<PAGE>
As filed with the Securities and Exchange Commission on November 1, 2000
Registration No. 333-44772
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CATALYTICA ENERGY SYSTEMS, INC.
(Exact Name of Corporation as Specified in Its Charter)
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<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 Energy 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 Energy 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)
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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........ $62,548,000 $16,513
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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
September 30, 2000.
(2) Amount previously paid.
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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 NOVEMBER 1, 2000.
Catalytica Energy Systems, Inc.
18,333,333 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 "CESI".
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.
-----------
<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................................................................. 29
Unaudited Pro Forma Combined Financial Information....................... 43
Management............................................................... 46
Material United States Federal Income Tax Considerations................. 57
Related-Party Transactions............................................... 60
Arrangements Between Us and Catalytica................................... 62
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 69
Validity of Common Shares................................................ 70
Experts.................................................................. 70
Where You Can Find More Information...................................... 70
Index to Financial Statements............................................ F-1
</TABLE>
Through and including the 25th day after the date the distribution of the
shares covered by 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," and "Energy Systems" are to Catalytica Energy 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.
Synotex did not have an interest in acquiring our company or Catalytica
Advanced Technologies, a wholly-owned subsidiary of Catalytica. Accordingly,
prior to the Catalytica merger, Catalytica Advanced Technologies, will be
combined with us and 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 .25 to .34 of a share of the common stock of Catalytica
Energy 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 86% to
88% of our common stock at the time of the distribution. Catalytica is
purchasing this additional stock to provide us with operating capital to fund
anticipated losses. The merger agreement with Synotex also requires the
distribution of our common stock
3
<PAGE>
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 .34 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 set as the date of, or the date immediately preceding, the closing of the
merger with Synotex. The merger will close if and when the Catalytica
stockholders approve the merger and the other conditions to the merger are
satisfied.
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 "CESI."
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 57-59 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 Energy 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 plan to ship our first product and begin to derive
product revenues in late 2001.
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. We plan to ship our first
product and begin to derive product revenue in late 2001.
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. We do not expect to ship our
product until at least 2001 and we expect to incur losses until at least 2003.
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
5
<PAGE>
overall project performance and efficiency and can create incremental health
risks through secondary emissions and the transportation and storage of toxic
reagents. In addition, exhaust cleanup systems cannot be used in all gas
turbine applications. A combination of traditional technologies could reduce
gas turbine emissions to levels comparable to or lower than emission levels of
Xonon-equipped gas turbines in some 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. In applications where gas turbines
cannot achieve near-zero emissions using traditional technologies, Xonon can
expand the use of gas turbines. In applications where gas turbines can achieve
near-zero emissions using a combination of traditional technologies, Xonon can
reduce compliance costs as a lower-cost emissions solution. While we expect
Xonon-equipped gas turbines to be priced to end-users by the OEM's to capture a
share of the value added, we expect Xonon to be viewed by end-users to be a
cost-effective emissions or combustion solution in light of its benefits.
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. Our initial focus under this
agreement is the 10 megaWatt (or MW) GE10 turbines manufactured by GE's Nuovo
Pignone subsidiary and GE Power Systems' larger 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. While both F class and E class gas
turbines have combustion temperatures well in excess of their operating
temperatures when using conventional flame-based combustion, F class gas
turbines have higher operating temperatures than E class gas turbines.
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
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1.3 million shares of our Series B preferred stock (2.7 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.
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. In October 2000, we changed our
name from Catalytica Combustion Systems, Inc. to Catalytica Energy Systems,
Inc. Our telephone number at that location is (650) 960-3000. Our web site is
http://www.catalytica-inc.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 Energy Systems, Inc. This prospectus also refers to
trademarks and trade names of other organizations.
7
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Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31, September 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 $ 3,890
------- ------- ------- ------- -------- -------
Costs and expenses:
Research and
development(1)....... 6,051 6,451 6,009 9,313 9,627 7,304
Costs associated with
discontinued product
line................. 2,143 268 -- -- -- --
Selling general and
administrative....... 591 708 671 1,269 4,786 5,366
------- ------- ------- ------- -------- -------
Total costs and
expenses........... 8,785 7,427 6,680 10,582 14,413 12,670
------- ------- ------- ------- -------- -------
Operating loss.......... (4,556) (1,493) (1,541) (4,303) (11,360) (8,780)
Loss on joint venture... -- -- (4,355) (3,826) (1,133) (236)
Interest income......... -- -- -- 1,409 1,041 596
Interest expense........ (41) (114) (374) (177) (278) (106)
------- ------- ------- ------- -------- -------
Net loss(2)............. $(4,597) $(1,607) $(6,270) $(6,897) $(11,730) $(8,526)
======= ======= ======= ======= ======== =======
</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>
September 30,
December 31 2000
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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 $10,295 $49,895
Total assets................................ 28,520 19,840 14,048 62,548
Total stockholders' equity.................. 24,137 12,552 4,315 58,392
</TABLE>
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(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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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 September 30, 2000, we had an accumulated deficit of $52.5 million.
We have not achieved profitability and expect to continue to incur net losses
until we can produce sufficient revenues to cover our costs. Proceeds from the
expected sale of additional shares to Catalytica estimated at $50 million are
expected to finance operations through 2002. We expect to incur operating
losses through at least 2003 and we expect that we will need to raise
additional capital before we become profitable. 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. Delays in completing this work could result in
the loss of orders, and the emergence of significant technical issues could
result in termination by OEMs of certain agreements to adapt Xonon to their
gas turbines
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 are, however, currently
performing within the timetables established for completion of these programs.
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
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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 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
could be harmed and future sales 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 could be harmed and our
sales 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;
10
<PAGE>
. The future costs of natural gas and other fuels;
. 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.
A number of our components are provided by a single supplier and our
purchase volumes are not yet at the point where we can secure agreements
ensuring long-term supplies at attractive prices given the alternative of
maintaining a strategic inventory reserve. Some of our suppliers use
proprietary processes to manufacture components. Although alternative
suppliers are available, a switch in suppliers could be costly and could take
up to one year to accomplish.
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. For example, during the period from January 1,
1999 to July 31, 2000, the price of palladium ranged from $295 to $832 per
troy ounce. During that period, the price of platinum ranged from $334 to $586
per troy ounce. 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.
11
<PAGE>
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 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
subjected to a variety of operating conditions and to be deployed in a number
of extremely demanding environments. For example, gas turbines will be
deployed in a wide range of temperature conditions, in the presence of
atmospheric or other contaminants, under a wide range of operating
requirements and with varying maintenance practices. 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
12
<PAGE>
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.
If we are unable to protect our intellectual property others may duplicate our
technology
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. The
ability of others to use our intellectual property could allow them to
duplicate the benefits of our product and reduce our competitive advantage. 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. If we do not fully commercialize Xonon, we will not be
profitable.
Our ability to adapt our technology to gas turbines, to continue to develop
our technology, to effectively market our product, and to manage our business
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.
The GENXON joint venture may require additional funding or subject us to
liability in connection with litigation
Our joint venture, GENXON, has completed its prototype development, but
could incur additional costs. Neither joint venture partner is contractually
required to make further capital infusions. If our partner decides not to make
additional capital contributions, we would be faced with the possibility of
having to fund the joint venture on our own or find additional sources of
financing. In this event, additional financing might not be available on
acceptable terms, or at all.
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
13
<PAGE>
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. While it is not possible to predict with certainty the outcome of
this matter, and while we do not believe an adverse result would have a
material effect on our consolidated financial position, it could be material
to the results of operations and cash flows for a fiscal year. Moreover, we
may be obligated to indemnify Catalytica pursuant to our indemnification
agreement with Catalytica for liabilities incurred by Catalytica in connection
with the operations of GENXON or litigation involving GENXON.
Risks Associated with our Separation from Catalytica
We may incur additional liabilities as a result of the transactions
contemplated by the distribution, including liabilities of Catalytica Advanced
Technologies and Catalytica.
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.
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 will own approximately 30-32% 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
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<PAGE>
Assets, L.P., an affiliate of Enron, and Morgan Stanley together are expected
to own approximately 47% to 49% 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,
conditions and at the same price as Catalytica will for the contemplated
purchase of $50 million of our common stock from us in connection with
Catalytica's merger with Synotex. Enron will not, however, have this right
with respect to such purchase if a "when-issued" trading market develops for
our stock prior to the distribution by Catalylica. 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 2,514,144 shares that may be issued upon the
exercise of options outstanding as of September 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.
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 .34 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 87% to 88% of our outstanding common stock, which is all of the
stock held by Catalytica, will be distributed to Catalytica's stockholders.
These percentages assume Sundance Assets, L.P., an affiliate of Enron, does
not acquire additional shares of our stock. 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 86.6%
$15 3,333,333 87.1%
$10 5,000,000 88.1%
</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 and that it does not exercise its
option to purchase additional shares of our stock. If Sundance Assets does
exercise its right to co-invest with Catalytica, then Catalytica's ownership
will remain at approximately 85% (assuming Sundance Assets does not exercise
its option). 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
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<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 United
States 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 contemplates 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.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 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 us; 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 September 30,
2000
----------------------
Actual Pro Forma(1)
-------- ------------
(in thousands, except
Stockholders' equity: per share data)
<S> <C> <C>
Energy 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 13
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.............................. 57,255 116,332
Deferred compensation................................... (452) (452)
Deficit accumulated during the development stage........ (52,501) (57,501)
-------- -------
Total stockholders' equity........................ $ 4,315 $58,392
======== =======
Total capitalization.............................. $ 4,315 $58,392
======== =======
</TABLE>
--------
(1) The number of shares of common stock outstanding on a pro forma basis is
estimated to be 21,044,997. This includes an estimated 3,333,333 shares
which will be purchased by Catalytica, Inc. at $15 per share and
immediately thereafter distributed to stockholders.
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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 nine month periods
ended September 30, 1999 and 2000 and the summary combined balance sheet data
as of September 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>
Nine months
ended
Year ended December 31, September 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 $ 2,166 $ 3,890
------- ------- ------- ------- -------- ------- -------
Costs and expenses:
Research and
development(1)....... 6,051 6,451 6,009 9,313 9,627 5,880 7,304
Costs associated with
discontinued product
line................. 2,143 268 -- -- -- -- --
Selling general and
administrative....... 591 708 671 1,269 4,786 2,591 5,366
------- ------- ------- ------- -------- ------- -------
Total costs and
expenses............ 8,785 7,427 6,680 10,582 14,413 8,471 12,670
------- ------- ------- ------- -------- ------- -------
Operating loss.......... (4,556) (1,493) (1,541) (4,303) (11,360) (6,305) (8,780)
Loss on joint venture... -- -- (4,355) (3,826) (1,133) (1,133) (236)
Interest income......... -- -- -- 1,409 1,041 789 596
Interest expense........ (41) (114) (374) (177) (278) (195) (106)
------- ------- ------- ------- -------- ------- -------
Net loss(2)............. $(4,597) $(1,607) $(6,270) $(6,897) $(11,730) $(6,844) $(8,526)
======= ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31 September 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 $10,295
Total assets............ 685 2,767 2,871 28,520 19,840 14,048
Total stockholders'
equity (deficit) ...... (7,322) (8,928) (15,198) 24,137 12,552 4,315
</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.
19
<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. In
July 2000, we formed Catalytica NovoTec Inc. as a subsidiary. NovoTec is
developing improved catalytic processes employing proprietary high speed
testing and computer learning 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 September 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 Nine-Month Periods Ended September 30, 1999, and September 30,
2000 (Unaudited).
Revenue
<TABLE>
<CAPTION>
For the nine
months ended
September 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Total revenue........................................ $2,166 $3,890 80%
</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 80% for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999. This increase was
principally due to securing $1.6 million of additional external development
funding for Xonon development programs of which $1.3 million is related to GE
programs.
Costs and Expenses
<TABLE>
<CAPTION>
For the nine
months ended
September 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in
thousands)
<S> <C> <C> <C>
Research and development (includes allocated costs from
Catalytica of $1.5 million and $1.4 million for the
nine months ended September 30, 1999 and September 30,
2000, respectively)................................... $5,880 $7,304 24%
Selling, general and administrative (includes allocated
costs from Catalytica of $0.8 million and $0.9 million
for the nine months ended September 30, 1999 and
September 30, 2000, respectively)..................... 2,591 5,366 107%
</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 24% for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999. Once the prototype
development program of our 50% owned GENXON joint venture was completed in
June 1999, the engineering efforts relating to additional catalyst system
testing and development were conducted principally by us and consequently
resulted in us having increased R&D costs of $2.0 million. The increase in R&D
expenditures was also attributable to an increase of $0.5 million from Xonon
development programs. We expect to continue our R&D efforts, and we expect R&D
expense to increase in the future. The R&D expense increase was partially
offset by a net reimbursement of advances made by us to Enron totaling
approximately $1.1 million. In December 1999, we agreed to advance cash to
Enron in order to accelerate the development of Xonon cool combustion
applications for turbines. In exchange, Enron obligated itself to repay any
advances at the end of nine months in either cash or "turbine credits". Under
the arrangement, if certain conditions were met, Enron could gain the
unilateral right to select whether it would repay our advances with cash or
settle them through turbine credits. The turbine credits entitle the holder to
a dollar for dollar credit on the purchase of certain turbines that specify
the use of our Xonon process. Because Enron could gain the right to use the
turbine credits to settle the advances and because we were unable to
reasonably estimate the amount we would ultimately realize if Enron used
turbine credits to settle the advances, we recorded a $1.2 million provision
which was equal to the amount advanced by us to Enron at December 31, 1999. In
March 2000, the agreement was amended and Enron reimbursed Catalytica for
approximately $1.1 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,
21
<PAGE>
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 107% for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999. This increase was
primarily due to $1.2 million in transaction costs recorded in the third
quarter which related to our spin-off and $0.9 million in severance costs
associated with the resignation of our former President and Chief Executive
Officer. In addition, $0.5 million of the increase was due to increased
staffing costs of which $0.3 million was related to the commercialization of
Xonon and $0.2 million was related to Novotec, our subsidiary, which was
formed in June 2000.
Loss on Joint Venture
<TABLE>
<CAPTION>
For the nine months
ended September 30, Annual %
-------------------- Change
1999 2000 2000/1999
---------- ------------------
(dollars in
thousands)
<S> <C> <C> <C>
Loss on joint venture....................... $ 1,133 $ 236 (79)%
</TABLE>
We account for losses of our joint ventures under the equity method of
accounting. We incurred joint venture losses of $0.2 million in the first nine
months of 2000. Under the equity method of accounting, we are required to
record losses in the joint venture since we made a capital contribution in an
equal amount during this period. During the nine months ended September 30,
1999, our share of GENXON's losses was $1.1 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
recognition of additional pro rata losses, neither joint venture partner is
contractually required to make such capital infusions. Our reduced level of
investment in GENXON is expected to continue throughout 2000.
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 $0.15 million in 1998. The
operating agreement does not require any further capital contributions by
Catalytica Advanced Technologies beyond its initial $0.15 million
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 nine
months ended
September 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in
thousands)
<S> <C> <C> <C>
Interest income................................... $ 789 $ 596 (25)%
</TABLE>
Interest income decreased for the nine months ended September 30, 2000,
compared with the nine months ended September 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.
22
<PAGE>
Interest Expense
<TABLE>
<CAPTION>
For the nine
months ended
September 30, Annual %
------------- Change
1999 2000 2000/1999
------ ------ ---------
(dollars in
thousands)
<S> <C> <C> <C>
Interest expense.................................. $ 195 $ 106 (46)%
</TABLE>
Interest expense decreased for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999, due to a $0.1 million
one-time interest cost in the first quarter of 2000 related to the recovery of
$1.1 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. For the nine months ended September 30, 1999, Catalytica charged
Catalytica Advanced Technologies $0.2 million of intercompany interest.
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 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 $1.2 million decrease in external research funding
received by us during 1999, as well as a $2.0 million 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 which accounted for an increase of $0.4
million 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.
23
<PAGE>
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 (includes
allocated costs from Catalytica of
$1,480, $1,938, and $2,045 for the
twelve months ended December 31,
1997, 1998, and 1999,
respectively)...................... $6,009 $9,313 $9,627 55% 3%
Selling, general and administrative
(includes allocated costs from
Catalytica of $765, $1,049, $1,052
for the twelve months ended
December 31, 1997, 1998, and 1999,
respectively)...................... 671 1,269 4,786 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,
when compared to the previous period. Although the total amount of R&D expense
remained relatively flat in 1999, R&D expense was impacted by a shift in R&D
spending from the GENXON joint venture back to us and a decrease in Catalytica
Advanced Technologies' R&D expense due to commencement of their joint venture
with Sud-Chemie. 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 was completed in June 1999, we
assumed primary funding of additional catalyst system testing and development
which resulted in an increase in R&D costs of $0.9 million in 1999. 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 in the amount of $1.7 million due
to a shift in emphasis from contract research to development of new
technologies primarily through its 50/50 joint venture, Sud-Chemie Catalytica,
which was formed in July of 1998. R&D expenses which were previously incurred
by Catalytica Advanced Technologies were transferred to the Sud-Chemie
Catalytica joint venture which accounted for a reduction of Catalytica
Advanced Technologies' R&D expenses of $1.1 million in the twelve months ended
December 31, 1999. Catalytica Advanced Technologies formed this joint venture
to share development costs with its joint venture partner.
R&D expense increased 55% for the twelve months ended December 31, 1998.
This increase is primarily due to a $1.7 million increase in staffing and a
$1.6 million increase in other R&D 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 Venture"). 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 us (under our contract with GENXON) and charged to the GENXON
joint venture: $2.0 million in 1999, $2.5 million in 1998, and $2.6 million in
1997. Additionally, the GENXON joint venture incurred other significant R&D
costs reflected in the GENXON financial statements. Once GENXON completed its
final program in June 1999, all further R&D efforts were conducted principally
by us and consequently are reflected in our R&D costs. We account for losses
of our joint ventures under the equity method of accounting.
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.
24
<PAGE>
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. As we move toward commercialization we have developed a need
to increase our marketing and other SG&A activities. Related to this
transition our costs increased $2.0 million between 1998 and 1999, and
increased $0.6 million between 1997 and 1998. Additionally, in 1999, we
incurred a $1.3 million reserve for contingencies. 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 upgrading out-of-warranty turbines with new systems 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 $0.15 million in 1998. The
operating agreement does not require any further capital contributions by
Catalytica Advanced Technologies beyond its initial $0.15 million
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.
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 of $0.1 million
of interest expense attributable to an increase of approximately
25
<PAGE>
$2.0 million of intercompany debt balance between Catalytica Advanced
Technologies and Catalytica. Catalytica Advanced Technologies used borrowings
from Catalytica to fund our operations. Catalytica charged Catalytica Advanced
Technologies $0.3 million, $0.2 million, and $0.3 million for the twelve
months ended December 31, 1997, 1998, and 1999, respectively. We incurred
interest expense to Catalytica at an annual interest rate of 7% on these
borrowings.
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 incurred interest expense to Catalytica
at an annual interest rate of 7% 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 Nine months
December 31, ended
----------------- September 30,
1998 1999 2000
-------- ------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Cash, cash equivalents, and short-term
investments.............................. $ 22,847 $16,032 $10,295
Working capital........................... 22,424 10,653 2,786
Cash provided by (used in)
Operating activities...................... (3,784) (7,367) (6,017)
Investing activities...................... (10,017) (1,488) (293)
Financing activities...................... 31,455 1,763 1,063
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents.............................. 17,654 (7,092) (5,247)
Current Ratio............................. 7.14 2.62 1.31
</TABLE>
Decreases in working capital since 1998 result primarily from uses of cash
and advances from Catalytica, Inc. to support operations. 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 September 30, 2000, primarily from
funds invested by Catalytica and the 1998 sale of equity to Enron Ventures. In
January 1998, Enron Ventures purchased 2,678,572 shares of our convertible
Series B preferred stock (on an as-converted basis) for $30.0 million in cash.
Under this equity transaction, we recorded additional paid in capital of
approximately $30.0 million. Additionally, Enron Ventures received an option
to purchase up to an additional 1,071,430 shares of convertible Series B
preferred stock (on an as-converted basis), for $13.44 per share (on an as
converted basis). Enron Ventures' right to purchase these shares terminates on
January 14, 2001. This option may be exercised on a "cash-less" basis pursuant
to which we would issue fewer shares and not receive cash. See "Business--
Relationship with Enron." As of September 30, 2000, we had cash, cash
equivalents, and short term investments totaling approximately $10.3 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.
26
<PAGE>
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 product
incorporating the funded technology are achieved. Currently, we have three
such arrangements with Tanaka Kikinzoku Kogyo ("Tanaka"), Gas Research
Institute ("GRI") and the California Energy Commission ("CEC").
We have developed our catalytic combustion technology under a development
agreement with Tanaka, a major Japanese precious metals company. Under this
agreement, Tanaka funded a significant amount of the development effort
related to this technology. In January 1995, we entered into a new agreement
for further development and commercialization of the catalytic combustion
technology that superseded the original agreement. The new agreement divides
commercialization rights to the technology between the parties along market
and geographic lines. We have exclusive rights to manufacture and market
catalytic combustion systems for large gas turbines (greater than 25 MW power
output) on a worldwide basis and for small- and medium-sized gas turbines (25
MW 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 our area of exclusivity. In each
case, the manufacturing and marketing party will pay a royalty on net sales to
the other party, and an additional royalty on net sales if the sale occurs in
the other party's area of exclusivity. 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.
In 1999 we entered into a funding arrangement with GRI to fund the next
generation Xonon combustor and demonstrate its performance. We will be
required to make royalty payments of $243,000 per year to GRI beginning with
the sale, lease, or other transfer of the twenty-fifth catalyst module for gas
turbines rated greater than 1MW, for seven years, up to a maximum of $1.7
million.
In 1998 we entered into a funding arrangement with the CEC in which they
agreed to fund a portion of our Xonon-engine test and demonstration facility
located in Santa Clara, California. Under this agreement we are required to
pay a royalty of 1.5% of the sales price on the sale of each product or right
related to this project for fifteen years. We have the right to choose an
early buyout option which is equal to two times the CEC's funding amount of
$1.3 million, without a pre-payment penalty, provided the payment occurs
within two years from the date at which royalties are first due to the CEC.
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.
27
<PAGE>
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.
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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 speed testing and computer learning technologies.
Additionally, Catalytica Advanced Technologies is working on projects to
develop and commercialize fuel processing technology for fuel cells, including
reforming gasoline for transportation applications and natural gas for
stationary power applications. Catalytica NovoTec was formed by us in July
2000 to rapidly improve chemical and petrochemical manufacturing processes
using high speed tools for the discovery and development of new catalysts.
NovoTec is developing a powerful proprietary system, the Catalyst Development
Engine, to rapidly identify optimal catalysts which will procure significant
economic benefits in the manufacturing processes of large volume chemical
products and intermediates.
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).
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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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;
. 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.
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<PAGE>
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 14% of total United States electricity generation in 1998, will
represent 31% 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, or nearly continuously operating, gas turbine generating
plants that operate in combined cycle (with a heat recovery system) for added
efficiency, 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) for added
operating flexibility 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.
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<PAGE>
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.
. 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,
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<PAGE>
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.
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
35
<PAGE>
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.
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
36
<PAGE>
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 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
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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.
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 initially 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 component
manufacturing expertise.
For internal production we plan to use manufacturing cells. Manufacturing
cells are a sequence of manufacturing equipment arranged in a manner to allow
the continuous production of a set of similar products, such as Xonon modules.
Our manufacturing cells are designed to produce all varieties of Xonon modules
and each cell will ultimately produce the equivalent of up to 1,000 complete
KHI M1A-13A modules per year and have a 3,000 square foot footprint. These
cells are scaleable to capacity needs and can be additionally located near
customer facilities or distribution nodes as appropriate. 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 2002. We anticipate adding additional
cells starting in 2002.
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 the
precious metals palladium and platinum. 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
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production quantities. In the case of all of our components and materials, we
have either identified alternative suppliers or substitute materials, with the
exception of one, a high temperature steel alloy. In this case, this
material's primary use is in the jet aircraft and turbine industries, and our
requirements would represent less than 5% of the present demand. We believe
the continuing supply of this material will be ensured by its demand in its
primary market. We are also evaluating substitute materials for this alloy.
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.
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 parts per million (or 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
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<PAGE>
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 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 5 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.
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Competition
We expect Xonon-equipped gas turbines to compete with turbines outfitted
with traditional emissions reduction technologies, including lean pre-mix
combustion and conventional exhaust cleanup systems.
We believe Xonon is unique in its abilities to allow gas turbines to
achieve near-zero emissions in simple cycle and to achieve near-zero emission
without the use of exhaust cleanup systems. Lean premix combustion systems
cannot achieve near-zero emissions, and the applicability of conventional
exhaust cleanup systems is limited. Exhaust cleanup used in combination with
lean premix combustion can reach near-zero emissions in some applications. As
Xonon is applied to gas turbine models, these benefits will enhance the value
of those gas turbines. We expect Xonon-equipped gas turbines to be priced to
end-users by the OEMs to capture a share of that value.
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.
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.
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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 speed testing and computer learning technologies.
Employees
As of August 31, 2000, we employed 65 persons. None of our employees is
represented by a labor union. We believe our relations with our employees are
good.
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. While it is not possible to predict with certainty the
outcome of this matter, and while we do not believe an adverse result would
have a material effect on our consolidated financial position, it could be
material to the results of operations and cash flows for a fiscal year.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statement includes the
unaudited pro forma condensed combined balance sheet as of September 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 September 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 us to increase our capitalization 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 our
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 September 30, 2000. In
addition, they do not purport to indicate our future financial position. This
unaudited pro forma condensed financial statement should be read in
conjunction with our historical financial statements and notes of 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 42 of
this document.
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CATALYTICA ENERGY SYSTEMS, INC.
and
CATALYTICA ADVANCED TECHNOLOGIES, INC.
(a combined company in the development stage)
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
September 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical Adjustments Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 5,315 $39,600 (1)(2) $ 44,915
Short-term investments................. 4,980 -- 4,980
Note receivable from Catalytica,
Inc. ................................. 5,400 (1) 5,400
Accounts receivable, net
Trade................................ 1,002 -- 1,002
Joint venture........................ 325 -- 325
Employees............................ 50 -- 50
-------- ------- --------
1,377 -- 1,377
Inventory.............................. 98 -- 98
Prepaid expenses and other assets...... 19 -- 19
-------- ------- --------
Total current assets................. 11,789 45,000 56,789
Property and equipment, net.............. 1,789 3,500 (1) 5,289
Notes receivable from employees.......... 470 -- 470
-------- ------- --------
$ 14,048 $48,500 $ 62,548
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Catalytica, Inc. ........... $ 6,126 $(6,126)(3) --
Accrued liabilities.................... 2,682 1,279 (1) $ 3,961
Deferred revenue....................... 195 -- 195
-------- ------- --------
Total current liabilities............ 9,003 (3,912) 4,156
Note payable to Catalytica............... 730 (730)(3) --
Stockholders' equity:
Preferred stock........................ 11 (11)(4) --
Common stock........................... 2 11 (1)(4) 13
Additional paid-in capital............. 57,255 59,077 (1)(3) 116,332
Deferred compensation.................. (452) -- (452)
Deficit................................ (52,501) (5,000)(2) (57,501)
-------- ------- --------
Total stockholders' equity........... 4,315 54,077 58,392
-------- ------- --------
$ 14,048 $48,500 $ 62,548
======== ======= ========
</TABLE>
See Accompanying Notes to Unaudited Condensed Combined Financial Statements.
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<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 September 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 September 30, 2000. In
addition, they do not purport to indicate the future financial position of
Energy 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
Energy 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 balance of at least $40
million in cash and cash equivalents. Catalytica currently expects to
purchase additional shares of our stock for $50 million. This amount will
be funded by cash of $44.6 million and a short-term note of $5.4 million.
The note is expected to be paid one day after closing. This records the
capitalization of that amount as well as certain assets at the Mountain
View facility which include all leasehold improvements, general laboratory
equipment, certain analytical equipment, computers, and office equipment
($3.5 million). Liabilities which consist of employee benefits such as
vacation accrual, employee incentive plan, and pension accrual ($1.3
million) will be transferred from Catalytica to us 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 ($5.0 million). This cost will be
expensed in the fourth quarter of 2000.
3. To record forgiveness of intercompany payable to Catalytica.
4. To record merger of the Energy Systems and the Catalytica Advanced
Technologies businesses.
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<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees as of September 30,
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
Ralph A. Dalla Betta.... 54 Chief Technology Officer and Vice President, Technology
Dennis Riebe............ 58 Chief Financial Officer
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
Richard Buchanan........ 37 Vice President, Business Leader
Lawrence W. Briscoe..... 56 Director
William B. Ellis........ 59 Director
Frederick M. O'Such..... 62 Director
John A. Urquhart........ 71 Director
Thomas E. White......... 56 Director
Ernest Mario............ 62 Director
Howard I. Hoffen........ 36 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.
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 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.
Dennis S. Riebe has served as our chief financial officer since September
2000. Prior to that, Mr. Riebe spent 34 years with AlliedSignal (now
Honeywell), in a variety of positions including both Finance and
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<PAGE>
Operations. He served as the CFO for an AlliedSignal Engines acquisition in
Stratford, Connecticut, and has been the Director of Cost Management and
Director of Financial Planning and Analysis for the AlliedSignal Engine
business. Prior to that he was the Corporate Controller for The Garrett
Corporation, and served as an officer and member of the Board of Directors for
an international Joint Venture with the Republic of China (Taiwan). Mr. Riebe
is a graduate of Purdue University and has completed graduate studies in
business administration at Arizona State 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. Since October 1997, Mr. Conroy has served as
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.
Richard Buchanan has served as our Vice President, Business Leader since
October 2000. Prior to that, Mr. Buchanan spent 15 years with Allied Signal
(now Honeywell) in a variety of positions in Customer Support and was most
recently the Manager of Regional Turbofan, New Business Development. Mr.
Buchanan holds a Bachelor of Science Degree in Business Management and an
Associate of Applied Science Degree in Aviation Management from Southern
Illinois University.
Lawrence W. Briscoe has served as our director since our inception in 1995.
Mr. Briscoe served as our chief financial officer since our inception until
September 2000. 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
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<PAGE>
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.
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 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.
Ernest Mario, Ph.D. joined our board of directors in September 2000. Dr.
Mario has served as a director of Catalytica Pharmaceuticals and Catalytica
since July 1996. Dr. Mario is currently chairman and chief executive officer
of ALZA. Before joining ALZA in August 1993 Dr. Mario served as deputy
chairman and chief executive officer of Glaxo Holding p.l.c., having served in
a variety of executive positions with Glaxo, Inc. beginning in 1986. From 1977
to 1984, he held various executive level positions with Squibb Corporation,
ending as president and chief executive officer of Squibb Medical Products.
Dr. Mario is a member of the board of directors of several companies,
including SonoSite, COR Therapeutics, Cepheid and Pharmaceutical Product
Development Co. Dr. Mario has a Ph.D. and a M.S. in physical sciences from the
University of Rhode Island and a B.S. in pharmacy from Rutgers University.
Howard I. Hoffen joined our board of directors in September 2000. Mr.
Hoffen has served as a director of Catalytica since August 1997. Mr. Hoffen is
currently the managing director of Morgan Stanley Dean Witter Private Equity
and Morgan Stanley & Co., Inc. He joined Morgan Stanley Dean Witter in 1985
and Private
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<PAGE>
Equity in 1986. Mr. Hoffen is a director of several privately held companies
including Somerset Energy and Union Drilling. Mr. Hoffen has a B.S. from
Columbia University and an M.B.A. from the Harvard Business 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 Lawrence Briscoe, William Ellis and Thomas
White, our Class II directors will be Ricardo Levy, Craig Kitchen and Howard
Hoffen, and our Class III directors will be Ernest Mario and John Urquhart and
Frederick M. O'Such. 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.
We have agreed to grant Morgan Stanley the right to appoint three members
to our board of directors. Morgan Stanley was granted this right in connection
with its agreement to vote in favor of the Catalytica and Synotex merger.
Enron has the right to appoint one member to our board of directors. Thomas
White is Enron's nominee to our board.
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. Craig Kitchen, Ernest Mario and
Howard Hoffen did not serve on our board in 1999.
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.
49
<PAGE>
Director Compensation
Directors who are not our officers, except for Thomas White and Howard
Hoffen, 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 Thomas White and Howard
Hoffen, 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 $12.94. 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.
Executive Compensation
The following table sets forth the compensation paid by us, or where noted
by Catalytica, 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."
50
<PAGE>
(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 resigned as our chief financial officer in September 2000
when Dennis Riebe was appointed as our chief financial officer. Mr.
Briscoe also serves as the chief financial officer and vice president
finance and administration of Catalytica. The amounts in the table were
paid by Catalytica and 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 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>
51
<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) 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.
(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 a 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.
52
<PAGE>
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 the board of directors of the issuer of the options, 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.
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 and stock purchase rights to our
employees, directors and consultants. As of September 30, 2000, 3,500,000
shares of common stock were reserved for issuance under this plan. Of these
shares, 33,712 had been issued upon exercise of stock options or stock
purchase rights, 2,514,544 shares were subject to outstanding options or stock
purchase rights and 985,456 shares were available for future grant.
53
<PAGE>
Administration
Our board of directors or a committee of our board administers the stock
plan and determines the terms of awards granted, including the exercise price,
the number of shares subject to individual awards and the vesting period of
awards. In the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the committee
will consist of two or more "outside directors" within the meaning of Section
162(m) of the Code.
Options
The administrator determines the exercise price of options granted under
the 1998 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the date of
grant. The term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must equal at least 110% of the fair market value on
the grant date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 500,000 shares
in any fiscal year. However, in connection with his or her initial service, an
optionee may be granted an option to purchase up to an additional 500,000
shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for 3 months. However, an option may never be
exercised later than the expiration of its term.
Stock Purchase Rights
Stock purchase rights, which represent the right to purchase our common
stock, may be issued under our stock plan. The administrator determined the
exercise price of stock purchase rights granted under our stock plan. Unless
the administrator determines otherwise, a restricted stock purchase agreement,
an agreement between us and an optionee which governs the terms of stock
purchase rights, will grant us a repurchase option that we may exercise upon
the voluntary or involuntary termination of the purchaser's service with us
for any reason, including death or disability. The purchase price for shares
we repurchase will generally be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to us. The
administrator determines the rate at which our repurchase option will lapse.
Transferability
Our stock plan generally does not allow for the transfer of options and
stock purchase rights and only the optionee may exercise an option or stock
purchase right during his or her lifetime.
Adjustments upon Merger or Asset Sale
Our stock plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the
successor corporation will assume or substitute each option and stock purchase
right. If the outstanding options and stock purchase rights are not assumed or
substituted, the administrator will provide notice to the optionee that he or
she shall fully vest in and have the right to exercise the option or stock
purchase right as to all of the shares subject to the option or stock purchase
right, including shares which would not otherwise be exercisable, for a period
of 10 days from the date of the notice. The option or stock purchase right
will terminate upon the expiration of the 10-day period. In the event we incur
a change of control, each optionee shall fully vest in and have the right to
exercise each option and stock purchase right on the date six months after
such change of control or earlier if an optionee's status as a service
provider with the successor corporation is terminated as a result of an
involuntary termination.
54
<PAGE>
Amendment and Termination
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.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan." The Purchase Plan was
adopted by our board and stockholders in October 2000.
Number of Shares of Common Stock Available under the Purchase Plan. A total
of 300,000 shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance under the Purchase Plan on the first day of
fiscal year, beginning in 2002, equal to the lesser of:
. 1.5% of the outstanding shares of our common stock on the first day of
the applicable year,
. 150,000 shares, or
. another amount as our board may determine.
Administration of the Purchase Plan. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.
Eligibility to Participate. All of our employees are eligible to
participate in the Purchase Plan if they are customarily employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, an employee may not be granted the right
to purchase stock under the Purchase Plan if the employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions. Our Purchase Plan is intended to
qualify under Section 423 of the Code and contains consecutive, overlapping
24-month offering periods. Each offering period includes four six-month
purchase periods. The offering periods generally start on the first trading
day on or after January 1 and July 1 of each year, except for the first such
offering period which will commence on the first trading day on or after the
effective date of this offering and will most likely end on the last trading
day on or after January 1, 2003. All eligible employees will be automatically
enrolled in the first offering period, but payroll deductions and continued
participation in the first offering period will not be determined until after
the effective date of the Form S-8 registration statement which is intended to
register the shares reserved for issuance under the Purchase Plan.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of their eligible compensation which includes
a participant's base salary commissions, overtime and shift premium, but
excludes all other compensation. A participant may purchase a maximum of
10,000 shares during a six-month purchase period.
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period or on a purchase period
end. If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, participants will
be withdrawn from the current offering period following their purchase of
shares on the purchase date and will be automatically re-enrolled in a new
offering period. Participants may end their participation at any time during
an offering period, and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.
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Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or as otherwise provided under the Purchase Plan.
Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets,
a successor corporation may assume or substitute each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
Amendment and Termination of the Purchase Plan. Our board of directors has
the authority to amend or terminate our Purchase Plan, except that, subject to
certain exceptions described in the Purchase Plan, no such action may
adversely affect any outstanding rights to purchase stock under our Purchase
Plan.
401(k) Plan
Catalytica has a Retirement Savings and Investment Plan which covers our
eligible 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 limits (one such limit is
$10,500 in 2000) and to have the amount of such reduction contributed to this
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, 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.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Heller Ehrman White & McAuliffe LLP, counsel to us, and
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to
Catalytica and us, the following discussion sets forth 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 (the "Code"), 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 the tax consequences as described below. This
discussion is also based upon certain assumptions and representations of
Synotex and Catalytica regarding the Transaction. If any of these assumptions
or representations are inaccurate, the federal income tax consequences of the
distribution could differ from the treatment described in this discussion.
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 before or after
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 TRANSACTION,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO
THEM OF THE TRANSACTION IN THEIR PARTICULAR CIRCUMSTANCES.
A distribution by a corporation to its stockholders may be taxed in either
of two different ways, as a dividend or as a payment in exchange for stock. A
dividend generally produces ordinary income, and an exchange generally
produces capital gains. A distribution will be taxable to a stockholder as an
"exchange" only if the distribution is treated as a redemption that meets one
of the alternative tests set forth in Section 302(b) of the Code. For example,
a redemption will be taxable as an exchange if the redemption terminates the
stockholder's interest in the distributing corporation, or if the redemption
"is not essentially equivalent to a dividend."
The Transaction should constitute a single integrated transaction with
respect to Catalytica and its stockholders for federal income tax purposes, in
which case the distribution should be treated as a redemption of outstanding
Catalytica common stock in connection with the complete termination of the
Catalytica stockholders' interest in Catalytica, or as a redemption not
essentially equivalent to a dividend. Accordingly, the distribution should
qualify as an exchange under the rules described above.
Assuming the Transaction qualifies as an exchange as described above 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, only to the
extent of any excess of the sum of the amount of cash received in the
merger plus the fair market value of our stock received by
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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. If 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 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. One reasonable method of determining this
is by using the weighted average trade price of CESI comon stock on the
first full day of trading; however you are urged to consult with your
own tax advisor for your particular circumstances.
. The holding period of our common stock received in the distribution will
commence on the day after the distribution.
. Each individual who acquired shares of Catalytica common stock through
the exercise of incentive stock options will incur a disqualifying
disposition of those shares upon receipt of the cash in the merger and
the CESI common stock at the time of the distribution if the shares have
not been held for more than two years from the grant date of the
incentive stock option and more than one year after the exercise date of
the incentive stock option for those shares. Upon the disqualifying
disposition, each individual will recognize ordinary income equal to the
excess, if any, of the fair market value of the shares of Catalytica
common stock at the time the incentive stock option was exercised over
the aggregate exercise price paid for those shares. Any additional gain
or loss recognized upon the exchange of Catalytica common stock for the
cash in the merger and the CESI common stock at the time of the
distribution will be capital gain or loss, which will be long term if
the shares of Catalytica common stock were held more than one year from
the date of the exercise. However, if the aggregate value of the cash
and the CESI common stock received per share of Catalytica common stock
is less than the exercise price paid per share of Catalytica common
stock upon the exercise of the incentive stock option, then the
individual will not recognize any ordinary income upon the disqualifying
disposition of those shares and will recognize a capital loss per share
equal to the excess of such exercise price per share over the cash and
CESI common stock paid per share of Catalytica common stock. The capital
loss will be short term unless the shares of Catalytica common stock
involved in the disqualifying disposition have been held for more than
one year.
. Each individual who acquired shares of Catalytica common stock through
the purchase of shares under the Catalytica 1992 ESPP will incur a
disqualifying disposition of those shares upon receipt of the cash in
the merger and the CESI common stock at the time of the distribution if
the shares have not been held for more than two years from the beginning
of the applicable offering period, and more than one year after purchase
of those shares under the ESPP. Upon the disqualifying disposition, each
individual will recognize ordinary income equal to the excess, if any,
of the fair market value of the shares of Catalytica common stock at the
time of the purchase over the aggregate price paid for those shares. Any
additional gain or any loss recognized upon the exchange of Catalytica
common stock for cash in the merger and CESI common stock at the time of
the distribution will be capital gain or loss, which will be long term
if the shares of Catalytica common stock were held more than one year
from the date of purchase. However, if the aggregate value of the cash
and the CESI common stock received per share of Catalytica common stock
is less than the purchase price paid per share of Catalytica common
stock upon the purchase under the employee stock purchase plan, then the
individual will not recognize any ordinary income upon the disqualifying
disposition of those shares and will recognize a capital loss per share
equal to the excess of such purchase price per share over the cash and
CESI common stock paid per share of Catalytica common stock. The capital
loss will be short term unless the shares of Catalytica common stock
involved in the disqualifying disposition have been held for more than
one year.
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No ruling has been or will be sought 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 clause (2). 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 Internal Revenue Service. 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.
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.
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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 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. Enron was also granted
the right to purchase its pro-rata share of our stock on the same terms
offered to another party. This right generally terminates when the
registration statement to which this prospectus is a part becomes effective.
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."
Relationship with Morgan Stanley
In connection with the Catalytica and Synotex merger, we agreed to grant
Morgan Stanley the right to elect three members to our board of directors. We
are also obligated to register with the SEC the shares of our stock
distributed to Morgan Stanley by Catalytica.
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. On August 31, 2000, Catalytica entered 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 paid
him a lump sum amount of $18,900 and will pay him $18,000 per month, less
applicable withholdings, for each of the twelve months through to the
anniversary of the termination date. Mr. Orwig is also 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 agreement,
the outstanding loans to Mr. Orwig with total principal and interest balances
of approximately $620,000 were 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, are 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
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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 June 30, 2000, Mr. Evans'
outstanding loan balance was $250,000. All loans to Mr. Evans are secured by
his properties in California.
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 welfare 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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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 Synotex 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 Synotex such information as Synotex may
request in connection with any Tax Proceeding.
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. 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 their 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.
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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 Energy 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.
64
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of September 30, 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 17,711,664 shares outstanding as of
September 30, 2000, and 21,044,997 shares outstanding after this distribution.
The number and percentage of shares beneficially owned after the distribution
is estimated assuming that .27 of a share of our stock is distributed for each
share of Catalytica stock and assuming that Catalytica purchases 3,333,333
shares of our stock prior to the distribution. 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 September
30, 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 Energy Systems, Inc., 430 Ferguson Drive, Mountain View,
California 94043.
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
------------------------------------------
Before Distribution After 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 84.69% -- --
Morgan Stanley Capital Partners
III, L.P. ........................ -- -- 6,750,000 32.07%
Franklin Resources, Inc. .......... -- -- 795,150 3.78%
Enron Corp.(2)(5).................. 3,750,002 19.96% 3,750,002 16.96%
c/o Thomas E. White
1400 Smith Street
Houston, Texas 77002
Dennis A. Orwig(3)................. 348,742 1.97% 359,585 1.71%
Craig N. Kitchen................... -- -- 2,700 *
Ralph A. Dalla Betta(4)............ 221,826 1.25% 345,416 1.64%
Thomas E. White(5)................. -- * *
1400 Smith Street
Houston, Texas 77002
Ricardo B. Levy(6)................. 99,120 * 371,874 1.77%
William B. Ellis(7)................ 68,000 * 69,080 *
Frederick M. O'Such(8)............. 68,000 * 69,080 *
John A. Urquhart(9)................ 68,000 * 77,720 *
Ernest Mario....................... -- * 8,370 *
Howard I. Hoffen................... -- * -- *
Patrick T. Conroy(10).............. 66,544 * 68,164 *
Lawrence W. Briscoe(11)............ 49,218 * 102,516 *
Peter B. Evans(12)................. 7,708 * 8,561 *
All officers and directors as a
group (16 persons)(13)............ 4,875,964 27.53% 5,370,875 25.52%
</TABLE>
--------
(1) Represents 1,000,000 shares of common stock and 14,000,000 shares of
common stock issuable upon conversion of 7,000,000 shares of Series A
preferred stock. These shares will be converted into 14,000,000 shares of
common stock upon completion of the distribution.
65
<PAGE>
(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.
(3) Includes 348,742 shares issuable upon exercise of options held by Mr.
Orwig, which options are exercisable within 60 days of September 30,
2000.
(4) Includes 221,826 shares issuable upon exercise of options held by Dr.
Dalla Betta, which options are exercisable within 60 days of September
30, 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 99,120 shares issuable upon exercise of options held by Dr.
Levy, which options are exercisable within 60 days of September 30, 2000.
(7) Includes 68,000 shares issuable upon exercise of options held by Mr.
Ellis, which options are exercisable within 60 days of September 30,
2000.
(8) Includes 68,000 shares issuable upon exercise of options held by Mr.
O'Such, which options are exercisable within 60 days of September 30,
2000.
(9) Includes 68,000 shares issuable upon exercise of options held by Mr.
Urquhart, which options are exercisable within 60 days of September 30,
2000. Mr. Urquhart disclaims beneficial ownership of the shares
beneficially owned by Enron.
(10) Includes 66,544 shares issuable upon exercise of options held by Mr.
Conroy, which options are exercisable within 60 days of September 30,
2000.
(11) Includes 39,218 shares issuable upon exercise of options held by Mr.
Briscoe, which options are exercisable within 60 days of September 30,
2000.
(12) Includes 7,708 shares issuable upon exercise of options held by Mr.
Evans, which options are exercisable within 60 days of September 30,
2000.
(13) Includes 1,115,962 shares issuable upon exercise of options held by
directors and executive officers, which options are exercisable within 60
days of September 30, 2000.
66
<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, 17,711,664 shares of
the common stock are outstanding on September 30, 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.
67
<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
68
<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 21,044,997 shares of common stock, assuming no exercise of options after
September 30, 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 September 30, 2000 and currently reserved for issuance under all
of our plans, this registration statement would cover approximately 3,500,000
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 221,164 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.
69
<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 Energy Systems, Inc.
(formerly 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.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Catalytica Energy Systems, Inc.
(formerly 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-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Members' Capital............................................. F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
Financial Statements of Genxon Power Systems, L.L.C.:
Report of Independent Accountants.......................................... F-32
Balance Sheets............................................................. F-33
Statements of Operations................................................... F-34
Statements of Members' Capital............................................. F-35
Statements of Cash Flows................................................... F-36
Notes to Financial Statements.............................................. F-37
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Catalytica Energy Systems, Inc.
(formerly Catalytica Combustion Systems, Inc.)
and Catalytica Advanced Technologies, Inc.
We have audited the accompanying combined balance sheets of Catalytica
Energy 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 Energy 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 Energy 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 ENERGY SYSTEMS, INC.
(formerly 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
For the nine Amounts from
For the year ended months ended Inception
December 31, September 30, through
-------------------------- ---------------- September 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 $ 2,166 $ 3,890 $ 46,920
------- ------- -------- ------- ------- --------
Costs and expenses:
Research and
development.......... 6,009 9,313 9,627 5,880 7,304 65,192
Costs associated with
discontinued product
line................. -- -- -- -- -- 9,299
Selling, general and
administrative....... 671 1,269 4,786 2,591 5,366 17,334
------- ------- -------- ------- ------- --------
Total costs and
expenses........... 6,680 10,582 14,413 8,471 12,670 91,825
------- ------- -------- ------- ------- --------
Operating loss.......... (1,541) (4,303) (11,360) (6,305) (8,780) (44,905)
Loss on joint venture... (4,355) (3,826) (1,133) (1,133) (236) (9,551)
Interest income......... -- 1,409 1,041 789 596 3,046
Interest expense........ (374) (177) (278) (195) (106) (1,091)
------- ------- -------- ------- ------- --------
Net loss................ $(6,270) $(6,897) $(11,730) $(6,844) $(8,526) $(52,501)
======= ======= ======== ======= ======= ========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.66) $ (0.48)
======== =======
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
(unaudited)............ 17,678 17,711
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC.
(formerly 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
Stockholders'
December 31, Equity at
------------------ September 30, September 30,
1998 1999 2000 2000
-------- -------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 17,654 $ 10,562 $ 5,315
Short-term investments....... 5,193 5,470 4,980
Accounts receivable:
Trade, less allowance of
$100....................... 1,826 736 1,002
Joint venture............... 1,079 176 325
Notes receivable from
employees................... 300 182 50
Inventory.................... 25 56 98
Prepaid expenses and other
current assets.............. -- 29 19
-------- -------- --------
Total current assets....... 26,077 17,211 11,789
Property and equipment:
Leasehold improvements and
equipment................... 2,086 2,680 3,041
Less accumulated depreciation
and amortization............ (535) (964) (1,252)
-------- -------- --------
1,551 1,716 1,789
Notes receivable from
employees..................... 643 913 470
Investment in joint venture.... 249 -- --
-------- -------- --------
Total assets............... $ 28,520 $ 19,840 $ 14,048
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Payable to Catalytica, Inc... $ 2,988 $ 5,026 $ 6,126
Accounts payable and accrued
liabilities................. 565 1,532 2,682
Deferred revenue............. 44 -- 195
Current long term debt....... 56 -- --
-------- -------- --------
Total current liabilities.. 3,653 6,558 9,003
Notes payable to Catalytica,
Inc......................... 730 730 730
-------- -------- --------
Total Liabilities.......... 4,383 7,288 9,733
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 $ 9
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 4
Combined
Additional paid-in capital... 56,369 56,718 57,255 57,225
Deferred compensation........ -- (204) (452) (452)
Deficit accumulated during
the development stage....... (32,245) (43,975) (52,501) (52,501)
-------- -------- -------- --------
Total stockholders'
equity.................... 24,137 12,552 4,315 $ 4,315
-------- -------- -------- ========
Total liabilities and
stockholders' equity...... $ 28,520 $ 19,840 $ 14,048
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC.
(formerly 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
(August 1,
1995)........... 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
to Enron in
January 1998.... -- -- 1,339 $ 1 -- -- -- -- -- --
Conversion of
Catalytica notes
in January 1998
................ -- -- -- -- -- -- -- -- -- --
Issuance of
stock options at
various dates in
1998 ........... -- -- -- -- -- -- -- -- -- --
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 at
various date in
1999............ -- -- -- -- -- -- -- -- -- --
Issuance of
stock options in
various dates in
1999............ -- -- -- -- -- -- -- -- -- --
Acceleration of
stock option
vesting at
various dates in
1999............ -- -- -- -- -- -- -- -- -- --
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 at
various dates in
2000 (unaudited) -- -- -- -- 33 -- -- -- -- --
Issuance of
stock options at
various dates in
2000 (unaudited)
................ -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- --
----- --- ----- --- ----- --- ----- --- ----- ---
Bal. at
September 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
(August 1,
1995)........... $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
to Enron in
January 1998.... 29,921 -- -- 29,922
Conversion of
Catalytica notes
in January 1998
................ 16,222 -- -- 16,222
Issuance of
stock options at
various dates in
1998 ........... 88 -- -- 88
Net loss........ -- -- (6,897) (6,897)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1998............ 56,369 -- (32,245) 24,137
Issuance of
stock options at
various date in
1999............ 82 -- -- 82
Issuance of
stock options in
various dates in
1999............ 256 (256) -- --
Acceleration of
stock option
vesting at
various dates in
1999............ 11 -- -- 11
Amortization of
deferred
compensation.... -- 52 -- 52
Net loss........ -- -- (11,730) (11,730)
------- ------------ ----------- -------------
Bal. at Dec. 31,
1999............ 56,718 (204) (43,975) 12,552
Exercise of
stock options at
various dates in
2000 (unaudited) 5 -- -- 5
Issuance of
stock options at
various dates in
2000 (unaudited)
................ 532 (376) -- 156
Amortization of
deferred
compensation
(unaudited)..... -- 128 -- 128
Net loss
(unaudited)..... -- -- (8,526) (8,526)
------- ------------ ----------- -------------
Bal. at
September 30,
2000
(unaudited)..... $57,255 $(452) $(52,501) $ 4,315
======= ============ =========== =============
</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
For the nine Amounts from
months ended Inception
Year ended December 31, September 30, through
--------------------------- ---------------- September 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) $(11,730) $(6,844) $(8,526) $(52,501)
Adjustments to
reconcile net loss to
net cash used in
operating activity:
Depreciation and
amortization......... 216 (114) 230 198 533 1,964
Forgiveness of note
receivable to former
officer of CESI...... -- -- -- -- 620 620
Losses in joint
ventures............. 4,355 3,826 1,133 1,133 236 9,551
Acceleration of stock
option vesting....... -- -- 94 22 156 250
Stock based
compensation......... -- 89 51 35 128 268
Changes in:
Accounts and notes
receivable.......... (58) (770) 1,993 1,893 (477) (1,389)
Inventory............ (58) 81 (31) (8) (42) (98)
Accounts payable..... -- 404 (404) -- --
Prepaid expenses and
other current
assets.............. -- -- (29) (19) 10 (19)
Deferred revenue..... (71) 41 (44) (39) 195 195
Other accrued
liabilities......... 605 (444) 1,370 (241) 1,150 1,651
------- -------- -------- ------- ------- --------
Net cash used in
operating
activities......... (1,281) (3,784) (7,367) (3,870) (6,017) (39,508)
Cash flows from
investing activities:
Purchases of
investments.......... -- (37,202) (26,635) (19,714) (10,500) (74,337)
Maturities of
investments.......... -- 32,431 26,624 19,781 11,000 70,055
Investment in joint
venture.............. (4,355) (4,075) (883) (884) (236) (9,551)
Purchase of property
and equipment........ (204) (1,171) (594) (424) (557) (3,237)
------- -------- -------- ------- ------- --------
Net cash used in
investing
activities......... (4,559) (10,017) (1,488) (1,241) (293) (17,070)
Cash flows from
financing activities:
Net issuance of notes
receivable to
employees............ -- (1,001) (219) (357) (42) (1,262)
Payments on capital
lease obligation..... (93) (105) (56) (56) -- --
Advances from
Catalytica........... 5,933 8,306 4,867 4,742 7,913 38,287
Payments to
Catalytica........... -- (5,667) (2,829) (3,604) (6,813) (15,209)
Proceeds from stock
options.............. -- -- -- -- 5 5
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
financing
activities......... 5,840 31,455 1,763 725 1,063 61,893
------- -------- -------- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents........... -- 17,654 (7,092) (4,386) (5,247) 5,315
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 $13,268 $ 5,315 $5,315
======= ======== ======== ======= ======= ========
Additional disclosure
of cash flow
information:
Conversion of
Catalytica payable to
additional paid in
capital.............. $ -- $ 16,222 $ -- $ -- $ -- $ 16,222
======= ======== ======== ======= ======= ========
Forgiveness of notes
receivable to
employees............ $ -- $ 58 $ 67 $ 45 $ 59 $ 184
======= ======== ======== ======= ======= ========
Interest Paid......... $ 25 $ 13 $ 3 $ 3 $ 106 $ 163
======= ======== ======== ======= ======= ========
Deferred compensation
for issuance of stock
options to non-
employees in March
1999.................. $ -- $ -- $ 227 $ 227 $ -- $ 227
======= ======== ======== ======= ======= ========
Deferred compensation
for issuance of stock
options to directors
below market value in
July 1999............. $ -- $ -- $ 28 $ 28 $ -- $ 28
======= ======== ======== ======= ======= ========
Deferred compensation
for issuance of stock
options to non-
employees in March
2000.................. $ -- $ -- $ -- $ -- $ 176 $ 176
======= ======== ======== ======= ======= ========
Deferred compensation
related to revaluation
of stock options
issued to non-
employees in March
1999.................. $ -- $ -- $ -- $ -- $ 88 $ 88
======= ======== ======== ======= ======= ========
Deferred compensation
related to revaluation
of stock options
issued to non-
employees in March
2000.................. $ -- $ -- $ -- $ -- $ 76 $ 76
======= ======== ======== ======= ======= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
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 CESI 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 CESI. CESI is engaged in developing, manufacturing and marketing
of technologies that use catalysts to measure and prevent the formation of
harmful pollutants. In 1995, CESI 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. CESI
also has a subsidiary named Advanced Sensor Devices which is inactive. In July
2000, CESI formed Catalytica NovoTec Inc. ("NovoTec") as a subsidiary. Novotec
is developing improved catalytic processes employing proprietary high speed
testing and computer learning technologies.
Catalytica Advanced Technologies, Inc. ("CAT") was incorporated in 1995.
CAT conducts in-house and contract research and development. In 1998, CAT and
United Catalysts, Inc. formed Sud-Chemie Catalytica L.L.C. a 50/50 joint
venture. In that year, CAT recognized losses of $0.15 million relating to this
operation to the extent of its investment. Since that year, no further capital
contributions were made to this business therefore no additional losses have
been recognized.
Basis of Presentation These financial statements present the combined
balance sheets and combined statements of operations, stockholders' equity,
and cash flows of CESI 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 September 30,
2000 are presented on the combined statements of operations and cash flows
represent both CESI and CAT.
Unaudited Interim Financial Statements The unaudited combined financial
statements for the nine month periods ended September 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 nine-month period ended September 30, 2000,
are not necessarily indicative of the combined results that may be expected
for the year ended December 31, 2000.
Cash Equivalents CESI 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 CESI'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.
Investments in joint ventures where we have a 20% to 50% ownership interest
are accounting for on the equity method. See Note 3. Under this method, CESI
and CAT record their pro rata share of the investee's net earnings or losses.
Investee net losses are recorded until CESI's or CAT's net investment and
obligation, if any, to pay down debt are reduced to zero.
Concentrations of Credit Risk For both CESI and CAT, assets subject to
concentrations of credit risk consist principally of cash equivalents,
investments, and receivables. CESI 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
F-7
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
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)
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. CESI performs ongoing
credit evaluations of its customers and generally does not require collateral.
Inventory CESI'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 CESI 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 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, CESI and CAT adopted FAS
No. 130, "Reporting Comprehensive Income." Neither company has components of
other comprehensive income.
Research and Development Revenues For both CESI 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. Customer advances
and customer billings in excess of recognized revenues are recorded as
deferred revenue until earned.
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 CESI 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 CESI and CAT are
expensed as incurred.
Stock-Based Compensation CESI and CAT account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has
adopted the disclosure only alternative of Statement of Accounting Standards
No. 123, "Accounting for Stock-based Compensation" ("FAS 123").
Any deferred stock compensation calculated under APB 25 is amortized over
the vesting period of the individual options, generally 4 years, using the
graded vesting method. The graded vesting method provides for vesting of
portions of the overall awards at interim dates and results in greater vesting
in earlier years than the straight-line method of amortization.
F-8
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
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)
All stock-based awards to non-employees are accounted for at fair value, as
calculated using the Black-Scholes model, in accordance with FAS 123 and
Emerging Task Force Consensus No. 96-18. Related options are subject to
periodic re-valuations over their vesting terms.
Income Taxes CESI 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 been presented on a pro forma basis.
The pro forma net loss per share is computed using the weighted-average number
of shares of common stock outstanding, including: 1) the effects of the
planned merger of CESI and CAT, and 2) the proforma effect of the automatic
conversion of CESI's series A and B convertible preferred stock into shares of
common stock, effective upon the registration of the shares of common stock of
CESI as if such merger and conversion occurred at the beginning of the periods
presented. Pro forma stockholders' equity at June 30, 2000, as adjusted for
the merger and the conversion of the series A and B convertible preferred
stock is disclosed on the balance sheet.
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.
CESI 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 Exchange Commission issued SAB 101,
"Revenue Recognition in Financial Statements". CESI and CAT currently cannot
determine the effect, if any, that SAB 101 will have on their combined
financial statements.
Financial Accounting Standards Board Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44") became effective
on July 1, 2000. It contains rule interpretations designed to clarify the
application of APB 25. CESI and CAT believe adopting FIN 44 will not have a
material effect on their results of operations or their financial position.
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 CESI 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, $2.3 million, and $2.3 million, respectively, for the
years ended December 31, 1997, 1998 and 1999, and for the nine months ended
September 30, 1999 and September 30, 2000. Charges for these services have
been allocated based upon square footage, usage, headcount and other methods
that management believes to be reasonable.
Prior to the Enron investment (see Investment by Enron below), CESI and CAT
used borrowings from Catalytica to fund their operations. In January 1998,
when Enron invested in CESI (see Investment by Enron below) all of CESI's
intercompany debt was forgiven and CESI incurred no further intercompany debt
with Catalytica and consequently no further intercompany interest expense.
Catalytica Advanced Technologies has continued to borrow from Catalytica and
has incurred interest expense on these borrowings. Beginning in 2000,
Catalytica discontinued charging CAT interest
F-9
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 2. Transactions with Related Parties--(Continued)
related to intercompany debt owed to Catalytica. Catalytica charged interest
at a rate of 7% for all years. Intercompany interest charged by Catalytica to
CESI and CAT was $0.3 million, $0.2 million, $0.3 million, $0.2 million, and
none for the twelve months ended December 31, 1997, 1998, and 1999 and the
nine months ended September 30, 1999 and 2000, respectively.
Investment By Enron On January 14, 1998, Enron Ventures Corporation
("Enron"), a wholly-owned subsidiary of Enron Corporation, purchased a 15%
minority interest in CESI for $30.0 million in cash. Enron also received a
three-year option to purchase an additional 1,071,430 of shares of CESI for
$14.4 million in cash. In connection with this Stock Purchase Agreement, CESI
entered into a Share Exchange Agreement, providing Enron the right to exchange
the Series B Preferred Stock of CESI for Catalytica, Inc. common stock. After
the five year anniversary of the agreement, if CESI has not undertaken a
public offering, in which CESI 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 CESI was contributed to CESI's capital.
Transaction With An Affiliate of Enron In December 1999, an affiliate of
Enron, the holder of a minority interest in CESI, specified CESI's Xonon
combustion system as the preferred emissions control system for certain
turbine orders from GE Power Systems ("GE"). In connection therewith, CESI and
this affiliate of Enron signed an agreement which provided, among other
things, that CESI 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 CESI in cash or
turbine credits. Turbine credits entitle the holder to a dollar for dollar
credit on the purchase of certain turbines (in the case of these specific
credits, those that specify the use of CESI's Xonon process). Repayment in
cash or other consideration was required by September 30, 2000. CESI 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
turbine credits and the fair market value of the latter was not reasonably
estimatable and because: 1) we are not in the business of buying turbines, 2)
we are not in the business of exchanging turbine credits with those that buy
turbines, and 3) in our particular case, the turbine credits we would receive
specified they could only be used on purchases of turbines that specify the
use of CESI's Xonon process. Xonon is a relatively new technology and there
can be no assurance that it will be specified by sufficient buyers of turbines
to create a market for these turbine credits. CESI, therefore, recorded a
provision equal to the advance as research and development expense. In 2000,
the arrangement between CESI and the Enron affiliate was amended and all
previous advances through that date of $2.8 million from CESI 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. CESI will record a one-time charge in the third quarter of 2000 for
$234,900 related to the officer's severance. If he remains unemployed after
the twelve months, payments of $18,000 will continue for an additional six
months or until he is employed. These payments will be expensed when and if
they become probable. In addition, previous loans and accrued interest of
$620,000 will be forgiven in equal installments over a twelve month period.
CESI recorded a one-time charge in the third quarter of 2000 for $620,000
related to the forgiveness of the officer's loans and interest. Additionally,
his options to purchase common stock of Catalytica and Catalytica
Pharmaceuticals, and his options to
F-10
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 2. Transactions with Related Parties--(Continued)
purchase 4,158 shares of CESI's common stock, which would have vested in the
eighteen month period following his termination, will become immediately
exercisable. CESI recorded compensation expense totaling $0.1 million in the
third quarter of 2000 associated with the acceleration of vesting of these
options.
Note 3. Joint Venture
Joint Venture (GENXON) In October 1996, CESI 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, GENXON(TM) 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 CESI, and $8.0 million from Woodward. In addition, CESI
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. CESI has
recorded its share of losses on the joint venture of $4.4 million, $3.7
million, $1.1 million, and $0.2 million for the years ended December 31, 1997,
1998, and 1999 and the nine months ended September 30, 2000, respectively. In
the third quarter of 1999, GENXON completed its prototype development. All
further funding of the durability testing was assumed by CESI and is no longer
being charged to the joint venture. All R & D costs related to the durability
testing are expensed directly by CESI. Because the carrying value of our net
investment in Genxon is zero and we are not obligated in anyway to pay down
Genxon's debts, we ceased recognizing our pro rata share of its losses in the
first half of 2000.
The following information summarizes GENXON's financial position for the
twelve months ended September 30, 1999, the unaudited quarter ended December
31, 1999, and the unaudited nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months
Twelve Months Ended Ended Nine Months Ended
September 30, 1999 December 31, 1999 September 30, 2000
------------------- ----------------- ------------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Total revenues.......... $ 887 $ 3 $ 4
======= ===== =====
Net loss................ $(4,157) $(204) $(300)
======= ===== =====
Current assets.......... $ 338 $ 239 $ 678
Long-term assets........ 270 155 --
------- ----- -----
Total assets.......... $ 608 $ 394 $ 678
======= ===== =====
Current liabilities..... $ 646 $ 636 $ 641
Members' earnings
(deficit).............. (38) (242) 37
------- ----- -----
Total liabilities and
members' capital..... $ 608 $ 394 $ 678
======= ===== =====
</TABLE>
F-11
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 3. Joint Venture--(Continued)
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 CESI because: (1) CESI has no
obligation to make any further cash contributions to GENXON; and, (2) the
financial statements of CESI 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.
CESI has entered into an agreement with Genxon to provide management,
technical and administrative support services. These costs are incurred by
CESI and then billed to Genxon. Related amounts (both the costs and the
amounts billed to Genxon) are recorded net as a element of research and
development costs ($2.0 million in 1999; $2.9 million in 1998; and $3.2
million in 1997) while amounts actually billed are recorded as accounts
receivable from joint venture on our balance sheet.
Note 4. Income Taxes
CESI 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. CESI and CAT are not reimbursed for the
tax benefits of their net operating losses. However, in the event CESI 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 CESI 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.
CESI 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, CESI 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.
F-12
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 4. Income Taxes--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. 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>
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, CESI'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
CESI
In August 2000, CESI's Board of Directors approved a 2 for 1 stock split.
For all periods presented, references to CESI's common stock and related per
share information retroactively reflects this split.
Common Stock Shares of common stock reserved for future issuance are as
follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Series A preferred stock................................. 14,000,000
Series B preferred stock................................. 2,678,572
Stock options............................................ 3,500,000
Enron option............................................. 1,071,430
----------
21,250,002
==========
</TABLE>
F-13
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion System, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5. Capital Stock--(Continued)
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.
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 (2,678,572 shares of common
stock, if Series B preferred stock has been converted as described above).
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. Beginning
F-14
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5. Capital Stock--(Continued)
on the tenth day after the distribution the option is exercisable on a
cashless basis. 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
follows:
<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 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 CESI 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.
The Company's 1995 Stock Option Plan Under this plan, the Company's 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-15
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Employee Benefit Plans--(Continued)
For purposes of applying APB No. 25, prior to the granting of stock awards,
CESI's Board of Directors establishes the estimated fair value of its common
stock, after considering the following: 1) the implied fair value of the
underlying businesses, based on the sale its convertible preferred stock to
Enron discussed in Note 2, in relation to the then total estimated market
capitalization of its publicly-owned parent, Catalytica, Inc., and 2) other
developments that the Board of Directors, in its judgement, considers relevant
to fair value.
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).............. (479,912) 479,912 12.30 5,488,297
Canceled (unaudited)............. 75,742 (75,742) 6.15 (474,993)
Exercised (unaudited)............ 33,712 (33,712) 0.25 (8,354)
--------- --------- ----------
Balance at September 30, 2000
(unaudited)....................... 985,456 2,514,544 3.12 $9,203,761
========= ========= ==========
</TABLE>
F-16
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytic Combustion Systems, Inc.)
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 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 CESI's stock option activity for the year ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Range of Weighted Average Number Exercisable
Exercise Number Outstanding Remaining Weighted Average As of December 31, Weighted Average
Prices December 31, 1999 Contractual Life Exercise Price 1999 Exercise 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>
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 Free Risk Free Dividend Volatility Volatility Volatiliy Weighted Average Weighted Average
Interest Rate Interest Rate Yield Factor Factor Factor Expected Life Expected Life
1997 1998/1999 All 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 CESI'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 CESI'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 CESI'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) $(11,730)
Compensation expense.......................... (85) (547) (826)
------- ------- --------
Pro forma net loss............................ $(6,355) $(7,444) $(12,551)
======= ======= ========
</TABLE>
F-17
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Employee Benefit Plans--(Continued)
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.
CAT 1995 Stock Option Plan In 1995, the Company adopted the CAT 1995 Stock
Option Plan under which 949,624 shares have been reserved for future issuance.
This Plan has been terminated and the options granted under the Plan will be
terminated prior to the distribution of CESI's common stock owned by
Catalytica to Catalytica's stockholders since the related options have no
value. The Board of Directors of CAT determined that the outstanding CAT
options have no value based on the business, financial condition and prospects
of CAT.
Stock Options Granted to Non Employees In March 1999, CESI granted certain
employees of Catalytica Inc. and its subsidiaries options to purchase 21,000
shares of its common stock at a price of $10.80 per share. The ownership of
these options vests over a four year period. Since the recipients of these
options are not employees of CESI, CESI recorded a deferred compensation
obligation of $227,000, of which $46,000 and $43,000 was earned and charged to
operations in the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively. This obligation was remeasured at September
30, 2000, and $88,000 of additional deferred compensation was recorded. In
each subsequent reporting period (through the vesting period) this obligation
will be remeasured.
In July 1999, CESI granted 12,000 options to directors at $2.37 below
market value. The ownership of these options vest over a one year period.
Since the recipients of these options received options below their fair market
value, CESI recorded a deferred compensation obligation of $28,000, of which
$5,000 and $23,000 was earned and charged to operations in the year ended
December 31, 1999 and for the nine months ended September 30, 2000,
respectively. This obligation has been fully amortized over the vesting period
of the options and will not be remeasured in future reporting periods.
Stock Options Granted to Non Employees In March 2000, CESI granted certain
employees of Catalytica Inc. and its subsidiaries options to purchase 16,800
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 CESI, CESI recorded a deferred compensation
obligation of $176,000, of which $26,000 was charged to operations in the nine
months ended September 30, 2000. This obligation was remeasured at September
30, 2000, and $76,000 of additional deferred compensation was recorded. In
each subsequent reporting period (through the vesting period) this obligation
will be remeasured.
Compensation Expense Related to Stock Options The Company has occasionally
granted options to non-employees and accelerates vesting of options for
terminated employees. Compensation expense of $89,000, $94,000, and $192,000
was recorded in the twelve months ended December 31, 1998, December 31, 1999,
and the nine months ended September 30, 2000, respectively. The resulting
additional charges were recorded as additional paid-in capital with the offset
expensed as compensation.
F-18
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
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, CESI entered into a three-year capital lease to purchase a
compressor. In 1999, CESI 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 Delaware 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,
CESI and CAT will be combined and all of the shares of the combined company
will be distributed on a pro rata basis to the Catalytica stockholders (the
"Spin-Off").
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 CESI as determined by the weighted average trading
price of CESI on the first full
F-19
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 9. Merger--(Continued)
day of trading. In addition, the Merger Consideration will be reduced by
contributions by Catalytica to CESI to provide CESI with adequate operating
capital. The amount of that contribution is currently estimated to be $50
million. 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, CESI has agreed to indemnify Catalytica Inc.
for certain matters arising from its business activities.
Note 10. Commitments and Contingencies
CESI has developed its catalytic combustion technology under a development
agreement with Tanaka, Kikinzoku Kogyo ("Tanaka"), a major Japanese precious
metals company. In January 1995, CESI 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. CESI 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 CESI'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.
CESI 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. While it is not possible to predict with certainty the outcome of
this matter, and while we do not believe an adverse result would have a
material effect on our consolidated financial position, it could be material
to the results of operations and cash flows for a fiscal year.
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
F-20
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
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)
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.
Note 11. Segment Disclosures
The Company operates primarily in two businesses: CESI and CAT. The Company
has determined the reportable operating segments based upon how the businesses
are managed and operated. CESI and CAT operate as independent businesses with
their own sales, research and development, and operations departments. As
such, the following table discloses their revenues, operating income, and
identifiable assets for the above named operating segments.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------- September 30,
1997 1998 1999 2000
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Revenues
CESI................................ $ 1,950 $ 2,707 $ 1,552 $ 2,688
CAT................................. 3,189 3,572 1,501 1,202
------- ------- -------- -------
Total revenues.................... $ 5,139 $ 6,279 $ 3,053 $ 3,890
======= ======= ======== =======
<CAPTION>
Year ended December 31,
-------------------------- September 30,
1997 1998 1999 2000
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Operating loss
CESI................................ $ (478) $(3,014) $ (9,670) $(7,060)
CAT................................. (1,063) (1,289) (1,690) (1,720)
------- ------- -------- -------
Total operating loss.............. $(1,541) $(4,303) $(11,360) $(8,780)
======= ======= ======== =======
<CAPTION>
Year ended December 31,
-------------------------- September 30,
1997 1998 1999 2000
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Identifiable assets
CESI................................ $ 2,011 $27,403 $ 19,335 $13,419
CAT................................. 860 1,117 505 629
------- ------- -------- -------
Total assets...................... $ 2,871 $28,520 $ 19,840 $14,048
======= ======= ======== =======
</TABLE>
Note 12. Subsequent Event
Transactions with Enron
In August 2000, CESI, Catalytica, Inc. and Sundance Assets, L.P., successor
in interest to and an affiliate of Enron, entered into an omnibus agreement
with CESI 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
F-21
<PAGE>
CATALYTICA ENERGY SYSTEMS, INC. (CESI)
(formerly Catalytica Combustion Systems, Inc.)
and
CATALYTICA ADVANCED TECHNOLOGIES, INC. (CAT)
(a combined company in the development stage)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 12. Subsequent Event--(Continued)
distribution by Catalytica, Inc. 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,
Inc., distribution. Sundance Assets' registration rights were also modified so
that Sundance Assets can request that CESI register its shares of common stock
with the SEC beginning the day after the Catalytica, Inc. distribution.
Name Changes
In October 2000, Catalytica Combustion Systems, Inc. changed its name to
Catalytica Energy Systems, Inc.
F-22
<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-23
<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-24
<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-25
<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-26
<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)
September 30, September to 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-27
<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
F-28
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
$24.3 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.
Revenue recognition
The Company revenue is derived from government research funding related to
the prototype development of the Kawasaki program. The Company performs
services under time and materials contracts in which revenue is recognized as
services are performed.
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.
Concentrations
At September 30, 1999 and 1998 one customer accounted for 100% of the
Company's accounts receivable.
One customer comprised 100% of the revenue for the years ended, September
30, 1999 and 1998.
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.
F-29
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
In 1998 Genxon entered into a technical services agreement with the City of
Glendale (City) (Note 4) for the retrofit of the City's gas turbine. In 1999,
the Company returned the turbine in its original state to the City as allowed
in the contract. Related to the contract, the Company had acquired certain
equipment to support the Company's performance under the contract. Since the
contract has been terminated the Company has no alternative use for the
equipment and at September 30, 1999 disposed of the equipment. Accordingly,
the carrying value of the equipment is not recoverable and an impairment loss
has been recognized. The effect of this statement for the year ended September
30, 1999 was a write-down of equipment of approximately $503,000, which has
been included in the Statement of Operations within the caption "Research and
Development."
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>
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 was
extended in September 1999 and will expire on the later of the completion of
all services described in the agreement or December 31, 2000, 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.
F-30
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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,
1996 (date of
inception) to
September 30,
1999 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Catalytica:
Research and development............... $2,454,940 $3,182,559 $9,087,576
General and administrative............. $ 685,777 $ 816,163 $2,857,248
Woodward:
Research 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-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
Genxon Power Systems, L.L.C. (a company in the development stage):
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-32
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
(a company in the development stage)
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-33
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
(a company in the development stage)
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-34
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
(a company in the development stage)
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-35
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
(a company in the development stage)
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-36
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
(a company in the development stage)
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
F-37
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liablity company)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
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.
Concentrations:
At September 30, 1998 one customer accounted for 100% of the Company's
accounts receivable.
One customer comprised 100% of the revenue for the year ended, September
30, 1998 and for the period from October 21, 1996 (date of inception) to
September 30, 1997.
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.
F-38
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liablity company)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition:
The Company revenue is derived from government research funding related to
the prototype development of the Kawasaki program. The Company performs
services under time and materials contracts in which revenue is recognized as
services are performed.
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.
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, 2000, 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.
F-39
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liablity company)
(a coompany in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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-40
<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 Energy
Systems, Inc. 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................................................. $ 16,513
NASDAQ National Market........................................... 5,000
Blue sky qualification fees and expenses......................... 50,000
Printing and engraving expenses.................................. 500,000
Legal fees and expenses.......................................... 700,000
Accounting fees and expenses..................................... 500,000
Transfer agent and registrar fees................................ 100,000
Miscellaneous expenses........................................... 50,000
----------
Total.......................................................... $1,921,513
==========
</TABLE>
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
2,514,544 shares of common stock with exercise prices ranging from $0.20 to
$15.00 per share. Since our incorporation, options to purchase 33,712
shares of common stock have been exercised for aggregate consideration of
$8,354.
2. In January 1998, we issued to Enron Ventures Corp. (a subsidiary of
Enron Corp.) a total of 2,678,572 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
1,071,430 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 Master Trademark Ownership and 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 Confidential 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 among Catalytica, Inc. and the
registrant.
2.10 Form of Master Transitional Services Agreement between Catalytica,
Inc. and the registrant.
2.11 Form of Real Estate Matters Agreement between Catalytica, Inc. and the
registrant.
2.12 Form of Master Separation Agreement between Catalytica, Inc. and the
registrant.
3.1 Form of Amended and Restated Certificate of Incorporation to be
effective upon completion of the distribution.
3.2 Form of Amended and Restated Bylaws to be effective upon completion of
the offering.
5.1(1) Opinion of Heller Ehrman White & McAuliffe LLP.
8.1 Form of Opinion of Heller Ehrman White & McAuliffe LLP regarding
certain tax consequences of the distribution.
8.2 Form of Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation regarding certain tax consequences of the distribution.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 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** 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.
10.18 Employee Stock Purchase Plan of the Registrant.
10.19 Letter Agreement with Dennis S. Riebe dated August 29, 2000.
10.20 Catalytica Energy Sytems, Inc. 1995 Stock Plan (as amended and
restated October 26, 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 Financial Data Schedule.
</TABLE>
--------
+ Confidential treatment has been granted for portions of these agreements.
** Confidential treatment has been requested for portions of these agreements.
II-3
<PAGE>
(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).
(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. 3 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Mountain View, California, on the 1st day of November, 2000.
Catalytica Combustion Systems, Inc.
/s/ Craig N. Kitchen
By: _________________________________
Craig N. Kitchen
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of Dennis Riebe, Ernest Mario
and Howard I. Hoffen hereby constitutes and appoints Craig N. Kitchen and
Lawrence W. Briscoe and each of them acting individually, as his true and
lawful attorneys-in-fact and agents, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule
462(b) increasing the number of securities for which registration is sought),
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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>
Ricardo B. Levy* Director and Chairman November 1, 2000
______________________________________ of the Board
Ricardo B. Levy
/s/ Craig N. Kitchen Chief Executive Officer November 1, 2000
______________________________________ (Principal Executive
Craig N. Kitchen Officer)
/s/ Dennis Riebe Chief Financial Officer November 1, 2000
______________________________________
Dennis Riebe
Lawrence W. Briscoe* Director November 1, 2000
______________________________________
Lawrence W. Briscoe
William B. Ellis* Director November 1, 2000
______________________________________
William B. Ellis
Frederick M. O'Such* Director November 1, 2000
______________________________________
Frederick M. O'Such
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
John A. Urquhart* Director November 1, 2000
______________________________________
John A. Urquhart
Thomas E. White* Director November 1, 2000
______________________________________
Thomas E. White
/s/ Ernest Mario Director November 1, 2000
______________________________________
Ernest Mario
/s/ Howard I. Hoffen Director November 1, 2000
______________________________________
Howard I. Hoffen
</TABLE>
/s/ Craig N. Kitchen
*By: ____________________________
Craig N. Kitchen
Attorney-in-fact
II-6
<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 Master Trademark Ownership and 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 Confidential 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 among Catalytica, Inc. and the
registrant.
2.10 Form of Master Transitional Services Agreement between Catalytica,
Inc. and the registrant.
2.11 Form of Real Estate Matters Agreement between Catalytica, Inc. and
the registrant.
2.12 Form of Master Separation Agreement between Catalytica, Inc. and the
registrant.
3.1 Form of Amended and Restated Certificate of Incorporation to be
effective upon completion of the distribution.
3.2 Form of Amended and Restated Bylaws to be effective upon completion
of the offering.
5.1(1) Opinion of Heller Ehrman White & McAuliffe LLP.
8.1 Form of Opinion of Heller Ehrman White & McAuliffe LLP regarding
certain tax consequences of the distribution.
8.2 Form of Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation regarding certain tax consequences of the distribution.
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 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** 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.
10.18 Employee Stock Purchase Plan of the Registrant.
10.19 Letter Agreement with Dennis S. Riebe dated August 29, 2000.
10.20 Catalytica Energy Systems, Inc. 1995 Stock Plan (as amended and
restated October 26, 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 Financial Data Schedule.
</TABLE>
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+ 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).
