<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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)
(650) 960-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 7, 1998, there were outstanding 28,199,084 shares of the
registrant's Common Stock, par value $.001, which is the only class of common
stock of the registrant registered under Section 12(g) of the Securities Act of
1933. The Company also has outstanding 13,270,000 shares of Class A Common
Stock and 11,730,000 shares of Class B Common Stock which are convertible into
an equal number of shares of Common Stock.
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CATALYTICA, INC.
FORM 10-Q
TABLE OF CONTENTS
SEPTEMBER 30, 1998
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and September 30, 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
1998 and September 30, 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
</TABLE>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,689 $ 35,149
Short-term investments 5,172 11,918
Accounts receivable, net 28,294 12,640
Accounts receivable from joint venture 217 967
Notes receivable from employees 293 405
Inventory:
Raw materials 41,926 52,648
Work in process 45,306 54,883
Finished goods 11,761 6,714
-------- --------
98,993 114,245
Deferred tax asset 166 166
Prepaid expenses and other assets 2,219 1,939
-------- --------
Total current assets 166,043 177,429
Property, plant and equipment:
Land 5,391 5,391
Equipment 116,287 99,744
Buildings and leasehold improvements 66,873 65,744
-------- --------
188,551 170,879
Less accumulated depreciation and amortization (24,669) (15,075)
-------- --------
163,882 155,804
Other assets 3,279 2,040
-------- --------
$333,204 $335,273
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,119 $ 23,281
Accrued payroll and related expenses 14,162 5,768
Deferred revenue 1,574 1,848
Other accrued liabilities 6,719 8,250
Current portion of long-term debt 305 50,332
Income taxes payable 661 525
-------- --------
Total current liabilities 39,540 90,004
Long-term debt 77,709 75,069
Non-current deferred revenue 2,559 3,611
Other accrued liabilities 6,400 6,400
Minority interest 41,000 11,000
Class A and B common stock 97,079 97,079
Stockholders' equity:
Common stock 32 28
Additional paid-in capital 102,156 100,375
Deferred compensation (312) (406)
Accumulated deficit (32,959) (47,887)
-------- --------
Total stockholders' equity 68,917 52,110
-------- --------
$333,204 $335,273
======== ========
</TABLE>
See accompanying notes.
3
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CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales $86,072 $66,699 $270,118 $76,020
Research revenues 2,115 1,606 6,280 4,832
------- ------- -------- -------
88,187 68,305 276,398 80,852
Costs and expenses:
Cost of sales 67,896 60,223 222,703 69,310
Research and development 6,351 2,470 16,446 6,909
Selling, general and administrative 5,545 2,139 12,801 4,130
------- ------- -------- -------
Total costs and expenses 79,792 64,832 251,950 80,349
Operating income 8,395 3,473 24,448 503
Interest income 616 303 2,171 808
Interest expense (1,960) (1,881) (6,980) (2,119)
Loss on joint venture (745) (1,150) (3,052) (2,600)
------- ------- -------- -------
Income (loss) before income taxes 6,306 745 16,587 (3,408)
Provision for income taxes (662) (2) (1,659) (2)
------- ------- -------- -------
Net income (loss) $ 5,644 $ 743 $ 14,928 $(3,410)
======= ======= ======== =======
Net income (loss) per share:
Basic $0.10 $0.02 $0.26 $(0.13)
======= ======= ======== =======
Diluted $0.09 $0.02 $0.24 $(0.13)
======= ======= ======== =======
Number of shares used in computing net
income (loss) per share:
Basic 53,176 40,914 53,054 26,896
======= ======= ======== -------
Diluted 59,238 44,753 59,044 26,896
======= ======= ======== -------
</TABLE>
See accompanying notes.
4
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CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,928 $ (3,410)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activity:
Depreciation and amortization 9,383 2,552
Deferred income taxes -- --
Losses in affiliated company 3,052 2,600
Changes in:
Accounts receivable (15,654) (17,038)
Accounts receivable from joint venture 750 545
Inventory 15,252 11,027
Prepaid expenses and other current assets (988) (721)
Accounts payable (7,162) 14,651
Accrued payroll and related expenses 8,394 3,465
Deferred revenue (1,326) (1,344)
Accrued acquisition costs (70) 285
Other accrued liabilities (1,325) 6,359
-------- ---------
Net cash provided by operating activities 25,234 18,971
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (28,906) (13,184)
Maturities of investments 36,089 21,532
Investment in affiliate company (3,052) (2,600)
Disposition of property and equipment 189 --
Acquisition of property and equipment (17,881) (3,651)
Acquisition of Glaxo inventory -- (117,500)
Acquisition of Glaxo property, plant and equipment -- (130,497)
-------- ---------
Net cash used in investing activities (13,561) (245,900)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts on (issuance of) notes receivable from employees (531) 73
Additions to debt obligations 2,700 137,726
Payments on debt obligations (50,087) (5,551)
Minority investment 30,000 --
Issuance of Class A and B common stock, net -- 117,679
Issuance of stock, net of issuance costs 1,785 5,790
-------- ---------
Net cash provided by (used in) financing activities (16,133) 255,717
-------- ---------
Net increase (decrease) in cash and cash equivalents (4,460) 28,788
Cash and cash equivalents at beginning of period 35,149 15,540
-------- ---------
Cash and cash equivalents at end of period $ 30,689 $ 44,328
======== =========
Non cash financing activities:
Issuance of warrants in conjunction with the Glaxo Wellcome facility acquisition -- $ 6,500
======== =========
Issuance of Catalytica Pharmaceutical's Junior Preferred Stock in conjunction with
the Glaxo Wellcome facility acquisition -- $ 3,000
======== =========
Assumption of liability in conjunction with Glaxo Wellcome facility acquisition -- $ 6,400
======== =========
</TABLE>
See accompanying notes.
5
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Catalytica, Inc.
Annual Report on Form 10-K for the year ended December 31, 1997.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is presented in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (EPS). This statement requires the presentation of EPS
to reflect both "Basic EPS" and "Diluted EPS" on the face of the statement of
operations. For the nine months ended September 30, 1997, the inclusion of
common stock equivalents and the reduction of Catalytica Pharmaceuticals income
due to holders of subsidiary stock options is antidilutive, therefore loss per
share is computed based on the weighted average number of common shares
outstanding excluding common stock equivalents for this period. Weighted average
shares outstanding for the three and nine months ended September 30, 1998, and
the three months ended September 30, 1997 includes Class A and B common shares
as Catalytica, Inc. ("the Company") considers Class A and B to be the equivalent
of common stock. The periods presented herein have been adjusted to reflect the
calculation of EPS in accordance with SFAS No. 128.
6
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A reconciliation of the numerators and denominators for the Basic and Diluted
EPS calculations follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share: Income (loss)
available to common shareholders $ 5,644 $ 743 $14,928 (3,410)
Less: Reduction of Catalytica Pharmaceuticals income
attributable to holders of subsidiary stock options (384) (25) (940) --
------- ------- ------- -------
Numerator for diluted earnings (loss) per share $ 5,260 $ 718 $13,988 (3,410)
------- ------- ------- -------
DENOMINATOR:
Denominator for basic earnings per share
Weighted-average shares 53,176 40,914 53,054 26,896
------- ------- ------- -------
Effect of dilutive securities:
Catalytica, Inc. employee stock options 798 624 764 --
Catalytica Pharmaceuticals Convertible Preferred Stock 1,668 1,483 1,681 --
Catalytica Pharmaceuticals Convertible Junior
Preferred Stock 563 500 567 --
Catalytica Combustion Systems, Inc. Convertible
Preferred Stock 2,645 -- 2,664 --
Catalytica, Inc. warrants issued to common shareholders -- 1,187 -- --
Catalytica, Inc. warrants issued to Glaxo Wellcome,
Inc. 388 45 314 --
------- ------- ------- -------
Dilutive potential common shares 6,062 3,839 5,990 --
Denominator for diluted earnings (loss) per share
Adjusted weighted-average shares and assumed
conversions 59,238 44,753 59,044 26,896
------- ------- ------- -------
Basic earnings (loss) per share $0.10 $0.02 $0.26 $ (0.13)
======= ======= ======= =======
Diluted earnings (loss) per share $0.09 $0.02 $0.24 $ (0.13)
======= ======= ======= =======
</TABLE>
3. IMPACT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company has
no comprehensive earnings adjustments for the three and nine months ended
September 30, 1998 and 1997, thus total comprehensive earnings is equal to net
earnings (loss).
7
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4. FINANCIAL INSTRUMENTS
For the purposes of the consolidated cash flows, all investments with
maturities of three months or less at the date of purchase held as available-
for-sale are considered to be cash and cash equivalents; instruments with
maturities of three months or less at the date of purchase that are planned to
be held-to-maturity ($5,171,860 at September 30, 1998) and investments with
maturities greater than three months that are available-for-sale (none at
September 30, 1998) 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 September 30, 1998). All investments at
September 30, 1998, 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.
5. 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.
6. REVENUE RECOGNITION
In connection with the purchase of the Glaxo Wellcome, Inc. ("Glaxo Wellcome")
facility in Greenville, North Carolina ("Greenville Facility") by the Company on
July 31, 1997, Glaxo Wellcome entered into a Supply Agreement under which
Catalytica Pharmaceuticals, Inc., a subsidiary of the Company ("Catalytica
Pharmaceuticals"), has been and will continue to manufacture products for Glaxo
Wellcome. During the quarter ended June 30, 1998, the original Supply Agreement
was amended to expand production of Glaxo Wellcome products at the Greenville
Facility in 1998 and 1999. Glaxo Wellcome has guaranteed that revenues paid to
Catalytica Pharmaceuticals will meet a specified level of minimum revenue or
that Glaxo Wellcome will pay Catalytica Pharmaceuticals any shortfall.
The Company recognizes revenue under the Supply Agreement with Glaxo Wellcome
based upon the minimum revenues under this agreement. All other product
revenues are recorded upon shipment. During the three and nine months ended
September 30, 1998, the Company recorded $77 and $244 million, respectively, of
revenue derived from sales to Glaxo Wellcome.
As of September 30, 1998, a receivable in the amount of $17.6 million was
outstanding from Glaxo Wellcome.
7. DEBT
In conjunction with the acquisition of the Greenville Facility, the Company
entered into a Credit Agreement pursuant to which a syndicate of banks led by
Chase Securities, Inc. ("Chase") agreed to lend Catalytica Pharmaceuticals an
aggregate of up to $200,000,000 (the "Debt Facilities"). The Debt Facilities
consisted of a senior secured term loan facility (the "Term Debt Facility") in
an aggregate principal amount of $125,000,000 and a senior secured revolving
facility (the "Revolving Debt Facility") in an aggregate principal amount of
$75,000,000. In the quarter ended June 30, 1998, this Credit Agreement was
amended to increase the Revolving Debt Facility from $75,000,000 million to
$100,000,000. In addition, the Term Debt Facility was reduced from its original
balance of $125,000,00 million to $75,000,000. Up to $20,000,000 of the
Revolving Debt Facility is available for the issuance of letters of credit. The
Term Debt Facility, which originally matured December 31, 2001, will now mature
December 31, 2002 and will amortize in quarterly installments commencing on
December 31, 1999. The Credit Agreement, which is guaranteed by the Company,
requires that the Company maintain certain financial ratios and levels of
tangible net worth, profitability, and liquidity and implements restrictions on
the Company's ability to declare and pay dividends. The senior secured facility
interest rate is a variable interest rate tied to LIBOR. This interest rate was
6.06% as of September 30, 1998. As of September 30, 1998, nothing was
outstanding under the Revolving Debt Facility and $75,000,000 was outstanding
under the Term Debt Facility.
8
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In addition to the restrictions above, the Credit Agreement contains various
covenants restricting further indebtedness, issuance of preferred stock by the
Company or its subsidiaries, liens, acquisitions, asset sales, and capital
expenditures. At September 30, 1998, the Company and Catalytica Pharmaceuticals,
Inc. were in compliance with the covenants.
In the second quarter of 1998 following the restructuring of the Credit
Agreement, the Company entered into a $50,000,000 interest rate swap,
derivative transaction to reduce the Company's exposure to fluctuations in
short-term interest rates. This interest rate swap transaction effectively
fixed the LIBOR benchmark rate used to calculate the Company's borrowing cost at
5.59% for 4 years on $50,000,000 of the Term Debt Facility. The Company
accounts for this interest rate swap as a hedge, and accrues the interest rate
differential as interest expense on a monthly basis.
During the second quarter of 1998, the Company received a $2.7 million non-
interest bearing loan from a customer to be used to finance special equipment
requirements. The loan is payable in aggregate annual amounts of (i) $.7
million on December 31, 1999; (ii) $1 million on December 31, 2000; and (iii)
$ 1 million on December 31, 2001.
8. FORMATION OF GENXON/(TM)/ JOINT VENTURE WITH WOODWARD GOVERNOR COMPANY
On October 15, 1996 Catalytica's subsidiary Catalytica Combustion Systems,
Inc. ("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, was formed to upgrade the combustion
systems of installed turbines with XONON, which is designed to reduce emissions
and permit greater asset utilization for both power generation and mechanical
drive markets.
Subsequent to the initial funding of $10 million, which was completed during
the quarter ended September 30, 1997, continued funding of the joint venture
beyond the initial commitment has occurred on a 50/50 basis with each joint
venture partner contributing an equal amount quarterly. For the three and nine
months ended September 30, 1998, each partner contributed $1.7 and $3.35
million, respectively, bringing the total combined investment in the joint
venture to $21.4 million to date. Although the Company believes that Combustion
Systems and Woodward intend to continue the funding of this joint venture,
neither joint venture partner is contractually required to make further capital
infusions.
Combustion Systems recognized its 50% share of GENXON losses of $1.5 million,
of which $.7 million was Combustion Systems' 50% of GENXON's loss for the three
months ended September 30, 1998, and $6.1 million, of which $3.0 million was
Combustion Systems' 50% of GENXON's loss for the nine months ended September
30, 1998. Accordingly, losses on the joint venture were recognized in the
results of operations.
As of September 30, 1998, an account receivable for $217,000 existed from the
joint venture for costs incurred by Combustion Systems. Accordingly these costs
have not been included in the consolidated entity.
9. INCOME TAXES
The provision for income taxes for the three and nine months ended September
30, 1998 was approximately 10%, for each period, as compared to 0% for the
corresponding periods in 1997. The increase in the estimated annual tax rate is
due primarily to state income taxes relating to the Greenville facility coupled
with the federal alternative minimum tax.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, which
involve risks and uncertainties including but not limited to those statements
that have been identified by an asterisk ("*") and other 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 including those set
forth under "Risk Factors" and elsewhere in this Report.
The Company is creating new businesses that leverage 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 capabilities to two primary areas: (i)
production of pharmaceutical components and products; (ii) developing advanced
combustion systems to reduce toxic emissions generated by natural gas turbines.
To pursue these opportunities, the Company has created two operating
subsidiaries, Catalytica Pharmaceuticals, Inc. ("Catalytica Pharmaceuticals")
and Catalytica Combustion Systems, Inc. ("Combustion Systems"). In addition to
market focus, the formation of subsidiaries provides greater flexibility for
strategic financial arrangements and business partnerships. A third subsidiary,
Catalytica Advanced Technologies ("Advanced Technologies"), is exploring new
business opportunities and markets for the Company's technologies.
On July 31, 1997, Catalytica Pharmaceuticals, Inc. (formerly Catalytica
Fine Chemicals, Inc.), a subsidiary of the Company, acquired from Glaxo
Wellcome, Inc. a pharmaceutical manufacturing facility (the "Greenville
Facility") located in Greenville, North Carolina (the "Acquisition"), in
exchange for (i) $244.7 million in cash (after certain post closing
adjustments); (ii) 250,000 shares of Junior Preferred Stock of Catalytica
Pharmaceuticals; (iii) warrants to purchase 2,000,000 shares of the Company's
Common Stock at an exercise price of $12.00 per share and (iv) 10% of the
earnings before interest and taxes prior to July 31, 2007, in excess of an
aggregate cumulative amount of $10 million attributable to the Sterile Product
Operations ("SPO") portion of the Greenville Facility, up to an aggregate
cumulative payment to Glaxo Wellcome of an additional $25.0 million.
To raise the cash needed to complete the Acquisition, the Company used a
combination of equity and debt financing. With the closing of the Acquisition,
the Company completed the sale of 13,270,000 shares of its Class A Common Stock
and 16,730,000 shares of its Class B Common Stock to Morgan Stanley Capital
Partners III, L.P. and two affiliated funds ("MSCP") (collectively, the "Stock
Sale"), at a price of $4.00 per share, for an aggregate of $120,000,000. The
Class A and B stock are convertible into common stock of the Company on a share
for share basis. In November of 1997, the Company repurchased 5,000,000 of the
Class B MSCP shares at $4.75 per share with the proceeds from the issuance of a
warrant dividend granted to its stockholders in connection with the financing of
the acquisition.
In addition to the equity investment by MSCP, the Company, The Chase
Manhattan Bank ("Chase") and Chase Securities Inc. ("CSI") entered into a Credit
Agreement pursuant to which a syndicate of banks led by Chase agreed to lend
Catalytica Pharmaceuticals an aggregate of up to $200,000,000 (the "Debt
Facilities"). The Debt Facilities consisted of a senior secured term loan
facility (the "Term Debt Facility") in an aggregate principal amount of
$125,000,000 and a senior secured revolving facility (the "Revolving Debt
Facility") in an aggregate principal amount of $75,000,000. In the quarter ended
June 30, 1998, this Credit Agreement was amended to increase the Revolving Debt
Facility from $75,000,000 million to $100,000,000. In addition, the Term Debt
Facility was reduced from its original balance of $125,000,00 million to
$75,000,000. In the second quarter of 1998, the Company also entered into an
interest rate swap, derivative transaction which fixed the LIBOR benchmark rate
used to calculate the Company's borrowing cost at 5.59% plus the spread in the
Credit Agreement for 4 years on $50,000,000 of the Term Debt Facility. As of
September 30, 1998, nothing was outstanding under the revolving debt facility
and $75,000,000 was outstanding under the Term Debt Facility. (See Note 7 to
Unaudited Condensed Consolidated Financial Statements).
10
<PAGE>
The additional facilities, employees and business volumes resulting from
the Acquisition have substantially increased the expenses and working capital
requirements and placed increased burdens on the Company's management resources.
Furthermore, the success of the Company's future results depends, in significant
part, on the levels of new manufacturing business developed by Catalytica
Pharmaceuticals.* In the event Catalytica Pharmaceuticals does not continue to
obtain additional new customers, which could involve additional business from
Glaxo Wellcome, on terms sufficient to offset the costs associated with
operating and maintaining the Greenville Facility, and with servicing the debt
incurred in connection with the acquisition of the Greenville Facility, the
Company's consolidated results of operations and financial condition would be
materially adversely affected.
Due to the size of the Acquisition, the results of operations of Catalytica
Pharmaceuticals have a material affect on the consolidated results of operations
of the Company, and the results of operations of the Company's other businesses
are expected to only modestly impact consolidated results for fiscal year 1998.*
The anticipated revenues from the Supply Agreement with Glaxo Wellcome are
expected to allow the Company to achieve continued profitable operations for
Catalytica Pharmaceuticals throughout 1998, and the consolidated parent Company
as well, offsetting losses arising from continued investments in the Company's
Combustion Systems and Advanced Technologies businesses.* After 1998, Catalytica
Pharmaceuticals' profitability will depend on its success and timing in
continuing to obtain additional new customers, including possible new agreements
with Glaxo Wellcome.* Profitability on a consolidated basis will depend on the
operating results of each of the Company's subsidiaries, particularly the rate
of commercial success of Catalytica Combustion Systems.*
Manufacturing at the Greenville Facility is conducted in three district
operations: Chemical Manufacturing Operations ("CMO"), Pharmaceutical Product
Operations ("PPO"), and Sterile Product Operations ("SPO"). There is
substantial underutilization of manufacturing capacity at the PPO and SPO
facilities, but because of the long lead times required to obtain necessary
regulatory approvals to manufacture final dosage products at these facilities,
Catalytica Pharmaceuticals does not anticipate additional significant revenue
from such facilities until 1999 at the earliest.* The inability of Catalytica
Pharmaceuticals to fill additional available capacity or to reduce costs in
conjunction with lower levels of capacity utilization would have a material
adverse effect on the Company's results of operations and financial condition.
Catalytica Pharmaceuticals also owns and operates a flexible, multi-
purpose, commercial scale manufacturing plant in East Palo Alto, California,
which has approximately 12,000 gallons of reactor capacity set up in a wide
range of reactor sizes ("Bayview Facility"). The Bayview Facility includes a
pilot plant used for scaling up manufacturing processes and a solids handling
facility that operates under current Good Manufacturing Practices ("cGMP").
This facility was acquired in 1993 from Novartis (formerly Sandoz).
On May 8, 1996, Catalytica Pharmaceuticals, announced that Pfizer Inc.
("Pfizer") had signed an agreement to invest $15 million in Catalytica
Pharmaceuticals. These funds originally provided Pfizer a 15% interest in
Catalytica Pharmaceuticals and a five-year research and development ("R&D")
commitment by Catalytica Pharmaceuticals to develop new processes and technology
for the manufacture of Pfizer products. Prior to this investment, Catalytica
Pharmaceuticals was a wholly-owned subsidiary of Catalytica, Inc. Pursuant to
the terms of the Greenville Acquisition, Glaxo Wellcome received approximately a
1.5% equity interest in Catalytica Pharmaceuticals and the Company purchased
additional shares of Catalytica Pharmaceuticals, which resulted in Pfizer's
ownership interest decreasing to approximately 4.4%. The Company owns the
remaining 94.1% outstanding equity interest in Catalytica Pharmaceuticals.
During the past four years, Catalytica Pharmaceuticals and Pfizer have
collaborated on the development of proprietary processes for key intermediate
products for several of Pfizer's promising new pharmaceuticals. During the first
quarter of 1998, Catalytica Pharmaceuticals and Pfizer signed a new
collaborative agreement to begin research and development into new drug
formulations. Under the new agreement, Catalytica Pharmaceuticals through it's
Greenville Facility, will now provide expertise in development of innovative
processes for the manufacture of tablets, capsules, injectable products, and
other formulations for releasing medications internally. The new agreement with
Pfizer extends the aforementioned existing R&D relationship between the two
companies, established in 1996, under which Catalytica Pharmaceuticals has
focused on the development of new processes for synthesizing chemical compounds
for the production of Pfizer drugs. The Pfizer drugs are at varying stages of
approval by the Food and Drug Administration ("FDA"), ranging from Phase II
clinical trials through the New Drug
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Application stage. Catalytica Pharmaceuticals currently manufactures
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 October 15, 1996 Catalytica's subsidiary Catalytica Combustion Systems
Inc. ("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, was formed to upgrade the combustion
systems of installed turbines with XONON which is designed to reduce emissions
and permit greater asset utilization for both power generation and mechanical
drive markets.
Subsequent to the initial funding of $10 million, which was completed
during the quarter ended September 30, 1997, continued funding of the joint
venture beyond the initial commitment has occurred on a 50/50 basis with each
joint venture partner contributing an equal amount quarterly. For the three and
nine months ended September 30, 1998, each partner contributed $1.7 and $3.35
million, respectively, bringing the total combined investment in the joint
venture to $21.4 million to date. Although the Company believes that Combustion
Systems and Woodward intend to continue the funding of this joint venture,
neither joint venture partner is contractually required to make further capital
infusions.*
On January 14, 1998, Enron Ventures Corporation, a wholly-owned subsidiary
of Enron Corporation ("Enron"), purchased a 15% minority interest in Catalytica
Combustion Systems for $30 million. The Company owns the remaining 85%
outstanding equity interest in Catalytica Combustion Systems. In addition, Enron
also received a three-year option to purchase an additional 5% of Combustion
Systems for $14.4 million. In connection with the Stock Purchase agreement, the
Company entered into a Share Exchange agreement, providing Enron the right to
exchange the Series B Preferred Stock of Combustion Systems for Catalytica, Inc.
Common Stock. After the five year anniversary of the agreement, if Combustion
Systems has not undertaken a public offering, in which Combustion Systems
receives proceeds of at least $20 million, Enron 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 Catalytica, Inc. Common Stock based upon a
determined exchange rate. The exchange rate is based upon the fair value of the
Series B Preferred Stock and the market value of Catalytica's Common Stock at
the time of conversion. Upon consolidation of Combustion Systems into
Catalytica, Inc., the Series B Preferred Stock issued to Enron is reflected as
$30 million of minority interest.
The Company's business had not been profitable until the second half of
1997, and as of September 30, 1998, the Company had an accumulated deficit of
$32.9 million. To achieve continued profitable operations, the Company must
successfully manage the operations of its Greenville Facility and develop
additional business with Glaxo and other customers, and, to a lesser extent,
successfully develop, manufacture, introduce and market or license its
combustion systems and catalytic processes.* The Company's success will depend
on its ability to complete the transition from emphasizing research and
development to full commercialization and sale of its products.* The Company
began manufacturing, marketing and selling pharmaceutical intermediates in 1994
with the acquisition of the Bayview Facility, and substantially increased its
manufacturing and marketing of pharmaceutical products in 1997 with the
acquisition of the Greenville Facility.
Results of Operations
Net revenues for the three and nine months ended September 30, 1998
increased by 29% and 242% respectively, compared to the same quarter in fiscal
1997 due to an increase in product sales attributable to the July 31, 1997
acquisition of the Greenville Facility and the related Supply Agreement with
Glaxo Wellcome. The Greenville Facility acquisition contributed to two of the
three months of revenue in the third quarter of 1997 which reflects the 29%
increase in 1998 third quarter revenue. During the three and nine months ended
September 30, 1998, 90% and 91%, respectively, of the Company's pharmaceutical
product revenues were derived from sales to Glaxo Wellcome. As part of the
Supply Agreement, Glaxo Wellcome guarantees a specified minimum level of
revenues in each year of the agreement. To the extent the minimum level of
revenues exceeds revenues due as a result of product shipments, the Company
receives additional payments from Glaxo Wellcome which help offset
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<PAGE>
fixed manufacturing costs associated with manufacturing capacity reserved for
Glaxo Wellcome as required in the long term Supply Agreement (See Note 6 to
Unaudited Condensed Consolidated Financial Statements). There was a 32% and 30%
increase, respectively, in research revenues for the three and nine months of
1998 reflecting an increase in funded research associated with Advanced
Technologies and Combustion Systems and a milestone payment from GENXON to
Combustion Systems in the second quarter.
Interest income increased 103% and 169% for the three and nine months ended
September 30, 1998, respectively, when compared to the same period in 1997.
Cash and investments increased due to an increase in product sales and the Enron
cash investment in Catalytica Combustion Systems. The Enron cash investment has
restrictions related to its use such that these funds cannot be used to retire
debt in other Catalytica subsidiaries such as Catalytica Pharmaceuticals.
Cost of sales increased 13% and 221% for the three and nine months of 1998.
The increase in cost of sales reflects increased physical volume of product
sales primarily due to an increase in sales attributable to the July 31, 1997
acquisition of the Greenville Facility and the related Supply Agreement with
Glaxo Wellcome. The Greenville Facility acquisition contributed to two of the
three months of cost of sales in the third quarter of 1997 which reflects the
13% increase in third quarter cost of sales. Operating margins in the third
quarter of 1998 were favorably influenced by product mix. Margins on the
pharmaceutical products are subject to fluctuations from quarter to quarter due
to various factors including the mix of products being manufactured,
manufacturing efficiencies achieved on production runs, the length of down-time
associated with setting up new productions runs, and numerous other variables
present in the chemical and dosage form manufacturing environment.
Research and development expenses increased 157% and 138% for the three and
nine months ended September 30, 1998, as compared to the same periods in 1997.
This increase is largely attributable to research and development expenses
associated with the Greenville Facility coupled with increased R&D activity
associated with Combustion Systems and Advanced Technologies. Research and
development expenses may fluctuate from quarter to quarter.
Selling, general and administrative expenses ("SG&A") increased 159% and
210% for the three and nine months ended 1998 compared to the same periods of
1997 largely due to SG&A costs incurred by the addition of SG&A employees at the
Greenville Facility. SG&A expenses have increased as the Company has expanded
it's sales and marketing personnel to sell the available capacity in the
Facility.* SG&A expenses also increased during the third quarter of 1998 due
to management incentive accruals related to above plan performance.
Net interest expense increased 4% for the third quarter of 1998 and
increased 229% for the first nine months of 1998 when compared to the same
periods last year due to debt associated with the July 31, 1997 acquisition of
the Greenville Facility.
Combustion Systems recognized its 50% share of GENXON losses of $1.5
million, of which $.7 million was Combustion Systems' 50% of GENXON's loss for
the three months ended September 30, 1998, and $6.1 million, of which $3.0
million was Combustion Systems' 50% of GENXON's loss for the nine months ended
September 30, 1998. The Company's capital contribution for the three and nine
months ended 1998 was $.7 and $3.3 million, respectively. The Company estimates
it may make additional capital contributions to the joint venture during the
remainder of 1998.* The Company anticipates GENXON will continue to generate
losses during this time frame, and accordingly the Company will record its share
of these losses to the extent of its capital contribution.*
The provision for income taxes for the three and nine months ended
September 30, 1998 was approximately 10% as compared to 0% for the corresponding
periods in 1997. The increase in the estimated annual tax rate is due primarily
to the Company's recent profitability resulting in state income taxes relating
to the Greenville Facility coupled with the federal alternative minimum tax.
13
<PAGE>
Liquidity and Capital Resources
Total cash and cash equivalents plus short-term investments decreased to
$35.9 million at September 30, 1998, compared to $47.1 million at December 31,
1997. The decrease in cash was primarily due to early payments of $50 million on
the Chase Term Debt Facility (See Note 7 to Unaudited Condensed Consolidated
Financial Statements), coupled with a net increase in various working capital
items associated with the Pharmaceutical business, largely offset by a $30
million investment in Combustion Systems by Enron Ventures Corporation for a 15%
ownership in Combustion Systems. During the quarter ended September 30, 1998,
the Company made early payments of $10 million on the Chase Term Debt Facility.
During the past several years, the Company has obtained various term loans
and lines of credit to fund capital purchases and working capital needs. On July
31, 1997 in conjunction with the acquisition of the Greenville Facility, the
Company and a syndicate of Banks led by Chase Manhattan Bank ("Chase") entered
into a Credit Agreement. In the second quarter of 1998 this Credit Agreement
was amended, pursuant to which Catalytica Pharmaceuticals could borrow up to an
aggregate of $175,000,000 (the "Debt Facilities"). The Debt Facilities consisted
of a senior secured term loan facility (the "Term Debt Facility") in an
aggregate principal amount of $75,000,000 and a senior secured revolving
facility (the "Revolving Debt Facility") in an aggregate principal amount of
$100,000,000. The Term Debt Facility will mature on December 31, 2002, and
amortizes in quarterly installments commencing on December 31, 1999 in aggregate
annual amounts of (i) $10,000,000 in the fourth quarter of 1999, (ii)
$15,000,000 in the year 2000, (iii) $20,000,000 in the year 2001, and (iv)
$30,000,000 in the year 2002. The Revolving Debt Facility matures on December
31, 2002. As of September 30, 1998, nothing was outstanding under the
Revolving Debt Facility and $75,000,000 was outstanding under the Term Debt
Facility. In the first three quarters of 1998, the Company made early payments
of $50 million on the original Chase Term Debt Facility. During the quarter
ended September 30, 1998, the Company made early payments of $10 million on the
original Chase Term Debt Facility. Because of these early payments and the
amendment of the Debt Facilities which includes changes to the amortization
schedule, there are no remaining amounts owed in 1998. As of September 30,
1998, the Company was in compliance with various covenants and other
restrictions contained in the Chase Debt Agreement and believes that it will
remain in compliance.*
In the second quarter of 1998, the Company entered into an interest rate
swap, derivative transaction in order to better match the Company's floating-
rate interest income on its cash equivalents and short-term investments with its
fixed-rate interest expense on its long-term debt, and to diversify a portion of
the Company's exposure away from fluctuations in short-term interest rates.
The net effect of the interest rate swap was to fix the LIBOR benchmark rate
used to calculate the Company's borrowing cost at 5.9% for 4 years on
$50,000,000 of the Term Debt Facility.
The Company's operations to date have required substantial amounts of cash.
As part of the financing of the acquisition of the Greenville Facility,
Catalytica Pharmaceuticals incurred approximately $125 million of long-term
indebtedness, of which $75 million was outstanding as of September 30, 1998. The
Company and its subsidiary Catalytica Advanced Technology have guaranteed this
indebtedness. As a result of this increased leverage, Catalytica
Pharmaceuticals' principal and interest obligations have increased
substantially. The degree to which Catalytica Pharmaceuticals is leveraged could
adversely affect Catalytica Pharmaceuticals' and the Company's ability to obtain
additional financing for working capital, acquisitions or other purposes and
could make Catalytica Pharmaceuticals and the Company more vulnerable to
economic downturns and competitive pressures. The Company's future capital
requirements will depend on many factors, including Catalytica Pharmaceuticals
level of business beyond the Supply Agreement with Glaxo Wellcome, the rate of
commercialization of the Company's catalytic combustion systems, and the need to
expand manufacturing capacity for pharmaceutical or combustion systems
business.* The Company expects to spend approximately $30 million during 1998
for capital expenditures primarily at Catalytica Pharmaceuticals.* Because of
its cash position of $35.9 million (including short-term investments) and its
available line of credit of $100 million as of September 30, 1998 coupled with
the anticipated cash flow from operations in 1998, the Company believes that it
has adequate funds to meet its working capital needs and debt repayment
obligations for at least the next 12 months.*
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<PAGE>
RISK FACTORS
Year 2000 Computer Systems Compliance. Many computer systems, software,
and electronic products require valid dates to work acceptably but are coded to
accept only two-digit entries in the date code field. These systems will need
to be changed to distinguish 21st century dates from 20th century dates. In
addition, certain systems and products do not correctly process "leap year"
dates. As a result, in the next 15 months, computer systems, software ("IT
Systems"), and other equipment, such as elevators, phones, office equipment, and
manufacturing equipment used by many companies may need to be upgraded,
repaired, or replaced to comply with "Year 2000" and "leap year" requirements.
The Company's existing systems are not yet completely Year 2000 compliant. As a
result, the Company is continuing to modify the systems.
The Company has conducted an internal review of most of its internal
systems, including inventory, manufacturing, planning, finance, human resources,
payroll, automation, laboratory, and embedded systems. The systems affected by
the Year 2000 problem are divided into three categories. BUSINESS INFORMATION
TECHNOLOGY SYSTEMS comprise any mainframe, midrange, or PC based computer system
used in corporate operations. These systems generally involve application code
supported by internal staff. MANUFACTURING AUTOMATION SYSTEMS are specific
computer and process control systems used in production processes, including
programmable logic controllers. These systems generally involve application
code that is supported by internal staff or directly by the vendor. EMBEDDED
SYSTEMS may comprise any system or device that includes an intelligent processor
or chip that is not programmable or cannot be modified without hardware changes.
These systems are generally supported by the vendor and are not maintained by
internal staff, other than for routine calibration or adjustment (e.g. stand-
alone controllers, intelligent field devices, laboratory instruments,
telecommunications devices).
Set forth below is a chart showing the Company's present status of
compliance (at September 30, 1998) and internal target dates for compliance.
The Company has prioritized the remediation effort to fix critical business
systems first, non-critical systems second, and cosmetic changes to reports and
displays last. Key critical business systems, such as Financials (General
Ledger, Purchasing, Accounts Payable, Accounts Receivable, and Fixed Assets) and
Material Requirements Planning, are currently 100% compliant. Remaining
critical and non-critical business systems are expected to be completed by mid-
1999 and cosmetic changes to reports and displays are anticipated to be
completed in fourth quarter 1999. *
PRESENT YEAR 2000 STATUS AS OF SEPTEMBER 30, 1998
- -------------------------------------------------
<TABLE>
<CAPTION>
RESOLUTION PHASES
- ----------------------------------------------------------------------------------------------
EXPOSURE TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BUSINESS INFORMATION 100% Complete 71 % Complete 61% Complete 51% Complete
TECHNOLOGY SYSTEMS
Expected Completion November 1999 November 1999 December 1999
- ----------------------------------------------------------------------------------------------
MANUFACTURING 87% Complete 82% Complete 77% Complete 63% Complete
AUTOMATION SYSTEMS
Expected Completion December 1998 July 1999 July 1999 September 1999
- ----------------------------------------------------------------------------------------------
EMBEDDED SYSTEMS 78% Complete 63% Complete 63% Complete 63% Complete
Expected Completion December 1998 September 1999 September 1999 September 1999
- ----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Assessment of potential problems in business information technology systems
is complete; assessment of manufacturing automation systems and embedded systems
is in progress and is expected to be complete in the fourth quarter of 1998.*
Testing and remediation of Business Information Technology Systems,
Manufacturing Automation Systems, and Embedded Systems is in progress. All
phases of these efforts are expected to be successfully completed during 1999.*
As part of the Company's review to assure compliance with Year 2000, the
Company has formed a task force (the "Task Force") to oversee Year 2000 and leap
year issues.* The Task Force has reviewed all IT Systems and Non-IT Systems
that have been determined not to be Year 2000 and leap year compliant and has
identified and begun implementation of solutions to ensure such compliance.* The
Company has evaluated its systems for Year 2000 and leap year compliance.
Remediation of problems discovered will be corrected through internal efforts,
vendor upgrades, replacement, or decommissioning of obsolete systems and
equipment.* External and internal costs associated with these efforts are
currently expected to be approximately $7 million.* In conjunction with the
purchase of the Greenville site, Glaxo Wellcome has agreed to reimburse
Catalytica for $4 million of these costs. As of September 30, 1998, the Company
had spent $3.4 million on costs associated with the Year 2000 effort of which
$2.5 million is to be reimbursed by Glaxo Wellcome.* Catalytica does
not expect the costs relating to Year 2000 remediation to have a material effect
on results of operations or financial condition.*
The Company has contacted its major customers, vendors, and service
suppliers whose systems failures potentially could have a significant impact on
the Company's operations to verify their Year 2000 readiness to determine
potential exposure to Year 2000 issues. The Company has been informed by 65 per
cent of its major customers, vendors, and service suppliers that such suppliers
will be Year 2000 compliant by the Year 2000.
Failure of these third parties systems to timely achieve Year 2000
compliance could have a material adverse effect on the business, financial
condition, results of operation and prospects of the Company. Year 2000
problems could affect many of the Company's production, distribution, plant
equipment, financial, and administrative operations. Systems critical to the
business which have been identified as non-Year 2000 compliant are either being
replaced or corrected through programming modifications.
As part of contingency planning, Catalytica is developing procedures for
those areas that are critical to its business. These plans will be designed to
mitigate serious disruptions to the business beyond the end of 1999.* The major
efforts in contingency planning will occur in the last quarter of 1998 and the
first half of 1999, with the expectation that contingency plans will be in place
by the end of the second quarter of 1999.* Based on current plans and efforts
to date, the Company does not anticipate that Year 2000 problems will have a
material effect on results of operations or financial condition.*
The Company has not determined the state of compliance of certain third-
party suppliers of services such as phone companies, long distance carriers,
financial institutions and electric companies, the failure of any one of which
could severely disrupt the Company's ability to carry on its business as well as
disrupt the business of the Company's customers.
Failure to provide Year 2000 and leap year compliant business solutions to
customers or to receive such business solutions from its suppliers could result
in liability to the Company or otherwise have a material adverse effect on the
Company's business, results of operations, financial condition and prospects.
The Company could be affected through disruptions in the operation of the
enterprises with which the Company interacts or from general widespread problems
or an economic crisis resulting from non-compliant Year 2000 systems. Despite
the Company's efforts to address the Year 2000 effect on its internal systems
and business operations, such effect could result in a material disruption of
its business or have a material adverse effect on the Company's business,
financial condition or results of operations.
UNCERTAINTY OF FUTURE RESULTS. To achieve continued profitable operations,
Catalytica must successfully manage the operations of the pharmaceutical
manufacturing facility located in Greenville, North Carolina (the "Greenville
16
<PAGE>
Facility"), and, to a lesser extent, successfully develop, manufacture,
introduce and market or license its combustion systems and catalytic processes.*
The Company began manufacturing, marketing and selling pharmaceutical
intermediates in 1994. As a result of the acquisition of the Greenville
Facility in 1997, it has substantially increased its manufacturing of
pharmaceutical products. The Company's business first achieved profitability
in the quarter ended September 30, 1997.
The Company's profitability is dependent on the continued profitability of
Catalytica Pharmaceuticals and the extent of the losses in its other operating
subsidiaries.* Catalytica Pharmaceuticals' profitability will depend on its
success and timing in continuing to obtain new customers, including possible
new agreements with Glaxo Wellcome.* In the event Catalytica Pharmaceuticals
does not continue to obtain additional new customers, which could involve
additional business from Glaxo Wellcome, on terms sufficient to offset the
costs associated with operating and maintaining the Greenville Facility, and
with servicing the debt incurred in connection with the acquisition of the
Greenville Facility, the Company's consolidated results of operations and
financial condition would be materially adversely affected. Manufacturing at
the Greenville Facility is conducted in three distinct operations: Chemical
Manufacturing Operations ("CMO"), Pharmaceutical Product Operations ("PPO")
and Sterile Product Operations ("SPO"). There is substantial underutilization
of manufacturing capacity at the PPO and SPO facilities, and because of the
long lead times required to obtain necessary regulatory approvals to
manufacture pharmaceutical and sterile products at these facilities,
Catalytica Pharmaceuticals does not anticipate additional significant revenue
from such facilities until 1999 at the earliest.* See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company anticipates its operating results 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 pharmaceuticals products coupled with changes in product mix, as well as the
amount and timing of payments and expenses under the Company's research and
development contracts.
RELIANCE ON RELATIONSHIP WITH GLAXO WELLCOME. Catalytica Pharmaceuticals
estimates that aggregate payments by Glaxo Wellcome under the Supply Agreement,
as amended, which commenced on August 1, 1997, and was expanded in the second
quarter of 1998, will total approximately $850 million, which include guaranteed
minimum payments plus the cost of raw materials.* The annual level of minimum
payments declines significantly after 1998, but is expected to continue to
represent a significant source of revenue for Catalytica Pharmaceuticals.*
Results for Catalytica Pharmaceuticals business is substantially dependent on
its Supply Agreement with Glaxo Wellcome during 1998 and 1999, and will continue
to be dependent on Glaxo Wellcome in part thereafter until the end of the term
of the Supply Agreement.* Catalytica Pharmaceuticals' business and the
Company's consolidated results of operations would be adversely affected if
Catalytica Pharmaceuticals does not successfully perform its
17
<PAGE>
obligations under the Supply Agreement. This could result in increased costs to
the Company or in possible termination of the Supply Agreement by Glaxo
Wellcome.*
DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent on the
retention of principal members of its management and scientific staff and on the
ability to continue to attract, motivate and retain additional key personnel.*
Competition for such key personnel is intense, and the loss of the services of
key personnel or the failure to recruit necessary additional personnel could
have a material adverse effect on the Company's operations and on its research
and development efforts. The Company does not have non-competition agreements
with any of its key employees. The Company's expansion into areas and
activities requiring additional expertise, such as manufacturing, marketing and
distribution, have placed increased demands on the Company's resources. These
activities require the addition of new personnel with expertise in these areas
and the development of additional expertise by existing personnel. Any failure
on the part of Catalytica Pharmaceuticals to attract or retain necessary
personnel would have a material adverse effect on the Company's consolidated
results of operations.
UNCERTAINTIES RELATED TO COMBUSTION SYSTEMS BUSINESS. The Company, through
its subsidiary Catalytica Combustion Systems, Inc. ("Combustion Systems"), 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 rigorous testing by turbine
manufacturers. Ultimate sales of the Company's combustion system products will
depend upon the acceptance and use of the Company's technology by a limited
number of turbine manufacturers and the Company's ability to enter into
commercial relationships with these manufacturers.* The Company's subsidiary,
Combustion Systems, is currently working with leading turbine manufacturers,
including: Pratt & Whitney Canada, Inc., General Electric, Allison Engine Co., a
subsidiary of Rolls Royce, and Solar, a subsidiary of Caterpillar, Inc. In
addition, through its joint venture company GENXON, Combustion Systems is
developing complete combustor systems for 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 retrofitted on older out-of-warranty turbines no
longer supported by OEM's.* Neither the Company, its subsidiary Combustion
Systems, 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
could 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, and to the extent that the Company's existing
facilities are inadequate, 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 that affect capital investment decisions, as well as the
regulatory environment.* There can be no assurance that the Company's
combustion products will be economically attractive when compared to competitive
products.
In October 1996 Combustion Systems and Woodward Governor Company formed a
Delaware limited liability company in connection with a 50/50 joint venture to
serve the gas turbine retrofit market for installed, out-of-warranty engines.
The new company, GENXON/(TM)/ Power Systems, LLC ("GENXON"), was formed to
upgrade the combustion systems of installed turbines with XONON which is
designed to reduce emissions and permit greater asset utilization for both power
generation and mechanical drive markets. GENXON plans to deliver an integrated
product which includes Combustion Systems' system for ultra low NOx emissions
and Woodward's control systems.* 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
18
<PAGE>
that GENXON will be successful in developing new combustion chambers that will
work in lieu of the current design that does not incorporate a catalyst. There
can be no assurance that GENXON's products will be economically attractive when
compared to competitive products.
The initial capital commitment of the GENXON joint venture partners was $10
million--$2 million from Combustion Systems and $8 million from Woodward--
payable over time as the funds were required by the joint venture. This initial
capital commitment of $10 million was reached during the third quarter of 1997.
Continued funding of the joint venture beyond the initial $10 million commitment
has occurred on a 50/50 basis with each joint venture partner contributing $1.7
and $3.35 million, respectively, for the three and nine months ended September
30, 1998, bringing the total investment in the joint venture to $21.4 million to
date. Combustion Systems recognized its 50% share of GENXON losses, of $1.5
million, of which $.7 million was Combustion Systems 50% of GENXON's loss for
the three months ended September 30, 1998, and $6.1 million, of which $3.0
million was Combustion Systems 50% of GENXON's loss for the nine months ended
September 30, 1998. Accordingly, losses on the joint venture were recognized in
the results of operations. The Company expects to make additional capital
contributions to the joint venture during the remainder of fiscal 1998 and
anticipates GENXON will incur additional losses.* The Company will record its
share of these losses to the extent of its capital contribution. Although
Combustion Systems and Woodward intend to continue the funding of this joint
venture, neither joint venture partner is contractually required to make further
capital infusions. If 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 an
adverse effect on the Company's results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK OF PRODUCT LIABILITY. Although Catalytica Pharmaceuticals intends to
seek indemnification from its customers for any product liability claims that
may result from the pharmaceutical products it produces, there can be no
assurance that Catalytica Pharmaceuticals will not ultimately be found liable
for any product liability claims regarding products it manufactures. Catalytica
Pharmaceuticals expects it will be required to indemnify its customers for
product liability claims if a manufacturing defect results in injury. There can
be no assurance that Catalytica Pharmaceuticals will be able to obtain or
maintain product liability insurance in the future on acceptable terms or with
adequate coverage against potential liabilities. If Catalytica Pharmaceuticals
is found liable in a product liability claim and the Company does not have
adequate product liability insurance or indemnification, the Company's
consolidated results of operations could be materially adversely effected.
Additionally, under the Supply Agreement, Catalytica Pharmaceuticals is
obligated to maintain $100,000,000 of product liability insurance. If
Catalytica Pharmaceuticals does not meet this requirement, it would be
considered a default under the Supply Agreement.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS. The Company's research and
development activities and fine chemicals manufacturing involve the use of many
hazardous chemicals. The use of such chemicals has significantly increased as a
result of the acquisition of the Greenville Facility. The Company is subject to
extensive federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and associated
waste products. The Company believes that its properties and operations comply
in all material respects with applicable environmental laws; however, the risk
of environmental liabilities cannot be completely eliminated. Public awareness
of environmental issues has increased the impact of such laws on the conduct of
manufacturing operations and ownership of property. Any failure by the Company
to comply with present or future environmental laws could result in cessation of
portions or all of the Company's operations, impositions of fines, restrictions
on the Company's ability to carry on or expand its operations, significant
expenditures by the Company to comply with environmental laws and regulations,
and/or liabilities in excess of the resources of the Company. The Company has
environmental impairment insurance with regard to first party and third party
liability in the amount of $25,000,000 (with a $1,000,000 retention) with
respect to the Greenville Facility only. There can be no assurance that the
Company will not be required to make renovations or improvements to comply with
environmental laws and regulations in the future. The Company's operations,
business or assets could be materially adversely affected in the event such
environmental laws or regulations require the Company to modify current
facilities substantially or otherwise limit the Company's ability to conduct or
expand its operations.
19
<PAGE>
Catalytica Pharmaceuticals expects that significant expenditures may be
incurred at the Greenville Facility as a result of new environmental
regulations.* As of September 21, 1998, the United States Environmental
Protection Agency (the "EPA") has issued, new regulations for the
pharmaceutical industry under the authority of the federal Clean Air Act and
Clean Water Act. These proposed regulations will require the installation of
"Maximum Achievable Control Technology" for certain hazardous air pollutant
emissions sources ("Pharmaceutical MACT") and could potentially require the
installation of additional pretreatment systems for wastewater discharges.* The
EPA is also considering changes to its particulate matter emissions regulations
as well as regulation of certain ozone precursor emissions.* As these rules are
in the early stages of consideration by the EPA, and as there can be no
assurance of their adoption, the additional cost of complying with such
regulations cannot be determined at this time. There can be no assurance that
Catalytica Pharmaceuticals will not be required to make additional renovations
or improvements to comply with environmental laws and regulations in the future.
Catalytica Pharmaceuticals' operations, business and assets could be materially
adversely affected in the event such environmental laws or regulations require
Catalytica Pharmaceuticals to modify the current Greenville Facility
substantially or otherwise limit Catalytica Pharmaceuticals' ability to conduct
or expand its operations.
CURRENT AND POTENTIAL ENVIRONMENTAL CONTAMINATION AT CATALYTICA
PHARMACEUTICALS' TWO SITES. Glaxo Wellcome has been working with the EPA and
the North Carolina Department of Environment and Natural Resources (the
"NCDENR") to investigate, identify and remediate contamination in the soil and
groundwater at the Greenville Facility now owned by Catalytica Pharmaceuticals.
This investigation, carried out pursuant to the federal Resource Conservation
and Recovery Act, has identified 17 different areas of the Greenville Facility
where contamination has or may have occurred. Of these 17 areas, at least six
have been identified as requiring further investigation and remediation by
NCDENR ("Site Contamination"). Contaminants found in the soil and groundwater
at the Greenville Facility include solvents, petroleum hydrocarbons and
pesticides. As the new owner of the Greenville Facility, Catalytica
Pharmaceuticals has become legally liable for such contamination.
Notwithstanding such legal liability, Glaxo Wellcome has agreed to be primarily
liable for and to perform, at its cost, the remediation required by law for
contamination of the soil and groundwater existing at the Greenville Facility as
of the Closing. The cost and extent of remediation to be required at the
Greenville Facility is currently unknown. The Environmental Agreement with
Glaxo Wellcome also requires Catalytica Pharmaceuticals to provide access to the
Greenville Facility and certain facility services as required for the
remediation, subject to reimbursement by Glaxo Wellcome. However, there can be
no assurance that the Company or Catalytica Pharmaceuticals will not incur
unreimbursed costs or suffer an interference with ongoing operations as a result
of Glaxo Wellcome's remediation activities or the existence of contamination at
the Greenville Facility. In addition, the Company's future development of the
Greenville Facility may be limited by the existence of contamination or Glaxo
Wellcome's remediation activities. There also can be no assurance that
Catalytica Pharmaceuticals' ongoing operations at the Greenville Facility will
not cause additional contamination. The determination of the existence and cost
of any such additional contamination contributed by Catalytica Pharmaceuticals
of the Company could involve costly and time-consuming negotiations and
litigation. Furthermore, any such contamination caused by Catalytica
Pharmaceuticals or the Company could materially adversely affect the business,
results of operations and financial condition of Catalytica Pharmaceuticals and
the consolidated results of operations and financial condition of the Company.
In addition, a moderate amount of asbestos containing material ("ACM") is
present at the Greenville Facility. Catalytica Pharmaceuticals believes that
the ACM, in its present condition, does not require abatement. Abatement will
only be required if and as renovations are performed in those areas containing
ACM. Catalytica Pharmaceuticals cannot presently predict whether, when or to
what extent it may need or desire to renovate areas of the Greenville Facility
containing ACM. However, should such renovations be necessary, the additional
costs could be substantial.
The Company through a subsidiary leases the land on which its Bayview
facility in East Palo Alto, California is located from Rhone Poulenc, Inc.,
("Rhone Poulenc"). The past activities of Rhone Poulenc's predecessor caused
significant soil and groundwater contamination of the facility and a down
gradient area located along the San Francisco Bay. Consequently, the site is
subject to a clean up and abatement order issued by the Bay Area Regional Water
Quality Control Board ("RWQCB") which currently requires stabilization,
containment and monitoring of the arsenic and volatile organic contamination at
the site and surrounding areas. The ground lease between Rhone Poulenc and the
Company includes an indemnity by Rhone Poulenc against any costs and liabilities
that the Company might incur to fulfill the RWQCB order and to otherwise address
the contamination that is the
20
<PAGE>
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.
CATALYTICA PHARMACEUTICALS' COMPLIANCE WITH FDA REGULATIONS. Many of the
fine chemicals products Catalytica Pharmaceuticals manufactures, or will
manufacture in the future, and the final drug products in which they are used
are subject to regulation for safety and efficacy by the FDA and foreign
regulatory authorities before such products can be commercially marketed. The
process of obtaining regulatory clearances for marketing is uncertain, costly
and time consuming. Catalytica Pharmaceuticals cannot predict how long the
necessary regulatory approvals will take or if its customers will ever obtain
such approval for their products. To the extent Catalytica Pharmaceuticals'
customers do not obtain the necessary regulatory approvals for marketing new
products, Catalytica Pharmaceuticals' fine chemicals product sales will be
adversely affected.
Products manufactured by Catalytica Pharmaceuticals at the Greenville
Facility require Catalytica Pharmaceuticals to comply with the FDA's current
Good Manufacturing Practices ("cGMP") regulations, and certain of Catalytica
Pharmaceuticals' customers, including Glaxo Wellcome, also require Catalytica
Pharmaceuticals to adhere to cGMP regulations, even if not required by the FDA.
In complying with cGMP regulations, manufacturers must continue to expend time,
money and effort in production, record keeping and quality control to ensure
that the product meets applicable specifications and other requirements. The
FDA periodically inspects drug-manufacturing facilities to ensure compliance
with applicable cGMP requirements. Failure to comply subjects the manufacturer
to possible FDA action, such as suspension of manufacturing. The FDA also may
require the submission of any lot of the product for inspection and may restrict
the release of any lot that does not comply with FDA regulations, or may
otherwise order the suspension of manufacture, recall or seizure. Failure of
Catalytica Pharmaceuticals' customers to obtain and to maintain FDA clearance
for marketing of the products manufactured by Catalytica Pharmaceuticals, or
failure of Catalytica Pharmaceuticals to comply with cGMP regulations as
required by the FDA or Catalytica Pharmaceuticals' customers, would have a
material adverse effect on the Company's results of operations.
INFLUENCE OF ENVIRONMENTAL REGULATIONS ON RATE OF COMMERCIALIZATION. The
rate at which industrial companies adopt the Company's catalytic combustion
systems 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 systems.*
Demand for the Company's systems and processes will be affected by how quickly
the standards are implemented and the level of reductions required.* Certain
industries or companies may successfully delay the implementation of existing or
new regulations or purchase or acquire emissions credits from other sources,
which could delay or eliminate their need to purchase the Company's systems and
processes. Moreover, new environmental regulations may impose different
requirements which may not be met by the systems and processes being developed
by Catalytica or which may require costly modifications of the Company's
products. The United States Congress is currently reviewing existing
environmental regulations. There can be no certainty as to whether Congress
will amend or modify existing regulations in a manner that could have an adverse
effect on demand for the Company's combustion system products.
21
<PAGE>
COMPETITION AND TECHNOLOGICAL CHANGE. There are numerous competitors in a
variety of industries in the United States, Europe and Japan that 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. 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 market for fine chemicals used in
pharmaceutical products and in the market for final dosage form of
pharmaceutical products, the Company faces its primary competition from
pharmaceutical companies that manufacture their own products and from other fine
chemicals manufacturers such as Lonza AG and DSM Fine Chemicals. In the
combustion systems market, the Company faces its primary competition from large
gas turbine power generation manufacturers, such as General Electric Co.
("General Electric"), Allison Engine Company ("Allison") and Solar Turbines
Incorporated ("Solar"), each of which is developing competing DLN systems for
their own turbines. Many of the Company's competitors in the combustion systems
market are also potential customers of the Company, and the Company expects to
rely on these potential customers to help commercialize its products.* Most of
these competitors have greater research and development capabilities, financial
resources, managerial resources, marketing experience and manufacturing
experience than the Company. If these companies are successful in developing
such products, the Company's ability to sell its systems and processes would be
materially adversely affected. Further, since many of the Company's competitors
are existing or potential customers, the Company's ability to gain market share
may be limited.
PATENTS AND INTELLECTUAL PROPERTY. The Company has an active program of
pursuing patents for its inventions in the United States and in markets
throughout the world relevant to its business areas. The Company has at least
37 United States patents and 14 pending United States patent applications, and
at least 91 foreign patents and patent applications.
The Company's success will depend on the ability to continue to obtain
patents, protect trade secrets and operate without infringing on the proprietary
rights of others in the United States and other countries. There can be no
assurance that the Company's patent applications will result in the issuance of
any patent, that any of the Company's existing patents or any patents that may
be issued in the future will provide significant proprietary protection, that
any such patents will be sufficiently broad to protect the Company's technology,
or that any such patents will not be challenged, circumvented or invalidated.
There can also be no assurance that the patents of others will not have an
adverse effect on the Company. Others may independently develop similar systems
or processes or design around patents issued to the Company. In addition, the
Company may be required to obtain licenses to patents or other proprietary
rights. The Company cannot assure that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to the
Company, if at all. If Catalytica requires and does not obtain such licenses,
it could encounter delays in system or process introductions while it attempts
to design around such patents, or it could find that the development,
manufacture, sale or licensing of systems or processes requiring such licenses
could be foreclosed. The Company could incur substantial costs in defending
itself or its licensees in litigation brought by others or prosecuting
infringement claims against third parties. The Company could incur substantial
costs in interference proceedings declared by the United States Patent and
Trademark Office in connection with one or more of the Company's or third
parties' patents or patent applications, and those proceedings could also result
in an adverse decision as to the priority of the Company's inventions. The
Company also protects its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
CONCENTRATION OF OWNERSHIP. Morgan Stanley Capital Partners III, L.P. and
two affiliated funds (collectively, "MSCP") beneficially own approximately 32%
of the voting control of the Company and 47% of the outstanding capital stock of
the Company as of September 30, 1998. As a result, MSCP is able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of all significant corporate transactions
such as any merger, consolidation or sale of all or substantially all of the
Company's assets. The Company has granted to MSCP certain contractual rights,
including representation on the Company's Board of Directors and committees of
the Board of Directors, that will give MSCP additional rights to participate in
certain actions to be taken by the Company. Such concentration of ownership and
contractual rights
22
<PAGE>
may have the effect of delaying, deferring or preventing a change of control of
the Company. The sale by MSCP of shares of the Company's capital stock could
constitute a change of control under the Company's credit agreement, which would
trigger a default of the agreement. MSCP has agreed not to trigger a change of
control under the credit agreement. In addition, such concentration of ownership
and contractual rights could allow MSCP to prevent significant corporate
transactions.
23
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Catalytica Combustion Systems, Inc. 1995 Stock Plan, as
amended, and related form of Stock Option Agreement
10.2 Catalytica Pharmaceuticals, Inc. 1995 Stock Plan, as
amended, and related form of Stock Option Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1998.
All information required by other items in Part II is omitted because the
items are inapplicable, the answer is negative or substantially the same
information has been previously reported by the registrant.
24
<PAGE>
CATALYTICA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998
CATALYTICA, INC.
(Registrant)
BY: /S/ LAWRENCE W. BRISCOE
---------------------------------
Lawrence W. Briscoe
Vice President and Chief
Financial Officer
Signing on behalf of the
registrant and as principal
financial officer
25
<PAGE>
EXHIBIT 10.1
CATALYTICA COMBUSTION SYSTEMS, INC.
1995 STOCK PLAN
(AS AMENDED AUGUST 4, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available persons for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Parent and any Subsidiary and to promote the
success of the Company's business. Options granted under the Plan may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant of an Option and subject to the applicable
provisions of Section 422 of the Code and the regulations promulgated
thereunder. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Catalytica" means Catalytica, Inc., a Delaware Corporation.
----------
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Catalytica Combustion Systems, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not. If the Company registers any class of any
equity security pursuant to the Exchange Act, the term Consultant shall
thereafter not include Directors who are not compensated for their services or
are paid only a Director's fee by the Company.
(i) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave
<PAGE>
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed 180 days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract, including
Company policies. If reemployment upon expiration of a leave of absence approved
by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
(j) "Director" means a member of the Board of Directors of the Company.
--------
(k) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
prior to the date of determination and reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common Stock,
its Fair Market Value shall be determined in good faith by the Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(p) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
-2-
<PAGE>
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(t) "Optionee" means an Employee or Consultant who receives an Option
--------
or Stock Purchase Right.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1995 Stock Plan.
----
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(y) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(z) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 1,162,125 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, and the original purchaser of such Shares did
not receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan. For purposes of the preceding
sentence, voting rights shall not be considered a benefit of Share ownership.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to Directors,
Officers and Employees who are neither Directors nor Officers.
(ii) Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options and Stock Purchase Rights to Employees who are also
Officers or Directors of the Company, the Plan shall be administered by (A) the
Board if the Board may administer the Plan in compliance with the rules under
Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule
16b-3") relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be constituted to comply with the
rules under Rule 16b-3 relating to the disinterested administration of employee
benefit plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made.
(iii) Administration with Respect to Other Employees and
--------------------------------------------------
Consultants. With respect to grants of Options and Stock Purchase Rights to
- -----------
Employees or Consultants who are neither Directors nor Officers of the Company,
the Plan shall be administered by (A) the Board or (B) a Committee designated by
the Board, which committee shall be constituted in such a manner as to satisfy
the legal requirements, if any, relating to the administration of incentive
stock option plans, applicable state corporate and securities laws, of the Code,
and of any applicable stock exchange or national market system upon which the
Common Stock is then listed or traded (the "Applicable Laws"). Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase the
size of the Committee and appoint additional members, remove members (with or
without cause) and appoint new members, fill vacancies, however caused, and
remove all members of the Committee and thereafter directly administer the Plan,
all to the extent permitted by the Applicable Laws.
-4-
<PAGE>
(c) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange or national market
system upon which the Common Stock is then listed, the Administrator shall have
the authority in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of Shares to be covered by each
such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the time or
times when Options may be exercised, any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Shares relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted; and
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options, Stock Purchase Rights or
Restricted Stock.
-5-
<PAGE>
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if otherwise eligible, be granted additional Options or
Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year (under
all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they are granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to the continuation of the
Optionee's employment or consulting relationship with the Company, nor shall it
interfere in any way with the Optionee's right or the Company's right to
terminate the Optionee's employment or consulting relationship at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
------------
of its adoption by the Board of Directors or its approval by the shareholders of
the Company, as described in Section 19 of the Plan. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 15 of
the Plan.
7. Term of Option. The term of each Option shall be the term stated in the
--------------
Option Agreement. However, the term shall be no more than ten (10) years from
the date of grant thereof. In the case of an Incentive Stock Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued upon exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
-6-
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to an Employee or Consultant who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Employee or Consultant, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(b) Consideration. The consideration to be paid for the Shares to be
-------------
issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant). Such consideration may consist of
(1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case
of Shares acquired upon exercise of an Option, have been owned by the Optionee
for more than six months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and a broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price, or (6) any combination of the foregoing methods of
payment. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan. Except in the case of Options granted to Officers, Directors
-7-
<PAGE>
and Consultants, Options shall become exercisable at a rate of no less than 20%
per year over five (5) years from the date the Options are granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) hereof. Until
the issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote, receive dividends or any other rights
as a shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such stock certificate promptly upon exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within the time specified in the Notice of Grant and
related Option Agreement (of at least thirty (30) days), and only to the extent
that the Optionee was entitled to exercise it at the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Notice of Grant). In the case of an Incentive Stock Option, if such
exercise occurs more than three (3) months from the date of termination, the
Incentive Stock Option shall be treated for tax purposes as a Nonstatutory Stock
Option. If, on the date of termination, the Optionee is not entitled to
exercise the Optionee's entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified in the
Notice of Grant and related Option Agreement, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
-8-
<PAGE>
(c) Disability of Optionee. Upon the termination of an Optionee's
----------------------
Continuous Status as an Employee or Consultant as a result of his or her
Disability, the Optionee may exercise his or her Option, but only within the
time specified in the Notice of Grant and related Option Agreement (of at least
six (6) months), and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the case of an Incentive Stock Option, if such exercise occurs more than twelve
(12) months from the date of such termination, the Incentive Stock Option shall
be treated for tax purposes as a Nonstatutory Stock Option. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified in the Notice of Grant and related
Option Agreement, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. Upon the death of an Optionee, the Option may
-----------------
be exercised by the Optionee's estate or by a person who has acquired the right
to exercise the Option by bequest or inheritance, but only within the time
specified in the Notice of Grant and related Option Agreement (of at least six
(6) months), and only to the extent that the Optionee was entitled to exercise
it at the date of death (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant). If, on the date of death,
the Optionee is not entitled to exercise the Optionee's entire Option, the
Shares covered by the unexercisable portion of the Option shall revert to the
Plan. If, after death, the Option is not exercised within the time specified in
the Notice of Grant and related Option Agreement, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Company or an affiliate of the Company may
-----------------
at any time offer to buy out for a payment in cash or Shares, an Option
previously granted, based on such terms and conditions as the Company or an
affiliate of the Company shall establish and communicate to the Optionee at the
time that such offer is made. In addition, an Option may be subject to a buy-
back right of the Company or any affiliate of the Company, based on such terms
and conditions as may be provided in the Option Agreement.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b) of
----------
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
-9-
<PAGE>
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator has
determined that it will offer Stock Purchase Rights under the Plan, the
Administrator shall advise the offeree in writing of the terms, conditions and
restrictions related to the offer, including the number of Shares that such
person shall be entitled to purchase, the price to be paid, and the time within
which such person must accept such offer, which shall in no event exceed six (6)
months from the date upon which the Administrator has made the determination to
grant the Stock Purchase Right. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator. Shares
purchased pursuant to the grant of a Stock Purchase Right shall be referred to
herein as "Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that except in the case of
Options granted to Officers, Directors and Consultants, the repurchase option
shall in no case lapse at a rate of less than 20% per year over five (5) years
from the date of purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right, shall be proportionately adjusted
for any increase or decrease in the number of issued
-10-
<PAGE>
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock. Such adjustment
shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator in its discretion may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of a Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has
not been previously exercised, an Option will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company:
(i) Options and Stock Purchase Rights. Unless otherwise provided in
---------------------------------
the Notice of Grant and Option Agreement or Restricted Stock Purchase Agreement,
each Option and Stock Purchase Right may be assumed or an equivalent option or
right substituted by such successor corporation (including as a "successor" any
purchaser of substantially all of the assets of the Company) or a parent or
subsidiary of such successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option and Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. In such
event the Administrator shall notify the Optionee as soon as practicable prior
to the effective date of such transaction that the Option or Stock Purchase
Right shall be fully exercisable for a period of ten (10) days from the date of
such notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period if the successor corporation does not assume or
substitute for such option or right. For the purposes of this paragraph, an
Option or Stock Purchase Right shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares). If such consideration received in the merger is not
solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation,
-11-
<PAGE>
provide for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(ii) Shares Subject to Repurchase Option. Any Shares subject to a
-----------------------------------
repurchase option of the Company shall be exchanged for the consideration
(whether stock, cash, or other securities or property) received in the merger or
asset sale by the holders of Common Stock for each Share held on the effective
date of the transaction, as described in the preceding paragraph. If in such
exchange the Optionee receives shares of stock of the successor corporation or a
parent or subsidiary of such successor corporation, and if the successor
corporation has agreed to assume or substitute for Options as provided in the
preceding paragraph, such exchanged shares shall continue to be subject to a
repurchase option as provided in the Optionee's restricted stock purchase
agreement. If, as provided in the preceding paragraph, the Optionees shall have
the right to exercise Options as to all of the Optioned Stock covered thereby,
all of the Shares that are subject to a repurchase option of the Company will
automatically be released from such repurchase option.
13. Change in Control.
-----------------
(a) In the event of a Change of Control (as defined below), an
Optionee shall have the right to exercise each Option and Stock Purchase Right
as to all or a portion of the Optioned Stock covered thereby, including Shares
as to which the Option or Stock Purchase Right would not otherwise be
exercisable on the date six (6) months after such Change of Control or earlier
if an Optionee's Continuous Status as an Employee or Consultant with the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below). Thereafter, the Option or Stock
Purchase Right shall remain exercisable in accordance with Section 9.
(b) For purposes of this Section 13, the following definitions shall
apply:
(i) a "Change in Control" means the happening of any of the
following events:
(A) Any "person", other than Catalytica, Inc., (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities; or
(B) A change in the composition of the Board occurring within
a one-year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who either
(i) are directors of the Company as of the date
-12-
<PAGE>
hereof, or (ii) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Incumbent Directors at the time
of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company); or
(C) The consummation of a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; or
(D) the consummation of the sale or disposition by the Company of
all or substantially all of the Company's assets.
(ii) "Involuntary Termination" shall mean any of the following events:
(A) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority or responsibilities, relative to the Optionee's
duties, authority or responsibilities as in effect immediately prior to the
Change in Control; (B) without the Optionee's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Optionee
immediately prior to the Change in Control; (C) without the Optionee's express
written consent, a reduction in the base salary of the Optionee as in effect
immediately prior to the Change in Control; (D) without the Optionee's express
written consent, a material reduction in the kind or level of employee benefits,
including bonuses, to which the Optionee was entitled immediately prior to the
Change in Control with the result that the Optionee's overall benefits package
is significantly reduced; (E) without the Optionee's express written consent,
the relocation of the Optionee to a facility or a location more than thirty (30)
miles from the Optionee's then present location; (F) any purported termination
of the Optionee which is not effected for Disability or for Cause (as defined
below), or any purported termination for which the grounds relied upon are not
valid; or (G) or any act or set of facts or circumstances which would, under
California case law or statute, constitute a constructive termination of the
Optionee.
(iii) "Cause" shall mean (A) any act of personal dishonesty taken by
the Optionee in connection with his responsibilities as an Employee or
Consultant and intended to result in substantial personal enrichment of the
Optionee, (B) Optionee's conviction of or plea of nolo contendere to a felony,
(C) a willful act by the Optionee which constitutes gross misconduct and which
is injurious to the successor corporation, or (D) following delivery to the
Optionee of a written demand for performance from the successor corporation
which describes the basis for the successor corporation's belief that the
Optionee has not substantially performed his duties, continued violations by the
Optionee of the Optionee's obligations to the successor corporation which are
demonstrably willful and deliberate on the Optionee's part.
-13-
<PAGE>
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the grant shall be given to each Employee or Consultant to whom an
Option or Stock Purchase Right is to be granted within a reasonable time after
the date of grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options or Stock Purchase Rights
already granted, and such Options and Stock Purchase Rights shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or national market system upon which the
Shares may then be listed or traded, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful
-14-
<PAGE>
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is listed or traded.
20. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-15-
<PAGE>
CATALYTICA COMBUSTION SYSTEMS, INC.
1995 STOCK PLAN
EMPLOYEE STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1995 Stock Plan
shall have the same defined meanings in this Stock Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[OPTIONEE'S NAME AND ADDRESS]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
1
<PAGE>
12.5% of the Shares subject to the Option shall vest six months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be an Employee
or Consultant on such dates.
Termination Period:
------------------
If the Optionee ceases to be an Employee or Consultant prior to the date
nine months after the Company becomes subject to the reporting requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, this
Option shall be exercisable for one year following the date the Company becomes
subject to the Exchange Act reporting requirements. If the Optionee ceases to
be an Employee or Consultant on or after the date nine months after the Company
becomes subject to the Exchange Act reporting requirement, this Option shall be
exercisable for three months after Optionee ceases to be an Employee or
Consultant. Not withstanding the above, upon Optionee's death or Disability,
this Option may be exercised for one year after Optionee ceases to be an
Employee or Consultant. In no event may Optionee exercise this Option after the
Term/Expiration Date as provided above in the Notice of Grant.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant,
at the exercise price per Share set forth in the Notice of Grant (the
"Exercise Price"), and subject to the terms and conditions of the Plan, which
is incorporated herein by reference. Subject to Section 15 of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this
Option Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant
and with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
2
<PAGE>
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
-------
B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
3
<PAGE>
8. Buy-Out Right by Catalytica.
---------------------------
(a) Buy-Out Right of Catalytica. In the event of a proposed change of
---------------------------
control of Catalytica, Catalytica or its assignee shall have the right for a
period of ninety (90) days prior to the date of the change of control and until
one hundred eighty (180) days after the date of such change of control (the
"Buy-Out Right") to buy out the vested and unvested portion of the Option and
all Shares, if any, issued upon exercise of such Option, for a per share price
equal to the Buy-Out Price. The Buy-Out Right shall automatically be assigned
to any successor to Catalytica in connection with a merger, consolidation or
sale of all or substantially all of the assets of Catalytica and may be assigned
by Catalytica to another party (Catalytica or its assignee are referred to
herein as "Catalytica"). The Buy-Out Right shall terminate one hundred eighty
(180) days after the date of such change of control, or earlier in the event
that the Company sells shares of its Common Stock to the public pursuant to a
registration statement filed with and declared effective by the Securities
Exchange Commission under the Securities Act of 1933, as amended. The Buy-Out
Price shall be determined in accordance with Section 8(b) below. Change of
control is defined in Section 8(c) below. The Buy-Out Right shall be
exercisable as follows:
(i) Catalytica shall notify the Optionee in writing of its
intention to exercise the Buy-Out Right and of the date and place for closing,
which closing shall take place not more than sixty (60) days from the date of
such notice.
(ii) Upon closing, Catalytica shall deliver to Optionee the Buy-
Out Price for the number of Shares to be bought out, including all Shares, if
any, issued upon exercise of such Option, and the Option shall be canceled in
its entirety.
(iii) At its option, Catalytica may elect to make payment of the
Buy-Out Price in cash or in shares of Common Stock of Catalytica. If
Catalytica elects to make payment in Common Stock, the per share value of
Catalytica Common Stock to be used in determining the number of shares to be
delivered to Optionee shall be the average closing price of Catalytica Common
Stock on the NASDAQ Stock Market or other principal market or exchange on
which such Common Stock is traded as reported in The Wall Street Journal for
-----------------------
each of the preceding twenty (20) trading days.
(b) Determination of Buy-Out Price. The Buy-Out Price shall be the
------------------------------
fair market value of a share of Common Stock of the Company on the date of the
notice of exercise of the Buy-Out Right as determined by the Board of Directors,
less the exercise price per share for the number of Shares subject to the
unexercised portion of the Option.
(c) Change of Control. "Change of Control means the occurrence of any
-----------------
of the following events:
(i) Any "person," other than Catalytica, Inc., (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities
4
<PAGE>
of Catalytica representing 50% or more of the total voting power represented
by Catalytica's then outstanding voting securities; or
(ii) The stockholders of Catalytica approve a merger or
consolidation of Catalytica with any other corporation, other than a merger or
consolidation which would result in the voting securities of Catalytica
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of Catalytica or such surviving entity
outstanding immediately after such merger or consolidation, or the
stockholders of Catalytica approve a plan of complete liquidation of
Catalytica or an agreement for the sale or disposition by Catalytica of all or
substantially all Catalytica's assets.
9. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
10. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. Also summarized are some of the tax
consequences of the exercise of the Cash-Out and Buy-Out Rights. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) Exercise of NSO. There may be a regular federal income tax
---------------
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee's compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(b) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are
---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price
5
<PAGE>
and the lesser of (1) the Fair Market Value of the Shares on the date of
exercise, or (2) the sale price of the Shares. Any additional gain will be
taxed as capital gain, short-term or long-term depending on the period that
the ISO Shares were held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
(e) Exercise of Cash-Out and Buy-Out Rights. Regardless of whether
---------------------------------------
the Option is an ISO or an NSO, upon the exercise of a Cash-Out Right or a Buy-
Out Right the Optionee may be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the amount of cash or the value
of the Catalytica stock received upon exercise. If Optionee is an Employee or a
former Employee, the Company may be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
11. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
12. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS AN EMPLOYEE OR CONSULTANT AT ANY TIME, WITH
OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
6
<PAGE>
OPTIONEE CATALYTICA COMBUSTION SYSTEMS, INC.
- ---------------------------------- ---------------------------------------
Signature By
- ---------------------------------- ---------------------------------------
Print Name Title
- ----------------------------------
- ----------------------------------
Residence Address
7
<PAGE>
EXHIBIT A
---------
1995 STOCK PLAN
EXERCISE NOTICE
Catalytica Combustion Systems, Inc.
430 Ferguson Drive
Mountain View, CA 94043-5272
Attention: [TITLE]
1. Exercise of Option. Effective as of today, ______________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
______________ shares of the Common Stock (the "Shares") of Catalytica
Combustion Systems, Inc. (the "Company") under and pursuant to the 1995 Stock
Plan (the "Plan") and the Stock Option Agreement dated ____________, 19____ (the
"Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
<PAGE>
(b) Exercise of Right of First Refusal. At any time within thirty (30)
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the
<PAGE>
purchase or disposition of the Shares and that Optionee is not relying on the
Company for any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY
COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARES.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A BUY-
OUT RIGHT BY CATALYTICA, INC. (OR ITS ASSIGNEE OR SUCCESSOR) AS
SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE
ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED
AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH RIGHT IS BINDING ON
TRANSFEREES OF THE SHARES REPRESENTED HEREBY.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of
<PAGE>
this Exercise Notice or (ii) to treat as owner of such Shares or to accord the
right to vote or pay dividends to any purchaser or other transferee to whom
such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Exercise Notice to single or multiple assignees, and this Exercise Notice
shall inure to the benefit of the successors and assigns of the Company.
Subject to the restrictions on transfer herein set forth, this Exercise Notice
shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Exercise Notice, the Plan, the Option Agreement and
the Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE CATALYTICA COMBUSTION SYSTEMS, INC.
- -------------------------------- ---------------------------------------
Signature By
- -------------------------------- ---------------------------------------
Print Name Title
Address: Address:
- ------- -------
- -------------------------------- 430 Ferguson Drive
- -------------------------------- Mountain View, CA 94043-5272
--------------------------------------
Date Received
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: CATALYTICA COMBUSTION SYSTEMS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, and any other legend required under applicable
state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at
the time of the grant of the Option to the Optionee, the exercise will be exempt
from registration under the Securities Act. In the event the Company becomes
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any
market stand-off agreement may require) the Securities exempt under Rule 701 may
be resold, subject to the satisfaction of certain of the conditions specified by
Rule 144, including:
<PAGE>
(1) the resale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and, in the case of an
affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
-------------------------------------------
Date: 19
----------------------------, ------
<PAGE>
EXHIBIT 10.2
CATALYTICA PHARMACEUTICALS, INC.
1995 STOCK PLAN
(AS AMENDED AUGUST 4, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available persons for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Parent and any Subsidiary and to promote the
success of the Company's business. Options granted under the Plan may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant of an Option and subject to the applicable
provisions of Section 422 of the Code and the regulations promulgated
thereunder. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Catalytica" means Catalytica, Inc., a Delaware Corporation.
----------
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Catalytica Pharmaceuticals, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not. If the Company registers any class of any
equity security pursuant to the Exchange Act, the term Consultant shall
thereafter not include Directors who are not compensated for their services or
are paid only a Director's fee by the Company.
(i) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company or
1
<PAGE>
(ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. A leave of absence approved by the
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed 180 days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract, including
Company policies. If reemployment upon expiration of a leave of absence approved
by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
(j) "Director" means a member of the Board of Directors of the Company.
--------
(k) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
prior to the date of determination and reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, its Fair Market Value shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
2
<PAGE>
(p) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(t) "Optionee" means an Employee or Consultant who receives an Option
--------
or Stock Purchase Right.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1995 Stock Plan.
----
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(y) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(z) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 2,947,025 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to
3
<PAGE>
the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, and the original purchaser of such Shares did
not receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan. For purposes of the preceding
sentence, voting rights shall not be considered a benefit of Share ownership.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3, the Plan may be administered by different bodies with respect to
Directors, Officers and Employees who are neither Directors nor Officers.
(ii) Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options and Stock Purchase Rights to Employees who are also
Officers or Directors of the Company, the Plan shall be administered by (A) the
Board if the Board may administer the Plan in compliance with the rules under
Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule
16b-3") relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be constituted to comply with the
rules under Rule 16b-3 relating to the disinterested administration of employee
benefit plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made.
(iii) Administration with Respect to Other Employees and
--------------------------------------------------
Consultants. With respect to grants of Options and Stock Purchase Rights to
- -----------
Employees or Consultants who are neither Directors nor Officers of the Company,
the Plan shall be administered by (A) the Board or (B) a Committee designated by
the Board, which committee shall be constituted in such a manner as to satisfy
the legal requirements, if any, relating to the administration of incentive
stock option plans, applicable state corporate and securities laws, of the Code,
and of any applicable stock
4
<PAGE>
exchange or national market system upon which the Common Stock is then listed or
traded (the "Applicable Laws"). Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members, remove members (with or without cause) and appoint new
members, fill vacancies, however caused, and remove all members of the Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange or national market
system upon which the Common Stock is then listed, the Administrator shall have
the authority in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of Shares to be covered by each
such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the time or
times when Options may be exercised, any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Shares relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted; and
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
5
<PAGE>
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options, Stock Purchase Rights or
Restricted Stock.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if otherwise eligible, be granted additional Options
or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year (under
all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they are granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to the continuation of the
Optionee's employment or consulting relationship with the Company, nor shall it
interfere in any way with the Optionee's right or the Company's right to
terminate the Optionee's employment or consulting relationship at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement. However, the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
6
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued upon exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to an Employee or Consultant who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Employee or Consultant, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(b) Consideration. The consideration to be paid for the Shares to be
-------------
issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant). Such consideration may consist of (1)
cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
a broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
7
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan. Except in the case of Options granted to Officers, Directors and
Consultants, Options shall become exercisable at a rate of no less than 20% per
year over five (5) years from the date the Options are granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) hereof. Until
the issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote, receive dividends or any other rights
as a shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such stock certificate promptly upon exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within the time specified in the Notice of Grant and
related Option Agreement (of at least thirty (30) days), and only to the extent
that the Optionee was entitled to exercise it at the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Notice of Grant). In the case of an Incentive Stock Option, if such
exercise occurs more than three (3) months from the date of termination, the
Incentive Stock Option shall be treated for tax purposes as a Nonstatutory Stock
Option. If, on the date of termination, the Optionee is not entitled to
exercise the Optionee's entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified in the
Notice of Grant and related Option Agreement, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
8
<PAGE>
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
(c) Disability of Optionee. Upon the termination of an Optionee's
----------------------
Continuous Status as an Employee or Consultant as a result of his or her
Disability, the Optionee may exercise his or her Option, but only within the
time specified in the Notice of Grant and related Option Agreement (of at least
six (6) months), and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the case of an Incentive Stock Option, if such exercise occurs more than twelve
(12) months from the date of such termination, the Incentive Stock Option shall
be treated for tax purposes as a Nonstatutory Stock Option. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified in the Notice of Grant and related
Option Agreement, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. Upon the death of an Optionee, the Option may
-----------------
be exercised by the Optionee's estate or by a person who has acquired the right
to exercise the Option by bequest or inheritance, but only within the time
specified in the Notice of Grant and related Option Agreement, (of at least six
(6) months) and only to the extent that the Optionee was entitled to exercise it
at the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Notice of Grant). If, on the date of death, the
Optionee is not entitled to exercise the Optionee's entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after death, the Option is not exercised within the time specified in the Notice
of Grant and related Option Agreement, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Company or an affiliate of the Company may
-----------------
at any time offer to buy out for a payment in cash or Shares, an Option
previously granted, based on such terms and conditions as the Company or an
affiliate of the Company shall establish and communicate to the Optionee at the
time that such offer is made. In addition, an Option may be subject to a buy-
back right of the Company or any affiliate of the Company, based on such terms
and conditions as may be provided in the Option Agreement.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
9
<PAGE>
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator has
determined that it will offer Stock Purchase Rights under the Plan, the
Administrator shall advise the offeree in writing of the terms, conditions and
restrictions related to the offer, including the number of Shares that such
person shall be entitled to purchase, the price to be paid, and the time within
which such person must accept such offer, which shall in no event exceed six (6)
months from the date upon which the Administrator has made the determination to
grant the Stock Purchase Right. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator. Shares purchased
pursuant to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that except in the case of
Options granted to Officers, Directors and Consultants, the repurchase option
shall in no case lapse at a rate of less than 20% per year over five (5) years
from the date of purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
10
<PAGE>
12. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock. Such adjustment shall be made by the
Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator in its discretion may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of a Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company:
(i) Options and Stock Purchase Rights. Unless otherwise
---------------------------------
provided in the Notice of Grant and Option Agreement or Restricted Stock
Purchase Agreement, each Option and Stock Purchase Right may be assumed or an
equivalent option or right substituted by such successor corporation (including
as a "successor" any purchaser of substantially all of the assets of the
Company) or a parent or subsidiary of such successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. In
such event the Administrator shall notify the Optionee as soon as practicable
prior to the effective date of such transaction that the Option or Stock
Purchase Right shall be fully exercisable for a period of ten (10) days from the
date of such notice, and the Option or Stock
11
<PAGE>
Purchase Right shall terminate upon the expiration of such period if the
successor corporation does not assume or substitute for such option or right.
For the purposes of this paragraph, an Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares). If such consideration received
in the merger is not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(ii) Shares Subject to Repurchase Option. Any Shares subject to
-----------------------------------
a repurchase option of the Company shall be exchanged for the consideration
(whether stock, cash, or other securities or property) received in the merger or
asset sale by the holders of Common Stock for each Share held on the effective
date of the transaction, as described in the preceding paragraph. If in such
exchange the Optionee receives shares of stock of the successor corporation or a
parent or subsidiary of such successor corporation, and if the successor
corporation has agreed to assume or substitute for Options as provided in the
preceding paragraph, such exchanged shares shall continue to be subject to a
repurchase option as provided in the Optionee's restricted stock purchase
agreement. If, as provided in the preceding paragraph, the Optionees shall have
the right to exercise Options as to all of the Optioned Stock covered thereby,
all of the Shares that are subject to a repurchase option of the Company will
automatically be released from such repurchase option.
13. Change in Control.
-----------------
(a) In the event of a Change of Control (as defined below), an Optionee
shall have the right to exercise each Option and Stock Purchase Right as to all
or a portion of the Optioned Stock covered thereby, including Shares as to which
the Option or Stock Purchase Right would not otherwise be exercisable, on the
date six (6) months after such Change of Control or earlier if an Optionee's
Continuous Status as an Employee or Consultant with the successor corporation is
terminated by the successor corporation as a result of an Involuntary
Termination (as defined below). Thereafter, the Option or Stock Purchase Right
shall remain exercisable in accordance with Section 9.
12
<PAGE>
(b) For purposes of this Section 13, the following definitions shall
apply:
(i) a "Change in Control" means the happening of any of the
following events:
(A) Any "person", other than Catalytica, Inc., (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities; or
(B) A change in the composition of the Board occurring with
in a one-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (i) are directors of the Company as of the date hereof, or (ii) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(C) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; or
(D) the consummation of the sale or disposition by the
Company of all or substantially all of the Company's assets.
(ii) "Involuntary Termination" shall mean any of the following
events: (A) without the Optionee's express written consent, a significant
reduction of the Optionee's duties, authority or responsibilities, relative to
the Optionee's duties, authority or responsibilities as in effect immediately
prior to the Change in Control; (B) without the Optionee's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Optionee immediately prior to the Change in Control; (C) without the
Optionee's express written consent, a reduction in the base salary of the
Optionee as in effect immediately prior to the Change in Control; (D) without
the Optionee's express written consent, a material reduction in the kind or
level of employee benefits, including bonuses, to which the Optionee was
entitled immediately prior to the Change in Control with the result that the
Optionee's overall benefits package is significantly reduced; (E) without the
Optionee's express written consent, the relocation of the Optionee to a facility
or a location more than thirty (30) miles from the Optionee's then present
location; (F) any purported termination of the Optionee which is not effected
for Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; or (G) or any act or set of facts
or circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.
13
<PAGE>
(iii) "Cause" shall mean (A) any act of personal dishonesty taken
by the Optionee in connection with his responsibilities as an Employee or
Consultant and intended to result in substantial personal enrichment of the
Optionee, (B) Optionee's conviction of or plea of nolo contendre to a felony,
(C) a willful act by the Optionee which constitutes gross misconduct and which
is injurious to the successor corporation, or (D) following delivery to the
Optionee of a written demand for performance from the successor corporation
which describes the basis for the successor corporation's belief that the
Optionee has not substantially performed his duties, continued violations by the
Optionee of the Optionee's obligations to the successor corporation which are
demonstrably willful and deliberate on the Optionee's part.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the grant shall be given to each Employee or Consultant to whom an
Option or Stock Purchase Right is to be granted within a reasonable time after
the date of grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options or Stock Purchase Rights
already granted, and such Options and Stock Purchase Rights shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or national market system upon which the
Shares may then be listed or traded, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
14
<PAGE>
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is listed or traded.
20. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
15
<PAGE>
CATALYTICA PHARMACEUTICALS, INC.
1995 STOCK PLAN
EMPLOYEE STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1995 Stock Plan
shall have the same defined meanings in this Stock Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[OPTIONEE'S NAME AND ADDRESS]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
12.5% of the Shares subject to the Option shall vest six months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be an Employee
or Consultant on such dates.
<PAGE>
Termination Period:
------------------
If the Optionee ceases to be an Employee or Consultant prior to the date
nine months after the Company becomes subject to the reporting requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, this
Option shall be exercisable for one year following the date the Company becomes
subject to the Exchange Act reporting requirements. If the Optionee ceases to
be an Employee or Consultant on or after the date nine months after the Company
becomes subject to the Exchange Act reporting requirements, this Option shall be
exercisable for three months after Optionee ceases to be an Employee or
Consultant. Notwithstanding the above, upon Optionee's death or Disability,
this Option shall be exercisable for one year after Optionee ceases to be an
Employee or Consultant. In no event may Optionee exercise this Option after the
Term/Expiration Date as provided above in the Notice of Grant.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 15 of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
-2-
<PAGE>
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
-------
B.
- -
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Buy-Out Right by Catalytica.
---------------------------
(a) Buy-Out Right of Catalytica. In the event of a proposed change of
---------------------------
control of Catalytica, Catalytica or its assignee shall have the right for a
period of ninety (90) days prior to the date of the change of control and until
one hundred eighty (180) days after the date of such change of
-3-
<PAGE>
control (the "Buy-Out Right") to buy out the vested and unvested portion of the
Option and all Shares, if any, issued upon exercise of such Option, for a per
share price equal to the Buy-Out Price. The Buy-Out Right shall automatically be
assigned to any successor to Catalytica in connection with a merger,
consolidation or sale of all or substantially all of the assets of Catalytica
and may be assigned by Catalytica to another party (Catalytica or its assignee
are referred to herein as "Catalytica"). The Buy-Out Right shall terminate one
hundred eighty (180) days after the date of such change of control, or earlier
in the event that the Company sells shares of its Common Stock to the public
pursuant to a registration statement filed with and declared effective by the
Securities Exchange Commission under the Securities Act of 1933, as amended. The
Buy-Out Price shall be determined in accordance with Section 8(b) below. Change
of control is defined in Section 8(c) below. The Buy-Out Right shall be
exercisable as follows:
(i) Catalytica shall notify the Optionee in writing of its intention
to exercise the Buy-Out Right and of the date and place for closing, which
closing shall take place not more than sixty (60) days from the date of such
notice.
(ii) Upon closing, Catalytica shall deliver to Optionee the Buy-Out
Price for the number of Shares to be bought out, including all Shares, if any,
issued upon exercise of such Option, and the Option shall be canceled in its
entirety.
(iii) At its option, Catalytica may elect to make payment of the Buy-
Out Price in cash or in shares of Common Stock of Catalytica. If Catalytica
elects to make payment in Common Stock, the per share value of Catalytica Common
Stock to be used in determining the number of shares to be delivered to Optionee
shall be the average closing price of Catalytica Common Stock on the NASDAQ
Stock Market or other principal market or exchange on which such Common Stock is
traded as reported in The Wall Street Journal for each of the preceding twenty
-----------------------
(20) trading days.
(b) Determination of Buy-Out Price. The Buy-Out Price shall be the
------------------------------
fair market value of a share of Common Stock of the Company on the date of the
notice of exercise of the Buy-Out Right as determined by the Board of Directors,
less the exercise price per share for the number of Shares subject to the
unexercised portion of the Option.
(c) Change of Control. "Change of Control" means the occurrence of
-----------------
any of the following events:
(i) Any "person", other than Catalytica, Inc., (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of Catalytica representing 50%
or more of the total voting power represented by Catalytica's then outstanding
voting securities; or
(ii) The stockholders of Catalytica approve a merger or
consolidation of Catalytica with any other corporation, other than a merger or
consolidation which would result in the voting securities of Catalytica
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty
-4-
<PAGE>
percent (50%) of the total voting power represented by the voting securities of
Catalytica or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of Catalytica approve a plan of complete
liquidation of Catalytica or an agreement for the sale or disposition by
Catalytica of all or substantially all Catalytica's assets.
9. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
10. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. Also summarized are some of the tax
consequences of the exercise of the Buy-Out Rights. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(a) Exercise of NSO. There may be a regular federal income tax
---------------
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee's compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(b) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are
---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired
-5-
<PAGE>
pursuant to the ISO on or before the later of (1) the date two years after the
Date of Grant, or (2) the date one year after the date of exercise, the Optionee
shall immediately notify the Company in writing of such disposition. Optionee
agrees that Optionee may be subject to income tax withholding by the Company on
the compensation income recognized by the Optionee.
(e) Exercise of Buy-Out Rights. Regardless of whether the Option is
--------------------------
an ISO or an NSO, upon the exercise of a Buy-Out Right the Optionee may be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the amount of cash or the value of Catalytica stock received
upon exercise. If Optionee is an Employee or a former Employee, Catalytica may
be required to withhold from Optionee's compensation or collect from Optionee
and pay to the applicable taxing authorities an amount equal to a percentage of
this compensation income at the time of exercise.
11. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
12. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS AN EMPLOYEE OR CONSULTANT AT ANY TIME, WITH
OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
-6-
<PAGE>
OPTIONEE CATALYTICA PHARMACEUTICALS, INC.
- ------------------------------- -----------------------------------------
Signature By
- ------------------------------- -----------------------------------------
Print Name Title
- ------------------------------- -----------------------------------------
- -------------------------------
Residence Address
-7-
<PAGE>
EXHIBIT A
---------
1995 STOCK PLAN
EMPLOYEE STOCK OPTION AGREEMENT
EXERCISE NOTICE
Catalytica Pharmaceuticals, Inc.
430 Ferguson Drive
Mountain View, CA 94043-5272
Attention: [TITLE]
1. Exercise of Option. Effective as of today, ______________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
______________ shares of the Common Stock (the "Shares") of Catalytica
Pharmaceuticals, Inc. (the "Company") under and pursuant to the 1995 Stock Plan
(the "Plan") and the Stock Option Agreement dated ____________, 19____ (the
"Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
<PAGE>
(b) Exercise of Right of First Refusal. At any time within thirty (30)
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the
<PAGE>
purchase or disposition of the Shares and that Optionee is not relying on the
Company for any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY
COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARES.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A BUY-
OUT RIGHT BY CATALYTICA, INC. (OR ITS ASSIGNEE OR SUCCESSOR) AS
SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE
ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED
AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH RIGHT IS BINDING ON
TRANSFEREES OF THE SHARES REPRESENTED HEREBY.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Exercise Notice or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
<PAGE>
8. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Exercise Notice to single or multiple assignees, and this Exercise Notice
shall inure to the benefit of the successors and assigns of the Company.
Subject to the restrictions on transfer herein set forth, this Exercise Notice
shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Exercise Notice, the Plan, the Option Agreement and
the Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE CATALYTICA PHARMACEUTICALS, INC.
- ------------------------------- -----------------------------------------
Signature By
- ------------------------------- -----------------------------------------
Print Name Title
- ------------------------------- -----------------------------------------
Address: Address:
- ------- -------
- ------------------------------- 430 Ferguson Drive
Mountain View, CA 94043-5272
- -------------------------------
-----------------------------------------
Date Received
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: CATALYTICA PHARMACEUTICALS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, and any other legend required under applicable
state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at
the time of the grant of the Option to the Optionee, the exercise will be exempt
from registration under the Securities Act. In the event the Company becomes
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any
market stand-off agreement may require) the Securities exempt under Rule 701 may
be resold, subject to the satisfaction of certain of the conditions specified by
Rule 144, including: (1) the resale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934);
<PAGE>
and, in the case of an affiliate, (2) the availability of certain public
information about the Company, (3) the amount of Securities being sold during
any three month period not exceeding the limitations specified in Rule 144(e),
and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
_________________________________________
Date:___________________________ 19______
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