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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File No. 0-20966
CATALYTICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2262240
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
430 FERGUSON DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
(415) 960-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value NASDAQ
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1997, there were outstanding 19,880,549 shares of the
registrant's common stock, par value $.001, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by nonaffiliates of the registrant (based on the
closing price for the common stock on NASDAQ on February 28, 1997) was
$156,398,000. For purposes of this disclosure, shares of Common Stock held by
each officer and director of the Registrant and by each person who owns 5% or
more of the outstanding voting stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CATALYTICA, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
DECEMBER 31, 1996
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PART I
Item 1. Business 2
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 22
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
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This report contains certain forward-looking statements which involve risks
and uncertainties, including statements regarding the Company's strategy,
financial performance, and revenue sources. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors" and elsewhere in this report.
PART I
ITEM 1. BUSINESS
OVERVIEW
Catalytica, Inc. ("Catalytica" or the "Company" and its subsidiaries) 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 Fine Chemicals, Inc. ("Fine
Chemicals") and Catalytica Combustion Systems, Inc. ("Combustion Systems"). In
addition to market focus, the formation of subsidiaries provides increased
flexibility for strategic financial arrangement and business partnerships.
A catalyst is a substance that initiates, accelerates and determines the
products of a chemical reaction. In a catalytic process, compounds are changed
or combined at the molecular level to create a desired product. Highly
selective catalysts can improve industrial process economics by making possible
more efficient use of raw materials, reducing energy requirements, increasing
product yields and eliminating or minimizing the formation or use of
environmental pollutants. As a result, catalyst design and performance can have
a significant impact on operating and capital costs across a variety of
industries.
Fine Chemicals 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. Fine
Chemicals manufactures products for several leading pharmaceutical companies,
including Pfizer, Inc. ("Pfizer") and Merck & Co. ("Merck"). Fine Chemicals
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. Fine Chemicals 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.
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The Company is currently negotiating with Glaxo Wellcome to purchase its
Greenville, North Carolina production facilities as part of Catalytica Fine
Chemicals' production expansion plans. See "Proposed Transaction with Glaxo
Wellcome", page 5.
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.
CATALYTICA FINE CHEMICALS
INDUSTRY BACKGROUND
Chemicals are often grouped into three major categories - commodity
chemicals, specialty chemicals and fine chemicals. "Commodity chemicals" such as
methanol, ethylene, and ammonia, are low value-added products manufactured
according to specification in large volumes using well-established manufacturing
processes, and are sold to a wide range of customers. "Specialty chemicals,"
such as polymer additives, water treatment chemicals and lubricant additives,
are produced in smaller volumes and must satisfy well-defined performance
requirements. "Fine chemicals" are high value-added products often used as
intermediates in the production of a broad range of products, including
pharmaceuticals, agrochemicals, aroma chemicals, and food and feed additives.
Fine chemicals are usually produced to specification in lower volumes using
complex manufacturing processes and must satisfy well-defined chemical
specifications, which generally results in a closer relationship between the
fine chemical producer and the customer. Fine chemicals typically are sold for
higher prices than other chemicals. Rapid response to potential customers,
reliability of product supply and quality are important competitive factors.
Fine chemicals are an essential and costly component in the production of
pharmaceuticals. Based on industry sources, the Company believes the
pharmaceuticals sector of the fine chemicals market represents a $9 billion
market in the United States in 1996. The pharmaceutical industry currently is
facing significant competitive, manufacturing and regulatory challenges that are
resulting in the increasing outsourcing of certain activities, including the
manufacture of pharmaceutical intermediates and bulk actives. The challenges
facing the pharmaceutical industry include:
Increased Competitive Pressures. Increased penetration by managed
care companies and a continued focus on the cost of publicly sponsored
healthcare programs, such as Medicare and Medicaid, have resulted in
increasing pressure for lower priced drugs. This pricing pressure, coupled
with an increase in the acceptance of lower-priced generic drugs, is
putting pressure on pharmaceutical companies to reduce their manufacturing
costs in order to maintain margins. Over
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the next few years a large number of branded drugs will lose patent
exclusivity, creating added competition from multiple generic alternatives.
Efficient Use of Resources. Many pharmaceutical companies are
reevaluating their business models with a focus on drug discovery and
development, and sales and marketing. As a result, pharmaceutical
companies are increasingly outsourcing many of the activities that
traditionally were performed in-house, including the production of fine
chemicals used to produce pharmaceuticals.
Requirement to Meet More Stringent Environmental and FDA Regulation.
Increased environmental burdens are being imposed upon the pharmaceutical
industry which produces significant toxic waste as a byproduct of the
currently complex manufacturing processes. As a result, manufacturing
costs have increased due to higher waste-handling and processing costs.
Improvements in manufacturing processes are also required as a result of
FDA regulations that have increased demand for higher levels of drug
purity.
Need to Shorten Drug Development Cycles. To shorten the time required
to market a new drug, pharmaceutical companies are seeking to outsource
certain supply responsibilities to third parties that are able to develop
cost effective product manufacturing protocols as early as possible in the
drug development cycle. These suppliers must be capable of providing the
full spectrum of needs from small research quantities to clinical trial
samples and large commercial volumes.
STRATEGY
Fine Chemicals' strategy is to leverage its intellectual property base and
experience in commercial catalytic technology development to manufacture
pharmaceutical intermediates and bulk actives, and to become a "one-stop"
supplier to the pharmaceutical industry. Fine Chemicals initially targeted
intermediates because it believed its technology could be used to quickly
achieve improvements that reduce costs by streamlining manufacturing processes.
The Company planned to move to the manufacture of bulk actives and final dosage
products. The implementation of Fine Chemical's strategy will be accelerated if
Catalytica completes its proposed transaction with Glaxo Wellcome Inc., since it
will immediately commence manufacturing bulk actives for Glaxo Wellcome. See
"Item 1, Business--Proposed Transaction with Glaxo," "Item 2, Properties" and
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations."
A key component of Fine Chemicals' strategy is to become involved with its
customers early in the design of the drug manufacturing process. Fine Chemicals
believes that its technology and expertise enables it to develop efficient
manufacturing processes at the research and clinical samples stage and
successfully scale-up such processes for the manufacture of commercial volumes.
These broad capabilities, coupled with its research, pilot and manufacturing
facilities, should enable it to develop close relationships with its customers
by becoming an integral part of their drug development process and a key
preferred supplier of the customer's commercial fine chemical requirements.
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TECHNOLOGY AND EXPERTISE
Fine Chemicals has an extensive intellectual property base and expertise in
catalytic science and engineering. Catalysis is an effective means to streamline
complex manufacturing processes and to reduce or eliminate toxic materials and
waste. The Company's staff draws on its experience of many years of catalytic
process development in the petroleum and petrochemical industry, where high
yields and efficient manufacturing represent important competitive factors. As
of December 31, 1996, Catalytica's technical staff included 37 chemists and 26
chemical engineers, of whom 29 hold Ph.D.'s. These scientists have a broad
background in the discovery, development and scale-up of novel catalysts and
catalytic processes that are relevant to developing efficient manufacturing
processes of pharmaceutical intermediates and bulk actives.
MANUFACTURING
Fine Chemicals owns and operates a flexible, multi-purpose, commercial
scale manufacturing plant in East Palo Alto, California, which has approximately
10,000 gallons of reactor capacity set up in a wide range of reactor sizes. A
new, 2,000 gallon reactor scheduled to go on-line in the second quarter of 1997
will increase the plant's total reactor capacity to 12,000 gallons. The
facility includes a pilot plant used for scaling up manufacturing processes and
a solids handling facility that operates under current Good Manufacturing
Practices ("cGMP").
The facility is located on approximately five acres of land leased under a
long term lease which provides space for expansion if required. Fine Chemicals
believes that its current plant capacity will be sufficient to meet its
requirements through 1997. Fine Chemicals intends to increase its current
manufacturing capacity by acquiring additional manufacturing plants. See "Item
1, Business--Proposed Transaction with Glaxo," "Item 2, Properties" and "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The manufacturing facility was acquired from Novartis in December 1993 to
provide Fine Chemicals with manufacturing capacity. As part of the acquisition,
Novartis entered into a five-year contract which expires in 1998 for the
manufacture of a fine chemical intermediate. Under the terms of the agreement,
Novartis transferred certain equipment and technology relating to the
manufacture of a particular intermediate, and agreed to purchase all of its
requirements of the intermediate from Fine Chemicals subject to certain volume
limitations. The agreement may be terminated by either party upon 30 days prior
written notice for failure to perform a material provision of the agreement, if
such failure is not cured within 60 days after receipt of the notice.
PROPOSED TRANSACTION WITH GLAXO WELLCOME
The Company and Glaxo Wellcome Inc. ("Glaxo") signed a non-binding letter
of intent effective February 5, 1997 to enter into a series of transactions
pursuant to which the Company would acquire (the "Acquisition") Glaxo's
pharmaceutical production facility in Greenville, North Carolina (the
"Facility") as part of its expansion plans for Fine Chemicals.
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The proposed agreement calls for the Company to purchase all of the
buildings and equipment at the 1.8 million-square-foot Facility, as well as the
approximately 600 acres of land on which it is situated. Under the agreement,
the Company will enter into long term manufacturing contracts to supply
designated Glaxo Wellcome prescription products with a potential revenue to the
Company estimated at $800 million over five years.
Under the terms of the proposed Acquisition, the Company will pay Glaxo an
undisclosed amount. The Acquisition is expected to be financed by a combination
of an equity investment in Catalytica by Morgan Stanley Capital Partners and
debt from a major global financial institution. In addition, Glaxo will receive
a small equity stake in Fine Chemicals. The agreement also provides for Glaxo
to receive a share of the profits from Catalytica's production of products in
the Greenville site's sterile products facility. Terms of the equity financing
are expected to be structured to reflect the valuation of the Company's
businesses prior to the announcement of the Acquisition. Terms of the debt
financing are expected to be structured to reflect cash flows generated by
supply contracts with Glaxo Wellcome and other parties.
No definitive agreements have been signed by the Company and Glaxo relating
to the proposed Acquisition. As a result, there can be no assurance, and
stockholders should not assume, that the proposed transactions will be
completed. The completion of the Acquisition is subject to a number of risks
and uncertainties, including the following: (i) completion of the negotiation
of definitive documents, including an asset purchase agreement and long term
supply contracts for chemical, final dosage and sterile products; (ii)
completion of the due diligence review by the Company and its equity and debt
financing sources; (iii) completion of the negotiation of the terms of the
substantial equity and debt financings required to consummate the Acquisition;
and (iv) receipt of certain regulatory approvals and consents, including
stockholder approval.
In addition, the proposed Acquisition, which is not expected to close prior
to the latter portion of the second quarter of 1997, will require significant
management time and legal, accounting and other expenditures, whether or not the
transactions are completed. In the event the Acquisition is consummated, the
additional facilities, employees and business volumes will substantially
increase the Company's expenses and working capital requirements and place
substantial burdens on the Company's management resources. Furthermore, the
success of the Acquisition depends, in part, on the levels of additional
manufacturing business developed by the Company, and the related terms,
including price. In the event the Company does not develop new business
sufficient to offset the costs and expenses associated with operating and
maintaining the new facilities, and with servicing the debt associated with the
acquisition of such facilities, the Company's results of operations would be
materially adversely affected. See "Item 2, Properties" and "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
Fine Chemicals believes that the key competitive factors in the fine
chemicals manufacturing industry include reliability of supply, product quality,
ability to comply with environmental and FDA regulations, capacity, price, and
the technical and manufacturing ability to produce a full range of
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quantities from small batches for clinical samples to large commercial
quantities. Fine Chemicals believes it competes favorably with respect to these
factors. Fine Chemicals' primary competition is from pharmaceutical companies
that produce their own fine chemicals and to a lesser extent from other
independent fine chemicals manufacturers such as Lonza AG and DSM Andeno B.Z.
Most of Fine Chemicals' competitors have substantially greater financial
resources than the Company.
FINE CHEMICALS' MANAGEMENT AND DIRECTORS
As part of the Company's strategy to create focused business units, Fine
Chemicals has assembled a management group that includes dedicated senior
executives and independent directors who provide relevant industry expertise.
The directors and management of Fine Chemicals include:
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NAME POSITION WITH FINE CHEMICALS
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Barry M. Bloom Director
Richard Fleming Director
Thomas L. Gutshall Director
Ricardo B. Levy Director
Ernest Mario Director
James A. Cusumano President and Director
Gary Hollingsworth Senior Vice President, Business Development
John H. Grate Vice President, Research and Development
Suresh Mahajan Vice President, Process Engineering
Lawrence W. Briscoe Chief Financial Officer and Director
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BARRY M. BLOOM has been a director of Fine Chemicals since February 1995.
He retired in September 1993 from Pfizer Inc. where he was most recently
Executive Vice President, Research and Development since 1992, and a member of
the Board of Directors since 1971. Dr. Bloom was with Pfizer Inc. since 1952,
where he served in executive level positions since 1971. He is a member of
several corporate Board of Directors, including Cubist Pharmaceuticals, Inc.,
Neurogen Corp., Incyte Pharmaceuticals, Inc. and Vertex Pharmaceuticals, Inc.
Dr. Bloom was a member of the United States Congressional Commission on the
Federal Drug Approval Process and the Pharmaceutical Manufacturers Association
Commission on Drugs for Rare Diseases. He has a Ph.D. in organic chemistry from
the Massachusetts Institute of Technology.
RICHARD FLEMING has been a director of Fine Chemicals since 1995. Mr.
Fleming has been a director of Catalytica since 1985 and also serves as an
advisor and consultant to Catalytica. Mr. Fleming was President and Chief
Executive Officer of the Company from 1985 through August 1991. From 1969 to
1980, Mr. Fleming served at Air Products and Chemicals, most recently as
Executive Vice President, and from 1980 to 1981, he served as President and
Chief Operating Officer of GAF Corporation, a chemical company. He has served
as President and Chief Executive Officer of Richard Fleming Associates, Inc., a
consulting firm, since May 1981 and is Vice Chairman for Membership and Fiscal
Affairs of the Chemical Industry Institute of Toxicology. Mr. Fleming has an
M.S. in chemical engineering from New York University.
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THOMAS L. GUTSHALL has been a director of Fine Chemicals since February
1995. He has been Chief Executive Officer and Chairman of Cephaid since August
16, 1996. Mr. Gutshall was President and Chief Operating Officer of CV
Therapeutics, Inc. from January 1995 to August 1996, and has 35 years of
experience in specialty chemicals, pharmaceuticals, and diagnostics. Mr.
Gutshall served in executive level positions with Syntex Corp. from 1981 to
1994, most recently as Executive Vice President since June 1989. He previously
served with Mallinckrodt Inc., lastly as Vice President and General Manager,
Drug and Cosmetic Chemicals Division. Mr. Gutshall has a B.S. in chemical
engineering from the University of Delaware and is an alumnus of the Harvard
Executive Marketing Program.
ERNEST MARIO has been a director of Catalytica, Inc. since July, 1996. Dr.
Mario has been Co-Chairman and Chief Executive Officer of ALZA since August
1993. Prior to joining ALZA, Dr. Mario was Deputy Chairman and Chief Executive
Officer of Glaxo Holding p.l.c., having served in a variety of executive
positions with Glaxo, Inc., beginning in 1986. From 1977 to 1984, he held
various executive level positions with Squibb Corporation, ending as President
and Chief Executive Officer of Squibb Medical Products. Dr. Mario is a member
of the Board of Directors of several companies, including Advanced Technology
Labs, COR Therapeutics, and Pharmaceutical Product Development Co. Dr. Mario has
a Ph.D. and M.S. in physical sciences from the University of Rhode Island, and a
B.S. in pharmacy from Rutgers University. He is a licensed pharmacist in the
states of New York and Rhode Island, and an adjunct professor of pharmacy at the
University of Rhode Island.
JOHN H. GRATE joined Catalytica in 1981 and currently serves as the Vice
President of Research and Development for Catalytica Fine Chemicals. Prior to
helping found Catalytica's fine chemicals business, Dr. Grate led numerous
research and development projects, inventing and developing homogeneous
catalytic processes for the production of commercially valuable organic
chemicals. Dr. Grate holds a B.S. in chemistry from Miami University, Oxford,
Ohio and a Ph.D. from the University of California, San Diego. Dr. Grate is a
registered Patent Agent.
SURESH MAHAJAN joined Catalytica in 1986 and currently serves as the Vice
President of Process Engineering for Fine Chemicals. Dr. Mahajan previously
worked at Ethyl Corporation, Occidental Research Corporation and Novartis, where
he served as a senior chemical engineer and project leader developing commercial
processes for pharmaceuticals, agrochemicals, and chemicals. Dr. Mahajan
received a B.S. from the University of Delhi, an M.S. from Oklahoma State
University, and a Ph.D. in chemical engineering from Purdue University.
GARY D. HOLLINGSWORTH joined Catalytica in 1989 and currently serves as
Senior Vice President of Business Development for Catalytica Fine Chemicals.
Mr. Hollingsworth has more than fifteen years of business development experience
that includes serving as Marketing Manager and Director of Planning at Owens-
Corning Fiberglas, and as Director of Planning and Business Development and
International Business Manager for divisions of ICI. He has a B.S. in chemical
engineering from Oklahoma State University and an M.B.A. from Stanford Graduate
School of Business.
JAMES A. CUSUMANO, LAWRENCE W. BRISCOE AND RICARDO B. LEVY, who are
also directors of Fine Chemicals, are officers and/or directors of Catalytica,
Inc. For information on their business backgrounds, see "Executive Officers."
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CATALYTICA COMBUSTION SYSTEMS
INDUSTRY BACKGROUND
One of the critical issues facing the utilities and power generation
industry is the ability to satisfy economically the growing worldwide demand for
power while complying with environmental protection requirements. Natural gas
turbines are expected to meet the majority of this increasing demand because
natural gas burns more cleanly than other fossil fuels, and gas turbines have
shorter construction lead times and lower aggregate installation cost per
kilowatt than alternative power generation methods. However, all fuel
combustion, including natural gas, creates significant emissions of NOx, carbon
monoxide and unburned hydrocarbons, which are among the primary sources of air
pollution and result in smog and ground level ozone. There is significant
regulatory pressure in much of the industrialized world to reduce these
emissions from stationary and mobile power generation sources. Through its
Combustion Systems subsidiary, Catalytica is developing catalytic combustion
systems that are designed to significantly reduce emissions of pollutants from
turbines.
The gas turbine market encompasses a range of turbine sizes and
applications that are typically divided into two segments, utility power
generation and industrial applications. The installed base of natural gas
turbines in the United States is approximately 50,000 megawatts, which is
estimated to be less than one-half of the worldwide installed base. One
megawatt is sufficient energy to provide power to approximately 1,000
households.
Utility Power Generation. The utility power generation segment is
comprised principally of large turbines ranging from 50 to 250 megawatts,
with an average size of approximately 100 megawatts, with 12 combustors.
The principal users of these turbines are major electric utilities and
independent power producers. According to the North American Electricity
Reliance Council, demand for power is projected to grow in the United
States at an average rate of 6,000 megawatts per year through at least
2003. Combustion Systems believes that the market in the rest of the
world, which is approximately twice as large as the United States market,
will grow more rapidly. General Electric and its affiliates are estimated
to have over a 60% share of the worldwide utility power generation market.
Industrial Applications. The industrial applications segment is
comprised of small- and medium-size turbines generally ranging from one to
25 megawatts, with an average turbine size of approximately 10 megawatts,
with one or more combustors. The principal users of these turbines are
non-utility industrial power generators and mechanical drive turbines such
as those used for processing and transmission of natural gas in pipelines.
According to Forecast International, a market information service, the
world market for industrial power generation and mechanical drive natural
gas turbines is projected to grow at an average rate of 10,000 megawatts
per year. The United States market is believed to represent approximately
25% of the world market. Allison and Solar together have a majority of the
worldwide market. Other suppliers include European Gas Turbines and
Kawasaki.
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CURRENT EMISSIONS CONTROL APPROACHES
Natural gas turbines currently utilize diffusion flame combustors that
operate at about 1800 degrees C (3270 degrees F). Without emissions controls or
clean-up processes, combustion at these temperatures results in NOx emissions of
between 75 and 200 parts per million ("ppm"). These levels generally are not
acceptable for turbines in most areas of the United States. For example, in
several metropolitan areas of the United States, new natural gas turbines have
been required to achieve NOx emission levels of 5 ppm or lower to obtain permits
for installation. Specifications for the next generation turbines being
developed under the United States government sponsored Advanced Turbine System
program require the achievement of less than 8 ppm of NOx without any post-
emissions clean-up system.
One current approach for reducing NOx is to reduce the combustor
temperature by using wet controls, which involves injecting water or steam into
the turbine combustor. NOx emission levels can be reduced to about 42 ppm with
water and about 25 ppm with steam injection. However, the use of water and
steam requires that purified water be available at the site location. Capital
and operating costs can significantly increase if sufficiently pure water is not
readily available and extensive water clean-up is required. Additionally,
corrosion induced by water impurities can cause serious turbine damage over a
relatively short time period.
A second approach currently used to reduce gas turbine emissions by
reducing temperature utilizes a control technology that is generally referred to
as lean pre-mix or dry-low-NOx ("DLN"). DLN is a combustion process in which
natural gas and air are premixed prior to entering the combustor, resulting in a
low fuel to air ratio. Turbine manufacturers utilizing this approach have
achieved emission levels of approximately 25 ppm, and are undertaking to achieve
emission levels in the 10 to 15 ppm range in the next product generation.
Compared to wet controls, DLN capital costs are moderate to high and operating
costs are low to moderate. Operating costs are expected to increase as
emissions are reduced below 25 ppm.
Maintaining an operating temperature in the combustors at 1500 degrees C
(2700 degrees F) or below virtually eliminates production of NOx. Wet controls
and DLN technologies are not able to operate at this temperature level, and
therefore these methods require post combustion process clean-up to achieve
lower emission levels.
The most common post combustion clean-up process is selective catalytic
reduction ("SCR"). SCR reduces NOx emissions by approximately 80%. For example,
a turbine with NOx emissions at 25 ppm can be reduced by 80%, to about 5 ppm,
with the addition of an SCR unit. Capital and operating costs of this approach
add significantly to the overall cost of producing power. In addition, the
natural gas turbine operator must store and handle large quantities of ammonia,
a toxic, hazardous substance.
CATALYTICA'S APPROACH
In contrast to competitive combustion technologies, Combustion Systems'
technology, marketed under the name XONON, is designed to reduce the high
temperatures created in conventional combustors to below 1500 degrees C at full
power generation, which results in virtually no NOx emissions and significant
reductions in emissions of carbon monoxide and unburned hydrocarbons. XONON
uses
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a proprietary flameless process in which fuel and air react on the surface of a
catalyst in the turbine combustor to produce energy in the form of hot gases,
which drive the turbine.
Combustion Systems believes that the XONON system provides the lowest level
of emissions achieved with any control technology at natural gas turbine
operating conditions. Combustion Systems has tested the durability of the XONON
catalytic combustion system for over 7,000 hours at atmospheric pressure and for
over 1,000 hours at high pressure with no change in system performance for NOx,
carbon monoxide or unburned hydrocarbons emissions. Emissions levels obtained
in the Company's tests of the XONON system that simulate full turbine operating
conditions have been as low as 0.5 ppm for NOx, 0.8 ppm for carbon monoxide and
1.7 ppm for unburned hydrocarbons. Results in a series of tests conducted by
General Electric at its commercial-scale test facility have supported the
emissions results obtained by the Company's test results.
Combustion Systems believes the XONON system will provide superior
emissions reduction performance and competitive costs compared to alternative
technologies. The XONON system is expected to have capital and operating costs
that are similar to DLN while offering significant emissions performance and
cost advantages relative to water and steam control systems. Additionally, the
XONON system is expected to provide significant cost advantages over SCR
systems. Once the technology is commercially applied, the Company believes it
will be accepted as best available control technology ("BACT"), lowest
achievable emissions rate ("LAER") technology and reasonably available control
technology ("RACT") for reduction of NOx in natural gas turbines. BACT, LAER and
RACT are the benchmarks by which the Environmental Protection Agency ("EPA"),
and state and local regulatory authorities decide which emissions control
technologies will be required for specific installations.
The Company's XONON system is designed to fit inside each combustor on a
turbine. Large turbines, such as those used in the utility power generation
market require an average of 12 combustors per turbine, while smaller industrial
turbines require one or more combustors. Combustion Systems expects to generate
revenues from the sale of XONON systems installed in each combustor of new
turbines, the retrofit of combustors in existing turbines and the ongoing sale
of catalytic replacement units.
COMMERCIALIZATION STRATEGY
To commercialize the XONON system, Combustion Systems is developing
products for both the utility power generation and industrial applications
markets through collaborative relationships with leading manufacturers in both
of these market segments. Combustion Systems believes the earliest
commercialization opportunities are in small- and medium-sized turbines because
design and testing requirements are less extensive and the sales and
commercialization process are faster than for the larger natural gas turbines
used in the utility power generation market. Combustion Systems is also focused
on out-of-warranty turbines that are not currently supported by existing turbine
manufacturers. These efforts are being pursued by GENXON Power Systems, the
Company's joint venture with Woodward Governor.
Industrial Applications Market. In the industrial applications area,
Combustion Systems, through GENXON Power Systems, LLC, the Company's new joint
venture company, is working with AGC to install and test the XONON system in
AGC's unit that uses a 1.5 megawatt Kawasaki turbine unit. AGC
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funded the initial development work on this project. AGC manufactures and
markets small co-generation systems to deliver power and steam to industrial
users. The engineering design for the installation of the XONON system in the
AGC co-generation unit currently is in progress. Combustion Systems and AGC
negotiated an amendment to their agreement whereby AGC will provide a turbine
and technical assistance, and Combustion Systems has assumed control of and
responsibility for funding, the completion of the development and construction
of the catalytic combustor and the operation of the turbine during the
demonstration phase. Combustion Systems commenced testing of the XONON system in
the AGC unit in December, 1996. See "Item 1, Business--Formation of GENXON Joint
Venture."
Combustion Systems is also working with Allison and Solar, two of the
world's leading manufacturers of small- to medium-sized turbines. Combustion
Systems and Allison have completed a preliminary evaluation of the catalytic
combustion technology for one of Allison's principal commercial turbines and
have demonstrated in a test that ultra low emission targets can be met under
simulated turbine operating conditions. Based on these results, Allison is
continuing to fund the development effort. Combustion Systems is also conducting
a development program funded by Solar to investigate the application of
Combustion Systems' catalytic combustion technology to Solar's gas turbines.
Because of the large installed base of Allison and Solar turbines, Combustion
Systems believes there is a significant retrofit market opportunity for many of
these turbines used by gas processors and gas transmission companies which face
increasing emissions regulation in the United States. Both Allison and Solar
are participating in the United States government sponsored Advanced Turbine
System program and are utilizing the XONON system to meet the NOx emissions
specifications established for the program. If either Allison or Solar
terminated its relationship with Combustion Systems, there is no assurance as to
whether Combustion Systems could enter into a similar relationship with another
manufacturer, and the Company's ability to complete its research and development
and introduce commercial systems in these markets could be adversely affected.
Utility Power Generation Market. Combustion Systems is pursuing the market
opportunity in large turbines used by electric utilities and independent power
producers through a program with General Electric, the world's largest
manufacturer of natural gas turbines. This collaboration began in 1990 and
currently is in the second phase of testing at General Electric's commercial
scale test facility. General Electric is continuing to fund the development of
the XONON system for application in General Electric turbines. Catalytica
anticipates that several additional years of development will be necessary to
complete the design of a commercial system for large turbines. The Company's
ability to complete research and development and introduce commercial systems in
the large turbine utility market would be adversely affected if General Electric
terminated its relationship with Combustion Systems. If such a termination
occurred, there is no assurance Combustion Systems could enter into a similar
relationship with another manufacturer.
FORMATION OF GENXON/TM/ JOINT VENTURE
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, will initially provide gas
turbine fleet asset planning and utilization services for both power generation
and mechanical drive markets. These planning services will result in the
delivery of an integrated product
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portfolio which includes XONON Combustion System for ultra low NOx emissions,
Woodward's control systems, turbine overhaul and upgrades, as well as contract
maintenance and service.
The initial capital commitment of the GENXON joint venture partners is $10
million--$2 million from Combustion Systems and $8 million from Woodward--
payable over time as the funds are required by the joint venture. These capital
infusions are predicated upon reaching certain milestones, and neither joint
venture partner is contractually required to make further capital infusions if
these milestones are not met. In addition to the capital commitment, Combustion
Systems has contributed to the joint venture an exclusive license for the use of
its catalytic combustion technologies and Woodward contributed to the joint
venture an exclusive license for the use of its instrumentation and control
systems for gas turbine catalytic combustion. These licenses only cover
applications serving the retrofit of out-of-warranty turbines not supported by
original equipment manufacturers. See "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SALE OF ADVANCED SENSOR DEVICES, INC.
In June 1996 Catalytica completed the sale of substantially all the assets
of its wholly owned subsidiary Advanced Sensor Devices, Inc. (ASD) to Monitor
Labs, Inc. ASD produced continuous emission monitors (CEMs) based on
proprietary catalytic sensors. The terms for selling substantially all of ASD's
assets included an initial payment of approximately $1.1 million at the closing,
a second payment of $0.5 million at year end, and a royalty stream based on
future revenues. See "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations."
REGULATORY OVERVIEW
In the United States, the Clean Air Act and amendments of 1970, 1979 and
1990 (collectively, the "Clean Air Act"), provide the regulatory guidelines for
the emissions of NOx, carbon monoxide and unburned hydrocarbons. The Clean Air
Act establishes the emission levels that must be met by power generation
sources. However, the emission requirements for specific sites are defined at
the state and local level.
Under the Clean Air Act, the EPA establishes ambient air quality standards.
Areas which meet these standards are considered "attainment areas", while areas
not meeting these standards are considered to be "non-attainment." In areas
that are considered to be non-attainment, the regulations require the emissions
of a new gas turbine to be "offset," i.e., if a new turbine is going to exceed a
specified emissions level, the user must offset the entire emissions of the
project so that the net increase of emissions for the area is zero. In many
cases there is a multiplier applied to the new emissions, so that the new
project combined with the "offset" must actually provide a net decrease in
emissions.
One of the ways to meet the offset requirements is to make contemporaneous
reductions of emissions at the same facility. As part of bringing a new project
on line, emission reductions at the facility are made by introducing controls on
existing equipment at the location or by taking existing equipment out of
service. If it is not possible to make sufficient contemporaneous reductions at
the facility, then the user must obtain Emission Reduction Credits ("ERC's")
from one of their own locations or from someone else's location to offset the
emissions from the project. There is a developing market for ERC's
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which provides economic value to sources with credits available from their
emission reductions and establishes the cost for those who must acquire such
credits.
In addition to environmental requirements in the United States, there are
increasing regulatory requirements relating to emissions in many other
countries, particularly Japan and in Western Europe.
TANAKA DEVELOPMENT AGREEMENT
Catalytica has developed its catalytic combustion technology since 1988
under a development agreement with Tanaka, Kikinzoku Kogyo ("Tanaka"), a major
Japanese precious metals company, under which Tanaka funded a significant amount
of the development effort until 1994. In January 1995, Catalytica and Tanaka
entered into a new agreement for further development and commercialization of
the catalytic combustion technology that supersedes their original agreement.
The new agreement divides commercialization rights to the technology between the
parties along market and geographic lines. Catalytica has exclusive rights to
manufacture and market catalytic combustion systems for large gas turbines
(greater than 25 megawatts power output) on a worldwide basis and for small- and
medium-sized gas turbines (25 megawatts power output or less) in the Western
Hemisphere and in Western Europe. Genxon also has exclusive rights to
manufacture and market catalytic combustors for Kawasaki turbines in the one to
three megawatt range developed with AGC on a worldwide basis. Tanaka has
reciprocal exclusive rights to manufacture and market catalytic combustors for
use in automobiles on a worldwide basis and for small- and medium-sized turbines
in regions outside of Catalytica's area of exclusivity. In each case, the
manufacturing and marketing party will pay a royalty on net sales to the other
party. The agreement allows for sales by an international customer of one party
into the other party's exclusive area for an additional royalty payment. Under
this new agreement, each party is responsible for its own development expenses,
and any invention made after May 1, 1995, is the sole property of the party
making the invention with the other party having a right to obtain a royalty-
bearing, nonexclusive license to use it in its areas of exclusivity.
COMBUSTION SYSTEMS PATENTS
Catalytica has an active patent program for its technology. A total of 15
patents have been issued in the United States and five United States patent
applications are pending for Combustion Systems' catalytic combustion
technology. Corresponding foreign applications have been filed in countries
that the Company believes represent significant markets throughout the world
pursuant to the PCT Patent Convention. These patents and patent applications
cover various aspects of the catalytic combustion technology, including catalyst
compositions, catalyst structure and design, multistage catalytic combustion
concepts, and certain modifications to gas turbine combustors. See "Item 7,
Risk Factors-- Patents and Intellectual Property."
COMPETITION
Combustion Systems expects to compete with the DLN systems being developed
by the turbine manufacturers, including General Electric, Allison, and Solar,
for their own turbines. Combustion Systems also competes with manufacturers of
SCR systems, including Mitsubishi Heavy Industries, Babcock-Hitachi, Engelhard
Corp. and Johnson Mathey. All of these competitors have substantially greater
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financial resources and larger research and development staffs than Combustion
Systems. The turbine manufacturers are also potential customers of Combustion
Systems and the Company expects to rely on these customers to help commercialize
its products. If these turbine manufacturers focus solely on their own
solutions and products, Combustion Systems competitive position in the OEM
market would be materially adversely affected.
COMBUSTION SYSTEMS' MANAGEMENT AND DIRECTORS
As part of the Company's strategy to create focused business units,
Combustion Systems has assembled a management group that includes dedicated
senior executives and independent directors who provide relevant industry
experience. The directors, special board advisor and management of Combustion
Systems include:
<TABLE>
<CAPTION>
NAME POSITION WITH COMBUSTION SYSTEMS
- ----------------- ---------------------------------------------
<S> <C>
William B. Ellis....... Director
William K. Reilly...... Director
Fred O'Such............ Director
Ricardo B. Levy........ Director
John A. Urquhart....... Special Board Advisor
Dennis A. Orwig........ President and Director
Lawrence W. Briscoe.... Chief Financial Officer and Director
Ralph Dalla Betta...... Vice President
</TABLE>
WILLIAM B. ELLIS joined the Board of Directors of Combustion Systems in
September 1995. Mr. Ellis is a Senior Fellow of the Yale University School of
Forestry and Environmental Studies. Mr. Ellis retired as chairman of Northeast
Utilities in 1995, where he also served as chief executive officer from 1983 to
1993. Mr. Ellis joined Northeast Utilities in 1976 as its Chief Financial
Officer. Mr. Ellis was a partner with McKinsey & Co. from 1969 to 1976. Mr.
Ellis serves on several other Boards of Directors, including the Connecticut
Mutual Life Insurance Company and Radian Corporation. He has a Ph.D. in
chemical engineering from the University of Maryland.
WILLIAM K. REILLY has served as a director of Combustion Systems since July
1995. He served as the Administrator of the United States Environmental
Protection Agency from 1989 to 1993. Mr. Reilly is currently an associate with
the Texas Pacific Group, an international investment partnership, and a visiting
professor of international studies at Stanford University. He currently serves
as a director of a number of corporations and organizations including E.I.
DuPont de Nemours and Co., the World Wildlife Fund and Yale University. Mr.
Reilly holds a B.A. from Yale University, an M.S. from Columbia University and a
J.D. from Harvard University.
FRED O'SUCH has served as a director of Combustion Systems since 1995. He
served as Group Vice President with Gulton Industries, Inc. from 1963 to 1970.
From 1970 to 1981, Mr. O'Such served as Group President and Vice President-
Corporate Development with Envirotech Corporation. From 1981 to 1986, Mr.
O'Such served as CEO of Xertex Corporation. Mr. O'Such currently is President
and CEO of Xertex Capital. Mr. O'Such is a member of several Boards of
Directors, and holds an MBA from Harvard University and a BS in Chemical
Engineering from Lehigh University.
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JOHN A. URQUHART has served as a special board advisor to Combustion
Systems since July 1995. He is the Vice Chairman of Enron Corp., a global
integrated natural gas company, and also serves on a number of other corporate
Boards of Directors including TECO Energy, Inc., Weir Group PLC, and Tampa
Electric Co. He previously served as the Senior Vice President of Industrial
and Power Systems at General Electric.
DENNIS A. ORWIG joined Catalytica in April 1996 as Executive Vice
President, and was named President and Director in June 1996. Prior to
Catalytica, he spent three years as an executive in the Office-of-the-President
of Elliott Company, a manufacturer of goods for the power generation and
petrochemical industries. From 1989 to 1993, Mr. Orwig served as President and
Chief Executive Officer of ABB Power Generation, Inc. He previously served as
Vice-President and General Manager of Combustion Engineering Corporation and in
various executive positions at AccuRay Corporation. Mr. Orwig holds B.S. degrees
in Chemical Engineering and Pulp & Paper Science from Miami University.
RALPH A. DALLA BETTA joined Catalytica in 1976 and serves as the Chief
Scientist of Catalytica and Vice President of Catalytica Combustion Systems.
Dr. Dalla Betta's major interests are in the design and synthesis of
heterogeneous catalysts, the detailed characterization of catalyst structure and
surface properties, and catalyst testing. His development work has included
catalytic combustion systems that produce low NOx emissions, selective
hydrogenation catalyst systems and a rapid technique for measuring noble metal
surface areas for analyzing vehicle emissions control catalysts. Dr. Dalla
Betta has a Ph.D. in physical chemistry from Stanford University.
RICARDO B. LEVY and LAWRENCE W. BRISCOE, who are also directors of
Combustion Systems, are officers and/or directors of Catalytica, Inc. For
information on their business backgrounds, see "Executive Officers."
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CATALYTICA, INC.
OTHER BUSINESS OPPORTUNITIES
In addition to Fine Chemicals and Combustion Systems, Catalytica is engaged
in a number of other research and development, consulting, and special projects,
primarily in the petroleum and petrochemical industries through its subsidiary,
Catalytica Advanced Technologies, Inc. Catalytica Advanced Technologies is
pursuing the use of nanoscale materials in catalysts with a joint venture
partner. The U.S. Department of Commerce's National Institute of Standards and
Technology is providing funding for this effort under a $2 million grant awarded
in 1994. Additional funding is being obtained from potential users of the
technology. Nanoscale technology has the potential to significantly lower
manufacturing costs and reduce byproduct waste by improving catalyst activity
and selectivity. During 1996, Catalytica Advanced Technologies successfully
scaled up this technology for a specific application for which a commercial
demonstration is being planned for 1997.
Commercial production in 1997 is the goal for an organometallic synthesis
project launched in 1996 by Catalytica Advanced Technologies. Metallocenes are
catalysts used in the production of plastics to impart improved and more
controlled properties. Catalytica has developed technology which permits the
manufacture of these specialized catalysts at lower production cost. Early in
1997, one catalyst was qualified by the first customer, and commercial
production is planned for later this year.
Another program Catalytica Advanced Technologies is pursuing involves the
conversion of natural gas to liquid hydrocarbons. Catalytica has been designing
and implementing the natural gas conversion program and is currently at the
continuous bench-scale phase of this program. Mitsubishi Oil and Petro-Canada
have reimbursed Catalytica for most of the costs of this development program.
In early March of 1997, the subsidiary was awarded a $2 million grant from the
U.S. Department of Commerce to further develop this technology.
HUMAN RESOURCES
At February 28, 1997, Catalytica employed a total of 117 employees. The
Company is not subject to any collective bargaining agreements. Catalytica
believes that it maintains good relations with its employees.
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EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- -------------------------------------------------
<S> <C> <C>
Ricardo B. Levy.......... 51 President, Chief Executive Officer and Director
James A. Cusumano........ 54 Chairman of the Board and Chief Technical Officer
Lawrence W. Briscoe...... 52 Vice President, Finance and Administration, and
Chief Financial Officer
W. Robert Epperly*....... 61 Vice President, Engineering
Ralph A. Dalla Betta..... 51 Vice President and Chief Scientist
</TABLE>
- ---------------------------
* W.R. Epperly resigned from the Company effective January 15, 1997.
At December 31, 1996, there were five individuals designated as executive
officers by the Board of Directors. The following sets forth certain
information with regard to the executive officers of Catalytica who are not
Directors with the exception of Ricardo Levy and James Cusumano:
RICARDO B. LEVY, a founder of Catalytica and a director since 1974, served
as Chief Operating Officer from the Company's inception in 1974 until August
1991, when he became President and Chief Executive Officer. Prior to founding
Catalytica, Dr. Levy was a founding member of Exxon's Chemical Physics Research
Team. Dr. Levy is an alumnus of Princeton and Harvard University's Executive
Management Program, and has a Ph.D. in chemical engineering from Stanford
University.
JAMES A. CUSUMANO, a founder of Catalytica and a director since 1974,
served as President of the Company from its inception in 1974 until 1985, when
he became Chairman of the Board and Chief Technical Officer. Dr. Cusumano
served as Director of Catalysis Research and Development at Exxon's Corporate
Research Laboratory from 1967 to 1974. Dr. Cusumano has a Ph.D. in physical
chemistry from Rutgers University.
LAWRENCE W. BRISCOE joined Catalytica in July 1994 as Chief Financial
Officer and Vice President, Finance and Administration. Prior to joining the
Company, he held various executive and financial positions including President
and Chief Operating Officer and Director of Brae Corporation, Vice President of
Corporate Development at Transamerica Corp., and Chief Executive Officer of U.S.
Commercial Telephone Corp. Mr. Briscoe has an M.B.A. from Stanford University,
an M.S. in business from the University of Southern California, and a B.S. in
electrical engineering from the University of Missouri.
W. ROBERT EPPERLY joined Catalytica in March 1992 as Vice President,
Engineering. Mr. Epperly was named President, Catalytica Advanced Technologies
Inc. in September 1995. From April 1990 to March 1992, Mr. Epperly was an
independent consultant. From 1986 to 1990, Mr. Epperly served in various
positions at Fuel Tech N.V., a firm specializing in low-emission combustion
technology, most recently from 1989 to 1990 as Chief Executive Officer. From
1957 to 1986, he was with Exxon
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Research and Engineering Company, most recently as General Manager of Corporate
Research. Mr. Epperly has an M.S. in chemical engineering from Virginia
Polytechnic Institute.
RALPH A. DALLA BETTA has served as Vice President since 1979 and has been a
Chief Scientist at Catalytica since 1976. From 1972 to 1976 Dr. Dalla Betta
worked at Ford Motor Company's Catalysis Group in the Fuel Sciences Department.
Dr. Dalla Betta has a Ph.D. in physical chemistry from Stanford University.
ITEM 2. PROPERTIES
Catalytica's headquarters and research and development facilities, based in
Mountain View, California, occupy three buildings covering approximately 60,000
square feet. The Company's lease expires on December 31, 1998, with a five-year
option for renewal. The Company's research and development facility is adequate
for the Company's needs for the foreseeable future.
Catalytica's Fine Chemicals' manufacturing facility is located in East Palo
Alto, California, on approximately five acres. The Company owns the buildings,
but leases the land at the site from Rhone Poulenc Inc. The initial lease term
is 15 years and expires on November 30, 2008, after which the Company has
options to extend for an additional 14 years. 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. Although there can be no assurance the
Company will obtain orders sufficient to fill the capacity by such time, the
Company's manufacturing facility for pharmaceutical intermediates is expected to
reach capacity in 1997. In order to augment its current pharmaceutical
intermediates manufacturing capacity, the Company entered into a non-binding
letter of intent with Glaxo Wellcome to acquire Glaxo's pharmaceutical
production facility in Greenville,
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North Carolina. See "Item 1, Business--Proposed Transaction with Glaxo" and
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
Catalytica's Common Stock is traded in the over-the-counter market under
the NASDAQ symbol "CTAL." The following table shows the range of high and low
closing prices of Catalytica's Common Stock as reported by the NASDAQ National
Market System by quarter for 1996 and 1995. Such prices represent interdealer
prices and do not include retail mark-ups or mark-downs or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
HIGH LOW HIGH LOW
----- ------ ------ ------
<S> <C> <C> <C> <C>
Quarter ended 3/31 $4 3/8 $3 3/4 $4 3/4 $2
Quarter ended 6/30 5 3 3/4 4 5/8 3 1/8
Quarter ended 9/30 4 1/8 3 5/8 5 5/8 3 1/4
Quarter ended 12/31 4 1/4 3 5/8 5 5/8 3 3/4
</TABLE>
At February 28, 1997, there were approximately 228 holders of record of the
Company's Common Stock.
The market price of the Common Stock is likely to be highly volatile.
Factors such as the results of research and development and pilot scale testing
by Catalytica and its collaborative partners, 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, fluctuations in the Company's operating results,
including changes in the rate of growth and profitability of its Fine Chemicals
business, 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.
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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial data of Catalytica. This
historical data should be read in conjunction with the Consolidated Financial
Statements and the related Notes thereto in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7. No
cash dividends were declared in any of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product Sales ..................... $ 9,813 $ 8,858 $ 5,800 $ -- $ --
Research and development .......... 6,501 4,766 6,395 8,353 9,628
-------- -------- -------- -------- --------
Total Revenues ........... 16,314 13,624 12,195 8,353 9,628
Net loss .......................... (5,192) (8,687) (9,145) (9,003) (3,741)
Net loss per share ................ (0.27) (0.55) (0.61) (0.66) (0.83)
Cash, cash equivalents, short-term,
and long-term investments....... 23,821 20,902 13,614 23,987 3,268
Total assets ...................... 41,003 31,239 22,186 31,720 12,536
Long-term debt .................... 1,524 1,556 1,573 930 928
Stockholders' equity .............. 17,263 22,029 15,779 24,438 4,891
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain certain forward-looking statements which involve risks and
uncertainties, including statements regarding the Company's strategy, financial
performance, and revenue sources. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under "Risk Factors" and elsewhere in this
report.
Catalytica is developing advanced products and manufacturing processes
which use the Company's proprietary chemical catalysis technologies. These
products and processes can yield economic and environmental benefits, including
lower manufacturing costs and reduced hazardous byproducts associated with
traditional manufacturing processes. The Company has developed significant
expertise in catalysis, an essential step in the production of many industrial
products. Approximately 98% of the Company's fiscal 1996 product sales are
derived from sales of fine chemicals products and its research and development
revenues are derived principally from the Company's Combustion Systems and
Advanced Technology businesses. In December 1993, the Company acquired a
manufacturing facility from Novartis (formerly Sandoz) to obtain fine chemicals
manufacturing capacity. As part of the acquisition, Novartis entered into a
five-year contract for the manufacture of a fine chemical intermediate. Under
the terms of the agreement, Novartis transferred certain equipment and
technology relating to the manufacture of the particular intermediate, and
agreed to purchase all of its requirements of such
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intermediate from the Company, subject to certain volume limitations. These
requirements represent approximately $3.0 million of revenue per year. However,
the timing of receipt of revenues under this contract varies, depending on the
timing of receipt of orders and shipment of products. During the years ended
December 31, 1996 and 1995, 18% and 49% respectively of the Company's fine
chemical product revenues were derived from sales to Novartis. The Company has
no contractual volume commitments from Novartis beyond May 31, 1998, and there
can be no assurance the Novartis contract will be renewed. The Company plans to
replace the Novartis contractual products with product sales to new customers in
the pharmaceutical industry. The agreement may be terminated by either party
upon 30 days prior written notice for failure to perform a material provision of
the agreement, if such failure is not cured within 60 days after receipt of the
notice.
The Company's business has not been profitable to date, and as of December
31, 1996, the Company had an accumulated deficit of $48.2 million. The Company
had anticipated incurring additional losses for at least the next several
quarters. However, future results would be significantly impacted by the
completion of the acquisition of the Glaxo Wellcome facility (See Note 13 of
Notes to Financial Statements). The Company expects that future operating
results will fluctuate from quarter to quarter, as a result of differences in
the amount and timing of expenses incurred and the revenues received. In
particular, the Company's operating results are affected by the size of and
timing of receipt of orders for and shipments of its fine chemicals products, as
well as the amount and timing of payments and expenses under the Company's
research and development contracts. In 1994, the Company began deriving revenues
from the sale of fine chemicals products, and the Company expects that in the
future it will rely increasingly on product sales for its revenues. To achieve
profitable operations, Catalytica must increase significantly its commercial
sales of fine chemicals and successfully develop, manufacture, introduce, and
market or license its combustion systems. There can be no assurance that the
Company will be able to achieve profitability on a sustained basis.
On May 8, 1996, Catalytica Fine Chemicals, Inc., announced that Pfizer Inc.
had signed an agreement to infuse $15 million in Catalytica Fine Chemicals.
These funds give Pfizer a 15 percent interest in Catalytica Fine Chemicals Inc.
and a five-year R&D commitment by Catalytica Fine Chemicals to develop new
processes and technology for the manufacture of Pfizer products. Prior to this
investment, Catalytica Fine Chemicals was a wholly-owned subsidiary of
Catalytica, Inc. (See Note 2 of Notes to Financial Statements).
During the past four years, Catalytica Fine Chemicals and Pfizer have
collaborated on the development of proprietary processes for key intermediate
products for several of Pfizer's promising new pharmaceuticals. The Pfizer
drugs are at varying stages of approval by the Food and Drug administration,
ranging from Phase II clinical trials through the New Drug Application stage.
In the past, Catalytica Fine Chemicals has manufactured intermediates for
certain Pfizer drugs and anticipates becoming a supplier of intermediates to
Pfizer for other pharmaceutical products in the future. There can be no
assurance, however, that orders will be forthcoming from Pfizer.
On June 28, 1996 Catalytica completed the sale of substantially all the
assets of Advanced Sensor Devices, Inc. (ASD) to Monitor Labs, Inc. Prior to
the sale, ASD produced continuous emission monitors (CEMs) based on proprietary
catalytic sensors. The terms for selling substantially all of ASD's
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assets included an initial payment of approximately $1.1 million at the closing,
a second payment of $0.5 million a year end, and a royalty stream based on
future revenues. The Company recorded a gain of $0.9 million on the sale of
these assets (See Note 3 of Notes to Financial Statements).
On October 15, 1996 Catalytica's wholly owned subsidiary Catalytica
Combustion Systems Inc. (CCSI) and Woodward Governor Company ("Woodward") 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, will initially provide gas
turbine fleet asset planning and utilization services for both power generation
and mechanical drive markets. These planning services will result in the
delivery of an integrated product portfolio which includes CCSI's XONON/TM/
system for ultra low NOx emissions, Woodward's control systems, turbine overhaul
and upgrades, as well as contract maintenance and service.
The initial capital commitment of the GENXON joint venture partners is $10
million--$2 million from CCSI and $8 million from Woodward--payable over time as
the funds are required by the joint venture. These capital infusions are
predicated upon reaching certain milestones, and neither joint venture partner
is contractually required to make further capital infusions if these milestones
are not met. In addition to the capital commitment, CCSI has contributed to the
joint venture an exclusive license for the use of its catalytic combustion
technology, and Woodward contributed to the joint venture an exclusive license
for the use of its instrumentation and control systems for gas turbine catalytic
combustors. CCSI will account for its share of the joint venture gain or loss
upon the first cash infusion totaling $1.0 million which occurred on January 3,
1997 upon completion of a milestone. Prior to January 3, 1997, the joint
venture was being funded entirely by Woodward (See Note 3 of Notes to Financial
Statements).
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Revenues were $16.3 million, $13.6 million, and $12.2 million for 1996,
1995, and 1994, respectively. The Company's overall revenues increased by
approximately 20% in 1996 and 12% in 1995, reflecting significant growth in fine
chemical product sales. While the Company's research and development revenues
declined somewhat in 1995, new funding from external partners including the
Pfizer research agreement signed earlier this year has led to an upturn in this
revenue category during 1996.
Prior to 1994, substantially all revenues for the Company were from
research agreements. In December, 1993, the Company acquired a manufacturing
facility from Novartis to obtain fine chemicals manufacturing capacity. As part
of the acquisition, Novartis entered into a five-year contract for the
manufacture of a fine chemical intermediate. During 1994, the first year of
operation of the new manufacturing facility, $5.6 million of revenues were
related to fine chemicals product sales--much of it attributable to Novartis.
During 1995, the Company continued to focus on the commercialization of its
technologies. Fine chemicals product sales increased to $8.5 million, a 52%
increase over 1994. Most of this increase was due to shipments of
pharmaceutical intermediates products to new customers, which the Company
expects to rely on for an increasing portion of the Company's revenues. The
remaining
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product revenues for 1995 of $0.4 million was attributable to sensor sales and
the first commercial shipments of the new CEMcat/TM/ continuous emissions
monitor produced by the Company's wholly-owned subsidiary Advanced Sensor
Devices. Research revenue declined in 1995, reflecting the full year impact of
the cessation of funding on the gasoline alkylation program which occurred in
mid 1994, and the absence of contractual payments related to the original
agreement with Conoco and Neste.
During 1996, product sales continued their upward trend increasing 11% due
to increased shipments of fine chemical products to new and existing customers.
Sales in 1996 were negatively impacted in part by the timing of a contractual
shipment of product for Novartis which normally occurs in the fourth quarter
each year but this year was deferred at their request to the first quarter of
1997. This in part explains the $1.3 million increase in finished goods
inventory over 1995. The 36% increase in research revenues reflects initiation
of the aforementioned new funded research commitment associated with the five-
year research and development agreement between Catalytica Fine Chemicals and
Pfizer plus increased funding of the Company's work on nanoscale materials used
in catalysts and related contract research activities. The increase in research
revenue was also aided by a $0.5 million reimbursement by the newly formed
GENXON joint venture for R&D expenses incurred prior to the formation of the JV
by Catalytica Combustion Systems, Inc. The increase in research revenues and to
a much lesser extent the increase in product sales were partially offset by the
discontinuation of the sensor business on June 28, 1996 following the sale of
all the assets of Advanced Sensor Devices, Inc. (ASD) to Monitor Labs, Inc. (See
Overview above). ASD generated $0.5 million in research revenues and $0.4
million in product sales in 1995 as compared to no research revenues and $0.2
million in product sales in 1996.
In 1994, 1995, and 1996, a substantial amount of the Company's revenues
were derived from a few research agreements, the product supply agreement with
Novartis, and in 1996, the new five-year research and development agreement
between Catalytica Fine Chemicals and Pfizer. In the fiscal year ended December
31, 1996, revenue recognized from agreements and/or contracts with Upjohn,
Merck, Novartis, Pfizer and Mitsubishi Oil represented 17%, 13%, 11%, 11%, and
9% of total revenues, respectively. (See Note 1 of Notes to Financial
Statements).
The $9.1 million in cost of goods sold for 1996 represents a 9% increase
over 1995, and corresponds with the 11% product revenue increase for the same
period as noted above. The increases in 1995 over 1994 levels were much larger
as 1994 represented the first year of production at the new facility. Cost of
goods sold for 1995 were 51% higher than 1994 while product revenues were 53%
higher than in 1994. Gross margins were 8% in 1996, 6% in 1995, and 5% in 1994.
This trend reflects increasing utilization of the capacity that exists at the
facility. Full utilization of current capacity would occur at product revenues
in the $15 to $20 million range depending on product mix. Margins on the fine
chemical products are subject to fluctuations from year-to-year due to various
factors including the mix of products being manufactured, manufacturing
efficiencies achieved on production runs, the length of down-time associated
with setting up new production runs, and numerous other variables present in the
chemical manufacturing environment.
Research and development expenses were $9.7 million, $9.8 million, and
$13.0 million for the years ended December 31, 1996, 1995, and 1994,
respectively. Although research and development
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expenses for 1996 were down slightly from the previous years level, the actual
level of research activity occurring at Catalytica increased during 1996. This
isn't reflected on the Company's financial statements largely due to a shift of
certain catalytic combustion research and development costs from Catalytica to
the newly formed GENXON joint venture (See Note 3 of Notes to Financial
Statements). This transfer of R&D funding occurred beginning on August 1, 1996
and resulted in a shift of approximately $1.8 million of research and
development costs being financed by the joint venture rather than Catalytica. It
should be noted, however, that without the funding provided by the joint
venture, the level of R&D spending on the retrofit technology would likely have
been much lower if Catalytica alone was funding this technology. On an absolute
basis, i.e., excluding the $1.8 million transfer of R&D expenses, R&D spending
on catalytic combustion technology actually increased $1.9 Million over 1995
levels--although all of that increase was funded and recorded on the books of
the joint venture. Cessation of all research activities of Advanced Sensor
Devices (ASD) following the sale of its assets (See Note 3 of Notes to Financial
Statements) also contributed approximately $0.8 million towards the reduction of
R&D expenses. This decrease in R&D funding during 1996 due to the formation of
the joint venture and sale of ASD was mostly offset by increases in R&D expenses
elsewhere in the Company reflecting new work on nanoscale materials used in
catalysts and related contract research activities, plus increased research
activities supporting the research commitment to Pfizer Inc. (See Note 2 of
Notes to Financial Statements).
Research and development expenses for 1995 decreased 25% as compared to
1994, reflecting the Company's continuing emphasis on commercialization of its
products, and a resulting shift of resources away from research and development
into sales and administration. The Company also realized the full-year impact
of reduced research and development expenses as a result of its restructuring in
the fourth quarter of 1994 (See Note 8 of Notes to Financial Statements).
Research and development expenses consist primarily of salaries and benefits for
scientific and research personnel, related support staff, consultants, supplies,
occupancy costs, and depreciation.
Of the Company's research and development expenses for 1996, approximately
42% were utilized to develop the Company's advanced combustion systems
technology, approximately 24% was spent on the Company's fine chemicals
technologies, and the remaining approximately 34% was spent on various other
technologies, substantially all of which was done at the specific request of,
and funded by, third parties.
Selling, general, and administrative expenses (SG&A) were $4.5 million for
each of the years ended December 31, 1996, and 1995, and $3.1 million for the
year ended December 31, 1994. Selling, general, and administrative expenses for
1995 increased 45% compared to 1994, primarily due to an increase in sales
personnel in the fine chemicals business and an increase in sales and
administrative expenses associated with Advanced Sensor Devices, a subsidiary of
Catalytica, and the shifting of certain resources from research and development.
Although the aggregate selling, general, and administrative expenses remained
flat for the full year 1996 as compared to 1995, there were changes in some of
the components. Increases in SG&A expense levels in some business units were
largely offset by two factors--the discontinuation of the Advanced Sensor
Devices subsidiary at the end of the second quarter and the formulation of the
new GENXON joint venture which resulted in a shift of some administrative
expenses to the joint venture as certain Catalytica employees spent time on
joint venture organization
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activities for which the Company was reimbursed by the joint venture entity.
Once the joint venture becomes fully staffed, these management activities being
temporarily manned by Catalytica employees will be taken over by full time
GENXON employees. Thus, to the extent that Catalytica's SG&A costs are being
reimbursed by GENXON which amounted to $0.2 million in 1996, these reductions
should be considered temporary. The reduction in SG&A costs due to
discontinuation of Advanced Sensor Devices, however, is a permanent reduction.
If the company does not consummate the proposed transaction with Glaxo Wellcome,
SG&A expense would increase significantly to reflect the reclassification of
acquisition costs which will be capitalized as part of the acquisition costs
starting in the first quarter of 1997. Prior to the first quarter of 1997, these
acquisition costs were recorded as SG&A expense as they were incurred. See "Item
1, Business--Proposed Transaction with Glaxo Wellcome," as well as the
description below.
In 1994, the Company took a restructuring charge of $499,000, primarily
related to costs associated with an 18% workforce reduction in the third quarter
of 1994.
The $0.9 million gain on sale of assets represents the net realized gain
over book value on the sale of ASD's assets to Monitor Labs, Inc. on June 28,
1996 (See Note 3 of Notes to Financial Statements).
Net interest income was $0.8 million, $0.3 million, and $0.8 million in
1996, 1995 and 1994, respectively. Net interest income decreased 56% in 1995
when compared to 1994 due to lower average balances of cash and short-term
investments as these funds were used to support the Company's operations, and
incremental interest expense associated with new loans that funded a portion of
capital improvements at the Fine Chemicals manufacturing facility. Interest
income was favorably impacted during the last two months of 1995 due to
significantly higher cash and short-term investment balances resulting from the
proceeds of the Company's secondary offering completed on November 3, 1995.
This trend continued into 1996 and was helped further by the $15 million cash
infusion by Pfizer on May 8, 1996. The higher cash balances resulted in a 144%
increase in net interest income in 1996 when compared to 1995. This increase in
interest income in 1996 was partially offset by increased interest expense on a
line of credit and other short-term working capital financing at the Catalytica
Fine Chemicals Bay View manufacturing facility.
The Company's net loss was $5.2 million, $8.7 million, and $9.1 million in
1996, 1995, and 1994, respectively. The decrease in the net loss in 1996 as
compared to 1995 was largely due to the discontinuation of all activities at the
Advanced Sensors Devices Subsidiary upon its sale to Monitor Labs coupled with
the $0.9 million gain on the sale of the subsidiary's assets. The formation of
the GENXON joint venture also contributed significantly to the reduced net loss
in 1996. The decrease in the net loss in 1995 as compared to 1994 reflects
significant reductions in internal funding of research and development
activities coupled with a positive contribution of the fine chemicals product
sales, both partially offset with increased spending on general, sales, and
marketing activities. For discussion of the Company's net operating loss
carryforwards, see Note 9 of Notes to Financial Statements.
In 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted
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cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The Company adopted Statement 121 in the first quarter of 1996
and the impact was not material.
Also in 1995, the FASB issued Statement No. 123, Accounting for Stock Based
Compensation, which provides an alternative to APB Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock based compensation to
employees. The Company has elected to account for stock based compensation to
employees in accordance with Opinion 25, providing only pro forma disclosures
required by Statement 123.
FUTURE RESULTS
This Section contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
certain factors set forth under "Risk Factors" and elsewhere in this report.
The Company expects to incur additional operating losses at least through
the next several quarters due to continued self-funding of research and
development expenditures coupled with higher sales, general and administrative
expenses. These losses, however, should decrease as the Company expands the
sales of its Fine Chemicals business and moves this unit toward profitability.
The expected increase in general and administrative expenses reflect incremental
sales and marketing efforts to support increased business at Catalytica Fine
Chemicals. The Company's future results would be significantly impacted upon
the completion of the acquisition of the Glaxo Wellcome facility. See "Item 1,
Business--Proposed Transaction with Glaxo," "Item 2, Properties," as well as
the description below.
In the past, losses have fluctuated from quarter to quarter due to the
seasonality of the fine chemical products manufactured for Novartis and
differences in the timing of expenses incurred and the revenues received from
collaborative agreements. Such fluctuations may be somewhat reduced in the
future as products that are planned to be manufactured in the Bay View facility
fill up excess capacity and even out production and as the Company continues its
shift from a research and development company to a commercial entity with
product sales.
The Company expects to continue certain of its research and development
programs, which include the self-funding of expenditures that are not covered by
payments from collaborative partners. The Company believes its internally
funded research projects have the potential to lead to commercial sales in the
next few years. The Company anticipates that in the future, research that does
not have the potential for near-term commercialization will be conducted only
when funded by collaborative partners.
As a result of the Company's acquisition of the Bay View manufacturing
facility in the fourth quarter of 1993, 1994 was the first year to include
significant revenues from fine chemicals product sales, incremental costs
associated with producing these products, and incremental fixed manufacturing
costs. During 1994, 1995 and 1996 a significant amount of the capacity at the
Bay View facility was underutilized. The Company is planning to use a
substantial portion of this capacity for the production of products utilizing
proprietary technologies for both the pharmaceutical and nonpharmaceutical
markets. During 1997, the Company plans additional capital expenditures in Bay
View to expand its
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capacity for certain types of products. Sales and marketing efforts increased
significantly in 1995, with much of that effort directed towards finding other
fine chemical products that can be manufactured under contract for new
customers. From 1994 to 1995, these efforts resulted in a 52% increase in
product sales, primarily to new customers. From 1995 to 1996, product sales
increased by 11%. Additional incremental product sales are expected in the
future as a result of these sales and marketing efforts. There is no assurance,
however, that additional revenues from products under development, or from these
sales efforts, will be achieved.
The Company's ability to increase revenues from its fine chemicals business
will also depend, in part, on the availability of manufacturing capacity.
Although there can be no assurance the Company will obtain orders sufficient to
fill the capacity by such time, the Company's manufacturing facility for
pharmaceutical intermediates is expected to reach capacity in 1997. The
Company's ability to increase its revenues from the fine chemicals business
could be constrained if the Company is unable to acquire additional plant
capacity. The Company could experience delays in manufacturing certain
products, which could result in the loss of contracts or customers. There can
be no assurance that the Company will be able to acquire additional plant
capacity on acceptable terms, if at all. In order to augment its current
pharmaceutical intermediates manufacturing capacity, the Company entered into a
non-binding letter of intent with Glaxo Wellcome to acquire Glaxo's
pharmaceutical production facility in Greenville, North Carolina. See "Item 1,
Business--Proposed Transaction with Glaxo", "Item 2, Properties", as well as the
description below.
Catalytica faces challenges in advancing its programs from bench and pilot
scale to cost-effective commercial products and processes. There can be no
assurance that the Company will successfully address the challenges that will
arise during the development of each of its programs.
PROPOSED TRANSACTION WITH GLAXO WELLCOME
The Company and Glaxo Wellcome Inc. ("Glaxo") signed a non-binding letter
of intent effective February 5, 1997 to enter into a series of transactions
pursuant to which the Company would acquire (the "Acquisition") Glaxo's
pharmaceutical production facility in Greenville, North Carolina (the
"Facility") as part of its expansion plans for Fine Chemicals.
The proposed agreement calls for the Company to purchase all of the
buildings and equipment at the 1.8 million-square-foot Facility, as well as the
approximately 600 acres of land on which it is situated. Under the agreement,
the Company will enter into long term manufacturing contracts to supply
designated Glaxo Wellcome products, including bulk active chemicals, final
dosage forms, and sterile products, with a potential revenue to the Company
estimated at $800 million over five years.
Under the terms of the proposed Acquisition, the Company will pay Glaxo an
undisclosed amount. The Acquisition will be financed by a combination of an
equity investment in Catalytica by Morgan Stanley Capital Partners and debt from
a major global financial institution. In addition, Glaxo will receive a small
equity stake in Fine Chemicals. The agreement also provides for Glaxo to
receive a share of the profits from Catalytica's production of products in the
Greenville site's sterile products facility. Terms of the equity financing are
expected to be structured to reflect the valuation of the
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Company's businesses prior to the announcement of the Acquisition. Terms of the
debt financing are expected to be structured to reflect anticipated cash flows
under the supply contracts with Glaxo Wellcome and other parties.
No definitive agreements have been signed by the Company and Glaxo relating
to the proposed Acquisition. As a result, there can be no assurance, and
stockholders should not assume, that the proposed transactions will be
completed. The completion of the Acquisition is subject to a number of risks
and uncertainties, including the following: (i) completion of the negotiation
of definitive documents, including an asset purchase agreement and long term
supply contracts for chemical, final dosage and sterile products; (ii)
completion of the due diligence review by the Company and its equity and debt
financing sources; (iii) completion of the negotiation of the terms of the
substantial equity and debt financings required to consummate the Acquisition;
and (iv) receipt of certain regulatory approvals and consents, including
stockholder approval.
In addition, the proposed Acquisition, which is not expected to close prior
to the latter portion of the second quarter of 1997, will require significant
management time and legal, accounting and other expenditures, whether or not the
transactions are completed. In the event the Acquisition is consummated, the
additional facilities, employees and business volumes will substantially
increase the Company's expenses and working capital requirements and place
substantial burdens on the Company's management resources. Furthermore, the
success of the Acquisition depends on the levels of new manufacturing business
developed by the Company, and the related terms negotiated by the parties. In
the event the Company does not achieve additional new business from Glaxo and
other customers on terms sufficient to offset the costs associated with
operating and maintaining the new facilities, and with servicing the debt
associated with the acquisition of the new facilities, the Company's results of
operations would be materially adversely affected. See "Item 1, Business--
Proposed Transaction with Glaxo" and "Item 2, Properties."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private placements of
equity securities, an initial public offering of its Common Stock on February 8,
1993, a secondary public offering on November 3, 1995, a $15 million cash
infusion from Pfizer on May 8, 1996, revenues from collaborative research
agreements, and starting in 1994, product revenues. At December 31, 1996, the
Company had cash, cash equivalents and short-term investments totaling $23.8
million.
Primarily as a result of the Company's self-funding of certain research and
development programs, the Company generated net operating losses for each of the
three years in the period ended December 31, 1996, and used $19.0 million of
cash for its operating activities. In addition, the Company expended $8.4
million of cash for capital expenditures and repaid approximately $6.1 million
of debt obligations during this same three-year period. The primary sources of
cash have been from financing activities, including $23.6 million received from
the sale of Common Stock in the parent corporation and its subsidiary Catalytica
Fine Chemicals, Inc., plus $9.7 million from debt issuances during the three
years ended December 31, 1996.
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In 1994, 1995 and 1996, the Company obtained various lines of credit to
fund capital purchases and future working capital needs (See Note 7 of Notes to
Financial Statements). One of these lines of credit collateralized with
accounts receivable was increased in 1995 to $2.0 million from $1.0 million in
1994. It was further increased to $3.5 million in 1996. As of December 31,
1996, the Company had approximately $2.3 million outstanding under this line of
credit. The loan includes a covenant that requires the Company's fine chemicals
manufacturing facility to achieve certain minimum levels of profitability. At
June 30, 1995, the Company was in violation of this covenant. During the
quarter ended June 30, 1995, the requirement was for break-even operations for
such facility. The actual loss with respect to such facility for the quarter
amounted to $72,000. The bank agreed to waive the covenant for the quarter
ended June 30, 1995, and effective September 28, 1995, and further amended on
November 30, 1995, the bank and the Company entered into an agreement which
reduced certain financial covenants, including the minimum profitability
requirement. As a result of this amendment as of September 30, 1995, the
Company was not in violation of the covenants contained in its line of credit.
Accordingly, amounts payable under the line of credit agreement due more than
one year from the balance sheet date continue to be classified as long-term.
The company has not been in violation of any bank covenants subsequent to the
initial violation in 1995. To the extent the Company does not comply with the
required financial covenants in the future, there can be no assurance the bank
will waive the covenants. Failure to comply with the financial covenants could
result in acceleration of payment of the principal amount and interest due under
the line and termination of the line of credit.
The Company's operations to date have required substantial amounts of cash.
The Company anticipates that existing capital resources, product revenues, and
research and development revenues will enable the Company to maintain current
and planned operations for at least the next 12 months. The Company's future
capital requirements will depend on many factors, including rate of
commercialization of the Company's catalytic combustion systems, the need to
expand manufacturing capacity for both its fine chemicals and combustion systems
business, and the completion of the proposed transaction with Glaxo. However,
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. If adequate funds
are not available, the Company may be required to delay, scale back or eliminate
some or all of its research and product development programs. Although there
can be no assurance the Company will obtain orders sufficient to fill the
capacity by such time, the Company's manufacturing facility for pharmaceutical
intermediates is expected to reach capacity in 1997. In order to augment its
current pharmaceutical intermediates manufacturing capacity, the Company entered
into a non-binding letter of intent with Glaxo Wellcome to acquire Glaxo's
pharmaceutical production facility in Greenville, North Carolina. See "Item 1,
Business--Proposed Transaction with Glaxo" and "Item 2, Properties," as well as
the description above.
RISK FACTORS
History of Operating Losses and Uncertainty of Future Results
The Company's business has not been profitable to date, and as of December
31, 1996, the Company had an accumulated deficit of $48.2 million. The Company
anticipates incurring additional
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losses for at least the next several quarters. The Company expects that losses
will fluctuate from quarter to quarter as a result of differences in the amount
and timing of expenses incurred and revenues received. In particular, the
Company's operating results are affected by the size and timing of receipt of
orders for and shipments of its fine chemicals products, as well as the amount
and timing of payments and expenses under the Company's research and development
contracts. Through 1993, substantially all of the Company's revenues were
derived from research and development contracts. Most of the Company's research
and development contracts are subject to periodic review by the funding partner,
which may result in modifications, including reduction or termination of
funding. The Company's research and development revenues declined in 1995 and
1994 as certain research projects were terminated. There can be no assurance the
Company will continue to receive research and development funding, and the
Company expects that it will increasingly rely on product sales for its
revenues.
In 1994, the Company began deriving revenues from the sale of fine
chemicals products. During the past several years, a significant portion of the
Company's product revenues has been derived from sales to Novartis Agro, Inc.
("Novartis") under a five-year contract pursuant to which Novartis committed to
buy certain minimum volumes for the first four years and eight months. (See Note
1 of Notes to Financial Statements, "Major Customer Information"). The Company
has no contractual volume commitment from Novartis beyond May 31, 1998. There
can be no assurance the Novartis contract will be renewed or replaced with new
business. The Novartis agreement may be terminated by either party upon 30 days
prior written notice for failure to perform a material provision of the
agreement, if such failure is not cured within 60 days after receipt of notice.
The Company expects that it will need to manufacture new products to increase
revenue. Typically, new products have lower gross margins during the initial
manufacturing phase, which could have an adverse effect on the Company's results
of operations. To achieve profitable operations, Catalytica must significantly
increase its commercial sales of fine chemicals and successfully develop,
manufacture, introduce and market or license its combustion systems and
catalytic processes. There can be no assurance that the Company will be able to
achieve profitability on a sustained basis, or at all.
Commercialization; Shift from Research and Development
The Company's success will depend on its ability to complete the transition
from emphasizing research and development to full commercialization and sale of
its products. The Company began manufacturing, marketing and selling
pharmaceutical intermediates in 1994. Success of the Company's fine chemicals
business is dependent upon development and commercialization of appropriate
catalytic processes for new customers and new fine chemicals products. There
can be no assurance the Company will be able to develop and commercialize such
processes. In addition, sales of certain of the Company's fine chemicals
intermediates are dependent upon the customer obtaining clearance from the
United States Food and Drug Administration ("FDA") for marketing of the
customer's end-product. Failure of the Company's customers to obtain the
necessary FDA clearance would have an adverse affect on sales of certain fine
chemicals products.
The Company, 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 products will be required to undergo
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rigorous testing by turbine manufacturers. Ultimate sales of the Company's
combustion system products will depend upon the acceptance and users of the
Company's technology by a limited number of turbine manufacturers and the
Company's ability to enter into commercial relationships with these
manufacturers. The Company's subsidiary, 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, the company 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 products will be economically
attractive when compared to competitive products. See "Item 1,
Business--Formation of GENXON Joint Venture."
Proposed Transaction With Glaxo Wellcome
The Company and Glaxo Wellcome Inc. ("Glaxo") signed a non-binding letter
of intent effective February 5, 1997 to enter into a series of transactions
pursuant to which the Company would acquire (the "Acquisition") Glaxo's
pharmaceutical production facility in Greenville, North Carolina (the
"Facility") as part of its expansion plans for Fine Chemicals.
The proposed agreement calls for the Company to purchase all of the
buildings and equipment at the 1.8 million-square-foot Facility, as well as the
approximately 600 acres of land on which it is situated. Under the agreement,
the Company will enter into long term manufacturing contracts to supply
designated Glaxo Wellcome proscription products with a potential revenue to the
Company estimated at $800 million over five years.
Under the terms of the proposed Acquisition, the Company will pay Glaxo an
undisclosed amount. The Acquisition will be financed by a combination of an
equity investment in Catalytica by
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Morgan Stanley Capital Partners and debt from a major global financial
institution. In addition, Glaxo will receive a small equity stake in Fine
Chemicals. The agreement also provides for Glaxo to receive a share of the
profits from Catalytica's production of medicines in the Greenville site's
sterile products facility. Terms of the equity financing are expected to be
structured to reflect the valuation of the Company's businesses prior to the
announcement of the Acquisition. Terms of the debt financing are expected to be
structured to reflect anticipated cash flows under supply contracts with Glaxo
Wellcome and other parties.
No definitive agreements have been signed by the Company and Glaxo relating
to the proposed Acquisition. As a result, there can be no assurance, and
stockholders should not assume, that the proposed transactions will be
completed. The completion of the Acquisition is subject to a number of risks
and uncertainties, including the following: (i) completion of the negotiation
of definitive documents, including an asset purchase agreement and long term
supply contracts for chemical, final dosage and sterile products; (ii)
completion of the due diligence review by the Company and its equity and debt
financing sources; (iii) completion of the negotiation of the terms of the
substantial equity and debt financings required to consummate the Acquisition;
and (iv) receipt of certain regulatory approvals and consents, including
stockholder approval.
In addition, the proposed Acquisition, which is not expected to close prior
to the latter portion of the second quarter of 1997, will require significant
management time and legal, accounting and other expenditures, whether or not the
transactions are completed. In the event the Acquisition is consummated, the
additional facilities, employees and business volumes will substantially
increase the Company's expenses and working capital requirements and place
substantial burdens on the Company's management resources. Furthermore, the
success of the Acquisition depends, in part, on the levels of manufacturing
business developed by the Company. In the event the Company does not achieve
additional new business from Glaxo and other customers on terms sufficient to
offset the costs associated with operating and maintaining the new facilities,
and with servicing the debt associated with acquisition of the new facilities,
the Company's results of operations would be materially adversely affected. See
"Item 1, Business--Proposed Transaction with Glaxo", "Item 2, Properties", and
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Future Capital Requirements and Uncertainty of Additional Funding
See Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Liquidity and Capital Resources.
Risks Associated with GENXON Joint Venture
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, will initially provide gas
turbine fleet asset planning and utilization services for both power generation
and mechanical drive markets. The Company plans to deliver an integrated product
portfolio which includes
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<PAGE>
Combustion Systems' system for ultra low NOx emissions, Woodward's control
systems, turbine overhaul and upgrades, as well as contract maintenance and
service.
The initial capital commitment of the GENXON joint venture partners is $10
million--$2 million from Combustion Systems and $8 million from Woodward--
payable over time as the funds are required by the joint venture. These capital
infusions are predicated upon reaching certain milestones, and neither joint
venture partner is contractually required to make further capital infusions if
these milestones are not met. If the milestones are not met, and the Company
desired to complete any projects being developed by the joint venture, the
Company could be required to fund the projects itself if Woodward decides not to
make any additional capital contributions to GENXON. If such an event were to
occur, it could have a material adverse effect on the Company's results of
operations. See "Item 7, Management Discussion and Analysis of Financial
Conditions and Results of Operations."
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 the Company's products will be economically attractive when compared to
competitive products. See "Item 1, Business-Formation of GENXON Joint Venture."
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
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<PAGE>
existing regulations in a manner that could have an adverse effect on demand for
the Company's combustion system products.
Effect of FDA Regulations on Fine Chemicals Manufacturing
Many of the fine chemicals products the Company manufactures, or will
manufacture in the future, and the final drug products in which they are used
are subject to regulation for safety and efficacy by the FDA and foreign
regulatory authorities before such products can be commercially marketed. The
process of obtaining regulatory clearances for marketing is uncertain, costly
and time consuming. The Company cannot predict how long the necessary
regulatory approvals will take or if its customers will ever obtain such
approval for their products. To the extent the Company's customers do not
obtain the necessary regulatory approvals for marketing new products, the
Company's fine chemicals product sales will be adversely affected.
In the future, the Company intends to manufacture bulk actives. To do so,
the Company would be required to comply with the FDA's current Good
Manufacturing Practices ("cGMP") regulations, and certain of the Company's
customers may also require the Company to adhere to cGMP regulations, even if
not required by the FDA. 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 the Company's customers to obtain
and to maintain FDA clearance for marketing of the products manufactured by the
Company, or failure of the Company to comply with cGMP regulations as required
by the FDA or the Company's customers, would have a material adverse effect on
the Company's results of operations.
Competition and Technological Change
There are numerous competitors in a variety of industries in the United
States, Europe and Japan which have commercialized and are working on
technologies that could be competitive with those under development by the
Company, including both catalytic and other technological approaches. Some of
these competitive products are in more advanced stages of development and
testing. The Company's competitors may develop technologies and systems and
processes that are more effective than those being developed by the Company or
that would render the Company's technology and systems and processes less
competitive or obsolete. In the fine chemicals market, the Company faces its
primary competition from pharmaceutical companies that produce their own fine
chemicals and from other fine chemicals manufacturers such as Lonza AG and DSM
Fine Chemicals. In 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
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<PAGE>
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.
Dependence on Key Personnel
The Company's success is dependent on the retention of principal members of
its management and scientific staff and on the ability to continue to attract,
motivate and retain additional key personnel. Competition for such key personnel
is intense, and the loss of the services of key personnel or the failure to
recruit necessary additional personnel could have a material adverse effect upon
the Company's operations and on its research and development efforts. The
Company does not have non-competition
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<PAGE>
agreements with any of its key employees. The Company's anticipated expansion
into areas and activities requiring additional expertise, such as manufacturing,
marketing and distribution, are expected to place increased demands on the
Company's resources. These activities are expected to require the addition of
new personnel with expertise in these areas and the development of additional
expertise by existing personnel. The failure to acquire such personnel or to
develop such expertise could materially adversely affect prospects for the
Company's success.
Hazardous Materials and Environmental Matters
The Company's research and development activities and fine chemicals
manufacturing involve the use of many hazardous chemicals. The Company is
subject to extensive federal, state and local laws and regulations governing the
use, manufacture, storage, handling and disposal of such materials and
associated waste products. The Company believes that its properties and
operations comply in all material respects with applicable environmental laws;
however, the risk of environmental liabilities cannot be completely eliminated.
Public awareness of environmental issues has increased the impact of such laws
on the conduct of manufacturing operations and ownership of property. Any
failure by the Company to comply with present or future environmental laws could
result in cessation of portions or all of the Company's operations, impositions
of fines, restrictions on the Company's ability to carry on or expand its
operations, significant expenditures by the Company to comply with environmental
laws and regulations, and/or liabilities in excess of the resources of the
Company. The Company does not have environmental impairment liability
insurance. In 1992, the Company completed a renovation of its research and
development facilities at a cost of approximately $2.3 million to comply with
environmental laws and regulations. There can be no assurance, however, that
the Company will not be required to make additional renovations or improvements
to comply with environmental laws and regulations in the future. The Company's
operations, business or assets could be materially adversely affected in the
event such environmental laws or regulations require the Company to modify
current facilities substantially or otherwise limit the Company's ability to
conduct or expand its operations.
The Company leases the land on which its fine chemicals facility is located
from Rhone Poulenc, Inc., ("Rhone Poulenc"). The past activities of Rhone
Poulenc's predecessor caused significant soil and groundwater contamination of
the facility and a down gradient area located along the San Francisco Bay.
Consequently, the site is subject to a clean up and abatement order issued by
the Bay Area Regional Water Quality Control Board ("RWQCB") which currently
requires stabilization, containment and monitoring of the arsenic and volatile
organic contamination at the site and surrounding areas. The ground 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
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<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Schedules, and the report of the
independent auditors appear on pages 54 through 78 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of March 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------------------
<S> <C> <C>
Ricardo B. Levy.......... 52 President, Chief Executive Officer and Director
James A. Cusumano........ 55 Chairman of the Board and Chief Technical Officer
Lawrence W. Briscoe...... 52 Vice President, Finance and Administration and
Chief Financial Officer
Ralph A. Dalla Betta..... 51 Vice President and Chief Scientist
Utz Felcht, Ph.D. (2).... 50 Director
Richard Fleming (1) (2).. 72 Director
Ernest Mario, Ph.D. (1).. 58 Director
Yoshindo Tomoi (3)....... 59 Director
</TABLE>
- ----------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Director Tomoi is nominated to the Company's Board of Directors
pursuant to a certain agreement. See "Item 13, Certain Relationships
and Related Transactions."
There is no family relationship between any of the directors or executive
officers of the Company.
RICARDO B. LEVY, a founder of Catalytica and a director since 1974, served
as Chief Operating Officer from the Company's inception in 1974 until August
1991, when he was promoted to his current position of President and Chief
Executive Officer. Dr. Levy is also a director of Catalytica Fine Chemicals,
Inc. Prior to founding Catalytica, Dr. Levy was a founding member of Exxon
Corporation's Chemical Physics Research Team. Dr. Levy is an alumnus of
Princeton and Harvard University's Executive Management Program and has a Ph.D.
in chemical engineering from Stanford University.
JAMES A. CUSUMANO, a founder of Catalytica and a director since 1974,
served as President of the Company from its inception in 1974 until 1985, when
he assumed his current position of Chairman of the Board and Chief Technical
Officer. Dr. Cusumano also serves as President of Catalytica Fine Chemicals,
Inc., a subsidiary of the Company, since February 1995. Dr. Cusumano served as
Director of Catalysis Research and Development at Exxon Corporation's Corporate
Research Laboratory from 1967 to 1974. Dr. Cusumano has a Ph.D. in physical
chemistry from Rutgers University.
LAWRENCE W. BRISCOE joined Catalytica in July 1994 as Chief Financial
Officer and Vice President, Finance and Administration. Prior to joining the
Company, he held various executive and financial positions including President
and Chief Operating Officer and Director of Brae Corporation, Vice President of
Corporate Development at Transamerica Corp., and Chief Executive Officer of U.S.
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<PAGE>
Commercial Telephone Corp. Mr. Briscoe has an M.B.A. from Stanford University,
an M.S. in business from the University of Southern California, and a B.S. in
electrical engineering from the University of Missouri.
RALPH A. DALLA BETTA has served as Vice President since 1979 and has been a
Chief Scientist at Catalytica since 1976. From 1972 to 1976 Dr. Dalla Betta
worked at Ford Motor Company's Catalysis Group in the Fuel Sciences Department.
Dr. Dalla Betta has a Ph.D. in physical chemistry from Stanford University.
UTZ FELCHT has been a director of Catalytica since March 1991. He served
as Vice Chairman of Celanese Mexicana, a chemical company located in Mexico,
from April 1989 until 1993. From July 1986 until July 1988, he served as Head
of Corporate Research of Hoechst AG, a broadly diversified chemical company, and
from 1988 to 1991, he served as Group President, Advanced Technology and Vice
President of Hoechst Celanese Corporation, also a diversified chemical company
that is a subsidiary of Hoechst AG. Since April 1991, Dr. Felcht has also been
a Member of the board of directors of Hoechst AG where he currently is
responsible for research and development and for director personnel. Dr. Felcht
has a Ph.D. in organic chemistry from the University of Kaiserslautern.
RICHARD FLEMING has been a director of Catalytica since 1985 and also
serves as an advisor and consultant to Catalytica. Mr. Fleming was President and
Chief Executive Officer of the Company from 1985 through August 1991. He has
served as President and Chief Executive Officer of Richard Fleming Associates,
Inc., a consulting firm, since May 1981 and is Vice Chairman for Membership and
Fiscal Affairs of the Chemical Industry Institute of Toxicology. From 1969 to
1980, Mr. Fleming served at Air Products and Chemicals, most recently as
Executive Vice President, and from 1980 to 1981, he served as President and
Chief Operating Officer of GAF Corporation, a chemical company. Mr. Fleming is
also a director of Catalytica Fine Chemicals, Inc. Mr. Fleming has an M.S. in
chemical engineering from New York University.
ERNEST MARIO has been a director of Catalytica, Inc. since July 10, 1996.
Dr. Mario has been Co-Chairman and Chief Executive Officer of ALZA since August
1993. Prior to joining ALZA, Dr. Mario was Deputy Chairman and Chief Executive
Officer of Glaxo Holdings p.l.c., having served in a variety of executive
positions with Glaxo, Inc. beginning in 1986. From 1977 to 1984, he held
various executive level positions with Squibb Corporation, ending as President
and Chief Executive Officer of Squibb Medical Products. Dr. Mario has a Ph.D.
and M.S. in physical sciences from the University of Rhode Island, and a B.S. in
pharmacy from Rutgers University.
YOSHINDO TOMOI has been a director of Catalytica since January 1995. Mr.
Tomoi has held various positions at Mitsubishi Oil since 1961, including Manager
of Corporate Planning and Overseas New Business Development and General Manager
of the Technical Department. He has been a member of the board of directors of
Mitsubishi Oil Co., Ltd. since 1991, where he is currently responsible for two
research laboratories and the new business development department. Mr. Tomoi
has a B.S. in industrial chemistry from Kyoto University.
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<PAGE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of five meetings during
the year ended December 31, 1996.
The Audit Committee, which during the year ended December 31, 1996,
consisted of Directors Felcht and Fleming met one time during the last fiscal
year. This Committee recommends engagement of the Company's independent public
accountants and is primarily responsible for approving the services performed by
such accountants and for reviewing and evaluating the Company's accounting
principles and its system of internal accounting controls.
The Compensation Committee, which during the year ended December 31, 1996,
consisted of Directors Fleming and Mario, met once during the last fiscal year.
This Committee establishes the salary and incentive compensation of the
executive officers of the Company and administers the Company's employee benefit
plans. See "Report of the Compensation Committee of the Board of Directors on
Executive Compensation."
The Nominating Committee, which for the year ended December 31, 1996,
consisted of Directors Fleming and Levy, did not meet during the past fiscal
year. The Nominating Committee reviews candidates and makes recommendations for
nominees to serve on the Board of Directors.
During the fiscal year ended December 31, 1996, no Director attended fewer
than 75% of the aggregate of all meetings of the Board of Directors and any
committees on which such Director served, except that Mr. Tomoi attended only
60% of such meetings.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company with
respect to the years ended December 31, 1994, December 31, 1995, and December
31, 1996, to the Chief Executive Officer and each of the other four most highly
compensated executive officers (collectively, the "Named Officers") of the
Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
FISCAL ----------------------- UNDERLYING ALL OTHER
NAME AND RRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS (#) COMPENSATION ($)
- --------------------------- ---- ---------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Ricardo B. Levy ...................... 1996 $218,000 $ 7,000 40,000 $ 17,264(1)
President and Chief Executive 1995 $212,000 $ 7,000 100,000 $ 16,148(2)
Officer 1994 $205,000 $ -- -- $ 16,153(3)
James A. Cusumano .................... 1996 $206,000 $ 4,140 10,000 $ 15,891(1)
Chairman of the Board and 1995 $200,000 $ 1,650 30,000 $ 15,044(2)
Chief Technical Officer 1994 $193,000 $ -- -- $ 15,320(3)
Lawrence W. Briscoe .................. 1996 $188,000 $ 4,500 35,000 $ 4,000(4)
Vice President, Finance and 1995 $179,000 $ 4,500 25,000 $ 4,000(4)
Administration and Chief 1994 $ 92,884(5) -- $100,000 $ 3,251(5)
Financial Officer
W. Robert Epperly .................... 1996 $157,000 $ 11,990 6,000 $ 4,000(4)
Vice President, Engineering 1995 $150,000 $ 11,990 -- $ 4,000(4)
1994 $150,000 $ -- 6,426 $ 4,000(4)
Ralph A. Dalla Betta ................. 1996 $152,000 $ 1,000 10,000 $ 10,640(1)
Vice President and Chief Scientist 1995 $147,000 $ 1,000 20,000 $ 10,036(2)
1994 $147,000 $ 3,540 3,938 $ 10,361(3)
- ------------------------
</TABLE>
(1) Includes $4,000 contributed by the Company to each Named Officer's account
under the defined contribution pension plan and the following amounts
contributed by the Company to the Named Officer's account under the
Supplemental Severance Benefits Plan: Dr. Levy $13,264; Dr. Cusumano
$11,891; and Dr. Dalla Betta $6,640.
(2) Includes (i) $4,000 contributed by the Company to each Named Officer's
account under the defined contribution pension plan and (ii) the following
amounts contributed by the Company to the Named Officer's account under the
Supplemental Severance Benefits Plan: Dr. Levy $12,148; Dr. Cusumano
$11,044; and Dr. Dalla Betta $6,036.
(3) Includes (i) $4,000 contributed by the Company to each Named Officer's
account under the defined contribution pension plan and (ii) the following
amounts contributed by the Company to the Named Officer's account under the
Supplemental Severance Benefits Plan: Dr. Levy $12,153; Dr. Cusumano
$11,320; and Dr. Dalla Betta $6,361.
(4) Includes $4,000 contributed by the Company to each Named Officer's account
under the Defined Contribution Pension Plan.
(5) Mr. Briscoe joined Catalytica in July 1994. His 1994 salary annualized
equaled $175,000 per year. In 1994, the Company contributed $3,251 to his
account under the Defined Contribution Pension Plan.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1996 to each of the Named Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1) POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM(3)
GRANTED FISCAL PRICE EXPIRATION ----------------------------
NAME (#)(1) YEAR(2) ($/SH.) DATE 5%($) 10%($)
- ----------------------------- ------------ -------------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
aRicardo B. Levy.............. 40,000 14.3% $3.88 7/10/06 $97,604 $247,349
James A. Cusumano............ 10,000 3.6% $3.88 7/10/06 $24,401 $ 61,837
Lawrence W. Briscoe.......... 35,000 12.5% $3.88 7/10/06 $85,404 $216,430
W. Robert Epperly............ 6,000 2.1% $3.88 7/10/06 $14,641 $ 37,102
Ralph A. Dalla Betta......... 10,000 3.6% $3.88 7/10/06 $24,401 $ 61,837
</TABLE>
- -----------------------
(1) These options were granted under the Company's Stock Option Plan (the
"Option Plan"). Options granted under the Option Plan generally have a ten-
year term and become exercisable in annual 20% increments commencing on the
first anniversary of the original grant date, with full exercisability
occurring on the fifth anniversary date. The per share exercise price is
the Nasdaq closing price for the Company's Common Stock on the date of
grant. The Option Plan provides for the automatic acceleration of vesting
of all outstanding options (such that they become exercisable in full) in
the event of a "change in control," as defined in the Option Plan.
(2) Based on options to purchase an aggregate of 280,700 shares granted to
employees during 1996.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the ten-year option term. These numbers are
calculated based on the requirements promulgated by the SEC and do not
reflect the Company's estimate of future stock price.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, for each of the Named Officers, information
with respect to the exercise of stock options during the fiscal year ended
December 31, 1996 and stock options held at fiscal year end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR END(#) OPTIONS AT FISCAL YEAR END
ACQUIRED ON VALUE -------------------------------- --------------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ --------------- -------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Ricardo B. Levy ....... -- -- 20,000 120,000 $15,000 $64,800
James A. Cusumano...... -- -- 6,000 34,000 $ 4,500 $19,200
Lawrence W. Briscoe.... -- -- 55,000 105,000 $41,250 $56,700
W. Robert Epperly...... -- -- 20,048 13,198 $31,690 $ 9,480
Ralph A. Dalla Betta... -- -- 5,574 28,364 $ 3,000 $13,200
</TABLE>
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1996 minus the
exercise price.
-44-
<PAGE>
DIRECTOR COMPENSATION
The Directors do not receive any compensation for their services as
Directors of the Company, with the exception of Utz Felcht and Ernest Mario, who
receive $8,000 and $10,000 per year, respectively, plus reimbursement of
expenses.
During the year ended December 31, 1996, the Company paid Richard Fleming
Associates, a consulting organization of which Richard Fleming, a Director of
the Company, is the President and Chief Executive Officer, approximately
$168,000. These payments were for services provided to the Company by Mr.
Fleming in his capacity as a consultant to the Company at a rate of $12,000 per
month, plus expenses. Mr. Fleming provided assistance to the Company on various
development programs and in identifying and investigating new business
opportunities.
During the fiscal year ended December 31, 1996, Dr. Felcht and Mr. Fleming
each received options to purchase 4,000 shares of Common Stock and Dr. Mario
received options to purchase 20,000 shares of Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consisted of Directors Mario and Fleming in
1996. No executive officer of the Company serves as a member of the Board of
Directors or on the Compensation Committee of any entity which has an executive
officer serving as a member of the Company's Board of Directors or Compensation
Committee.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The following is the Report of the Compensation Committee of the Company,
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation earned by such executive
officers for the year ended December 31, 1996.
The Compensation Committee of the Board of Directors of Catalytica
establishes the general compensation policies of the Company as well as the
compensation plans and specific compensation levels for executive officers. The
Compensation Committee during the year ended December 31, 1996, consisted of two
independent, non-employee Directors, Richard Fleming and Ernest Mario.
The Company's compensation philosophy is to provide a total compensation
package that will enable the Company to attract and retain top executive talent,
while emphasizing the linkage of compensation to corporate, team and individual
performance.
The compensation program for the executive officers is identical to that
for all employees and consists of base salary, incentive stock options and
bonus. Other benefits, such as medical insurance, a
-45-
<PAGE>
defined contribution pension plan, an employee stock purchase plan and
supplemental severance benefits, are also available to all eligible employees.
The Compensation Committee establishes the compensation of the Chief
Executive Officer and the other executive officers based on several criteria
that affect the Company's performance:
1. Salaries of executive officers in similar positions of comparably
sized technology companies that have been in business for as long as the Company
has and that have earned a reputation in the marketplace similar to that of the
Company. Selecting comparable companies is difficult due to the unique nature
of the Company, which engages in the manufacturing of pharmaceuticals
intermediates and combustion system products for prevention of nitrogen oxide
emissions.
2. The Company's performance for the prior year, including the ability to
manage to agreed-upon budgets, progress in the Company's development program,
the successful negotiation and execution of collaborative research agreements,
and the ability to obtain financing.
3. The achievement of corporate objectives, which includes focusing and
accelerating development towards commercialization, entering business areas
where there is the potential for a large return balanced with commensurate
risks, and other objectives that are designed to maximize stockholder value.
In determining the CEO's compensation, the Committee also considered
achievement of certain individual objectives related to the CEO's area of
responsibility. The current CEO, Dr. Ricardo Levy, was appointed by the Board
in September 1991. Based on the factors discussed above, the CEO's salary was
increased by 3.67% to $226,000 effective January 1, 1997.
The Company intends to take the necessary steps to comply with the $1
million compensation deduction limitation pursuant to Section 162(m) of the
Omnibus Reconciliation Act of 1993. In addition, the non-equity-based
compensation paid to the Named Officers in fiscal 1994, 1995, and 1996 did not
exceed $1 million for any individual.
COMPENSATION COMMITTEE
Richard Fleming
Ernest Mario
-46-
<PAGE>
PERFORMANCE GRAPH
The following is a graph comparing the cumulative total return to
stockholders, calculated on a dividend reinvested basis, from the effective date
of the initial public offering of the Company's Common Stock (February 8, 1993)
through December 31, 1996, to the cumulative total return over such period of
(i) Nasdaq U.S. Stock Market Index and (ii) Alex. Brown & Sons Environmental
Index. The graph assumes that $100 was invested in the Company's Common Stock
at the initial public offering price, the Nasdaq U.S. Stock Market, and in the
Alex. Brown & Sons Environmental Index on January 29, 1993. Data for the Alex.
Brown & Sons Environmental Index was unavailable for dates in the middle of the
month. The information contained in the performance graph shall not be deemed
to be "soliciting material" or to be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filing under the
Securities Act or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.
COMPARISON OF CUMULATIVE TOTAL RETURN
Conversion to Index Point 2/8/93 12/31/93 12/31/94 12/31/95 12/31/96
- ------------------------- ------ -------- -------- -------- --------
Catalytica, Inc. 100 111 41 63 57
NASDAQ US Stock Market 100 111 109 154 189
Alex Brown Environmental Index 100 88 81 96 109
-47-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 31, 1997, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than five percent of
the outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers named in the table under "Executive Compensation-
- -Summary Compensation Table" and (iv) all directors and executive officers as a
group. Except as otherwise indicated in the footnotes to this table, the persons
and entities named in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to community property laws,
where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED
------------------------------------------
NAME OF PERSON OR IDENTITY OF GROUP NUMBER PERCENTAGE OWNERSHIP
- ------------------------------------------------- -------------- --------------------------
<S> <C> <C>
Chancellor LGT Asset Management, Inc. (1) ............ 2,451,600 12.33%
50 California St., 27th Floor
San Francisco, California 94111
Pioneering Management Corporation (2) ................ 1,916,500 9.64%
60 State Street
Boston, Massachusetts 02109
Mitsubishi Oil Co., Ltd (3) .......................... 1,536,099 7.73%
Yoshindo Tomoi(1)
2-4, Toranomon 2-chome
Minatu-ku Tokyo, Japan
Qualivest Capital Management, Inc. (4) ............... 1,315,300 6.62%
111 S.W. Fifth Ave., Suite 3500
Portland, Oregon 97204
Saad Alissa (5) ...................................... 1,151,519 5.79%
P.O. Box 192
Alkhobar 81962
Saudi Arabia
James A. Cusumano (6) ................................ 959,951 4.83%
c/o Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043
Ricardo B. Levy (7) .................................. 868,883 4.36%
c/o Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043
Richard Fleming (8) .................................. 409,222 2.06%
Ralph Dalla Betta (9) ................................ 349,490 1.76%
Lawrence W. Briscoe (10) ............................. 74,167 *
Utz Felcht (11) ...................................... 18,666 *
W. Robert Epperly (12) ............................... 13,369 *
Ernest Mario (13) .................................... 6,889 *
All officers and directors as a group (9 persons) (14) 4,236,736 21.11%
</TABLE>
- -----------------------------
*Less than 1%
(1) Based on a Schedule 13G filed with the Securities and Exchange Commission
("SEC") at December 31, 1996, Chancellor LGT Asset Management, Inc. held
sole voting power and dispositive power as to 2,451,600 of such shares.
-48-
<PAGE>
(2) Based on a Schedule 13G filed with the SEC at December 31, 1996, Pioneering
Management Corporation held sole voting power as to 1,916,500 of such
shares and sole dispositive power as to 73,000 of such shares and shared
dispositive power as to 1,843,500 of such shares.
(3) Represents 1,536,099 shares held by Mitsubishi Oil Co., Ltd. ("Mitsubishi
Oil"). Mr. Tomoi is a member of the Board of Directors of Mitsubishi Oil.
Mr. Tomoi disclaims beneficial ownership of the shares owned by Mitsubishi
Oil.
(4) Based on a Schedule 13G filed with the SEC at December 31, 1996, U. S.
Bancorp held sole voting power as to 1,313,300 of such shares and sole
dispositive power as to 602,200 of such shares and held shared dispositive
power as to 22,500 of such shares. Qualivest Capital Management, Inc. is a
wholly-owned subsidiary of U.S. Bancorp.
(5) Based on a Schedule 13G filed with the SEC at December 31, 1996, Saad
Alissa held sole voting power and dispositive power as to 0 of such shares,
and held shared voting power as to 1,151,519 of such shares and shared
dispositive power as to 1,151,519 of such shares.
(6) Includes shares held by the following trusts, of which Dr. Cusumano serves
as trustee: (i) 762,500 shares held by the Cusumano Family Trust; (ii)
93,271 shares held by the Brian K. Levy Trust; and (iii) 90,513 shares held
by the Tamara Levy Trust. Dr. Cusumano disclaims beneficial ownership of
the shares owned by the Brian K. Levy Trust and the Tamara Levy Trust.
(7) Represents shares held by the following trusts, of which Dr. Levy serves as
trustee: (i) 769,516 shares held by the Levy Family Trust; (ii) 26,350
shares held by the Polly Jean Cusumano Trust; and (iii) 26,350 shares held
by the Doreen Ann Nelson Trust. Dr. Levy disclaims beneficial ownership for
the shares owned by the Polly Jean Cusumano Trust and the Doreen Ann Nelson
Trust.
(8) Represents 9,222 shares issuable upon exercise of options held by Mr.
Fleming, which options are exercisable within 60 days of the Record Date.
(9) Represents 12,029 shares issuable upon exercise of options held by Mr.
Dalla Betta, which options are exercisable within 60 days of the Record
Date.
(10) Includes 74,167 shares issuable upon exercise of options held by Mr.
Briscoe, which options are exercisable within 60 days of the Record Date.
(11) Includes 18,666 shares issuable upon exercise of options held by Dr.
Felcht, which options are exercisable within 60 days of the Record Date.
(12) Includes 12,648 shares which were actually exercised February 14, 1997 by
Mr. Epperly, who resigned effective January 15, 1997. Mr. Epperly has no
outstanding options.
(13) Includes 6,889 shares issuable upon exercise of options held by Dr. Mario,
which options are exercisable within 60 days of the Record Date.
(14) Includes 181,307 shares issuable upon exercise of options held by 4
directors and 4 executive officers, which options are exercisable within 60
days of the Record Date; and 12,648 shares which were actually exercised on
February 14, 1997 by 1 executive officer who resigned January 15, 1997.
-49-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mitsubishi Oil Co., Ltd. In December 1992, the Company entered into a
Stock Purchase Agreement with Mitsubishi Oil Company, Ltd. ("Mitsubishi Oil"),
pursuant to which the Company agreed to sell preferred stock to Mitsubishi Oil
simultaneously with the sale of shares offered by the Company in its Initial
Public Offering. Concurrently with the Stock Purchase Agreement, the Company
entered into a Technical Cooperation Agreement with Mitsubishi Oil, pursuant to
which Catalytica agreed to provide certain advice with regard to research
activities and projects of Mitsubishi Oil and agreed to have up to two
individuals from Mitsubishi Oil serve at Catalytica in various research
capacities.
The Preferred Stock purchased by Mitsubishi Oil pursuant to the Stock
Purchase Agreement automatically converted into 1,536,099 shares of Common Stock
upon the closing of the Initial Public Offering. Mitsubishi Oil has certain
rights under the Stock Purchase Agreement. Until December 1999, Mitsubishi Oil
has a right of first refusal, subject to certain exceptions, to purchase
additional shares of capital stock or securities convertible into capital stock
to maintain its percentage equity ownership in the Company and certain
registration rights. Until the earlier of (i) December 10, 1999, (ii) such time
as Mitsubishi Oil ceases to own at least 80% of the shares of the Common Stock
received upon conversion of the Preferred Stock or (iii) such time as the
Technical Cooperation Agreement is no longer in effect, the Company is required
to include one nominee chosen by Mitsubishi Oil in its slate of nominees
recommended by the Board of Directors for election as directors of the Company
and to use its best efforts to cause the Company's directors and management to
vote shares as to which any of them hold proxies or are otherwise entitled to
vote in favor of the election of Mitsubishi Oil's designee. Pursuant to the
Stock Purchase Agreement, Mr. Tomoi has been nominated for election as a
director at the Annual Meeting of Stockholders. Mitsubishi Oil has agreed to be
present in person or by proxy at all meetings of the stockholders of the Company
and to vote its shares in favor of management's nominees to the Board of
Directors, provided that Mitsubishi Oil is not restricted from selecting and
exercising its right to elect to the Company's Board of Directors such number of
directors (including its designee) as Mitsubishi Oil would be able to elect
under cumulative voting. So long as Mitsubishi Oil owns over 5% of the
outstanding shares of the Company's stock, the Company has the right of first
refusal, subject to certain exceptions, to purchase shares of stock which
Mitsubishi Oil elects to sell or otherwise transfer if, following such sale or
transfer, the transferee would own over 5% of the Company's stock. Mitsubishi
Oil has agreed that, until December 10, 1999, it will not acquire over 20% of
the aggregate outstanding stock of the Company without the written consent of
the Company. Mitsubishi Oil currently owns approximately 7.7% of the
outstanding stock of the Company. The Company has agreed to indemnify
Mitsubishi Oil for any claims against it in connection with the offering of the
shares of Common Stock made in the Initial Public Offering.
Pursuant to the Technical Cooperation Agreement, the parties agreed to
meet regularly to review research strategies and directions and to investigate
potential future collaborative research and development projects. This
agreement has a term of 10 years. However, Catalytica may terminate it sooner
if Mitsubishi Oil ceases to own at least 80% of the shares of Common Stock
received upon conversion of the Preferred Stock.
-50-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
A. (1) Financial Statements:
The following financial statements of the Registrant are filed as part
of this Report
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 54
Consolidated Statements of Operations for the fiscal years ended December 31,
1996, 1995, and 1994 55
Consolidated Balance Sheets at December 31, 1996, and December 31, 1995 56
Consolidated Statements of Cash Flows for the fiscal years ended December 31,
1996, 1995, and 1994 57
Consolidated Statement of Stockholders' Equity for the fiscal years ended
December 31, 1996, 1995, and 1994 58
Notes to Consolidated Financial Statements 59
</TABLE>
(2) Financial Statement Schedules:
All schedules have been omitted because they are not applicable or
because the required information is disclosed in the consolidated financial
statements or notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 + Third Amended and Restated Certificate of Incorporation.
3.2 + Bylaws of Registrant.
4.1(A) + Agreement of Shareholders Amending Registration Rights and Right of First Refusal.
4.1(B) + Amended and Restated Registration Rights Agreement dated September 27, 1988.
4.1(C) + Amendment No. 1 to Amended and Restated Registration Rights Agreement.
4.1(D) + Form of Amended and Restated Rights Agreement.
4.2 + Specimen of Common Stock Certificate.
4.3 +++ Preferred Shares Rights Agreement dated as of October 23, 1996, between
Catalytica, Inc. and Chase Mellon Shareholder Services, L.L.P,
including the form of Rights Certificate and the Certificate of
Designation, the Summary of Rights Attached thereto as Exhibits A, B
and C, respectively.
</TABLE>
-51-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1 + 1983 Incentive Stock Option Plan, as amended, with forms of agreements
thereunder.
10.2 + 1992 Stock Option Plan, with forms of agreements thereunder.
10.3 + 1992 Employee Stock Purchase Plan.
10.4 + ** Agreement, dated as of July 18, 1988, between the Company and Tanaka Kikinzoku Kogyo K.K.
10.5 + Joint Development Agreement, dated December 1, 1991 among the Company, Conoco Inc. and Neste Oy.
10.7 + ** Development Agreement, dated January 4, 1991 among the Company,
Petro-Canada Inc. and Techmocisco, Inc. (a subsidiary of Mitsubishi Oil),
as amended.
10.8 + Series D and E Preferred Shares and Warrant Purchase Agreement, dated
September 27, 1988 between the Company and Koch Industries, Inc.
10.9 + Term Note, dated February 25, 1992 between the Company and James A.
Cusumano.
10.11 + Form of Indemnification Agreement.
10.12 + Agreement and Plan of Reorganization dated as of September 27, 1988
among the Company, Lubrizol Enterprises, Inc. and Catven, Inc.
10.13 + Stock Purchase Agreement dated December 10, 1992 between the
Company and Mitsubishi Oil Co., Ltd.
10.15 ++** Ground Lease Agreement, dated November 30, 1993 between the
Company and Rhone-Poulenc Inc.
10.16 ++** Supply Agreement, dated September 28, 1993 between the Company and
Novartis Agro, Inc.
10.17 ++ Lease Agreement, dated January 1, 1993 between the Company and Jack
Dymond Associates.
10.18 ++ Loan and Security Agreement, dated November 18, 1994 between the
Company and Silicon Valley Bank.
10.19 ++** Agreement, dated January 31, 1995 between the Company and Tanaka
Kikinzoku Kogyo K.K.
10.20 * Loan Modification Agreement, dated November 30, 1995
10.21 * Catalytica Fine Chemicals, Inc. 1995 Stock Plan, with forms of agreements
thereunder.
10.22 * Catalytica Advanced Sensor Devices 1995 Stock Plan, with forms of
agreements thereunder.
10.23 * Catalytica Advanced Technologies, Inc. 1995 Stock Plan, with forms of
agreements thereunder.
10.24 * Catalytica Combustion Systems, Inc. 1995 Stock Plan, with forms of
agreements thereunder.
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.25 * Catalytica, Inc. 1995 Director Stock Option Plan, with forms of agreements
thereunder.
10.26 x Limited Liability Operating Agreement of GENXON Power Systems, LLC,
dated October 21, 1996.
21.1 + Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 x Power of Attorney.
27.1 x Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibits filed with the Company's Annual
Report on Form 10-K, for the year ended December 31, 1995.
** Confidential treatment has been granted for portions of these agreements.
+ Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
++ Incorporated by reference to the exhibits filed with the Company's Form
10-K for the fiscal year ended December 31, 1994.
+++ Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A as filed with the Commission on November
29, 1996.
x Previously filed with the Company's Annual Report on Form 10-K, for the
year ended December 31, 1996.
B. Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
-53-
<PAGE>
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Catalytica, Inc.
We have audited the accompanying consolidated balance sheets of Catalytica,
Inc. as of December 31, 1996 and December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Catalytica, Inc. at December 31, 1996 and December 31, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
January 28, 1997
-54-
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product sales $ 9,813 $ 8,858 $ 5,800
Research and development contracts 6,501 4,766 6,395
-------- -------- --------
Total revenues 16,314 13,624 12,195
Costs and expenses:
Cost of product sales 9,073 8,339 5,512
Research and development 9,707 9,818 13,012
General and administrative 4,452 4,492 3,091
Restructuring costs -- -- 499
-------- -------- --------
Total costs and expenses 23,232 22,649 22,114
Operating loss (6,918) (9,025) (9,919)
Gain on sale of assets 900 -- --
Interest income 1,179 616 860
Interest expense (353) (278) (86)
-------- -------- --------
Net loss $ (5,192) $ (8,687) $ (9,145)
-------- -------- --------
Net loss per share $ (0.27) $ (0.55) $ (0.61)
-------- -------- --------
Number of shares used in computing net loss per share 19,283 15,785 15,070
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
-55-
<PAGE>
CATALYTICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,540 $ 5,021
Short-term investments 8,281 15,881
Accounts receivable, net of allowance for doubtful accounts of $100 3,944 3,557
Accounts receivable from joint venture 865 --
Notes receivable from employees 328 72
Inventory:
Raw materials 1,689 498
Work in process 249 178
Finished goods 1,479 178
-------- --------
3,417 854
Prepaid expenses and other current assets 681 371
-------- --------
Total current assets 33,056 25,756
Property and equipment
Equipment 9,260 7,950
Leasehold improvements 8,173 6,059
-------- --------
Less accumulated depreciation and amortization (9,536) (8,626)
-------- --------
Notes receivable from employees 50 100
-------- --------
$ 41,003 $ 31,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,055 $ 1,339
Accrued payroll and related expenses 1,372 1,392
Deferred revenue 1,643 167
Other accrued liabilities 949 590
Borrowings under line of credit 2,300 1,995
Current portion of long-term debt ($213 payable to related party in 1995 and 1996) 833 2,171
-------- --------
Total current liabilities 9,152 7,654
Long-term debt ($213 payable to related party in 1995) 1,524 1,556
Non-current deferred revenue 5,064 --
Minority interest 8,000 --
<CAPTION>
1995 1996
---------- ----------
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized, none issued and
outstanding -- --
Common Stock, $.001 par value; 40,000,000 shares authorized, 19,397,074
shares issued and outstanding in 1996; (19,190,222 shares in 1995) 19 19
Additional paid-in capital 65,482 65,101
Deferred compensation (41) (86)
Accumulated deficit (48,197) (43,005)
-------- --------
Total stockholders' equity 17,263 22,029
-------- --------
$ 41,003 $ 31,239
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-56-
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,192) $ (8,687) $ (9,145)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activity:
Depreciation and amortization 944 1,547 1,474
Restructuring charges and other -- -- 252
Changes in:
Accounts receivable (387) (2,058) 875
Accounts receivable from related party (865) -- --
Inventory (2,563) (275) (42)
Prepaid expenses, and other current assets (310) 387 (17)
Accounts payable 716 211 190
Accrued payroll and related expenses (20) (24) 188
Deferred revenue 6,540 -- (1,997)
Royalties payable to related party -- (622) 271
Other accrued liabilities 359 (407) (332)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (778) (9,928) (8,283)
Cash flows from investing activities:
Purchases of investments (22,748) (19,817) (14,295)
Maturities of investments 30,500 14,000 23,424
Acquisition of property and equipment (3,565) (1,645) (3,169)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: 4,187 (7,462) 5,960
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts on (issuance of) notes receivable from employees (206) 115 (36)
Additions to debt obligations 4,213 4,384 1,126
Payments on debt obligations (5,278) (618) (200)
Minority investment 8,000 -- --
Sale of common stock 381 14,892 290
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,110 18,773 1,180
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 10,519 1,383 (1,143)
Cash and cash equivalents at beginning of year 5,021 3,638 4,781
-------- -------- --------
Cash and cash equivalents at end of year $ 15,540 $ 5,021 $ 3,638
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-57-
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ----------- --------------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 14,844,423 15 49,771 (175) (25,173) 24,438
Sale of common stock 225,854 -- 290 -- -- 290
Expense recorded from acceleration of
stock options -- -- 152 -- -- 152
Amortization of deferred compensation -- -- -- 44 -- 44
Net loss -- -- -- -- (9,145) (9,145)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 15,070,277 15 50,213 (131) (34,318) 15,779
Sale of common stock 119,945 -- 218 -- -- 218
Public offering dated November 3, 1995,
net of offering costs 4,000,000 4 14,667 -- -- 14,671
Exercise of warrants -- -- 3 -- -- 3
Amortization of deferred compensation -- -- -- 45 -- 45
Net loss -- -- -- -- (8,687) (8,687)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 $19,190,222 $ 19 $ 65,101 $ (86) (43,005) $ 22,029
Sale of common stock 206,852 -- 358 -- -- 358
Expense recorded from acceleration of
stock options -- -- 23 -- -- 23
Amortization of deferred compensation -- -- -- 45 -- 45
Net loss -- -- -- -- (5,192) (5,192)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 $19,397,074 $ 19 $ 65,482 $ (41) $ (48,197) $ 17,263
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-58-
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
DESCRIPTION OF BUSINESS Catalytica, Inc. (the "Company"), was incorporated
in California in 1974 and is engaged in developing new manufacturing
technologies that intend to offer economic and environmental benefits. The
Company is applying its expertise in catalysis to create more efficient
production processes and to prevent pollution. In 1992, the stockholders
approved the reincorporation of the Company into Delaware. The Company has
formed various wholly-owned operating subsidiaries aligned with its various
technologies. These subsidiaries include Catalytica Fine Chemicals, Inc.,
Catalytica Combustion Systems, Inc., and Catalytica Advanced Technologies, Inc.
BASIS OF PRESENTATION The accompanying Consolidated Financial Statements
include the accounts of the Company and its wholly owned subsidiaries after
elimination of all significant intercompany accounts and transactions. Certain
amounts from 1995 have been reclassified to reflect 1996 presentation.
PUBLIC OFFERING In November, 1995, the Company sold 4,000,000 shares of
Common Stock at $4.00 per share in an offering filed on Form S-1, resulting in
net proceeds of approximately $14.7 million. In connection with the offering,
the Company issued a warrant to purchase 320,000 shares of common stock at a
price per share equal to 120% of the $4.00 per share offering price (See Note
11).
FINANCIAL INSTRUMENTS On November 15, 1995, the FASB staff issued a special
report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities. In accordance with the provisions in
that special report, the Company chose to reclassify certain securities from
held-to-maturity to available-for-sale. At December 31, 1995, the carrying
value of those securities, which were corporate debt securities and carried in
short-term investments was $982,000, which approximated fair value.
For the purposes of the consolidated cash flows, all investments with
maturities of three months or less at the date of purchase held as available-
for-sale are considered to be cash and cash equivalents; investments with
maturities of three months or less at the date of purchase which are held-to-
maturity (none at December 31, 1996) and investments with maturities greater
than three months which are available-for-sale ($8,281,000 at December 31, 1996)
are considered to be short-term investments; investments with maturities greater
than one year are considered to be long-term investments and are available-for-
sale (none at December 31, 1996). All investments at December 31, 1996, were
carried at amortized cost, which approximated fair market value (quoted market
price). The classification of investments is made at the time of purchase with
classification for held-to-maturity made when the Company has the positive
intent and ability to hold the investments to maturity.
As of December 31, 1996, the average portfolio duration is approximately
2.7 months.
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<PAGE>
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
investments in cash equivalents, short-term and long-term investments and trade
receivables. The Company uses local banks and various investment firms to
invest its excess cash, principally in commercial paper and money market funds
from a diversified portfolio of investments with strong credit ratings. The
Company is exposed to credit risks in the event of default by the financial
institutions or issuers of investments to the extent recorded on the balance
sheet. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. There have been no provisions for
doubtful accounts in any of the periods presented in the accompanying
consolidated statements of operations.
REVENUES Revenues consist of both product sales and research revenues.
Approximately 98% of revenues related to product sales primarily represent the
sale of fine chemicals. Product revenues are recognized upon shipment. Through
December 31, 1996 and 1995, approximately 18% and 49% respectively of the
Company's fine chemicals product revenues have been derived from sales to
Novartis under a five-year contract pursuant to which Novartis committed to buy
certain minimum volumes for the first four years and eight months. The Company
has no contractual volume commitment from Novartis beyond May 31, 1998. There
can be no assurance that the Novartis contract will be renewed or replaced with
new business. The Novartis agreement may be terminated by either party upon 30
days prior written notice for failure to perform a material provision of the
agreement, if such failure is not cured within 60 days after receipt of notice.
Approximately 40% of the Company's revenues were derived from research and
development contracts. Most of the company's research and development contracts
are subject to periodic review by the funding partner, which may result in
modifications, including reduction or termination of funding. The Company
experienced a decline in research and development revenues during 1995 and
1994, as certain research projects were terminated and the Company began to
shift its focus to the sale of products. There can be no assurance that the
Company will continue to receive research and development funding, and the
Company expects that it will rely increasingly on product sales for its
revenues.
Research revenues are earned as contractual services are performed in
connection with collaborative arrangements and are recognized in accordance with
contract terms, principally based on reimbursement of total costs and expenses
incurred. In return for funding development, collaborative partners receive
certain rights in the commercialization of the resulting technology. Costs of
$6,235,000, $4,409,000, and $5,281,000 related to research revenues were
included in total costs and expenses for each of the three years ended December
31, 1996, 1995, and 1994, respectively. Unbilled revenues related to work
performed under collaborative arrangements were approximately $385,000 at
December 31, 1996 ($194,000 and $105,000 at December 31, 1995, and 1994,
respectively) and are included in accounts receivable on the accompanying
balance sheet. Most amounts unbilled at December 31, 1996, were billed in
January, 1997.
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<PAGE>
MAJOR CUSTOMER INFORMATION Revenues from major collaborative partners
representing more than 10% of revenues in any of the past three years are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
Customer 1996 1995 1994
- -------------------------------- -------- ------- ------
<S> <C> <C> <C>
Upjohn 17% 0% 0%
Merck 13% 13% 0%
Novartis 11% 31% 38%
Pfizer 11% 4% 2%
Mitsubishi Oil Company, Ltd. 9% 10% 6%
Conoco Inc./Neste Oy 0% 0% 23%
</TABLE>
In 1991, the Company entered into an agreement with Conoco Inc. and Neste
Oy to jointly develop the Company's gasoline alkylation technology. Under the
agreement, Conoco and Neste are entitled to reimbursement of approximately $5.8
million (at December 31, 1996) plus interest from the first 10% of the annual
pre-tax income, if any, realized from commercializing the technology.
RESEARCH AND DEVELOPMENT All costs for research and development activities
are expensed in the year incurred. Such costs include proprietary research and
development expenses associated with revenues from research and development
agreements. Approximately 42% of the company's 1996 research and development
expenses was spent to develop the company's advanced combustion systems
technology, approximately 24% was spent on fine chemicals technology, and
approximately 34% was spent on other technologies, substantially all of which
was performed at the specific request of, and funded by, third parties.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-
out) or market.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line basis over the
lesser of the useful lives of the respective assets or the lease term, if
applicable (generally 3-15 years). At December 31, 1996 the gross value of
all capital leases was $298,000, with accumulated depreciation of $43,000.
STOCK-BASED COMPENSATION In 1995, the FASB issued Statement No. 123,
Accounting for Stock-Based Compensation, which provides an alternative to APB
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation to employees. The Company has elected to account for
stock-based compensation to employees in accordance with Opinion 25, providing
only pro forma disclosures required by Statement 123.
NET LOSS PER SHARE Except as noted below, net loss per share is computed
using the weighted average number of shares of Common Stock outstanding. Common
equivalent shares from stock options are excluded from the computation as their
effect is antidilutive, except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common and common equivalent shares
issued
-61-
<PAGE>
at prices below the public offering price during the twelve-month period prior
to the offering have been included in the calculation as if they were
outstanding for all periods presented prior to the initial public offering
(using the treasury stock method).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March, 1995, the FASB
issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company adopted Statement
No. 121 in the first quarter of 1996 and the impact of adoption was not
material. As of December 31, 1996, the Company has no long-lived assets in
operations that require impairment losses to be recorded as required by SFAS No.
121.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2. MINORITY INTEREST IN CATALYTICA FINE CHEMICALS, INC.
On May 8, 1996, Pfizer Inc. ("Pfizer") entered into a Collaborative
Research and License Agreement and a Stock Purchase Agreement with Catalytica
Fine Chemicals, Inc. ("CFC"), a subsidiary of Catalytica, Inc., that included
the purchase of 150,000 shares of Series B Preferred stock by Pfizer. The
holders of the Series B Preferred stock shall be entitled to receive non-
cumulative dividends at a rate of $6.00 per share, per annum, when and if
declared by the Board of Directors. In consideration of the $15 million paid,
CFC is obligated to perform specified agreed upon research for a five year
period. Accordingly, Catalytica recognized Pfizer's minority interest in CFC at
$8 million and recorded deferred revenue of $7 million to be recognized as
research is performed. As $536,000 of research was performed and recognized as
revenue as of December 31, 1996, the deferred revenue balance pertaining to
Pfizer is $6.5 million at December 31, 1996.
In conjunction with the Stock Purchase agreement, the Company entered into
a Share Exchange agreement, providing Pfizer the right to exchange the Series B
preferred stock of the Company for Catalytica, Inc. (Catalytica) common stock.
After the three year anniversary of the agreement, Pfizer shall have the right
to require the Company to exchange all of the outstanding shares of Series B
preferred stock for that number of shares of common stock based upon a
determined exchange rate. The exchange rate is based upon the fair value of the
preferred stock and the market value of Catalytica's common stock at the time of
conversion. In the event of insolvency of the Company, Pfizer may convert
$4,200,000 of Series B preferred shares into 700,000 shares of Catalytica's
common stock.
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<PAGE>
NOTE 3. BUSINESS COMBINATIONS AND DISPOSALS
FORMATION OF JOINT VENTURE (GENXON) On October 15, 1996, Catalytica's
wholly owned subsidiary, Catalytica Combustion Systems Inc. (CCSI), and Woodward
Governor Company formed a Delaware limited liability company in connection with
a 50/50 joint venture to serve the gas turbine retrofit market for installed,
out-of-warranty engines. The new company, GENXON/TM/ Power Systems, LLC, will
initially provide gas turbine fleet asset planning and utilization services for
both power generation and mechanical drive markets.
The initial capital commitment of the GENXON joint venture partners is $10
million: $2 million from CCSI, and $8 million from Woodward, payable over time
as the funds are required by the joint venture. These capital infusions are
predicated upon reaching certain milestones, and neither joint venture partner
is contractually required to make further capital infusions if these milestones
are not met. CCSI will account for its share of the joint venture gain or loss
upon the first cash infusion totaling $1.0 million which occurred on January 3,
1997 upon completion of a milestone. Prior to January 3, 1997, the joint
venture was being funded entirely by Woodward Governor.
Research revenue in the amount of $.5 million was recorded from GENXON in
conjunction with the achievement of a milestone in December 1996. This
reimbursement was for costs incurred by the Company in the development of the
proprietary technology prior to the formation of the joint venture. Subsequent
to the formation of the joint venture, the Company received reimbursements for
cost incurred by the Company on behalf of GENXON totaling $1,996,000.
Accordingly, these costs have not been included in the consolidated entity.
As of December 31, 1996, accounts receivable of $865,000 were outstanding from
GENXON. This receivable was paid in full in January 1997.
ADVANCED SENSOR DEVICES On June 28, 1996, Catalytica completed the sale of
substantially all the business of its wholly owned subsidiary, Advanced Sensor
Devices, Inc. (ASD), to Monitor Labs, Inc. ASD produced continuous emission
monitors (CEMs) based on proprietary catalytic sensors. The terms for selling
substantially all of ASD's assets included an initial payment of approximately
$1.1 million at the closing, an additional $0.5 million paid upon certification
for the CEM product which occurred in December 1996, and a royalty stream based
on future revenues. For the year ended December 31, 1996, Catalytica realized a
$0.9 million gain on the sale of ASD's assets.
NOTE 4. PURCHASE OF FINE CHEMICALS MANUFACTURING FACILITY
On October 15, 1993, the Company signed an agreement with Novartis to
acquire a fine chemicals manufacturing facility including its existing buildings
and equipment located in East Palo Alto, California ("Site"). The facility,
located on five acres, is a multipurpose fine chemicals manufacturing plant with
several general purpose reactors totaling approximately 10,000 gallons in
capacity. Concurrent with the agreement to acquire the building and equipment,
the Company entered into a ground lease agreement with Rhone Poulenc Inc. to
lease the surface of the Site. The ground lease commenced on November 30, 1993
for an initial term of 15 years (see Note 10). The Company spent $1.0 million
and $1.6 million on leasehold improvements in 1996 and 1995, respectively at
this Site.
-63-
<PAGE>
Because of significant soil and groundwater contamination caused by past
activities on the Site, Rhone Poulenc Inc. is remediating the soil and
groundwater of the Site pursuant to an order from the Bay Area Regional Water
Quality Control Board ("RWQCB"). Pursuant to the ground lease with Rhone
Poulenc Inc., the Company has received an indemnity for the contamination which
is the subject of the RWQCB's order.
In addition to the facility purchase agreement, the Company signed a
separate agreement with Novartis to be the sole supplier of a fine chemicals
intermediate that is used in a proprietary product marketed by Novartis. The
supply agreement expires on May 31, 1998, but may be extended beyond the initial
term by mutual agreement of both parties. As security for the Company's
performance of all obligations under this agreement, Novartis holds a first lien
security interest in the equipment used to manufacture this proprietary product.
Should the Company fail to fully perform, this lien will provide Novartis the
right to recover the equipment during the life of the supply agreement. Once
the agreement expires, Novartis has no further rights to the equipment.
ENVIRONMENTAL REGULATIONS 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. 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 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. There can be no assurance that these regulations will ever
be adopted.
Many of the fine chemicals products the Company manufactures, or will
manufacture in the future, and the final drug products in which they are used,
are subject to regulation for safety and efficacy by the FDA and foreign
regulatory authorities before such products can be commercially marketed. The
process of obtaining regulatory clearances for marketing is uncertain, costly,
and time-consuming. The Company cannot predict how long the necessary
regulatory approvals will take, or if its customers will ever obtain such
approval for their products. To the extent the Company's customers do not
obtain the necessary regulatory approvals for marketing new products, the
Company's fine chemicals product sales will be adversely affected.
NOTE 5. RELATED PARTY TRANSACTIONS
PFIZER INC. On May 8, 1996, Catalytica Fine Chemicals, Inc. ("CFC")
entered into a collaborative research and license agreement and a stock purchase
agreement with Pfizer Inc. ("Pfizer"). In consideration for the $15 million
paid, Pfizer received 150,000 shares of Catalytica Fine Chemicals Series B
Preferred stock and a five-year R&D commitment by Catalytica Fine Chemicals to
develop new processes and technology for the manufacture of Pfizer products.
The holders of the Series B Preferred
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<PAGE>
stock shall be entitled to receive non-cumulative dividends at a rate of $6.00
per share, per annum, when and if declared by the Board of Directors. Catalytica
recognized Pfizer's minority interest in CFC at $8 million and recorded deferred
revenue of $7 million to be recognized as research is performed. As $536,000 of
research was performed and recognized as revenue as of December 31, 1996, the
deferred revenue balance pertaining to Pfizer is $6.5 million at December 31,
1996. Prior to this investment, Catalytica Fine Chemicals was a wholly-owned
subsidiary of Catalytica, Inc. (See Note 2).
KOCH INDUSTRIES, INC. In connection with certain agreements between the
company and Koch Industries entered into in 1991 and 1992, the Company is
required to reimburse Koch up to 15% of the future pre-tax income realized by
Catalytica, if any, associated with commercialization or licensing of several
technologies developed under research agreements with Koch. On December 22,
1995, rights to the Naphthalene Alkylation technology were sold to Koch in
return for $50,000 and future royalty payments should Koch commercialize the
technology. At December 31, 1996 and 1995, the amounts which could be required
to be paid out of pretax profits realized from activities related to these
technologies and which accrue interest from December 1991 total $15,258,000 and
$14,092,000 respectively. The Company is not currently developing or marketing
any of these technologies.
Subject to the terms of this agreement, the Company owes Koch $213,000 in
royalties payable as of December 31, 1996, for license fees realized on the
gasoline alkylation project related to funding received from Conoco and Neste
(See Note 1). This obligation, which originally totaled $640,000 at December 31,
1994, was converted to a promissory note payable in quarterly installments
amortized over three years with interest accruing at the prime rate compounded
annually (See Note 7).
GENXON/TM/ POWER SYSTEMS, LLC As discussed in Note 3, on October 15, 1996,
Catalytica's wholly owned subsidiary, Catalytica Combustion Systems Inc. (CCSI)
and Woodward Governor Company formed a Delaware limited liability company in
connection with a 50/50 joint venture to serve the gas turbine retrofit market
for installed, out-of-warranty engines. The new company, GENXON/TM/ Power
Systems, LLC, will develop and sell XONON combustion systems to be retrofitted
on existing turbines in the power generation and mechanical drive markets.
Research revenue in the amount of $.5 million was recorded from GENXON in
conjunction with the achievement of a milestone in December 1996. This amount
was a reimbursement for costs incurred by the Company in the development of the
proprietary technology prior to the formation of the joint venture. As of
December 31, 1996, accounts receivable of $865,000 were outstanding from GENXON.
This receivable was paid in full in January 1997. Subsequent to the formation of
the joint venture, the Company received reimbursements for cost incurred by the
Company on behalf of GENXON totaling $1,996,000. Accordingly, these costs have
not been included in the consolidated entity.
NOTE 6. PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution pension plan and a nonqualified
pension plan for employees meeting certain requirements, based on a defined
percentage of the employees' compensation. Pension expense amounted to
approximately $324,000, $297,000, and $270,000, for each of the three years
ended December 31, 1996, 1995, and 1994, respectively.
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<PAGE>
NOTE 7. DEBT
During fiscal 1991, the Company borrowed $830,000 from a collaborative
partner to partially fund improvements to its facilities. Per the note
agreement, the Company made annual interest payments based on the outstanding
loan balance from 1992 through 1994. Commencing in December, 1995, the Company
made the first of four annual principal payments, which extend through 1998.
This loan, which bears interest at 7% per year, is unsecured. The balance of
the loan was $415,000 at December 31, 1996.
In November 1995, the Company's Fine Chemicals subsidiary obtained a line
of credit which was guaranteed by Catalytica, Inc. The working capital line of
credit agreement limited the Company's borrowings to the lesser of $2,000,000 or
the eligible portion of the Company's accounts receivable and contract rights.
The line of credit was paid off in full June 30, 1996. For the six months this
loan was outstanding in 1996, the average interest rate and the average amount
outstanding were 9.79% and $875,000 respectively.
The Company's Fine Chemicals subsidiary renewed and increased its working
capital line of credit in September 1996. Under the current agreement, the
Company's total borrowings are limited to the lesser of $3,500,000, or $500,000
plus 80% of the Company's eligible accounts receivable (which were $2,499,000 at
December 31, 1996). The agreement is secured by Fine Chemicals' current and
future assets. Borrowings under this arrangement bear interest at the prime
rate plus 1 1/2%. As of December 31, 1996, the outstanding balance on this loan
was $2,300,000, with an interest rate of 9.75%. This line of credit agreement
expires in September, 1997.
The Fine Chemicals subsidiary had another credit agreement representing a
promissory note of $1,500,000 for the purpose of refinancing the subsidiary's
outstanding subordinated debt to Catalytica, Inc. The note was paid in full
June 30, 1996. For the six months this loan was outstanding in 1996, the
average interest rate and the average amount outstanding were 10.29% and
$1,500,000 respectively.
The Fine Chemicals subsidiary also has two term loans from the same lender,
both of which are restricted to purchases of equipment. Under the first loan,
the Company had an outstanding balance of $930,000 at December 31, 1996, and
$1,167,000 at December 31, 1995. Borrowings under this credit agreement have
converted to five-year term loans maturing through June 30, 2000, are secured by
the Company's current and future assets, and bear interest ranging from 9.71% to
11.82%. The average interest rate and the average amount outstanding on this
loan during 1996 were 11.52% and $1,061,000 respectively.
The second credit agreement, funded October 1996, authorizes borrowings up
to $500,000. Once the draw down period expires in June 1997, it will convert to
a fully amortized, five year term loan. This agreement originally carried a
variable interest rate of the prime rate plus 1 3/4%. In December 1996, this
loan was converted to a fixed rate of 9.95%. For the three months this loan was
outstanding in 1996, the average interest rate was 10.00%. As of December 31,
1996, total outstanding borrowings on this credit agreement were $500,000.
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<PAGE>
The three credit facilities discussed above contain various covenants. At
June 30, 1995, the Company was in violation of one of these covenants. The
loan includes a covenant that requires the Bay View Facility to achieve certain
minimum profitability requirements. During the quarter ended June 30, 1995, the
requirement was for break-even operations. The actual loss for the quarter
amounted to $72,000. The bank agreed to waive the covenant for the quarter
ended June 30, 1995. On September 28, 1995, and on November 30, 1995, the bank
agreed to redefine certain financial covenants. As a result of these amendments
to the original line of credit agreement, the Company was in compliance with the
covenants contained in its line of credit agreement, and believes that it will
remain in compliance throughout the remaining term of the agreement.
Accordingly, amounts payable under the credit facilities due more than one year
from the balance sheet date continue to be classified as long-term. The Company
has not been in violation of any bank covenants subsequent to the initial
violation in 1995.
When the working capital line of credit was renewed on September 24, 1996,
the original note, which included the two term loans, was amended to release any
and all guarantees by Catalytica. The notes and line of credit are now solely
the responsibility of Fine Chemicals, which is required to maintain a tangible
net worth plus subordinated debt of at least $6.0 million.
As discussed in Note 5, the Company owed Koch $213,000 in royalties payable
as of December 31, 1996, for license fees. The average interest rate and the
average amount outstanding on this loan during 1996 were 8.27% and $347,000
respectively. This note is also unsecured.
In 1996, the Company entered into a capital lease to purchase two
compressors for its Combustion Systems subsidiary. The minimum principal
payments due on the lease, which has a three-year term, are approximately
$254,000 at December 31, 1996.
In 1995 and 1996, the Company entered into two capital leases to purchase
office trailers for use at its Bay View facility. The minimum principal
payments on the leases, which both have three-year terms, amount to
approximately $14,000 at December 31, 1996.
In 1996, the Company entered into a capital lease to purchase a telephone
system for its Bay View facility. The minimum principal payments on the lease,
which has a five-year term, are $29,000 at December 31, 1996.
Fair value of debt is based on pricing models or securities with similar
terms, and approximates carrying value.
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<PAGE>
At December 31, 1996, future minimum principal payments on debt were as
follows:
<TABLE>
<S> <C>
1997 $3,133,000
1998 696,000
1999 499,000
2000 140,000
2001 122,000
----------
$4,590,000
==========
</TABLE>
Cash paid for interest for each of the three years ended December 31, 1996,
1995 and 1994, amounted to approximately $354,000, $278,000, and $86,000,
respectively.
NOTE 8. RESTRUCTURING OF OPERATIONS
During the third quarter of fiscal 1994, the Company incurred a
restructuring charge of $499,000 related to streamlining certain operations to
reduce expenses and to focus on the commercialization of the Company's
technologies. The charge primarily related to severance costs associated with
reducing the Company's workforce by 18%, or 20 people. All such severance
obligations have been paid.
NOTE 9. INCOME TAXES
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows
<TABLE>
<CAPTION>
(in thousands):
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Tax at federal statutory rate $(1,765) $(2,954) $(3,109)
Losses not currently benefited 1,765 2,954 3,109
------- ------- -------
Provision for income taxes $ -- $ -- $ --
======= ======= =======
</TABLE>
The components of deferred income taxes consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Capitalized R&D costs $ 1,022 $ 923
Net operating loss carryforwards 14,561 12,982
Credit carryforwards 184 184
Other, net 1,384 2,722
-------- --------
Total deferred tax assets $ 17,151 $ 16,811
Valuation allowance (17,151) (16,811)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
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<PAGE>
The realization and amount of any tax benefit from the deferred tax asset
of $17,151,000 is dependent upon the generation of future taxable income and the
tax rate in effect in such years. Accordingly, due to the uncertainty of
realizing future taxable earnings, a valuation allowance has been established
for the deferred tax asset. The valuation allowance increased by $340,000 and
$4,283,000 during 1996 and 1995 respectively.
At December 31, 1996, for federal income tax purposes, the Company has net
operating loss carryforwards of approximately $42,600,000 which expire in the
years 1998 through 2011. The net operating loss carryforwards differ from the
accumulated deficit as a result of temporary differences in the recognition of
certain revenue and expense items for financial and federal tax reporting
purposes, primarily consisting of expenses not currently deductible for tax
reporting purposes.
The Company also has approximately $184,000 of investment and research and
development credit carryforwards that will expire in years 1997 through 2000.
Investment tax credits will be accounted for under the flow-through method when
utilized.
The Company also has net operating loss carryforwards for California income
tax purposes of approximately $1,100,000 that will expire in years 1997 through
2000. The net operating loss carryforwards differ from the accumulated deficit
as a result of the 50% limitation for net operating loss carryforwards, the
expiration of previous years' state net operating losses, capitalized research
and development costs, and as a result of temporary differences in the
recognition of certain revenue and expense items for financial and state tax
reporting purposes.
An initial public offering of the Company's Common Stock was completed by
the Company during fiscal 1993. The utilization of federal net operating loss
and the deduction equivalent of federal tax credit carryforwards incurred prior
to the offering of approximately $14,163,000 will be subject to an annual
limitation of approximately $4,150,000 per year. Future changes in ownership
may result in additional limitations.
NOTE 10. COMMITMENTS
Catalytica leases its research and office facilities in Mountain View under
an operating lease agreement that expires on December 31, 1998, after which the
Company has the option for a five-year extension. The fine chemicals
manufacturing facility in East Palo Alto is owned by the Company; however, the
land at the facility is leased under a ground lease agreement commencing
November 30, 1993 (see Note 4). The lease expires on November 30, 2008, after
which the Company has two five-year options to extend the lease term, and one
four-year option to extend the lease term after expiration of the first two
option periods.
Annual minimum rental payments which principally relate to the research and
office facilities through 1998 are $707,000 per year. Rent expense was
$732,000, $707,000, and $713,000 for each of the three years ended December 31,
1996, 1995, and 1994, respectively.
-69-
<PAGE>
The aggregate minimum annual commitments under all operating leases as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1997 707,000
1998 707,000
1999 38,000
2000 38,000
2001 38,000
and thereafter 266,000
----------
$1,794,000
==========
</TABLE>
NOTE 11. STOCKHOLDERS' EQUITY
STOCKHOLDERS RIGHTS PLAN
On October 28, 1996 the Board of Directors adopted a Stockholders Rights
Plan providing a dividend of rights (which cannot be exercised until certain
events occur) to purchase shares of preferred stock of the Company. Each
shareholder of record receives one right for each share of common stock then
owned. This plan was adopted to ensure that all stockholders of the Company
receive fair value for their common stock in the event of any proposed takeover
of the Company and to guard against coercive tactics to gain control of the
Company without offering fair value to the Company's stockholders.
PREFERRED STOCK
The Company has 5,000,000 shares of Preferred Stock authorized, all of
which are unissued and undesignated. The Board of Directors of the Company has
the authority, without further vote or action by the stockholders, to issue
these undesignated 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, terms or
redemption, redemption prices, liquidation preferences, and the number of shares
constituting any series or the designation of such series.
STOCK OPTION AND STOCK PURCHASE PLANS
The Company has elected to follow Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise price
of the Company's stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
-70-
<PAGE>
Pro forma information regarding net income and earnings per share is
required by FAS 123 which also requires that the information be determined as if
the Company has accounted for its employee stock awards and those of its
subsidiaries granted subsequent to December 31, 1994, under the fair value
method of this Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes multiple option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Weighted
Risk Free Average Compensation
Interest Rate Expected Life Expense
------------- Dividend Volatility ------------- -------------
1996 1995 Yield Factor 1996 1995 1996 1995
----- ----- -------- ---------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Catalytica, Inc. Stock Option
Plans 6.42 6.03 0 .8852 3.5 3.0 $470 $295
Catalytica Employee Stock
Purchase Plan 6.03 6.03 0 .8852 1.7 1.4 74 180
Catalytica Advanced
Technologies, Inc. 6.67 6.47 0 .8852 7.0 8.0 25 22
Catalytica Combustion Systems,
Inc. 6.57 6.26 0 .8852 5.0 6.0 66 49
Catalytica Fine Chemicals, Inc. 6.39 6.11 0 .8852 3.5 4.1 44 36
Total $679 $582
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
------------------ -------------------
(in thousands, except per share data)
<S> <C> <C>
Actual net loss............. $(5,192) $(8,687)
Compensation expense........ $ (679) $ (582)
Pro forma net loss.......... $(5,871) $(9,269)
Pro forma loss per share.... $ (0.30) $ (0.59)
</TABLE>
Since compensation expense is recognized over the vesting period of the
related options, which are generally five years, and because pro forma
disclosure is only required commencing with 1995, the initial impact on pro
forma income may not be representative of compensation expense in future years.
CATALYTICA INC.
1995 CATALYTICA DIRECTOR STOCK OPTION PLAN In 1995, the Company adopted
the 1995 Director Option Plan under which 100,000 shares were reserved for
future issuance. Under the 1995 Director Option Plan, the Board of Directors is
authorized to grant nonqualified stock options to Outside
-71-
<PAGE>
Directors to provide incentive to continue service on the Board. The
nonqualified stock options may be granted at a price of not less than 100% of
the fair market value of Common Stock on the date of grant. Options generally
become exercisable ratably over three years from the date of grant and expire no
later than ten years from the date of grant.
1992 CATALYTICA STOCK OPTION PLAN In 1992, the Company adopted the 1992
Stock Option Plan under which 1,950,000 shares have been reserved for future
issuance. Under the 1992 Stock Option Plan, the Board of Directors is
authorized to grant incentive stock options, or nonqualified stock options to
eligible employees and consultants, although incentive stock options may be
granted only to employees. Incentive stock options may be granted at an
exercise price of not less than 100% of the fair market value of Common Stock on
the date of grant while nonqualified stock options may be granted at a price not
less than 50% of the value of the Common Stock. Options generally become
exercisable ratably over five years from the date of grant and expire no later
than ten years from the date of grant.
CATALYTICA NON-QUALIFIED STOCK OPTION PLAN Since 1985, the Company has
granted to certain directors, officers, and consultants 438,800 nonqualified
stock options at an average price of $0.51 per share. As of December 31, 1996,
8,000 shares had been exercised, and 428,400 were exercisable. Of the amounts
disclosed, 400,000 options were granted in 1985 to an officer of the Company who
is now a director. All options were granted at the fair market value at the
date of grant.
1983 CATALYTICA INCENTIVE STOCK OPTION PLAN The Company established an
incentive stock option plan in 1983 pursuant to which 1,240,000 shares were
reserved for future issuance to employees. The plan provided for full-time
employees to be granted options to purchase common shares at fair value, as
determined by the Board of Directors. The 1983 Incentive Stock Option Plan
expired, in accordance with its terms, on May 16, 1993. While all future awards
will be made under the 1992 Stock Option Plan, awards made under the 1983
Incentive Stock Option Plan will continue to be administered in accordance with
that plan. All shares reserved but unissued under that plan were canceled.
1983 CATALYTICA RESTRICTED STOCK PURCHASE PLAN The Company has a 1983
restricted stock purchase plan pursuant to which 200,000 shares were reserved
for future issuance to employees. Under the 1983 Employee Restricted Stock
Purchase Plan, employees purchased 179,357 common shares at fair value, as
determined by the Board of Directors. The 1983 Restricted Stock Purchase Plan
expired, in accordance with its terms, on May 16, 1993. All shares reserved but
unissued under that plan were canceled. No shares were subject to repurchase.
In September, 1995, the Company implemented a stock exchange program
whereby certain option holders could exchange higher priced options for a
reduced number of new options at the current fair market value. Options
canceled and regranted are reflected in the table below.
The following table summarizes stock option plan activity for the 1995
Director Stock Option Plan, the 1992 Stock Option Plan, the 1985 Catalytica Non-
Qualified Plan, the 1983 Incentive Stock Option Plan, and the 1983 Restricted
Stock Purchase Plan:
-72-
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------
Shares Weighted
Available Number Average Aggregate
for of Exercise Exercise
Grant Shares Price Price
----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 587,680 1,259,650 $ 1.44 $ 1,814,610
Granted (261,726) 261,726 $ 6.27 1,640,969
Exercised -- (192,892) $ 0.81 (155,790)
Canceled 46,030 (46,030) $ 3.87 (177,948)
Expired (22,009) -- -- --
--------- --------- -------- -----------
Balance at December 31, 1994 349,975 1,282,454 $ 2.43 $ 3,121,841
Authorized 100,000 -- -- --
Granted (534,659) 534,659 $ 3.38 1,807,002
Exercised -- (49,575) $ 0.76 (37,866)
Canceled 265,473 (265,473) $ 5.97 (1,585,034)
Expired (3,765) -- -- --
--------- --------- -------- -----------
Balance at December 31, 1995 177,024 1,502,065 $ 2.20 $ 3,305,943
Authorized 1,200,000 -- -- --
Granted (308,700) 308,700 $ 3.89 1,201,756
Exercised -- (124,095) $ 1.56 (194,102)
Canceled 37,017 (37,017) $ 3.63 (134,310)
Expired (4,200) -- -- --
--------- --------- -------- -----------
Balance at December 31, 1996 1,101,141 1,649,653 $ 2.53 $ 4,179,287
========= ========= ======== ===========
</TABLE>
The weighted average fair value of options granted during 1996 is $2.33.
A summary of the Company's stock option activity and related information
for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------
Weighted Number Weighted
Range of Number Average Weighted Exercisable as Average
Exercise Outstanding Remaining Average of December 31 Exercise
Prices December 31, 1996 Contractual Life Exercise Price 1996 Price
- ------------------ ----------------- ----------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
$0.4500 - $0.6000 486,700 7.02 $0.4684 486,700 $0.4684
$0.9000 - $0.9000 124,969 4.18 $0.9000 124,969 $0.9000
$1.8000 - $1.8000 122,890 5.31 $1.8000 96,160 $1.8000
$3.2500 - $3.8800 734,181 8.93 $3.5080 138,721 $3.2621
$4.3800 - $5.3800 51,000 8.51 $4.8853 21,700 $4.8542
$5.7500 - $6.5000 129,913 6.81 $6.1038 65,866 $6.0312
--------- ---- ------- ------- -------
$0.4500 - $6.5000 1,649,653 7.55 $2.5334 934,115 $1.5722
</TABLE>
-73-
<PAGE>
1992 CATALYTICA EMPLOYEE STOCK PURCHASE PLAN
In 1992, the Company adopted the 1992 Employee Stock Purchase Plan ("ESPP")
under which 500,000 shares have been reserved for future issuance. Under the
1992 Employee Stock Purchase Plan, employees of the Company are given an
opportunity to purchase Common Stock of the Company through accumulated payroll
deductions. Shares are purchased under the ESPP at 85% of the fair market value
at certain specified dates. Of the 500,000 shares authorized to be issued under
this plan, 283,517 are available for issuance at December 31, 1996. For the
year ended December 31, 1996, employees purchased 82,757 shares for $214,606.
For the year ended December 31, 1995, employees purchased 70,370 shares for
$181,000. For the year ended December 31, 1994, employees purchased 33,955
shares for $141,000. The weighted average fair value of those purchase rights
granted in January 1996 and January 1995 were 1.86 and 1.65, respectively.
CATALYTICA DEFERRED COMPENSATION
The Company granted to an officer, certain employees, and consultants
options to purchase 36,910 shares of Common Stock at an exercise price of $1.80
per share in 1992, for which the Company recorded deferred compensation
amounting to approximately $234,000. The deferred compensation is being
amortized into earnings ratably over the vesting period of the option, five
years.
WARRANTS
The Company issued a warrant to purchase 320,000 shares of Common Stock at
a price per share equal to $4.80 per share in connection with its financing in
November, 1995. This warrant expires on November 3, 2000.
ADVANCED SENSOR DEVICES INC.
1995 ADVANCED SENSOR DEVICES STOCK OPTION PLAN In 1995, The Company
adopted the 1995 Advanced Sensor Devices Stock Option Plan under which 400,000
shares were reserved for future issuance and 312,600 shares were granted in
1995. The company believes the stock underlying these options has no value as a
result of the sale of Advanced Sensor Devices' assets. Therefore, these options
have not been valued in accordance with the provisions of FASB 123. (See Note
3).
CATALYTICA ADVANCED TECHNOLOGIES, INC.
1995 CATALYTICA ADVANCED TECHNOLOGIES STOCK OPTION PLAN In 1995, The
Company adopted the 1995 Catalytica Advanced Technologies Stock Option Plan
under which 900,000 shares have been reserved for future issuance. Under the
1995 Catalytica Advanced Technologies Stock Option Plan, the Catalytica Advanced
Technologies Board of Directors is authorized to grant incentive stock options,
or nonqualified stock options to eligible employees and consultants, although
incentive stock options may be granted only to employees. The incentive stock
options generally vest ratably over four years from the date of grant and expire
no later than ten years from the date of grant. Nonqualified stock options vest
ratably over three years from the date of grant and expire no later than ten
years from the date of
-74-
<PAGE>
grant. These options become exercisable upon an initial public offering of the
subsidiary's stock, acquisition of more than 50% of the subsidiary's outstanding
securities by a third party, or upon reaching the date January 1, 2004.
The following table summarizes stock option plan activity for the 1995
Catalytica Advanced Technologies Stock Option Plan:
<TABLE>
<CAPTION>
Outstanding Options
Shares --------------------------------------
Available Number Weighted Aggregate
for of Average Exercise
Grant Shares Exercise Price Price
--------- --------- ---------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 --- --- --- ---
Authorized 800,000 --- --- ---
Granted (756,500) 756,500 $0.1000 $ 75,650
Exercised --- --- --- ---
Canceled --- --- --- ---
Expired --- --- --- ---
--------- -------- ------- -------
Balance at December 31, 1995 43,500 756,500 $0.1000 75,650
Authorized 100,000 --- --- ---
Granted (80,000) 80,000 $0.1000 8,000
Exercised --- --- --- ---
Canceled 8,000 (8,000) $0.1000 (800)
Expired --- --- --- ---
--------- -------- ------- -------
Balance at December 31, 1996 $ 71,500 $828,500 $0.1000 $82,850
========= ======== ======= =======
</TABLE>
The weighted average fair value of options granted during 1996 was $0.08.
At December 31, 1996, options outstanding had a weighted average remaining
contractual life of 8.74 years and options to purchase approximately 360,737
shares of Catalytica Advanced Technologies common stock were vested with a
weighted average exercise price of $.10/share.
CATALYTICA COMBUSTION SYSTEMS, INC.
1995 CATALYTICA COMBUSTION SYSTEMS STOCK OPTION PLAN In 1995, The Company
adopted the 1995 Catalytica Combustion Systems Stock Option Plan under which
750,000 shares were reserved for future issuance. Under the 1995 Catalytica
Combustion Systems Stock Option Plan, the Catalytica Combustion Systems Board of
Directors is authorized to grant incentive stock options, or nonqualified stock
options to eligible employees and consultants, although incentive stock options
may be granted only to employees. The incentive stock options generally vest
ratably over four years from the date of grant and expire no later than ten
years from the date of grant. Nonqualified stock options vest ratably over
three years from the date of grant and expire no later than ten years from the
date of grant. These options become exercisable upon an initial public offering
of the subsidiary's stock, acquisition of more than 50% of the subsidiary's
outstanding securities by a third party, or upon reaching the date January 1,
2004.
-75-
<PAGE>
The following table summarizes stock option plan activity for the 1995
Catalytica Combustion Systems Stock Option Plan:
<TABLE>
<CAPTION>
Outstanding Options
Shares ------------------------------------------
Available Number Weighted Aggregate
for of Average Exercise
Grant Shares Exercise Price Price
--------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 --- --- --- ---
Authorized 750,000 --- --- ---
Granted (498,100) 498,100 $0.4000 $199,240
Exercised --- --- --- ---
Canceled --- --- --- ---
Expired --- --- --- ---
-------- ------- ------- --------
Balance at December 31, 1995 251,900 498,100 $0.4000 $199,240
Granted (242,900) 242,900 $0.4000 97,160
Exercised --- --- --- ---
Canceled 72,292 (72,292) $0.4000 (28,917)
Expired --- --- --- ---
-------- ------- ------- --------
Balance at December 31, 1996 81,292 668,707 $0.4674 $267,483
======== ======= ======= ========
</TABLE>
The weighted average fair value of options granted during 1996 was $0.29.
At December 31, 1996, options outstanding has a weighted average remaining
contractual life of 8.95 years and options to purchase approximately 234,028
shares of Catalytica Combustion Systems common stock were vested with a weighted
average exercise price of $.40/share.
CATALYTICA FINE CHEMICALS, INC.
1995 FINE CHEMICALS STOCK OPTION PLAN In 1995, The Company adopted the
1995 Fine Chemicals Stock Option Plan under which 478,000 shares have been
reserved for future issuance. Under the 1995 Fine Chemicals Stock Option Plan,
the Catalytica Fine Chemicals Board of Directors is authorized to grant
incentive stock options, or nonqualified stock options to eligible employees and
consultants, although incentive stock options may be granted only to employees.
The incentive stock options generally vest ratably over four years from the date
of grant and expire no later than ten years from the date of grant.
Nonqualified stock options vest ratably over three years from the date of grant
and expire no later than ten years from the date of grant. These options become
exercisable upon an initial public offering of the subsidiary's stock,
acquisition of more than 50% of the subsidiary's outstanding securities by a
third party, or upon reaching the date January 1, 2004.
-76-
<PAGE>
The following table summarizes stock option plan activity for the 1995 Fine
Chemicals Stock Option Plan:
<TABLE>
<CAPTION>
Outstanding Options
Shares -------------------------------------------------
Available Number Weighted Aggregate
for of Average Exercise
Grant Shares Exercise Price Price
-------- ------------------- -------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994..... --- --- --- ---
Authorized................... 378,000 --- --- ---
Granted...................... (377,100) 377,100 $ 0.4000 $150,840
Exercised.................... --- --- --- ---
Canceled..................... --- --- --- ---
Expired...................... --- --- --- ---
-------- ------- ------- --------
Balance at December 31, 1995..... 900 377,100 $0.4000 150,840
Authorized................... 100,000 --- --- ---
Granted...................... (121,900) 121,900 $0.6631 80,830
Exercised.................... --- --- --- ---
Canceled..................... 23,000 (23,000) $0.4000 (9,200)
Expired...................... --- --- --- ---
-------- ------- ------- --------
Balance at December 31, 1996 2,000 476,000 $0.4674 $222,470
======== ======= ======= ========
</TABLE>
The weighted average fair value of options granted during 1996 was $0.40.
At December 31, 1996, options to purchase approximately 181,996 shares of
Catalytica Fine Chemicals common stock were vested with a weighted average
exercise price of $.40/share.
A summary of Catalytica Fine Chemicals' stock option activity and related
information for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------
Weighted Number Weighted
Range of Number Average Weighted Exercisable As Average
Exercise Outstanding Remaining Average of December 31, Exercise
Prices December 31, 1996 Contractual Life Exercise Price 1996 Price
- ------------------ ------------------- ------------------ ---------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
$0.4000 - $0.4000 369,100 8.48 $0.4000 181,996 $0.4000
$0.7000 - $0.7000 106,900 9.52 $0.7000 0 $0.0000
------- ---- ------- ------- -------
$0.4000 - $0.7000 476,000 8.71 $0.4674 181,996 $0.4000
</TABLE>
NOTE 13. SUBSEQUENT EVENT
On February 5, 1997, the Company signed a letter of intent with Glaxo
Wellcome Inc. to acquire its pharmaceutical production facility in Greenville,
North Carolina. The proposed agreement requires Catalytica to purchase all of
the land, buildings and equipment at the 1.8 million-square-foot facility. In
addition to the asset purchase agreement, Catalytica will enter into a
manufacturing contract to supply designated Glaxo Wellcome prescription
products.
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<PAGE>
Under the terms of the proposed transaction, Catalytica will pay Glaxo
Wellcome certain cash consideration. In addition, Glaxo Wellcome will receive a
small equity stake in Catalytica Fine Chemicals. The agreement also provides
for Glaxo Wellcome to receive a share of the profits from Catalytica's
production in the Greenville site's sterile products facility. Determination of
the total purchase price will be based upon the completion of due diligence with
respect to the assets acquired and liabilities assumed.
-78-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CATALYTICA, INC.
(Registrant)
Dated: April 28, 1997
By:/s/ Ricardo B. Levy
-------------------
Ricardo B. Levy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ Ricardo B. Levy President, Chief Executive Officer April 28, 1997
- --------------------------------------- (Principal Executive Officer), and
Ricardo B. Levy Director
/s/ James A. Cusumano* Chairman of the Board and Chief April 28, 1997
- --------------------------------------- Technical Officer
James A. Cusumano
/s/ Lawrence W. Briscoe* Vice President, Finance and April 28, 1997
- --------------------------------------- Administration, and Chief Financial
Lawrence W. Briscoe Officer (Principal Accounting and
Financial Officer)
/s/ Ralph A. Dalla Betta* Vice President and Chief Scientist April 28, 1997
- ---------------------------------------
Ralph A. Dalla Betta
/s/ Utz Felcht* Director April 28, 1997
- ---------------------------------------
Utz Felcht
/s/ Richard Fleming* Director April 28, 1997
- ---------------------------------------
Richard Fleming
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ Ernest Mario* Director April 28, 1997
- ---------------------------------------
Ernest Mario
/s/ Yoshindo Tomoi* Director April 28, 1997
- ---------------------------------------
Yoshindo Tomoi
*By: /s/Ricardo B. Levy
-----------------------------------
Ricardo B. Levy, Attorney-in-fact
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT
The Company has not yet furnished its annual report or proxy material to
its Stockholders. The Company shall furnish the appropriate copies of such
materials to the Commission in the appropriate manner when it sends such
materials to its Stockholders.
-80-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 + Third Amended and Restated Certificate of Incorporation.
3.2 + Bylaws of Registrant.
4.1(A) + Agreement of Shareholders Amending Registration Rights and Right of First Refusal.
4.1(B) + Amended and Restated Registration Rights Agreement dated September 27, 1988.
4.1(C) + Amendment No. 1 to Amended and Restated Registration Rights Agreement.
4.1(D) + Form of Amended and Restated Rights Agreement.
4.2 + Specimen of Common Stock Certificate.
4.3 +++ Preferred Shares Rights Agreement dated as of October 23, 1996, between
Catalytica, Inc. and Chase Mellon Shareholder Services, L.L.P,
including the form of Rights Certificate and the Certificate of
Designation, the Summary of Rights Attached thereto as Exhibits A, B
and C, respectively.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1 + 1983 Incentive Stock Option Plan, as amended, with forms of agreements
thereunder.
10.2 + 1992 Stock Option Plan, with forms of agreements thereunder.
10.3 + 1992 Employee Stock Purchase Plan.
10.4 + ** Agreement, dated as of July 18, 1988, between the Company and Tanaka Kikinzoku Kogyo K.K.
10.5 + Joint Development Agreement, dated December 1, 1991 among the Company, Conoco Inc. and Neste Oy.
10.7 + ** Development Agreement, dated January 4, 1991 among the Company,
Petro-Canada Inc. and Techmocisco, Inc. (a subsidiary of Mitsubishi Oil),
as amended.
10.8 + Series D and E Preferred Shares and Warrant Purchase Agreement, dated
September 27, 1988 between the Company and Koch Industries, Inc.
10.9 + Term Note, dated February 25, 1992 between the Company and James A.
Cusumano.
10.11 + Form of Indemnification Agreement.
10.12 + Agreement and Plan of Reorganization dated as of September 27, 1988
among the Company, Lubrizol Enterprises, Inc. and Catven, Inc.
10.13 + Stock Purchase Agreement dated December 10, 1992 between the
Company and Mitsubishi Oil Co., Ltd.
10.15 ++ ** Ground Lease Agreement, dated November 30, 1993 between the
Company and Rhone-Poulenc Inc.
10.16 ++ ** Supply Agreement, dated September 28, 1993 between the Company and
Novartis Agro, Inc.
10.17 ++ Lease Agreement, dated January 1, 1993 between the Company and Jack
Dymond Associates.
10.18 ++ Loan and Security Agreement, dated November 18, 1994 between the
Company and Silicon Valley Bank.
10.19 ++** Agreement, dated January 31, 1995 between the Company and Tanaka
Kikinzoku Kogyo K.K.
10.20 * Loan Modification Agreement, dated November 30, 1995
10.21 * Catalytica Fine Chemicals, Inc. 1995 Stock Plan, with forms of agreements
thereunder.
10.22 * Catalytica Advanced Sensor Devices 1995 Stock Plan, with forms of
agreements thereunder.
10.23 * Catalytica Advanced Technologies, Inc. 1995 Stock Plan, with forms of
agreements thereunder.
10.24 * Catalytica Combustion Systems, Inc. 1995 Stock Plan, with forms of
agreements thereunder.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Notes Description
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.25 * Catalytica, Inc. 1995 Director Stock Option Plan, with forms of agreements
thereunder.
10.26 x Limited Liability Operating Agreement of GENXON Power Systems, LLC,
dated October 21, 1996.
21.1 + Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 x Power of Attorney.
27.1 x Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibits filed with the Company's Annual
Report on Form 10-K, for the year ended December 31, 1995.
** Confidential treatment has been granted for portions of these agreements.
+ Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
++ Incorporated by reference to the exhibits filed with the Company's Form
10-K for the fiscal year ended December 31, 1994.
+++ Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A as filed with the Commission on November
29, 1996.
x Previously filed with the Company's Annual Report on Form 10-K, for the
year ended December 31, 1996.
B. Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
<PAGE>
CATALYTICA, INC.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8's No. 33-62964 and No. 333-09533) pertaining to the 1992 Stock Option
Plan, the 1992 Employee Stock Purchase Plan, and the 1995 Director Option Plan
of Catalytica, Inc. of our report dated January 28, 1997, with respect to the
consolidated financial statements of Catalytica, Inc., included in this Annual
Report (Form 10-K/A) for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Jose, California
April 28, 1997
