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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File No. 0-20966
CATALYTICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2262240
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
430 FERGUSON DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
(415) 960-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
The number of outstanding shares of the Registrant's Common Stock, $.001 par
value, was 19,202,092 as of April 30, 1996.
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CATALYTICA, INC.
FORM 10-Q
TABLE OF CONTENTS
MARCH 31, 1996
PART I. FINANCIAL INFORMATION
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PAGE NO.
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets 3
As of March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1996 and March 31, 1995 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1996 and March 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8-17
PART II. OTHER INFORMATION 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,957 $ 5,021
Short-term investments 8,559 15,881
Accounts receivable, net 2,196 3,557
Notes receivable from employees 374 72
Inventory:
Raw materials 994 498
Work in process 314 178
Finished goods 236 178
-------- --------
1544 854
Prepaid expenses and other
current assets 493 371
-------- --------
Total current assets 21,123 25,756
Property and equipment:
Equipment 8,137 7,950
Leasehold improvements 6,206 6,059
-------- --------
14,343 14,009
Less accumulated depreciation and
amortization (8,852) (8,626)
-------- --------
5,491 5,383
Notes receivable from employees 100 100
-------- --------
$ 26,714 $ 31,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 872 $ 1,339
Accrued payroll and related expenses 1,304 1,392
Deferred revenue 325 167
Other accrued liabilities 663 590
Current portion of long-term debt 2,438 4,166
-------- --------
Total current liabilities 5,602 7,654
Long-term debt 1,480 1,556
Other long-term liabilities -- --
Stockholders' equity:
Common stock 19 19
Additional paid-in capital 65,063 65,101
Deferred compensation (75) (86)
Accumulated deficit (45,375) (43,005)
-------- --------
Total stockholders' equity 19,632 22,029
-------- --------
$ 26,714 $ 31,239
======== ========
</TABLE>
See accompanying notes.
3
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
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<S> <C> <C>
Revenues:
Product sales $ 2,017 $ 1,353
Research revenues 1,323 1,182
------- -------
3,340 2,535
Costs and expenses:
Cost of sales 2,010 1,395
Research and development 2,571 2,465
Selling, general and administrative 1,246 1,295
------- -------
Total costs and expenses 5,827 5,155
------- -------
Operating loss (2,487) (2,620)
Interest income 245 160
Interest expense (128) (58)
------- -------
Net loss $(2,370) $(2,518)
======= =======
Net loss per share $(0.12) $(0.17)
======= =======
Shares used in computing net
loss per share 19,196 15,073
======= =======
</TABLE>
See accompanying notes.
4
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
ended March 31,
-------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,370) $(2,518)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activity:
Depreciation and amortization 106 362
Changes in:
Accounts receivable 1,361 (238)
Inventory (690) (234)
Prepaid expenses and other
current assets (122) 287
Accounts payable (467) (201)
Accrued payroll and related
expenses (88) 26
Deferred revenue 158 268
Other accrued liabilities 73 (136)
------- -------
NET CASH USED IN OPERATING
ACTIVITIES (2,039) (2,384)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (9,547) (3,954)
Maturities of investments 17,000 5,000
Acquisition of property and equipment (334) (281)
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 7,119 765
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts on (issuance of) notes
receivable from employees (302) --
Additions to debt obligations --- 115
Payments on debt obligations (1,804) (96)
Sale of common stock (38) 2
------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES (2,144) 21
------- -------
Net decrease in cash and cash
equivalents 2,936 (1,598)
Cash and cash equivalents at
beginning of period 5,021 3,638
------- -------
Cash and cash equivalents at
end of period $ 7,957 $ 2,040
======= =======
</TABLE>
See accompanying notes.
5
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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 (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Catalytica, Inc. annual report on Form 10-
K for the year ended December 31, 1995.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options and
warrants are excluded in the computation as their effect is antidilutive.
3. FINANCIAL INSTRUMENTS
For the purposes of the consolidated cash flows, all investments with
maturities of three months or less at the date of purchase held as available
-for-sale are considered to be cash and cash equivalents; instruments with
maturities of three months or less at the date of purchase which are held-to
maturity ($1,998,000 at March 31, 1996) and investments with maturities
greater than three months which are available-for-sale ($6,561,000 at March
31, 1996) are considered to be short-term investments; investments with
maturities greater than one year are considered to be long-term investments
and are available-for-sale (none outstanding at March 31, 1996). All
investments at March 31, 1996 were carried at amortized cost, which
approximated fair market value. The classification of investments is made at
the time of purchase with classification for held-to-maturity made when the
Company has the positive intent and ability to hold the investments to
maturity.
4. 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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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5. SUBSEQUENT EVENT
On May 8, 1996, Catalytica Fine Chemicals, Inc., announced that Pfizer Inc.
signed an agreement to infuse $15 million in Catalytica Fine Chemicals.
These funds give Pfizer a 15 per percent interest in Catalytica Fine
Chemicals Inc. and a five-year R&D commitment by Catalytica Fine Chemicals
to develop new processes and technology for the manufacture of Pfizer
products. Prior to this investment, Catalytica Fine Chemicals was a wholly-
owned subsidiary of Catalytica Inc.
During the past four years, Catalytica Fine Chemicals and Pfizer have
collaborated on the development of proprietary processes for key
intermediate products for several of Pfizer's promising new pharmaceuticals.
The Pfizer drugs are at varying stages of approval by the Food and Drug
administration, ranging from Phase II clinical trials through the New Drug
Application stage. Catalytica Fine Chemicals has already manufactured
intermediates for these drugs and aims to become a supplier to Pfizer on
these and other pharmaceutical candidates.
7
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PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
--------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain certain forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
the results anticipated in these forward-looking statements as a result of
certain factors set forth under "Risk Factors" and elsewhere in this report.
Catalytica is developing advanced products and manufacturing processes which
use the Company's proprietary chemical catalysis technologies. These
products and processes can yield economic and environmental benefits,
including lower manufacturing costs and reduced hazardous byproducts
associated with traditional manufacturing processes. The Company has
developed significant expertise in catalysis, an essential step in the
production of many industrial products. Approximately 96% of the Company's
fiscal 1995 product sales were derived from sales of fine chemicals products
and its research and development revenues were derived from the Company's
other lines of business, including natural gas combustion systems. In
December 1993, the Company acquired a manufacturing facility from Sandoz to
obtain fine chemicals manufacturing capacity. As part of the acquisition,
Sandoz entered into a five-year contract for the manufacture of a fine
chemical intermediate. Under the terms of the agreement, Sandoz transferred
certain equipment and technology relating to the manufacture of the
particular intermediate, and agreed to purchase all of its requirements of
such intermediate from the Company, subject to certain volume limitations.
These requirements represent approximately $3.0 million of revenue per year.
However, the timing of receipt of revenues under this contract varies,
depending on the timing of receipt of orders and shipment of products.
During the year ended December 31, 1995 and the quarter ended March 31,
1996, 49% and 20% respectively of the Company's fine chemical product
revenues were derived from sales to Sandoz. The Company has no contractual
volume commitments from Sandoz beyond May 31, 1998, and there can be no
assurance the Sandoz contract will be renewed. The Company plans to
eventually replace the Sandoz contractual products with higher margin
product sales to new customers. The agreement may be terminated by either
party upon 30 days prior written notice for failure to perform a material
provision of the agreement, if such failure is not cured within 60 days
after receipt of the notice.
The Company's business has not been profitable to date, and as of March 31,
1996, the Company had an accumulated deficit of $45.4 million. The Company
anticipates incurring additional losses for at least the next 12 to 18
months. The Company expects that losses will fluctuate from quarter to
quarter, as a result of differences in the amount and timing of expenses
incurred and the revenues received. In particular, the Company's operating
results are affected by the size and timing of orders and shipment schedules
of its fine chemicals products, as well as the amount and timing of payments
and expenses under the Company's
8
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research and development contracts. Through 1993, substantially all of the
Company's revenues were derived from research and development contracts.
Most of the Company's research and development contracts are subject to
periodic review with the funding partner, which may result in modifications,
including a reduction or termination of funding. The Company's research and
development revenues declined in 1994 and 1995 as certain research projects
were terminated. There can be no assurance the Company will continue to
receive research and development funding, and the Company expects that in
the future it will increasingly rely on product sales for its revenues. In
1994, the Company began deriving revenues from the sale of fine chemicals
products. To achieve profitable operations, Catalytica must increase
significantly its commercial sales of fine chemicals and successfully
develop, manufacture, introduce, and market or license its combustion
systems and catalytic processes. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis, or at all.
On November 3, 1995, Catalytica completed a public offering of 4,000,000
shares of Common Stock at a price of $4.00 per share. The net proceeds were
approximately $14.7 million after deducting estimated fees and offering
expenses. Catalytica intends to use the net proceeds for general corporate
purposes, including working capital requirements, new product development,
and marketing and sales activities for its Fine Chemicals' and Combustion
Systems' businesses. A portion of the proceeds may also be used for the
acquisition of additional manufacturing facilities for Fine Chemicals. The
Company currently has no agreement or understanding with respect to any such
acquisitions. Pending the use thereof, the Company has invested the net
proceeds in short-term, interest bearing, investment grade securities.
RESULTS OF OPERATIONS
---------------------
Net revenues for the first quarter of fiscal 1996 increased by 32% as
compared to the same quarter in fiscal 1995 largely due to a 49% increase in
product sales and a 12% increase in research revenues. The increase in
product sales can be primarily attributed to the shipment of fine chemical
products to new and existing customers. The increase in research revenues
reflects increased activity and funding of the Company's work on nanoscale
materials used in catalysts. This work, which is being conducted through a
joint venture with Microfluidics International Corp., is being funded by a
$2 million grant awarded in 1994 by the U.S. Department of Commerce's
National Institute of Standards and Technology and by funding from potential
customers of this technology.
The increase in cost of goods sold reflects increased physical volume of
product sales coupled with higher than normal costs associated with
production start-up of several new fine chemical products. Margins were
also adversely impacted with lower margins on the fine chemical products
being manufactured for Sandoz under a five-year agreement negotiated in
connection with the purchase of the Company's Bay View facility plus start-
up manufacturing costs associated with the recent introduction of the new
CEMcat(TM) continuous emissions monitor produced by the Company's wholly
owned subsidiary Advanced Sensor Devices. Margins on the fine chemical
products are subject to fluctuations from quarter to quarter due to various
factors including the mix of products being manufactured, manufacturing
efficiencies achieved on production runs, the length of
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down-time associated with setting up new productions runs, and numerous
other variables present in the chemical manufacturing environment.
Research and development expenses increased slightly to $2.6 million for the
first quarter of 1996 as compared to $2.5 million for the same quarter last
year. Research and development expenses may fluctuate from quarter to
quarter.
Selling, general and administrative expenses decreased slightly to $1.2
million as compared to $1.3 million for the same quarter in fiscal 1995.
Net interest income increased 15% due to higher balances of cash and short-
term investments associated with the Company's recent public offering,
partially offset by increased interest expense on a line of credit and other
short-term working capital financing at the Catalytica Fine Chemicals Bay
View manufacturing facility.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Total cash and cash equivalents plus short-term and long-term investments
decreased to $16.5 million compared to $20.9 million at December 31, 1995.
This decrease is primarily due to the net loss for the quarter coupled with
the payments on a working capital line of credit agreement associated with
the Catalytica Fine Chemicals Bay View manufacturing facility.
In 1994 and 1995, the Company obtained various lines of credit to fund
capital purchases and future working capital needs of its Fine Chemicals
Subsidiary. Two of these credit facilities, a working capital line of credit
agreement with $0.3 million outstanding on March 31, 1996 and a promissory
note of $1.5 million used to refinance a subsidiary's outstanding
subordinated debt, are due and payable on June 30, 1996. The Company is
considering various longer term options to finance the fixed and working
capital needs of its Fine Chemicals subsidiary including an extension
and/or modification of its current credit facilities used to support this
business. On May 8, 1996, Catalytica Fine Chemicals, Inc., announced that
Pfizer Inc. signed an agreement to infuse $15 million in Catalytica Fine
Chemicals. These funds give Pfizer a 15 percent interest in Catalytica Fine
Chemicals Inc. and a five-year R&D commitment by Catalytica Fine Chemicals
to develop new processes and technology for the manufacture of Pfizer
products. See note 5, Subsequent event.
The Company's operations to date have required substantial amounts of cash.
The Company anticipates that existing capital resources, product revenues,
and research and development revenues will enable the Company to maintain
current and planned operations for at least the next 18 months. The
Company's future capital requirements will depend on many factors, including
rate of commercialization of the Company's catalytic combustion systems and
the need to expand manufacturing capacity for both its fine chemicals and
combustion systems business. Although there can be no assurance the Company
will obtain orders sufficient to fill the capacity by such time, the
Company's manufacturing facility for pharmaceutical intermediates is
expected to reach capacity in 1997. The Company intends to augment its
current pharmaceutical intermediates manufacturing capacity by acquiring or
constructing additional plant capacity. However, to date, the Company has
made plans only to modestly expand its production capacity for certain types
of products. Adequate funds for future operations, whether from the
financial markets or from collaborative or other arrangements, may not be
available when needed or on terms acceptable to the Company and, if
available or acceptable to the Company, may result in significant dilution
10
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to existing stockholders. If adequate funds are not available, the Company
may be required to delay, scale back or eliminate some or all of its
research and product development programs.
RISK FACTORS
History of Operating Losses and Uncertainty of Future Results
The Company's business has not been profitable to date, and as of March 31,
1996, the Company had an accumulated deficit of $45.6 million. The Company
anticipates incurring additional losses for at least the next 12 to 18
months. The Company expects that losses will fluctuate from quarter to
quarter as a result of differences in the amount and timing of expenses
incurred and revenues received. In particular, the Company's operating
results are affected by the size and timing of receipt of orders for and
shipments of its fine chemicals products, as well as the amount and timing
of payments and expenses under the Company's research and development
contracts. Through 1993, substantially all of the Company's revenues were
derived from research and development contracts. Most of the Company's
research and development contracts are subject to periodic review by the
funding partner, which may result in modifications, including reduction or
termination of funding. The Company's research and development revenues
declined in 1995 and 1994 as certain research projects were terminated.
There can be no assurance the Company will continue to receive research and
development funding, and the Company expects that it will increasingly rely
on product sales for its revenues.
In 1994, the Company began deriving revenues from the sale of fine chemicals
products. Through December 31, 1995, a significant portion of the Company's
product revenues has been derived from sales to Sandoz Agro, Inc. ("Sandoz")
under a five-year contract pursuant to which Sandoz committed to buy certain
minimum volumes for the first four years and eight months. The Company has
no contractual volume commitment from Sandoz beyond May 31, 1998. There can
be no assurance the Sandoz contract will be renewed or replaced with new
business. The Sandoz agreement may be terminated by either party upon 30
days prior written notice for failure to perform a material provision of the
agreement, if such failure is not cured within 60 days after receipt of
notice. The Company expects that it will need to manufacture new products to
increase revenue. Typically, new products have lower gross margins during
the initial manufacturing phase, which could have an adverse effect on the
Company's results of operations. To achieve profitable operations,
Catalytica must significantly increase its commercial sales of fine
chemicals and successfully develop, manufacture, introduce and market or
license its combustion systems and catalytic processes. There can be no
assurance that the Company will be able to achieve profitability on a
sustained basis, or at all.
Commercialization; Shift from Research and Development
The Company's success will depend on its ability to complete the transition
from emphasizing research and development to full commercialization and sale
of its products. The Company began manufacturing, marketing and selling
pharmaceutical intermediates in 1994. Success of the Company's fine
chemicals business is dependent upon development
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and commercialization of appropriate catalytic processes for new customers
and new fine chemicals products. There can be no assurance the Company will
be able to develop and commercialize such processes. In addition, sales of
certain of the Company's fine chemicals intermediates are dependent upon the
customer obtaining clearance from the United States Food and Drug
Administration ("FDA") for marketing of the customer's end-product. Failure
of the Company's customers to obtain the necessary FDA clearance would have
an adverse affect on sales of certain fine chemicals products.
The Company is still conducting research and development on its combustion
systems. Prior to commercialization of its combustion systems, the Company's
products will be required to undergo rigorous testing by turbine
manufacturers. Ultimate sales of the Company's combustion system products
will depend upon the acceptance and users of the Company's technology by a
limited number of turbine manufacturers and the Company's ability to enter
into commercial relationships with these manufacturers. The Company's
subsidiary, Catalytica Combustion Systems, Inc., is currently working with
leading turbine manufacturers, including: General Electric in large
turbines, Allison Engine Co., a subsidiary of Rolls Royce, and Solar
Turbines Inc., a subsidiary of Caterpillar, Inc., in medium size turbines,
and Affiliated Group of Companies (AGC), which uses small Kawasaki Heavy
Industries turbines for mobile cogeneration applications. Neither the
Company or its subsidiaries have formal long-term agreements in place with
many of these companies. The Company's ability to complete research and
development and introduce commercial systems for these markets could be
adversely affected if one or more of these companies terminated its
relationship with the Company. If such terminations occurred, there is no
assurance as to whether the Company could enter into a similar relationship
with another manufacturer. The Company currently has limited manufacturing
and marketing capability for its combustion products. The Company's existing
facilities are inadequate for commercial production of the combustion
products under development, and to the extent that the Company chooses to
produce commercial quantities of its products, the Company will be required
to develop or acquire manufacturing capability. In order to market any of
its combustion system products, the Company will be required to develop
marketing capability, either on its own or in conjunction with others. There
can be no assurance that the Company will be able to manufacture its
products successfully or develop an effective marketing and sales
organization. In addition, the Company's combustion systems and processes
are expected to be sold as components of large systems such as natural gas
turbines for electric power plants. Accordingly, the rate of adoption of the
Company's systems and processes may depend in part on economic conditions
which affect capital investment decisions, as well as the regulatory
environment. There can be no assurance that the Company's products will be
economically attractive when compared to competitive products.
Future Capital Requirements and Uncertainty of Additional Funding
See Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.
12
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Influence of Environmental Regulations on Rate of Commercialization
The rate at which the Company's catalytic combustion systems are adopted by
industrial companies will be heavily influenced by the enactment and
enforcement of environmental regulations at the federal, state and local
levels. Current federal law governing air pollution generally does not
mandate the specific means for controlling emissions, but instead, creates
ambient air quality standards for individual geographic regions to attain
through individualized planning on a regional basis in light of the general
level of air pollution in the region. Federal law requires state and local
authorities to determine specific strategies for reducing emissions or
specific pollutants. Among other strategies, state and local authorities in
all areas which do not meet ambient air quality standards must adopt
performance standards for all major new and modified sources of air
pollution. The more polluted the air in a particular region has become, the
more stringent such controls must be. The Company's revenues will depend, in
part, on the standards, permit requirements and programs these state and
local authorities promulgate for reducing emissions (including emissions of
NOx) addressed by the Company's combustion and monitoring products systems.
Demand for the Company's systems and processes will be affected by how
quickly the standards are implemented and the level of reductions required.
Certain industries or companies may successfully delay the implementation of
existing or new regulations or purchase or acquire emissions credits from
other sources, which could delay or eliminate their need to purchase the
Company's systems and processes. Moreover, new environmental regulations may
impose different requirements which may not be met by the systems and
processes being developed by Catalytica or which may require costly
modifications of the Company's products. The United States Congress is
currently reviewing existing environmental regulations. There can be no
certainty as to whether Congress will amend or modify existing regulations
in a manner that could have an adverse effect on demand for the Company's
combustion system products.
In the past, the Company pursued a research and development project to
eliminate the use of hydrofluoric acid in the production of alkylate, an
important blending component for high-octane gasoline. Due partly to a shift
in the regulatory environment, the Company's partners decided in 1994 not to
fund continued research at Catalytica for this project. Each party is
currently funding its own activities with respect to the project and the
interest of
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other parties in funding additional research is being explored by Catalytica
and its partners. Similarly, in 1995, certain regulations regarding the
continuous monitoring of NOx emissions were delayed, so that demand did not
develop as expected for the Company's continuous emissions monitoring
devices. There can be no assurance these regulations will ever be adopted.
Effect of FDA Regulations on Fine Chemicals Manufacturing
Many of the fine chemicals products the Company manufactures, or will
manufacture in the future, and the final drug products in which they are
used are subject to regulation for safety and efficacy by the FDA and
foreign regulatory authorities before such products can be commercially
marketed. The process of obtaining regulatory clearances for marketing is
uncertain, costly and time consuming. The Company cannot predict how long
the necessary regulatory approvals will take or if its customers will ever
obtain such approval for their products. To the extent the Company's
customers do not obtain the necessary regulatory approvals for marketing new
products, the Company's fine chemicals product sales will be adversely
affected.
In the future, the Company intends to manufacture bulk actives. To do so,
the Company would be required to comply with the FDA's current Good
Manufacturing Practices ("cGMP") regulations, and certain of the Company's
customers may also require the Company to adhere to cGMP regulations, even
if not required by the FDA. To comply with cGMP regulations, a manufacturer
must continue to expend time, money and effort in production, recordkeeping
and quality control to ensure that the product meets applicable
specifications and other requirements. The FDA periodically inspects drug
manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply subjects the manufacturer to possible FDA
action, such as suspension of manufacturing. The FDA also may require the
submission of any lot of the product for inspection and may restrict the
release of any lot that does not comply with FDA regulations, or may
otherwise order the suspension of manufacture, recall or seizure. Failure of
the Company's customers to obtain and to maintain FDA clearance for
marketing of the products manufactured by the Company, or failure of the
Company to comply with cGMP regulations as required by the FDA or the
Company's customers, would have a material adverse effect on the Company's
results of operations.
Competition and Technological Change
There are numerous competitors in a variety of industries in the United
States, Europe and Japan which have commercialized and are working on
technologies that could be competitive with those under development by the
Company, including both catalytic and other technological approaches. Some
of these competitive products are in more advanced stages of development and
testing. The Company's competitors may develop technologies and systems and
processes that are more effective than those being developed by the Company
or that would render the Company's technology and systems and processes less
competitive or obsolete. In the fine chemicals market, the Company faces its
primary competition from pharmaceutical companies that produce their own
fine chemicals and from other fine chemicals manufacturers such as Lonza AG
and DSM Fine Chemicals. In
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the combustion systems market, the Company faces its primary competition
from large gas turbine power generation manufacturers, such as General
Electric Co. ("General Electric"), Allison Engine Company ("Allison") and
Solar Turbines Incorporated ("Solar"), each of which is developing competing
systems for their own turbines. Many of the Company's competitors in the
combustion systems market are also potential customers of the Company, and
the Company expects to at least partially rely on these potential customers
to help commercialize its products. Most of these competitors have greater
research and development capabilities, financial resources, managerial
resources, marketing experience and manufacturing experience than the
Company. If these companies are successful in developing such products, the
Company's ability to sell its systems and processes would be materially
adversely affected. Further, since many of the Company's competitors are
existing or potential customers, the Company's ability to gain market share
may be limited.
Patents and Intellectual Property
The Company has an active program of pursuing patents for its inventions in
the United States and in markets throughout the world relevant to its
business areas. The Company has 56 United Stated patents and 15 pending
United States patent applications.
The Company's success will depend on the ability to continue to obtain
patents, protect trade secrets and operate without infringing on the
proprietary rights of others in the United States and other countries. There
can be no assurance that the Company's patent applications will result in
the issuance of any patent, that any of the Company's existing patents or
any patents that may be issued in the future will provide significant
proprietary protection, that any such patents will be sufficiently broad to
protect the Company's technology, or that any such patents will not be
challenged, circumvented or invalidated. There can also be no assurance that
the patents of others will not have an adverse effect on the Company. Others
may independently develop similar systems or processes or design around
patents issued to the Company. In addition, the Company may be required to
obtain licenses to patents or other proprietary rights. The Company cannot
assure that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at
all. If Catalytica requires and does not obtain such licenses, it could
encounter delays in system or process introductions while it attempts to
design around such patents, or it could find that the development,
manufacture, sale or licensing of systems or processes requiring such
licenses could be foreclosed. The Company could incur substantial costs in
defending itself or its licensees in litigation brought by others or
prosecuting infringement claims against third parties. The Company could
incur substantial costs in interference proceedings declared by the United
States Patent and Trademark Office in connection with one or more of the
Company's or third parties' patents or patent applications, and those
proceedings could also result in an adverse decision as to the priority of
the Company's inventions. The Company also protects its proprietary
technology and processes in part by confidentiality agreements with its
collaborative partners, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors.
15
<PAGE>
Dependence on Key Personnel
The Company's success is dependent on the retention of principal members of
its management and scientific staff and on the ability to continue to
attract, motivate and retain additional key personnel. Competition for such
key personnel is intense, and the loss of the services of key personnel or
the failure to recruit necessary additional personnel could have a material
adverse effect upon the Company's operations and on its research and
development efforts. The Company does not have non-competition agreements
with any of its key employees. The Company's anticipated expansion into areas
and activities requiring additional expertise, such as manufacturing,
marketing and distribution, are expected to place increased demands on the
Company's resources. These activities are expected to require the addition of
new personnel with expertise in these areas and the development of additional
expertise by existing personnel. The failure to acquire such personnel or to
develop such expertise could materially adversely affect prospects for the
Company's success.
Hazardous Materials and Environmental Matters
The Company's research and development activities and fine chemicals
manufacturing involve the use of many hazardous chemicals. The Company is
subject to extensive federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
associated waste products. The Company believes that its properties and
operations comply in all material respects with applicable environmental
laws; however, the risk of environmental liabilities cannot be completely
eliminated. Public awareness of environmental issues has increased the impact
of such laws on the conduct of manufacturing operations and ownership of
property. Any failure by the Company to comply with present or future
environmental laws could result in cessation of portions or all of the
Company's operations, impositions of fines, restrictions on the Company's
ability to carry on or expand its operations, significant expenditures by the
Company to comply with environmental laws and regulations, and/or liabilities
in excess of the resources of the Company. The Company does not have
environmental impairment liability insurance. In 1992, the Company completed
a renovation of its research and development facilities at a cost of
approximately $2.3 million to comply with environmental laws and regulations.
There can be no assurance, however, that the Company will not be required to
make additional renovations or improvements to comply with environmental laws
and regulations in the future. The Company's operations, business or assets
could be materially adversely affected in the event such environmental laws
or regulations require the Company to modify current facilities substantially
or otherwise limit the Company's ability to conduct or expand its operations.
The Company leases the land on which its fine chemicals facility is located
from Rhone Poulenc, Inc., ("Rhone Poulenc"). The past activities of Rhone
Poulenc's predecessor caused significant soil and groundwater contamination
of the facility and a down gradient area located along the San Francisco Bay.
Consequently, the site is subject to a clean up and abatement order issued by
the Bay Area Regional Water Quality Control Board ("RWQCB") which currently
requires stabilization, containment and monitoring of the arsenic and
volatile organic contamination at the site and surrounding areas. The ground
16
<PAGE>
lease between Rhone Poulenc and the Company includes an indemnity by Rhone
Poulenc against any costs and liabilities that the Company might incur to
fulfill the RWQCB order and to otherwise address the contamination that is
the subject of the order. The Company also has obtained an indemnification
from Sandoz (the immediately preceding owner/operator of the facility)
against any costs and liability the Company may incur with respect to any
contamination caused by Sandoz' operations. However, there can be no
assurance that the Company will not be held responsible with respect to the
existing contamination or named in an action brought by a governmental agency
or a third party because of such contamination. If the Company is held
responsible and it has contributed to the contamination, it will be liable
for any damage to third parties, and will be required to indemnify Rhone
Poulenc and Sandoz for any additional clean up costs or liability they may
incur, with respect to the contamination caused by the Company. The
determination of the existence and additional cost of any such incremental
contamination contribution by the Company could involve costly and time-
consuming negotiations and litigation. Further, any such incremental
contamination by the Company or the unenforceability of either of the
indemnity agreements described above could materially adversely affect the
Company's business and results of operations.
PART II - OTHER INFORMATION
All information required by items in Part II is omitted because the items
are inapplicable, the answer is negative or substantially the same
information has been previously reported by the registrant.
17
<PAGE>
CATALYTICA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 1996 CATALYTICA, INC.
------------ (Registrant)
By: /s/ Lawrence W. Briscoe
-----------------------
Lawrence W. Briscoe
Vice President and Chief
Financial Officer
Signing on behalf of the
registrant and as principal
financial officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- - --------- -------------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,957
<SECURITIES> 8,559
<RECEIVABLES> 2,296
<ALLOWANCES> 100
<INVENTORY> 1,544
<CURRENT-ASSETS> 21,123
<PP&E> 14,343
<DEPRECIATION> 8,852
<TOTAL-ASSETS> 26,714
<CURRENT-LIABILITIES> 5,602
<BONDS> 1,480
0
0
<COMMON> 65,082
<OTHER-SE> (45,450)
<TOTAL-LIABILITY-AND-EQUITY> 26,714
<SALES> 2,017
<TOTAL-REVENUES> 3,340
<CGS> 2,010
<TOTAL-COSTS> 5,827
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> (2,370)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,370)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,370)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
