 7FA turbines will be shipped with Xonon, however, unless
that system is developed in time.
Our Strategy
Our goal is to make Xonon the preferred combustion solution for gas turbines
and other applications. Our strategy for achieving this goal is as follows:
. Continue to Develop our OEM Relationships. We intend to develop and sell
Xonon combustion systems through OEMs. We plan to work with current OEM
partners to expand the availability of Xonon in their product lines, and
with additional OEMs to incorporate Xonon in their gas turbines.
. Market Currently Offered Xonon-equipped Gas Turbines. During the initial
stages of commercialization, we are working with our OEM partners and
are participating in the early stages of discussions related to their
gas turbine orders.
. Establish and Promote Xonon Brand Awareness. We believe that increased
awareness of the Xonon combustion system and its benefits among end-
users will accelerate OEMs' incorporation of Xonon combustion systems
across their product lines. We expect to actively promote awareness of
Xonon combustion systems to a broad audience and to establish brand
awareness by targeting our marketing and product development activities
to demonstrate the range of Xonon's benefits.
. Aggressively Defend Our Intellectual Property and Broaden Our Technology
Base. Both our accumulated experience and our intellectual property base
place us at a considerable advantage relative to other potential
developers of catalytic combustion and competing technologies. We intend
to continue technological development and to vigorously defend our
intellectual property.
. Expand the Applications of Our Technology. We believe our technology can
be implemented in many additional applications including diesel engines,
micro-turbines and hybrid fuel cell power systems. We expect to continue
research and development in these areas where technical and commercial
factors appear encouraging.
We were incorporated in Delaware in June 1995 as a wholly-owned subsidiary
of Catalytica. Our principal executive offices are located at 430 Ferguson
Drive, Mountain View, California 94043-5273. Our telephone number at that
location is (650) 960-3000. Our web site is http://www.catalytica-
combustion.com. This web site address is subject to change. The information
found on our web site is not part of this prospectus.
Xonon(TM), Cool Combustion(TM) and Catalyst Development Engine(TM) are
trademarks of Catalytica Combustion Systems, Inc. This prospectus also refers
to trademarks and trade names of other organizations.
7
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months
ended June
Year ended December 31, 30,
-------------------------------------------- ----------
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Combined Statement Of
Operations Data:
Research and development
contracts.............. $ 4,229 $ 5,934 $ 5,139 $ 6,279 $ 3,053 $ 2,433
Costs and expenses:
Research and
development(1)....... 6,051 6,451 6,009 9,313 9,627 4,244
Costs associated with
discontinued product
line................. 2,143 268 -- -- -- --
Selling general and
administrative....... 591 708 671 1,269 4,781 2,068
------- ------- ------- ------- -------- -------
Total costs and
expenses........... 8,785 7,427 6,680 10,582 14,408 6,312
------- ------- ------- ------- -------- -------
Operating loss.......... (4,556) (1,493) (1,541) (4,303) (11,355) (3,879)
Loss on joint venture... -- -- (4,355) (3,826) (1,133) --
Interest income......... -- -- -- 1,409 1,041 496
Interest expense........ (41) (114) (374) (177) (278) (200)
------- ------- ------- ------- -------- -------
Net loss(2)............. $(4,597) $(1,607) $(6,270) $(6,897) $(11,725) $(3,583)
======= ======= ======= ======= ======== =======
</TABLE>
In the "pro forma" column below, we have adjusted the actual balance sheet
data to give effect to the distribution of our stock by Catalytica prior to the
merger of Catalytica with Synotex and to give effect to related transaction
expenses.
<TABLE>
<CAPTION>
December 31 June 30, 2000
--------------- -----------------
1998 1999 Actual Pro forma
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Summary Combined Balance Sheet:
Cash, cash equivalents and short-term
investments................................ $22,847 $16,032 $12,906 $57,906
Total assets................................ 28,520 19,840 17,807 65,586
Total stockholders' equity.................. 24,137 12,552 9,049 61,877
</TABLE>
--------
(1) See Note 2 to the financial statements.
(2) Since the combined entity does not have a formal capital structure, loss
per share information has not been presented.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before you decide
to hold or sell our common stock. If any of the following risks were to occur,
our business, financial condition or results of operations could suffer. In
that event, the trading price of our common stock could decline, and you may
lose all or part of your investment.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our company and our
industry. These forward-looking statements involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, as more fully
described below and elsewhere in this prospectus.
Risks Related to Our Business
We are an early stage company and your basis for evaluating us is limited
Our activity to date has consisted of developing the Xonon Cool Combustion
technology and designing products for its commercialization. We do not expect
to ship our Xonon modules until at least 2001. Catalytica Advanced
Technologies is also in the early stages of development. Accordingly, there is
only a limited basis upon which you can evaluate our business and prospects.
Since we are an early stage company, our revenues will initially be low
relative to the size of likely orders and may therefore vary significantly
from quarter to quarter. An investor in our common stock should consider the
challenges, expenses and difficulties that we will face as an early stage
company seeking to develop, manufacture and sell a new product.
We have incurred losses and anticipate continued operating losses through at
least 2003
As of June 30, 2000, we had an accumulated deficit of $47.5 million. We
have not achieved profitability and expect to continue to incur net losses
until we can produce sufficient revenues to cover our costs. We expect to
incur operating losses through at least 2003. Even if we do achieve
profitability, we may be unable to sustain or increase our profitability in
the future.
We must successfully complete further development work before Xonon-equipped
gas turbines can be shipped
Incorporating our technology in each gas turbine model will require
adaptation work by us and the OEM, such as additional engineering work and,
for some turbines, technology development. In most cases, that work has not
yet been completed. For example, we have not yet completed the development of
Xonon required to integrate it into the GE 7FA gas turbine. The GE 7FA gas
turbine operates at a higher firing temperature than other gas turbine models
for which we and GE have done more extensive adaptation work. The remaining
work for the 7FA and possibly other gas turbine models may involve significant
technical risks, and may extend over several years. We may not be successful
in adapting Xonon technology to particular gas turbine models, and even if we
are successful, the development work may result in delays in commercial
shipment. Under the terms of our collaborative commercialization and license
agreement with GE, GE may terminate the agreement at any time if it determines
that there are significant technical issues which indicate that the technical
objectives of the Xonon commercialization program are not achievable or cannot
be achieved within the timetable established for the program.
Given the long lead times for gas turbine orders, we expect that OEMs will
take initial orders for Xonon-equipment turbines prior to completion of the
development work, and that these initial orders will take into account the
attendant risks. For example, for Enron North America's December 1999 7FA
order specifying Xonon as the preferred emissions control system, GE and Enron
have the right to substitute alternative emissions control technology for any
of these gas turbines for any reason, including in the event the Xonon
combustion
9
<PAGE>
system cannot be developed or has not been developed in time to support Enron
North America's project schedule. In that case, we would lose the revenue
associated with these orders.
We are heavily dependent on our relationships with OEMs and their commitment
to adopt and market Xonon technology on their gas turbines
Substantially all of our revenue for the foreseeable future will be derived
from sales of Xonon modules to manufacturers of gas turbines for use in their
new and installed turbines. We have ongoing programs with several OEMs which
are in various stages of incorporating our Xonon technology into, or
evaluating our Xonon technology for incorporation into, their gas turbine
product lines. These and future OEMs may decide not to continue the
development and commercialization of Xonon combustion systems for their gas
turbines.
Our agreements with OEMs generally provide the OEM with the right to be the
sole market channel for distribution of Xonon combustion systems in that OEM's
gas turbines under contract. A decision by an OEM not to continue with the
commercialization of Xonon combustion systems in its product line could
significantly limit our access to the market for that OEM's turbines.
Our ability to sell Xonon modules for those gas turbines for which Xonon
combustion systems become commercially available is heavily dependent upon the
OEMs' marketing and sales strategies for Xonon combustion systems and their
worldwide sales and distribution networks and service capabilities. Any
decision on their part to limit, constrain or otherwise fail to aggressively
market and sell Xonon combustion systems, including limiting their
availability or pricing them uncompetitively, could harm our potential
earnings by depriving us of full access to their market.
If the initial orders for Xonon-equipped turbines do not ship, our reputation
and future prospects could be adversely affected
Although our OEM customers have received initial orders for Xonon-equipped
gas turbines, we cannot assure you that these orders will ultimately be
shipped. There are many reasons why these orders might not ship, including:
. A failure by us and the OEM to complete necessary development, design
and adaptive work;
. A decision by the OEM not to include Xonon-based systems in its
turbines, or in a particular turbine model, for commercial or other
reasons; and
. Cancellation of the OEM's turbine order by the end-user, due to its
inability to obtain permitting, or for commercial or other reasons.
If the initial announced orders for Xonon-equipped turbines do not
ultimately ship, then, depending on the stated reasons for cancellation and
market perceptions of the cancellation, our reputation and future prospects
could be adversely affected.
Xonon-equipped gas turbines may never attain market acceptance
Xonon-equipped gas turbines represent an emerging market. If Xonon Cool
Combustion technology does not attain market acceptance, end-users may not
want to purchase turbines equipped with Xonon modules. If a significant
commercial market fails to develop or develops more slowly than we anticipate,
we may be unable to recover the losses incurred to develop our product and may
be unable to achieve profitability. The development of a commercial market for
our systems may be impacted by factors which are out of our control,
including:
. The cost competitiveness of the Xonon combustion system;
. A significant drop in demand for new gas turbines;
. The future costs of natural gas and other fuels;
10
<PAGE>
. Changing regulatory requirements;
. The emergence of more effective technologies and products; and
. Changes in federal, state or local environmental regulations.
We have not yet developed Xonon systems for "dual fuel" turbines, which may
account for a portion of our market
We believe that a portion of new electric generation projects may require
turbines powered by natural gas and an alternative liquid fuel. These turbines
are known as "dual fuel." We do not know what portion of the market dual fuel
turbines may represent in the future. Xonon is in the development stage for
use in dual fuel turbines, and we have not undertaken the adaptation work for
any particular turbine models. The necessary adaptation work for specific
turbine models may delay availability, or even be unsuccessful, which could
adversely affect our sales.
We have no experience manufacturing Xonon modules on a commercial basis
To date, we have focused primarily on research and development and have no
experience manufacturing Xonon modules on a commercial basis. We have
constructed a 3,000 square foot manufacturing facility and we are continuing
to develop our manufacturing processes. We may not be able to develop
efficient, low-cost manufacturing capability and processes that will enable us
to meet the quality, price, engineering, design and production standards or
production volumes required to manufacture Xonon modules on a commercial
scale. We may also encounter difficulty purchasing components and materials,
particularly those with long lead times. Even if we are successful in
developing our manufacturing capability and processes, we do not know whether
we will do so in time to meet our product commercialization schedule or to
satisfy the requirements of our customers.
We are dependent on third party suppliers for the development and supply of
key components for our products
We have recently entered into commercial arrangements with suppliers of the
key components of our systems. We do not know, however, when or whether we
will secure arrangements with suppliers of other required materials and
components for our Xonon modules, or whether these arrangements will be on
terms that will allow us to achieve our objectives. If we fail to obtain
suppliers of all the required materials and components for our systems, our
business could be harmed. A supplier's failure to supply materials or
components in a timely manner, or to supply materials or components that meet
our quality, quantity or cost requirements, or our inability to obtain
substitute sources of these materials and components on a timely basis or on
terms acceptable to us, could harm our ability to manufacture our Xonon
modules.
We rely on only one supplier for a number of our components. Some of our
suppliers use proprietary processes to manufacture components. Although
alternative suppliers are available, a switch in suppliers could be costly or
time consuming.
Significant price increases in key materials may reduce our gross margins and
profitability
The prices of palladium and platinum, which are used in the production of
Xonon modules, can be volatile. If the long-term costs of these materials were
to significantly increase we would, in addition to recycling materials from
returned modules, attempt to reduce material usage or find substitute
materials. If these efforts were not successful and if these cost increases
could not be passed onto the customers of Xonon modules, then our gross
margins and profitability would be reduced.
Our success depends on the continued demand for gas turbines
A significant portion of the market for Xonon combustion systems will
result from the purchase and installation of new Xonon-equipped gas turbines.
If the market for gas turbines significantly declines, the demand
11
<PAGE>
for Xonon combustion systems could be reduced. The market for new gas turbines
has historically been cyclical in nature. If this pattern continues in the
future, then during periods of low demand the portion of our business derived
from new turbine sales will decline.
Competition from alternative technologies may adversely affect our
profitability
The market for emissions reduction is intensely competitive. There are
alternative technologies which, when used in combination, could reduce gas
turbine emissions to levels comparable to or lower than Xonon-equipped gas
turbines. These technologies include lean pre-mix combustion systems, which
are used in conjunction with gas turbine exhaust cleanup systems such as
selective catalytic reduction. Lean pre-mix systems are offered by several gas
turbine OEMs, some of which have much greater financial resources than we do.
There are also a number of companies, universities, research institutions
and governments engaged in the development of emissions reduction technologies
that could compete with the Xonon technology. Many of these entities have
substantially greater resources than we do.
Xonon combustion systems will be deployed in complex and varied operating
environments, and they may have limitations or defects that we find only after
full deployment
Gas turbines equipped with Xonon combustion systems are expected to be
deployed in a number of extremely demanding environments and subjected to a
variety of operating conditions and modes. As a result, technical limitations
may only become apparent in the field after many Xonon-equipped gas turbines
have been deployed. These limitations could require correction, and the
corrections could be expensive. In addition, the need to develop and implement
these corrections could temporarily delay the sale of new Xonon-equipped gas
turbines.
Any failure of gas turbines incorporating our technology could damage our
reputation, reduce our revenues or otherwise harm our business
The Xonon combustion system includes components which are located in a
critical section of the gas turbine. A mechanical failure of a Xonon-equipped
gas turbine may be attributed to the Xonon combustion system, even if the
immediate cause is not clear. If this occurs, the reputation of the Xonon
combustion system and its acceptability in the marketplace could be negatively
impacted.
We may be unable to raise additional capital to complete our product
development and commercialization plans
Our product development and commercialization schedule could be delayed if
we are unable to fund our research and development activities or the
continuing development of our manufacturing capabilities. We expect that our
current cash resources and the cash to be received from Catalytica will be
sufficient to fund our operations through at least 2002. However, we may need
to raise additional funds to achieve full commercialization of the Xonon
combustion systems and other potential products. We do not know whether we
will be able to secure additional funding on terms acceptable to us to pursue
our commercialization plans.
We may have difficulty managing the expansion of our operations
We are undergoing and expect to continue to undergo growth in the number of
our employees, the size of our physical plant and the scope of our operations.
We must also integrate the operations of Catalytica Advanced Technologies, a
subsidiary of Catalytica that is being combined with us prior to the
distribution of our common stock. This expansion is likely to place a
significant strain on our management team and other resources. Our business
could be harmed if we encounter difficulties in effectively managing the
budgeting, forecasting and other process control issues presented by such a
rapid expansion.
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<PAGE>
We face risks associated with our plans to market and distribute our products
internationally
We intend to market, distribute and service Xonon combustion systems
internationally through our OEM relationships. We have limited direct
experience developing, and no experience supplying, our products in accordance
with the commercial and legal requirements of international markets. Our
success in those markets will depend, in part, on our ability to secure
relationships with international OEMs and our ability to supply products that
meet foreign regulatory and commercial requirements. In addition, our planned
international operations are subject to other risks, including potential
difficulties in enforcing contractual obligations and intellectual property
rights in foreign countries and fluctuations in currency exchange rates.
We may not be able to protect important intellectual property
We rely on a combination of patent, copyright and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Our
ability to compete effectively will depend, in part, on our ability to protect
our proprietary technology, systems designs and manufacturing processes. We do
not know whether any of our pending patent applications will issue or, in the
case of patents issued or to be issued, that the claims allowed are or will be
sufficiently broad to protect our technology or processes. Even if all our
patent applications are issued and are sufficiently broad, they may be
challenged or invalidated. We could incur substantial costs in prosecuting or
defending patent infringement suits. While we have attempted to safeguard and
maintain our proprietary rights, we do not know whether we have been or will
be completely successful in doing so.
Further, our competitors may independently develop or patent technologies
or processes that are substantially equivalent or superior to ours. If we are
found to be infringing on third party patents, we do not know whether we will
be able to obtain licenses to use such patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
manufacture or sale of our systems.
We rely, in part, on contractual provisions to protect our trade secrets
and proprietary knowledge. These agreements may be breached, and we may not
have adequate remedies for any breach. Our trade secrets may also be known
without breach of such agreements or may be independently developed by
competitors. Our inability to maintain the proprietary nature of our
technology and processes could allow our competitors to limit or eliminate any
competitive advantages we may have and prevent us from fully commercializing
Xonon technology, thereby harming our business prospects.
Our future plans could be harmed if we are unable to attract or retain key
personnel
Our business requires a highly skilled management team and specialized
workforce, including scientists, engineers, researchers, and manufacturing and
marketing professionals who have developed essential proprietary skills. Based
on our planned expansion, we will need to increase the number of our employees
and outside contractors. Our future success will therefore depend on
attracting and retaining additional qualified management and technical
personnel. We do not know whether we will be successful in hiring or retaining
qualified personnel. Our inability to hire qualified personnel on a timely
basis, or the departure of key employees, could harm our expansion and
commercialization plans.
Risks Associated with our Separation from Catalytica
We may incur additional liabilities as a result of the transactions related to
the distribution
We may incur additional liabilities as a result of the distribution. For
example, when the business of Catalytica Advanced Technologies is combined
with ours, we will become responsible for the liabilities of Catalytica
Advanced Technologies. Additionally, we will have obligations under the
agreements we are entering into with Catalytica and Synotex. See "Arrangements
Between Us and Catalytica." For example, we must indemnify Catalytica for
liabilities arising out of our business, the business of Catalytica Advanced
Technologies and other liabilities of Catalytica not associated with the
pharmaceuticals business. We are also responsible for liabilities arising out
of the distribution. The nature and amount of these potential liabilities
cannot be estimated. If we incur these liabilities, our financial results
could be harmed.
13
<PAGE>
Morgan Stanley Dean Witter Capital Partners may own a significant amount of
our common stock and may therefore have significant influence over our
business
Immediately following the distribution, Morgan Stanley Dean Witter Capital
Partners and its affiliates may own approximately 36% of our outstanding
common stock. Morgan Stanley will also have shareholder rights, including
rights to appoint directors, and registration rights. As a result, Morgan
Stanley and its affiliates will hold a substantial voting position in us and
may be able to significantly influence our business.
We will not be able to rely on Catalytica to fund our future capital
requirements
Except for proceeds from the 1998 sale of preferred stock to Enron
Ventures, a subsidiary of Enron Corp., our capital needs to date have been
satisfied by Catalytica. Following the distribution, Catalytica will no longer
provide funds to finance our working capital or other cash requirements.
Financing from other sources, if needed, may not be available on favorable
terms or at all.
We currently use a portion of Catalytica's operational and administrative
infrastructure, which we must replace
We currently use Catalytica's management information systems to support our
operations, including systems to manage order processing, human resources,
shipping, accounting, payroll and internal computing operations. These systems
are being modified to enable us to operate independently.
We have agreements with Catalytica for temporary transitional services
after distribution. After the expiration of these various arrangements, we may
not be able to replace the transitional services in a timely manner or on
terms and conditions as favorable as those we would receive from Catalytica.
A large number of shares may be sold in the market following the distribution,
which may depress the market price of our common stock
Sales of a substantial number of shares of our common stock in the public
market following the distribution could cause the market price of our common
stock to decline. Immediately after the distribution, Sundance Assets, L.P.,
an affiliate of Enron, and Morgan Stanley together are expected to own
approximately 46% to 50% of our outstanding shares of common stock.
Additionally, Sundance Assets, L.P., an affiliate of Enron, will have the
option to purchase up to 1,071,430 shares of our common stock. Enron also has
the right to purchase additional shares of our common stock on the same terms
that Catalytica will purchase $50 million of our common stock in connection
with the merger with Synotex. The number of shares of common stock available
for sale in the public market is limited by restrictions under federal
securities law. We have granted to Sundance Assets, L.P., an affiliate of
Enron, and have agreed to grant to Morgan Stanley, the right to have their
shares registered with the SEC immediately after the distribution.
Additionally, all of the 2,387,414 shares that may be issued upon the
exercise of options outstanding as of June 30, 2000, will be registered with
the SEC and upon issuance will be eligible for sale. For a further description
of the eligibility of shares for sale into the public market following the
distribution, see "Shares Eligible for Future Sale."
Provisions in our charter documents may delay or prevent our acquisition,
which could decrease the value of your shares
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without
the consent of our board of directors. These provisions include a classified
board of directors. In addition, our board of directors has the right to issue
preferred stock without stockholder approval, which could be used to dilute
the stock ownership of a potential hostile acquirer. Although we believe these
provisions provide for an opportunity to receive a higher bid by requiring
potential acquirers to negotiate with our board of directors, these provisions
apply even if the offer may be considered beneficial by some stockholders.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intend," "potential" or
"continue" or the negative of such terms or other comparable terminology. In
addition, these forward-looking statements include, but are not limited to,
statements regarding the following: (1) our combustion systems, (2) our
ability to adapt our technology to particular gas turbine models, (3) our
intellectual property portfolio, (4) our business strategies and plans, and
(5) the merger of Catalytica with Synotex and the related transactions. These
statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assume responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus or to conform these statements to
actual results.
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<PAGE>
THE DISTRIBUTION
The board of directors of Catalytica has declared a distribution to its
stockholders of all of the shares of our common stock owned by Catalytica
contingent on all conditions to the merger having been satisfied and
immediately prior to the merger. We currently estimate that you will receive
between .25 and .29 of a share of our common stock for every share of
Catalytica common stock held. The number of shares of our common stock to be
distributed to each Catalytica stockholder will be based upon the number of
shares of Catalytica common stock outstanding on the record date for the
distribution. Since the precise record date is expected to be the closing date
of the Catalytica merger and therefore will not be determined until
immediately prior to the merger, the number of shares that you will receive
cannot be established until that date. As a result of the distribution, up to
approximately 85% to 88% of our outstanding common stock, which is all of the
stock held by Catalytica, will be distributed to Catalytica's stockholders.
See "Description of Capital Stock" and "Principal Stockholders."
Before the distribution, we and Catalytica will complete internal
restructuring transactions required to complete the merger of Catalytica with
Synotex. Those transactions include:
. The merger of Catalytica Advanced Technologies, Inc., a wholly owned
subsidiary of Catalytica, into us.
. Catalytica entering into a number of agreements with us that will
continue after the distribution. See "Arrangements Between us and
Catalytica."
. The sale to Catalytica of additional shares of our common stock
currently estimated at $50 million in cash.
These additional shares will increase Catalytica's percentage ownership in
us and will also be distributed to Catalytica's stockholders. The purchase
price per share will not be determined until shortly prior to the distribution
and will be based on the fair market value of our common stock. The following
table sets forth the number of additional shares of common stock to be issued
to Catalytica and the resulting percentage ownership by Catalytica of our
outstanding stock assuming the fair market value of our common stock is $20,
$15 and $10 per share.
<TABLE>
<CAPTION>
Assumed Fair Shares to be Catalytica's Approximate
Market Issued to Percentage Ownership in
Value Per Share Catalytica Our Common Stock
--------------- ------------ ------------------------
<S> <C> <C>
$20 2,500,000 87%
$15 3,333,333 87%
$10 5,000,000 88%
</TABLE>
The table above assumes that Sundance Assets, L.P., an affiliate of Enron,
does not exercise its right to purchase additional shares of our common stock
when Catalytica purchases additional shares. If Sundance Assets does exercise
its right, then Catalytica's ownership will remain at approximately 85%. The
effect of Catalytica purchasing additional shares of stock is that more shares
of our stock will be distributed to Catalytica's stockholders. As the price of
the stock to be sold to Catalytica decreases the number of shares to be
distributed will increase. The registration statement of which this prospectus
forms a part will be amended to include any additional shares of common stock
issued to Catalytica prior to the distribution.
If the Catalytica stockholders vote to approve the merger of Catalytica
with Synotex, and all of the conditions to the merger are waived or satisfied,
the record date for the distribution will be set as immediately prior to the
closing of the merger. The distribution will not occur if the Catalytica
stockholders do not approve the merger or if the merger is otherwise
abandoned. Catalytica will effect the distribution by delivering all of our
common stock that it holds to the custodian for the benefit of the Catalytica
stockholders of record as of the record date. Promptly after the closing of
the merger, the distribution agent will mail the shares to the Catalytica
stockholders of record as of the record date. No fractional shares will be
issued as part of the distribution. The
16
<PAGE>
distribution agent will aggregate undistributed fractional shares and sell
those shares at the earliest practicable date at the then-prevailing market
price. Each person who would be otherwise entitled to receive a fractional
share will instead receive a cash payment equal to that person's proportionate
share of the net proceeds of the sale of those aggregated shares. The receipt
of cash instead of fractional shares will be taxable. See "Material Federal
Income Tax Considerations."
Catalytica stockholders will not be required to pay any cash for our common
stock received in the distribution. The distribution of our common stock to
Catalytica stockholders will have important tax and other consequences, as
discussed in this document. The distribution and the merger are expected to be
taxable to Catalytica shareholders. See "Material United States Federal Income
Tax Considerations." The general terms and conditions of the distribution and
the arrangements between us and Catalytica are set forth in the agreements
between us and Catalytica which are described in "Arrangements Between us and
Catalytica." We will pay the costs and expenses it incurs in connection with
the distribution.
REASONS FOR THE DISTRIBUTION
Catalytica previously considered a public offering of our stock. This
distribution is intended to fulfill a similar strategic goal: to enable
Catalytica stockholders to realize the value of the energy business through a
public market independent from Catalytica's pharmaceuticals business.
The merger agreement with Synotex requires the combination of Catalytica's
energy businesses, which include Catalytica Advanced Technologies and
Combustion Systems. The merger agreement also requires the subsequent
distribution of the combined business immediately prior to and in connection
with the merger.
Synotex would not agree to acquire the energy business in connection with
the merger. After thorough consideration, the board of directors of Catalytica
therefore determined that a distribution of the energy business was in the
best interest of all of our stockholders and the stockholders of Catalytica.
The Catalytica board of directors considered a number of factors in
determining to recommend approval of the distribution including:
. The necessity of distributing the combined energy business in order to
complete Catalytica's merger with Synotex;
. The current financial market conditions and the historical market
information concerning our common stock;
. The value that may be expected to accrue to the Catalytica stockholders
from the shares and cash being distributed; and
. Our ability to become a viable, stand-alone, public company and create
substantial stockholder value by, among other things, allowing the
financial community to focus separately on our business.
After reviewing Catalytica's goals and objectives and considering other
possible methods of disposing of the energy business, Catalytica's management
and board of directors concluded that enhancing this business through the
combination of us with Catalytica Advanced Technologies and the distribution
would be in the best interest of Catalytica stockholders and all of our
stockholders.
DIVIDEND POLICY
We have never paid cash dividends on our common stock or any other
securities. We anticipate that we will retain any future earnings for use in
the expansion and operation of our business, and do not anticipate paying cash
dividends in the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. On an actual basis;
. On a pro forma basis as of such date to reflect (i) the conversion of
7,000,000 shares of Series A preferred stock into common stock, (ii) the
conversion of 1,339,286 shares of Series B preferred stock into common
stock, and (iii) and the filing of an amended and restated certificate
of incorporation to increase the number of common shares authorized, to
authorize us to issue preferred stock and to effectuate the two for one
common stock split; to reflect the combination of Catalytica Advanced
Technologies with Combustion Systems; and to reflect the sale to
Catalytica of additional shares of our common stock currently estimated
at $50 million in cash.
This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of June 30,
2000
-------------------
Actual Pro Forma
-------- ---------
(in thousands,
except
Stockholders' equity: per share data)
<S> <C> <C>
Combustion Systems
Convertible preferred stock, $0.001 par value, 9,000
shares authorized in 1998, 1999 and at 2000, issuable in
Series:
Series A:
Authorized issued and outstanding shares--7,000 in
1998, 1999 and 2000, actual.......................... $ 7 $ --
Series B:
Authorized 2,000 shares in 1998, 1999 and 2000, issued
and outstanding 1,339 shares in 1998, 1999 and 2000,
actual............................................... 1 --
Common stock, $0.0005 par value, 20,500 shares authorized
in 1998, 1999 and 2000, 1,000 shares issued and
outstanding in 1998 and 1999, and 1,033 shares issued and
outstanding in 2000, actual.............................. 1 15
Catalytica Advanced Technologies
Convertible preferred stock, $0.001 par value, 3,000
shares authorized in 1998, 1999 and at 2000, issuable in
Series:
Series A:
Authorized issued and outstanding shares--3,000 in
1998, 1999 and 2000, actual.......................... 3 --
Common stock, $0.001 par value, 4,800 shares authorized in
1998, 1999 and 2000, 1,000 shares issued and outstanding
in 1998 and 1999, 2000, actual........................... 1 --
Combined
Additional paid-in capital................................ 56,740 114,556
Deferred compensation..................................... (151) (151)
Deficit accumulated during the development stage.......... (47,553) (52,543)
-------- -------
Total stockholders' equity.......................... $ 9,049 $61,877
======== =======
Total capitalization................................ $ 9,049 $61,877
======== =======
</TABLE>
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<PAGE>
SELECTED COMBINED FINANCIAL DATA
(in thousands, except per share data)
The following tables contain selected combined financial data as of and for
each of the three fiscal years ended December 31, 1997, 1998 and 1999 and have
been derived from our combined financial statements, which have been derived
by Ernst & Young LLP, independent auditors. The selected financial data
relating to 1995 and 1996 has been derived from unaudited combined financial
statements. The summary of combined operations data for the six month periods
ended June 30, 1999 and 2000 and the summary combined balance sheet data as of
June 30, 2000 are derived from our unaudited combined financial statements
included elsewhere in this prospectus and include all adjustments consisting
only of normal, recurring adjustments, which we consider necessary for a fair
presentation of the data. The selected financial data are qualified by
reference to, and should be read in conjunction with, our financial statements
and the notes to those combined financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this registration statement and prospectus. No cash
dividends were declared in any of the periods presented.
<TABLE>
<CAPTION>
Six months
Year ended December 31, ended June 30,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statement of
Operations Data:
Research and development
contracts.............. $ 4,229 $ 5,934 $ 5,139 $ 6,279 $ 3,053 $ 1,385 $ 2,433
------- ------- ------- ------- -------- ------- -------
Costs and expenses:
Research and
development(1)....... 6,051 6,451 6,009 9,313 9,627 3,042 4,244
Costs associated with
discontinued product
line................. 2,143 268 -- -- -- -- --
Selling general and
administrative....... 591 708 671 1,269 4,781 1,808 2,068
------- ------- ------- ------- -------- ------- -------
Total costs and
expenses............ 8,785 7,427 6,680 10,582 14,408 4,850 6,312
------- ------- ------- ------- -------- ------- -------
Operating loss.......... (4,556) (1,493) (1,541) (4,303) (11,355) (3,465) (3,879)
Loss on joint venture... -- -- (4,355) (3,826) (1,133) (975) --
Interest income......... -- -- -- 1,409 1,041 537 496
Interest expense........ (41) (114) (374) (177) (278) (125) (200)
------- ------- ------- ------- -------- ------- -------
Net loss(2)............. $(4,597) $(1,607) $(6,270) $(6,897) $(11,725) $(4,028) $(3,583)
======= ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31 June 30,
------------------------------------------- 2000
1995 1996 1997 1998 1999 Actual
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Combined Balance Sheet
Data:
Cash, cash equivalents
and short term
investments............. $ -- $ -- $ -- $22,847 $16,032 $12,906
Total assets............. 685 2,767 2,871 28,520 19,840 17,807
Total stockholders'
equity (deficit) ....... (7,322) (8,928) (15,198) 24,137 12,552 9,049
</TABLE>
--------
(1) See Note 2 to the financial statements.
(2) Since the combined entity does not have a formal capital structure, loss
per share information has not been presented.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our historical combined financial statements and the notes to those combined
financial statements, which are included in this prospectus. This prospectus
contains forward-looking statements relating to future events and our future
financial performance. Actual results could be significantly different from
those discussed in this prospectus. Factors that could cause or contribute to
such differences include those set forth in the section entitled "Risk
Factors."
Overview
We develop proprietary technologies that use catalysts to essentially
eliminate the formation of harmful pollutants and improve the performance of
hydrocarbon combustion systems such as gas turbines. We have developed Xonon
Cool Combustion, a breakthrough combustion technology that reduces
temperatures in combustion systems to avoid the formation of chemical
pollutants without diminishing combustion efficiency. We are developing and
marketing Xonon Cool Combustion technology for use in gas turbines in power
generation and gas pipeline compression applications.
Prior to and as a condition to the consummation of the Catalytica merger
with Synotex, we and Catalytica Advanced Technologies, Inc. will be combined
and all of the shares of the combined company owned by Catalytica will be
distributed on a pro rata basis to the Catalytica stockholders. The
consummation of the merger is subject to the satisfaction of numerous
customary conditions, including the approval of the merger by Catalytica
stockholders, applicable regulatory clearances and the consummation of the
distribution. The distribution will take place only immediately prior to, and
after all other conditions to the merger have been satisfied.
In our early stage of development we were engaged in developing,
manufacturing and marketing technologies that use catalysts to measure the
existence of harmful pollutants. In 1995, we ceased efforts to develop
measurement products and disposed of related assets in 1996. Cumulative net
costs associated with this discontinued product line were $9.3 million. Prior
to our combination with Catalytica Advanced Technologies, as described above,
new technologies were developed through Catalytica Advanced Technologies.
Our costs to date, excluding costs associated with the discontinued product
line, have primarily consisted of expenses to support Xonon development. We
expect to significantly increase our research and development expenses to
further commercialize Xonon. As we begin to fulfill commercial orders we will
incur cost of goods sold expenses. Costs associated with Catalytica Advanced
Technologies to date have primarily consisted of expenses to support
contracted research.
All of our revenue through June 30, 2000, has consisted of revenue from
research and development contracts funded either from gas turbine
manufacturers, government sources or research institutions, as well as
contracted and collaborative research. We do not anticipate product sales
until at least 2001. These sales may require future royalty payments to
others. We expect to incur operating losses through at least 2003.
Results of Operations
Comparison of Six-Month Periods Ended June 30, 1999, and June 30, 2000
(Unaudited).
Revenue
<TABLE>
<CAPTION>
For the six
months ended
June 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Total revenue........................................ $1,385 $2,433 76%
</TABLE>
20
<PAGE>
Our revenue has consisted entirely of research and development revenues
that are derived from cost reimbursement contracts with gas turbine
manufacturers, government agencies and research institutions, as well as
contracted and collaborative research. Reimbursement contracts provide for
partial recovery of our direct and indirect costs. The timing of these
reimbursements varies from year to year, and from contract to contract, based
on the terms agreed upon by us and the funding party.
Revenue increased 76% for the six months ended June 30, 2000, compared with
the six months ended June 30, 1999. This increase was principally due to
securing additional external development funding for Xonon development
programs and additional collaborative research contracts associated with
Catalytica Advanced Technologies.
Costs and Expenses
<TABLE>
<CAPTION>
For the six
months ended
June 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in
thousands)
<S> <C> <C> <C>
Research and development............................. $3,042 $4,244 40%
Selling, general and administrative.................. 1,808 2,068 14%
</TABLE>
Research and Development ("R&D"). R&D expense includes compensation and
benefits for engineering staff, expenses for contract engineers, materials to
build prototype units, fees paid to outside suppliers for subcontracted
components and services, supplies used, and facility-related costs. We expense
all R&D costs as incurred.
R&D expense increased 40% for the six months ended June 30, 2000, compared
with the six months ended June 30, 1999. The increase in R&D expenditures was
attributable to an increase in staffing and other costs associated with
continued testing and development of Xonon technology and staffing of
Novotech. R&D expenses were incurred by the 50% owned GENXON joint venture for
the six months ended June 30, 1999 and June 30, 2000. Once the GENXON
prototype development program was completed in June 1999, the engineering
efforts relating to additional catalyst system testing and development were
conducted principally by us and consequently are reflected in R&D costs. We
expect to continue to expand our R&D efforts, and we expect R&D expenses to
increase in the future.
R&D expense was partially offset by a December 1999 agreement with Enron
the purpose of which was to accelerate the development of our Xonon
technology. In connection with this agreement, we recorded a $1.2 million
provision in 1999. In March 2000, the agreement was amended and Enron
reimbursed Catalytica for approximately $1.0 million of the previous advance.
Accordingly, that amount was recorded in the first quarter of 2000 as a
reduction of related research and development expense.
Selling, General and Administrative ("SG&A"). SG&A expenses include
compensation, benefits and related costs in support of corporate functions,
which include management, business development, marketing, sales and finance.
Additionally, SG&A expenses include charges by Catalytica for various costs
paid by Catalytica on our behalf, including facilities, finance, legal, human
resources, pension and other expenses. Charges for these services have been
allocated based upon square footage, usage, headcount and other methods that
management believes to be reasonable.
SG&A expenses increased 14% for the six months ended June 30, 2000,
compared with the six months ended June 30, 1999. This increase was due to
increased staffing and increased marketing expenses related to the
commercialization of Xonon. When our separation from Catalytica occurs, our
expenses are expected to increase as we will be required to provide services,
previously provided to us by Catalytica, either through internal expansion or
outsourcing. We also expect SG&A expenses to increase as we enter into later
stages of commercialization.
21
<PAGE>
Loss on Joint Venture
<TABLE>
<CAPTION>
For the six months
ended June 30, Annual %
------------------- Change
1999 2000 2000/1999
--------- --------- ---------
(dollars in
thousands)
<S> <C> <C> <C>
Loss on joint venture....................... $ 975 $ -- --
</TABLE>
We incurred no joint venture losses in the first six months of 2000. During
the six months ended June 30, 1999, our share of GENXON's losses was $0.975
million, which represented our capital contribution during this period. In the
third quarter of 1999, GENXON completed its prototype development of the
Kawasaki combustor unit, and we began conducting subsequent testing programs.
Although we expect to make further reduced capital contributions during 2000,
which will result in the allocation of additional losses, neither joint
venture partner is contractually required to make such capital infusions. The
reduced level of the Company's investment in GENXON is expected to continue
throughout 2000.
Interest Income
<TABLE>
<CAPTION>
For the six
months
ended
June 30, Annual %
----------- Change
1999 2000 2000/1999
----- ----- ---------
(dollars in
thousands)
<S> <C> <C> <C>
Interest income........................................ $ 537 $ 496 (8)%
</TABLE>
Interest income decreased for the six months ended June 30, 2000, compared
with the six months ended June 30, 1999, due to reduced average cash balances
attributable to the funding of operations. Interest income in 2001 is expected
to be higher than in previous years as a result of higher cash balances
related to cash we expect Catalytica to invest prior to the close of the
distribution.
Interest Expense
<TABLE>
<CAPTION>
For the six
months
ended
June 30, Annual %
----------- Change
1999 2000 2000/1999
----- ----- ---------
(dollars in
thousands)
<S> <C> <C> <C>
Interest expense....................................... $ 125 $ 200 60%
</TABLE>
Interest expense increased for the six months ended June 30, 2000, compared
with the six months ended June 30, 1999, due to a $0.2 million one-time cost
in the first quarter of 2000 related to the recovery of $1 million of the $1.2
million advance incurred to develop Xonon technology. In addition, beginning
in 2000, Catalytica discontinued charging Catalytica Advanced Technologies
interest related to intercompany debt owed to Catalytica. Interest expense is
expected to be minimal for the next few years.
Comparison of the Years Ended December 31, 1997, December 31, 1998, and
December 31, 1999.
Revenue
<TABLE>
<CAPTION>
For the year ended
December 31, Annual % Change
-------------------- -------------------
1997 1998 1999 1998/1997 1999/1998
------ ------ ------ --------- ---------
(dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Total revenue....................... $5,139 $6,279 $3,053 22% (51)%
</TABLE>
Our revenue has consisted entirely of research and development revenues
that are derived from cost reimbursement contracts with gas turbine
manufacturers, government agencies and research institutions, as well
22
<PAGE>
as contracted and collaborative research. Reimbursement contracts provide for
partial recovery of our direct and indirect costs. The timing of these
reimbursements varies from year to year and contract to contract, based on the
terms agreed upon by the funding party and us.
Revenue decreased 51% for the twelve months ended December 31, 1999,
compared with the twelve months ended December 31, 1998. This reduction was
principally due to a decrease in external research funding received by us
during 1999, as well as a decrease in Catalytica Advanced Technologies' R&D
revenue as it decreased its emphasis on contract research and focused its
efforts on development of new technologies through joint ventures. Revenue
increased 22% for the twelve months ended December 31, 1998, compared to the
twelve months ended December 31, 1997, due to the timing of our contractual
cost reimbursement and an increase in reimbursable program development
efforts.
Most of our research and development contracts are subject to periodic
review by the funding partner, which may result in modifications, termination
of funding or schedule delays. We cannot assure that we will continue to
receive research and development funding. In return for funding development,
collaborative partners receive certain rights in the commercialization of the
resulting technology. We expect to continue to pursue funded research
programs. These may not, however, be a continual source of revenue. Due to the
nature of our operating history, period comparisons of revenues are not
necessarily meaningful and should not be relied upon as indications of future
performance.
Costs and Expenses
<TABLE>
<CAPTION>
For the year ended
December 31, Annual % Change
-------------------- -------------------
1997 1998 1999 1998/1997 1999/1998
------ ------ ------ --------- ---------
(dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Research and development.......... $6,009 $9,313 $9,627 55% 3%
Selling, general and
administrative................... 671 1,269 4,781 89% 277%
</TABLE>
Research and Development. R&D expense includes compensation and benefits
for engineering staff, expenses for contract engineers, materials to build
prototype units, fees paid to outside suppliers for subcontracted components
and services, supplies used, and facility-related costs. We expense all R&D
costs as incurred.
R&D expense increased 3% for the twelve months ended December 31, 1999, and
increased 55% for the twelve months ended December 31, 1998 when compared to
the previous periods. Although the change in R&D expense remained relatively
flat in 1999, our increase in R&D expense was impacted by a shift in R&D
spending from the GENXON joint venture back to us. Beginning in the second
half of 1996 through the end of the second quarter of 1999, a significant
portion of our research activity was financed through and allocated to the
GENXON joint venture. Once the prototype development of the Kawasaki
development program in was completed June 1999, we assumed primary funding of
additional catalyst system testing and development. In addition, $1.2 million
of costs incurred to accelerate the development of Xonon technology also
contributed to the increase in R&D expense in 1999. Lastly, the increase in
R&D expenses was partially offset by lower R&D expenses by Catalytica Advanced
Technologies due to a shift in emphasis from contract research to development
of new technologies through joint ventures.
The increase in R&D expense in 1998 corresponds to a significant increase
in staffing and other costs associated with continued testing and development
of Xonon technology and components. We expect to continue to expand our R&D
efforts, and we expect R&D expense to increase in the future.
Through the end of the second quarter of 1999, a significant portion of our
research activity was conducted on behalf of the GENXON joint venture (see
"Loss on Joint Ventures"). As a result, some R&D costs were incurred by the
joint venture rather than by us. The following amounts of R&D expenses were
incurred by the
23
<PAGE>
GENXON joint venture: $2.0 million in 1999, $2.5 million in 1998, and $2.6
million in 1997. Once the GENXON prototype development program was completed
in June 1999, the engineering efforts relating to additional catalyst system
testing and development were conducted principally by us and consequently are
reflected in R&D costs.
Selling, General and Administrative. SG&A expenses include compensation,
benefits and related costs in support of corporate functions, which include
management, business development, marketing, sales and finance. Additionally,
SG&A expenses include charges by Catalytica for various costs paid by
Catalytica on our behalf, including facilities, finance, legal, human
resources, pension and other expenses. Charges for these services have been
allocated based upon square footage, usage, headcount and other methods that
management believes to be reasonable.
SG&A expenses increased 277% for the twelve months ended December 31, 1999
and 89% for the twelve months ended December 31, 1998 when compared to the
previous periods. These increases were due to increased staffing and marketing
expenses related to the commercialization of Xonon. The increase in SG&A
expenditures from 1998 to 1999 was also affected by a transition in staff and
other resources from R&D to SG&A-related activities. We expect SG&A expenses
to increase in the future as we enter later stages of commercialization.
Loss on Joint Ventures
<TABLE>
<CAPTION>
For the year
ended December
31, Annual % Change
----------------- -------------------
1997 1998 1999 1998/1997 1999/1998
----- ----- ----- --------- ---------
(dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Loss on joint ventures............... 4,355 3,826 1,133 (12)% (70)%
</TABLE>
In 1996 we formed a Delaware limited liability company, GENXON LLC, in
connection with a 50/50 joint venture with Woodward Governor to develop the
potential market for retrofitting out-of-warranty turbines to improve
emissions and operating performance. We recognized 50% of the loss of the
joint venture to the extent of our capital contribution, which resulted in
losses of $1.1 million in 1999, $3.7 million in 1998, and $4.4 million in
1997. In the third quarter of 1999, GENXON completed its prototype development
of the Kawasaki combustion unit, and we began conducting subsequent catalyst
system testing programs.
In 1998, Catalytica Advanced Technologies formed a joint venture with
United Catalysts, Inc., a division of Sud-Chemie Group, to form Sud-Chemie
Catalytica. No losses were recorded by Catalytica Advanced Technologies in
1999 related to Sud-Chemie Catalytica, since it had recorded its share of
losses to the extent of its capital contribution of $150,000 in 1998. The
operating agreement does not require any further capital contributions by
Catalytica Advanced Technologies beyond its initial $150,000 contribution.
Therefore, we do not expect to incur further losses unless we decide to invest
additional capital beyond the initial $5 million commitment by the joint
venture partner.
Interest Income
<TABLE>
<CAPTION>
For the year ended
December 31, Annual % Change
------------------ -------------------
1997 1998 1999 1998/1997 1999/1998
---- ------ ------ --------- ---------
(dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Interest income....................... $-- $1,409 $1,041 -- % (26)%
</TABLE>
Interest income decreased 26% for the twelve months ended December 31, 1999
when compared to the previous period, due to reduced average cash balances
attributable to the funding of operations. In January 1998, Enron Ventures
invested $30.0 million in our company. Prior to the Enron Ventures investment,
we had no interest income. Our interest income consists of interest earned on
cash, cash equivalents and short-term investments. Interest income in 2001 is
expected to be higher than in previous years as a result of higher cash
balances related to cash we expect to receive from Catalytica as required by
the merger agreement.
24
<PAGE>
Interest Expense
<TABLE>
<CAPTION>
For the year
ended December
31, Annual % Change
-------------- -------------------
1997 1998 1999 1998/1997 1999/1998
---- ---- ---- --------- ---------
(dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Interest expense.......................... $374 $177 $278 (53)% 57%
</TABLE>
Interest expense increased 57% for the twelve months ended December 31,
1999 when compared to the previous period due to an increase in the
intercompany debt balance between Catalytica Advanced Technologies and
Catalytica.
Interest expense decreased 53% for the twelve months ended December 31,
1998 when compared to the previous period due to a $30 million investment by
Enron Ventures. Prior to the Enron investment, we used borrowings from
Catalytica to fund our operations. We paid interest expense to Catalytica on
these borrowings. The decrease in interest expense was partially offset by an
increase of interest expense related to an increased intercompany debt balance
between Catalytica Advanced Technologies and Catalytica. Interest expense is
expected to be minimal for the next few years.
Income Taxes
No benefit for federal and state income tax is reported in the combined
financial statements because of our tax sharing agreement with Catalytica. In
accordance with the tax sharing agreement, we are not reimbursed for the tax
benefit of our past losses.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Year ended
December 31, Six months
---------------- ended
1998 1999 June 30, 2000
------- ------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Cash, cash equivalents, and short-term
investments............................... $22,847 $16,032 $12,906
Working capital............................ 22,424 10,653 7,190
Cash provided by (used in)
Operating activities....................... (3,784) (7,150) (4,608)
Investing activities....................... (10,017) (1,489) (211)
Financing activities....................... 31,455 1,547 1,672
------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 17,654 (7,092) (3,147)
Current Ratio.............................. 7.14 2.62 1.90
</TABLE>
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize Xonon Cool
Combustion technology, market acceptance of our systems and other factors. We
expect to devote substantial capital resources to further commercialize Xonon
Cool Combustion technology, hire and train our production staff, develop and
expand our manufacturing capacity, begin production activities and expand our
research and development activities. We believe that our current cash
resources combined with the currently planned $50 million stock sale to
Catalytica will provide us with capital to fund currently contemplated
operations through at least 2002.
We have financed our operations through June 30, 2000, primarily from funds
invested by Catalytica and the 1998 sale of equity to Enron Ventures. In
January 1998, Enron Ventures purchased 1,339,286 shares of our convertible
Series B preferred stock (2,678,572 shares on an as-converted to common stock
basis) for $30.0 million in cash. Under this equity transaction, we recorded
additional paid in capital of $30.0 million. Additionally, Enron Ventures
received an option to purchase up to an additional 535,215 shares of
convertible Series B preferred stock (1,071,430 on an as-converted to common
stock basis), for $26.88 per share. Enron Ventures' right to purchase these
shares terminates on January 14, 2001. See "Business--Relationship
25
<PAGE>
with Enron." As of June 30, 2000, we had cash, cash equivalents, and short
term investments totaling approximately $12.9 million. We anticipate incurring
substantial additional losses over at least the next several years, and we
expect that our cash requirements will increase in future periods.
We entered into research collaboration arrangements that may require us to
make future royalty payments. These payments would generally be due once
specified milestones such as commencement of commercial sales of products
incorporating the funded technology are achieved. Related royalty payments for
certain technologies would range from 1.5% to 5.0% of product sales during the
period covered by the royalty agreement.
We have never paid cash dividends on our common stock, or any other
securities. We anticipate that we will retain any future earnings for use in
the expansion and operation of our business, and do not anticipate paying cash
dividends in the foreseeable future.
Impact of Inflation
The effect of inflation and changing prices on our operations was not
significant during the periods presented.
Impact of Recently Issued Accounting Standards
FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for the fiscal year ending on or about December 31,
2001. It establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset or
liability measured at its fair value. We and Catalytica Advanced Technologies
do not believe that adopting this statement will have a material effect on
their combined financial position or combined results of operations. In
December 1999, the Securities and Exchange Commission issued SAB 101, "Revenue
Recognition in Financial Statements". We and Catalytica Advanced Technologies
currently cannot determine the effect, if any, that SAB 101 will have on their
combined financial statements.
Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest
in may have market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the then-
prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money
market funds, government and non-government debt securities. The average
duration of all of our investments in 1999 was less than one year. Due to the
short term nature of these investments, we believe we have no material
exposure to interest rate risk arising from our investments. Therefore, no
quantitative tabular disclosure is required.
We have operated primarily in the United States and all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure
to foreign currency rate fluctuations.
26
<PAGE>
BUSINESS
We develop proprietary technologies that use catalysts to essentially
eliminate the formation of harmful pollutants and improve the performance of
hydrocarbon combustion systems such as gas turbines. We manufacture and market
products that incorporate our technologies. We have developed Xonon Cool
Combustion, a breakthrough combustion technology that achieves stable
combustion at lower temperatures to avoid the formation of chemical pollutants
without diminishing combustion efficiency. Our initial application of this
technology is in gas turbines used for electric power generation and gas
pipeline compression.
Gas turbines have emerged as the solution of choice for new power
generation. We believe that Xonon Cool Combustion technology will expand the
range of applications for gas turbines and thereby accelerate many of the
changes occurring in the power industry today. We expect to derive our revenue
principally through the sale of Xonon modules, the critical component of the
Xonon combustion system for gas turbines. Our revenue stream will be composed
of sales of Xonon modules in new and installed original equipment and for
routine replacement. We are working with a number of major turbine
manufacturers to develop and market Xonon-equipped turbines worldwide.
Prior to the distribution, Catalytica Advanced Technologies will be merged
into us. Catalytica Advanced Technologies acts as an incubator for new
businesses and is engaged in a number of areas of catalytic research. These
areas include the development of improved catalytic processes employing
proprietary high throughput testing and computer learning technologies and the
development of fuel processing technology for fuel cells that encompass the
reforming of gasoline and natural gas for transportation and stationary power
applications. Catalytica Advanced Technologies is the majority shareholder of
Catalytica NovoTec, Inc. which develops improved catalytic processes employing
proprietary high throughput testing and computer learning technologies.
Our Product
How Xonon Cool Combustion Works
A gas turbine operates by compressing incoming air, combining it with fuel,
and combusting the mixture. The combustion process releases the fuel's energy,
forming hot gases that power the turbine. In conventional combustion systems,
a flame is used to combust the fuel. The temperature required to sustain a
stable flame is significantly higher than the temperature at which the gas
turbine is designed to operate. This excessive temperature causes the nitrogen
and oxygen in the air to react, forming nitrogen oxides (NOx), a major
contributor to air pollution.
We have developed Xonon Cool Combustion, a catalytic technology that
combusts fuel flamelessly. This process releases the same amount of energy as
flame-based combustion systems but at a lower temperature. Importantly, this
lower temperature is below the threshold at which NOx is formed. The Xonon
combustion system is the only operating catalytic combustion system for gas
turbines and the only gas turbine combustion system demonstrated to achieve
near-zero emissions.
How Xonon Cool Combustion is Integrated into the Gas Turbine
We collaborate with gas turbine OEMs to adapt their combustion systems to
incorporate Xonon Cool Combustion technology. We believe that we and the OEMs
can design the Xonon combustion system to suit any size and type of gas
turbine. For each turbine model that an OEM agrees to pursue, we would design
a catalytic Xonon module, the key component of the Xonon combustion system, to
fit directly into the turbine combustor(s). We then would manufacture the
custom-designed Xonon modules and sell the Xonon modules to OEMs to
incorporate them as an integral part of their product. The Xonon modules would
have an expected life of approximately one year of continuous operation and
would be replaced during regular, scheduled maintenance over the 15 to 20 year
life of the turbine.
27
<PAGE>
Key Benefits of Xonon Cool Combustion
We have developed and are marketing the Xonon combustion system for gas
turbines used in electric power generation and gas pipeline compression.
Integration of the Xonon Cool Combustion technology has several key benefits
when compared to conventional gas turbine combustion and emissions reduction
systems. Xonon Cool Combustion technology:
. Essentially Eliminates the Formation of NOx. Excessive temperatures in
conventional gas turbine combustion systems result in the formation of
NOx, a harmful pollutant. Xonon Cool Combustion technology allows
combustion to occur at lower temperatures, avoiding the formation of
NOx. Xonon Cool Combustion technology allows the Xonon combustion system
to achieve near-zero emissions.
. Reduces Emissions of Carbon Monoxide and Unburned Hydrocarbons. In
flame-based combustion, measures used to reduce emissions of NOx
increase emissions of carbon monoxide and unburned hydrocarbons. Since
the Xonon combustion system uses catalytic combustion rather than flame-
based combustion, carbon monoxide and the hydrocarbon fuel are more
thoroughly combusted. As a result, only trace amounts of carbon monoxide
and unburned hydrocarbons remain in the exhaust.
. Avoids Costly Exhaust Cleanup. Gas turbines using flame-based combustion
can achieve near-zero emissions only in some applications and only
through the combination of lean pre-mix and exhaust cleanup systems. Gas
turbine exhaust cleanup systems, however, add significant capital and
operating costs, reduce system efficiency, take up space, and in many
cases require the use of toxic chemicals. Xonon enables gas turbines in
essentially all applications to achieve near-zero emissions, without the
use of exhaust cleanup systems.
. Maintains Gas Turbine Combustion Efficiency. Compared to flame-based
combustion, the Xonon combustion system releases the same energy from
the fuel and achieves the same combustion efficiency required for
optimal operation of the turbine.
. Reduces Potential for Premature Component Failure. The Xonon combustion
system avoids the combustor vibration or "noise" that can occur when a
conventional flame is modified to reduce NOx formation. The result is
more stable combustion operating conditions, reduced stress and wear-
and-tear on expensive combustion parts, and less potential for premature
component failure.
. Broadens Gas Turbine Applicability. To date, conventional exhaust
cleanup systems cannot be applied cost-effectively to all applications
and sizes of gas turbines. For example, simple cycle turbines, or
turbines without heat recovery systems, cannot use conventional exhaust
cleanup systems. Additionally, it can be cost prohibitive for smaller
gas turbines to use exhaust cleanup systems. As a result, these
facilities cannot achieve near-zero emissions. We believe Xonon will
enable essentially all applications and sizes of gas turbines to achieve
near-zero emissions, thus broadening their range of uses.
With all these benefits, Xonon should significantly increase flexibility in
siting, permitting, and operating new and installed gas turbines. Xonon-
equipped turbines can be put into service in densely populated areas where
environmental concerns may have previously prevented gas turbines from being
used.
Key Milestones Achieved
We began the development of Xonon in 1988. The following is a summary of
our key milestones:
<TABLE>
<CAPTION>
Date Milestone
---- ---------
<C> <C> <S>
1989 Q4 Demonstrated viability of Xonon technology under laboratory
conditions.
1991 Q1 Completed test of pilot-scale Xonon module with GE.
1992 Q1 Initiated full-scale Xonon module test with GE.
1994 Q4 Completed 7000 hour catalyst durability test.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Date Milestone
---- ---------
<C> <C> <S>
1996 Q1 Began joint development program with Rolls Royce.
1996 Q2 Began joint development program with Solar Turbines.
1997 Q2 Published joint research paper with GE reporting near-zero
emissions in Xonon tests.
1997 Q3 Completed 1000+ hour prototype gas turbine demonstration.
1998 Q1 Obtained $30 million equity investment from Enron Ventures.
1998 Q2 Signed commercialization and development agreement with Pratt &
Whitney Canada.
1998 Q3 Signed Monterey Bay Alliance Agreement for development of
distributed power generation projects.
1998 Q4 Signed Collaborative Commercialization and License Agreement with
GE Power Systems.
1999 Q2 Commenced operation of Xonon-equipped turbine connected to
electric utility grid at Silicon Valley Power in Santa Clara,
California.
1999 Q4 Obtained ISO 9001 registration for design, installation,
manufacturing and service of Xonon modules.
1999 Q4 Enron specified the Xonon combustion system as the preferred
emissions control system on 7FA 170 MW gas turbines that it
ordered from GE.
1999 Q4 Completed 4,000 hours of operation of Xonon-equipped turbine at
Silicon Valley Power.
2000 Q1 Satisfied all EPA guidelines for an "achieved-in practice"
technology.
2000 Q2 Agreed with GE to commercialize the Xonon-equipped Nuovo Pignone
GE10 10MW gas turbine.
2000 Q2 GE and Alliance Power entered into a preliminary agreement to
order six Xonon-equipped Nuovo Pignone GE10 gas turbines.
2000 Q2 Kawasaki and Enron Energy Services announced their intent to
furnish three Xonon-equipped M1A-13X 1.5 MW gas turbines.
</TABLE>
The Changing Electric Power Industry
Three major forces are reshaping the electric power industry today:
. A broad restructuring initiative seeking to solve the shortcomings of
the old regulated system;
. A continued focus on the environmental consequences associated with the
generation of electric power; and
. An increased demand for very high levels of power reliability and
quality to support the strict power tolerances of digital electronics.
These forces will alter the way electricity will be provided in the future
and will ultimately result in significantly increased demand for the benefits
offered by Xonon combustion systems.
Restructuring of the Utility Industry
The electric power industry is undergoing fundamental changes both
domestically and internationally. Governments around the world have recognized
the inefficiencies inherent in providing electricity through heavily regulated
monopoly systems. While the pace and extent of the restructuring activities
vary geographically, several themes have emerged:
. The customer's right to choose a power supplier;
29
<PAGE>
. The separation of the generation, transmission and distribution segments
of the business; and
. Market-based pricing for electricity.
The industry transition to a competitive generation environment is changing
the context in which power producers operate existing facilities and evaluate
new projects. Competition has heightened attention on all elements of cost,
including fuel and environmental compliance. Producers are seeking to identify
market opportunities where, whether driven by temporary or chronic imbalances
in supply, they can capture premium pricing. They place particular value on
the ability to site quickly and operate non-controversial, clean generating
units designed to meet temporary periods of peak demand. Other market
participants, including public utilities, independent power producers, end-
users and independent transmission operators are also seeking new, more
responsive alternatives to building additional transmission and distribution
lines to serve growing urban loads. These participants are driving demand
towards a more distributed generation, peaking plants and new technologies
which are both economically and environmentally sound.
Continued Environmental Awareness
The second force affecting the electric power generation industry is the
continued public focus on environmental issues. Electric power production
results in significant emissions of certain environmentally harmful
byproducts, including NOx, carbon monoxide, unburned hydrocarbons and
particulate matter. In the United States, the Clean Air Act creates the
National Ambient Air Quality Standards which are the basis for regulations
that limit emissions on a facility-by-facility basis. These restrictions vary
geographically and are most stringent in areas where existing pollution levels
are high, such as in urban areas and in California, the Northeast states and
Texas. Air quality regulations in the United States encourage the use of more
effective emissions-control technology by requiring the use of the "Best
Available Control Technology," and they provide an economic incentive to
achieve lower emissions through requirements to offset emissions of new
sources with reductions from existing sources in areas that do not meet air
quality standards.
The cost of emissions control systems alone does not capture the full
impact of environmental issues on the power producer. Public opinion and
permitting issues often prevent power producers from siting plants near
population centers, even if they can meet emissions standards. As a result,
the availability of cost-effective emissions technologies which surpass
regulatory requirements can be extremely valuable to power producers. Beyond
reducing costs, these technologies can actually enable projects which
otherwise would not have been possible.
Increased Quality and Reliability Requirements
The third force reshaping the electric power industry is the new digital
economy's need for reliable, high quality power. The rapid growth in the use
of computers, the Internet and telecommunications products has significantly
increased the demand for high quality power to run computer equipment,
cellular base stations and many other components and devices that depend on a
reliable electricity supply. Unlike traditional electrical loads such as
lights and motor-operated equipment, sophisticated digital devices cannot
tolerate voltage instabilities, such as surges and sags, without serious
negative impact on their operations. These increased quality and reliability
requirements are creating demands for new supplies of cost-effective and
reliable electric power that can be located in populated areas, close to
loads, where they can provide the highest-quality service.
Limitations of Existing Technology
Gas turbines have emerged as the solution of choice for new power
generation, throughout the world where natural gas is available, due primarily
to their inherent operating flexibility, high efficiency, relatively low
capital and installation costs and overall cleanliness relative to other
generation alternatives. Gas generation as a percent of total installed
capacity is expected to rise significantly over the next two decades.
According to the U.S. Department of Energy, gas-fired generation, which
accounted for 15% of total United States electricity generation
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in 1997, will represent 33% of total generation by 2020. This increase is
attributable to the rapid build-up of gas-fired generation capacity. Cambridge
Energy Research Associates, an independent industry research firm, estimates
that gas-fired generation will account for 97% of all U.S. generation capacity
additions between 1999 and 2004. In Europe, according to Power Data Group, gas
turbines represented 80% of the utility and independent power producer order
volume from 1996 through 1998.
Despite the advantages of gas-fired generation, emissions remain a concern
for both air quality regulators and wholesale generators who have sought to
emphasize their use of clean power generation technologies. In order to reduce
emissions, gas turbine manufacturers have developed improved flame-based
combustion systems. The most advanced of the modified flame-based combustion
systems are the lean pre-mix systems such as dry-low NOx or DLN. These
measures have, however, in some cases contributed to premature component
failure and reduced gas turbine reliability. Furthermore, even the most
effective lean pre-mix systems cannot achieve desired near-zero emissions
levels.
For baseload gas turbine generating plants that operate in combined cycle
(with a heat recovery system), exhaust cleanup systems are required to achieve
near-zero emissions. The most common conventional exhaust cleanup system is
selective catalytic reduction or SCR. While this technology has become
commonplace, it adds significant capital and operating costs, reduces overall
project performance and efficiency and can create incremental health risks
through secondary emissions and the transportation and storage of toxic
reagents. Operators of baseload generating plants are particularly sensitive
to the costs of exhaust cleanup due to the competitive pricing nature of the
markets they serve.
Exhaust cleanup systems cannot be used in all gas turbine applications. Gas
turbines that operate in simple cycle (without heat recovery system), such as
peaking turbines and gas pipeline compressors, have exhaust temperatures that
are too hot for conventional exhaust cleanup systems. For small gas turbines
with heat recovery systems used in distributed generation applications, the
addition of SCR can be cost prohibitive.
The limitations associated with existing emissions control technologies
prevent power producers from cost-effectively achieving near-zero emissions
across all gas turbine applications. As a result, producers have been limited
in their ability to respond to the changing needs of the power industry. Power
producers seeking to develop flexible peaking plants in capacity-constrained
regions have faced more lengthy permitting processes and/or operating
restrictions due to concerns over the plants' inability to achieve low
emissions. Power producers have also been unable to offer distributed
generation on a wide scale because technologies that can achieve near-zero
emissions, such as fuel cells, remain prohibitively expensive while cost-
effective alternatives, such as gas turbines, produce harmful emissions that
limit their use in distributed generation applications.
The limitations associated with existing emission control technologies have
also adversely impacted gas pipeline operators. Gas turbine pipeline
compressors cannot use conventional exhaust cleanup systems. As a result, they
cannot achieve near-zero emissions and operators are often required to install
more expensive electric motor drives in emissions sensitive areas.
The Xonon Cool Combustion Solution
We believe that the introduction of a technology that can cost-effectively
achieve near-zero emissions in all gas turbine applications will create
significant value for users of gas turbines by enabling them to better respond
to the changing needs of the energy industry. Furthermore, we believe:
. Xonon Cool Combustion offers a low cost, near-zero emissions solution
for baseload gas turbine generating plants.
. Xonon enables simple cycle gas turbines to achieve near-zero emissions.
As a result, Xonon will facilitate the siting and permitting of peaking
turbines and enhance their value by eliminating emissions-related
operating restrictions.
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. Small Xonon-equipped gas turbines represent the first distributed
generation alternative that is cost effective, achieves near-zero
emissions, is based on proven technology and is currently available on a
commercial basis. We believe the implementation of Xonon-equipped gas
turbines in these applications will accelerate the acceptance of
distributed generation in the changing electric power industry.
. Xonon enables turbines to be used in pipeline compressor applications in
the most emissions-sensitive areas and avoids the use of more expensive
electric motor drives.
Our Strategy
Our goal is to make Xonon the preferred combustion system for all gas
turbines and for other applications. Our strategy for achieving this goal is as
follows:
. Develop Our OEM Relationships. We intend to develop and sell Xonon
combustion systems through gas turbine OEMs. We have entered into
collaborative development agreements with a number of leading turbine
manufacturers for the joint design and application of Xonon Cool
Combustion technology to their turbines. Upon completion of these
development programs, we expect them to commercialize their Xonon-
equipped turbines.
We believe offering Xonon on their gas turbines would give OEMs a
competitive advantage in new equipment sales. We also believe Xonon
module replacement services and the availability of Xonon as an upgrade
for existing gas turbines would enhance the OEMs' service businesses.
Once an OEM adopts Xonon combustion technology on one of its gas
turbines, we will work to extend Xonon combustion technology to other
gas turbines in its product lines. We believe our collaborative
relationships with OEMs place us at a considerable competitive advantage
relative to others.
. Market Currently Offered Xonon-equipped Gas Turbines. During the early
stages of commercialization, we are working with our OEM partners and
are actively seeking out prospective users of Xonon-equipped gas
turbines. We are participating in the initial stages of discussions
relating to their gas turbine orders. We are also working with the OEMs
to identify situations where project circumstances are well-suited for
early adoption of Xonon.
. Establish and Promote Xonon Brand Awareness. We believe that increased
awareness of the Xonon combustion system and its benefits among end
users will accelerate OEMs' incorporation of Xonon combustion systems
across their product lines. We expect to actively promote awareness of
Xonon combustion systems among a broad audience through peer-reviewed
technical articles, advertisements in trade journals, presentations at
trade shows and other promotional activities. We will establish brand
awareness by targeting our marketing and product development activities
to demonstrate the range of Xonon's benefits. We expect that the OEMs
will market the Xonon combustion system under our Xonon brand.
. Aggressively Defend Our Intellectual Property and Broaden Our Technology
Base. Xonon Cool Combustion technology is a proprietary technology
protected by patents. Our intellectual property base and our accumulated
experience in applying catalytic combustion to operating systems place
us at a considerable advantage relative to other potential developers of
catalytic combustion and competing technologies. We intend to continue
technological development of Xonon to further extend catalyst life, gain
experience with a wider set of gas turbine operating conditions and
develop component design approaches for gas turbines under different
operating conditions and combustion configurations. In addition, we plan
to vigorously defend our intellectual property.
. Expand the Applications of Our Technology. We believe our technology is
applicable to other types of gas turbines such as microturbines and
turbines incorporated in fuel cell-gas turbine hybrid power systems. We
also believe our technology can be used in combustion systems other than
gas turbines such as diesel engines. We expect to continue research and
development in these areas where technical and commercial factors appear
encouraging.
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Market for Xonon
We believe that Xonon combustion systems offer distinct advantages in all
gas turbine markets within the power generation and gas pipeline compression
industries. We divide our potential market into four segments based on gas
turbine size, OEM participants and end-user applications. These segments
include large, medium and small gas turbines for power generation and gas
turbines for gas pipeline compressor applications.
Small Gas Turbines (less than 15 MW)
Due to their earlier shipping dates, we expect that Xonon modules for small
gas turbines will compose a majority of our product revenue over the next few
years. The small gas turbine segment includes turbines that generate less than
15 MW of electric power. Turbines in this segment serve light industrial,
commercial and institutional loads in power only and combined heat and power,
or cogeneration, applications. With the restructuring of the utility industry
the desire to site near users has become a key driver of demand for these
turbines. Such units can avoid the need to expand transmission and
distribution capacity and enhance power quality and reliability.
According to Forecast International, sales of gas turbines smaller than 15
MW used for power generation (excluding microturbines) should generate $1.1
billion in 2000. This market sector is poised for dramatic growth. According
to the Gas Research Institute, generation in this size range is predicted to
reach a 20%-40% share of total power generation capacity additions over the
next ten years.
Gas turbine OEMs in this segment include AlliedSignal, Alstom Power,
Kawasaki Heavy Industries, GE's Nuovo Pignone subsidiary, Pratt & Whitney
Canada, Rolls Royce, and Caterpillar's Solar Turbines unit. According to
Forecast International, Solar, Rolls Royce and Alstom Power are the dominant
participants.
We are operating a 1.5 MW Xonon-equipped Kawasaki Heavy Industries gas
turbine on the electric utility grid at Silicon Valley Power in Santa Clara,
California. On May 17, 2000, Kawasaki and Enron Energy Services announced
their intent to furnish three Xonon-equipped 1.5 MW Kawasaki M1A-13X gas
turbines for a distributed power generation project in the Northeastern United
States. We expect that these turbines will be delivered to the end-user in
late 2001. We are also currently working with GE to develop and commercialize
the Xonon combustion system for Nuovo Pignone's GE10 gas turbine. On April 4,
2000, GE entered into a preliminary agreement to supply Alliance Power with
six Xonon-equipped GE10 gas turbines, subject to successful completion of the
development work on this Xonon system. We expect that these gas turbines will
be delivered to Alliance beginning in mid-2002. For both of these orders, we
expect to ship our Xonon modules and recognize the associated revenue up to
six months prior to turbine delivery. We are also engaged with Solar Turbines
and Rolls Royce in adapting Xonon for gas turbines they manufacture in this
size range.
Large Gas Turbines (greater than 60 MW)
Due to longer turbine lead times, we expect that Xonon modules for large
gas turbines will not compose a significant portion of our revenue until at
least 2003. The large gas turbine segment includes turbines that generate more
than 60 MW of electric power. These turbines are presently used by public
utilities and wholesale generating companies to provide large quantities of
power to serve utility loads or for resale in wholesale markets. The majority
of gas turbines in this market are used in combined cycle configuration for
base load power generation. With the restructuring of the power industry,
however, demand for large-scale simple cycle peaking turbines has surged.
Diesel & Gas Turbine Worldwide reported a six-fold increase in orders of these
gas turbines from 1998 to 1999. All Diesel & Gas Turbine Worldwide figures are
based on years ended in May.
According to Forecast International, new gas turbine sales in this sector
should be approximately $11.6 billion in 2000. The market for large turbines
has recently demonstrated very high growth with turbine manufacturers
reporting significant sales increases and backlogs. According to Diesel & Gas
Turbine Worldwide, global orders of gas turbines greater than 60 MW more than
doubled from 1998 to 1999.
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According to Power Data Group, Alstom Power, GE, and Siemens/Westinghouse
together represent nearly all of this market on a unit basis. GE is the market
leader in this sector.
In November 1998, we signed a collaborative agreement with GE to develop
the Xonon combustion system components for incorporation into GE's model 7EA
and 7FA gas turbines. In December 1999, GE accepted an order from Enron
specifying Xonon as the preferred emissions control system on GE 7FA gas
turbines, with GE and Enron maintaining the right to substitute alternative
emissions control technology for any reason, including if the Xonon combustion
system cannot be developed or has not been developed in time to meet delivery
requirements. We are also engaged in discussions at various stages with other
manufacturers serving this sector.
Medium Gas Turbines (15 to 60 MW)
The medium gas turbine segment includes turbines that generate between 15
and 60 MW of electric power. These units are used in energy intensive
industrial facilities for power generation and cogeneration.
According to Forecast International, new gas turbine sales in this sector
are expected to generate $2.9 billion in 2000. Alstom Power, GE, Rolls Royce
and Siemens/Westinghouse will represent about 90% of this market on a unit
basis. GE is the dominant participant.
Turbines for Gas Pipeline Compressors (5 to 60 MW equivalent)
The gas pipeline compressor sector includes gas turbines generally ranging
from 5 MW to 60 MW (equivalent) used as mechanical drives for compressors on
gas pipelines.
According to Forecast International, gas turbine sales for mechanical
drives, essentially all of which are for gas pipeline drives, will generate
about $500 million in 2000. Alstom Power, GE, Rolls Royce and Solar Turbines
will represent about 90% of this market. GE and Solar are the leading
participants.
Several of the Xonon-equipped gas turbines that we are collaboratively
developing with OEMs may be marketed for pipeline compressor applications.
Relationships With Enron
In January 1998, Enron announced that it would evaluate the use of the
Xonon combustion system in certain of its future wholesale power generation,
distributed power generation, and pipeline compressor projects. At the same
time, Enron Ventures, a wholly owned subsidiary of Enron, purchased a 15%
equity interest in us for $30.0 million. Enron Ventures also received a three-
year option to purchase up to an additional 1,071,430 shares (on an as-
converted to common stock basis) for $14.4 million. Beginning on the tenth day
after the distribution the option is exerciseable on a cashless basis. As part
of the investment, Thomas E. White, then an officer of Enron Ventures and
currently Vice Chairman of Enron Energy Services, joined our board of
directors. Enron Ventures has the right to nominate one member of our board so
long as it owns at least 5% of our voting stock. See "Related-Party
Transactions-Relationship with Enron."
In December 1999, an Enron North America order for GE 7FA gas turbines
specified the Xonon combustion system as the emissions control system for the
gas turbines. Enron and GE have the right to substitute alternative emissions
control technology for any of these gas turbines for any reason, including in
the event the Xonon combustion system has not been developed or cannot be
developed in time to support Enron North America's project schedule.
In December 1999, Enron North America also agreed to contribute to the
funding of the development of the Xonon combustion system for use in GE 7FA
gas turbines. GE agreed to use commercially reasonable efforts to complete, in
collaboration with us, development, design, and on-engine testing of the Xonon
combustion system for 7FA gas turbines. GE's collaborative effort for
development, design and testing of Xonon for 7FA gas
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turbines is not limited by the future selection of the emissions control
technology used in Enron's December 1999 order for GE 7FA gas turbines.
Collaborations
To date, we have entered into the following collaborative relationships
with leading industry participants to produce and sell Xonon combustion
systems.
. General Electric. GE is the leading manufacturer of gas turbines in the
world. We have been working with GE on the application of the Xonon
system to gas turbines under a series of development program agreements
since 1991. In November 1998, we signed an agreement with GE for the
development, design and commercialization of the Xonon system in
selected models of new and existing GE gas turbines. The agreement
requires that GE market the Xonon Cool Combustion system only under the
Xonon brand. The agreement also includes provisions for the development
and supply of Xonon modules to satisfy GE's requirements for initial
installation and periodic replacement. In December 1999, GE accepted
from Enron North America the first order for GE 7FA gas turbines
specifying Xonon combustion systems as the preferred emissions control
system. Concurrently with this gas turbine order GE agreed to use
commercially reasonable efforts to complete, in collaboration with us,
development, design and testing of the Xonon combustion system for the
7EA and 7FA gas turbines. The Enron order provides that the 7FA gas
turbines will be equipped with Xonon unless Enron or GE elect to
substitute alternative emissions control technology. The agreement
provides that GE may terminate the agreement at any time if it
determines that there are significant technical issues which indicate
that the technical objectives of the Xonon commercialization program are
not achievable or cannot be achieved within the timetable established
for the program.
. Nuovo Pignone. We and GE are working to develop and commercialize the
Xonon system for the GE10 gas turbine manufactured by GE's Nuovo Pignone
subsidiary. This gas turbine is used for distributed generation and gas
pipeline compression applications. In April 2000, GE entered into a
preliminary agreement for the purchase of six Nuovo Pignone GE10
turbines equipped with the Xonon combustion system. Alliance Power, Inc.
would be the launch customer.
. Solar Turbines. In the second quarter of 1996, we and Solar Turbines, a
wholly-owned subsidiary of Caterpillar, Inc., began a joint design and
development program for the inclusion of Xonon into Solar's new Advanced
Technology System gas turbine being co-funded by the U.S. Department of
Energy. Xonon full-scale testing is in process at Solar on the Solar
Mercury 50 (5 MW), which has resulted from this program. Future plans
include additional testing at Solar in 2000. We are also investigating
application of Xonon technology in other Solar gas turbines.
. Rolls Royce. In the first quarter of 1996, we began a joint development
program with the Allison Engine division of Rolls Royce for the design
of Xonon as an integral part of their new Advanced Technology System gas
turbine which was co-funded by the U.S. Department of Energy.
Development and testing of the engine is continuing and Xonon's
development is tracking with the schedule defined for the gas turbine.
In addition to our collaborative relationships with these OEMs, in
September 1998, we and five other companies signed the Monterey Bay Alliance
Agreement. Under the terms of the alliance the member companies agreed to
implement complete energy solution projects for distributed generation
applications. The current alliance members are, in addition to us: Alliance
Power, Carrier Corporation, Enron Energy Services, Harding Lawson & Associates
Inc., Kawasaki, Pratt & Whitney Canada and Solar Turbines. Alliance Power is
the primary developer of projects for the alliance. All projects will be based
upon turbines of one or more alliance members and all turbines will include
Xonon combustion technology. Alliance Power's preliminary agreement to
purchase six Xonon-equipped GE10 gas turbines from GE announced in April 2000
is a direct result of the relationships developed within the Monterey Bay
Alliance.
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Development of Xonon technology has been supported in part by government
agencies and research institutions, including the U.S. Department of Energy,
The California Energy Commission, the California Air Resources Board, and the
Gas Research Institute. In connection with some of these funding arrangements,
these parties receive certain financial rights in the commercialization of the
resulting technology.
Manufacturing and Testing
We plan to manufacture commercial quantities of Xonon modules at our
facility in Mountain View, California. We believe that our manufacturing
facilities will require only modest capital expenditures over the next several
years to expand our capabilities to supply Xonon modules. We plan to retain
all proprietary manufacturing within our facilities and outsource the non-
critical components to third party suppliers having OEM gas turbine
manufacturing expertise.
For internal production we plan to use manufacturing cells, which are
designed to produce approximately 1,000 complete modules per year and have a
3,000 square foot footprint. These cells are scaleable to capacity needs and
can be located near customer facilities or distribution nodes. During 1999 we
constructed the Mountain View facility with the manufacturing cell design and
have achieved start-up and initial production of commercial-quality modules.
In the fourth quarter of 1999, we earned ISO 9001 Registration from
Underwriters Laboratories, Inc. (UL) for the production of Xonon modules. The
ISO series standards are internationally recognized quality management system
requirements developed by the International Organization of Standardization
(ISO). ISO 9001 is the most comprehensive standard in the ISO 9000 series. It
covers design, manufacture, installation, and servicing systems.
We anticipate achieving production efficiencies as commercial production
volume ramps up over the next three years. Overall capacity growth will be
achieved through a combination of these efficiency improvements and the start-
up of additional manufacturing cells, both at our current facility and at
additional sites, as appropriate. Because of the modular design of these
cells, our capacity can grow in cell-sized increments in line with increasing
demand. Our manufacturing process lead-time is much shorter than the
production lead-time of the gas turbines into which our modules fit. Based on
our commercialization plan, we anticipate that our existing facilities will
provide sufficient capacity through 2003. We anticipate adding additional
cells starting in 2004.
Pursuant to our arrangements with the gas turbine manufacturers, Xonon
modules will be returned to us at the end of their useful life. We expect to
reclaim, reuse or recycle most components of the module, including precious
metals. Because we can recover and reuse these metals in our modules, we can
protect against the volatility of precious metal prices.
Our sourcing strategy is designed to take advantage of existing suppliers
and production infrastructure and to ensure the supply of critical materials
and components. We will ensure supply of critical materials by a combination
of dual sourcing, strategic inventory control and identification of substitute
materials. We expect to outsource metal fabrication components to suppliers
already supplying similar components to the turbine OEMs. Other materials
required for Xonon module production will be sourced from the specialty
chemicals and specialty metals industries. We expect these components and
materials to have lead times of under four months at full production
quantities. To date we have identified and are using at least two such
suppliers for all metal fabrication components and the majority of the
remaining materials. We expect to have at least two qualified sources or to
have identified substitutes for all purchased materials within the next year.
In addition to our manufacturing facilities, we own and operate facilities
used for testing and developing our technologies. We have catalyst test
facilities, including two combustion test rigs, at our site in Mountain View,
California. These facilities are capable of testing catalysts at a range of
gas turbine operating conditions representative of most gas turbines that are
presently manufactured. We have additional facilities that allow for the
testing of critical combustor components such as preburners and mixers.
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We also own a Kawasaki Heavy Industries 1.5 MW M1A-13A gas turbine equipped
with the Xonon combustion system that is operating on the electric utility
grid in Santa Clara, California. This turbine provides electric power under
contract to Silicon Valley Power. In addition to power production, this unit
serves as our on-engine test and demonstration facility for the Xonon
combustion system for gas turbines.
Regulatory
In the United States, federal air quality regulations include standards for
ground-level ozone (a primary component of smog) and particulate matter
(soot). Since NOx is both a precursor to ground-level ozone and a contributor
to the formation of fine particulate matter, reducing NOx emissions at power
generation facilities is important to meeting air quality standards. Federal
air quality regulations also include standards for emissions of carbon
monoxide and unburned hydrocarbons, two other common byproducts of electric
power generation. The federal regulations governing air quality create
National Ambient Air Quality Standards (NAAQS). Areas that meet the NAAQS are
designated as "attainment areas," while areas not meeting the standards are
designated as "non-attainment areas." State and local authorities determine
specific strategies to be applied in each area in order to meet the federal
air quality standards. Generally speaking, emissions restrictions applied in
the most severe non-attainment areas are the most extensive.
Federal law requires that major new and modified sources of air pollution
in attainment areas utilize the most effective emissions control technology
that has been demonstrated in practice and is commercially available, unless
it can be shown not to be cost-effective. This requirement is referred to as
the "Best Available Control Technology," or BACT, standard. State and local
authorities determine whether a particular facility is in compliance with the
BACT standard.
In areas that do not meet ambient air quality standards, authorities
assessing new facilities are not permitted to consider the cost-effectiveness
of technology alternatives. This more stringent standard is referred to as the
"Lowest Achievable Emissions Rate", or LAER, standard. In some particularly
polluted non-attainment areas, existing facilities may also be required to
retrofit more effective emissions control technology if it is demonstrated in
practice, available and cost-effective. This requirement is referred to as the
"Reasonably Available Control Technology", or RACT, standard. Furthermore, in
non-attainment areas, the permitted emissions of major new or modified sources
of air pollution must also be offset by emissions reductions elsewhere such
that there is a net decrease in overall emissions as a result of the new
source. In order to satisfy this requirement, project developers may
demonstrate emissions reductions or, in some markets, purchase credits for
emissions reductions.
To facilitate the control technology assessments in BACT/LAER
determinations, some state and local authorities have published guidance
documents for developers that identify desired emissions levels for different
types of sources. For example, the California Air Resources Board (CARB) and
the South Coast Air Quality Management District (SCAQMD) covering the Los
Angeles Basin have adopted guidance NOx emissions levels for gas turbines of
2.5 ppm. The Xonon Cool Combustion system operating on the gas turbine at
Silicon Valley Power has satisfied federal Environmental Protection Agency
guidelines for an emissions control technology that is "achieved in practice"
and has demonstrated emissions levels that would satisfy the CARB and SCAQMD
guidelines for gas turbines. We believe that Xonon is the only gas turbine
combustion system demonstrated to meet these guidelines without requiring a
costly exhaust cleanup system.
While U.S. regulations do not directly force the adoption of new control
technologies or mandate lower emissions levels, they do provide an economic
incentive to achieve lower emissions, and, through BACT/LAER determinations,
serve to encourage the use of newly introduced control technologies that are
more cost-effective and/or achieve lower emissions levels. We believe the
Xonon combustion system for gas turbines achieves desired ultra-low emission
levels more cost-effectively than post-combustion exhaust cleanup systems, and
enables gas turbines to achieve ultra-low emissions in situations where these
exhaust cleanup systems cannot be used. As a result, we believe Xonon will
enhance the value of gas turbine projects by reducing emissions
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compliance costs and contributing to regulatory and community acceptance, thus
improving the siting and operating flexibility of gas turbines.
In addition to environmental requirements in the United States, there are
increasing restrictions on emissions abroad, particularly in Japan and Western
Europe. Furthermore, lenders and public pressure are expected to force host
countries to adopt proven emissions control technologies on power plants in
developing countries.
Our Intellectual Property
Xonon Cool Combustion is a proprietary technology with extensive
intellectual property protection. Our intellectual property strategy is to
identify key intellectual property developed by us in order to protect it in a
timely and effective manner, and to use and assert such intellectual property
to our competitive advantage in the catalytic combustion business.
Intellectual property includes proprietary technology, know-how, business
strategies and market information. An objective of our intellectual property
strategy is to enable us to be first to market with proprietary technology and
to sustain a long-term technological lead in the market. We rely on a
combination of patents, trade secrets, trademarks, copyrights and contracts to
protect our proprietary technology.
We use patents as the primary means of protecting our technological
advances and innovations, such as our proprietary Xonon Cool Combustion system
designs, catalyst compositions, new materials, manufacturing processes,
operating techniques, combustor components and combustor system designs. We
have adopted a proactive approach to identifying patentable inventions and
securing patent protection through the timely filing and aggressive
prosecution of patent applications. Our employees participate in a
comprehensive invention disclosure program involving preparation of written
invention memoranda and preservation of supporting laboratory records. Patent
applications are filed in various jurisdictions internationally, which are
carefully chosen based on the likely value and enforceability of intellectual
property rights in those jurisdictions, and to strategically reflect our
anticipated major markets. Patents provide us with the right to exclude others
from incorporating these technical innovations into their products and
processes. We also use patents, along with publications and, where
appropriate, licensing-in of third party technology to provide us with the
flexibility to adopt preferred technologies.
As of June 30, 2000, we (a) owned, either exclusively or jointly, (b) held
exclusive license rights from third parties for, or (c) held license rights
from affiliates, in 15 U.S. patents issued, 4 U.S. patents pending, 10
International Patent Treaties, and 43 international registered patents. An
additional 4 patent applications are currently in preparation.
We believe we have developed a significant international patent portfolio.
We have filed an increasing number of patent applications each year and we
anticipate that this trend will continue. We actively monitor the patent
position, technical developments and market activities of our competitors. We
expect that our growing patent portfolio, especially when coupled with a
strong enforcement program, will provide us with a significant advantage over
our competitors.
Portions of our know-how are protected as trade secrets and supported
through contractual agreements with our employees, suppliers, partners and
customers. We aggressively protect our intellectual property rights in our
collaboration agreements with a view to capturing maximum value from our
products in our markets and ensuring a competitive advantage.
Competition
We expect Xonon-equipped gas turbines to compete with turbines outfitted
with existing emissions reduction technologies, including lean pre-mix
combustion and conventional exhaust cleanup systems. Lean pre-mix combustion
systems are manufactured and provided by gas turbine OEMs as part of their
turbine product line. These gas turbine OEMs represent the potential customer
base for our Xonon modules, and we expect to rely upon them to distribute
Xonon-equipped turbines to end-users.
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Third parties, including Cormatech, Englehardt, Goal Line, Mitsubishi and
Siemens, manufacture conventional exhaust cleanup systems. End-users generally
purchase these systems directly from the manufacturers, through packagers, or
from vendors of heat recovery steam generation equipment. Gas turbine OEMs do
not function as intermediaries in these transactions and do not receive any
economic value from the sale of exhaust systems.
We expect that gas turbine OEMs will choose to purchase Xonon modules and
distribute Xonon-equipped turbines despite the fact that Xonon represents a
direct competitive challenge to their existing emissions control products. We
believe this will be the case for two reasons. First, Xonon combustion systems
achieve near-zero emissions at lower costs than competing technologies. Based
on this cost differential, turbines that incorporate Xonon Cool Combustion
technology offer a significant competitive advantage over turbines equipped
with conventional emissions technology. Incorporation of Xonon Cool Combustion
technology, therefore, enhances the OEM's product line and offers the
potential for the turbine OEM to gain market share from competitors whose
turbines do not incorporate Xonon Cool Combustion technology. Second,
incorporating Xonon into its turbines allows the OEM to capture a larger
portion of the economics associated with pollution control. Currently, OEMs
only capture the portion of emissions reduction economics associated with LPM,
while third parties capture the portion of economics associated with exhaust
cleanup systems. Because Xonon replaces LPM technology and eliminates the need
for exhaust cleanup systems, its incorporation in the turbine allows OEMs to
capture a larger portion of the economic value associated with emissions
reduction.
Over time, the Xonon combustion system may also face competition from new
entrants to the market for emissions reduction. New entrants may eventually
develop competing technologies, catalytic or otherwise, that also achieve
near-zero emissions on a cost-effective basis. For example, Precision
Combustion, Inc. ("PCI") has indicated on its web site that it has a long-term
business agreement with Siemens Westinghouse Power Corporation to develop,
manufacture and sell low, single digit NOx catalytic combustors for certain of
Westinghouse's gas turbines. PCI also states that it is working with other gas
turbine manufacturers under shorter term agreements. PCI has not characterized
these agreements as exclusive.
We believe, based on a review of public reports, that we are the only
company to have demonstrated catalytic combustion in full-scale combustor
systems at actual gas turbine conditions and to have achieved operation of
catalytic combustion on a gas turbine with the durability required for
commercial success. Further, we believe the technology that has enabled us to
achieve these milestones is proprietary to us.
We believe that the measures we have taken to protect our intellectual
property provide a significant barrier to entry for future competing
technologies. We also believe that even if current efforts to create competing
technologies could circumvent our intellectual property protections, these
efforts are several years away from commercial development.
Catalytica Advanced Technologies acts as an incubator for new businesses
and is engaged in a number of areas of catalytic research, including
development of fuel processing technology for fuel cells, that encompass the
reforming of gasoline and natural gas for transportation and stationary power
applications. As part of our combination with Catalytica Advanced
Technologies, new technologies formerly developed by Catalytica Advanced
Technologies will continue to be developed. One such technology is being
developed by Catalytica NovoTec, Inc., a new subsidiary of ours that
previously operated as a development group within Catalytica Advanced
Technologies. NovoTec is developing improved catalytic processes employing
proprietary high throughput testing and computer learning technologies.
Employees
As of July 31, 2000, we employed 63 persons. None of our employees is
represented by a labor union. We believe our relations with our employees are
good.
39
<PAGE>
Legal Proceedings
On August 4, 2000, a purported class action complaint Sims et al. v.
Cusumano et al., Civil Action No. 18197NC, was filed in the Chancery Court of
the State of Delaware against Catalytica and certain of its directors. The
complaint alleges that defendants breached their fiduciary duties by agreeing
to a transaction that contemplates the distribution of our shares to
Catalytica stockholders and in which Catalytica would be acquired by DSM. The
plaintiffs contend the transaction is unfair to the Catalytica shareholders
and they seek to, among other things, enjoin the transaction. Defendants have
not yet responded to the complaint. Based on the facts known to date,
Catalytica believes that the claims are without merit and intends to
vigorously defend this suit. Catalytica further believes that the outcome of
this litigation will not have a material adverse effect on Catalytica's
financial condition or results of operations.
On August 14, 2000, the City of Glendale filed a complaint against us,
Catalytica and Genxon Power Systems, Inc. in Los Angeles County Superior
Court, Case No. EC029841. The complaint asserts claims against all defendants
for breach of contract, breach of the covenant of good faith and fair dealing,
fraud and negligent misrepresentation arising out of defendants' failure to
complete its performance under a Technical Services Agreement between the City
of Glendale and Catalytica providing for the retrofit of the FT4 engine with
the FT4 Xonon Combustion System. The City of Glendale seeks compensatory
damages in excess of $7,500,000 and punitive damages. The defendants believe
they have meritorious defenses to the claims asserted and intend to defend the
action vigorously.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statement include the
unaudited pro forma condensed combined balance sheet as of June 30, 2000, and
the accompanying notes. There were no pro forma adjustments affecting
operations.
The unaudited pro forma balance sheet has been prepared to reflect the
effects of the distribution and other adjustments as if they had occurred as
of June 30, 2000.
The pro forma adjustments are preliminary and based on management's
estimates. In addition, management is in the process of assessing and
formulating its business plans. Management does not know the exact amount of
related distribution or other reorganization costs but does not believe actual
amounts will differ significantly from their estimates. Based on the timing of
the closing of the proposed transaction, the finalization of the integration
plans and other factors, final pro forma adjustments may differ materially
from those presented in these pro forma financial statements.
Immediately prior to the distribution, by agreement Catalytica will
contribute an amount of cash to CCSI to increase the capitalization of CCSI by
an amount that will result in a cash balance of at least $40 million.
Catalytica expects to purchase stock for $50 million. This amount is required
to fund its operating requirements for the near term and to pay transaction
related expenses.
The unaudited pro forma condensed combined financial statement is not
necessarily indicative of what the actual financial results would have been
had the transaction described above taken place on June 30, 2000. In addition,
they do not purport to indicate the future financial position of CCSI. This
unaudited pro forma condensed financial statement should be read in
conjunction with the historical financial statements and notes of CCSI that
are included in this document.
The transactions described in this filing and the pro forma financial
statement are the subject of stockholder litigation described on page 40 of
this document.
41
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
June 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical Adjustments Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 7,415 $45,000 (1)(2) $ 52,415
Short-term investments................. 5,491 -- 5,491
Accounts receivable, net
Trade................................ 1,963 -- 1,963
Joint venture........................ 175 -- 175
Employees............................ 40 -- 40
-------- ------- --------
2,178 -- 2,178
Inventory.............................. 110 -- 110
Prepaid expenses and other assets...... 24 -- 24
-------- ------- --------
Total current assets................. 15,218 45,000 60,218
Property and equipment, net.............. 1,736 2,779 (1) 4,515
Notes receivable from employees.......... 853 -- 853
-------- ------- --------
$ 17,807 $47,779 $ 65,586
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Catalytica, Inc. ........... $ 6,533 $(6,533)(3) --
Accrued liabilities.................... 773 2,214 (1) $ 2,987
Deferred revenue....................... 722 -- 722
-------- ------- --------
Total current liabilities............ 8,028 (4,319) 3,709
Note payable to Catalytica............... 730 (730)(3) --
Stockholders' equity:
Preferred stock........................ 11 (11)(4) --
Common stock........................... 2 13 (1)(4) 15
Additional paid-in capital............. 56,740 57,826 (1)(3) 114,556
Deferred compensation.................. (151) -- (151)
Deficit................................ (47,553) (5,000)(2) (52,543)
-------- ------- --------
Total stockholders' equity........... 9,049 52,828 61,877
-------- ------- --------
$ 17,807 $47,779 $ 65,586
======== ======= ========
</TABLE>
See Accompanying Notes to Unaudited Condensed Combined Financial Statements.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENT
(In thousands)
Basis of Presentation
This unaudited pro forma financial statement has been prepared to
illustrate the distribution of the shares of our stock held by Catalytica to
shareholders of Catalytica. This distribution will not take place unless the
stockholders of Catalytica approve the proposed merger of Catalytica and
Synotex. The unaudited pro forma balance sheet has been prepared to reflect
the effects of the distribution and other adjustments as if they occurred as
of June 30, 2000.
The unaudited pro forma condensed combined financial statement is not
necessarily indicative of what the actual financial results would have been
had the transaction described above taken place on June 30, 2000. In addition,
they do not purport to indicate the future financial position of Combustion
Systems and Catalytica Advanced Technologies.
These unaudited pro forma condensed financial statement should be read in
conjunction with the combined financial statements and notes of Catalytica
Combustion Systems, Inc. and Catalytica Advanced Technologies, Inc. that are
included in this document.
Adjustments
The unaudited pro forma condensed statements give effect to the following
pro forma adjustments:
1. The merger agreement provides for Catalytica to increase our
capitalization by an amount that will result in a cash balance of at least
$40 million. Catalytica currently expects to purchase additional shares of
our stock for cash of $50 million. This records the capitalization of that
amount as well as certain assets ($2,779) and liabilities ($2,214)
transferred by agreement. An inter-company charge that closely approximates
the amortization of these assets is included in the historical operating
results.
2. To record estimated transaction costs ($5,000).
3. To record forgiveness of intercompany payable to Catalytica.
4. To record merger of the Combustion Systems and the Catalytica Advanced
Technologies businesses.
43
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees as of July 31, 2000,
are as follows:
<TABLE>
<CAPTION>
Name Age Position with Catalytica Combustion Systems
---- --- -------------------------------------------
<S> <C> <C>
Ricardo B. Levy......... 54 Chairman of the Board and Director
Craig N. Kitchen........ 49 President and Chief Executive Officer and Director
Lawrence W. Briscoe..... 55 Chief Financial Officer and Director
Ralph A. Dalla Betta.... 54 Chief Technology Officer and Vice President, Technology
Carl Schopfer........... 54 Senior Vice President, Engineering
Peter B. Evans.......... 41 Senior Vice President, Business Development
Patrick T. Conroy....... 54 Senior Vice President, Product Development
Steven J. Oliva......... 41 Vice President, Operations
Julie A. Messersmith.... 35 Director of Finance
William B. Ellis........ 59 Director
Frederick M. O'Such..... 62 Director
John A. Urquhart........ 71 Director
Thomas E. White......... 56 Director
</TABLE>
Ricardo B. Levy, Ph.D. joined our board of directors in June 1995 as
chairman of the board. He is a founder of Catalytica and has been a director
of Catalytica since 1974. He served as chief operating officer from
Catalytica's inception in 1974 until August 1991, when he became president and
chief executive officer. Before founding Catalytica, Dr. Levy was a founding
member of Exxon's chemical physics research team. Dr. Levy has an M.S. from
Princeton University and a Ph.D. in chemical engineering from Stanford
University. Dr. Levy is an alumnus of Princeton and Harvard University's
Executive Management Program.
Craig N. Kitchen was appointed as our president and chief executive officer
in July 2000. Prior to that Mr. Kitchen was a corporate vice president at
Triumph Group, a manufacturer of major airframe, structural and aircraft
engine components, where he most recently directed business for the aerospace
companies. From October 1994 to July 1997, Mr. Kitchen was a partner at
Stolper-Fabralloy, a supplier of combustors for aerospace and industrial gas
turbines, and led the business development efforts for new combustors such as
GE Aircraft Engines, Rolls Royce, Allison Engine and Solar Gas Turbines. From
1982 to 1994, Mr. Kitchen served in several senior management positions and
was vice president, repairs and overhaul/business development for
AlliedSignal. Mr. Kitchen holds a B.S.M.E. from the U.S. Air Force Academy and
an M.B.A. from the University of Northern Colorado.
Lawrence W. Briscoe has served as our chief financial officer and director
since our inception in 1995. Since July 1994, Mr. Briscoe has served as the
chief financial officer and vice president, finance and administration of
Catalytica. Before joining Catalytica, he held various executive and financial
positions including president and chief operating officer and director of Brae
Corporation, vice president of corporate development at Transamerica Corp. and
chief executive officer of United States Commercial Telephone Corp. Mr.
Briscoe holds a B.S. in electrical engineering from the University of
Missouri, an M.S. in business from the University of Southern California and
an M.B.A. from Stanford University.
Ralph A. Dalla Betta, Ph.D. has served as our chief technology officer and
vice president, technology since June 1995. Dr. Dalla Betta has been employed
by Catalytica since 1976 and currently serves as the chief scientist
44
<PAGE>
of Catalytica. Dr. Dalla Betta has been the major technical architect of the
catalytic technology used in the Xonon Cool Combustion system. Prior to
joining Catalytica, Dr. Dalla Betta was a senior scientist at the Ford Motor
Company. He has authored over 40 scientific papers, holds 12 patents and is
co-author of one book. He holds a B.S. degree from the Colorado College and a
Ph.D. in physical chemistry from Stanford University.
Carl Schopfer has served as our senior vice president, engineering since
April 2000. Prior to that, Mr. Schopfer spent over 20 years at AlliedSignal
Engines (formerly Garrett Turbine Engine Company), most recently as vice
president, engineering and technology. Prior to that he was AlliedSignal
Engines' vice president, strategic planning and business development. From
1968 to 1976, Mr. Schopfer worked as a development engineer at the Allison Gas
Turbine Division of General Motors Corporation. Mr. Schopfer holds a B.S. in
mechanical engineering from the University of Missouri-Rolla and an M.B.A.
from Butler University.
Peter B. Evans has served as our senior vice president, business
development since April 1999. From February 1998 to April 1999, he was a
director in the Western Origination group of Enron Capital & Trade Resources
Corp., predecessor of Enron North America, a subsidiary of Enron. From 1991 to
February 1998, Mr. Evans was employed by U.S. Generating Co. (now PG&E
Generating), PG&E's competitive power generation affiliate, most recently as
director of marketing and development. Prior to that, Mr. Evans held financial
positions at PG&E Enterprises and in PG&E's corporate finance department, and
worked as an engineer on PG&E's Diablo Canyon nuclear plant. Mr. Evans holds
B.S. degrees in chemical engineering and nuclear engineering and an M.B.A.
from the University of California at Berkeley. Mr. Evans is a Registered
Professional Mechanical Engineer in California and a Chartered Financial
Analyst.
Patrick T. Conroy has served as our senior vice president, product
development since September 1998. From October 1997 to August 1998, Mr. Conroy
was president and chief executive officer of GENXON Power Systems LLC, a joint
venture we entered into with Woodward Governor Company. From 1971 until
February 1997, Mr. Conroy was employed by Westinghouse Electric Corporation in
the nuclear energy and power generation businesses. Significant positions
during his tenure at Westinghouse included four years as operations manager of
the nuclear service business and six years as general manager of the power
generation service business. He was also the senior sales executive for
Westinghouse's power generation business in Europe, the Middle East and Africa
and president of a joint venture with Rolls Royce Industrial Power. Mr. Conroy
holds a B.S. in marine engineering from the US Merchant Marine Academy (Kings
Point) and has completed graduate work in business administration at Widener
University.
Stephen J. Oliva has served as our vice president, operations since June
1998, when he was promoted from director of operations, a position he had held
since joining us in May 1995. From March 1990 to May 1995, Mr. Oliva was with
the consulting firm of Pittiglio, Rabin, Todd & McGrath, a leader in
operations and product development consulting to high technology companies,
where he served in a number of roles, including director of materials and
director of operations for various clients. Prior to that, Mr. Oliva held
technical and management positions in operations with DuPont, Hewlett Packard
and Genentech. Mr. Oliva holds a B.S. in chemical engineering from M.I.T. and
an M.B.A. from Stanford.
Julie A. Messersmith has served as our director of finance since March
1998. From May 1993 to February 1998, Ms. Messersmith was a financial planning
manager at Siemens-Pyramid Technologies for their engineering, manufacturing,
marketing and facilities organizations. Prior to that, Ms. Messersmith worked
in corporate financial planning for United Technologies-Chemical Systems
Division. Ms. Messersmith holds a B.A. in business administration-finance from
the University of Wisconsin-Eau Claire.
William B. Ellis joined our board of directors in September 1995. Mr. Ellis
is a senior fellow of the Yale University School of Forestry and Environmental
Studies. Mr. Ellis retired as chairman of Northeast Utilities in 1995, where
he also served as chief executive officer from 1983 to 1993. Mr. Ellis joined
Northeast Utilities in 1976 as its chief financial officer. Mr. Ellis was a
consultant with McKinsey & Co. from 1969 to 1976 and was a principal in that
firm from 1975 to 1976. Mr. Ellis serves on several other boards of directors,
including HSB
45
<PAGE>
Group, Inc., Advest Group, Inc., and Massachusetts Mutual Life Insurance
Company. He has a Ph.D. in chemical engineering from the University of
Maryland.
Frederick M. O'Such joined our board of directors in 1995. Mr. O'Such is
currently president and chief executive officer of Xertex Capital. From 1981
to 1986, Mr. O'Such served as chief executive officer of Xertex Corporation.
From 1970 to 1981, Mr. O'Such served as group president and vice president,
corporate development with Envirotech Corporation. He served as group vice
president with Gulton Industries, Inc. from 1963 to 1970. Mr. O'Such is a
member of several boards of directors, including Herrick-Pacific Corporation.
Mr. O'Such holds a B.S. in chemical engineering from Lehigh University and an
M.B.A. from Harvard University.
John A. Urquhart joined our board of directors in April 1997. Mr. Urquhart
has served as a director of Catalytica since April 1997 and has served as one
of our board advisors since July 1995. He currently serves as senior advisor
to the chairman of Enron Corp. and also served as the vice chairman of Enron
from 1990 to 1998. Mr. Urquhart also serves on a number of other boards of
directors, including Enron, Hubbell Incorporated, TECO Energy, Inc., Weir
Group PLC and Tampa Electric Co. He previously served as the senior vice
president/executive vice president of industrial and power systems at General
Electric. In addition, he served five years as a committee member on the board
of the United States Council for Energy Awareness. Mr. Urquhart holds a B.S.
in engineering from the Virginia Polytechnic Institute.
Thomas E. White joined our board of directors in January 1998. Mr. White
has been designated by Enron Energy Services to serve as one of our directors
pursuant to Enron Ventures' right to nominate a director under its Series B
Preferred Stock Purchase Agreement. Mr. White was named chairman and chief
executive officer of Enron Power Corp., a wholly-owned subsidiary of Enron, in
1991 and assumed the titles of Chairman and Chief Executive Officer of Enron
Operations Corp. in 1993, Chairman and Chief Executive Officer of Enron
Ventures Corp. in 1996, and Vice Chairman of Enron Energy Services in 1998.
Mr. White joined Enron in 1990 after retiring as a brigadier general from the
United States Army, following 23 years of military service. Mr. White holds a
B.S. in engineering from the United States Military Academy and an M.S. in
operations research from the United States Naval Post Graduate School.
Board Composition
Upon the closing of this distribution, in accordance with the terms of our
bylaws, the terms of office of the board of directors will be divided into
three classes:
. Class I directors, whose term will expire at the annual meeting of
shareholders to be held in 2001;
. Class II directors, whose term will expire at the annual meeting of
shareholders to be held in 2002; and
. Class III directors, whose term will expire at the annual meeting of
shareholders to be held in 2003.
Our Class I directors will be William Ellis and Thomas White, our Class II
directors will be Lawrence Briscoe, Howard Hoffen and Frederick M. O'Such, and
our Class III directors will be Ricardo Levy and John Urquhart. At each annual
meeting of shareholders after the initial classification, the successors to
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following
election.
Board Meetings
Our board of directors held a total of five meetings during the year ended
December 31, 1999.
During the fiscal year ended December 31, 1999, directors Lawrence Briscoe,
William Ellis, Ricardo Levy, Dennis Orwig, John Urquhart and Thomas White
attended all meetings of the board of directors. Frederick M. O'Such attended
80% of the meetings held during fiscal 1999.
46
<PAGE>
Committees of the Board of Directors
The audit committee of the board of directors will be established prior to
completion of this distribution. The audit committee will review, act on and
report to the board of directors on various auditing and accounting matters,
including the recommendation of our independent auditors, the scope of the
annual audits, fees to be paid to the independent auditors, the performance or
our independent auditors and our accounting practices.
The compensation committee of the board of directors will be established
prior to completion of this distribution. The compensation committee will
review and approve the salaries and stock options recommended by our human
resources department for our employees, consultants, directors and other
individuals compensated by us.
Compensation Committee Interlocks and Insider Participation Interlocks
None of our officers or employees will serve as a member of the
compensation committee, nor will any of them serve as a member of the board of
directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.
Director Compensation
Directors who are not our officers, except for Mr. White, each receive an
annual retainer for their services in the amount of $20,000 per year, plus
reimbursement of expenses. Mr. Urquhart also serves as director of the board
of our parent company, Catalytica, and receives similar compensation for that
service. During the fiscal year ended December 31, 1999, Mr. Urquhart received
a total of $40,000 in connection with his services as our director and as a
director of Catalytica.
On July 1, 1999, each of our directors, except for Mr. White, received
options to purchase 4,000 of our shares at an exercise price of $7.875,
exercisable at the rate of one-twelfth of the shares subject to the option at
the end of each month that the director remains on the board following the
date of grant. The options become fully vested within one year of the date of
grant. Dr. Levy, in his capacity as one of our directors and as president and
chief executive officer of Catalytica, received options to purchase 9,000 of
our shares at an exercise price of $10.80 with four-year vesting.
Mr. Urquhart, who served on the board of directors of Catalytica, received
options during the fiscal year ended December 31, 1999 to purchase 8,000
shares of common stock of Catalytica at an exercise price of $9.00. Mr.
Urquhart's options become exercisable at the rate of one-twelfth of the shares
subject to the option at the end of each month that he remains on the
Catalytica board following the date of grant, so that his options become fully
vested within one year of the date of grant.
47
<PAGE>
Executive Compensation
The following table sets forth the compensation paid by us during 1999,
1998 and 1997 to our former chief executive officer and to our four other most
highly compensated executive officers (collectively, the "Named Officers") who
received salary and bonus compensation of more than $100,000 during 1999. The
following table does not include options granted to the Named Officers by
Catalytica, which are included in the second table below.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Name and Principal Position Compensation Awards
--------------------------- ------------------ ------------
Securities
Fiscal Underlying All Other
Year Salary($) Bonus($) Options(#) Compensation($)
------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Dennis A. Orwig(1)........................... 1999 $208,000 $ 21,000 16,800 $ 80,368(2)
President and Chief Executive Officer 1998 $196,000 $ 26,000 20,200 $256,444(2)
1997 $187,000 $ 4,740 120,000 $ 22,040(2)
Lawrence W. Briscoe(3)....................... 1999 $265,000 $170,000 4,400 $ 8,000(3)
Chief Financial Officer 1998 $250,000 $178,000 2,400 $ 4,000(3)
1997 $198,000 $ 54,000 -- $ 4,000(3)
Ralph A. Dalla Betta......................... 1999 $175,000 $ 17,000 9,800 $ 15,062(4)
Chief Technology Officer and Vice President, 1998 $166,000 $ 16,000 23,500 $ 11,680(4)
Technology 1997 $162,000 $ 3,000 -- $ 10,808(4)
Patrick T. Conroy(5)......................... 1999 $190,000 $ 70,000 8,350 $ 41,828(5)
Senior Vice President, Product Development 1998 $180,000 -- -- $ 99,755(5)
1997 $ 45,000 $100,000 80,000 $ 24,792(5)
Peter B. Evans(6)............................ 1999 $115,800 $ 25,000 16,000 $ 76,515(6)
Senior Vice President, Business Development 1998 -- -- -- --
1997 -- -- -- --
</TABLE>
--------
(1) Mr. Orwig resigned as president and chief executive officer on July 17,
2000. Craig N. Kitchen was appointed as our president and chief executive
officer on July 17, 2000. See "Related-Party Transactions--Employment
Agreement with Craig N. Kitchen."
(2) Amounts under "All Other Compensation" include (i) forgiveness of
principal and interest on a loan to Mr. Orwig for $72,528 in 1999 and
$72,554 in 1998, (ii) contributions by us of $7,840 in 1999, $4,000 in
1998 and $4,000 in 1997 under Catalytica's 401(k) plan, and (iii)
relocation assistance in the amount of $179,890 in 1998 and $18,040 in
1997.
(3) Mr. Briscoe also serves as the chief financial officer and vice president
finance and administration of Catalytica. The amounts in the table
reflect compensation for his services to Catalytica and to us. The
amounts under "All Other Compensation" include contributions by us under
Catalytica's 401(k) plan.
(4) Amounts under "All Other Compensation" include (i) the following amounts
we contributed to the account of Dr. Dalla Betta under Catalytica's
Supplemental Severance Benefit Plan: $7,062 in 1999, $7,680 in 1998 and
$6,808 in 1997, and (ii) contributions by us of $8,000 in 1999, $4,000 in
1998 and $4,000 in 1997 under Catalytica's 401(k) plan.
(5) Mr. Conroy joined us on October 1, 1997. On an annualized basis, Mr.
Conroy's salary for 1997 would have been $180,000. The amounts under "All
Other Compensation" include (i) forgiveness of principal
48
<PAGE>
and interest on a loan to Mr. Conroy for $33,828 in 1999, $35,742 in 1998
and $9,414 in 1997, (ii) contributions by us of $8,000 in 1999, $4,000 in
1998 and $1,574 in 1997 under Catalytica's 401(k) plan, and (iii)
relocation assistance in the amount of $60,013 in 1998 and $13,804 in 1997.
(6) Mr. Evans joined us on April 12, 1999. On an annualized basis, Mr. Evans'
salary for 1999 would have been $160,000. "All Other Compensation"
includes $4,915 contributed by us under Catalytica's 401(k) plan and
$71,600 for relocation assistance.
The Parent and Other Subsidiaries' Summary Stock Option Table
The following table sets forth the stock options granted by Catalytica and
Catalytica Pharmaceuticals, Inc. with respect to the years ended December 31,
1997, December 31, 1998 and December 31, 1999, to our former chief executive
officer and the Named Officers. The options were granted under the Catalytica
Stock Option Plan (the "Parent Option Plan"). Options granted under the Parent
Option Plan generally have a ten-year term and vest ratably over a four-year
period. The per share exercise price is the Nasdaq closing price for
Catalytica's common stock on the date of grant. Unless otherwise determined by
the board of directors, the Parent Option Plan provides for the automatic
acceleration of vesting of all outstanding options (so that they become
exercisable in full) in the event of a "change in control," as defined in the
Parent Option Plan.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Securities
Securities Underlying
Underlying Catalytica
Catalytica, Inc Pharmaceuticals
Name and Principal Position Fiscal Year Options(#) Inc. Options(#)
--------------------------- ----------- --------------- ---------------
<S> <C> <C> <C>
Dennis A. Orwig................... 1999 4,000 --
Former President and Chief
Executive Officer 1998 2,300 1,100
1997 20,000 --
Lawrence W. Briscoe............... 1999 17,300 --
Chief Financial Officer 1998 19,000 5,000
1997 100,000 30,000
Ralph A. Dalla Betta.............. 1999 2,400 --
Chief Technology Officer and Vice
President, Technology 1998 1,500 700
1997 -- --
Patrick T. Conroy................. 1999 -- --
Senior Vice President, Product
Development 1998 -- --
1997 6,000 --
Peter B. Evans.................... 1999 3,000 --
Senior Vice President, Business
Development 1998 -- --
1997 -- --
</TABLE>
49
<PAGE>
Company Option Grants in Last Fiscal Year
The following table sets forth the stock options granted by us during the
fiscal year ended December 31, 1999, to each of the Named Officers. These
options were granted under our 1995 Stock Option Plan (the "Option Plan").
Options granted under the Option Plan generally have a ten-year term.
Generally, 12.5% of the grant becomes exercisable six months after the date of
grant. The balance of the grant then vests monthly, with full exercisability
occurring on the fourth anniversary date. The per share exercise price is
based on the fair market value of our common stock on the date of grant, as
determined by the board of directors. Unless otherwise determined by the board
of directors, the Option Plan provides for the automatic acceleration of
vesting of all outstanding options (such that they become exercisable in full)
in the event of a "change in control," as defined in the Option Plan.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Potential
Realizable
Value at Assumed
Annual Rates of
Stock
% of Price
Number of Total Options Appreciation for
Securities Granted to Option Term(2)
Underlying Options Employees in Exercise Expiration -----------------
Name Granted(#)(1) Fiscal Year(1) Price($/sh.) Date 5%($) 10%($)
---- ------------------ -------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Orwig......... 16,800 9.3% $10.80 3/1/09 $114,107 $289,169
Lawrence W. Briscoe..... 4,400 2.4% $10.80 3/1/09 $ 29,885 $ 75,735
Ralph A. Dalla Betta.... 9,800 5.4% $10.80 3/1/09 $ 66,562 $168,682
Patrick T. Conroy....... 8,300 4.6% $10.80 3/1/09 $ 56,374 $142,863
Peter B. Evans.......... 16,000 8.9% $10.80 3/1/09 $108,673 $275,399
</TABLE>
--------
(1) Based on options to purchase an aggregate of 180,440 shares granted to
employees during 1999.
(2) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year option term. These numbers are
calculated based on the requirements promulgated by the SEC and do not
reflect our estimate of future stock price.
The Parent Company Option Grants in Last Fiscal Year
The following table sets forth the stock options granted by Catalytica
during the fiscal year ended December 31, 1999, to each of the Named Officers.
The options were granted under the Parent Option Plan.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Potential
Realizable
Value at Assumed
Annual Rates of
Stock
% of Price
Number of Total Options Appreciation for
Securities Granted to Option Term(2)
Underlying Options Employees in Exercise Expiration -----------------
Name Granted(#)(1) Fiscal Year(1) Price($/sh.) Date 5%($) 10%($)
---- ------------------ -------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Orwig......... 4,000 0.4% $14.25 3/1/09 $ 35,847 $ 90,843
Lawrence W. Briscoe..... 17,300 1.6% $14.25 3/1/09 $155,038 $392,897
Ralph A. Dalla Betta.... 2,400 0.2% $14.25 3/1/09 $ 21,508 $ 54,506
Patrick T. Conroy....... -- -- -- -- -- --
Peter B. Evans.......... 3,000 0.3% $13.69 4/30/09 $ 25,823 $ 65,441
</TABLE>
--------
(1) Market value of underlying securities on the exercise date, as determined
by our board of directors, minus the exercise price.
(2) The percent of total options granted to employees during the fiscal year
is based on the total number of options issued to employees at the parent
and at each particular subsidiary and is broken down accordingly.
Particularly, the percent of total options granted to employees of
Catalytica during 1999 is based on options to purchase an aggregate of
1,062,421 shares.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of a ten-year option term. These numbers are
50
<PAGE>
calculated based on the requirements promulgated by the SEC and do not
reflect our estimate of future stock price.
Company Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Values
The following table sets forth for each of the Named Officers, information
with respect to stock options to purchase our stock exercised during the
fiscal year ended December 31, 1999, and stock options to purchase our stock
held at fiscal year end. The value of unexercised in-the-money options is
based on the market value of our common stock at December 31, 1999, as
determined by our board of directors, minus the exercise price.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Shares Unexercised In-the-Money Options at
Acquired on Options at Fiscal Year End (#) Fiscal Year End ($)
Exercise Value ---------------------------------- -------------------------
Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Orwig......... -- -- 295,350 101,650 $2,816,515 $768,375
Lawrence W. Briscoe..... -- -- 45,660 6,140 $ 444,782 $ 17,668
Ralph A. Dalla Betta.... -- -- 205,212 29,088 $1,986,846 $127,829
Patrick T. Conroy....... -- -- 46,556 41,744 $ 405,000 $315,000
Peter B. Evans.......... -- -- 2,666 13,334 $ 0 $ 0
</TABLE>
The Parent Company and Subsidiary Aggregate Option Exercises in Last Fiscal
Year and Fiscal Year-End Values
The following table sets forth for each of the Named Officers, information
with respect to parent company and subsidiary stock options exercised during
the fiscal year ended December 31, 1999, and stock options held at fiscal year
end:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year End (#) Fiscal Year End ($)(1)
Acquired on Value ----------------------------------- -------------------------
Name Subsidiaries Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ------------ --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis A. Orwig......... (2) 14,500 $123,280 24,543 27,257 $179,097 $164,093
(3) -- -- 4,730 1,371 $ 88,762 $ 17,688
(4) -- -- -- 10,000 -- --
Lawrence W. Briscoe..... (2) 15,000 $152,500 92,845 74,555 $818,044 $512,826
(3) -- -- 43,450 3,150 $828,118 $ 17,862
(4) -- -- -- 14,000 -- --
Ralph A. Dalla Betta.... (2) -- -- 15,484 9,992 $155,101 $ 80,597
(3) -- -- 292 408 $ 1,314 $ 1,836
(4) -- -- -- -- -- --
Patrick T. Conroy....... (2) -- -- 3,000 3,000 $ 10,125 $ 10,125
(3) -- -- -- -- -- --
(4) -- -- -- -- -- --
Peter B. Evans.......... (2) -- -- 500 2,500 $ 407 $ 2,033
(3) -- -- -- -- -- --
(4) -- -- -- -- -- --
</TABLE>
--------
(1) Market value of underlying securities at December 31, 1999, as determined
by our board of directors, minus the exercise price.
(2) Represents option granted by Catalytica.
(3) Represents options granted by Catalytica Pharmaceuticals, Inc.
(4) Represents options granted by Catalytica Advanced Technologies, Inc.
51
<PAGE>
Employee Benefit Plans
Our 1995 Stock Option Plan was adopted by our board of directors in April
1995. This plan provides for the grant of incentive stock options to our
employees and nonstatutory stock options to our employees, directors and
consultants. As of June 30, 2000, 3,500,000 shares of common stock were
reserved for issuance under this plan. Of these shares, 32,946 had been issued
upon exercise of stock options or stock purchase rights, 2,387,414 shares were
subject to outstanding options or stock purchase rights and 1,079,660 shares
were available for future grant.
Our board of directors administers the stock plan and determines the terms
of options granted, including the exercise price, the number of shares subject
to individual option awards and the vesting period of options. The exercise
price of nonstatutory options must generally be at least 85% of the fair
market value of the common stock on the date of grant. The exercise price of
incentive stock options cannot be lower than 100% of the fair market value of
the common stock on the date of grant and, in the case of incentive stock
options granted to holders of more than 10% of our voting power, not less than
110% of the fair market value. The term of an incentive stock option cannot
exceed 10 years, and the term of an incentive stock option granted to a holder
of more than 10% of our voting power cannot exceed five years.
Options granted under our stock plan will accelerate and become fully
exercisable for a period of 30 days in the event we are acquired, unless the
successor corporation assumes or substitutes other options in their place. Our
board of directors may not, without the adversely affected optionee's prior
written consent, amend, modify or terminate the stock plan if the amendment,
modification or termination would impair the rights of optionees. Our stock
plan will terminate in 2007 unless terminated earlier by the board of
directors.
401(k) Plan
Catalytica had a Retirement Savings and Investment Plan which covered our
full-time employees located in the United States. This plan is being
transferred to us by Catalytica upon the closing of the merger of Catalytica
with Synotex. The plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended, so that contributions to this plan
by employees, and the investment earnings thereon, are not taxable to
employees until withdrawn. Pursuant to this plan, employees may elect to
reduce their current compensation by up to the lesser of 15% of their annual
compensation or the statutory prescribed annual limit ($10,500 in 2000) and to
have the amount of such reduction contributed to his plan. We currently match
a portion of contributions on behalf of plan participants.
Catalytica Supplemental Severance Benefit Plan
The plan was established in 1986 to provide severance pay benefits for
certain employees who participated in the Money Purchase Defined Contribution
Pension Plan (MPPP). This is a non qualified employee plan and is subject to
the Employee Retirement Income Security Act of 1974 (ERISA).
The plan no longer accepts new contributions from either the employer or
the employee. Interest earnings continues to accrue based on U.S. Treasury
Bill rates with a 26-week maturity plus 1%. The employer may elect to at any
to terminate the plan and distribute the account balance.
Benefits are paid in a lump sum within 24 months following termination of
employment. At the end of 1999, the plan's balance was $1,065,214, of which
$657,696 represents our eight employees and one director covered by this plan.
Dr. Dalla Betta, an officer, and Ricardo Levy, a director, are covered by this
plan.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation and agreements with
our board members limits the liability of directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors,
52
<PAGE>
except liability for: (1) breach of their duty of loyalty to the corporation
or its shareholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) unlawful payments of
dividends or unlawful stock repurchases or redemption's, or (4) any
transaction from which the director derived an improper personal benefit. Such
limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors, officers,
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws permit such indemnification.
There is no pending litigation or proceeding involving a director or
officer in which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
53
<PAGE>
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the distribution to Catalytica stockholders of our
common stock concurrent with the exchange of shares of Catalytica common stock
for cash in the merger, which we collectively refer to as the "Transaction".
This discussion is based on currently operative provisions of the Internal
Revenue Code of 1986, Treasury regulations under the Code, and administrative
rulings and court decisions, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter our tax consequences,
as well as those of Catalytica or the Catalytica stockholders as described
herein.
Catalytica stockholders should be aware that this discussion does not
address all federal income tax considerations that may be relevant to
particular stockholders of Catalytica in light of their particular
circumstances, such as stockholders who are banks, insurance companies, tax-
exempt organizations, dealers in securities, or foreign persons, stockholders
who acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions, stockholders who hold Catalytica
common stock as part of an integrated investment (including a "straddle")
comprising shares of Catalytica common stock and one or more other positions,
or stockholders who have previously entered into a constructive sale of
Catalytica common stock. In addition, the following discussion does not
address the tax consequences of the Transaction under foreign, state or local
tax laws or the tax consequences of transactions effectuated prior or
subsequent to or concurrently with the Transaction (whether or not such
transactions are in connection with the Transaction), including, without
limitation, transactions in which Catalytica common stock is acquired or our
common stock is disposed of.
ACCORDINGLY, CATALYTICA STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO
THEM OF THE TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.
The parties to the merger agreement intend that for United States federal
income tax purposes the Transaction will constitute a single integrated
transaction with respect to Catalytica and its stockholders, in which the
distribution will be treated as a redemption of outstanding common stock of
Catalytica in connection with the complete termination of the Catalytica
stockholders' interest in Catalytica. Catalytica believes that the foregoing
description correctly characterizes the Transaction for United States federal
income tax purposes and, therefore, that the Transaction should qualify as an
exchange within the meaning of section 302(b) of the Code, either because the
integrated combination of the distribution and the merger results in a
complete termination of the Catalytica stockholders' interests in Catalytica
or because the distribution, in conjunction with the merger, is not
essentially equivalent to a dividend.
Assuming the Transaction qualifies as an exchange within the meaning of
section 302(b) of the Code and that the shares of Catalytica common stock
surrendered in the Transaction were held as capital assets, then, subject to
the assumptions, limitations and qualifications referred to in this document,
the Transaction would result in the following federal income tax consequences:
. Each holder of Catalytica common stock will recognize gain, if any, only
to the extent of the excess of the sum of the amount of cash received in
the merger plus the fair market value of our stock received by such
holder at the time of the distribution, over the holder's adjusted basis
in the Catalytica common stock immediately prior to the Transaction.
Such gain generally should be capital gain, and generally should be
long-term capital gain if the Catalytica common stock exchanged in the
Transaction has been held for more than one year. In the event that a
holder's adjusted basis in the Catalytica common stock exceeds the sum
of the amount of cash and the fair market of our stock received by the
holder in the Transaction, the holder will recognize a loss. Such loss
generally should be capital loss, and generally
54
<PAGE>
should be long-term capital loss if the Catalytica common stock
exchanged in the Transaction has been held for more than one year.
. The tax basis of our common stock received by Catalytica stockholders in
the Transaction will be equal to the fair market value of such stock at
the time of the distribution.
. The holding period of our common stock received in the distribution will
commence on the day after the distribution.
No ruling has been or will be obtained from the Internal Revenue Service in
connection with the Transaction, and the Internal Revenue Service could
challenge the status of the Transaction as a single integrated transaction for
United States federal income tax purposes. Such a challenge, if successful,
would result in Catalytica stockholders being treated as receiving a
"dividend" distribution of our common stock in respect of their Catalytica
common stock in the distribution and as selling, in a separate transaction,
their Catalytica common stock to Synotex immediately after the distribution.
The amount treated as distributed in the distribution would be equal to the
fair market value of our common stock on the date of the distribution and
generally would be (1) treated as a dividend taxable as ordinary income to the
Catalytica stockholders to the extent of Catalytica's earnings and profits on
the date of the distribution, (2) to the extent such amount exceeded
Catalytica's earnings and profits, applied to reduce, but not below zero, each
Catalytica stockholder's adjusted basis in such stockholder's Catalytica
stock, and (3) taxable as capital gain to each Catalytica stockholder to the
extent the amount treated as received by such stockholder in the distribution
exceeded the amount described in (2) hereof. Catalytica stockholders would
have a basis in our common stock equal to its fair market value on the date of
the distribution, and the holding period of such stock would commence on the
day after the distribution. Catalytica stockholders generally would recognize
gain on the sale of their Catalytica common stock to Synotex in the merger in
an amount equal to the excess, if any, of the amount of cash received from
Synotex in the merger over their adjusted basis in the Catalytica common stock
immediately prior to the merger, taking into account the effect of the
distribution of our stock on such adjusted basis as described above. Such gain
generally would be capital gain and generally would be long-term capital gain
if the Catalytica common stock exchanged in the merger had been held for more
than one year. In the event that a holder's adjusted basis in the Catalytica
common stock, taking into account the effect of the distribution of our stock
on such adjusted basis as described above, exceeded the amount of cash
received from Synotex in the merger, the holder would recognize a loss. Such
loss generally would be a capital loss and generally would be long-term
capital loss if the Catalytica common stock exchanged in the merger had been
held for more than one year.
You may be subject to "backup withholding" at a rate of 31% on payments
(including the distribution of our common stock) received in connection with
the Transaction unless you (1) provide a correct taxpayer identification
number (which, if you are an individual, is your social security number) and
any other required information to the paying agent, or (2) are a corporation
or come within certain exempt categories and, when required, demonstrate this
fact, all in accordance with the requirements of the backup withholding rules.
If you do not provide a correct taxpayer identification number, you may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
does not constitute an additional tax and will be creditable against your
United States federal income tax liability. You should consult with your own
tax advisor as to your qualification for exemption from backup withholding and
the procedure for obtaining such exemption. You may prevent backup withholding
by completing the W-9 or substitute W-9 that is being provided to you by the
paying agent and submitting it to the paying agent when you submit your stock
certificate(s) following the effective time of the merger.
In addition, for U.S. federal income tax purposes, the distribution will be
treated as a taxable sale by Catalytica of our shares regardless of whether
the distribution is taxable as a capital gain or as a dividend to the
stockholders of Catalytica. As noted above, an estimate of the tax liability
to Catalytica on the distribution will be taken into account as a reduction to
the cash merger consideration to be paid to stockholders.
55
<PAGE>
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED
STATES INCOME TAX CONSEQUENCES OF THE TRANSACTION AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
THUS, CATALYTICA STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE TRANSACTION, INCLUDING
TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN,
FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS
56
<PAGE>
RELATED-PARTY TRANSACTIONS
Relationship with Enron
In January 1998, Enron Ventures, a wholly owned subsidiary of Enron Corp.,
purchased a 15% equity interest in us for $30.0 million. Enron Ventures also
received a three-year option to purchase up to an additional 535,715 shares of
Series B preferred stock (1,071,430 shares on an as-converted to common stock
basis) for $14.4 million and a right to purchase shares in a public offering.
Enron Ventures was also granted the right to elect one person to our board of
directors. Pursuant to this right, Thomas E. White, Vice Chairman of Enron
Energy Services, was elected to our board of directors. In August 2000,
Catalytica, Sundance Assets, L.P., successor in interest to and an affiliate
of Enron Ventures, and Enron North America Corp. entered into an omnibus
agreement with us to modify the stock purchase agreement. Under the omnibus
agreement, Sundance Assets agreed, among other things, to convert its
preferred stock into common stock upon the distribution by Catalytica.
Sundance Assets' option to purchase 1,071,430 shares of common stock on an as
converted basis was modified so that it could be exercised on a cashless basis
beginning ten days after the Catalytica distribution. Sundance Assets'
registration rights were also modified so that Sundance Assets can request
that we register its shares of common stock with the SEC beginning the day
after the Catalytica distribution. See "Description of Capital Stock--
Registration Rights."
Management Indebtedness
We loaned Mr. Orwig the amount of $280,000 as a bridge loan at an interest
rate of 7% in March 1996 to facilitate his relocation to northern California.
In addition, in January 1998 to further assist Mr. Orwig with his relocation,
we loaned him $700,000: $400,000 payable by no later than 2003 at an interest
rate of 7% and $300,000 which is a forgivable loan with a 7% interest rate on
any unforgiven amounts should Mr. Orwig terminate his employment with us prior
to January 2003. The forgivable loan is forgiven at a rate of 20% per year or
in monthly installments of $5,000. All loans to Mr. Orwig were secured by his
properties in California and by a stock option pledge.
On July 17, 2000, Mr. Orwig resigned as president and chief executive
officer. Catalytica intends to enter into an agreement with Mr. Orwig related
to the termination of Mr. Orwig's position as our president and chief
executive officer. Under the terms of this agreement, Catalytica will pay a
lump sum amount of $18,900 and $18,000 per month, less applicable
withholdings, for each of the twelve months through to the anniversary of the
termination date. Mr. Orwig will also be entitled to an additional $18,000 per
month for six months if he is not employed by an entity unrelated to
Catalytica at that time, the payment being subject to immediate suspension
when he obtains such employment. Under the terms of the proposed agreement,
the outstanding loans to Mr. Orwig with total principal and interest balances
of approximately $620,000 are being forgiven over a 12 month period.
Additionally, his options to purchase common stock of Catalytica and
Catalytica Pharmaceuticals, and his options to purchase 4,158 shares of our
common stock, which would have vested in the eighteen month period following
his termination, will become immediately exercisable.
In September 1997, our joint venture, GENXON, LLC, loaned Mr. Conroy
$150,000 interest-free for the purchase of real property as primary residence
in northern California. Mr. Conroy's loan is forgivable at the rate of 20% per
year or in monthly installments of $2,500 while Mr. Conroy is employed by us.
As of June 30, 2000, the outstanding balance on this loan was $75,000. This
loan is secured by Mr. Conroy's property.
We loaned Mr. Evans $150,000 at an interest rate of 6% in June 1999 to
facilitate his relocation within northern California. Payments on this loan
begin at the end of Mr. Evans' fourth year of employment with us at the rate
of 25% per year or in full should termination occur prior to 2003. We also
loaned Mr. Evans $100,000 at an interest rate of 6%. The $100,000 loan is
forgivable at the rate of 25% per year after two years of employment while Mr.
Evans is employed by us. The interest is forgiven at the end of year five if
Mr. Evans continues to remain employed by us. As of March 31, 2000, Mr. Evans'
outstanding loan balance was $250,000. All loans to Mr. Evans are secured by
his properties in California.
57
<PAGE>
Change of Control
On April 21, 1999 Catalytica entered into Change of Control Severance
Agreements with Lawrence Briscoe, Dennis Orwig, Ralph Dalla Betta, and Ricardo
Levy. The Change of Control Severance Agreements require that Catalytica
provide the following benefits in the event an officer is involuntarily
terminated (as defined in the Change of Control Severance Agreement): (1) 200
percent of the officer's annual compensation plus a pro rata payment of his
projected bonus, (2) continued employee benefits for up to two years from the
date of an involuntary termination, and (3) accelerated vesting of all of the
officer's options. If any of these people are involuntarily terminated as a
result of the Catalytica merger, severance payments will be owed by
Catalytica.
Employment Agreement with Craig N. Kitchen
Effective July 17, 2000, Craig N. Kitchen was hired to serve as our
president and chief executive officer. Mr. Kitchen's based salary was set at
$230,000, with a signing bonus of $68,000. Mr. Kitchen was granted an option
to purchase 150,000 shares of our common stock at $13.25 per share and an
option to purchase 10,000 shares of Catalytica common stock with an exercise
price equal to the fair market of the Catalytica common stock on the date of
grant. These amounts have been adjusted to reflect the two-for-one stock split
to be effected in connection with the distribution. Mr. Kitchen is eligible to
receive an annual $50,000 bonus on his first year anniversary of his
employment and he is eligible for an annual bonus at a target of 30.0% of his
salary. Mr. Kitchen was also guaranteed a minimum bonus of $35,000 for the
year 2000, provided he is employed on December 31, 2000. If Mr. Kitchen is
terminated without cause during his first two years of employment, he will be
entitled to 12 months salary and continuation of benefits. We also agreed to
provide Mr. Kitchen with change of control benefits similar to those in place
for Catalytica's executives, as discussed above.
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<PAGE>
ARRANGEMENTS BETWEEN US AND CATALYTICA
Overview
We have provided below a summary description of the agreements related to
our separation from Catalytica and agreements that will be in place between us
and Catalytica and/or Synotex. You should read the full text of these
agreements, which have been filed with the Securities and Exchange Commission
as exhibits to the registration statement of which this prospectus is a part.
Employee Matters Agreement
The employee matters agreement will provide for the allocation of assets,
liabilities and responsibilities relating to our current and former employees
and their participation in the benefit plans that Catalytica currently
sponsors and maintains.
Tax Sharing Agreement
We will enter into a tax sharing agreement with Synotex and Catalytica,
which will provide as follows:
. For 1999 and 2000, Synotex will, on a timely basis, file or cause to be
filed:
. consolidated federal income tax returns and estimated tax returns for
the consolidated group of which Catalytica is the common parent, also
called the "Group," as are required to be filed, and
. state, local and foreign tax returns for the Group and/or any of its
members on a combined, consolidated, unitary or other method as
determined by Synotex in its sole discretion.
. Synotex will have the right to determine the manner in which all these
returns will be filed; make any elections in connection with any such
returns; contest, compromise and settle any adjustment or deficiency
proposed, asserted or assessed in connection with any such returns;
file, pursue, compromise or settle any claim for refund; and determine
whether any refunds to which the Group is entitled will be paid by way
of refund or credit.
. We will execute and file such consents, elections and other documents as
may be required or appropriate in connection with the proper filing of
such returns, and will provide to Synotex any information Synotex may
request in connection with the matters contemplated by the tax sharing
agreement.
. Synotex will pay or cause to be paid the consolidated federal income tax
liability of the Group for all periods through and including the date of
the closing of the merger, and will indemnify us and hold us harmless
against any of this liability, including any liability for penalties,
interest and additions to the tax relating to these taxes, where the
liability arises solely by reason of us, Catalytica Advanced
Technologies or Catalytica being severally liable for these amounts
under Treas. Reg. (S)1.1502-6.
. We will be solely responsible for:
. filing our federal, state, local, foreign or other tax returns for
periods after the separation date, and
. paying our federal, state, local, foreign or other taxes attributable
to tax periods commencing after the separation date, and will
indemnify and hold harmless Synotex and Catalytica against any of
this liability, including any liability for penalties, interest and
additions to the tax relating to these taxes.
. We will fully cooperate with Catalytica in respect of any federal,
state, local, foreign or other tax audit, examination or claim for
refund or credit, each of which is also called a "Tax Proceeding,"
relating to a tax year in which we or Catalytica Advanced Technologies
was a member of the Group and, without limiting the generality of the
foregoing, will promptly make available to Parent such information as
Parent may request in connection with any Tax Proceeding.
59
<PAGE>
. The tax sharing agreement will supersede any existing tax sharing
agreement between Catalytica and us or Catalytica Advanced Technologies.
Master Confidentiality and Non-Disclosure Agreement
We and Catalytica will enter into a master confidentiality and non-
disclosure agreement, which will provide as follows:
. We and our subsidiaries will, and will cause our directors, officers,
employees, consultants and advisors to, keep confidential any
proprietary information of Catalytica and its subsidiaries.
. Catalytica and its subsidiaries will, and will cause its directors,
officers, employees, consultants and advisors to, keep confidential any
proprietary information of us and our subsidiaries.
. The confidentiality obligations will contain customary exceptions for
disclosures required by law.
Indemnification Agreement
We and Catalytica will enter into an indemnification agreement, which will
provide as follows:
. We will indemnify, defend and hold Catalytica and its subsidiaries
harmless against any and all liabilities, in perpetuity, relating to or
arising out of:
. our business and that of Catalytica Advanced Technologies and the
distribution except as otherwise contemplated by the merger
agreement,
. Catalytica (excluding any non-energy subsidiary) prior to the
effective time of the merger,
. any severance, termination, change of control or similar payments or
benefits paid or payable to specified officers and directors,
subject to certain limits,
. transaction expenses in excess of $5 million not deducted in
calculating the amount of cash payable to the holders of Catalytica
common stock under the merger agreement, and
. arbitration costs to be paid by us.
. Catalytica will indemnify, defend and hold us and our subsidiaries
harmless against any and all liabilities, in perpetuity, relating to or
arising out of (a) the business of Catalytica at or after the effective
time of the merger and/or (b) and the subsidiaries of Catalytica that
are not being combined with us prior to the merger, whether occurring
before, at or after the effective time of the merger.
. To the extent Catalytica or any of its subsidiaries that are not
combining with us prior to the merger is or becomes obligated to deliver
any of our shares to any person after the effective time of the merger
as a result of any agreement, right, document, obligation or other
instrument of Catalytica or any of its subsidiaries outstanding at any
time prior to the effective time of the merger, we will provide the
required number of shares to Catalytica so that it may satisfy the
obligation.
. The indemnifying party will be required to reimburse the indemnified
party for all of its actual costs and expenses of investigating,
defending any claim, lawsuit or arbitration related to a covered
liability.
Transition Services Agreement
We and Catalytica will enter into a transition services agreement, which
will provide as follows:
. We and Catalytica will each provide the other and its respective
subsidiaries specified transition services for a period not to exceed
six months following the merger;
. We and Catalytica will each reimburse the other for actual expenses in
providing the services, including allocated time costs for employees
responsible for providing or administering the services.
60
<PAGE>
License Agreement
We and Catalytica will enter into a license agreement, which will provide
for the royalty-free, perpetual license of the tradename "Catalytica" and any
trademarks which include the word "Catalytica" in connection with any uses of
the names "Catalytica Combustion Systems, Inc.," "Catalytica Advanced
Technologies, Inc.," and "Catalytica NovoTec, Inc."
Real Estate Matters
We and Catalytica will enter into a real estate matters agreement which
will provide for:
. The assignment to us of all of the rights and obligations of the lease
agreement, dated January 1, 1993, between Catalytica and Jack Dymond
Associates for our facilities in Mountain View, California, or, if an
assignment is not feasible, the sublease of such rights and obligations,
in each case to the extent Catalytica retains any rights thereunder,
effective on the separation date.
. The transfer to us of all buildings, fixtures, improvements and
furnishings on the leased property listed above.
. The transfer of all other assets used at least 75% in our business.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of July 31, 2000 (as adjusted to reflect the distribution of the shares
offered by this prospectus and the two for one stock split to be completed
prior to the distribution) by:
. Each person who is known by us to beneficially own more than 5% of our
common stock;
. Each of our named executive officers;
. Each of our directors; and
. All of our officers and directors as a group.
Percentage of ownership is based on 18,783,094 shares outstanding as of
July 31, 2000, and shares outstanding after this distribution, assuming no
exercise of the underwriters' over-allotment options. Beneficial ownership is
calculated based on SEC requirements. All shares of the common stock subject
to options currently exercisable or exercisable within 60 days after July 31,
2000, are deemed to be outstanding for the purpose of computing the percentage
of ownership of the person holding such options, but are not deemed to be
outstanding for computing the percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the table has sole
or shared voting and investment power with respect to all shares beneficially
owned, subject to applicable community property laws. Unless otherwise
indicated in the table, the address of each party listed in the table is
Catalytica Combustion Systems, Inc., 430 Ferguson Drive, Mountain View,
California 94043.
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially
Owned
---------------------------------------
After
Before Distribution Distribution
--------------------- -----------------
Percentage Percentage
Name of Person or Identity of Group Number Ownership Number Ownership
----------------------------------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Catalytica, Inc.(1)................... 15,000,000 79.86%
Enron Corp.(2)(5)..................... 3,750,002 19.96%
c/o Thomas E. White
1400 Smith Street
Houston, Texas 77002
Dennis A. Orwig(3).................... 360,684 1.92%
Craig N. Kitchen...................... -- --
Ralph A. Dalla Betta(4)............... 219,994 1.17%
Thomas E. White(5).................... -- *
1400 Smith Street
Houston, Texas 77002
Ricardo B. Levy(6).................... 96,422 *
William B. Ellis(7)................... 68,000 *
Frederick M. O'Such(8)................ 68,000 *
John A. Urquhart(9)................... 68,000 *
Patrick T. Conroy(10)................. 62,512 *
Lawrence W. Briscoe(11)............... 48,726 *
Peter B. Evans(12).................... 6,696 *
All officers and directors as a group
(13 persons)(13)..................... 4,877,378 25.97%
</TABLE>
--------
(1) Represents 1,000,000 shares of common stock and 14,000,000 shares of
common stock issuable upon conversion of 14,000,000 shares of Series A
preferred stock. These shares will be converted into 14,000,000 shares of
common stock upon completion of the distribution.
(2) Represents 2,678,572 shares of common stock issuable upon conversion of
1,339,286 shares of Series B preferred stock and an option to purchase up
to 1,071,430 shares of common stock upon exercise and conversion of up to
535,715 shares of Series B preferred stock. These shares and option were
originally issued to Enron Ventures Corp., an affiliate of Enron Corp.,
and have since been transferred to Sundance Assets, L.P., also an
affiliate of Enron Corp.
62
<PAGE>
(3) Includes 360,684 shares issuable upon exercise of options held by Mr.
Orwig, which options are exercisable within 60 days of July 31, 2000.
(4) Includes 219,994 shares issuable upon exercise of options held by Dr.
Dalla Betta, which options are exercisable within 60 days of July 31,
2000.
(5) Mr. White is a member of the board of directors of Enron Power Corp., an
affiliate of Enron. Mr. White disclaims beneficial ownership of the
shares beneficially owned by Enron.
(6) Includes 96,422 shares issuable upon exercise of options held by Dr.
Levy, which options are exercisable within 60 days of July 31, 2000.
(7) Includes 68,000 shares issuable upon exercise of options held by Mr.
Ellis, which options are exercisable within 60 days of July 31, 2000.
(8) Includes 68,000 shares issuable upon exercise of options held by Mr.
O'Such, which options are exercisable within 60 days of July 31, 2000.
(9) Includes 68,000 shares issuable upon exercise of options held by Mr.
Urquhart, which options are exercisable within 60 days of July 31, 2000.
Mr. Urquhart disclaims beneficial ownership of the shares beneficially
owned by Enron.
(10) Includes 62,512 shares issuable upon exercise of options held by Mr.
Conroy, which options are exercisable within 60 days of July 31, 2000.
(11) Includes 38,726 shares issuable upon exercise of options held by Mr.
Briscoe, which options are exercisable within 60 days of July 31, 2000.
(12) Includes 6,696 shares issuable upon exercise of options held by Mr.
Evans, which options are exercisable within 60 days of July 31, 2000.
(13) Includes 1,117,376 shares issuable upon exercise of options held by
directors and executive officers, which options are exercisable within 60
days of July 31, 2000.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital
The authorized capital stock of the Company consists of 70 million shares
of common stock, par value $0.0005 per share, per share, and five million
shares of Preferred Stock, par value $0.001 per share, 18,783,094 shares of
the common stock are outstanding on July 31, 2000. The following summary
description of the capital stock of the Company is qualified in its entirety
by reference to the form of Amended and Restated Certificate of Incorporation
of the Company and the Bylaws of the Company, a copy of each of which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
Common Stock
Voting Rights
The holders of common stock are entitled to one vote per share on all
matters required to be submitted to a vote of the stockholders. The holders of
common stock are not entitled to cumulative voting rights except and only to
the extent required by California Law. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of common stock would be entitled to share ratably in all assets
remaining after payment of liabilities subject to prior distribution rights
and payment of any distributions owing to holders of shares of preferred stock
then outstanding. Holders of the shares of common stock have no preemptive
rights, and the shares of common stock are not subject to further calls or
assessment by the Company. There are no redemption or sinking fund provisions
applicable to the shares of common stock.
Dividends
Holders of common stock will share in an equal amount per share in any
dividend declared by the board of directors, subject to any preferential
rights of any outstanding preferred stock.
Preferred Stock
The board of directors will be authorized, without shareholder approval,
from time to time to issue up to an aggregate of five million shares of
preferred stock, $0.001 par value per share, in one or more series. Each
series will have such rights and preferences, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as may be determined by the board of directors. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of holders of any preferred stock that may be issued in the future.
Issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding voting stock. We have no present plans to issue any shares of
preferred stock.
Registration Rights
Pursuant to a registration rights agreement with Enron, we are obligated to
register the common stock held by Sundance Assets, L.P.:
. If we receive written notice from Sundance Assets, L.P. requesting that
we effect a registration with respect to at least $7,500,000 of the
registrable shares; or
. If we decide to register our own securities.
64
<PAGE>
Pursuant to a registration rights agreement we are also required to
register the common stock held by Morgan Stanley and its affiliates:
. If we receive a written request from Morgan Stanley or its affiliates
demanding that we effect a registration with respect to an aggregate
offering price of at least $15 million; or
. If we decide to register our own securities.
However, if requested by the underwriters to decrease the number of shares
registered for Sundance or Morgan Stanley, we can limit the number of
registrable shares included in the registration statement.
Anti-Takeover Effects of Some Provisions of Our Charter Documents
Provisions of our charter and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions are expected to
discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
These provisions could limit the price investors might be willing to pay in
the future for our common stock. We believe that the benefits of increased
protection of our ability to negotiate with the proponent of an unfriendly or
unsolicited acquisition proposal outweigh the disadvantages of discouraging
these proposals, because among other things, negotiation will result in an
improvement of their terms. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common
stock. These provisions include:
. The division of the board of directors into three separate classes;
. Procedures for advance notification of stockholder nominations and
proposals; and
. The ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to five million shares of 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 stockholders. The issuance of preferred stock, while
providing flexibility in connection with possible financings or acquisitions
or other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock.
These and other provisions contained in our charter and bylaws could have
the effect of delaying or preventing a change in control.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is :
ChaseMellon Shareholder Services, L.L.C.
235 Montgomery Street, 23rd floor
San Francisco, CA 94104
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this distribution, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of the distribution, we will have outstanding an aggregate
of shares of common stock, assuming no exercise of options after ,
2000. All of the shares distributed will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares distributed to "affiliates" of ours as that term is defined in Rule 144
under the Securities Act. Shares distributed to affiliates may generally only
be sold pursuant to an effective registration statement under the Securities
Act or compliance with limitations of Rule 144 as described below.
Immediately after the completion of this distribution, we intend to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
stock option plans. Based upon the number of shares subject to outstanding
options as of July 31, 2000 and currently reserved for issuance under all of
our plans, this registration statement would cover approximately shares.
Shares registered under the registration statement will generally be available
for sale in the open market immediately after the filing of the registration
statement.
Also beginning after the date of this distribution, Sundance Assets, L.P.
will be entitled to registration rights with respect to all the shares of
common stock held by Sundance Assets, L.P. for sale in the public market.
Registration of these shares would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon
effectiveness of the registration.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell in "broker's
transactions" or to market makers, within any three-month period, a number of
shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding (which will
equal approximately shares immediately after this offering); or
. The average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice filing provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of the distribution.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
distribution is entitled to sell those shares 90 days after the distribution
in reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the volume limitation or notice filing
provisions of Rule 144.
66
<PAGE>
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, beginning 90 days after the date of this prospectus, may be
sold by persons other than "affiliates" (as defined in Rule 144) subject only
to the manner of sale provisions of Rule 144 and by "affiliates" under Rule
144 without compliance with its one year minimum holding period requirements.
VALIDITY OF COMMON SHARES
The validity of the common stock offered hereby will be passed upon for us
by Heller Ehrman White & McAuliffe LLP, Menlo Park, California.
EXPERTS
The combined financial statements of Catalytica Combustion Systems, Inc.
and Catalytica Advanced Technologies, Inc. (a combined company in the
development stage) at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein
which, as to each of the three years in the period ended December 31, 1999, is
based in part on the reports of Genxon Power Systems LLC's, independent
auditors. The financial statements referred to above are included in reliance
upon such reports given on the authority of such firms as experts in
accounting and auditing.
The financial statements of Genxon Power Systems, L.L.C. as of September
30, 1999 and 1998 and for the period from October 21, 1996 to September 30,
1999 and, as of September 30, 1998 and 1997 and for the year ended September
30, 1998 and for the period from October 21, 1996 (since inception) to
September 30, 1997 included in this Registration Statement have been so
included in reliance on the reports (which contain explanatory paragraphs
relating to Genxon Power Systems, L.L.C.'s ability to continue as a going
concern as described in Note 2) of PricewaterhouseCoopers, L.L.P., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits and schedules) under the Securities Act, with respect to the shares
to be distributed. This prospectus does not contain all of the information set
forth in the registration statement. For further information with respect to
us and the common stock offered in this prospectus, reference is made to the
registration statement, including the exhibits thereto, and the financial
statements and notes filed as a part thereof. With respect to each such
document filed with the SEC as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved.
We will be filing quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at
the public reference facilities of the SEC in Washington, D.C. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from the SEC's web site at
http: www.sec.gov.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Catalytica Combustion Systems, Inc.
and Catalytica Advanced Technologies, Inc.
(a combined company in the development stage)
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Combined Statements of Operations.......................................... F-3
Combined Balance Sheets.................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Combined Financial Statements..................................... F-7
Financial Statements of Genxon Power Systems, L.L.C.:
Report of Independent Accountants.......................................... F-20
Balance Sheets............................................................. F-21
Statements of Operations................................................... F-22
Statements of Members' Capital............................................. F-23
Statements of Cash Flows................................................... F-24
Notes to Financial Statements.............................................. F-25
Financial Statements of Genxon Power Systems, L.L.C.:
Report of Independent Accountants.......................................... F-28
Balance Sheets............................................................. F-29
Statements of Operations................................................... F-30
Statements of Members' Capital............................................. F-31
Statements of Cash Flows................................................... F-32
Notes to Financial Statements.............................................. F-33
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Catalytica Combustion Systems, Inc.
and Catalytica Advanced Technologies, Inc.
We have audited the accompanying combined balance sheets of Catalytica
Combustion Systems, Inc. and Catalytica Advanced Technologies, Inc. (a
combined company in the development stage) as of December 31, 1998 and 1999,
and the related combined statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Companys' management.
Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of Genxon Power
Systems, LLC a joint venture in which Catalytica Combustion Systems, Inc. has
a 50% interest and for which this Company recognized losses of $4,355,000,
$3,676,000, and $1,133,000 as of December 31, 1997, 1998 and 1999,
respectively. Those statements were audited by other auditors whose reports
dated October 17, 1999 and October 26, 1998 have been furnished to us and
included an explanatory paragraph that is discussed in note 3 to the financial
statements. Our opinion, insofar as it relates to data included for Genxon
Power Systems, LLC, is based solely on the reports of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit 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 and the
reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the combined financial position of Catalytica Combustion Systems,
Inc. and Catalytica Advanced Technologies, Inc. at December 31, 1998 and 1999,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
August 25, 2000
F-2
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Cumulative
Amounts
For the six from
For the year ended months ended Inception
December 31, June 30, through
-------------------------- ---------------- June 30,
1997 1998 1999 1999 2000 2000
------- ------- -------- ------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and
development
contracts............ $ 5,139 $ 6,279 $ 3,053 $ 1,385 $ 2,433 $ 33,572
------- ------- -------- ------- ------- --------
Costs and expenses:
Research and
development.......... 6,009 9,313 9,627 3,042 4,244 51,925
Costs associated with
discontinued product
line................. -- -- -- -- -- 9,298
Selling, general and
administrative....... 671 1,269 4,781 1,808 2,068 12,500
------- ------- -------- ------- ------- --------
Total costs and
expenses........... 6,680 10,582 14,408 4,850 6,312 73,723
------- ------- -------- ------- ------- --------
Operating loss.......... (1,541) (4,303) (11,355) (3,465) (3,879) (40,151)
Loss on joint venture... (4,355) (3,826) (1,133) (975) -- (9,164)
Interest income......... -- 1,409 1,041 537 496 2,946
Interest expense........ (374) (177) (278) (125) (200) (1,184)
------- ------- -------- ------- ------- --------
Net loss................ $(6,270) $(6,897) $(11,725) $(4,028) $(3,583) $(47,553)
======= ======= ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
COMBINED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
Pro forma
December 31, Stockholders'
------------------ June 30, Equity at
1998 1999 2000 June 30, 2000
-------- -------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 17,654 $ 10,562 $ 7,415
Short-term investments........... 5,193 5,470 5,491
Accounts receivable:
Trade, less allowance of $100... 1,826 736 1,963
Joint venture................... 1,079 176 175
Notes receivable from employees.. 300 182 40
Inventory........................ 25 56 110
Prepaid expenses and other
current assets.................. -- 29 24
-------- -------- --------
Total current assets........... 26,077 17,211 15,218
Property and equipment:
Leasehold improvements ..........
Equipment........................ 2,086 2,680 2,891
Less accumulated depreciation and
amortization.................... (535) (964) (1,155)
-------- -------- --------
1,551 1,716 1,736
Notes receivable from employees.... 643 913 853
Investment in joint venture........ 249 -- --
-------- -------- --------
Total assets................... $ 28,520 $ 19,840 $ 17,807
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Payable to Catalytica, Inc....... $ 2,988 $ 5,026 $ 6,533
Accounts payable and accrued
liabilities..................... 565 1,532 773
Deferred revenue................. 44 -- 722
Current long term debt........... 56 -- --
-------- -------- --------
Total current liabilities...... 3,653 6,558 8,028
Notes payable to Catalytica,
Inc............................. 730 730 730
-------- -------- --------
Total Liabilities.............. 4,383 7,288 8,758
Commitments and Contingencies
Stockholders' equity:
Catalytica Combustion Systems,
Inc.
Convertible preferred stock,
$.001 par value, 9,000 shares
authorized in 1998, 1999 and at
2000, issuable in Series:
Series A: authorized, issued and
outstanding shares--7,000 in
1998, 1999 and 2000 7 7 7
Series B: authorized 2,000
shares in 1998, 1999 and 2000,
issued and outstanding 1,339
shares in 1998, 1999 and 2000.. 1 1 1
Common stock, $.0005 par value,
20,500 shares authorized in
1998, 1999 and 2000, 1,000
shares issued and outstanding in
1998 and 1999, and 1,033 shares
issued and outstanding in 2000.. 1 1 1 $ 13
Advanced Technologies, Inc.
Convertible preferred stock,
$.001 par value, 3,000 shares
authorized in 1998, 1999 and at
2000, issuable in Series:
Series A: Authorized, issued and
outstanding shares--3,000 in
1998, 1999 and 2000............ 3 3 3
Common stock, $.001 par value,
4,800 shares authorized in 1998,
1999 and 2000, 1,000 shares
issued and outstanding in 1998
and 1999, 2000.................. 1 1 1
Combined
Additional paid-in capital....... 56,369 56,689 56,740 56,740
Deferred compensation............ -- (180) (151) (151)
Deficit accumulated during the
development stage............... (32,245) (43,970) (47,553) (47,553)
-------- -------- -------- --------
Total stockholders' equity..... 24,137 12,552 9,049 $ 9,049
-------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 28,520 $ 19,840 $ 17,807
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Catalytica Combustion Systems, Inc. Advanced Technologies, Inc.
----------------------------------------- ---------------------------
Preferred
Preferred Stock Stock
--------------------------- -------------
Series A Series B Common Stock Series A Common Stock
------------- ------------- ------------- ------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital
Contributions... 7,000 $ 7 -- -- 1,000 $ 1 3,000 $ 3 1,000 $ 1
Net loss from
Nov. 1, 1994
(inception) to
Dec. 31, 1996... -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at Dec. 31,
1996............ 7,000 7 -- -- 1,000 1 3,000 3 1,000 1
Net loss........ -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at Dec. 31,
1997............ 7,000 7 -- -- 1,000 1 3,000 3 1,000 1
Issuance of
preferred
stock........... -- -- 1,339 $ 1 -- -- -- -- -- --
Conversion of
Catalytica
notes........... -- -- -- -- -- -- -- -- -- --
Issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at Dec. 31,
1998............ 7,000 7 1,339 1 1,000 1 3,000 3 1,000 1
Issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Acceleration of
stock option
vesting......... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at Dec. 31,
1999............ 7,000 7 1,339 1 1,000 1 3,000 3 1,000 1
Exercise of
stock options
(unaudited) -- -- -- -- 33 -- -- -- -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at June 30,
2000
(unaudited)..... 7,000 $ 7 1,339 $ 1 1,033 $ 1 3,000 $ 3 1,000 $ 1
===== === ===== === ===== === ===== === ===== ===
<CAPTION>
Combined
----------------------------------------------
Deficit
During the
Paid-In Deferred Development Stockholders'
Capital Compensation Stage Equity
------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Capital
Contributions... $10,138 $ -- -- $ 10,150
Net loss from
Nov. 1, 1994
(inception) to
Dec. 31, 1996... -- -- (19,078) (19,078)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1996............ 10,138 -- (19,078) (8,928)
Net loss........ -- -- (6,270) (6,270)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1997............ 10,138 -- (25,348) (15,198)
Issuance of
preferred
stock........... 29,921 -- -- 29,922
Conversion of
Catalytica
notes........... 16,222 -- -- 16,222
Issuance of
stock options... 88 -- -- 88
Net loss........ -- -- (6,897) (6,897)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1998............ 56,369 -- (32,245) 24,137
Issuance of
stock options... 82 -- -- 82
Issuance of
stock options... 227 (227) -- --
Acceleration of
stock option
vesting......... 11 -- -- 11
Amortization of
deferred
compensation.... -- 47 -- 47
Net loss........ -- -- (11,725) (11,725)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1999............ 56,689 (180) (43,970) 12,552
Exercise of
stock options
(unaudited) 51 -- -- 51
Amortization of
deferred
compensation
(unaudited)..... -- 29 -- 29
Net loss
(unaudited)..... -- -- (3,583) (3,583)
------- ------------ ----------- -------------
Bal. at June 30,
2000
(unaudited)..... $56,740 $(151) $(47,553) $ 9,049
======= ============ =========== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Cumulative
Amounts
For the six from
months ended Inception
Year ended December 31, June 30, through
--------------------------- ----------------- June 30,
1997 1998 1999 1999 2000 2000
------- -------- -------- -------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(6,270) $ (6,897) $(11,725) $ (4,028) $(3,583) $(47,553)
Adjustments to
reconcile net loss to
net cash used in
operating activity:
Depreciation and
amortization........ 216 (114) 277 264 241 677
Losses in joint
ventures............ 4,355 3,826 1,133 975 -- 9,164
Stock based
compensation........ -- 89 309 12 46 443
Changes in:
Accounts and notes
receivable.......... (58) (770) 1,993 1,624 (1,226) (2,138)
Inventory............ (58) 81 (31) (23) (54) (110)
Accounts payable..... -- 404 (404) (143) -- --
Prepaid expenses and
other current
assets.............. -- -- (29) (115) 5 (24)
Deferred revenue..... (71) 41 (44) (36) 722 722
Other accrued
liabilities......... 605 (444) 1,371 282 (759) 773
------- -------- -------- -------- ------- --------
Net cash used in
operating
activities......... (1,281) (3,784) (7,150) (1,188) (4,608) (38,046)
Cash flows from
investing activities:
Purchases of
investments.......... -- (37,202) (26,635) (15,112) (6,500) (75,337)
Maturities of
investments.......... -- 32,431 26,624 15,172 6,500 70,555
Investment in joint
venture.............. (4,355) (4,075) (884) (726) -- (9,164)
Purchase of property
and equipment........ (204) (1,171) (594) (342) (211) (2,891)
------- -------- -------- -------- ------- --------
Net cash used in
investing
activities......... (4,559) (10,017) (1,489) (1,008) (211) (16,837)
Cash flows from
financing activities:
Net issuance of notes
receivable to
employees............ -- (1,001) (219) (243) 160 (1,048)
Payments on capital
lease obligation..... (93) (105) (56) (56) -- --
Advances from
Catalytica........... 5,933 8,306 4,867 2,249 6,023 38,694
Payments to
Catalytica........... -- (5,667) (2,829) (2,197) (4,516) (15,209)
Deferred
compensation......... -- -- (227) -- (227)
Proceeds from stock
options.............. -- -- 11 11 5 16
Proceeds from issuance
of common and Series
A preferred stock at
inception............ -- -- -- -- -- 10,150
Proceeds from issuance
of Series B preferred
stock and option to
Enron................ -- 29,922 -- -- -- 29,922
------- -------- -------- -------- ------- --------
Net cash from (used
in) financing
activities......... 5,840 31,455 1,547 (236) 1,672 62,298
------- -------- -------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents........... -- 17,654 (7,092) (2,432) (3,147) 7,415
Cash and cash
equivalents at
beginning of period... -- -- 17,654 17,654 10,562 --
------- -------- -------- -------- ------- --------
Cash and cash
equivalents at end of
period................ $ -- $ 17,654 $ 10,562 $ 15,222 $ 7,415 $ 7,415
======= ======== ======== ======== ======= ========
Additional disclosure
of non-cash financing
and investing
activities:
Conversion of
Catalytica payable to
additional paid in
capital.............. $ -- $ 16,222 $ -- $ -- $ -- $ 16,222
======= ======== ======== ======== ======= ========
Forgiveness of notes
receivable to
employees............ $ -- $ 58 $ 67 $ 30 $ 42 $ 155
======= ======== ======== ======== ======= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Description of Business and Significant Accounting Policies
Description of Business CCSI operated as an element of Catalytica, Inc.'s
research and development activities from inception through the date of its
incorporation as a separate division. In 1995, it was incorporated and became
a subsidiary of Catalytica, Inc. See Note 2 for discussion of Enron's minority
investment in CCSI. CCSI is engaged in developing, manufacturing and marketing
of technologies that use catalysts to measure and prevent the formation of
harmful pollutants. In 1995, CCSI ceased efforts to develop measurement
related products and disposed of related net assets in 1996. Cumulative net
costs associated with the discontinued product line were $9.3 million.
Beginning in 1996 development efforts were focused on Xonon technology. CCSI
also has a subsidiary named Advanced Sensor Devices which is inactive.
CAT was incorporated in 1995. CAT conducts in-house and contract research
and development. In July 2000, CAT formed Catalytica NovoTec Inc. ("Novotec")
as a subsidiary. Novotec is developing improved catalytic processes employing
proprietary high throughput testing and computer learning technologies. In
1998, CAT and United Catalysts, Inc. formed Sud-Chemie Catalytica L.L.C. In
that year, CAT recognized losses relating to this operation to the extent of
its investment. Since that year, no further capital contributions were made to
this business.
Basis of Presentation These financial statements present the combined
balance sheets and combined statements of operations, stockholders' equity,
and cash flows of CCSI and CAT. Both are commonly controlled subsidiaries of
Catalytica. Since on a combined basis, the majority of the operations are in
the development stage, cumulative losses from inception through June 30, 2000
are presented on the combined statements of operations and cash flows
represent both CCSI and CAT.
Unaudited Interim Financial Statements The unaudited combined financial
statements for the six month periods ended June 30, 1999 and 2000 have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Combined operating results for the six-month period ended June 30, 2000, are
not necessarily indicative of the combined results that may be expected for
the year ended December 31, 2000.
Cash Equivalents CCSI and CAT consider all highly liquid investments with a
maturity of three months or less from the date of purchase to be cash
equivalents.
Investments CCSI's investment consist of commercial paper with maturities
of three months or less and are classified as available for sale. They are
carried at cost, which approximates their fair market value.
Concentrations of Credit Risk For both CCSI and CAT, assets subject to
concentrations of credit risk consist principally of cash equivalents,
investments, and receivables. CCSI uses local banks and various investment
firms to invest its excess cash, principally in commercial paper and money
market funds from a diversified portfolio of investments with strong credit
ratings. Related credit risk would result from a default by the financial
institutions or issuers of investments to the extent of the recorded carrying
value of these assets. CCSI performs ongoing credit evaluations of its
customers and generally does not require collateral.
Inventory CCSI's inventory consists of raw materials and is stated at the
lower of cost (first-in, first-out) or market.
Property and Equipment For both CCSI and CAT, these assets are stated at
cost. Depreciation and amortization are provided on the straight-line basis
over the lesser of the useful lives of the respective assets or the lease
term. In
F-7
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 1. Description of Business and Significant Accounting Policies--
(Continued)
accordance with Financial Accounting Standards ("FAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," both companies review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. To date, no such impairment has been
indicated. If this review indicates the carrying value of these assets will
not be recoverable, as measured based on estimated undiscounted cash flows
over their remaining life, the carrying amount would be adjusted to fair
value. The cash flow estimates that will be used will contain management's
best estimates, using appropriate and customary assumptions and projections at
the time.
Comprehensive Income Effective January 1, 1998, CSSI and CAT adopted FAS
No. 130, "Reporting Comprehensive Income." Neither company has components of
other comprehensive income.
Research and Development Revenues For both CCSI and CAT these revenues are
derived entirely from research and development contracts. They are earned as
contractual services are performed and are recognized in accordance with
contract terms, principally based on reimbursement of total costs and expenses
incurred. No amounts recognized as revenue are refundable. In return for
funding, collaborative partners receive certain rights in the
commercialization of the resulting technology. The contracts are also subject
to periodic review by the funding partner, which may result in modifications,
including reduction or termination of funding. See Note 10.
Use of Estimates The preparation of combined financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results for
both CCSI and CAT could differ from those estimates and such differences may
be material to the combined financial statements.
Research and Development Activities Related costs for both CCSI and CAT are
expensed as incurred.
Stock-Based Compensation CCSI and CAT account for stock-based compensation
to employees in accordance with Accounting Principles Board ("APB") Opinion
25, Accounting for Stock Issued to Employees and have adopted the "disclosure
only" alternative described in Statement 123 Accounting for Stock-Based
Compensation.
Income Taxes CCSI and CAT account for income taxes under the asset and
liability method in accordance with FAS No. 109, "Accounting for Income
Taxes". Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
currently enacted tax rates and laws.
Net Loss per Share Since the combined entity does not have a formal capital
structure, loss per share information has not been presented.
Segment Disclosures CCSI and CAT operate in one reportable segment.
Impact of Recently Issued Accounting Standards FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", is effective for the fiscal
year ending on or about December 31, 2001. It establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
CCSI and CAT do not believe that adopting this statement will have a material
effect on their combined financial position or combined results of operations.
In December 1999, the Securities and
F-8
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 1. Description of Business and Significant Accounting Policies--
(Continued)
Exchange Commission issued SAB 101, "Revenue Recognition in Financial
Statements". CCSI and CAT currently cannot determine the effect, if any, that
SAB 101 will have on their combined financial statements.
Note 2. Transactions with Related Parties
Catalytica, Inc. The combined financial statements include allocations from
Catalytica, Inc. for the cost of functions and services provided to CCSI and
CAT. These allocations include charges for facilities, finance, legal, human
resources, and other employee benefit costs and totaled $2.4 million, $3.0
million, $3.1 million, $1.5 million, and $1.6 million, respectively, for the
years ended December 31, 1997, 1998 and 1999, and for the six months ended
June 30, 1999 and June 30, 2000.
Investment By Enron On January 14, 1998, Enron Ventures Corporation
("Enron"), a wholly-owned subsidiary of Enron Corporation, purchased a 15%
minority interest in CCSI for $30.0 million in cash. Enron also received a
three-year option to purchase an additional 1,071,430 of shares of CCSI for
$14.4 million in cash. In connection with this Stock Purchase Agreement, CCSI
entered into a Share Exchange Agreement, providing Enron the right to exchange
the Series B Preferred Stock of CCSI for Catalytica, Inc. common stock. After
the five year anniversary of the agreement, if CCSI has not undertaken a
public offering, in which CCSI receives at least $20.0 million, Enron shall
have the right to require Catalytica, Inc. to exchange all of the outstanding
shares of Series B Preferred Stock for that number of shares of Catalytica,
Inc. common stock based upon a determined exchange rate. The exchange rate is
based upon the fair value of the Series B Preferred Stock and the market value
of Catalytica, Inc's common stock at the time of conversion. In conjunction
with the Enron Stock Purchase Agreement, $16.2 million of indebtedness owed to
Catalytica by CCSI was contributed to CCSI's capital.
Transaction With An Affiliate of Enron In December 1999, an affiliate of
Enron, the holder of a minority interest in CCSI, specified CCSI's Xonon
combustion system as the preferred emissions control system for certain
turbine orders from GE Power Systems ("GE"). In connection therewith, CCSI and
this affiliate of Enron signed an agreement which provided, among other
things, that CCSI agreed to advance the affiliate up to $9.9 million to
accelerate the development of the Xonon-equipped GE gas turbines and the
affiliate had the right to elect to repay the advances to CCSI in cash or
other consideration, as defined. Repayment in cash or other consideration was
required by September 30, 2000. CCSI advanced the Enron affiliate $1.2 million
at December 31, 1999 under this arrangement. Since the Enron affiliate had the
option of repaying the advance in cash or other consideration and the fair
market value of the latter was not reasonably estimable, CCSI recorded a
provision equal to the advance as research and development expense. In 2000,
the arrangement between CCSI and the Enron affiliate was amended and all
previous advances through that date of $2.8 million from CCSI were refunded,
less certain costs, and the related provision was eliminated and reduced
research and development expense in this period.
Transactions With An Officer In July 2000, the President and Chief
Executive Officer resigned. His separation agreement provides for severance of
approximately $18,000 a month for twelve months and a one time payment of
$18,900. At that time, if he remains unemployed, payments of $18,000 will
continue for an additional six months or until he is employed. In addition,
previous loans and accrued interest of $620,000 will be forgiven in equal
installments over a twelve month period. Additionally, all of his stock
options will become immediately exercisable.
F-9
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 3. Joint Venture
Joint Venture (GENXON) In October 1996, CCSI and Woodward Governor Company
formed a Delaware limited liability company in connection with a 50/50 joint
venture to serve the gas turbine retrofit market for installed, out-of-
warranty engines. The new company, GENXONTM Power Systems, LLC ("GENXON"), was
formed to upgrade the combustion systems of installed turbines with Xonon,
which is designed to reduce emissions and permit greater asset utilization for
both power generation and mechanical drive markets. The initial capital
commitment of the GENXON joint venture partners was $10.0 million: $2.0
million from CCSI, and $8.0 million from Woodward. In addition, CCSI
contributed an exclusive license for the use of its catalytic combustion
technologies, and Woodward contributed an exclusive license for the use of its
instrumentation and control systems for gas turbine catalytic combustion.
The initial funding of the capital commitment of $10.0 million was made by
the third quarter of 1997. Continued funding of the joint venture beyond the
initial commitment is voluntary and has occurred on a 50/50 basis with each
joint venture partner contributing an equal amount quarterly. CCSI has
recorded its share of losses on the joint venture of $4.4 million, $3.7
million, and $1.1 million, for the years ended December 31, 1997, 1998, and
1999, respectively. In the third quarter of 1999, GENXON completed its
prototype development. Funding of the durability testing was assumed by CCSI.
The following information summarizes GENXON's financial position for the
twelve months ended September 30, 1999, and the unaudited quarters ended
December 31, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
Nine
Twelve Three Months Months
Months Ended Ended Ended
September 30, December 31, June 30,
1999 1999 2000
------------- ------------ --------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Total revenues....................... $ 887 $ 3 $ 5
======= ===== =====
Net loss............................. $(4,157) $(204) $(288)
======= ===== =====
Current assets....................... $ 338 $ 239 $ 130
Long-term assets..................... 270 155 108
------- ----- -----
Total assets....................... $ 608 $ 394 $ 238
======= ===== =====
Current liabilities.................. $ 646 $ 636 $ 564
Members' deficit..................... (38) (242) (326)
------- ----- -----
Total liabilities and members'
capital........................... $ 608 $ 394 $ 238
======= ===== =====
</TABLE>
The report of GENXON's independent auditors included an explanatory
paragraph indicating that GENXON's financial statements have been prepared on
the basis of accounting assuming that it is a going concern, which
contemplates realization of assets and satisfaction of liabilities in the
normal course of business. GENXON has reported a net loss of $4.2 million for
the year ended September 30, 1999 and a cumulative loss of $24.3 million
through that same date. Its management plans to obtain additional capital
contributions from its members or other additional investors to meet its
current and ongoing obligations. GENXON's continued existence is dependent on
its ability to obtain adequate additional funding. This matter is not material
in relation to the financial statements of CCSI because: (1) CCSI has no
obligation to make any further cash contributions to GENXON; and, (2) the
financial
F-10
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 3. Joint Venture--(Continued)
statements of CCSI at December 31, 1999 have no significant amounts due from
GENXON or any recorded carrying value of its investment in GENXON at that same
date.
Note 4. Income Taxes
CCSI and CAT are included in the consolidated federal and combined
California franchise tax returns of Catalytica, Inc.. Both have entered into a
tax sharing agreement pursuant to which they compute hypothetical tax returns
(with certain modifications) as if they were not joined in consolidated or
combined returns with Catalytica, Inc. CCSI and CAT are not reimbursed for the
tax benefits of their net operating losses. However, in the event CCSI or CAT
are profitable, they will not be required to pay taxes on such profits so long
as (on a hypothetical basis) they could have sheltered such profits with their
own net operating loss carryforwards. There were no intercompany tax related
amounts due to or from CCSI and CAT to Catalytica, Inc. at December 31, 1998
and 1999. At December 31, 1999, approximately $26.9 million of their net
operating losses have been absorbed in the federal consolidated return of
Catalytica, Inc.
CCSI and CAT recorded income tax benefit differs from the expected benefit
determined by applying the U.S. federal statutory rate to the net loss as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income tax benefit at U.S. statutory rate......... $ 2,132 $ 2,340 $ 3,987
Valuation allowance for deferred tax assets....... (2,132) (2,340) (3,987)
------- ------- -------
Income tax benefit................................ $ -- $ -- $ --
======= ======= =======
</TABLE>
Based on a proforma separate return basis, CCSI and CAT would not be able
to record an income tax benefit for the net loss incurred in 1999, because the
expected benefit computed by applying the U.S. federal statutory rate to the
net loss is offset by an increase in the valuation allowance for deferred tax
assets.
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. They include the
following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,008 $ 392
Other accruals.......................................... 436 491
Right of offset for losses utilized by Catalytica in
consolidated tax returns............................... 4,032 9,406
------- --------
Total gross deferred tax assets......................... 5,476 10,289
Less valuation allowance................................ (5,476) (10,289)
------- --------
Net deferred tax assets............................... $ -- $ --
======= ========
</TABLE>
F-11
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 4. Income Taxes--(Continued)
If the merger discussed in Note 9 is completed, the tax benefit associated
with the right of offset for losses utilized by Catalytica ($9,406) will no
longer exist.
Realization of the deferred tax assets is dependent on future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance,
in an amount equal to the related deferred tax assets has been established to
reflect these uncertainties. The valuation allowance increased by
approximately $2.9 million and $4.8 million in 1998 and 1999, respectively.
As of December 31, 1999, CCSI's and CAT's share of Catalytica, Inc.'s
consolidated federal net operating loss carryforward is approximately $ 1.1
million and expires in 2019 if not used to offset future taxable income.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and a similar state
provision. The annual limitation may result in the expiration of net operating
loss carryforwards before utilization.
Note 5. Capital Stock
CCSI
In August 2000, CCSI's Board of Directors approved a 2 for 1 stock split
effective for shareholders of record at . For all periods presented,
references to CCSI's common stock and related per share information
retroactively reflects this split.
Common Stock--Shares of common stock reserved for future issuance are as
follow:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Series A preferred stock..................................... 14,000,000
Series B preferred stock..................................... 2,678,572
Stock options................................................ 2,324,250
Enron option................................................. 1,071,430
----------
20,074,252
==========
</TABLE>
Convertible Preferred Stock--As of December 31, 1999, the Company has
9,000,000 shares of preferred stock, par value of $0.001, authorized, of which
660,714 are subject to future issuance in one or more classes or series of
preferred stock and options as determined by the Board of Directors. The
Company has 8,339,286 shares of preferred stock issued and outstanding at
December 31, 1999, consisting of the following classes:
Series A Preferred Stock--The Company has 7,000,000 shares of Series A
preferred stock issued and outstanding at December 31, 1999 held by
Catalytica, Inc.. The Series A preferred stock has the following rights: (a)
the right to receive a dividend of $0.06 per annum, per share, when and if
declared by the Company's Board of Directors; (b) dividends are paid prior to
dividends declared and paid on the common stock; (c) In the event of
liquidation, it is entitled to distributions amounting to $1.00 per share plus
all declared and unpaid dividends paid in preference to liquidation
distributions to common stock; (d) the right to convert into a single share of
common stock at any time after the date of issuance. The conversion rate is
subject to change based upon future dilutive transactions.
F-12
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5. Capital Stock--(Continued)
Upon the closing of an underwritten public offering of the Company's
securities at an aggregate gross offering price of not less than $20.0
million, these shares are automatically converted into common stock at the
then effective conversion price. The holder of each share is entitled to the
number of votes equal to the number of shares of common stock into which such
share of preferred stock could be converted at the record date for determining
the stockholders entitled to vote on such matters.
Series B Preferred Stock--As discussed in Note 2, on January 14, 1998, the
Company entered into a Stock Purchase Agreement with Enron and issued
1,339,286 shares of Series B preferred stock. This stock has the following
rights: (a) the right to receive a dividend of $1.34 when and if declared by
the Company's Board of Directors and prior to any dividends declared and paid
on Series A preferred stock and common stock; (b) in the event of liquidation,
any shares that remain outstanding have a liquidation preference over Series A
preferred stock and common stock amounting to $22.40 per share plus all
declared and unpaid dividends; (d) the right to convert into shares of common
stock, on a one-for-one basis (subject to adjustment in the case of stock
splits, reclassifications, stock dividends and rights offerings to existing
holders of common stock and similar events and in the event of common stock
fair market value, except for issuance's pursuant to employee benefit plans)
at any time at the option of the holder and automatically upon the closing of
an underwritten public offering, which results in gross proceeds to the
Company of at least $20.0 million. The holder of each share is entitled to the
number of votes equal to the number of shares of common stock into which such
shares of preferred stock could be converted at the record date for
determining the stockholders entitled to vote on such matters.
In addition, if the Company has not consummated an underwritten public
offering, which results in gross proceeds to the Company of at least $20.0
million within five years of the consummation of the Acquisition, the Series B
preferred stock shall be exchangeable, at the option of Enron, into shares of
common stock of Catalytica, as determined by the Exchange Rate. The Exchange
Rate is the quotient of (a) the Value Per Share of the Company's Series B
preferred stock, on an as converted basis, and (b) the average of the Price
Per Share of the Catalytica common stock over the twenty business days prior
to notice of conversion from Enron. Enron was granted an option in accordance
with the Stock Purchase Agreement to purchase 535,715 shares of Series B
preferred stock (or 1,071,430 shares of common stock, if Series B preferred
stock has been converted as described above), provided Enron's ownership
interest does not increase to more than 19.9% of the Company's total
outstanding capital stock, for $26.88 per share. Enron's right to purchase
these shares will terminate on January 14, 2001.
CAT
Common Stock--Shares of common stock reserved for future issuance are as
follow:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Series A preferred stock...................................... 3,000,000
Stock options................................................. 949,624
---------
3,949,624
=========
</TABLE>
Series A Preferred Stock--CAT has 3,000,000 shares of Series A preferred
stock authorized, issued and outstanding at December 31, 1999 held by
Catalytica. Inc. The Series A preferred stock has the following rights: (a)
the right to receive a dividend of $0.06 per annum, per share, when and if
declared by the Company's Board of
F-13
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5. Capital Stock--(Continued)
Directors, (b) dividends are paid prior to dividends declared and paid on the
common stock, (c) in the event of liquidation, holders are entitled to
distributions amounting to $0.67 per share plus all declared and unpaid
dividends paid in preference to liquidation distributions to common stock, (d)
the right to convert into a single share of common stock at any time after the
date of issuance (the conversion rate is subject to change based upon future
dilutive transactions).
Upon the closing of an underwritten public offering of the Company's
securities at an aggregate gross offering price of not less than $20.0
million, these shares are automatically converted into common stock at the
then effective conversion price. The holder of each share of Series A
preferred stock is entitled to the number of votes equal to the number of
shares of common stock into which such share of preferred stock could be
converted at the record date for determining the stockholders entitled to vote
on such matters.
Note 6. Employee Benefit Plans
Defined Contribution Plan CCSI and CAT have defined contribution plans,
which provides an employer match and a qualified contributory savings plan as
allowed under 401(k) in the Internal Revenue Code. The plans permit
participant contributions, which are matched by company contributions
according to a specified formula. Additionally, the plans requires a minimum
contribution independent of any employee contributions. Related contributions
for all years presented were not material.
CCSI 1995 Stock Option Plan Under this plan, the CCSI Board of Directors is
authorized to grant incentive stock options, or nonqualified stock options to
eligible employees and consultants, although incentive stock options may be
granted only to employees. The incentive stock options generally vest ratably
over four years from the date of grant and expire no later than ten years from
the date of grant. Nonqualified stock options offered to directors vest
ratably over three years from the date of grant and expire no later than ten
years from the date of grant. These options become exercisable upon an initial
public offering of the subsidiary's stock, acquisition of more than 50% of the
subsidiary's outstanding securities by a third party, or upon reaching the
date January 1, 2004. Effective August 4, 1998, all new option grants were
exercisable ratably over four years and expire no later than ten years from
the date of grant.
F-14
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Employee Benefit Plans--(Continued)
The following table summarizes related stock option plan activity:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Weighted
Shares Average Aggregate
Available Number of Exercise Exercise
for Grant Shares Price Price
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996....... 162,584 1,337,416 $ 0.20 $ 267,483
Authorized....................... 224,250 -- -- --
Granted.......................... (341,000) 341,000 1.02 348,550
Canceled......................... 9,500 (9,500) 0.20 (1,900)
--------- --------- ----------
Balance at December 31, 1997....... 55,334 1,668,916 0.37 614,133
Authorized....................... 600,000 -- -- --
Granted.......................... (375,900) 375,900 4.85 1,821,665
Canceled......................... 46,222 (46,222) 1.89 (87,244)
--------- --------- ----------
Balance at December 31, 1998....... 325,656 1,998,594 1.18 2,348,554
Granted.......................... (180,440) 180,440 10.59 1,910,352
Canceled......................... 34,948 (34,948) 1.72 (60,095)
--------- --------- ----------
Balance at December 31, 1999....... 180,164 2,144,086 1.96 4,198,811
Authorized (unaudited)........... 1,175,750 -- -- --
Granted (unaudited).............. (283,762) 283,762 11.74 3,331,366
Canceled (unaudited)............. 7,508 (7,508) 8.71 (65,389)
Exercised (unaudited)............ 32,926 (32,926) .20 (6,585)
--------- --------- ----------
Balance at June 30, 2000
(unaudited)....................... 1,112,586 2,387,414 3.12 $7,458,203
========= ========= ==========
</TABLE>
The weighted average fair value of options granted during 1997, 1998 and
1999 was $0.08, $6.60, and $10.68, respectively as calculated in accordance
with FAS 123. A summary of CCSIs' stock option activity for the year ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted Number
Number Average Weighted Exercisable Weighted
Range of Outstanding Remaining Average As of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1999 Life Price 1999 Price
-------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.20-$ 0.20 1,359,674 6.00 $ 0.20 1,291,620 $ 0.20
$ 1.25-$ 1.25 264,584 7.75 1.25 149,522 1.25
$ 2.80-$ 2.80 129,800 8.12 2.80 73,478 2.80
$ 6.00-$ 6.00 158,488 8.30 6.00 82,534 6.00
$ 7.25-$ 7.25 46,100 8.93 7.25 13,944 7.25
$ 7.88-$ 7.88 12,000 9.50 7.88 5,000 7.88
$ 8.00-$ 8.00 6,000 8.61 8.00 2,084 8.00
$10.25-$10.25 6,000 9.80 10.25 250 10.25
$10.80-$10.80 161,440 9.18 10.80 29,962 10.80
--------- ---------
$ 0.20-$10.80 2,144,086 6.86 1.96 1,648,394 0.99
========= =========
</TABLE>
F-15
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Employee Benefit Plans--(Continued)
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted
for its employee stock awards granted subsequent to December 31, 1994, under
the fair value method of this Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes multiple option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Risk Weighted Weighted
Free Risk Free Dividend Average Average
Interest Interest Yield Volatility Volatility Volatiliy Expected Expected
Rate Rate All Factor Factor Factor Life Life
1997 1998/1999 years 1997 1998 1999 1997/1998 1999
-------- --------- -------- ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
6.01 5.48 0.0 .9089 .8602 .8238 5.0 2.6
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because CCSI's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the CCSI's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under this
plan consistent with the method of FAS 123, the CCSI's net for the combined
entity loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Net loss...................................... $(6,270) $(6,897) $(11,725)
Compensation expense.......................... (85) (547) (826)
------- ------- --------
Pro forma net loss............................ $(6,355) $(7,444) $(12,551)
======= ======= ========
</TABLE>
Since compensation expense is recognized over the vesting period of the
related options, which is generally four years, and because pro forma
disclosure is only required commencing with 1995, the initial impact on pro
forma loss may not be representative of compensation expense in future years.
Stock Options Granted to Non Employees In 1999, CCSI granted certain
employees of Catalytica Inc. and its subsidiaries options to purchase 21,000
shares of its common stock at a price of $10.50 per share. The ownership of
these options vests over a four year period. Since the recipients of these
options are not employees of CCSI, the CCSI recorded a deferred compensation
obligation of $227,000, of which $47,000 was earned and charged to operations
in the year ended December 31, 1999. In each subsequent reporting period
(through the vesting period) this obligation will be remeasured.
F-16
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 7. Major Customers and Geographic Revenues
Major customers are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Department of Energy......................................... -- 5% 26%
Pratt & Whitney Canada....................................... -- 6% 12%
Solar Turbines............................................... 11% 5% 4%
McDermott.................................................... -- 2% 21%
Mitsubishi................................................... 19% 14% 9%
NIST......................................................... 12% 16% 8%
</TABLE>
Unbilled revenues related to work performed was approximately $208,000,
$289,000, $497,000, in 1997, 1998, and 1999, respectively. These amounts were
included in accounts receivable.
Research revenue by geographic region is as follows.
<TABLE>
<CAPTION>
For the year
ended December
31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
United States................................................ 79% 80% 79%
Canada....................................................... -- 5% 12%
Japan........................................................ 19% 14% 9%
Europe....................................................... 2% 1% --
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
</TABLE>
Note 8. Capital Lease Obligation
In 1996, CCSI entered into a three-year capital lease to purchase a
compressor. In 1999, CCSI completed the scheduled payments required under the
lease, exercised its bargain purchase option, and received title to the
compressor.
Note 9. Merger
On August 2, 2000, Catalytica entered into an Agreement and Plan of Merger
by and among Synotex Company, Inc. ("Synotex"), a Delaware corporation and
wholly owned subsidiary of DSM N.V., Synotex Acquisition Corporation
("Acquisition Corp"), a Deleware corporation and wholly owned subsidiary of
Synotex, and Catalytica, pursuant to which Acquisition Corp. will merge with
and into Catalytica and Catalytica will become a wholly owned subsidiary of
Synotex (the "Merger"). Immediately prior to the consummation of the Merger,
CCSI and CAT will be combined ("Spinco") and all of the shares of the combined
company will be distributed on a pro rata basis to the Catalytica stockholders
(the "Spin-Off").
F-17
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 9. Merger--(Continued)
If the Merger is consummated, Catalytica's stockholders will be entitled to
receive an aggregate of $750 million (the "Merger Consideration") in cash
subject to certain adjustments, including a reduction in the Merger
Consideration for the tax liability incurred by Catalytica with respect to the
Spin-Off. The tax liability, which is expected to be a material amount, will
be based on the value of Spinco as determined by the weighted average trading
price of Spinco on the first full day of trading. In addition, the Merger
Consideration will be reduced by contributions by Catalytica to Spinco to
provide Spinco with adequate operating capital. The amount of that
contribution will be determined in the next several weeks. These reductions
will be partially offset by proceeds from any exercises of options and
warrants to purchase Catalytica common stock prior to the consummation of the
Merger. The consummation of the Merger is subject to the satisfaction of
numerous customary conditions, including the approval of the Merger by
Catalytica stockholders, applicable regulatory clearances and the consummation
of the Spin-Off. No assurance can be given that the Merger or Spin-Off will be
consummated.
In connection with the merger, CCSI has agreed to indemnify Catalytica Inc.
for certain matters arising from its business activities.
Note 10. Commitments and Contingencies
CCSI has developed its catalytic combustion technology under a development
agreement with Tanaka, Kikinzoku Kogyo ("Tanaka"), a major Japanese precious
metals company. In January 1995, CCSI and Tanaka entered into a new agreement
for further development and commercialization of the catalytic combustion
technology. The new agreement provides commercialization rights to the
technology between the parties along market and geographic lines. CCSI has
exclusive rights to manufacture and market catalytic combustion systems for
large gas turbines (greater than 25 megawatts power output) on a worldwide
basis and for small- and medium-sized gas turbines (25 megawatts power output
or less) in the Western Hemisphere and in Western Europe. Tanaka has
reciprocal exclusive rights to manufacture and market catalytic combustors for
use in automobiles on a worldwide basis and for small- and medium-sized
turbines in regions outside of CCSI's area of exclusivity. In each case, the
manufacturing and marketing party will pay a royalty on net sales to the other
party. Under this agreement, each party is responsible for its own development
expenses, and any invention made after May 1, 1995, is the sole property of
the party making the invention with the other party having a right to obtain a
royalty-bearing, nonexclusive license to use it in its areas of exclusivity.
CCSI has entered into certain research collaboration arrangements whereby
potential future royalty payments may be required. Such payments would
generally be due once specified milestones such as commencement of commercial
sales of products incorporating the funded technology are achieved. Related
royalty payments for certain technologies would range from 1.5% to 5.0% of
product sales during the period covered by the royalty agreement.
On August 14, 2000, the City of Glendale filed a complaint against
Catalytica Combustion Systems, Inc., Catalytica, Inc., and Genxon Power
Systems, Inc. in Los Angeles County Superior Court, Case No. EC029841 (the
"Complaint"). The Complaint asserts claims against all defendants for breach
of contract, breach of covenant of good faith and fair dealing, fraud, and
negligent misrepresentation arising out of defendants' failure to complete its
performance under a Technical Services Agreement between the City of Glendale
and Catalytica providing for the retrofit one FT4 engine with the FT4 Xonon
Combustion System ("FT4 XCS"). The City of Glendale seeks compensatory damages
in excess of $7,500,000 and punitive damages. The defendants believe they have
meritorious defenses to the claims asserted and intend to defend the action
vigorously.
F-18
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC. (CCSI)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 10. Commitments and Contingencies--(Continued)
On August 4, 2000, a purported class action complaint, Sims et al. v.
Cusumano et al., Civil Action No. 18197NC, was filed in the Chancery Court of
the State of Delaware against Catalytica, Inc. ("Catalytica" or the "Company")
and certain of its directors. The complaint alleges that defendants breached
their fiduciary duties by agreeing to a transaction in which the Company would
be acquired by DSM, which plaintiffs contend is unfair to the Company's
shareholders. Defendants have not yet responded to the complaint. Based on the
facts known to date, the Company believes that the claims are without merit
and intends to vigorously defend this suit. The Company further believes that
the outcome of this litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of Genxon Power Systems, LLC:
In our opinion, the accompanying balance sheets and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of Genxon Power Systems, LLC (a company in the development
stage) at September 30, 1999 and 1998, and the results of its operations and
its cash flows for the years ended September 30, 1999 and 1998, and for the
period from October 21, 1996 (date of inception) to September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations in both
fiscal years 1999 and 1998, which raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
October 17, 1999, except for
second paragraph of
note 4 as to which the
date is August 28, 2000
F-20
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------
1999 1998
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $162,832 $ 594,573
Accounts receivable..................................... 175,321 204,233
Inventory............................................... -- 278,292
-------- ----------
Total current assets.................................. 338,153 1,077,098
Property and equipment, net............................... 179,558 897,876
Note receivable from employee............................. 90,000 120,000
-------- ----------
Total assets.......................................... $607,711 $2,094,974
======== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current Liabilities:
Payable to Woodward Governor Company.................... $ -- $ 9,060
Payable to Catalytica Combustion Systems, Inc........... 53,857 320,589
Accounts payable........................................ -- 199,480
Accrued liabilities..................................... 592,518 257,093
-------- ----------
Total current liabilities............................. 646,375 786,222
-------- ----------
Commitments and contingencies (Note 4)
Members' capital.......................................... (38,664) 1,308,752
-------- ----------
Total liabilities and members' capital................ $607,711 $2,094,974
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year ended Year ended inception)
September 30, September 30, to September
1999 1998 30, 1999
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Research contract.................. $ 887,224 $ 204,233 $ 1,359,457
----------- ----------- ------------
Operating expenses:
Research and development........... 3,964,331 8,137,903 20,758,676
Selling, general and administrative
expenses.......................... 1,095,602 1,709,337 4,952,736
----------- ----------- ------------
5,059,933 9,847,240 25,711,412
----------- ----------- ------------
Loss from operations................. (4,172,709) (9,643,007) (24,351,955)
Other income, net.................... 15,293 27,910 93,291
----------- ----------- ------------
Net loss............................. $(4,157,416) $(9,615,097) $(24,258,664)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
Catalytica
Woodward Combustion Total
Governor Systems, Members'
Company Inc. Capital
----------- ----------- ------------
<S> <C> <C> <C>
Capital contributions.................. $ 7,100,000 $ 1,900,000 $ 9,000,000
Net loss............................... (8,243,076) (2,243,075) (10,486,151)
----------- ----------- ------------
Members' capital, September 30, 1997... (1,143,076) (343,075) (1,486,151)
Capital contributions................ 6,605,000 5,805,000 12,410,000
Net loss............................. (4,807,548) (4,807,549) (9,615,097)
----------- ----------- ------------
Members' capital, September 30, 1998... 654,376 654,376 1,308,752
Capital contributions................ 1,405,000 1,405,000 2,810,000
Net loss............................. (2,078,708) (2,078,708) (4,157,416)
----------- ----------- ------------
Members' capital, September 30, 1999... $ (19,332) $ (19,332) $ (38,664)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year ended Year ended inception)to
September 30, September September
1999 30, 1998 30, 1999
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(4,157,416) $ (9,615,097) $(24,258,664)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation expense............... 215,181 74,477 289,658
Changes in assets and liabilities:
Accounts receivable............... 28,912 (204,233) (175,321)
Inventory......................... 278,292 (44,315) --
Prepaid expenses.................. -- 358,482 --
Note receivable from employee..... 30,000 (120,000) (90,000)
Payable to members................ (275,792) (75,414) 53,857
Accounts payable.................. (199,480) (1,652,534) --
Accrued liabilities............... 335,425 (176,168) 592,518)
Loss on disposal of fixed assets.. 503,137 -- 503,137
----------- ------------ ------------
Net cash used in operating
activities...................... (3,241,741) (11,454,802) (23,084,815)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of property and
equipment.......................... -- (414,991) (972,353)
----------- ------------ ------------
Cash flows from financing activities:
Members' capital contributions...... 2,810,000 12,410,000 24,220,000
----------- ------------ ------------
Net decrease in cash and cash
equivalents......................... (431,741) 540,207 162,832
Cash and cash equivalents, beginning
of period........................... 594,573 54,366 --
----------- ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 162,832 $ 594,573 $ 162,832
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business of the Company
GENXON Power Systems, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on October 21, 1996 to develop and sell products and
services to a wide range of users of out-of-warranty gas turbines which
require reductions in emissions, overhaul or upgrade. Except as provided for
in the Limited Liability Operating Agreement, the existence of the Company
will be perpetual.
Investor members in GENXON Power Systems, L.L.C. received a percentage
interest in the Company based on the amount of cash and the agreed-upon fair
value of certain technology licenses contributed to the Company. There were
two initial investor members, each receiving a 50 percent interest in the
Company. Their initial capital commitments were as follows:
<TABLE>
<CAPTION>
Cash Technology
Commitment Licenses Total
---------- ---------- -----------
<S> <C> <C> <C>
Catalytica Combustion Systems, Inc.
(Catalytica)........................... $2,000,000 $8,000,000 $10,000,000
Woodward Governor Company (Woodward).... $8,000,000 $2,000,000 $10,000,000
</TABLE>
At September 30, 1999, each member had contributed its agreed-upon
technology licenses and cash in the total amount of $34.3 million. Additional
future cash contributions will be at the discretion of each of the members,
but will generally be in proportion to their respective percentage interests
in the Company and will be governed by the terms of the Operating Agreement.
For financial statement purposes only, the fair value of the technology
licenses has not been recorded.
The Operating Agreement generally provides that profits and losses in any
fiscal year, or other applicable period, shall be allocated to each member in
proportion to their respective percentage interest. In the event that a
member's cumulative capital account, including the fair value of the
technology licenses contributed, is reduced to zero, losses will be
reallocated to members having positive capital account balances until all
members' capital accounts have been reduced to zero. Thereafter, losses will
again be allocated to the members based on their respective percentage
interests. Such "reallocated" losses shall first be restored by an allocation
of profits before any additional profits are allocated to the members. Under
the terms of the Operating Agreement, the Company is required to make cash
distributions to each member in the amount of the estimated tax liability for
the net taxable income and gains allocated to such member during the fiscal
year. Any additional distributions of cash or property will be at the
discretion of the Board of Managers as provided for in the Operating
Agreement. At September 30, 1999, cumulative capital account balances
determined in accordance with the Operating Agreement are as follows:
<TABLE>
<CAPTION>
Catalytica Woodward Total
------------ ------------ ------------
<S> <C> <C> <C>
Cash contributed................. $ 9,110,000 $ 15,110,000 $ 24,220,000
Technology licenses contributed.. 8,000,000 2,000,000 10,000,000
Allocation of cumulative net
loss............................ (12,129,332) (12,129,332) (24,258,664)
------------ ------------ ------------
Capital account balances......... $ 4,980,668 $ 4,980,668 $ 9,961,336
============ ============ ============
</TABLE>
2. Summary of Significant Accounting Policies
Basis of presentation
The Company's financial statements have been prepared on a basis of
accounting assuming that it is a going concern, which contemplates realization
of assets and satisfaction of liabilities in the normal course of business.
The Company has reported a net loss of $4.2 million for the year ended
September 30, 1999 and a cumulative loss of $24.3
F-25
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
million for the period from October 21, 1996 (date of inception) through
September 30, 1999. Management plans to obtain additional capital
contributions from its members or other additional investors to meet its
current and ongoing obligations. Continued existence of the Company is
dependent on the Company's ability to ensure the availability of adequate
funding and the establishment of profitable operations. The financial
statements do not include adjustments that might result from the outcome of
this uncertainty.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less at the date of purchase to be
cash equivalents. Substantially all of the Company's excess cash is invested
in money market accounts with a major investment company.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and other accrued
liabilities approximate fair value due to their short maturities.
Inventory
Inventory, consisting of purchased and manufactured parts to be used in the
overhaul and upgrade of gas turbine engines, is stated at the lower of cost or
estimated selling price.
Property and equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, generally 3 to 10
years. Gains and losses from the disposal of property and equipment will be
taken into income in the year of disposition.
Income taxes
The financial statements include no provision for income taxes since the
Company's income and losses are reported in the members' separate tax returns.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Laboratory equipment.................................. $ 344,235 $498,712
Less: Accumulated depreciation........................ (164,677) (74,477)
--------- --------
179,558 424,235
Construction in progress.............................. -- 473,641
--------- --------
$ 179,558 $897,876
========= ========
</TABLE>
F-26
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Commitments and Contingencies
The Company entered into an exclusive agreement with Agilis Group, Inc.
("Agilis") to provide assistance and advice in the development and design of
the combustor and combustor related hardware for the Company's proprietary
catalytic combustion technology. Under the terms of the agreement, Agilis has
responsibility as to the details, methods, and means of performing its
services. Subject to the Company's approval and on its behalf, Agilis may
enter into purchase commitments and contracts with outside vendors to provide
materials and services to complete the projects. At September 30, 1999, the
Company has no open purchase commitments through Agilis. The agreement will
expire on the later of the completion of all services described in the
agreement or December 31, 1999, unless extended in writing and agreed to by
both parties.
In October 1996, GENXON entered into a technical services agreement with
the City of Glendale in California for the retrofit of one of the City's gas
turbines with the Xonon system for a turnkey price of $700,000 GENXON did not
complete the agree-upon retrofit and returned the engine to the city in its
original state. On August 14, 2000, the City of Glendale filed a complaint
against Catalytica Combustion Systems, Inc., Catalytica, Inc., and Genxon
Power Systems, Inc. in Los Angeles County Superior Court, Case No. EC029841
(the "Complaint"). The Complaint asserts claims against all defendants for
breach of contract, breach of covenant of good faith and fair dealing, fraud,
and negligent misrepresentation arising out of defendants' failure to complete
its performance under a Technical Services Agreement between the City of
Glendale and Catalytica providing for the retrofit one FT4 engine with the FT4
Xonon Combustion System ("FT4 XCS"). The City of Glendale seeks compensatory
damages in excess of $7,500,000 and punitive damages. The defendants believe
they have meritorious defenses to the claims asserted and intend to defend the
action vigorously.
5. Related Party Transactions
The Company has entered into a services agreement with Catalytica and
Woodward to provide the Company with management support, technical services
support and administrative services. Costs under these services agreements for
the year ended September 30, 1999, September 30, 1998 and for the period from
October 21, 1996 (date of inception) to September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Period from
October 21,
1999 (date of
inception) to
September 30,
1999 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Catalytica:
Reseach and development................ $2,454,940 $3,182,559 $9,087,576
General and administrative............. $ 685,777 $ 816,163 $2,857,248
Woodward:
Reseach and development................ $ -- $ 552,690 $1,066,177
General and administrative............. $ -- $ 118,550 $ 183,742
</TABLE>
The Company has also entered into supply agreements with both Catalytica
and Woodward to supply combustion system products and control system products
to be used by the Company in its business of retrofitting installed and
operating gas turbine engines.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
Genxon Power Systems, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' capital and of cash flows present fairly in all
material respects, the financial position of Genxon Power Systems L.L.C. at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the year ended September 30, 1998 and for the period from October
21, 1996 (date of inception) to September 30, 1997. These financials 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations in both
fiscal years 1998 and 1997, which raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 26, 1998
F-28
<PAGE>
GENXON POWER SYSTEM, L.L.C.
(a Delaware limited liability company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 594,573 $ 54,366
Accounts receivable................................... 204,233
Inventory............................................. 278,292 233,977
Prepaid expenses...................................... 358,482
---------- -----------
Total current assets................................ 1,077,098 646,825
---------- -----------
Property and equipment, net............................. 897,876 557,362
Note receivable from employee........................... 120,000
---------- -----------
Total assets........................................ $2,094,974 $ 1,204,187
========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Payable to Woodward Governor Company.................. $ 9,060 $ 89,483
Payable to Catalytica Combustion Systems, Inc......... 320,589 315,580
Accounts payable...................................... 199,480 1,852,014
Accrued liabilities................................... 257,093 433,261
---------- -----------
Total current liabilities........................... 786,222 2,690,338
Commitments and contingencies (Note 3)
Members' capital........................................ 1,308,752 (1,486,151)
---------- -----------
Total liabilities and members' capital.............. $2,094,974 $ 1,204,187
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year Ended inception)
September 30, to September
1998 30, 1997
------------- ------------
<S> <C> <C>
Revenues:
Research contract................................. $ 204,233 $ 268,000
----------- ------------
Operating expenses:
Research and development.......................... 8,137,903 8,656,442
Selling, general and administrative expenses...... 1,709,337 2,147,797
----------- ------------
9,847,240 10,804,239
----------- ------------
Loss from operations................................ (9,643,007) (10,536,239)
Other income, net................................... 27,910 50,088
----------- ------------
Net loss............................................ $(9,615,097) $(10,486,151)
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
Catalytica
Woodward Combustion
Governor Systems,
Company Inc. Total
----------- ----------- ------------
<S> <C> <C> <C>
Capital contributions.................. $ 7,100,000 $ 1,900,000 $ 9,000,000
Net loss............................... (8,243,076) (2,243,075) (10,486,151)
----------- ----------- ------------
Members' capital, September 30, 1997... (1,143,076) (343,075) (1,486,151)
Capital contributions................ 6,605,000 5,805,000 12,410,000
Net loss............................. (4,807,548) (4,807,549) (9,615,097)
----------- ----------- ------------
Members' capital, September 30, 1998... $ 654,376 $ 654,376 $ 1,308,752
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year ended Inception)
September to September
30, 1998 30, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (9,615,097) $(10,486,151)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense............................. 74,447 --
Changes in assets and liabilities:
Accounts receivable............................. (204,233) --
Inventory....................................... (44,315) (233,977)
Prepaid expenses................................ 358,482 (358,482)
Note receivable from employee................... (120,000) --
Payable to members.............................. (75,414) 405,063
Accounts payable................................ (1,652,534) 1,852,014
Accrued liabilities............................. (176,168) 433,261
------------ ------------
Net cash used in operating activities.......... (11,454,832) (8,388,272)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment............. (414,991) (557,362)
------------ ------------
Cash flows from financing activities:
Members' capital contributions.................... 12,410,000 9,000,000
------------ ------------
Net increase in cash and cash equivalents.......... 540,207 54,366
Cash and cash equivalents, beginning of period..... 54,366 --
------------ ------------
Cash and cash equivalents, end of period........... $ 594,573 $ 54,366
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business of the Company:
GENXON Power Systems, L.L.C., a Delaware limited liability company, was
formed on October 21, 1996 to develop and sell products and services to a wide
range of users of out-of-warranty gas turbines which require reductions in
emissions, overhaul or upgrade. Except as provided for in the Limited
Liability Operating Agreement (the "Operating Agreement"), the existence of
GENXON will be perpetual.
Investor members in GENXON Power Systems, L.L.C. received a percentage
interest in GEXNON amount of cash and the agreed-upon fair value of certain
technology licenses contributed to GENXON. There were two initial investor
members, each receiving a 50 percent interest in GENXON. Their initial capital
commitments were as follows:
<TABLE>
<CAPTION>
Cash Technology
Commitment Licenses Total
----------- ----------- ------------
<S> <C> <C> <C>
Catalytica Combustion Systems,
Inc. (Catalytica)................ $2,000,000 $8,000,000 $10,000,000
Woodward Governor Company
(Woodward)....................... $ 8,000,000 $ 2,000,000 $ 10,000,000
</TABLE>
At September 30, 1998, each member had contributed its agreed-upon
technology licenses and cash in the total amount of $21.4 million. Additional
future cash contributions will be at the discretion of each of the members,
but will generally be in proportion to their respective percentage interests
in GENXON and will be governed by the terms of the Operating Agreement. For
financial statement purposes only, the fair value of the technology licenses
has not been recorded.
The Operating Agreement generally provides that profits and losses in any
fiscal year, or other applicable period, shall be allocated to each member in
proportion to their respective percentage interest. In the event that a
member's cumulative capital account, including the fair value of the
technology licenses contributed, is reduced to zero, losses will be
reallocated to members having positive capital account balances until all
members' capital accounts have been reduced to zero. Thereafter, losses will
again be allocated to the members based on their respective percentage
interests. Such "reallocated" losses shall first be restored by an allocation
of profits before any additional profits are allocated to the members. Under
the terms of the Operating Agreement, GENXON is required to make cash
distributions to each member in the amount of the estimated tax liability for
the net taxable income and gains allocated to such member during the fiscal
year. Any additional distributions of cash or property will be at the
discretion of the board of managers as provided for in the Operating
Agreement. At September 30, 1998, cumulative capital account balances
determined in accordance with the Operating Agreement are as follows:
<TABLE>
<CAPTION>
Catalytica Woodward Total
------------ ------------ ------------
<S> <C> <C> <C>
Cash contributed................. $ 7,705,000 $ 13,705,000 $ 21,410,000
Technology licenses contributed.. 8,000,000 2,000,000 10,000,000
Allocation of cumulative net
loss............................ (10,050,624) (10,050,624) (20,101,248)
------------ ------------ ------------
Capital account balances......... $ 5,654,376 $ 5,654,376 $ 11,308,752
============ ============ ============
</TABLE>
2. Summary of Significant Accounting Policies:
Basis of Presentation:
GENXON's financial statements have been prepared on a basis of accounting
assuming that it is a going concern, which contemplates realization of assets
and satisfaction of liabilities in the normal course of business. GENXON has
reported a net loss of $9.6 million for the year ended September 30, 1998 and
a cumulative loss of $20.1 million for the period from October 21, 1996 (date
of inception) through September 30, 1998. Management plans to obtain
additional capital contributions from its members or other additional
investors to meet its current and ongoing
F-33
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liablity company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
obligations. Continued existence of GENXON is dependent on GENXON's ability to
ensure the availability of adequate funding and the establishment of
profitable operations. The financial statements do not include adjustments
that might result from the outcome of this uncertainty.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
GENXON considers all highly liquid investments purchased with original or
remaining maturities of three months or less at the date of purchase to be
cash equivalents. Substantially all of GENXON's excess cash is invested in
money market accounts with a major investment company.
Fair Value of Financial Instruments:
Carrying amounts of certain of GENXON's financial instruments, including
cash and cash equivalents, accounts payable and other accrued liabilities
approximate fair value due to their short maturities.
Inventory:
Inventory, consisting of purchased and manufactured parts to be used in the
overhaul and upgrade of gas turbine engines, is stated at the lower of cost or
estimated selling price.
Property and Equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, generally three to 10
years. Gains and losses from the disposal of property and equipment will be
taken into income in the year of disposition. At September 30, 1998, property
and equipment consisted of tooling costs incurred in the construction of
GENXON's manufacturing equipment.
Income Taxes:
The financial statements include no provision for income taxes since
GENXON's income and losses are reported in the members' separate tax returns.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of
comprehensive income and becomes effective for GENXON for its fiscal year
1999, with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in members'
capital except those resulting from investments or contributions by members.
GENXON is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact its results of
operations.
F-34
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liablity company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise. The new standard becomes effective for GENXON's fiscal year 1999,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. GENXON is evaluating the
requirements of SFAS 131 and the effects, if any, on GENXON's current
reporting and disclosures.
3. Commitments and Contingencies:
GENXON entered into an exclusive agreement with Agilis Group, Inc. to
provide assistance and advice in the development and design of the combustor
and combustor related hardware for GENXON's proprietary catalytic combustion
technology. Under the terms of the agreement, Agilis has responsibility as to
the details, methods, and means of performing its services. Subject to
GENXON's approval and on its behalf, Agilis may enter into purchase
commitments and contracts with outside vendors to provide materials and
services to complete the projects. At September 30, 1998, GENXON had
approximately $0.7 million in open purchase commitments through Agilis. The
agreement will expire on the later of the completion of all services described
in the agreement or December 31, 1999, unless extended in writing and agreed
to by both parties.
GENXON has entered into a technical services agreement with the City of
Glendale, California to retrofit an FT4 gas turbine engine which was provided
by the City. Under the terms of the agreement, the retrofit will include
adding GENXON's proprietary XONON combustion system and a digital control
system for a total turnkey price of $0.7 million, and must be completed by
December 1998. In the event that GENXON is unable to complete the agreed upon
retrofit on time or damages the engine in the process, the agreement requires
GENXON to return the engine to its original state or replace it with a similar
engine, for which GENXON has recorded a reserve of $134,000. GENXON and the
City of Glendale are in discussions regarding the ultimate utilization of
XONON technology on either existing or new gas turbines under this agreement.
4. Related Party Transactions:
GENXON has entered into a services agreement with Catalytica and Woodward
to provide GENXON with management support, technical services support and
administrative services. Costs under these services agreements for the year
ended September 30, 1998 and for the period from October 21, 1996 (date of
inception) to September 30, 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Catalytica:
Research and development............................ $3,182,559 $3,450,077
General and administrative.......................... $ 816,163 $1,355,308
Woodward:
Research and development............................ $ 552,690 $ 513,487
General and administrative.......................... $ 118,550 $ 65,192
</TABLE>
GENXON has also entered into supply agreements with both Catalytica and
Woodward to supply combustion system products and control system products to
be used by GENXON in its business of retrofitting installed and operating gas
turbine engines.
F-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.*
The following table sets forth all expenses to be paid by Catalytica
Combustion Systems, Inc., other than the underwriting discounts and
commissions payable by us in connection with the sale of the common stock
being registered. All amounts shown are estimates except for the registration
fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount to
be Paid
---------
<S> <C>
Registration fee................................................... $
Advisory fees......................................................
NASDAQ National Market.............................................
Blue sky qualification fees and expenses...........................
Printing and engraving expenses....................................
Legal fees and expenses............................................
Accounting fees and expenses.......................................
Transfer agent and registrar fees..................................
Miscellaneous expenses.............................................
----
Total............................................................ $
====
</TABLE>
--------
* To be supplied by amendment.
Item 14. Indemnification of Officers and Directors.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors and other corporate agents under certain
circumstances and subject to certain limitations. Our Certificate of
Incorporation and Bylaws provide that we will indemnify our directors,
officers, employees and agents to the full extent permitted by Delaware
General Corporation Law, including in circumstances in which indemnification
is otherwise discretionary under Delaware law. The indemnification provisions
in our Certificate of Incorporation and Bylaws and the indemnification of our
officers and directors for liabilities (including reimbursement of expenses
incurred) include indemnification for liabilities arising under the Securities
Act.
We intend to maintain director and officer liability insurance, if
available on reasonable terms, to insure our directors and officers against
the cost of defense, settlement or payment of a judgment under certain
circumstances. We also intend to enter into indemnification agreements with
each of our directors providing indemnification for each of them.
Item 15. Recent Sales of Unregistered Securities.
Since May 1997, we have sold and issued the following securities:
1. Since our incorporation in July 1995, we have from time to time
issued, and there remain outstanding, options to purchase an aggregate of
1,793,707 shares of common stock with exercise prices ranging from $0.40 to
$21.60 per share. Since our incorporation, options to purchase 16,463
shares of common stock have been exercised for aggregate consideration of
$6,585.
2. In January 1998, we issued to Enron Ventures Corp. (a subsidiary of
Enron Corp.) a total of 1,339,286 shares of Series B preferred stock for
aggregate consideration of $30,000,000. This transaction also conveyed to
Enron Ventures Corp. a three-year option to purchase up to an additional
535,715 shares of Series B preferred stock for $14.4 million, and a right
to purchase shares in certain future offerings. All of the shares of Series
B preferred stock and the options to purchase addition stock have been
transferred to
II-1
<PAGE>
Sundance Assets, L.P., an affiliate of Enron Corp. Under the omnibus
agreement with Sundance Assets, the option can be exercised on a cashless
basis beginning ten days after the distribution by Catalytica.
There were no underwriters employed in connection with any of the items set
forth in Item 15.
The issuances of securities described in Item 15(1) were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
approved by the registrant's board of directors. With respect to the grant of
stock options described in Item 15(1), an exemption from registration was
unnecessary in that none of the transactions involved a "sale" of securities
as this term is used in Section 2(3) of the Securities Act. The issuances of
securities described in Item 15(2) were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder as transactions by an issuer not involving
a public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
Item 16. Exhibits and Financial Statement Schedules.
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
2.1(1) Assignment and Assumption Agreement between Catalytica, Inc. and the
registrant effective as of July 25, 1995.
2.2* Form of Employee Matters Agreement between Catalytica, Inc. and the
registrant.
2.3* Form of License Agreement between Catalytica, Inc. and the
registrant.
2.4* Form of Tax Sharing Agreement between Catalytica, Inc., Synotex, Inc.
and the registrant.
2.5* Form of Master Confidentiality and Non-Disclosure Agreement between
Catalytica, Inc. and the registrant.
2.6(1) Cross-License Agreement between Catalytica, Inc. and the registrant
effective as of July 1995.
2.7(1) Cross-License Agreement between Catalytica Advanced Technologies,
Inc. and Catalytica, Inc. dated July 1995.
2.8(1) Tax Sharing Agreement between Catalytica, Inc., Catalytica Bayview,
Inc., Catalytica Advanced Technologies, Inc. and the registrant dated
March 4, 1999.
2.9* Form of Indemnification Agreement between Catalytica, Inc. and the
registrant.
2.10* Form of Transition Services Agreement between Catalytica, Inc. and
the registrant.
2.11* Form of Real Estate Matters Agreement between Catalytica, Inc. and
the registrant.
3.1(1) Amended and Restated Certificate of Incorporation to be effective
upon completion of the distribution.
3.2(1) Amended and Restated Bylaws to be effective upon completion of the
offering.
5.1* Opinion of Heller Ehrman White & McAuliffe LLP.
10.1(2) 1995 Catalytica Combustion Systems, Inc. Stock Option Plan with
agreements thereunder.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
---------- -----------
<C> <S>
10.2(1) Promissory Notes and security documents issued to registrant from
Dennis A. Orwig.
10.3(1) Promissory Note from Patrick T. Conroy issued to GENXON Power
Systems LLC dated November 1997.
10.4(1) Promissory Notes from Peter B. Evans issued to registrant both
dated July 20, 1999.
10.5(1) Form of Change of Control and Severance Agreements between Ralph A.
Dalla Betta and Catalytica, Inc. dated May 26, 1999, Ricardo B.
Levy and Catalytica, Inc. dated April 30, 1999, between Lawrence W.
Briscoe and Catalytica, Inc. dated May 5, 1999, and between Dennis
A. Orwig and Catalytica, Inc. dated April 15, 1999.
10.6(3) Limited Liability Company Operating Agreement of GENXON Power
Systems, LLC, dated October 21, 1996.
10.7(4) Amendment No. 1, dated December 4, 1997, to the Operating Agreement
of GENXON Power Systems, LLC.
10.8(5)+ Agreement, dated as of July 18, 1988, between Catalytica, Inc. and
Tanaka Kikinzoku Kogyo K.K.
10.9(6)+ Agreement, dated as of January 31, 1995, between Catalytica, Inc.
and Tanaka Kikinzoku Kogyo K.K.
10.10(1) Series B Preferred Stock Purchase Agreement, dated December 9,
1997, between Catalytica, Inc., Enron Ventures Corp. and the
registrant.
10.11(1) Omnibus Agreement, dated August 29, 2000, by and among Catalytica,
Inc., Sundance Assets, L.P., Enron North America Corp. and the
registrant.
10.12(1)** Collaborative Commercialization and License Agreement among General
Electric Co., GENXON Power System, LLC and the registrant dated as
of November 19, 1998.
10.13(1) Letter Agreement with Craig N. Kitchen dated June 6, 2000.
10.14(1) Letter Agreement with Peter B. Evans dated March 26, 1999.
10.15(1) Letter Agreement with Lawrence W. Briscoe dated June 3, 1994.
10.16* Form of Indemnification Agreement for directors of the registrant.
10.17* Registration Rights Agreement between Morgan Stanley Dean Witter
Capital Partners and its affiliates and the registrant dated
September 2000.
21.1(1) Subsidiaries of registrant.
23.1 Independent Auditors' Consent of Ernst & Young LLP.
23.2 Independent Accountants' Consent of PricewaterhouseCoopers, LLP.
23.3* Consent of Heller Ehrman White & McAuliffe LLP (included in Exhibit
5.1).
24.1(1) Power of Attorney (contained on page II-4).
27.1(1) Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment has been granted for portions of these agreements.
** Confidential treatment has been requested for portions of these agreements.
(1) Previously filed as an exhibit to this registration statement.
(2) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-Q for the quarter ended September 30, 1998 (Commission File No. 0-
20966).
(3) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1996 (Commission File No. 0-20966).
(4) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1997 (Commission File No. 0-20966).
II-3
<PAGE>
(5) Incorporated by reference to exhibits filed with Catalytica, Inc.'s
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
(6) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1994 (Commission File No. 0-20966).
(B) Financial Statement Schedule (none required).
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the 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
hereunder, 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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
(2) For the purpose of determining any liability under the Securities
Act, 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 the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Mountain View, California, on the 5th day of September, 2000.
Catalytica Combustion Systems, Inc.
/s/ Craig N. Kitchen
By: _________________________________
Craig N. Kitchen
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ricardo B. Levy* Director and Chairman September 5, 2000
______________________________________ of the Board
Ricardo B. Levy
/s/ Craig N. Kitchen Chief Executive Officer September 5, 2000
______________________________________ (Principal Executive
Craig N. Kitchen Officer)
/s/ Lawrence W. Briscoe* Chief Financial Officer September 5, 2000
______________________________________ and Director
Lawrence W. Briscoe
/s/ William B. Ellis* Director September 5, 2000
______________________________________
William B. Ellis
/s/ Frederick M. O'Such* Director September 5, 2000
______________________________________
Frederick M. O'Such
/s/ John A. Urquhart* Director September 5, 2000
______________________________________
John A. Urquhart
/s/ Thomas E. White* Director September 5, 2000
______________________________________
Thomas E. White
</TABLE>
/s/ Craig N. Kitchen
*By: _______________________
Craig N. Kitchen
Attorney-in-fact
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1(1) Assignment and Assumption Agreement between Catalytica, Inc. and
the registrant effective as of July 25, 1995.
2.2* Form of Employee Matters Agreement between Catalytica, Inc. and
the registrant.
2.3* Form of License Agreement between Catalytica, Inc. and the
registrant.
2.4* Form of Tax Sharing Agreement between Catalytica, Inc., Synotex,
Inc. and the registrant.
2.5* Form of Master Confidentiality and Non-Disclosure Agreement
between Catalytica, Inc. and the registrant.
2.6(1) Cross-License Agreement between Catalytica, Inc. and the
registrant effective as of July 1995.
2.7(1) Cross-License Agreement between Catalytica Advanced Technologies,
Inc. and Catalytica, Inc. dated July 1995.
2.8(1) Tax Sharing Agreement between Catalytica, Inc., Catalytica
Bayview, Inc., Catalytica Advanced Technologies, Inc. and the
registrant dated March 4, 1999.
2.9* Form of Indemnification Agreement between Catalytica, Inc. and the
registrant.
2.10* Form of Transition Services Agreement between Catalytica, Inc. and
the registrant.
2.11* Form of Real Estate Matters Agreement between Catalytica, Inc. and
the registrant.
3.1(1) Amended and Restated Certificate of Incorporation to be effective
upon completion of the distribution.
3.2(1) Amended and Restated Bylaws to be effective upon completion of the
offering.
5.1* Opinion of Heller Ehrman White & McAuliffe LLP.
10.1(2) 1995 Catalytica Combustion Systems, Inc. Stock Option Plan with
agreements thereunder.
10.2(1) Promissory Notes and security documents issued to registrant from
Dennis A. Orwig.
10.3(1) Promissory Note from Patrick T. Conroy issued to GENXON Power
Systems LLC dated November 1997.
10.4(1) Promissory Notes from Peter B. Evans issued to registrant both
dated July 20, 1999.
10.5(1) Form of Change of Control and Severance Agreements between Ralph
A. Dalla Betta and Catalytica, Inc. dated May 26, 1999, Ricardo B.
Levy and Catalytica, Inc. dated April 30, 1999, between Lawrence
W. Briscoe and Catalytica, Inc. dated May 5, 1999, and between
Dennis A. Orwig and Catalytica, Inc. dated April 15, 1999.
10.6(3) Limited Liability Company Operating Agreement of GENXON Power
Systems, LLC, dated October 21, 1996.
10.7(4) Amendment No. 1, dated December 4, 1997, to the Operating
Agreement of GENXON Power Systems, LLC.
10.8(5)+ Agreement, dated as of July 18, 1988, between Catalytica, Inc. and
Tanaka Kikinzoku Kogyo K.K.
10.9(6)+ Agreement, dated as of January 31, 1995, between Catalytica, Inc.
and Tanaka Kikinzoku Kogyo K.K.
10.10(1) Series B Preferred Stock Purchase Agreement, dated December 9,
1997, between Catalytica, Inc., Enron Ventures Corp. and the
registrant.
10.11(1) Omnibus Agreement, dated August 29, 2000, by and among Catalytica,
Inc., Sundance Assets, L.P., Enron North America Corp. and the
registrant.
10.12(1)** Collaborative Commercialization and License Agreement among
General Electric Co., GENXON Power System, LLC and the registrant
dated as of November 19, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.13(1) Letter Agreement with Craig N. Kitchen dated June 6, 2000.
10.14(1) Letter Agreement with Peter B. Evans dated March 26, 1999.
10.15(1) Letter Agreement with Lawrence W. Briscoe dated June 3, 1994.
10.16* Form of Indemnification Agreement for directors of the registrant.
10.17* Registration Rights Agreement between Morgan Stanley Dean Witter
Capital Partners and its affiliates and the registrant dated
September 2000.
21.1(1) Subsidiaries of registrant.
23.1 Independent Auditors' Consent of Ernst & Young LLP.
23.2 Independent Accountants' Consent of PricewaterhouseCoopers, LLP.
23.3* Consent of Heller Ehrman White & McAuliffe LLP (included in Exhibit
5.1).
24.1(1) Power of Attorney (contained on page II-4).
27.1(1) Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment has been granted for portions of these agreements.
** Confidential treatment has been requested for portions of these agreements.
(1) Previously filed as an exhibit to this registration statement.
(2) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-Q for the quarter ended September 30, 1998 (Commission File No. 0-
20966).
(3) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1996 (Commission File No. 0-20966).
(4) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1997 (Commission File No. 0-20966).
(5) Incorporated by reference to exhibits filed with Catalytica, Inc.'s
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
(6) Incorporated by reference to exhibits filed with Catalytica, Inc.'s Form
10-K for the year ended December 31, 1994 (Commission File No. 0-20966).
