<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Number 333-32507
[LOGO OF CATALYTICA, INC.]
6,948,494 COMMON STOCK PURCHASE WARRANTS
EXPIRING OCTOBER 31, 1997
Catalytica, Inc. (the "Company") will issue at no cost to holders of record
of its common stock, par value $0.001 per share (the "Common Stock"), on
August 22, 1997 (the "Record Date"), one Common Stock Purchase Warrant (a
"Warrant") for each three shares of Common Stock held on the Record Date. No
fractional Warrants will be issued and accordingly the number of Warrants to
be issued to each holder will be rounded down to the nearest whole Warrant.
Each Warrant entitles the holder to purchase, at any time prior to 5:00 p.m.
(Pacific time) on October 31, 1997 (the "Warrant Expiration Date"), one share
of Common Stock at an exercise price of $4.00 per share (the "Warrant Price").
The issuance of the Warrants is referred to herein as the "Warrant Issuance."
The Common Stock of the Company is traded on The Nasdaq National Market
under the symbol "CTAL." On August 21, 1997, the last reported sale price of
the Company's Common Stock on The Nasdaq National Market was $13 1/8 per
share. See "Price Range of Common Stock." Prior to this Offering there has
been no public market for the Warrants of the Company. The Warrants have been
approved for quotation on The Nasdaq National Market under the symbol "CTALW."
See "The Warrant Issuance."
----------------
A PURCHASE OF THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
WARRANT DISCOUNTS AND PROCEEDS TO
EXERCISE PRICE COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Warrant.......................... $4.00 none $4.00
- --------------------------------------------------------------------------------
Total (3)............................ $27,793,976 none $27,793,976
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Warrants are being issued directly by the Company, and no commissions
or other remuneration is intended to be paid to any person for soliciting
purchases of the shares of Common Stock underlying the Warrants.
(2) Before deducting expenses payable by the Company estimated at $450,000.
(3) Assumes exercise of all Warrants to be issued hereby.
----------------
The date of this Prospectus is August 11, 1997
<PAGE>
A Warrant Certificate evidencing the total number of shares of Common Stock
a stockholder is entitled to purchase is being sent with this Prospectus to
each stockholder entitled to participate in this Warrant Issuance.
To the extent a stockholder does not exercise his Warrants, his percentage
equity interest in the Company and his voting power will be reduced. See "The
Warrant Issuance--Summary of Anticipated Effects of the Warrant Issuance;
Dilution."
The Warrants may not be exercised or sold by any person, and neither this
Prospectus nor any Warrant shall constitute an offer to sell or a solicitation
of an offer to purchase any shares of Common Stock, in any jurisdiction in
which such transactions would be unlawful. See "The Warrant Issuance--State
and Foreign Securities Laws."
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock of
the Company is quoted on The Nasdaq National Market and reports, proxy
statements and other information concerning the Company may also be inspected
at the offices of the National Association of Securities Dealers, 1735 K
Street, N.W., Washington, D.C. 20006.
Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits
thereto filed with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). For further information pertaining to the Company, the
Warrants and the Common Stock, reference is made to the Registration Statement
and the exhibits thereto, which may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed with the Commission and are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996 filed with the Commission on April 28, 1997.
2. The Company's Quarterly Report on Form 10-Q/A for the quarterly period
ended March 31, 1997 filed on June 4, 1997.
3. The Company's Proxy Statement dated July 16, 1997 in connection with the
1997 Annual Meeting of Stockholders filed on July 18, 1997.
2
<PAGE>
4. Description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed on December 11, 1992, as amended
November 19, 1996 and July 29, 1997.
5. Description of the Company's Preferred Share Purchase Rights contained in
the Company's Registration on Form 8-A filed with the Commission on July
29, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made by this Prospectus shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on written or oral request of such person, a copy of
any or all documents incorporated by reference in this Prospectus, without
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Copies of this Prospectus, as amended or
supplemented from time to time, and any other documents (or parts of
documents) that constitute part of the Prospectus under Section 10(a) of the
Securities Act will also be provided without charge to each such person, upon
written or oral request. Requests should be directed to Manager, Corporate
Marketing and Communications, Catalytica, Inc., 430 Ferguson Drive, Mountain
View, California 94043, telephone number (408) 960-3000.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus. See "Risk Factors" for information that
should be considered by prospective investors.
THE COMPANY
Catalytica, Inc. (the "Company") is developing and offering to its customers
advanced products that use the Company's proprietary catalytic technologies to
yield economic and environmental benefits by lowering manufacturing costs and
reducing hazardous byproducts. Catalytica currently is focused on applying its
technologies to two primary areas: (i) improving production of pharmaceutical
intermediates and bulk actives and (ii) developing advanced combustion systems
to reduce toxic emissions generated by natural gas turbines. To pursue these
opportunities, the Company has created two operating subsidiaries, Catalytica
Pharmaceuticals, Inc. ("Catalytica Pharmaceuticals") and Catalytica Combustion
Systems, Inc. ("Combustion Systems"). In addition to market focus, the
formation of subsidiaries provides increased flexibility for strategic
financial arrangements and business partnerships.
Catalytica Pharmaceuticals develops and uses its technology base to develop
proprietary manufacturing processes which it uses for the more cost-effective
and environmentally benign production of pharmaceutical intermediates.
Catalytica Pharmaceuticals manufactures products for several leading
pharmaceutical companies, including Pharmacia & Upjohn, Inc. ("Pharmacia &
Upjohn"), Merck & Co. ("Merck") and Pfizer, Inc. ("Pfizer"). Catalytica
Pharmaceuticals also is producing an intermediate for Novartis (formerly
Sandoz) under a supply agreement entered into at the time the Company purchased
its manufacturing plant from Novartis in 1993. Catalytica Pharmaceuticals is
capitalizing on market opportunities created by major changes that are
occurring in the pharmaceutical industry that are causing pharmaceutical
companies to outsource certain manufacturing activities. These changes include
increased pricing pressures on pharmaceutical companies, the need to shorten
drug development cycles and more stringent environmental and FDA regulations.
On July 31, 1997, Catalytica Pharmaceuticals, Inc. (formerly Catalytica Fine
Chemicals, Inc.), a subsidiary of the Company, acquired from Glaxo Wellcome
Inc. a pharmaceutical manufacturing facility (the "Facility") located in
Greenville, North Carolina (the "Acquisition"), in exchange for (i) $246.6
million in cash subject to a post-closing adjustment based on closing date
inventory levels; (ii) 250,000 shares of Junior Preferred Stock of Catalytica
Pharmaceuticals; (iii) warrants to purchase 2,000,000 shares of the Company's
Common Stock at an exercise price of $12.00 per share and (iv) 10% of the
earnings before interest and taxes in excess of an aggregate cumulative amount
of $10 million attributable to the sterile products portion of the Facility, up
to an aggregate cumulative payment to Glaxo Wellcome of an additional $25.0
million. In connection with the Acquisition, Glaxo Wellcome and Catalytica
Pharmaceuticals have entered into a supply agreement under which Catalytica
Pharmaceuticals will manufacture products for Glaxo Wellcome over the next one
and a half years for secondary products, the next three and a half years for
sterile products and the next five years for primary products (the "Supply
Agreement").
Combustion Systems is developing its XONON Flameless Combustion system
("XONON System") to reduce or eliminate certain toxic emissions produced by
natural gas turbines, including NOx, carbon monoxide and unburned hydrocarbons.
Combustion Systems' proprietary products are being developed for use by
utilities and other manufacturers and users of power generation systems.
Combustion Systems is currently working with leading turbine manufacturers,
including: General Electric in large turbines; Allison, a subsidiary of Rolls
Royce, and Solar, a subsidiary of Caterpillar, Inc., in medium size turbines;
and, through GENXON Power Systems, LLC, the Company's new joint venture
company, AGC, in small Kawasaki turbines for cogeneration applications.
The Company's executive offices are located at 430 Ferguson Drive, Mountain
View, California 94043 and its telephone number is (408) 960-3000.
4
<PAGE>
THE WARRANT ISSUANCE
The Company is distributing at no cost to holders of record of its Common
Stock on the Record Date, one Warrant for each three shares of Common Stock
held on the Record Date. No warrants to purchase fractional shares will be
issued and accordingly the number of Warrants to be issued to each holder will
be rounded down to the nearest whole number of Warrants.
<TABLE>
<C> <S>
Description............. Each Warrant entitles the holder to purchase at an
exercise price of $4.00 one share of Common Stock. On
August 21, 1997 the closing price of the Common Stock
on The Nasdaq National Market was $13 1/8 per share.
See "The Warrant Issuance."
Record Date............. August 22, 1997 (the "Record Date").
Warrant Expiration 5:00 p.m. (Pacific time), October 31, 1997 (the
Date................... "Warrant Expiration Date").
Nasdaq National Market
Symbols................ Common Stock . . . . . . . . . . . "CTAL"
Warrants . . . . . . . . . . . . "CTALW" (proposed)
Capital Stock
Outstanding
Prior to the Warrant
Issuance............... Approximately 50,305,830 shares.(1)
Capital Stock
Outstanding after the Approximately 52,254,324 shares, assuming the
Warrant Issuance....... exercise of all Warrants.(1)(2)
Use of Proceeds......... The maximum net proceeds to the Company from the sale
of the Common Stock issuable upon exercise of the
Warrants are estimated to be approximately
$27.3 million (assuming all of the shares of Common
Stock offered hereby are purchased pursuant to the
exercise of the Warrants and after deducting
estimated expenses of the Warrant Issuance). The
Company intends to use the net proceeds from the
exercise of the Warrants to repurchase up to an
aggregate of 5,000,000 shares of its Class B Common
Stock issued to Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P., and
MSCP III 892 Investors, L.P. (collectively "MSCP") on
July 31, 1997. The repurchase price will be $4.75 per
share, if such repurchase is consummated prior to
November 30, 1997, and $5.00 per share, if
consummated after November 30, 1997 and prior to May
31, 1998. The Class A Common Stock and Class B Common
Stock may not be repurchased after May 31, 1998. See
"The Warrant Issuance" and "Use of Proceeds."
Risk Factors............ An investment in the Common Stock issuable upon
exercise of the Warrants involves a high degree of
risk. See "Risk Factors."
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding on July 31, 1997.
Includes 13,270,000 shares of Class A Common Stock and 16,730,000 shares of
Class B Common Stock. Excludes options to purchase 952,664 shares of Common
Stock and warrants to purchase 2,000,000 shares of Common Stock outstanding
as of the Record Date.
(2) Excludes 5,000,000 shares of Class B Common Stock that the Company intends
to repurchase with the proceeds of the Warrant Issuance.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including those statements which have been identified by an asterisk ("*") and
other statements regarding the Company's strategy, financial performance and
revenue sources. Actual results could differ materially from those projected
in the forward-looking statements as a result of the risk factors set forth
below and elsewhere in this Prospectus. In addition to the other information
in this Prospectus, the following factors should be carefully considered in
evaluating the Company and its business before making a decision to purchase
the Common Stock underlying the Warrants.
History of Operating Losses and Uncertainty of Future Results. The Company's
business has not been profitable to date, and as of June 30, 1997, the Company
had an accumulated deficit of $52.4 million. To achieve profitable operations,
Catalytica must successfully manage the operations of the Facility, and, to a
lesser extent, successfully develop, manufacture, introduce and market or
license its combustion systems and catalytic processes. 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 and, pursuant to the Acquisition of the Facility, will
substantially increase its manufacturing of pharmaceutical intermediates in
1997.
The additional facilities, employees and business volumes resulting from the
Acquisition will substantially increase the expenses and working capital
requirements and place substantial burdens on the Company's management
resources. Furthermore, the success of the Acquisition and the Company's
future results depend, in significant part, on the levels of manufacturing
business developed by Catalytica Pharmaceuticals. In the event Catalytica
Pharmaceuticals does not obtain additional new customers, which could involve
additional business from Glaxo Wellcome, on terms sufficient to offset the
costs associated with operating and maintaining the Facility, and with
servicing the debt incurred in connection with the acquisition of the
Facility, the Company's consolidated results of operations and financial
condition would be materially adversely affected.
Due to the size of the Acquisition, the results of operations of Catalytica
Pharmaceuticals will have a material effect on the consolidated results of
operations of the Company, and the results of operations of the Company's
other businesses will be insignificant for the remainder of 1997 and 1998.*
The anticipated revenues from the Supply Agreement with Glaxo Wellcome are
expected to allow the Company to achieve profitable operations for Catalytica
Pharmaceuticals for the remainder of 1997 and for 1998.* After 1998,
Catalytica Pharmaceuticals' profitability will depend on its success and
timing in obtaining new customers, including possible new agreements with
Glaxo Wellcome.* The Company anticipates that its income (loss) per share will
be adversely affected in the second half of 1997, when it expects to
repurchase up to 5,000,000 shares of its Class B Common Stock from MSCP at a
price of $4.75 per share with the proceeds of the Warrant Issuance.*
Manufacturing at the Facility is conducted in three district operations:
primary, secondary and sterile. There is excess manufacturing capacity
available at the primary facility beginning in mid 1998 and based on marketing
efforts to date Catalytica Pharmaceuticals expects it will have one or more
customers for some or all of the unused primary facility beginning in mid
1998.* There is substantial excess manufacturing capacity immediately
available at the secondary and sterile facilities, but because of the long
lead times required to obtain necessary regulatory approvals to manufacture
secondary and sterile products at these facilities, Catalytica Pharmaceuticals
does not anticipate additional significant revenue from such facilities until
1998 or 1999 at the earliest. Catalytica Pharmaceuticals' inability to fill
additional available capacity or to reduce costs in conjunction with lower
levels of capacity utilization would have a material adverse effect on the
Company's results of operations.
Management of Substantially Increased Operations and Need for New Computer
System. The Company currently expects that revenues from the operation of the
Facility will represent a substantial portion of the Company's consolidated
revenues for the foreseeable future. The acquisition of the Facility and the
associated Supply Agreement are expected to expand Catalytica Pharmaceuticals'
revenues from $16.3 million during 1996 to an annualized revenue rate in
excess of $300 million in the second half of 1997 and in 1998.* Existing
6
<PAGE>
management has only limited prior experience in managing a large and
geographically dispersed operation. The Company expects to experience certain
inefficiencies as it begins managing and integrating the operations of the
Facility. Computer systems are used at the Facility to properly track and
record the processing and distribution of products according to drug form,
dose, packaging and destination. Catalytica Pharmaceuticals believes that
based on anticipated changes in operations, the nature of serving multiple
customers and the nature of being a contract manufacturer versus an integrated
pharmaceutical company, that it will need to replace the computer system that
is currently used at the Facility over the next several years. The Company
will need to carefully plan a transition to a new computer system to avoid any
disruption to its business. If the transition is not successfully executed, it
could have a material adverse effect on the Company's results of operations.
Reliance on Relationship with Glaxo Wellcome. Catalytica Pharmaceuticals
estimates that aggregate payments by Glaxo Wellcome under the Supply Agreement
will total approximately $800 million, which include guaranteed revenues plus
the cost of raw materials.* The annual level of guaranteed revenues declines
significantly after 1998, but is expected to continue to represent a
significant source of revenue for Catalytica Pharmaceuticals.* Catalytica
Pharmaceuticals is substantially dependent on Glaxo Wellcome for the next two
and one half years and will continue to be dependent on Glaxo Wellcome in part
thereafter until the end of the term of the Supply Agreement. Catalytica
Pharmaceuticals' business and the Company's consolidated results of operations
would be adversely affected if Catalytica Pharmaceuticals does not
successfully perform its obligations under the Supply Agreement. This could
result in increased costs to the Company or in possible termination of the
Supply Agreement by Glaxo Wellcome.
New Operating Strategy and Need to Hire Additional Personnel. The Facility
has been operated primarily as a captive manufacturing facility by Glaxo
Wellcome with only a limited portion of the Facility devoted to third party
manufacturing. Accordingly, the employees currently operating the Facility and
the managers hired to manage the operations of the Facility have limited prior
experience in conducting operations as a third party manufacturer. There is
limited infrastructure and an insufficient number of personnel at the Facility
currently involved in sales and marketing, research and development, payroll,
purchasing, accounting and information systems functions. The Company will
need to establish and maintain the appropriate infrastructure and hire and
train qualified personnel to perform these functions at the Facility. There
can be no assurance that the Company will successfully establish the
infrastructure or be able to hire qualified personnel in a timely fashion.
There can be no assurance that Catalytica Pharmaceuticals will be able to
establish a successful sales and marketing capability. Any failure to
successfully establish these capabilities at the Facility on a timely basis
would have a material adverse effect on the Company's consolidated results of
operations.
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 on 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
successful integration of the Facility with the operations of Catalytica
Pharmaceuticals will be significantly dependent upon Catalytica
Pharmaceuticals' ability to attract and retain the personnel (including former
Glaxo Wellcome employees) necessary to effectively integrate, and thereafter
operate, the combined businesses. In this regard, Catalytica Pharmaceuticals
has hired certain key managers of the Facility. Any failure on the part of
Catalytica Pharmaceuticals to attract or retain necessary personnel would have
a material adverse effect on the Company's consolidated results of operations.
Uncertainties Related to Combustion Systems Business. The Company, through
its subsidiary Catalytica Combustion Systems, Inc. ("CCSI"), and the GENXON
joint venture, is still conducting research and development on its combustion
systems. Prior to commercialization of its combustion systems, the Company's
7
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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 use 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,
CCSI, is currently working with leading turbine manufacturers, including:
General Electric in large turbines, Allison Engine Co., a subsidiary of Rolls
Royce, and Solar, a subsidiary of Caterpillar, Inc., in medium size turbines.
In addition, through its joint venture company GENXON, CCSI is developing
complete combustor systems for Affiliated Group of Companies (AGC), to be used
on small Kawasaki Heavy Industries turbines for mobile cogeneration
applications. GENXON is also developing complete combustor systems utilizing
Catalytica's combustion technology for end users to be retro fitted on older
out-of-warranty turbines no longer supported by OEM's. Neither the Company,
its subsidiary CCSI, nor the joint venture company GENXON 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 would be adversely affected if any of these companies terminated
its relationship with the Company or GENXON. 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, some of 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 combustion products will be economically attractive when
compared to competitive products.
In October 1996 Combustion Systems 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"), will initially
provide gas turbine fleet asset planning and utilization services for both
power generation and mechanical drive markets. GENXON plans to deliver an
integrated product portfolio which includes Combustion Systems' system for
ultra low NOx emissions, Woodward's control systems, turbine overhaul and
upgrades, as well as contract maintenance and service. Unlike Catalytica
Combustion Systems' efforts to date which have focused only on the design of
the catalyst assembly, GENXON is developing entire combustion systems. The
development of complete combustion systems by GENXON to serve the retrofit
market will require the design of new combustion chambers to be retrofitted on
existing turbines. This new combustion chamber will incorporate a XONON
catalyst. There can be no assurance that GENXON will be successful in
developing new combustion chambers that will work in lieu of the current
design that does not incorporate a catalyst. There can be no assurance that
GENXON's products will be economically attractive when compared to competitive
products.
Future Capital Requirements and Uncertainty of Additional Funding; Increased
Leverage. The Company's operations to date have required substantial amounts
of cash. As part of the financing of the Acquisition, Catalytica
Pharmaceuticals incurred approximately $140 million of long-term indebtedness.
The Company and its subsidiaries have guaranteed this indebtedness. As a
result of this increased leverage, Catalytica Pharmaceuticals' principal and
interest obligations will be increased substantially. The Company anticipates
that cash flows associated with the Supply Agreement will be sufficient to
reduce indebtedness incurred in connection with the Acquisition to a level
supportable by the current assets of the Company.* The degree to which
Catalytica Pharmaceuticals is leveraged could adversely affect Catalytica
Pharmaceuticals' and the Company's ability to obtain additional financing for
working capital, acquisitions or other purposes and could make Catalytica
Pharmaceuticals and the Company more vulnerable to economic downturns and
competitive pressures. The
8
<PAGE>
Company's future capital requirements will depend on many factors, including
Catalytica Pharmaceuticals level of business beyond the Supply Agreement with
Glaxo Wellcome, the rate of commercialization of the Company's catalytic
combustion systems, and the need to expand manufacturing capacity for
pharmaceutical or combustion systems business. 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 to existing stockholders.
Risk of Product Liability. Although Catalytica Pharmaceuticals intends to
seek indemnification from its customers for any product liability claims that
may result from the pharmaceutical products it produces, there can be no
assurance that Catalytica Pharmaceuticals will not ultimately be found liable
for any product liability claims regarding products it manufactures.
Catalytica Pharmaceuticals expects it will be required to indemnify its
customers for product liability claims if a manufacturing defect results in
injury. There can be no assurance that Catalytica Pharmaceuticals will be able
to obtain or maintain product liability insurance in the future on acceptable
terms or with adequate coverage against potential liabilities. If Catalytica
Pharmaceuticals is found liable in a product liability claim and the Company
does not have adequate product liability insurance or indemnification, the
Company's consolidated results of operations could be materially adversely
effected. Additionally, under the Supply Agreement, Catalytica Pharmaceuticals
will be obligated to maintain $100,000,000 of product liability insurance. If
Catalytica Pharmaceuticals does not meet this requirement, it would be
considered a default under the Supply Agreement.
Hazardous Materials and Environmental Matters. The Company's research and
development activities and fine chemicals manufacturing involve the use of
many hazardous chemicals. The use of such chemicals will significantly
increase as a result of the acquisition of the Facility from Glaxo Wellcome.
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 has environmental
impairment insurance with regard to first party and third party liability in
the amount of $25,000,000 (with a $1,000,000 retention) with respect to the
Facility only. There can be no assurance that the Company will not be required
to make 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.
Catalytica Pharmaceuticals expects that significant expenditures may be
incurred at the Facility as a result of new environmental regulations
currently under consideration. The United States Environmental Protection
Agency (the "EPA") is considering new regulations for the pharmaceutical
industry under the authority of the federal Clean Air Act. These proposed
regulations would require the installation of "Maximum Achievable Control
Technology" for certain hazardous air pollutant emissions sources
("Pharmaceutical MACT"). The EPA is also considering changes to its
particulate matter emissions regulations as well as regulation of certain
ozone precursor emissions. As these rules are in the early stages of
consideration by the EPA, and as there can be no assurance of their adoption,
the additional cost of complying with such regulations cannot be determined at
this time. There can be no assurance that Catalytica Pharmaceuticals will not
be required to make additional renovations or improvements to comply with
environmental laws and regulations in the future. Catalytica Pharmaceuticals'
operations, business and assets could be materially adversely affected in the
event such environmental laws or regulations require Catalytica
Pharmaceuticals to modify the current Facility substantially or otherwise
limit Catalytica Pharmaceuticals' ability to conduct or expand its operations.
9
<PAGE>
Current and Potential Environmental Contamination at Catalytica
Pharmaceuticals' Two Sites. The Company through a subsidiary leases the land
on which its Bayview facility in East Palo Alto, California 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 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 Novartis (the
immediately preceding owner/operator of the facility) against any costs and
liability the Company may incur with respect to any contamination caused by
Novartis' 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 Novartis 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.
Glaxo Wellcome has been working with the EPA and the North Carolina
Department of Environment, Health and Natural Resources (the "NCDEHNR") to
investigate, identify and remediate contamination in the soil and groundwater
at the Facility. This investigation, carried out pursuant to the federal
Resource Conservation and Recovery Act, has identified 16 different areas of
the Facility where contamination has or may have occurred. Of these 16 areas,
at least five have been identified as requiring further investigation and
remediation by NCDEHNR ("Site Contamination"). Contaminants found in the soil
and groundwater at the Facility include solvents, petroleum hydrocarbons and
pesticides. As the new owner of the Facility, Catalytica Pharmaceuticals will
become liable for such contamination. Although it is unknown at this time what
further remediation will be required at the Facility and the cost of such
remediation, Glaxo Wellcome has agreed to be primarily liable for any
contamination at the Facility site prior to the closing of the Acquisition and
to perform, at its cost, the remediation required by law for contamination of
the soil and groundwater existing at the Facility as of the Closing. The
Environmental Agreement with Glaxo Wellcome also requires Catalytica
Pharmaceuticals to provide access to the Facility and certain facility
services as required for the remediation, subject to reimbursement by Glaxo
Wellcome. However, there can be no assurance that the Company or Catalytica
Pharmaceuticals will not incur unreimbursed costs or suffer an interference
with ongoing operations as a result of Glaxo Wellcome's remediation activities
or the existence of contamination at the Facility. In addition, the Company's
future development of the Facility may be limited by the existence of
contamination or Glaxo Wellcome's remediation activities. There also can be no
assurance that Catalytica Pharmaceuticals' ongoing operations at the Facility
will not cause additional contamination. The determination of the existence
and cost of any such additional contamination contributed by Catalytica
Pharmaceuticals of the Company could involve costly and time-consuming
negotiations and litigation. Furthermore, any such contamination caused by
Catalytica Pharmaceuticals or the Company could materially adversely affect
the business, results of operations and financial condition of Catalytica
Pharmaceuticals and the consolidated results of operations and financial
condition of the Company.
In addition, a significant amount of asbestos containing material ("ACM") is
present at the Facility. Catalytica Pharmaceuticals believes that the ACM, in
its present condition, does not require abatement. Abatement will only be
required if and as renovations are performed in those areas containing ACM.
Catalytica Pharmaceuticals cannot presently predict whether, when or to what
extent it may need or desire to renovate areas of the Facility containing ACM.
However, should such renovations be necessary, the additional costs could be
10
<PAGE>
substantial. The cash consideration for the Facility was reduced by
approximately $6,400,000, in exchange for the assumption by the Company and
Catalytica Pharmaceuticals of the liability associated with the abatement of
ACM present at the Facility. There is no assurance that such amount will be
adequate to cover the costs associated with any future abatement of ACM at the
Facility. See also "Hazardous Materials and Environmental Matters."
Catalytica Pharmaceuticals' Compliance with FDA Regulations. Many of the
fine chemicals products Catalytica Pharmaceuticals 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. Catalytica Pharmaceuticals 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 Catalytica Pharmaceuticals'
customers do not obtain the necessary regulatory approvals for marketing new
products, Catalytica Pharmaceuticals' fine chemicals product sales will be
adversely affected.
Products manufactured by Catalytica Pharmaceuticals at the facility require
Catalytica Pharmaceuticals to comply with the FDA's current Good Manufacturing
Practices ("cGMP") regulations, and certain of Catalytica Pharmaceuticals'
customers, including Glaxo Wellcome, also require Catalytica Pharmaceuticals
to adhere to cGMP regulations, even if not required by the FDA. In complying
with cGMP regulations, manufacturers 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 Catalytica Pharmaceuticals' customers to obtain and to maintain FDA
clearance for marketing of the products manufactured by Catalytica
Pharmaceuticals, or failure of Catalytica Pharmaceuticals to comply with cGMP
regulations as required by the FDA or Catalytica Pharmaceuticals' customers,
would have a material adverse effect on the Company's results of operations.
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.
11
<PAGE>
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 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 DLN 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 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 38 United
States patents and 13 pending United States patent applications, plus 70
foreign patents and 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.
Concentration of Ownership. Prior to the Warrant Issuance, Morgan Stanley
Capital Partners III, L.P. and two affiliated funds (collectively, "MSCP")
beneficially own approximately 40% of the voting control of the Company and
60% of the outstanding capital stock of the Company. Upon completion of the
contemplated repurchase by the Company of 5,000,000 shares of Class B Common
Stock from MSCP, MSCP will beneficially
12
<PAGE>
own approximately 40% of the voting control of the Company and 48.5% of the
outstanding capital stock of the Company. As a result, MSCP is able to
exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of all significant
corporate transactions such as any merger, consolidation or sale of all or
substantially all of the Company's assets. Moreover, the Company has granted
to MSCP certain contractual rights, including representation on the Company's
Board of Directors and committees of the Board of Directors, that will give
MSCP additional rights to participate in certain actions to be taken by the
Company. Such concentration of ownership and contractual rights may have the
effect of delaying, deferring or preventing a change of control of the
Company. The sale by MSCP of shares of the Company's capital stock could
constitute a change of control under the Company's credit agreement which
would trigger a default of the agreement. MSCP has agreed not to trigger a
change of control under the credit agreement. In addition, such concentration
of ownership and contractual rights could allow MSCP to prevent significant
corporate transactions. In addition, Glaxo Wellcome owns approximately 1.5% of
the outstanding capital stock of Catalytica Pharmaceuticals and owns a warrant
to purchase 2,000,000 shares of Common Stock which represents approximately
3.8% of the Company's outstanding capital stock.
Uncertainty of Stock Price After Warrant Issuance. The Company cannot be
certain what effect the issuance of up to 6,948,494 shares of Common Stock
pursuant to the Warrant Issuance at $4.00 per share, combined with the planned
repurchase of up to 5,000,000 shares of Class B Common Stock, will have on the
market price of the Common Stock. On August 21, 1997, the last reported sale
price of the Common Stock on The Nasdaq National Market was $13 1/8 per share.
Registration of Additional Shares; Shares Eligible For Future
Sale. Beginning after July 1, 1998, MSCP has registration rights with respect
to the shares of Common Stock issuable upon conversion of the Class A Common
Stock and Class B Common Stock owned by it. In addition, Glaxo Wellcome has
been granted certain registration rights in connection with the issuance of a
warrant to purchase 2,000,000 shares of the Company's Common Stock. Future
resales in the public market of the Common Stock by MSCP or Glaxo Wellcome
(whether pursuant to the registration rights or otherwise) could adversely
affect the market price of the Common Stock.
13
<PAGE>
USE OF PROCEEDS
The maximum net proceeds to the Company from the sale of the Common Stock
issuable upon exercise of the Warrants are estimated to be approximately $27.3
million (assuming all of the shares of Common Stock offered hereby are
purchased pursuant to the exercise of the Warrants and after deducting
estimated expenses of the Warrant Issuance). The Company intends to use the
net proceeds from the exercise of the Warrants to repurchase up to an
aggregate of 5,000,000 shares of its Class A Common Stock and Class B Common
Stock issued to MSCP on July 31, 1997. The repurchase price will be $4.75 per
share, if such repurchase is consummated on or prior to November 30, 1997, and
$5.00 per share, if consummated after November 30, 1997 and prior to May 31,
1998. The Class A Common Stock and Class B Common Stock may not be repurchased
after May 31, 1998. Remaining proceeds, if any, of the Warrant Issuance will
be used for general corporate purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) as adjusted to give effect to the issuance of the Class A
Common Stock and Class B Common Stock and the incurrence of long term debt in
connection with the acquisition of the manufacturing facility from Glaxo
Wellcome Inc. on July 31, 1997, and (iii) pro forma as adjusted to give effect
to the sale and issuance of the shares of Common Stock underlying the Warrants
offered by the Company hereby, assuming the exercise of all of the Warrants
(based on the Warrant Price of $4.00 per share and after deducting the
estimated offering expenses), and the application of the net proceeds
therefrom to repurchase 5,000,000 shares of Class B Common Stock (assuming a
$4.75 per share repurchase price). See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------
AS ADJUSTED PRO FORMA,
ACTUAL FOR ACQUISITION AS ADJUSTED
------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt........................... $ 1,285 $139,941(1) $139,941(1)
Non-current deferred revenue............. 4,287 4,287 4,287
Other accrued liabilities................ -- 6,400(3) 6,400
Minority interest........................ 8,000 11,000(4) 11,000
Class A Common Stock, $.001 par value;
30,000,000 shares authorized, 13,320,000
issued and outstanding actual and pro
forma as adjusted(2).................... -- 52,170(1) 52,170
Class B Common Stock, $.001 par value;
17,000,000 shares authorized, 16,680,000
issued and outstanding actual,
11,680,000 issued and outstanding pro
forma as adjusted(2).................... -- 65,330(1) 45,330
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized, none
issued and outstanding at June 30,
1995.................................. -- -- --
Common Stock, $.001 par value;
120,000,000 shares authorized,
19,976,665 issued and outstanding
actual, 51,941,082 issued and
outstanding pro forma as adjusted(6).. 20 20 27
Additional paid-in capital............. 66,050 70,050(5) 92,929
Deferred compensation.................. (19) (19) (19)
Accumulated deficit.................... (52,350) (52,350) (52,350)
------- -------- --------
Total stockholders' equity........... $13,701 $ 17,701 $ 40,587
======= ======== ========
</TABLE>
- --------
(1) Represents (i) the proceeds of $120 million derived from the issuance of
the Class A Common Stock and Class B Common Stock, net of estimated
related issuance costs of $2.5 million and (ii) $140 million from the
assumed borrowings under the Senior Credit Facility, net of estimated
related issuance costs of $4 million and repayment of existing borrowings
of approximately $5 million.
(2) Terms of the Class A Common Stock and Class B Common Stock enable the
holders, at any time after July 1, 2005, the option to require the Company
to repurchase the outstanding shares of Class A and Class B common stock
for cash based on the original consideration paid for such shares on the
Closing Date of the Acquisition. In accordance with SEC regulations, the
Class A Common Stock and Class B Common Stock is therefore not shown as
part of equity.
(3) Represents a reduction in the cash consideration to be paid by Glaxo
Wellcome in exchange for assumption of the liability relating to any
required asbestos remediation by Catalytica Pharmaceuticals.
(4) Reflects the estimated fair value of the 250,000 shares of junior
convertible preferred stock of Catalytica Pharmaceuticals provided as
additional consideration in connection with the Acquisition.
(5) Reflects the estimated fair value of the warrants provided as additional
consideration in connection with the Acquisition which entitle Glaxo
Wellcome, at its discretion, to purchase 2,000,000 shares of the Company's
Common Stock, and the repurchase of 5,000,000 shares of Class B Common
Stock at a price of $4.75 per share.
(6) Excluding 1,157,002 shares of Common Stock reserved for issuance under the
Company's current employee benefit plans pursuant to outstanding options,
including currently exercisable vested options to purchase approximately
569,162 shares.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Catalytica's Common Stock is traded on The Nasdaq National Market under the
symbol "CTAL." The following table sets forth the range of high and low
closing prices of Catalytica's Common Stock as reported by The Nasdaq National
Market by quarter for 1995, 1996 and 1997.
<TABLE>
<CAPTION>
HIGH LOW
------- ---------
<S> <C> <C>
1995
First Quarter............................................ $ 4 3/4 $ 2
Second Quarter........................................... 4 5/8 3 1/8
Third Quarter............................................ 5 5/8 3 1/4
Fourth Quarter........................................... 5 5/8 3 3/4
1996
First Quarter............................................ 4 3/8 3 3/4
Second Quarter........................................... 5 3 3/4
Third Quarter............................................ 4 1/8 3 5/8
Fourth Quarter........................................... 4 1/4 3 5/8
1997
First Quarter............................................ 11 3/4 3 56/64
Second Quarter........................................... 13 5/8 7
Third Quarter (through August 21, 1997).................. 15 3/8 11 3/16
</TABLE>
At August 21, 1997, there were approximately 308 holders of record of the
Company's Common Stock. On August 21, 1997, the last reported sale price of
the Common Stock on The Nasdaq National Market was $13 1/8 per share.
The market price of the Common Stock is highly volatile. Factors such as
fluctuations in the Company's operating results, the results of research and
development, the effectiveness and commercial viability of products of
Catalytica or its competitors, changes in environmental regulations,
announcements of technological innovations or new products by the Company or
its competitors and changes in recommendations by financial analysts could
have a significant impact on the future price of the Common Stock. In
addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities issued by many companies for reasons that may be unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
16
<PAGE>
THE WARRANT ISSUANCE
The Company is distributing as soon as practicable after the date of this
Prospectus, at no cost, to each holder of Common Stock of record as of August
22, 1997 (the "Record Date"), one Warrant for each three shares of Common
Stock held on the Record Date. No Warrants to purchase fractional shares will
be issued, and, accordingly, the number of Warrants to be issued to each
stockholder will be rounded down to the nearest whole Warrant. Each Warrant
entitles the holder to purchase one share of Common Stock at the exercise
price of $4.00 (the "Warrant Price"). The Warrants will expire at 5:00 p.m.
(Pacific time) on October 31, 1997 (the "Warrant Expiration Date"). Warrant
holders may (i) purchase Common Stock through the exercise of their Warrants,
(ii) trade their Warrants or (iii) allow their Warrants to expire unexercised.
THE WARRANTS
Each Warrant will entitle the holder to purchase one share of the Company's
Common Stock at the Warrant Price of $4.00 per share during the period
commencing on the date of this Prospectus and ending on the Warrant Expiration
Date. Unless extended by the Company at its discretion, the Warrants will
expire at 5:00 p.m. (Pacific Time), on October 31, 1997. In the event a holder
of Warrants fails to exercise the Warrants prior to their expiration, the
Warrants will expire and the holder thereof will have no further rights with
respect to the Warrants.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise
of such Warrants under an effective registration statement filed with the
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state or residence of the
holder of such Warrants. Although the Company intends to have all shares so
qualified for sale in those states where the Warrants are being offered and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, subject to the terms of the Warrant Agreement, there can be no
assurance that it will be able to do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The Warrant Price and the number of shares issuable upon exercise of the
Warrants will be subject to adjustment to protect against dilution in the
event of stock dividends, stock splits, combinations, subdivisions and
reclassifications. No assurance can be given that the market price of the
Company's Common Stock will exceed the Warrant Price at any time during or
after the exercise period.
The Warrants are evidenced by certificates which record holders are
receiving concurrently with copies of this Prospectus.
All commissions, fees and other expenses (including brokerage commissions
and transfer taxes) incurred in connection with the exercise of the Warrants
are the responsibility of the holder of the Warrants and none of such
commissions, fees or expenses shall be paid by the Company.
METHOD OF OFFERING
The Warrant Issuance is being made directly by the Company. The Company will
not pay any underwriting discounts or commissions, finders fees or other
remuneration in connection with any distribution of the Warrants or sales of
the shares of the underlying Common Stock offered hereby, other than the fees
paid to ChaseMellon Shareholder Services, L.L.P. (the "Warrant Agent") as
Warrant Agent. The Company estimates that the expenses of the Warrant Issuance
will be approximately $450,000.
17
<PAGE>
EXERCISE OF WARRANTS AND WARRANT AGENT
Warrant holders may exercise the Warrant by properly completing and signing
the subscription form on the Warrant, including, if required, a signature
guarantee from an eligible institution, and mailing or delivering the Warrant
to the Warrant Agent, together with payment of the aggregate Warrant Price in
full (in United States dollars). A holder may exercise Warrants in whole or in
part, but no Warrants may be exercised for fractional shares.
Warrants and payment should be mailed or delivered by hand or overnight
courier by such holders to:
ChaseMellon Shareholder Services, L.L.C.
50 California Street
10th Floor
San Francisco, California 94111
The Warrant Agent's telephone number is (415) 954-9570.
Payment of the Warrant Price may be made by wire transfer, certified or
official bank check, bank draft or money order payable to the order of
ChaseMellon Shareholder Services, L.L.C., as Warrant Agent, for all shares of
Common Stock subscribed for. Wire transfers should be sent to: Bank of
America, San Francisco, California, ABA No.: 121-000-358, Beneficiary:
General Account, Credit Account No.: 23357-00389, For: Catalytica, Inc.
The Warrant Price will be considered to have been paid only upon clearance
of the wire transfer, certified or official bank check, bank draft or money
order tendered therefor. All funds received by the Warrant Agent from the
exercise of the Warrants will be deposited upon receipt. Pending issuance of
certificates representing shares of Common Stock, funds received for the
exercise of Warrants will be held in a segregated escrow account.
ONCE A HOLDER HAS EXERCISED A WARRANT, THE EXERCISE MAY NOT BE REVOKED.
TO BE ACCEPTED, THE PROPERLY COMPLETED WARRANTS AND PAYMENT WITH RESPECT TO
THE WARRANT PRICE MUST BE RECEIVED BY THE COMPANY BEFORE 5:00 P.M., (PACIFIC
TIME), ON OCTOBER 31, 1997.
THE INSTRUCTIONS ACCOMPANYING THE WARRANTS SHOULD BE READ CAREFULLY AND
FOLLOWED IN DETAIL. WARRANTS SHOULD BE SENT WITH PAYMENT TO THE WARRANT AGENT.
DO NOT SEND WARRANTS TO THE COMPANY.
Questions relating to the method of exercise and requests for additional
copies of this Prospectus should be directed to the Warrant Agent at 50
California Street, 10th Floor, San Francisco, California 94111.
EXPIRATION OF WARRANTS
THE WARRANTS WILL EXPIRE AND BECOME VOID AT 5:00 P.M., (PACIFIC TIME), ON
OCTOBER 31, 1997 (the "Warrant Expiration Date").
Warrants not exercised prior to the Warrant Expiration Date will no longer
be exercisable and will be canceled without further action. The Company will
not be obligated to honor any purported exercise of Warrants received by the
Warrant Agent after the Warrant Expiration Date. The Company reserves the
right, in its sole discretion, to extend the Warrant Expiration Date in order
to deal with any unforeseen contingencies relating to the issuance of the
Warrants, but does not currently expect to extend the Warrant Expiration Date.
18
<PAGE>
DELIVERY OF CERTIFICATES
Certificates representing the shares of Common Stock subscribed for will be
issued and delivered as soon as practicable after payment of the Warrant
Price. Holders of Warrants will have no rights as stockholders of the Company
until stock certificates representing the shares of Common Stock subscribed
for are issued to them.
RISK OF DELIVERY AND PAYMENT; DELIVERY BY MAIL
The risk of method of delivery of all documents and payment is on holders of
Warrants, not the Company. If the mail is used, it is recommended that
insured, registered mail be used and that a sufficient number of days be
allowed to ensure delivery to the Warrant Agent before the Warrant Expiration
Date.
TRANSFER OF WARRANTS
The Warrants have been approved for quotation on The Nasdaq National Market
under the Symbol "CTALW."
NOMINEE HOLDERS
Holders on the Record Date who hold shares of Common Stock for the account
of others, such as brokers, trustees or depositories for securities (a
"Nominee Record Date Holder"), should contact the respective beneficial owners
of such shares as soon as possible to ascertain those beneficial owners'
intentions and to obtain instructions and certain beneficial owner
certifications with respect to their Warrants, all as included in the
instructions distributed by Nominee Record Date Holders to beneficial owners.
If a beneficial owner so instructs, the Nominee Record Date Holder should
complete the appropriate subscription form on the Warrants and submit them to
the Warrant Agent with the proper payment. In addition, beneficial owners of
Common Stock or Warrants held through such Nominee Record Date Holder should
contact the Nominee Record Date Holder and request the Nominee Record Date
Holder to effect transactions in accordance with the beneficial owner's
instructions.
PROCEDURES FOR DTC PARTICIPANTS
Exercise of the Warrants may be effected through the facilities of The
Depository Trust Company.
INTERPRETATION
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of any exercise will be determined by the Company, in
its sole discretion, which determination shall be final and binding. The
Company reserves the absolute right to reject any exercise if it is not in
proper form or if the acceptance thereof or the issuance of Common Stock
pursuant thereto could be deemed unlawful. The Company also reserves the right
to waive any defect with regard to any particular exercise. The Company shall
not be under any duty to give notification of any defects or irregularities in
exercises, nor shall it incur any liability for failure to give such
notification. Warrants will not be deemed to have been exercised until any
such defects or irregularities have been cured or waived within such time as
the Company shall determine. Warrant exercises with defects or irregularities
which have not been cured or waived will be returned by the Company to the
appropriate holder of the Warrants as soon as practicable.
STATE AND FOREIGN SECURITIES LAWS
The Warrants may not be exercised by any person, and neither this Prospectus
nor any Warrants shall constitute an offer to sell or a solicitation of an
offer to purchase any shares of Common Stock in any jurisdiction in which such
transactions would be unlawful. The Company believes that any action required
of the Company
19
<PAGE>
has been taken in all jurisdictions of the United States to permit exercises
of the Warrants and purchases of the Common Stock by the stockholders of the
Company. No action has been taken in any jurisdiction outside the United
States to permit offers and sales of the Warrants or the Common Stock.
Consequently, the Company may reject subscriptions pursuant to the exercise of
Warrants by any holder of Warrants outside the United States, and the Company
may also reject subscriptions from holders in jurisdictions within the United
States if it should later determine that it may not lawfully issue shares to
such holders, even if it could do so by qualifying the shares for sale or by
taking other actions in such jurisdictions.
SUMMARY OF ANTICIPATED EFFECTS OF THE WARRANT ISSUANCE; DILUTION
The Warrant Issuance will have a material effect on the Company and on the
holders of the Company's Common Stock. The Warrant Issuance may result in a
significant dilution of the voting interests of the Company's Common
Stockholders, depending on the participation of the Stockholders in the
Warrant Issuance. Such dilution would reduce a Common Stockholder's ownership
interest in the Company.
The following table sets forth the equity ownership of the Company as of
July 31, 1997 (i) prior to the consummation of the Warrant Issuance and (ii)
after the Warrant Issuance and the repurchase of Class B Common Stock from
MSCP (assuming exercise of all of the Warrants to be issued hereby).
<TABLE>
<CAPTION>
BEFORE WARRANT AFTER WARRANT
ISSUANCE ISSUANCE
---------------- ----------------
NUMBER OF NUMBER OF
SHARES % SHARES %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Public................................. 20,305,830 40.4% 27,793,978 52.6%
MSCP................................... 30,000,000 59.6% 25,000,000 47.4%
---------- ----- ---------- -----
Total................................ 50,305,830 100.0% 52,793,978 100.0%
========== ===== ========== =====
</TABLE>
WARRANT EXERCISE
The exercise of the Warrants is subject to the availability of a Warrant
Exercise Prospectus. The Company has agreed to keep the Registration
Statement, of which the Warrant Exercise Prospectus forms a part, effective in
order to permit such exercises.
20
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax
consequences of the Warrant Issuance. This summary is based on current law, is
for general information only and is not based upon or supported by a ruling of
the Internal Revenue Service (the "Service") or an opinion of counsel. The tax
treatment of a holder of Warrants or Common Stock acquired on the exercise of
a Warrant may vary depending upon his or her particular situation. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF RECEIVING, HOLDING, EXERCISING AND
DISPOSING OF THE WARRANTS OR COMMON STOCK, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL, FOREIGN AND PENDING TAX LAWS.
WARRANTS
Receipt of Warrants. The Company intends to treat the Warrant Issuance as a
nontaxable distribution pursuant to Section 305(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). However, the law applicable to the
receipt of the Warrant Issuance is not entirely clear and the Service may take
the position that the Warrant Issuance constitutes a taxable distribution
under Section 301 of the Internal Revenue Code (the "Code"). In this event, a
holder receiving a Warrant would be considered to have received a distribution
on the date of distribution of the Warrant (the "Distribution Date"), in an
amount equal to the fair market value of the Warrant received. Although the
Company has an accumulated deficit in earnings and profits, to the extent the
Company has current earnings and profits in the taxable year of the Warrant
Issuance, if the distribution were treated as a taxable distribution, the
distribution would be treated first as a dividend taxable as ordinary income,
next as a nontaxable recovery of the adjusted tax basis in the Common Stock
with respect to which the Warrant was distributed and finally as gain from the
sale or exchange of such Common Stock. A holder's tax basis in a Warrant
received in a taxable distribution would equal the fair market value of the
Warrant as of the Distribution Date and the holding period of the Warrant
would commence on the Distribution Date.
Under the Company's intended treatment (i.e., treating the Warrant Issuance
as a nontaxable distribution), if a Warrant is exercised, the tax basis of the
Warrant in the hands of a holder will be determined by allocating the holder's
tax basis in his shares of Common Stock with respect to which the Warrant was
distributed between such shares of Common Stock and the Warrant, in proportion
to their relative fair market values on the Distribution Date. If, however,
the fair market value of the Warrant on the Distribution Date is less than 15%
of the fair market value of the shares of Common Stock with respect to which
the Warrant was distributed, the holder's tax basis in the Warrant will be
deemed to be zero unless the holder affirmatively elects, in accordance with
Treasury Regulations, to apportion his or her tax basis in accordance with the
preceding sentence. The holding period of a Warrant will include the holding
period for the shares of Common Stock with respect to which the Warrant was
distributed.
Exercise of Warrants. No gain or loss will be recognized by a holder of
Warrants upon exercise of the Warrants for cash. The adjusted tax basis of a
holder of Common Stock acquired upon exercise of Warrants will be equal to the
sum of the holder's adjusted tax basis in the exercised Warrants and the
Warrant Price. The holding period for Common Stock acquired upon exercise of
Warrants will commence on the date of such exercise.
Disposition of Warrants. The sale or other disposition of Warrants will
result in the recognition of gain or loss by the holder of such Warrant in an
amount equal to the difference between the amount realized and the holder's
adjusted tax basis in the Warrant (determined as discussed above). Gain or
loss will be capital gain or loss if the Warrant was held as a capital asset,
and will be long-term capital gain or loss if the Warrant has a holding period
for tax purposes of more than one year. As discussed above, the date on which
the holding period for the Warrant commences will depend on whether the
Warrant is treated as a non-taxable distribution or as a distribution taxable
under Section 301 of the Code.
21
<PAGE>
Expiration of Warrants Without Exercise. A holder of a Warrant who allows it
to expire without exercise may not allocate any tax basis to the unexercised
Warrant and will therefore not sustain a loss because of its expiration.
COMMON STOCK
Disposition of Common Stock. The sale or other disposition of Common Stock
acquired on exercise of a Warrant will result in the recognition of gain or
loss by the holder of such Common Stock in an amount equal to the difference
between the amount realized and the holder's adjusted tax basis in the Common
Stock. Gain or loss will be capital gain or loss if the Common Stock was held
as a capital asset, and will be long-term capital gain or loss if the Common
Stock has a holding period for tax purposes of more than one year. The holding
period of shares of Common Stock acquired by exercise of the Warrants
commences on the date such Warrants are exercised.
DESCRIPTION OF CAPITAL STOCK
As of July 31, 1997, the authorized capital stock of the Company consists of
120,000,000 shares of Common Stock, of which 73,000,000 have been designated
Common Stock, $0.001 par value, 30,000,000 have been designated Class A Common
Stock, $0.001 par value, and 17,000,000 have been designated Class B Common
Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001 par
value.
COMMON STOCK
As of July 31, 1997, there were 50,305,820 shares of Common Stock
outstanding. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders except that, upon giving of a
notice required by law, stockholders may cumulate their votes in elections of
directors. Subject to preferences that may be applicable to the Class A Common
Stock and Class B Common Stock described below and any Preferred Stock that
may be issued in the future, the holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors. In
the event of a liquidation, dissolution or winding up of the Company, and
subject to the prior rights of holders of the Class A Common Stock and Class B
Common Stock described below and any outstanding shares of Preferred Stock,
the holders of shares of Common Stock shall be entitled to receive pro rata
all of the remaining assets of the Company available for distribution to its
stockholders. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be outstanding upon exercise
of the Warrants will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, qualifications,
preferences, privileges, limitations and restrictions of each such series,
including dividend rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders. Although it presently has no intention to do so, the Board
of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. There are no shares of Preferred Stock outstanding and the Company
has no present plans to issue any additional Preferred Stock.
CLASS A COMMON STOCK
As of July 31, 1997, there were 13,270,000 shares of Class A Common Stock
outstanding, all of which were are held by MSCP. The Class A Common Stock has
the following rights and preferences:
22
<PAGE>
Voting. The Class A Common Stock votes together with the Common Stock as a
single class, except that so long as MSCP owns in the aggregate not less than
20% of the Company's outstanding Common Stock, a separate class vote of the
Class A Common Stock will be required for (i) the issuance of any additional
capital stock that ranks senior or pari passu to the Class A Common Stock or
Class B Common Stock, (ii) any changes to the Company's Certificate of
Incorporation that would adversely affect the rights of the Class A Common
Stock or Class B Common Stock, and (iii) any merger or consolidation of the
Company that has an effect on the Class A Common Stock or Class B Common Stock
substantially similar to (i) or (ii) above. In addition, the approval of a
majority of the outstanding shares of Class A Common Stock will be required
before the Company can enter into any arrangements which would affect the
capital structure or financing of the operations of the Company in excess of
$5,000,000 annually, other than an extension or renewal of any existing
indebtedness, (b) to authorize changes to the aggregate cash or equity
compensation of senior corporate officers of the Company and its subsidiaries,
or (c) to merge or consolidate the Company with or into another corporation or
the sale, transfer or lease all or substantially all of the assets of the
Company.
Dividends. There shall be no dividends on the Class A Common Stock. If a
dividend is paid on the Common Stock, the holders of the Class A Common Stock
shall be entitled to receive an amount equal to the amount which would have
been paid had the Class A Common Stock been converted to Common Stock in
accordance with its terms.
Catalytica has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain its earnings to finance the operation
and expansion of its business and therefore does not expect to pay any cash
dividends in the foreseeable future.
Conversion. Each share of Class A Common Stock may be converted at the
option of the holder into shares of Common Stock at the then effective
conversion price. Each share of Class A Common Stock shall automatically
convert into Common Stock (i) upon any transfer by MSCP, including any
distribution to its partners or affiliated entities, or (ii) if less than 10%
of the shares of Class A Common Stock initially issued are outstanding. The
conversion price initially shall be $4.00 per share and shall be subject to
adjustment in certain cases as described below. The Company may issue up to
$25,000,000 of aggregate amount of capital stock or warrants to stockholders
of the Company prior to May 31, 1998 without triggering an adjustment to the
conversion price of the Class A Common Stock. In addition, the Company may
issue in the aggregate up to an additional $2,500,000 of capital stock or
warrants to stockholders of the Company without triggering an adjustment to
the conversion price of the Class A Common Stock provided that such additional
capital stock is issued in connection with the exercise of the warrants from
the Warrant Issuance.
Liquidation Preference. The liquidation preference of the Class A Common
Stock ranks senior to all other Common Stock and Preferred Stock at any time
outstanding of the Company unless agreed to by MSCP. The liquidation
preference of the Class A Common Stock will be equal to the greater of (i)
$4.00 per share plus any accrued and unpaid dividends, (the "Liquidation
Preference") and (ii) the amount that holders thereof would have received in
such liquidation had the Class A Common Stock been converted to Common Stock
in accordance with its terms. For purposes of this provision, any merger,
consolidation or other business combination as a result of which the
stockholders of the Company immediately before such transaction own less than
50% of the total voting power of the surviving corporation or the sale of all
or substantially all of the assets of the Company shall in each case be deemed
a liquidation of the Company.
Other Terms. Appropriate adjustments shall be made to the liquidation and
conversion rights of the Class A Common Stock in cases of (a) stock splits,
reclassifications, stock dividends, rights offerings and similar events to
existing holders of Common Stock, and (b) in the event of issuance of Common
Stock or securities which are convertible into or which provide the right to
purchase Common Stock at less than fair market value at the time of issuance,
except in the case of shares or options issued or provided (i) upon conversion
of the Class A Common Stock or Class B Common Stock; (ii) to employees,
officers, directors and consultants of the Company pursuant to any employee
stock incentive plans or agreements; (iii) as a dividend or distribution on
the Class A Common Stock or Class B Common Stock; (iv) in connection with the
Acquisition of the assets or voting
23
<PAGE>
securities of another corporation or entity; (v) upon exercise of warrants
issued to Glaxo Wellcome in connection with the Acquisition; (vi) upon
issuance of up to $25,000,000 aggregate amount of capital stock and/or
warrants of the Company to stockholders of the Company at any time prior to
May 31, 1998; and (vii) in an underwritten public offering that results in
gross proceeds in excess of $5.0 million to the Company.
CLASS B COMMON STOCK
As of July 31, 1997 there were 16,730,000 shares of Class B Common Stock
outstanding, all of which were held by MSCP.
The Class B Common Stock has the same powers, preferences and rights
described above as the Class A Common Stock, except that the Class B Common
Stock is convertible into Class A Common Stock, has no voting rights (except
as required by Delaware law) and has no right to vote for the election of
directors. The shares of Class B Common Stock will, upon any transfer of such
shares by MSCP, be automatically converted into a like number of shares of
Common Stock, subject to adjustment upon certain events with respect to the
Common Stock. The shares of Class B Common Stock are convertible at the option
of MSCP into Common Stock or Class A Common Stock so long as such conversion
results in MSCP holding 40% or less of the Company's outstanding voting
securities.
REGISTRATION RIGHTS
As of July 31, 1997, the holders of approximately 1,536,099 shares of Common
Stock are entitled to certain rights with respect to the registration of such
shares under the Securities Act of 1933, as amended (the "Securities Act").
Under the terms of an agreement between the Company and such holders, holders
of at least 50% of the registrable shares may request, subject to certain
limitations, that the Company use it best efforts to register the securities
for public resale. The holders may request such registration on no more than
five occasions and the Company may, upon giving notice to the holders, defer
such registration for up to six months after the effective date of any public
offering. In addition, under the terms of such agreement, if the Company
proposes to register any of its securities under the Securities Act, either
for its own account or the account of other security holders exercising
registration rights, the holders are entitled to notice of such registration
and are entitled to include shares of Common Stock therein; provided, among
other conditions, that the underwriters have the right to limit the number of
shares included in such registration. In addition, the stockholders holding
these rights may require the Company to file registration statements on Form
S-3 under the Securities Act with respect to such shares so long as the
anticipated aggregate price to the public of any such registration statement
would exceed $500,000. The Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations,
including, but not limited to, applicable securities laws.
In July 1997, Glaxo Wellcome was granted certain registration rights in
connection with the issuance of a warrant to purchase 2,000,000 shares of the
Company's Common Stock. In particular, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or the
account of other security holders exercising registration rights, Glaxo
Wellcome is entitled to notice of such registration and is entitled to include
shares of Common Stock therein; provided, in addition to other conditions,
that the underwriters have the right to limit the number of shares included in
such registration statement. In addition, Glaxo Wellcome may require the
Company to file registration statements on Form S-3 under the Securities Act
with respect to up to 1,000,000 of such shares prior to July 31, 1998, and
with respect to all 2,000,000 of such shares after July 31, 1998, so long as
the anticipated aggregate price to the public of any such registration
statement would exceed $1,000,000. The Company is required to use commercially
reasonable efforts to effect such registration, subject to certain conditions
and limitations, including, but not limited to, applicable securities laws.
In addition, MSCP has the right, at any time after July 1, 1998, to request
the Company to effect a registration (a "Registration Request") of shares of
Common Stock issuable upon conversion of the Class A Common Stock and Class B
Common Stock held by it with an aggregate offering price of at least $15
million. MSCP is entitled to four Registration Requests. Registration Requests
may not be made within six months of
24
<PAGE>
any other Registration Request. In addition, in the event the Company proposes
to register any of its securities for its own account or the account of any of
its stockholders (other than certain registrations relating solely to a stock
option or other similar employee benefit plan), MSCP will have the right, upon
a timely request and subject to a right of priority in favor of the Company,
to have the Common Stock issuable upon conversion of the Class A Common Stock
and Class B Common Stock included in such registration. All expenses of
registration will be borne by the Company, but any underwriters' fees,
discounts or commissions will be borne by MSCP.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock issuable upon exercise of the Warrants will be passed upon for
the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The Financial Statements of the Company at December 31, 1994, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996
incorporated by reference in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as stated in
their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports upon the authority
of such firm as experts in accounting and auditing.
25
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Prospectus Summary......................................................... 4
Risk Factors............................................................... 6
Use of Proceeds............................................................ 14
Capitalization............................................................. 15
Price Range of Common Stock................................................ 16
The Warrant Issuance....................................................... 17
Certain Federal Income Tax Consequences.................................... 21
Description of Capital Stock............................................... 22
Legal Matters.............................................................. 25
Experts.................................................................... 25
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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6,948,494 COMMON STOCK PURCHASE WARRANTS
LOGO
------------------
PROSPECTUS
------------------
August 11, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Number 333-32507
WARRANT EXERCISE PROSPECTUS
[LOGO OF CATALYTICA, INC.]
6,948,494 SHARES OF COMMON STOCK
This Prospectus relates to 6,948,494 shares of Common Stock, par value
$0.001 per share (the "Common Stock"), of Catalytica, Inc. (the "Company")
issuable upon the exercise of 6,948,494 Common Stock Purchase Warrants (the
"Warrants") issued by the Company in connection with a Warrant Issuance on
August 22, 1997. The Common Stock is quoted on The Nasdaq National Market
under the symbol "CTAL." On August 21, 1997, the closing price of the Common
Stock was $13 1/8 per share.
----------------
THE COMMON STOCK OFFERED HEREBY OFFERS A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $4.00 none $4.00
- --------------------------------------------------------------------------------
Total (3)........................... $27,793,976 none $27,793,976
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Shares are being offered and sold directly by the Company, and no
commissions or other remuneration is intended to be paid to any person for
soliciting purchases of the shares in this Offering.
(2) Before deducting expenses payable by the Company estimated at $450,000.
(3) Assumes the exercise of all Warrants to be issued hereby.
----------------
The date of this prospectus is August 11, 1997
<PAGE>
A Warrant Certificate evidencing the total number of shares of Common Stock
a stockholder is entitled to purchase is being sent with this Prospectus to
each stockholder entitled to participate in this Warrant Issuance.
To the extent a stockholder does not exercise his Warrants, his percentage
equity interest in the Company and his voting power will be reduced. See "The
Warrant Issuance--Summary of Anticipated Effects of the Warrant Issuance;
Dilution."
The Warrants may not be exercised or sold by any person, and neither this
Prospectus nor any Warrant shall constitute an offer to sell or a solicitation
of an offer to purchase any shares of Common Stock, in any jurisdiction in
which such transactions would be unlawful. See "The Warrant Issuance--State
and Foreign Securities Laws."
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock of
the Company is quoted on The Nasdaq National Market and reports, proxy
statements and other information concerning the Company may also be inspected
at the offices of the National Association of Securities Dealers, 1735 K
Street, N.W., Washington, D.C. 20006.
Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits
thereto filed with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). For further information pertaining to the Company, the
Warrants and the Common Stock, reference is made to the Registration Statement
and the exhibits thereto, which may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed with the Commission and are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996 filed with the Commission on April 28, 1997.
2. The Company's Quarterly Report on Form 10-Q/A for the quarterly period
ended March 31, 1997 filed on June 4, 1997.
3. The Company's Proxy Statement dated July 16, 1997 in connection with the
1997 Annual Meeting of Stockholders filed on July 18, 1997.
2
<PAGE>
4. Description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed on December 11, 1992, as amended
November 19, 1996 and July 29, 1997.
5. Description of the Company's Preferred Share Purchase Rights contained in
the Company's Registration on Form 8-A filed with the Commission on July
29, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made by this Prospectus shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on written or oral request of such person, a copy of
any or all documents incorporated by reference in this Prospectus, without
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Copies of this Prospectus, as amended or
supplemented from time to time, and any other documents (or parts of
documents) that constitute part of the Prospectus under Section 10(a) of the
Securities Act will also be provided without charge to each such person, upon
written or oral request. Requests should be directed to Manager, Corporate
Marketing and Communications, Catalytica, Inc., 430 Ferguson Drive, Mountain
View, California 94043, telephone number (408) 960-3000.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus. See "Risk Factors" for information that
should be considered by prospective investors.
THE COMPANY
Catalytica, Inc. (the "Company") is developing and offering to its customers
advanced products that use the Company's proprietary catalytic technologies to
yield economic and environmental benefits by lowering manufacturing costs and
reducing hazardous byproducts. Catalytica currently is focused on applying its
technologies to two primary areas: (i) improving production of pharmaceutical
intermediates and bulk actives and (ii) developing advanced combustion systems
to reduce toxic emissions generated by natural gas turbines. To pursue these
opportunities, the Company has created two operating subsidiaries, Catalytica
Pharmaceuticals, Inc. ("Catalytica Pharmaceuticals") and Catalytica Combustion
Systems, Inc. ("Combustion Systems"). In addition to market focus, the
formation of subsidiaries provides increased flexibility for strategic
financial arrangements and business partnerships.
Catalytica Pharmaceuticals develops and uses its technology base to develop
proprietary manufacturing processes which it uses for the more cost-effective
and environmentally benign production of pharmaceutical intermediates.
Catalytica Pharmaceuticals manufactures products for several leading
pharmaceutical companies, including Pharmacia & Upjohn, Inc. ("Pharmacia &
Upjohn"), Merck & Co. ("Merck") and Pfizer, Inc. ("Pfizer"). Catalytica
Pharmaceuticals also is producing an intermediate for Novartis (formerly
Sandoz) under a supply agreement entered into at the time the Company purchased
its manufacturing plant from Novartis in 1993. Catalytica Pharmaceuticals is
capitalizing on market opportunities created by major changes that are
occurring in the pharmaceutical industry that are causing pharmaceutical
companies to outsource certain manufacturing activities. These changes include
increased pricing pressures on pharmaceutical companies, the need to shorten
drug development cycles and more stringent environmental and FDA regulations.
On July 31, 1997, Catalytica Pharmaceuticals, Inc. (formerly Catalytica Fine
Chemicals, Inc.), a subsidiary of the Company, acquired from Glaxo Wellcome
Inc. a pharmaceutical manufacturing facility (the "Facility") located in
Greenville, North Carolina (the "Acquisition"), in exchange for (i) $246.6
million in cash subject to a post-closing adjustment based on closing date
inventory levels; (ii) 250,000 shares of Junior Preferred Stock of Catalytica
Pharmaceuticals; (iii) warrants to purchase 2,000,000 shares of the Company's
Common Stock at an exercise price of $12.00 per share and (iv) 10% of the
earnings before interest and taxes in excess of an aggregate cumulative amount
of $10 million attributable to the sterile products portion of the Facility, up
to an aggregate cumulative payment to Glaxo Wellcome of an additional $25.0
million. In connection with the Acquisition, Glaxo Wellcome and Catalytica
Pharmaceuticals have entered into a supply agreement under which Catalytica
Pharmaceuticals will manufacture products for Glaxo Wellcome over the next one
and a half years for secondary products, the next three and a half years for
sterile products and the next five years for primary products (the "Supply
Agreement").
Combustion Systems is developing its XONON Flameless Combustion system
("XONON System") to reduce or eliminate certain toxic emissions produced by
natural gas turbines, including NOx, carbon monoxide and unburned hydrocarbons.
Combustion Systems' proprietary products are being developed for use by
utilities and other manufacturers and users of power generation systems.
Combustion Systems is currently working with leading turbine manufacturers,
including: General Electric in large turbines; Allison, a subsidiary of Rolls
Royce, and Solar, a subsidiary of Caterpillar, Inc., in medium size turbines;
and, through GENXON Power Systems, LLC, the Company's new joint venture
company, AGC, in small Kawasaki turbines for cogeneration applications.
The Company's executive offices are located at 430 Ferguson Drive, Mountain
View, California 94043 and its telephone number is (408) 960-3000.
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THE WARRANT ISSUANCE
The Company is distributing at no cost to holders of record of its Common
Stock on the Record Date, one Warrant for each three shares of Common Stock
held on the Record Date. No warrants to purchase fractional shares will be
issued and accordingly the number of Warrants to be issued to each holder will
be rounded down to the nearest whole number of Warrants.
<TABLE>
<C> <S>
Description............. Each Warrant entitles the holder to purchase at an
exercise price of $4.00 one share of Common Stock. On
August 21, 1997 the closing price of the Common Stock
on The Nasdaq National Market was $13 1/8 per share.
See "The Warrant Issuance."
Record Date............. August 22, 1997 (the "Record Date").
Warrant Expiration 5:00 p.m. (Pacific time), October 31, 1997 (the
Date................... "Warrant Expiration Date").
Nasdaq National Market
Symbols................ Common Stock . . . . . . . . . . . "CTAL"
Warrants . . . . . . . . . . . . "CTALW" (proposed)
Capital Stock
Outstanding
Prior to the Warrant
Issuance............... Approximately 50,305,830 shares.(1)
Capital Stock
Outstanding after the Approximately 52,254,324 shares, assuming the
Warrant Issuance....... exercise of all Warrants.(1)(2)
Use of Proceeds......... The maximum net proceeds to the Company from the sale
of the Common Stock issuable upon exercise of the
Warrants are estimated to be approximately
$27.3 million (assuming all of the shares of Common
Stock offered hereby are purchased pursuant to the
exercise of the Warrants and after deducting
estimated expenses of the Warrant Issuance). The
Company intends to use the net proceeds from the
exercise of the Warrants to repurchase up to an
aggregate of 5,000,000 shares of its Class B Common
Stock issued to Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P., and
MSCP III 892 Investors, L.P. (collectively "MSCP") on
July 31, 1997. The repurchase price will be $4.75 per
share, if such repurchase is consummated prior to
November 30, 1997, and $5.00 per share, if
consummated after November 30, 1997 and prior to May
31, 1998. The Class A Common Stock and Class B Common
Stock may not be repurchased after May 31, 1998. See
"The Warrant Issuance" and "Use of Proceeds."
Risk Factors............ An investment in the Common Stock issuable upon
exercise of the Warrants involves a high degree of
risk. See "Risk Factors."
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding on July 31, 1997.
Includes 13,270,000 shares of Class A Common Stock and 16,730,000 shares of
Class B Common Stock. Excludes options to purchase 952,664 shares of Common
Stock and warrants to purchase 2,000,000 shares of Common Stock outstanding
as of the Record Date.
(2) Excludes 5,000,000 shares of Class B Common Stock that the Company intends
to repurchase with the proceeds of the Warrant Issuance.
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RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including those statements which have been identified by an asterisk ("*") and
other statements regarding the Company's strategy, financial performance and
revenue sources. Actual results could differ materially from those projected
in the forward-looking statements as a result of the risk factors set forth
below and elsewhere in this Prospectus. In addition to the other information
in this Prospectus, the following factors should be carefully considered in
evaluating the Company and its business before making a decision to purchase
the Common Stock underlying the Warrants.
History of Operating Losses and Uncertainty of Future Results. The Company's
business has not been profitable to date, and as of June 30, 1997, the Company
had an accumulated deficit of $52.4 million. To achieve profitable operations,
Catalytica must successfully manage the operations of the Facility, and, to a
lesser extent, successfully develop, manufacture, introduce and market or
license its combustion systems and catalytic processes. 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 and, pursuant to the Acquisition of the Facility, will
substantially increase its manufacturing of pharmaceutical intermediates in
1997.
The additional facilities, employees and business volumes resulting from the
Acquisition will substantially increase the expenses and working capital
requirements and place substantial burdens on the Company's management
resources. Furthermore, the success of the Acquisition and the Company's
future results depend, in significant part, on the levels of manufacturing
business developed by Catalytica Pharmaceuticals. In the event Catalytica
Pharmaceuticals does not obtain additional new customers, which could involve
additional business from Glaxo Wellcome, on terms sufficient to offset the
costs associated with operating and maintaining the Facility, and with
servicing the debt incurred in connection with the acquisition of the
Facility, the Company's consolidated results of operations and financial
condition would be materially adversely affected.
Due to the size of the Acquisition, the results of operations of Catalytica
Pharmaceuticals will have a material effect on the consolidated results of
operations of the Company, and the results of operations of the Company's
other businesses will be insignificant for the remainder of 1997 and 1998.*
The anticipated revenues from the Supply Agreement with Glaxo Wellcome are
expected to allow the Company to achieve profitable operations for Catalytica
Pharmaceuticals for the remainder of 1997 and for 1998.* After 1998,
Catalytica Pharmaceuticals' profitability will depend on its success and
timing in obtaining new customers, including possible new agreements with
Glaxo Wellcome.* The Company anticipates that its income (loss) per share will
be adversely affected in the second half of 1997, when it expects to
repurchase up to 5,000,000 shares of its Class B Common Stock from MSCP at a
price of $4.75 per share with the proceeds of the Warrant Issuance.*
Manufacturing at the Facility is conducted in three district operations:
primary, secondary and sterile. There is excess manufacturing capacity
available at the primary facility beginning in mid 1998 and based on marketing
efforts to date Catalytica Pharmaceuticals expects it will have one or more
customers for some or all of the unused primary facility beginning in mid
1998.* There is substantial excess manufacturing capacity immediately
available at the secondary and sterile facilities, but because of the long
lead times required to obtain necessary regulatory approvals to manufacture
secondary and sterile products at these facilities, Catalytica Pharmaceuticals
does not anticipate additional significant revenue from such facilities until
1998 or 1999 at the earliest. Catalytica Pharmaceuticals' inability to fill
additional available capacity or to reduce costs in conjunction with lower
levels of capacity utilization would have a material adverse effect on the
Company's results of operations.
Management of Substantially Increased Operations and Need for New Computer
System. The Company currently expects that revenues from the operation of the
Facility will represent a substantial portion of the Company's consolidated
revenues for the foreseeable future. The acquisition of the Facility and the
associated Supply Agreement are expected to expand Catalytica Pharmaceuticals'
revenues from $16.3 million during 1996 to an annualized revenue rate in
excess of $300 million in the second half of 1997 and in 1998.* Existing
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management has only limited prior experience in managing a large and
geographically dispersed operation. The Company expects to experience certain
inefficiencies as it begins managing and integrating the operations of the
Facility. Computer systems are used at the Facility to properly track and
record the processing and distribution of products according to drug form,
dose, packaging and destination. Catalytica Pharmaceuticals believes that
based on anticipated changes in operations, the nature of serving multiple
customers and the nature of being a contract manufacturer versus an integrated
pharmaceutical company, that it will need to replace the computer system that
is currently used at the Facility over the next several years. The Company
will need to carefully plan a transition to a new computer system to avoid any
disruption to its business. If the transition is not successfully executed, it
could have a material adverse effect on the Company's results of operations.
Reliance on Relationship with Glaxo Wellcome. Catalytica Pharmaceuticals
estimates that aggregate payments by Glaxo Wellcome under the Supply Agreement
will total approximately $800 million, which include guaranteed revenues plus
the cost of raw materials.* The annual level of guaranteed revenues declines
significantly after 1998, but is expected to continue to represent a
significant source of revenue for Catalytica Pharmaceuticals.* Catalytica
Pharmaceuticals is substantially dependent on Glaxo Wellcome for the next two
and one half years and will continue to be dependent on Glaxo Wellcome in part
thereafter until the end of the term of the Supply Agreement. Catalytica
Pharmaceuticals' business and the Company's consolidated results of operations
would be adversely affected if Catalytica Pharmaceuticals does not
successfully perform its obligations under the Supply Agreement. This could
result in increased costs to the Company or in possible termination of the
Supply Agreement by Glaxo Wellcome.
New Operating Strategy and Need to Hire Additional Personnel. The Facility
has been operated primarily as a captive manufacturing facility by Glaxo
Wellcome with only a limited portion of the Facility devoted to third party
manufacturing. Accordingly, the employees currently operating the Facility and
the managers hired to manage the operations of the Facility have limited prior
experience in conducting operations as a third party manufacturer. There is
limited infrastructure and an insufficient number of personnel at the Facility
currently involved in sales and marketing, research and development, payroll,
purchasing, accounting and information systems functions. The Company will
need to establish and maintain the appropriate infrastructure and hire and
train qualified personnel to perform these functions at the Facility. There
can be no assurance that the Company will successfully establish the
infrastructure or be able to hire qualified personnel in a timely fashion.
There can be no assurance that Catalytica Pharmaceuticals will be able to
establish a successful sales and marketing capability. Any failure to
successfully establish these capabilities at the Facility on a timely basis
would have a material adverse effect on the Company's consolidated results of
operations.
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 on 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
successful integration of the Facility with the operations of Catalytica
Pharmaceuticals will be significantly dependent upon Catalytica
Pharmaceuticals' ability to attract and retain the personnel (including former
Glaxo Wellcome employees) necessary to effectively integrate, and thereafter
operate, the combined businesses. In this regard, Catalytica Pharmaceuticals
has hired certain key managers of the Facility. Any failure on the part of
Catalytica Pharmaceuticals to attract or retain necessary personnel would have
a material adverse effect on the Company's consolidated results of operations.
Uncertainties Related to Combustion Systems Business. The Company, through
its subsidiary Catalytica Combustion Systems, Inc. ("CCSI"), and the GENXON
joint venture, is still conducting research and development on its combustion
systems. Prior to commercialization of its combustion systems, the Company's
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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 use 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,
CCSI, is currently working with leading turbine manufacturers, including:
General Electric in large turbines, Allison Engine Co., a subsidiary of Rolls
Royce, and Solar, a subsidiary of Caterpillar, Inc., in medium size turbines.
In addition, through its joint venture company GENXON, CCSI is developing
complete combustor systems for Affiliated Group of Companies (AGC), to be used
on small Kawasaki Heavy Industries turbines for mobile cogeneration
applications. GENXON is also developing complete combustor systems utilizing
Catalytica's combustion technology for end users to be retro fitted on older
out-of-warranty turbines no longer supported by OEM's. Neither the Company,
its subsidiary CCSI, nor the joint venture company GENXON 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 would be adversely affected if any of these companies terminated
its relationship with the Company or GENXON. 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, some of 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 combustion products will be economically attractive when
compared to competitive products.
In October 1996 Combustion Systems 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"), will initially
provide gas turbine fleet asset planning and utilization services for both
power generation and mechanical drive markets. GENXON plans to deliver an
integrated product portfolio which includes Combustion Systems' system for
ultra low NOx emissions, Woodward's control systems, turbine overhaul and
upgrades, as well as contract maintenance and service. Unlike Catalytica
Combustion Systems' efforts to date which have focused only on the design of
the catalyst assembly, GENXON is developing entire combustion systems. The
development of complete combustion systems by GENXON to serve the retrofit
market will require the design of new combustion chambers to be retrofitted on
existing turbines. This new combustion chamber will incorporate a XONON
catalyst. There can be no assurance that GENXON will be successful in
developing new combustion chambers that will work in lieu of the current
design that does not incorporate a catalyst. There can be no assurance that
GENXON's products will be economically attractive when compared to competitive
products.
Future Capital Requirements and Uncertainty of Additional Funding; Increased
Leverage. The Company's operations to date have required substantial amounts
of cash. As part of the financing of the Acquisition, Catalytica
Pharmaceuticals incurred approximately $140 million of long-term indebtedness.
The Company and its subsidiaries have guaranteed this indebtedness. As a
result of this increased leverage, Catalytica Pharmaceuticals' principal and
interest obligations will be increased substantially. The Company anticipates
that cash flows associated with the Supply Agreement will be sufficient to
reduce indebtedness incurred in connection with the Acquisition to a level
supportable by the current assets of the Company.* The degree to which
Catalytica Pharmaceuticals is leveraged could adversely affect Catalytica
Pharmaceuticals' and the Company's ability to obtain additional financing for
working capital, acquisitions or other purposes and could make Catalytica
Pharmaceuticals and the Company more vulnerable to economic downturns and
competitive pressures. The
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Company's future capital requirements will depend on many factors, including
Catalytica Pharmaceuticals level of business beyond the Supply Agreement with
Glaxo Wellcome, the rate of commercialization of the Company's catalytic
combustion systems, and the need to expand manufacturing capacity for
pharmaceutical or combustion systems business. 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 to existing stockholders.
Risk of Product Liability. Although Catalytica Pharmaceuticals intends to
seek indemnification from its customers for any product liability claims that
may result from the pharmaceutical products it produces, there can be no
assurance that Catalytica Pharmaceuticals will not ultimately be found liable
for any product liability claims regarding products it manufactures.
Catalytica Pharmaceuticals expects it will be required to indemnify its
customers for product liability claims if a manufacturing defect results in
injury. There can be no assurance that Catalytica Pharmaceuticals will be able
to obtain or maintain product liability insurance in the future on acceptable
terms or with adequate coverage against potential liabilities. If Catalytica
Pharmaceuticals is found liable in a product liability claim and the Company
does not have adequate product liability insurance or indemnification, the
Company's consolidated results of operations could be materially adversely
effected. Additionally, under the Supply Agreement, Catalytica Pharmaceuticals
will be obligated to maintain $100,000,000 of product liability insurance. If
Catalytica Pharmaceuticals does not meet this requirement, it would be
considered a default under the Supply Agreement.
Hazardous Materials and Environmental Matters. The Company's research and
development activities and fine chemicals manufacturing involve the use of
many hazardous chemicals. The use of such chemicals will significantly
increase as a result of the acquisition of the Facility from Glaxo Wellcome.
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 has environmental
impairment insurance with regard to first party and third party liability in
the amount of $25,000,000 (with a $1,000,000 retention) with respect to the
Facility only. There can be no assurance that the Company will not be required
to make 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.
Catalytica Pharmaceuticals expects that significant expenditures may be
incurred at the Facility as a result of new environmental regulations
currently under consideration. The United States Environmental Protection
Agency (the "EPA") is considering new regulations for the pharmaceutical
industry under the authority of the federal Clean Air Act. These proposed
regulations would require the installation of "Maximum Achievable Control
Technology" for certain hazardous air pollutant emissions sources
("Pharmaceutical MACT"). The EPA is also considering changes to its
particulate matter emissions regulations as well as regulation of certain
ozone precursor emissions. As these rules are in the early stages of
consideration by the EPA, and as there can be no assurance of their adoption,
the additional cost of complying with such regulations cannot be determined at
this time. There can be no assurance that Catalytica Pharmaceuticals will not
be required to make additional renovations or improvements to comply with
environmental laws and regulations in the future. Catalytica Pharmaceuticals'
operations, business and assets could be materially adversely affected in the
event such environmental laws or regulations require Catalytica
Pharmaceuticals to modify the current Facility substantially or otherwise
limit Catalytica Pharmaceuticals' ability to conduct or expand its operations.
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Current and Potential Environmental Contamination at Catalytica
Pharmaceuticals' Two Sites. The Company through a subsidiary leases the land
on which its Bayview facility in East Palo Alto, California 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 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 Novartis (the
immediately preceding owner/operator of the facility) against any costs and
liability the Company may incur with respect to any contamination caused by
Novartis' 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 Novartis 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.
Glaxo Wellcome has been working with the EPA and the North Carolina
Department of Environment, Health and Natural Resources (the "NCDEHNR") to
investigate, identify and remediate contamination in the soil and groundwater
at the Facility. This investigation, carried out pursuant to the federal
Resource Conservation and Recovery Act, has identified 16 different areas of
the Facility where contamination has or may have occurred. Of these 16 areas,
at least five have been identified as requiring further investigation and
remediation by NCDEHNR ("Site Contamination"). Contaminants found in the soil
and groundwater at the Facility include solvents, petroleum hydrocarbons and
pesticides. As the new owner of the Facility, Catalytica Pharmaceuticals will
become liable for such contamination. Although it is unknown at this time what
further remediation will be required at the Facility and the cost of such
remediation, Glaxo Wellcome has agreed to be primarily liable for any
contamination at the Facility site prior to the closing of the Acquisition and
to perform, at its cost, the remediation required by law for contamination of
the soil and groundwater existing at the Facility as of the Closing. The
Environmental Agreement with Glaxo Wellcome also requires Catalytica
Pharmaceuticals to provide access to the Facility and certain facility
services as required for the remediation, subject to reimbursement by Glaxo
Wellcome. However, there can be no assurance that the Company or Catalytica
Pharmaceuticals will not incur unreimbursed costs or suffer an interference
with ongoing operations as a result of Glaxo Wellcome's remediation activities
or the existence of contamination at the Facility. In addition, the Company's
future development of the Facility may be limited by the existence of
contamination or Glaxo Wellcome's remediation activities. There also can be no
assurance that Catalytica Pharmaceuticals' ongoing operations at the Facility
will not cause additional contamination. The determination of the existence
and cost of any such additional contamination contributed by Catalytica
Pharmaceuticals of the Company could involve costly and time-consuming
negotiations and litigation. Furthermore, any such contamination caused by
Catalytica Pharmaceuticals or the Company could materially adversely affect
the business, results of operations and financial condition of Catalytica
Pharmaceuticals and the consolidated results of operations and financial
condition of the Company.
In addition, a significant amount of asbestos containing material ("ACM") is
present at the Facility. Catalytica Pharmaceuticals believes that the ACM, in
its present condition, does not require abatement. Abatement will only be
required if and as renovations are performed in those areas containing ACM.
Catalytica Pharmaceuticals cannot presently predict whether, when or to what
extent it may need or desire to renovate areas of the Facility containing ACM.
However, should such renovations be necessary, the additional costs could be
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substantial. The cash consideration for the Facility was reduced by
approximately $6,400,000, in exchange for the assumption by the Company and
Catalytica Pharmaceuticals of the liability associated with the abatement of
ACM present at the Facility. There is no assurance that such amount will be
adequate to cover the costs associated with any future abatement of ACM at the
Facility. See also "Hazardous Materials and Environmental Matters."
Catalytica Pharmaceuticals' Compliance with FDA Regulations. Many of the
fine chemicals products Catalytica Pharmaceuticals 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. Catalytica Pharmaceuticals 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 Catalytica Pharmaceuticals'
customers do not obtain the necessary regulatory approvals for marketing new
products, Catalytica Pharmaceuticals' fine chemicals product sales will be
adversely affected.
Products manufactured by Catalytica Pharmaceuticals at the facility require
Catalytica Pharmaceuticals to comply with the FDA's current Good Manufacturing
Practices ("cGMP") regulations, and certain of Catalytica Pharmaceuticals'
customers, including Glaxo Wellcome, also require Catalytica Pharmaceuticals
to adhere to cGMP regulations, even if not required by the FDA. In complying
with cGMP regulations, manufacturers 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 Catalytica Pharmaceuticals' customers to obtain and to maintain FDA
clearance for marketing of the products manufactured by Catalytica
Pharmaceuticals, or failure of Catalytica Pharmaceuticals to comply with cGMP
regulations as required by the FDA or Catalytica Pharmaceuticals' customers,
would have a material adverse effect on the Company's results of operations.
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.
11
<PAGE>
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 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 DLN 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 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 38 United
States patents and 13 pending United States patent applications, plus 70
foreign patents and 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.
Concentration of Ownership. Prior to the Warrant Issuance, Morgan Stanley
Capital Partners III, L.P. and two affiliated funds (collectively, "MSCP")
beneficially own approximately 40% of the voting control of the Company and
60% of the outstanding capital stock of the Company. Upon completion of the
contemplated repurchase by the Company of 5,000,000 shares of Class B Common
Stock from MSCP, MSCP will beneficially
12
<PAGE>
own approximately 40% of the voting control of the Company and 48.5% of the
outstanding capital stock of the Company. As a result, MSCP is able to
exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of all significant
corporate transactions such as any merger, consolidation or sale of all or
substantially all of the Company's assets. Moreover, the Company has granted
to MSCP certain contractual rights, including representation on the Company's
Board of Directors and committees of the Board of Directors, that will give
MSCP additional rights to participate in certain actions to be taken by the
Company. Such concentration of ownership and contractual rights may have the
effect of delaying, deferring or preventing a change of control of the
Company. The sale by MSCP of shares of the Company's capital stock could
constitute a change of control under the Company's credit agreement which
would trigger a default of the agreement. MSCP has agreed not to trigger a
change of control under the credit agreement. In addition, such concentration
of ownership and contractual rights could allow MSCP to prevent significant
corporate transactions. In addition, Glaxo Wellcome owns approximately 1.5% of
the outstanding capital stock of Catalytica Pharmaceuticals and owns a warrant
to purchase 2,000,000 shares of Common Stock which represents approximately
3.8% of the Company's outstanding capital stock.
Uncertainty of Stock Price After Warrant Issuance. The Company cannot be
certain what effect the issuance of up to 6,948,494 shares of Common Stock
pursuant to the Warrant Issuance at $4.00 per share, combined with the planned
repurchase of up to 5,000,000 shares of Class B Common Stock, will have on the
market price of the Common Stock. On August 21, 1997, the last reported sale
price of the Common Stock on The Nasdaq National Market was $13 1/8 per share.
Registration of Additional Shares; Shares Eligible For Future
Sale. Beginning after July 1, 1998, MSCP has registration rights with respect
to the shares of Common Stock issuable upon conversion of the Class A Common
Stock and Class B Common Stock owned by it. In addition, Glaxo Wellcome has
been granted certain registration rights in connection with the issuance of a
warrant to purchase 2,000,000 shares of the Company's Common Stock. Future
resales in the public market of the Common Stock by MSCP or Glaxo Wellcome
(whether pursuant to the registration rights or otherwise) could adversely
affect the market price of the Common Stock.
13
<PAGE>
USE OF PROCEEDS
The maximum net proceeds to the Company from the sale of the Common Stock
issuable upon exercise of the Warrants are estimated to be approximately $27.3
million (assuming all of the shares of Common Stock offered hereby are
purchased pursuant to the exercise of the Warrants and after deducting
estimated expenses of the Warrant Issuance). The Company intends to use the
net proceeds from the exercise of the Warrants to repurchase up to an
aggregate of 5,000,000 shares of its Class A Common Stock and Class B Common
Stock issued to MSCP on July 31, 1997. The repurchase price will be $4.75 per
share, if such repurchase is consummated on or prior to November 30, 1997, and
$5.00 per share, if consummated after November 30, 1997 and prior to May 31,
1998. The Class A Common Stock and Class B Common Stock may not be repurchased
after May 31, 1998. Remaining proceeds, if any, of the Warrant Issuance will
be used for general corporate purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) as adjusted to give effect to the issuance of the Class A
Common Stock and Class B Common Stock and the incurrence of long term debt in
connection with the acquisition of the manufacturing facility from Glaxo
Wellcome Inc. on July 31, 1997, and (iii) pro forma as adjusted to give effect
to the sale and issuance of the shares of Common Stock underlying the Warrants
offered by the Company hereby, assuming the exercise of all of the Warrants
(based on the Warrant Price of $4.00 per share and after deducting the
estimated offering expenses), and the application of the net proceeds
therefrom to repurchase 5,000,000 shares of Class B Common Stock (assuming a
$4.75 per share repurchase price). See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------
AS ADJUSTED PRO FORMA,
ACTUAL FOR ACQUISITION AS ADJUSTED
------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt........................... $ 1,285 $139,941(1) $139,941(1)
Non-current deferred revenue............. 4,287 4,287 4,287
Other accrued liabilities................ -- 6,400(3) 6,400
Minority interest........................ 8,000 11,000(4) 11,000
Class A Common Stock, $.001 par value;
30,000,000 shares authorized, 13,320,000
issued and outstanding actual and pro
forma as adjusted(2).................... -- 52,170(1) 52,170
Class B Common Stock, $.001 par value;
17,000,000 shares authorized, 16,680,000
issued and outstanding actual,
11,680,000 issued and outstanding pro
forma as adjusted(2).................... -- 65,330(1) 45,330
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized, none
issued and outstanding at June 30,
1995.................................. -- -- --
Common Stock, $.001 par value;
120,000,000 shares authorized,
19,976,665 issued and outstanding
actual, 51,941,082 issued and
outstanding pro forma as adjusted(6).. 20 20 27
Additional paid-in capital............. 66,050 70,050(5) 92,929
Deferred compensation.................. (19) (19) (19)
Accumulated deficit.................... (52,350) (52,350) (52,350)
------- -------- --------
Total stockholders' equity........... $13,701 $ 17,701 $ 40,587
======= ======== ========
</TABLE>
- --------
(1) Represents (i) the proceeds of $120 million derived from the issuance of
the Class A Common Stock and Class B Common Stock, net of estimated
related issuance costs of $2.5 million and (ii) $140 million from the
assumed borrowings under the Senior Credit Facility, net of estimated
related issuance costs of $4 million and repayment of existing borrowings
of approximately $5 million.
(2) Terms of the Class A Common Stock and Class B Common Stock enable the
holders, at any time after July 1, 2005, the option to require the Company
to repurchase the outstanding shares of Class A and Class B common stock
for cash based on the original consideration paid for such shares on the
Closing Date of the Acquisition. In accordance with SEC regulations, the
Class A Common Stock and Class B Common Stock is therefore not shown as
part of equity.
(3) Represents a reduction in the cash consideration to be paid by Glaxo
Wellcome in exchange for assumption of the liability relating to any
required asbestos remediation by Catalytica Pharmaceuticals.
(4) Reflects the estimated fair value of the 250,000 shares of junior
convertible preferred stock of Catalytica Pharmaceuticals provided as
additional consideration in connection with the Acquisition.
(5) Reflects the estimated fair value of the warrants provided as additional
consideration in connection with the Acquisition which entitle Glaxo
Wellcome, at its discretion, to purchase 2,000,000 shares of the Company's
Common Stock, and the repurchase of 5,000,000 shares of Class B Common
Stock at a price of $4.75 per share.
(6) Excluding 1,157,002 shares of Common Stock reserved for issuance under the
Company's current employee benefit plans pursuant to outstanding options,
including currently exercisable vested options to purchase approximately
569,162 shares.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Catalytica's Common Stock is traded on The Nasdaq National Market under the
symbol "CTAL." The following table sets forth the range of high and low
closing prices of Catalytica's Common Stock as reported by The Nasdaq National
Market by quarter for 1995, 1996 and 1997.
<TABLE>
<CAPTION>
HIGH LOW
------- ---------
<S> <C> <C>
1995
First Quarter............................................ $ 4 3/4 $ 2
Second Quarter........................................... 4 5/8 3 1/8
Third Quarter............................................ 5 5/8 3 1/4
Fourth Quarter........................................... 5 5/8 3 3/4
1996
First Quarter............................................ 4 3/8 3 3/4
Second Quarter........................................... 5 3 3/4
Third Quarter............................................ 4 1/8 3 5/8
Fourth Quarter........................................... 4 1/4 3 5/8
1997
First Quarter............................................ 11 3/4 3 56/64
Second Quarter........................................... 13 5/8 7
Third Quarter (through August 21, 1997).................. 15 3/8 11 3/16
</TABLE>
At August 21, 1997, there were approximately 308 holders of record of the
Company's Common Stock. On August 21, 1997, the last reported sale price of
the Common Stock on The Nasdaq National Market was $13 1/8 per share.
The market price of the Common Stock is highly volatile. Factors such as
fluctuations in the Company's operating results, the results of research and
development, the effectiveness and commercial viability of products of
Catalytica or its competitors, changes in environmental regulations,
announcements of technological innovations or new products by the Company or
its competitors and changes in recommendations by financial analysts could
have a significant impact on the future price of the Common Stock. In
addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities issued by many companies for reasons that may be unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
16
<PAGE>
THE WARRANT ISSUANCE
The Company is distributing as soon as practicable after the date of this
Prospectus, at no cost, to each holder of Common Stock of record as of August
22, 1997 (the "Record Date"), one Warrant for each three shares of Common
Stock held on the Record Date. No Warrants to purchase fractional shares will
be issued, and, accordingly, the number of Warrants to be issued to each
stockholder will be rounded down to the nearest whole Warrant. Each Warrant
entitles the holder to purchase one share of Common Stock at the exercise
price of $4.00 (the "Warrant Price"). The Warrants will expire at 5:00 p.m.
(Pacific time) on October 31, 1997 (the "Warrant Expiration Date"). Warrant
holders may (i) purchase Common Stock through the exercise of their Warrants,
(ii) trade their Warrants or (iii) allow their Warrants to expire unexercised.
THE WARRANTS
Each Warrant will entitle the holder to purchase one share of the Company's
Common Stock at the Warrant Price of $4.00 per share during the period
commencing on the date of this Prospectus and ending on the Warrant Expiration
Date. Unless extended by the Company at its discretion, the Warrants will
expire at 5:00 p.m. (Pacific Time), on October 31, 1997. In the event a holder
of Warrants fails to exercise the Warrants prior to their expiration, the
Warrants will expire and the holder thereof will have no further rights with
respect to the Warrants.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise
of such Warrants under an effective registration statement filed with the
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state or residence of the
holder of such Warrants. Although the Company intends to have all shares so
qualified for sale in those states where the Warrants are being offered and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, subject to the terms of the Warrant Agreement, there can be no
assurance that it will be able to do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The Warrant Price and the number of shares issuable upon exercise of the
Warrants will be subject to adjustment to protect against dilution in the
event of stock dividends, stock splits, combinations, subdivisions and
reclassifications. No assurance can be given that the market price of the
Company's Common Stock will exceed the Warrant Price at any time during or
after the exercise period.
The Warrants are evidenced by certificates which record holders are
receiving concurrently with copies of this Prospectus.
All commissions, fees and other expenses (including brokerage commissions
and transfer taxes) incurred in connection with the exercise of the Warrants
are the responsibility of the holder of the Warrants and none of such
commissions, fees or expenses shall be paid by the Company.
METHOD OF OFFERING
The Warrant Issuance is being made directly by the Company. The Company will
not pay any underwriting discounts or commissions, finders fees or other
remuneration in connection with any distribution of the Warrants or sales of
the shares of the underlying Common Stock offered hereby, other than the fees
paid to ChaseMellon Shareholder Services, L.L.P. (the "Warrant Agent") as
Warrant Agent. The Company estimates that the expenses of the Warrant Issuance
will be approximately $450,000.
17
<PAGE>
EXERCISE OF WARRANTS AND WARRANT AGENT
Warrant holders may exercise the Warrant by properly completing and signing
the subscription form on the Warrant, including, if required, a signature
guarantee from an eligible institution, and mailing or delivering the Warrant
to the Warrant Agent, together with payment of the aggregate Warrant Price in
full (in United States dollars). A holder may exercise Warrants in whole or in
part, but no Warrants may be exercised for fractional shares.
Warrants and payment should be mailed or delivered by hand or overnight
courier by such holders to:
ChaseMellon Shareholder Services, L.L.C.
50 California Street
10th Floor
San Francisco, California 94111
The Warrant Agent's telephone number is (415) 954-9570.
Payment of the Warrant Price may be made by wire transfer, certified or
official bank check, bank draft or money order payable to the order of
ChaseMellon Shareholder Services, L.L.C., as Warrant Agent, for all shares of
Common Stock subscribed for. Wire transfers should be sent to: Bank of
America, San Francisco, California, ABA No.: 121-000-358, Beneficiary:
General Account, Credit Account No.: 23357-00389, For: Catalytica, Inc.
The Warrant Price will be considered to have been paid only upon clearance
of the wire transfer, certified or official bank check, bank draft or money
order tendered therefor. All funds received by the Warrant Agent from the
exercise of the Warrants will be deposited upon receipt. Pending issuance of
certificates representing shares of Common Stock, funds received for the
exercise of Warrants will be held in a segregated escrow account.
ONCE A HOLDER HAS EXERCISED A WARRANT, THE EXERCISE MAY NOT BE REVOKED.
TO BE ACCEPTED, THE PROPERLY COMPLETED WARRANTS AND PAYMENT WITH RESPECT TO
THE WARRANT PRICE MUST BE RECEIVED BY THE COMPANY BEFORE 5:00 P.M., (PACIFIC
TIME), ON OCTOBER 31, 1997.
THE INSTRUCTIONS ACCOMPANYING THE WARRANTS SHOULD BE READ CAREFULLY AND
FOLLOWED IN DETAIL. WARRANTS SHOULD BE SENT WITH PAYMENT TO THE WARRANT AGENT.
DO NOT SEND WARRANTS TO THE COMPANY.
Questions relating to the method of exercise and requests for additional
copies of this Prospectus should be directed to the Warrant Agent at 50
California Street, 10th Floor, San Francisco, California 94111.
EXPIRATION OF WARRANTS
THE WARRANTS WILL EXPIRE AND BECOME VOID AT 5:00 P.M., (PACIFIC TIME), ON
OCTOBER 31, 1997 (the "Warrant Expiration Date").
Warrants not exercised prior to the Warrant Expiration Date will no longer
be exercisable and will be canceled without further action. The Company will
not be obligated to honor any purported exercise of Warrants received by the
Warrant Agent after the Warrant Expiration Date. The Company reserves the
right, in its sole discretion, to extend the Warrant Expiration Date in order
to deal with any unforeseen contingencies relating to the issuance of the
Warrants, but does not currently expect to extend the Warrant Expiration Date.
18
<PAGE>
DELIVERY OF CERTIFICATES
Certificates representing the shares of Common Stock subscribed for will be
issued and delivered as soon as practicable after payment of the Warrant
Price. Holders of Warrants will have no rights as stockholders of the Company
until stock certificates representing the shares of Common Stock subscribed
for are issued to them.
RISK OF DELIVERY AND PAYMENT; DELIVERY BY MAIL
The risk of method of delivery of all documents and payment is on holders of
Warrants, not the Company. If the mail is used, it is recommended that
insured, registered mail be used and that a sufficient number of days be
allowed to ensure delivery to the Warrant Agent before the Warrant Expiration
Date.
TRANSFER OF WARRANTS
The Warrants have been approved for quotation on The Nasdaq National Market
under the Symbol "CTALW."
NOMINEE HOLDERS
Holders on the Record Date who hold shares of Common Stock for the account
of others, such as brokers, trustees or depositories for securities (a
"Nominee Record Date Holder"), should contact the respective beneficial owners
of such shares as soon as possible to ascertain those beneficial owners'
intentions and to obtain instructions and certain beneficial owner
certifications with respect to their Warrants, all as included in the
instructions distributed by Nominee Record Date Holders to beneficial owners.
If a beneficial owner so instructs, the Nominee Record Date Holder should
complete the appropriate subscription form on the Warrants and submit them to
the Warrant Agent with the proper payment. In addition, beneficial owners of
Common Stock or Warrants held through such Nominee Record Date Holder should
contact the Nominee Record Date Holder and request the Nominee Record Date
Holder to effect transactions in accordance with the beneficial owner's
instructions.
PROCEDURES FOR DTC PARTICIPANTS
Exercise of the Warrants may be effected through the facilities of The
Depository Trust Company.
INTERPRETATION
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of any exercise will be determined by the Company, in
its sole discretion, which determination shall be final and binding. The
Company reserves the absolute right to reject any exercise if it is not in
proper form or if the acceptance thereof or the issuance of Common Stock
pursuant thereto could be deemed unlawful. The Company also reserves the right
to waive any defect with regard to any particular exercise. The Company shall
not be under any duty to give notification of any defects or irregularities in
exercises, nor shall it incur any liability for failure to give such
notification. Warrants will not be deemed to have been exercised until any
such defects or irregularities have been cured or waived within such time as
the Company shall determine. Warrant exercises with defects or irregularities
which have not been cured or waived will be returned by the Company to the
appropriate holder of the Warrants as soon as practicable.
STATE AND FOREIGN SECURITIES LAWS
The Warrants may not be exercised by any person, and neither this Prospectus
nor any Warrants shall constitute an offer to sell or a solicitation of an
offer to purchase any shares of Common Stock in any jurisdiction in which such
transactions would be unlawful. The Company believes that any action required
of the Company
19
<PAGE>
has been taken in all jurisdictions of the United States to permit exercises
of the Warrants and purchases of the Common Stock by the stockholders of the
Company. No action has been taken in any jurisdiction outside the United
States to permit offers and sales of the Warrants or the Common Stock.
Consequently, the Company may reject subscriptions pursuant to the exercise of
Warrants by any holder of Warrants outside the United States, and the Company
may also reject subscriptions from holders in jurisdictions within the United
States if it should later determine that it may not lawfully issue shares to
such holders, even if it could do so by qualifying the shares for sale or by
taking other actions in such jurisdictions.
SUMMARY OF ANTICIPATED EFFECTS OF THE WARRANT ISSUANCE; DILUTION
The Warrant Issuance will have a material effect on the Company and on the
holders of the Company's Common Stock. The Warrant Issuance may result in a
significant dilution of the voting interests of the Company's Common
Stockholders, depending on the participation of the Stockholders in the
Warrant Issuance. Such dilution would reduce a Common Stockholder's ownership
interest in the Company.
The following table sets forth the equity ownership of the Company as of
July 31, 1997 (i) prior to the consummation of the Warrant Issuance and (ii)
after the Warrant Issuance and the repurchase of Class B Common Stock from
MSCP (assuming exercise of all of the Warrants to be issued hereby).
<TABLE>
<CAPTION>
BEFORE WARRANT AFTER WARRANT
ISSUANCE ISSUANCE
---------------- ----------------
NUMBER OF NUMBER OF
SHARES % SHARES %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Public................................. 20,305,830 40.4% 27,793,978 52.6%
MSCP................................... 30,000,000 59.6% 25,000,000 47.4%
---------- ----- ---------- -----
Total................................ 50,305,830 100.0% 52,793,978 100.0%
========== ===== ========== =====
</TABLE>
WARRANT EXERCISE
The exercise of the Warrants is subject to the availability of a Warrant
Exercise Prospectus. The Company has agreed to keep the Registration
Statement, of which the Warrant Exercise Prospectus forms a part, effective in
order to permit such exercises.
20
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax
consequences of the Warrant Issuance. This summary is based on current law, is
for general information only and is not based upon or supported by a ruling of
the Internal Revenue Service (the "Service") or an opinion of counsel. The tax
treatment of a holder of Warrants or Common Stock acquired on the exercise of
a Warrant may vary depending upon his or her particular situation. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF RECEIVING, HOLDING, EXERCISING AND
DISPOSING OF THE WARRANTS OR COMMON STOCK, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL, FOREIGN AND PENDING TAX LAWS.
WARRANTS
Receipt of Warrants. The Company intends to treat the Warrant Issuance as a
nontaxable distribution pursuant to Section 305(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). However, the law applicable to the
receipt of the Warrant Issuance is not entirely clear and the Service may take
the position that the Warrant Issuance constitutes a taxable distribution
under Section 301 of the Internal Revenue Code (the "Code"). In this event, a
holder receiving a Warrant would be considered to have received a distribution
on the date of distribution of the Warrant (the "Distribution Date"), in an
amount equal to the fair market value of the Warrant received. Although the
Company has an accumulated deficit in earnings and profits, to the extent the
Company has current earnings and profits in the taxable year of the Warrant
Issuance, if the distribution were treated as a taxable distribution, the
distribution would be treated first as a dividend taxable as ordinary income,
next as a nontaxable recovery of the adjusted tax basis in the Common Stock
with respect to which the Warrant was distributed and finally as gain from the
sale or exchange of such Common Stock. A holder's tax basis in a Warrant
received in a taxable distribution would equal the fair market value of the
Warrant as of the Distribution Date and the holding period of the Warrant
would commence on the Distribution Date.
Under the Company's intended treatment (i.e., treating the Warrant Issuance
as a nontaxable distribution), if a Warrant is exercised, the tax basis of the
Warrant in the hands of a holder will be determined by allocating the holder's
tax basis in his shares of Common Stock with respect to which the Warrant was
distributed between such shares of Common Stock and the Warrant, in proportion
to their relative fair market values on the Distribution Date. If, however,
the fair market value of the Warrant on the Distribution Date is less than 15%
of the fair market value of the shares of Common Stock with respect to which
the Warrant was distributed, the holder's tax basis in the Warrant will be
deemed to be zero unless the holder affirmatively elects, in accordance with
Treasury Regulations, to apportion his or her tax basis in accordance with the
preceding sentence. The holding period of a Warrant will include the holding
period for the shares of Common Stock with respect to which the Warrant was
distributed.
Exercise of Warrants. No gain or loss will be recognized by a holder of
Warrants upon exercise of the Warrants for cash. The adjusted tax basis of a
holder of Common Stock acquired upon exercise of Warrants will be equal to the
sum of the holder's adjusted tax basis in the exercised Warrants and the
Warrant Price. The holding period for Common Stock acquired upon exercise of
Warrants will commence on the date of such exercise.
Disposition of Warrants. The sale or other disposition of Warrants will
result in the recognition of gain or loss by the holder of such Warrant in an
amount equal to the difference between the amount realized and the holder's
adjusted tax basis in the Warrant (determined as discussed above). Gain or
loss will be capital gain or loss if the Warrant was held as a capital asset,
and will be long-term capital gain or loss if the Warrant has a holding period
for tax purposes of more than one year. As discussed above, the date on which
the holding period for the Warrant commences will depend on whether the
Warrant is treated as a non-taxable distribution or as a distribution taxable
under Section 301 of the Code.
21
<PAGE>
Expiration of Warrants Without Exercise. A holder of a Warrant who allows it
to expire without exercise may not allocate any tax basis to the unexercised
Warrant and will therefore not sustain a loss because of its expiration.
COMMON STOCK
Disposition of Common Stock. The sale or other disposition of Common Stock
acquired on exercise of a Warrant will result in the recognition of gain or
loss by the holder of such Common Stock in an amount equal to the difference
between the amount realized and the holder's adjusted tax basis in the Common
Stock. Gain or loss will be capital gain or loss if the Common Stock was held
as a capital asset, and will be long-term capital gain or loss if the Common
Stock has a holding period for tax purposes of more than one year. The holding
period of shares of Common Stock acquired by exercise of the Warrants
commences on the date such Warrants are exercised.
DESCRIPTION OF CAPITAL STOCK
As of July 31, 1997, the authorized capital stock of the Company consists of
120,000,000 shares of Common Stock, of which 73,000,000 have been designated
Common Stock, $0.001 par value, 30,000,000 have been designated Class A Common
Stock, $0.001 par value, and 17,000,000 have been designated Class B Common
Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001 par
value.
COMMON STOCK
As of July 31, 1997, there were 50,305,820 shares of Common Stock
outstanding. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders except that, upon giving of a
notice required by law, stockholders may cumulate their votes in elections of
directors. Subject to preferences that may be applicable to the Class A Common
Stock and Class B Common Stock described below and any Preferred Stock that
may be issued in the future, the holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors. In
the event of a liquidation, dissolution or winding up of the Company, and
subject to the prior rights of holders of the Class A Common Stock and Class B
Common Stock described below and any outstanding shares of Preferred Stock,
the holders of shares of Common Stock shall be entitled to receive pro rata
all of the remaining assets of the Company available for distribution to its
stockholders. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be outstanding upon exercise
of the Warrants will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, qualifications,
preferences, privileges, limitations and restrictions of each such series,
including dividend rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders. Although it presently has no intention to do so, the Board
of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. There are no shares of Preferred Stock outstanding and the Company
has no present plans to issue any additional Preferred Stock.
CLASS A COMMON STOCK
As of July 31, 1997, there were 13,270,000 shares of Class A Common Stock
outstanding, all of which were are held by MSCP. The Class A Common Stock has
the following rights and preferences:
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Voting. The Class A Common Stock votes together with the Common Stock as a
single class, except that so long as MSCP owns in the aggregate not less than
20% of the Company's outstanding Common Stock, a separate class vote of the
Class A Common Stock will be required for (i) the issuance of any additional
capital stock that ranks senior or pari passu to the Class A Common Stock or
Class B Common Stock, (ii) any changes to the Company's Certificate of
Incorporation that would adversely affect the rights of the Class A Common
Stock or Class B Common Stock, and (iii) any merger or consolidation of the
Company that has an effect on the Class A Common Stock or Class B Common Stock
substantially similar to (i) or (ii) above. In addition, the approval of a
majority of the outstanding shares of Class A Common Stock will be required
before the Company can enter into any arrangements which would affect the
capital structure or financing of the operations of the Company in excess of
$5,000,000 annually, other than an extension or renewal of any existing
indebtedness, (b) to authorize changes to the aggregate cash or equity
compensation of senior corporate officers of the Company and its subsidiaries,
or (c) to merge or consolidate the Company with or into another corporation or
the sale, transfer or lease all or substantially all of the assets of the
Company.
Dividends. There shall be no dividends on the Class A Common Stock. If a
dividend is paid on the Common Stock, the holders of the Class A Common Stock
shall be entitled to receive an amount equal to the amount which would have
been paid had the Class A Common Stock been converted to Common Stock in
accordance with its terms.
Catalytica has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain its earnings to finance the operation
and expansion of its business and therefore does not expect to pay any cash
dividends in the foreseeable future.
Conversion. Each share of Class A Common Stock may be converted at the
option of the holder into shares of Common Stock at the then effective
conversion price. Each share of Class A Common Stock shall automatically
convert into Common Stock (i) upon any transfer by MSCP, including any
distribution to its partners or affiliated entities, or (ii) if less than 10%
of the shares of Class A Common Stock initially issued are outstanding. The
conversion price initially shall be $4.00 per share and shall be subject to
adjustment in certain cases as described below. The Company may issue up to
$25,000,000 of aggregate amount of capital stock or warrants to stockholders
of the Company prior to May 31, 1998 without triggering an adjustment to the
conversion price of the Class A Common Stock. In addition, the Company may
issue in the aggregate up to an additional $2,500,000 of capital stock or
warrants to stockholders of the Company without triggering an adjustment to
the conversion price of the Class A Common Stock provided that such additional
capital stock is issued in connection with the exercise of the warrants from
the Warrant Issuance.
Liquidation Preference. The liquidation preference of the Class A Common
Stock ranks senior to all other Common Stock and Preferred Stock at any time
outstanding of the Company unless agreed to by MSCP. The liquidation
preference of the Class A Common Stock will be equal to the greater of (i)
$4.00 per share plus any accrued and unpaid dividends, (the "Liquidation
Preference") and (ii) the amount that holders thereof would have received in
such liquidation had the Class A Common Stock been converted to Common Stock
in accordance with its terms. For purposes of this provision, any merger,
consolidation or other business combination as a result of which the
stockholders of the Company immediately before such transaction own less than
50% of the total voting power of the surviving corporation or the sale of all
or substantially all of the assets of the Company shall in each case be deemed
a liquidation of the Company.
Other Terms. Appropriate adjustments shall be made to the liquidation and
conversion rights of the Class A Common Stock in cases of (a) stock splits,
reclassifications, stock dividends, rights offerings and similar events to
existing holders of Common Stock, and (b) in the event of issuance of Common
Stock or securities which are convertible into or which provide the right to
purchase Common Stock at less than fair market value at the time of issuance,
except in the case of shares or options issued or provided (i) upon conversion
of the Class A Common Stock or Class B Common Stock; (ii) to employees,
officers, directors and consultants of the Company pursuant to any employee
stock incentive plans or agreements; (iii) as a dividend or distribution on
the Class A Common Stock or Class B Common Stock; (iv) in connection with the
Acquisition of the assets or voting
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securities of another corporation or entity; (v) upon exercise of warrants
issued to Glaxo Wellcome in connection with the Acquisition; (vi) upon
issuance of up to $25,000,000 aggregate amount of capital stock and/or
warrants of the Company to stockholders of the Company at any time prior to
May 31, 1998; and (vii) in an underwritten public offering that results in
gross proceeds in excess of $5.0 million to the Company.
CLASS B COMMON STOCK
As of July 31, 1997 there were 16,730,000 shares of Class B Common Stock
outstanding, all of which were held by MSCP.
The Class B Common Stock has the same powers, preferences and rights
described above as the Class A Common Stock, except that the Class B Common
Stock is convertible into Class A Common Stock, has no voting rights (except
as required by Delaware law) and has no right to vote for the election of
directors. The shares of Class B Common Stock will, upon any transfer of such
shares by MSCP, be automatically converted into a like number of shares of
Common Stock, subject to adjustment upon certain events with respect to the
Common Stock. The shares of Class B Common Stock are convertible at the option
of MSCP into Common Stock or Class A Common Stock so long as such conversion
results in MSCP holding 40% or less of the Company's outstanding voting
securities.
REGISTRATION RIGHTS
As of July 31, 1997, the holders of approximately 1,536,099 shares of Common
Stock are entitled to certain rights with respect to the registration of such
shares under the Securities Act of 1933, as amended (the "Securities Act").
Under the terms of an agreement between the Company and such holders, holders
of at least 50% of the registrable shares may request, subject to certain
limitations, that the Company use it best efforts to register the securities
for public resale. The holders may request such registration on no more than
five occasions and the Company may, upon giving notice to the holders, defer
such registration for up to six months after the effective date of any public
offering. In addition, under the terms of such agreement, if the Company
proposes to register any of its securities under the Securities Act, either
for its own account or the account of other security holders exercising
registration rights, the holders are entitled to notice of such registration
and are entitled to include shares of Common Stock therein; provided, among
other conditions, that the underwriters have the right to limit the number of
shares included in such registration. In addition, the stockholders holding
these rights may require the Company to file registration statements on Form
S-3 under the Securities Act with respect to such shares so long as the
anticipated aggregate price to the public of any such registration statement
would exceed $500,000. The Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations,
including, but not limited to, applicable securities laws.
In July 1997, Glaxo Wellcome was granted certain registration rights in
connection with the issuance of a warrant to purchase 2,000,000 shares of the
Company's Common Stock. In particular, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or the
account of other security holders exercising registration rights, Glaxo
Wellcome is entitled to notice of such registration and is entitled to include
shares of Common Stock therein; provided, in addition to other conditions,
that the underwriters have the right to limit the number of shares included in
such registration statement. In addition, Glaxo Wellcome may require the
Company to file registration statements on Form S-3 under the Securities Act
with respect to up to 1,000,000 of such shares prior to July 31, 1998, and
with respect to all 2,000,000 of such shares after July 31, 1998, so long as
the anticipated aggregate price to the public of any such registration
statement would exceed $1,000,000. The Company is required to use commercially
reasonable efforts to effect such registration, subject to certain conditions
and limitations, including, but not limited to, applicable securities laws.
In addition, MSCP has the right, at any time after July 1, 1998, to request
the Company to effect a registration (a "Registration Request") of shares of
Common Stock issuable upon conversion of the Class A Common Stock and Class B
Common Stock held by it with an aggregate offering price of at least $15
million. MSCP is entitled to four Registration Requests. Registration Requests
may not be made within six months of
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any other Registration Request. In addition, in the event the Company proposes
to register any of its securities for its own account or the account of any of
its stockholders (other than certain registrations relating solely to a stock
option or other similar employee benefit plan), MSCP will have the right, upon
a timely request and subject to a right of priority in favor of the Company,
to have the Common Stock issuable upon conversion of the Class A Common Stock
and Class B Common Stock included in such registration. All expenses of
registration will be borne by the Company, but any underwriters' fees,
discounts or commissions will be borne by MSCP.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock issuable upon exercise of the Warrants will be passed upon for
the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The Financial Statements of the Company at December 31, 1994, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996
incorporated by reference in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as stated in
their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports upon the authority
of such firm as experts in accounting and auditing.
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Prospectus Summary......................................................... 4
Risk Factors............................................................... 6
Use of Proceeds............................................................ 14
Capitalization............................................................. 15
Price Range of Common Stock................................................ 16
The Warrant Issuance....................................................... 17
Certain Federal Income Tax Consequences.................................... 21
Description of Capital Stock............................................... 22
Legal Matters.............................................................. 25
Experts.................................................................... 25
</TABLE>
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6,948,494 SHARES OF COMMON STOCK
[LOGO OF CATALYTICA, INC. APPEARS HERE]
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PROSPECTUS
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August 11, 1997
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