<PAGE>
As filed with the Securities and Exchange Commission on August 6, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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CATALYTICA, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
Delaware 8731 94-2262240
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
430 Ferguson Drive
Mountain View, California 94043-5272
(650) 960-3000
(Address, Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)
----------------
Lawrence W. Briscoe
Chief Financial Officer
Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043-5272
(650) 960-3000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------
Copies to:
Barry E. Taylor, Esq. Stephen C. Waterbury, Esq.
Wilson Sonsini Goodrich & Rosati Warner Norcross & Judd LLP
Professional Corporation 900 Old Kent Building
650 Page Mill Road 111 Lyon Street, N.W.
Palo Alto, California 94304 Grand Rapids, Michigan 49503
(650) 493-9300 (616) 752-2000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this registration statement and the
satisfaction of the conditions as proposed in the merger agreement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered(1) Per Share Offering Price Fee
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<S> <C> <C> <C> <C>
Common stock, $0.001 par
value................. 4,496,487 shares (2) (2) $6,026
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</TABLE>
(1) Represents the maximum number of shares of the Registrant's common stock
which may be issued to former holders of shares of common stock of Wyckoff
Chemical Company, Inc. ("Wyckoff") pursuant to the merger of Pilot
Acquisition Corporation with and into Wyckoff (the "Merger") pursuant to
the Agreement and Plan of Reorganization, dated as of July 14, 1999, among
the Registrant, Wyckoff and Pilot Acquisition Corporation.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended,
the registration fee has been calculated on the basis of the book value as
of June 30, 1999 of the securities of Wyckoff that will be canceled at the
completion of the Merger, calculated to be $21,673,852 in the aggregate.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
WYCKOFF CHEMICAL COMPANY, INC.
1421 Kalamazoo Street
South Haven, Michigan 49090
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on , 1999 at a.m.
To the shareholders of Wyckoff:
A special meeting of shareholders of Wyckoff Chemical Company, Inc. will be
held at a.m., local time, on , 1999 at Baseline Middle School, 7357
Baseline Road, South Haven, Michigan for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization, dated as of July 14, 1999, among Catalytica, Inc.,
Pilot Acquisition Corporation, a wholly-owned subsidiary of Catalytica,
and Wyckoff, which provides that Pilot Acquisition Corporation will
merge with and into Wyckoff. In summary, if Wyckoff shareholders approve
the merger agreement and the merger, among other things:
. Each share of Wyckoff common stock will be exchanged for shares of
Catalytica common stock, based on an exchange ratio described in the
accompanying proxy statement/prospectus.
. Catalytica will acquire Wyckoff and Wyckoff will be a wholly-owned
subsidiary of Catalytica.
. Catalytica will assume each outstanding option and other right to
purchase Wyckoff common stock, which will be converted into an
option or other right to purchase shares of Catalytica common stock.
2. To transact such other business as may properly come before the special
meeting or any adjournment of the meeting.
The board of directors has fixed the close of business on , 1999 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the special meeting or any adjournment of the special meeting. Only
shareholders of record are entitled to notice of, and to vote at, the special
meeting or any adjournment of the special meeting.
The accompanying proxy statement/prospectus describes the merger agreement
and the proposed merger in more detail. We encourage you to read this entire
document carefully.
The board of directors believes that the merger is fair to and in the best
interests of Wyckoff and its shareholders and recommends that you vote "FOR"
approval of the merger agreement and the merger.
Your vote is important. The affirmative vote of the holders of a majority of
the outstanding shares of Wyckoff common stock is required for approval of the
merger agreement. Even if you plan to attend the special meeting in person,
please sign and return the enclosed proxy card to ensure that your shares will
be represented at the special meeting if you are unable to attend. If you do
attend the special meeting and wish to vote in person, you may withdraw your
proxy and vote in person.
By Order of the Board of Directors
Ronald L. Hartgerink
Chairman of the Board and Chief
Executive Officer
South Haven, Michigan
, 1999
<PAGE>
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. CATALYTICA MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, dated August 6, 1999
PROXY STATEMENT PROSPECTUS
OF OF
WYCKOFF CHEMICAL COMPANY, INC. CATALYTICA, INC.
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Catalytica, Inc. and Wyckoff Chemical Company, Inc. have agreed to merge a
subsidiary of Catalytica with and into Wyckoff. After the merger, Wyckoff will
be a wholly-owned subsidiary of Catalytica.
In the merger, Catalytica will issue 4,496,487 shares of its common stock,
which will be exchanged for all of the outstanding Wyckoff common stock and
applied toward all of the outstanding options and other rights to purchase
Wyckoff common stock. Based on Wyckoff's capitalization as of July 14, 1999,
each share of Wyckoff common stock will be converted into approximately 14.16
shares of Catalytica common stock and each option or other right to purchase
Wyckoff common stock will be converted into an option or other right to
purchase approximately 14.16 shares of Catalytica common stock.
Catalytica common stock trades on the Nasdaq National Market under the
symbol "CTAL." On August 3, 1999, the closing price of Catalytica common stock
as reported on the Nasdaq National Market was $12.875.
----------------
We strongly urge you to read and consider carefully this proxy
statement/prospectus in its entirety, including the matters referred to under
"Risk Factors" beginning on page 13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Catalytica common stock to be issued
in the merger or determined if this proxy statement/prospectus is accurate or
adequate. Any representation to the contrary is a criminal offense.
The date of this proxy statement/prospectus is , 1999. It is
first being mailed to Wyckoff shareholders on or about , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE CATALYTICA/WYCKOFF MERGER................. 1
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................................. 4
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION.............................................................. 7
Catalytica, Inc. Selected Consolidated Financial Information............ 8
Wyckoff Chemical Company, Inc. Selected Consolidated Financial
Information............................................................ 9
Selected Unaudited Pro Forma Combined Financial Information............. 10
COMPARATIVE PER SHARE DATA (UNAUDITED).................................... 11
MARKET PRICE AND DIVIDEND INFORMATION..................................... 12
RISK FACTORS.............................................................. 13
Risks Related to the Merger............................................. 13
The number of shares of Catalytica common stock to be issued in the
merger is fixed, so the value of the shares you receive will not be
known until the merger is completed.................................. 13
Integrating two companies is a difficult task and the expected
benefits of the merger may not occur................................. 13
We depend on retaining and integrating key personnel after the
merger............................................................... 14
The merger depends on governmental and regulatory approval............ 14
If the merger does not qualify as a pooling of interests, Catalytica's
reported earnings could be lower in future periods................... 14
The merger will result in substantial expenses to the combined
company.............................................................. 14
Risks Related to the Combined Company................................... 15
Our quarterly operating results may fluctuate and we may be unable to
maintain profitability............................................... 15
We depend on a single customer for a large portion of our revenues,
and a reduction in the level of business with this customer could
seriously harm our business.......................................... 15
Our product sales depend on our customers to anticipate industry needs
and accurately forecast future demand for their products............. 15
We may be held responsible for product liability claims and may be
unable to obtain sufficient product liability insurance.............. 16
Our operations must comply with environmental regulations, and any
failure to comply could result in extensive costs which would harm
our business......................................................... 16
Soil and groundwater contamination exists at our facilities, and the
contamination may result in large expenditures of cash and other
resources............................................................ 16
Environmental regulations may delay the commercialization of
Catalytica's catalytic combustion systems or increase the costs of
bringing products to market.......................................... 17
Some of Catalytica's manufacturing facilities are underutilized, and
this underutilization may harm our operating results................. 17
Our success depends on the ability of our customers to develop new
pharmaceutical products and obtain required regulatory approvals for
those products....................................................... 18
Compliance with current Good Manufacturing Practices regulations is
costly and time-consuming, and our failure to comply could lead to
delays in filling product orders and loss of sales revenues.......... 18
Ownership of Catalytica's stock is concentrated in one owner, and this
owner may prevent or delay a change of control of Catalytica or
otherwise make decisions contrary to the interests of other
stockholders......................................................... 18
Many of our competitors have greater financial resources, research and
development experience and marketing ability......................... 19
If we are unable to protect and expand our intellectual property
rights, our competitive position will suffer......................... 19
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
A third party claim of infringement of intellectual property could
require us to spend time and money to address the claim and could
shut down some of our operations..................................... 20
Catalytica Combustion Systems' products are in early stages of
development and its ability to develop an effective and commercially
successful product depends on the cooperative efforts of its
strategic partners................................................... 20
Catalytica Combustion Systems has limited manufacturing and marketing
experience and will need to develop these capabilities or find
strategic partners to make and sell its products..................... 20
The GENXON joint venture may require additional funding and may not
result in
successful products.................................................. 21
Failure to develop new manufacturing processes will negatively impact
Wyckoff's revenues and profitability................................. 21
Interruption of supply of key raw materials could cause delays in
meeting product orders, loss of customers and increased costs of
production........................................................... 21
If we, our suppliers or our customers do not successfully address the
Year 2000 issue, we could experience a significant disruption of our
financial management and control systems or a lengthy interruption in
our manufacturing operations......................................... 21
Catalytica's charter and bylaws have provisions that may deter or
delay a change of control
of Catalytica........................................................ 22
SPECIAL MEETING OF WYCKOFF SHAREHOLDERS................................... 23
THE MERGER AND RELATED MATTERS............................................ 25
Structure of the Merger................................................. 25
Material Contacts and Board Deliberations............................... 25
Joint Reasons for the Merger............................................ 27
Catalytica's Reasons for the Merger..................................... 27
Recommendation of Wyckoff's Board and Wyckoff's Reasons for the Merger.. 28
Interests of Certain Persons in the Merger.............................. 29
Completion and Effectiveness of the Merger.............................. 29
Conversion of Wyckoff Common Stock into Catalytica Common Stock......... 30
Effect on Wyckoff Stock Options......................................... 30
Exchange of Wyckoff Stock Certificates for Catalytica Stock
Certificates........................................................... 30
Stock Ownership Following the Merger.................................... 31
Listing on the Nasdaq National Market................................... 31
Expenses................................................................ 31
Federal Income Tax Considerations....................................... 31
Governmental and Regulatory Approvals................................... 33
Accounting Treatment.................................................... 33
Dissenters' Rights...................................................... 33
Resale of Catalytica Common Stock....................................... 33
Operations After the Merger............................................. 33
The Merger Agreement.................................................... 34
Escrow Funds and Indemnity.............................................. 39
The Voting Agreements................................................... 40
Wyckoff Affiliate Agreements............................................ 40
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 41
CATALYTICA'S BUSINESS..................................................... 46
CATALYTICA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 61
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
CATALYTICA'S MANAGEMENT AND EXECUTIVE COMPENSATION....................... 77
OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND
MANAGEMENT OF CATALYTICA................................................ 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 87
WYCKOFF'S BUSINESS....................................................... 89
WYCKOFF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 94
WYCKOFF'S MANAGEMENT..................................................... 101
OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF WYCKOFF............ 103
DESCRIPTION OF CATALYTICA CAPITAL STOCK.................................. 105
DESCRIPTION OF WYCKOFF CAPITAL STOCK..................................... 109
COMPARISON OF RIGHTS OF HOLDERS OF CATALYTICA COMMON STOCK AND
WYCKOFF COMMON STOCK.................................................... 110
EXPERTS.................................................................. 116
LEGAL MATTERS............................................................ 116
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.......................... 116
WHERE YOU CAN FIND MORE INFORMATION...................................... 117
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
<TABLE>
<S> <C>
ANNEXES:
ANNEX I Agreement and Plan of Reorganization
ANNEX II Voting Agreement
ANNEX III Escrow and Indemnification Agreement
ANNEX IV Special Purpose Escrow and Indemnification Agreement
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE CATALYTICA/WYCKOFF MERGER
Q: Why are the two companies proposing to merge? (see page 27)
A: The boards of directors of Catalytica and Wyckoff believe that the merger
will create a combined company that will be able to:
. offer customers a broader range of products and services
. respond more quickly and effectively to competition and market demands in
the pharmaceutical outsourcing industry
. better use the skills and resources of the companies' respective
management teams
. provide better support coverage to its customers
Q: What will holders of Wyckoff common stock receive in the merger? (see page
30)
A: If the merger is completed, Wyckoff shareholders will have the right to
receive approximately 14.16 shares of Catalytica common stock for each share
of Wyckoff common stock owned, provided that an aggregate of 5.6% of the
shares Wyckoff shareholders are entitled to receive will be placed in
escrow. This exchange ratio is based on Wyckoff's capitalization as of July
14, 1999, and may increase or decrease slightly if Wyckoff's capitalization
changes before completion of the merger.
Based on the closing price of $12.875 for Catalytica common stock as
reported on the Nasdaq National Market on August 3, 1999, 14.16 shares of
Catalytica common stock are worth approximately $182.31.
Q: How do the escrow funds operate? (see page 39)
A: An aggregate of approximately 5.6% of the shares of Catalytica common stock
issuable in exchange for the outstanding shares of Wyckoff common stock upon
completion of the merger will be placed into two separate escrow funds. Each
shareholder will contribute into the escrow funds in proportion to the total
number of shares of Catalytica common stock that the shareholder would
otherwise have received upon completion of the merger.
The first escrow fund will be available to compensate Catalytica for any
losses it incurs as a result of any breach by Wyckoff of Wyckoff's
representations, warranties or covenants in the merger agreement. Catalytica
will not receive any shares from the first escrow fund for a breach of
Wyckoff's representations, warranties or covenants until Catalytica suffers
cumulative losses of more than $150,000. Except for any unresolved claims,
the first escrow fund will terminate on the earlier of (a) the date of the
auditor's report for the first audit of Catalytica's financial statements
reflecting combined operations of Catalytica and Wyckoff after completion of
the merger or (b) six months after the merger.
The second escrow fund will be available to compensate Catalytica for losses
it incurs related to a specific intellectual property matter. Except for any
unresolved claims, the second escrow fund will terminate on July 14, 2002,
the third anniversary of the date of the merger agreement.
Q: What will happen to stock options held by Wyckoff employees? (see page 30)
A: Each outstanding option or right to purchase shares of Wyckoff common stock,
whether or not exercisable, will be assumed by Catalytica and be subject to
the same terms and conditions governing each outstanding Wyckoff option
immediately before completion of the merger, except that the options will be
immediately exercisable and each option or other right to purchase Wyckoff
common stock will be converted into an option or other right to purchase
approximately 14.16 shares of Catalytica common stock. This exchange ratio
is based on Wyckoff's capitalization as of July 14, 1999, and may increase
or decrease slightly if Wyckoff's capitalization changes before completion
of the merger. Options outstanding at completion of the merger will not be
subject to the escrow funds.
1
<PAGE>
Q: Will I receive fractional shares as a result of the merger? (see page 30)
A: Catalytica will not issue fractional shares. Instead, you will receive cash
for any fractional shares of Catalytica common stock owed to you equal to
the (a) fraction multiplied by (b) $13.34375.
Q: What are the tax consequences to shareholders of the merger? (see page 31)
A: The merger will be treated as a tax-free reorganization for federal income
tax purposes. You will not recognize gain or loss on the exchange of your
stock, other than on account of cash received for a fractional share.
Catalytica stockholders will not recognize any gain or loss in connection
with the merger. Tax matters, however, are very complicated and the tax
consequences of the merger to you will depend on the facts of your
particular situation. We encourage you to contact your tax advisors to
determine the tax consequences of the merger to you.
Q: What percent of Catalytica common stock will Wyckoff shareholders and option
holders own after the merger? (see page 31)
A: After the merger, shareholders and option holders of Wyckoff will own
4,496,487 shares or options exercisable for shares of Catalytica common
stock. These shares will represent approximately 7.7% of Catalytica's total
common stock outstanding, based on 53,607,226 shares of Catalytica common
stock, including class A and class B common stock, outstanding as of July
14, 1999.
Q: When is the shareholders' meeting relating to the merger and what specific
proposals will I be asked to consider? (see page 23)
A: The Wyckoff special meeting will take place on , 1999 at Baseline
Middle School, 7357 Baseline Road, South Haven, Michigan. At the special
meeting, you will be asked to approve the merger agreement and the merger.
Q: If I am not going to attend the shareholder meeting, should I return my
proxy card instead? (see page 23)
A: Yes. Please fill out and sign your proxy card and return it in the enclosed
envelope as soon as possible. Returning your proxy card ensures that your
shares will be represented at the special meeting.
Q: What do I do if I want to change my vote? (see page 23)
A: Send in a later-dated, signed proxy card to Wyckoff's Secretary before the
special meeting or attend the special meeting in person and vote.
Q: Should I send in my stock certificates now? (see page 30)
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates. Catalytica stockholders will keep their
current certificates.
Q: Do I have dissenters' rights in connection with the merger? (see page 33)
A: No. Under Michigan law, shareholders of Wyckoff are not entitled to
dissenters' rights in connection with the merger.
Q: What do I need to do now? (see page 23)
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the special meeting.
In addition, you may attend the special meeting in person, rather than
signing and mailing your proxy card.
Q: Does Catalytica pay dividends? (see page 12)
A: No. After the merger, however, Catalytica's board of directors may change
that policy based on business conditions, Catalytica's financial condition
and earnings and other factors. Catalytica does not intend to pay dividends
in the near future.
2
<PAGE>
Q: When do you expect the merger to be completed and effective? (see page 29)
A: We are working toward completing the merger as quickly as possible. In
addition to Wyckoff shareholder approval, Wyckoff and Catalytica must
obtain regulatory approvals. We hope to complete the merger by the end of
1999. The merger will become effective when the articles of merger are
filed with the Michigan Corporation, Securities and Land Development
Bureau.
Q: What if I also own shares of Catalytica common stock?
A: Catalytica common stock will not be affected by the merger. If you
currently own shares of Catalytica common stock, you will continue to own
those shares after the merger.
Q: Whom should I call with questions?
A: If you have any questions about the merger, please call Ronald L.
Hartgerink, Wyckoff's Chairman of the Board and Chief Executive Officer, at
(616) 637-8474.
Q: May I exercise stock options and sell Wyckoff common stock between now and
the completion of the merger?
A: Yes, subject to existing transfer limitations.
3
<PAGE>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this proxy statement/prospectus. This summary does not contain all of the
information that is important to you. To fully understand our proposed merger,
we urge you to carefully read the entire proxy statement/prospectus and the
other documents to which this proxy statement/prospectus refers.
The Companies
Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043-5272
(650) 960-3000
Catalytica builds business in markets where its proprietary technologies
serve to optimize manufacturing and solve environmental problems. Catalytica
operates its businesses through three subsidiaries: (a) Catalytica
Pharmaceuticals, Inc. which provides drug development and product manufacturing
services to the pharmaceutical industry; (b) Catalytica Combustion Systems,
Inc. which produces XONON, a catalytic system that permits essentially
pollution free combustion for the energy market; and (c) Catalytica Advanced
Technologies, Inc. which serves as an incubator for new catalytic technologies
for industrial applications.
Wyckoff Chemical Company, Inc.
1421 Kalamazoo Street
South Haven, Michigan 49090-1945
(616) 637-8474
Wyckoff develops, manufactures and markets a broad range of active
pharmaceutical ingredients and advanced fine chemical ingredients. Wyckoff
sells its products and custom synthesis services to a number of pharmaceutical
companies that sell both branded and generic products, as well as to cosmetic
companies and other fine chemical end-users.
Structure of the Merger (see page 25)
A wholly-owned subsidiary of Catalytica will merge with Wyckoff and Wyckoff
will become a wholly-owned subsidiary of Catalytica. Following the merger, you
will have an equity stake in Catalytica, Wyckoff's parent company.
Record Date and Vote Required (see page 23)
Only Wyckoff shareholders of record at the close of business on the record
date, , 1999, are entitled to notice of and to vote at the special meeting.
Under Michigan law, approval of the merger and the merger agreement requires
the affirmative vote of holders of a majority of the outstanding shares of
Wyckoff common stock entitled to vote at the meeting. In addition, shareholder
approval is a condition to completion of the merger under the merger agreement.
No approval by Catalytica's stockholders is required to effect the merger.
Catalytica, as the sole shareholder of Pilot Acquisition Corporation, must
approve the merger and the merger agreement.
Recommendation of the Wyckoff Board of Directors (see page 28)
After careful consideration, the Wyckoff board of directors has approved the
merger agreement and believes that it is fair to, and in the best interests of,
Wyckoff and its shareholders. The Wyckoff board, therefore, recommends that
holders of Wyckoff common stock vote "FOR" approval of the merger and the
merger agreement.
Interests of Certain Persons in the Merger (see page 29)
Wyckoff shareholders should note that certain members of Wyckoff management
and the Wyckoff board have interests in the merger as employees and/or
directors that are different from, or in addition to, your interest as a
shareholder. These include the following:
. Members of Wyckoff's management and board of directors that hold Wyckoff
stock options will benefit from the fact that all Wyckoff stock options
become immediately exercisable upon completion of the merger.
4
<PAGE>
. After the merger, Catalytica will cause Wyckoff to indemnify Wyckoff's
present and former officers and directors against all claims arising out of
any acts or omissions at or before completion of the merger to the same
extent as they are currently indemnified by Wyckoff.
. If the merger is completed, Catalytica will honor the existing employment
agreement between Wyckoff and James B. Friederichsen, Chief Operating
Officer, President and a director of Wyckoff.
Share Ownership of Wyckoff Management (see page 103)
As of July 14, 1999, Wyckoff's directors and executive officers beneficially
owned 34.9% of the outstanding shares of Wyckoff common stock.
Market Price Data (see page 12)
Catalytica common stock trades on the Nasdaq National Market under the
symbol "CTAL." On July 14, 1999, the last trading day before the announcement
of the merger agreement, the closing price of Catalytica common stock as
reported on the Nasdaq National Market was $13.125 per share. Following the
merger, Catalytica common stock will continue to be traded on the Nasdaq
National Market under the symbol "CTAL." On August 3, 1999, the closing price
of Catalytica common stock as reported on the Nasdaq National Market was
$12.875.
No established trading market exists for Wyckoff common stock.
Resale of the Catalytica Common Stock Received in the Merger (page 33)
All of Wyckoff's shareholders, other than Wyckoff's executive officers,
directors and 10% shareholders, will be able to immediately resell the
Catalytica common stock they receive in the merger. Wyckoff's executive
officers, directors and 10% shareholders will be able to resell their common
stock only if they comply with securities laws, and with requirements relating
to the accounting treatment of the merger.
Regulatory Matters (see page 33)
Completion of the merger is subject to compliance with the federal antitrust
laws. The notifications required under federal law have been furnished to the
Federal Trade Commission and the Antitrust Division of the Department of
Justice. The specified waiting period under federal law may impact completion
of the merger. The merger also must satisfy the federal securities laws and
applicable securities laws of the various states.
Accounting Treatment (see page 33)
Catalytica intends to account for the merger as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles.
Conduct of the Combined Company Following the Merger (see page 33)
Catalytica currently intends to maintain Wyckoff as an operating subsidiary
of Catalytica. Catalytica also currently intends to retain the vast majority of
Wyckoff's employee base.
Conditions to the Merger (see page 36)
Completion of the merger is subject to the satisfaction of various
conditions, including:
. approval of the merger by a majority vote of the Wyckoff shareholders
. SEC declaration of effectiveness of the registration statement of which this
proxy statement/prospectus forms a part
. expiration of the waiting period imposed by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976
. receipt by Catalytica and Wyckoff of substantially identical written
opinions from their respective counsel to the effect that the merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code
. no material adverse change in Catalytica's or Wyckoff's condition
5
<PAGE>
Termination (see page 37)
The merger agreement may be terminated under certain circumstances,
including, without limitation:
. by mutual written consent of Catalytica and Wyckoff
. by either Catalytica or Wyckoff if the other party commits breaches of
representations, warranties or covenants contained in the merger agreement
. if the merger is not completed on or before January 15, 2000
Voting Agreements (see page 40)
Certain shareholders who are affiliates of Wyckoff have entered into voting
agreements with Catalytica. Under the voting agreements, these shareholders
have agreed to vote for approval of the merger agreement and the merger. As of
July 14, 1999, these affiliates beneficially owned 43.2% of Wyckoff common
stock.
Affiliate Agreements (see page 40)
Affiliates of Wyckoff have entered into agreements with Catalytica
restricting the sale, transfer or other disposition of the shares of Catalytica
common stock issued to the affiliate in connection with the merger or otherwise
held by the affiliate.
6
<PAGE>
SELECTED HISTORICAL AND SELECTED UNAUDITED
PRO FORMA FINANCIAL INFORMATION
We have derived the following selected historical annual financial
information of Catalytica and Wyckoff from their respective audited historical
consolidated financial statements. You should read this information in
conjunction with the consolidated financial statements and the notes to the
financial statements which are included beginning on page F-1 of this proxy
statement/prospectus.
We have derived the following selected unaudited pro forma combined
financial information of Catalytica and Wyckoff from the unaudited pro forma
combined condensed financial statements included in this proxy
statement/prospectus, which gives effect to the merger as a pooling of
interests. You should read this information in conjunction with the unaudited
pro forma financial statements and the related notes. We present the unaudited
pro forma financial information for illustrative purposes only. This
information is not necessarily indicative of the operating results or financial
position that would have occurred if the merger had been completed. Also, it
does not necessarily represent or predict future operating results or the
financial position of the combined companies.
We have derived the selected consolidated balance sheet data as of June 30,
1999 and June 30, 1998 and the selected consolidated statement of operations
data for the fiscal years ended June 30, 1997, June 30, 1998 and June 30, 1999
for Wyckoff from the audited consolidated financial statements of Wyckoff
appearing elsewhere in this proxy statement/prospectus. The selected
consolidated balance sheet data as of June 30, 1997, June 30, 1996 and June 30,
1995 and the selected consolidated statement of operations data for the years
ended June 30, 1996 and June 30, 1995 have been derived from audited
consolidated financial statements of Wyckoff not included in this proxy
statement/prospectus. We have derived the selected historical consolidated
financial information for the six months ended June 30, 1998 and June 30, 1999
for Wyckoff from the unaudited financial statements of Wyckoff included in this
proxy statement/prospectus. The unaudited consolidated financial statements
have been prepared by Wyckoff on a basis consistent with the audited
consolidated financial statements appearing elsewhere in this prospectus and,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for fair representation of such data.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of results to be expected for any subsequent period.
We have derived the selected unaudited pro forma combined financial
information of Catalytica and Wyckoff from the unaudited pro forma condensed
combined financial statements included in this proxy statement/prospectus,
which gives effect to the merger as a pooling of interests, and you should read
this information in conjunction with the unaudited pro forma statements and the
relevant notes. We present the unaudited pro forma financial information for
illustrative purposes only. This information is not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been completed. In addition, it does not necessarily represent or
picture future operating results or the financial position of the combined
companies.
Since the fiscal years of Catalytica and Wyckoff differ, periods combined
for purposes of the pro forma condensed combined financial statements are as
follows:
<TABLE>
<CAPTION>
Catalytica Wyckoff
---------- -------
<S> <C>
Fiscal year ended December 31, 1998 Twelve months ended December 31, 1998
Fiscal year ended December 31, 1997 Fiscal year ended June 30, 1998
Fiscal year ended December 31, 1996 Fiscal year ended June 30, 1997
Six months ended June 30, 1998 Six months ended June 30, 1998
Six months ended June 30, 1999 Six months ended June 30, 1999
</TABLE>
Wyckoff's results of operations for the six month period ended June 30, 1998
have been included in the unaudited pro forma results of operations for the
years ended December 31, 1997 and December 31, 1998.
7
<PAGE>
Catalytica, Inc.
Selected Consolidated Financial Information
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- -----------------------------------------------
1999 1998 1998 1997 (2) 1996 (2) 1995 (2) 1994 (2)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Statement
of Operations Data
Revenues:
Product sales......... $182,169 $182,512 $358,872 $174,347 $ 9,813 $ 8,858 $ 5,800
Research and
development.......... 10,314 5,699 16,284 6,599 6,501 4,766 6,395
-------- -------- -------- -------- ------- ------- -------
Total revenues...... 192,483 188,211 375,156 180,946 16,314 13,624 12,195
Net income (loss) before
common
stock redemption ...... 13,447 9,284 20,763 310 (5,192) (8,687) (9,145)
Premium paid on common
stock
redemption (1)......... -- -- -- (3,750) -- -- --
-------- -------- -------- -------- ------- ------- -------
Income (loss)
attributable to common
stockholders........... $ 13,447 $ 9,284 $ 20,763 $ (3,440) $(5,192) $(8,687) $(9,145)
======== ======== ======== ======== ======= ======= =======
Basic earnings (loss)
per share (1).......... $ 0.25 $ 0.18 $ 0.39 $ (0.10) $ (0.27) $ (0.55) $ (0.61)
Diluted earnings (loss)
per
share (1).............. $ 0.21 $ 0.15 $ 0.33 $ (0.10) $ (0.27) $ (0.55) $ (0.61)
Shares used in computing
basic net
income (loss) per
share.................. 53,477 52,993 53,109 33,248 19,283 15,785 15,070
Shares used in computing
diluted
net income (loss) per
share.................. 59,178 58,936 59,196 33,248 19,283 15,785 15,070
Historical Consolidated
Balance Sheet Data
Cash, cash equivalents,
short-term
and long-term
investments............ $ 51,557 $ 49,331 $ 47,585 $ 47,067 $23,821 $20,902 $13,614
Working capital......... 115,224 127,971 113,186 87,425 23,904 18,102 11,873
Total assets............ 351,780 334,007 347,396 328,873 41,003 31,239 22,186
Long-term debt ......... 59,500 77,712 67,007 75,069 1,524 1,556 1,573
Class A and B common
stock subject to
mandatory redemption... 97,079 97,079 97,079 97,079 -- -- --
Stockholders' equity.... 91,942 63,120 76,577 52,110 17,263 22,029 15,779
</TABLE>
- --------
(1) Net income (loss) per share in 1997 reflects a reduction in net income of
$3.75 million relating to the premium paid for the repurchase of 5,000,000
shares of class B common stock with proceeds received from the exercise of
warrants issued to stockholders as a dividend.
(2) See Note 2 to Catalytica's historical financial statements.
8
<PAGE>
Wyckoff Chemical Company, Inc.
Selected Consolidated Financial Information
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Statement of Operations Data
Revenues:
Net sales................... $36,524 $31,429 $29,041 $26,490 $26,298 $19,603
------- ------- ------- ------- ------- -------
Total revenues............ 36,524 31,429 29,041 26,490 26,298 19,603
Net income before cumulative
effect of an accounting
change....................... 2,891 2,870 2,702 1,642 1,475 936
Cumulative effect of an
accounting change (1)........ -- -- -- 176 -- --
------- ------- ------- ------- ------- -------
Net income ................... $ 2,891 $ 2,870 $ 2,702 $ 1,466 $ 1,475 $ 936
======= ======= ======= ======= ======= =======
Basic earnings per share...... $ 10.19 $ 10.09 $ 9.47 $ 5.14 $ 5.18 $ 3.29
Diluted earnings per share.... $ 10.08 $ 10.00 $ 9.39 $ 5.10 $ 5.13 $ 3.26
Shares used in computing basic
net income per share......... 284 284 285 285 285 284
Shares used in computing
diluted net income per
share........................ 287 287 288 288 287 287
Historical Consolidated
Balance Sheet Data
Cash ......................... $ 290 $ 305 $ 966 $ 444 $ 213 $ 177
Working capital............... 7,870 7,722 7,753 7,097 5,786 5,447
Total assets.................. 43,782 33,572 31,974 28,216 27,448 25,248
Long-term debt................ 10,822 7,109 8,478 7,817 7,162 7,938
Shareholders' equity.......... 21,674 19,084 16,753 14,372 13,218 12,061
</TABLE>
- --------
(1) Relates to the adoption of Financial Accounting Standards Board Statement
No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions." See Wyckoff's historical financial statements.
9
<PAGE>
Selected Unaudited Pro Forma Combined Financial Information
(In thousands except per share amounts)
Pro Forma Combined Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 (1) 1996 (1) 1999 1998
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues...... $406,459 $212,375 $45,355 $ 214,080 $ 204,586
Net income (loss)
attributable to common
stockholders........... 22,769 (570) (2,490) 15,897 10,897
Basic earnings (loss)
per share.............. $ 0.40 $ (0.02) $ (0.10) $ 0.27 $ 0.19
Diluted earnings (loss)
per share.............. $ 0.34 $ (0.02) $ (0.10) $ 0.23 $ 0.16
Shares used in computing
basic income (loss) per
share.................. 57,605 37,744 23,779 57,973 57,489
Shares used in computing
diluted income (loss)
per share.............. 63,692 37,744 23,779 64,048 63,432
</TABLE>
Pro Forma Combined Condensed Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
Six months
ended June
30, 1999
----------
<S> <C>
Cash, cash equivalents, short-term and long-term investments........ $ 51,847
Working capital..................................................... 122,094
Total assets........................................................ 395,562
Long-term debt ..................................................... 70,322
Class A and B common stock subject to mandatory redemption.......... 97,079
Stockholders' equity................................................ 112,796
</TABLE>
- --------
(1) See Note 2 to the historical financial statements.
10
<PAGE>
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth certain historical per share data of
Catalytica and Wyckoff and combined per share data on an unaudited pro forma
basis. You should read the information set forth below along with the selected
historical financial data and the unaudited pro forma combined condensed
financial information included elsewhere in this proxy statement/prospectus.
The pro forma combined financial data are not necessarily indicative of the
operating results that would have been achieved had the merger been completed
as of the beginning of the periods presented and you should not construe it as
representative of future operations.
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months
December 31, Ended
--------------------- June 30,
1998 1997 1996 1999
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Historical--Catalytica
Basic net income (loss) per share........... $ 0.39 $(0.10) $(0.27) $ 0.25
Diluted net income (loss) per share......... $ 0.33 $(0.10) $(0.27) $ 0.21
Book value per share(1)..................... $ 3.25 $ 2.82 $ 0.89 $ 3.53
<CAPTION>
Fiscal Year Ended Six Months
June 30, Ended
--------------------- June 30,
1999 1998 1997 1999
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Historical--Wyckoff
Basic net income per share.................. $10.19 $10.09 $9.47 $ 8.63
Diluted net income per share................ $10.08 $10.00 $9.39 $ 8.54
Book value per share(1)..................... $76.34 $67.32 $58.69 $76.34
<CAPTION>
Fiscal Year Ended Six Months
December 31, Ended
--------------------- June 30,
1998 1997 1996 1999
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Pro Forma Combined -- Catalytica
Pro forma basic net income (loss) per
Catalytica share(2)(3) .................... $ 0.40 $(0.02) $(0.10) $ 0.27
Pro forma diluted net income (loss) per
Catalytica share(2)(3)..................... $ 0.34 $(0.02) $(0.10) $ 0.23
Pro forma book value per Catalytica
share(4)................................... $ 3.61
Equivalent Pro Forma Combined-- Wyckoff(5)
Pro forma basic net income per Wyckoff share
........................................... $ 5.66 $(0.28) $ 1.42 $ 3.82
Pro forma diluted net income per Wyckoff
share...................................... $ 4.81 $(0.28) $ 1.42 $ 3.26
Pro forma book value per Wyckoff share...... $51.12
</TABLE>
- --------
(1) The historical book value per share is computed by dividing historical
stockholders' equity as of the end of each period for which the comparison
is made by the number of shares of common stock, including class A and B
common stock, as if converted, at the end of the period.
(2) The Catalytica pro forma combined net income (loss) per share reflects
Catalytica's net income (loss) attributable to common stockholders for the
fiscal years ended December 31, 1998, 1997 and 1996 and for the six months
ended June 30, 1999 combined with Wyckoff's net income for the 12-month
period ended December 31, 1998, for the fiscal years ended June 30, 1998
and 1997 and for the six months ended June 30, 1999 divided by the combined
weighted average shares for the respective periods.
(3) Catalytica expects to incur charges to operations, currently estimated to
be $1.0 million associated with the merger, consisting primarily of
transaction fees for attorneys, accountants, financial printing and other
related charges. This is a preliminary estimate only and may change. These
charges have been reflected in the unaudited pro forma combined condensed
balance sheet but have not been included in the unaudited pro forma
condensed combined statement of operations.
(4) The pro forma book value per share is computed by dividing pro forma
stockholders' equity by the pro forma number of shares outstanding at the
end of each period for which the computation is made.
(5) The Wyckoff equivalent pro forma combined per share amounts are calculated
by multiplying the Catalytica pro forma per share amounts by the exchange
ratio (computed as of July 14, 1999) of approximately 14.16 shares of
Catalytica common stock issued in exchange for each share of Wyckoff common
stock.
11
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Catalytica's common stock has been traded on the Nasdaq National Market
under the symbol "CTAL" since February 8, 1993. The following table sets forth,
for the periods indicated, the high and low closing prices for Catalytica
common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997 Calendar Year
Quarter ended 3/31......................................... $11 3/4 $3 7/8
Quarter ended 6/30......................................... 13 5/8 7
Quarter ended 9/30......................................... 15 3/8 9 1/2
Quarter ended 12/31........................................ 13 7/8 10 1/8
1998 Calendar Year
Quarter ended 3/31......................................... 13 15/32 10 3/4
Quarter ended 6/30......................................... 19 5/8 12 13/16
Quarter ended 9/30......................................... 20 3/16 10 3/16
Quarter ended 12/31........................................ 18 7/8 13 3/4
1999 Calendar Year
Quarter ended 3/31......................................... 18 1/16 11
Quarter ended 6/30......................................... 14 10 7/8
</TABLE>
On July 14, 1999, the last trading day before the announcement of the merger
agreement, the closing price of Catalytica common stock as reported on the
Nasdaq National Market was $13 1/8 per share. On August 3, 1999, the closing
price of Catalytica common stock as reported on the Nasdaq National Market was
$12 7/8.
There is no established trading market for shares of Wyckoff common stock.
Trading in the shares occurs from time to time in private transactions.
At June 30, 1999, there were approximately 589 holders of record of
Catalytica common stock and a substantially greater number of beneficial
owners. As of June 30, 1999, there were approximately 347 holders of record of
Wyckoff common stock.
Catalytica has never declared or paid cash dividends on its capital stock.
Catalytica currently intends to retain its earnings to finance the operation
and expansion of its business and therefore does not expect to pay any cash
dividends in the foreseeable future.
Wyckoff declared and paid cash dividends on a quarterly basis to
shareholders of record at the rate of $0.30 per common share for each fiscal
quarter from June 30, 1997 through June 30, 1999. If the merger is completed,
payments of future dividends, if any, will be at the discretion of Catalytica's
board of directors.
12
<PAGE>
RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in
Catalytica common stock. An investment in Catalytica common stock involves a
high degree of risk. In addition to the other information contained in this
proxy statement/prospectus, you should carefully consider the risks described
below. The matters set forth below are cautionary statements identifying
important factors that could cause actual results to differ materially and
adversely from those in the forward-looking statements in this proxy
statement/prospectus.
Risks Related to the Merger
The number of shares of Catalytica common stock to be issued in the merger is
fixed, so the value of the shares you receive will not be known until the
merger is completed
In the merger, Catalytica will issue 4,496,487 shares of common stock,
which will be exchanged for all of the outstanding capital stock of Wyckoff
and applied towards all of the outstanding options and other rights to
purchase capital stock of Wyckoff. Because the number of shares of Catalytica
common stock to be exchanged in the merger is fixed, it will not increase or
decrease due to fluctuations in the market price of Catalytica common stock.
Thus, the value of the consideration you will receive at the completion of the
merger will depend on the market price of Catalytica common stock at the time
the merger is completed. Catalytica common stock historically has been subject
to substantial price volatility and could decline before the merger is
completed. Neither Catalytica nor Wyckoff is permitted to "walk away" from the
merger because of changes in the price of Catalytica common stock.
Accordingly, the dollar value of the Catalytica common stock you will receive
upon completion of the merger will depend on the market value of Catalytica
common stock at the time the merger is completed.
Integrating two companies is a difficult task and the expected benefits of
the merger may not occur
The merger will not achieve its anticipated benefits unless Catalytica and
Wyckoff successfully combine their operations and integrate their products and
services in a timely manner. Integrating Catalytica and Wyckoff will be a
complex, time consuming and expensive process and may result in disruptions to
the operations of the business. Before the merger, Catalytica and Wyckoff
operated independently, each with its own business, business culture,
customers, employees and systems. Following the merger, the combined company
must use common information communication systems, operating procedures,
financial controls and human resource practices, including benefit, training
and professional development programs. There may be substantial difficulties,
costs and delays involved in integrating Catalytica and Wyckoff, including:
. distractions to management from the business of the combined company
. potential incompatibility of business cultures
. perceived and potential adverse change in customer service standards,
business focus or service offerings available to customers
. potential inability to successfully coordinate research and development,
sales and marketing efforts
. costs and delays in implementing common systems and procedures,
including financial accounting systems
. costs and inefficiencies in delivering services to the customers of the
combined company
. inability to retain and integrate key management, technical sales and
customer support personnel
Any one or all of the factors identified above may cause increased operating
costs, lower than anticipated financial performance or the loss of key
customers and employees. The failure to integrate Catalytica and Wyckoff could
harm the business of the combined company.
13
<PAGE>
We depend on retaining and integrating key personnel after the merger
Wyckoff's contribution to the combined company's success depends upon the
continued service of Wyckoff's key management and technical personnel. While
Catalytica has agreed to assume the employment agreement of James B.
Friederichsen, Wyckoff's President and Chief Operating Officer, this agreement
does not require that Mr. Friederichsen continue his employment with Wyckoff
for a specified period. No other Wyckoff executive officer has entered into an
employment agreement providing for continued employment with the combined
company after the merger. In addition, the competition to retain and motivate
qualified technical, sales and operations personnel is intense. We have at
times experienced, and continue to experience, difficulty retaining qualified
personnel. We might not be able to retain its Wyckoff's key personnel after the
merger. The loss of services of any of the key members of Wyckoff's management
team could harm the business of the combined company.
The merger depends on governmental and regulatory approval
The merger is subject to antitrust review by the Federal Trade Commission
and the Department of Justice. The merger also must satisfy federal securities
laws and applicable laws of the various states. There is a risk that government
and regulatory agencies may block or delay implementation of the merger. Any
delay in implementation due to these hurdles could result in increased
transaction costs, lost sales, employee anxiety and lost focus on the business.
If the merger does not qualify as a pooling of interests, Catalytica's
reported earnings could be lower in future periods
The pro forma combined financial results in this proxy statement/prospectus
are based on the merger being treated as a pooling of interests under
accounting and financial reporting rules. To qualify the merger as a pooling of
interests for accounting purposes, Wyckoff, Catalytica and their respective
affiliates must meet the criteria for pooling of interests accounting
established in opinions published by the Accounting Principles Board and
interpreted by the Financial Accounting Standards Board and the SEC. These
opinions are complex and the interpretation of them is subject to change.
The availability of pooling of interests accounting treatment for the merger
depends, in part, upon circumstances and events occurring after completion of
the merger. For example, the business of the combined company cannot change in
a significant manner, including significant sales of assets, for a period of
two years following completion of the merger. Further, affiliates of Catalytica
and Wyckoff must not sell, or otherwise reduce their risk with respect to, any
shares of either Catalytica or Wyckoff capital stock during the period
beginning on July 14, 1999 and continuing until two trading days after
Catalytica publicly announces financial results covering at least 30 days of
combined operations of Catalytica and Wyckoff. If completion of the merger
occurs in October 1999, Catalytica expects that such combined financial results
would be published in the fourth quarter of 1999. If affiliates of Catalytica
or Wyckoff sell their shares of Catalytica common stock before that time, the
merger may not qualify for accounting as a pooling of interests for financial
reporting purposes. The failure of the merger to qualify for pooling of
interests accounting treatment for any reason could materially reduce
Catalytica's future reported earnings.
The merger will result in substantial expenses to the combined company
Catalytica and Wyckoff estimate that the negotiation and implementation of
the merger will result in future aggregate pre-tax expenses to Catalytica and
Wyckoff of approximately $1.0 million, primarily relating to costs associated
with combining the operations of the two companies and fees of attorneys and
accountants. Although we do not believe that the costs will significantly
exceed this amount, our estimate may not be correct and unanticipated
contingencies may arise that will increase the costs of the merger.
14
<PAGE>
Risks Related to the Combined Company
Our quarterly operating results may fluctuate and we may be unable to maintain
profitability
Catalytica first achieved profitability in the quarter ended September 30,
1997. Catalytica's operating results have fluctuated significantly in the past
and we expect that the results of the combined company will continue to vary
from quarter to quarter. In particular, our quarterly results may fluctuate as
a result of:
. loss or reductions of orders from an important customer, such as Glaxo
Wellcome
. delays in availability or increases in costs of raw materials from our
suppliers
. increased price competition or reductions in the prices that we are able
to charge
. the amount and timing of payments and expenses under development and
production contracts
. changes in demand for the pharmaceuticals sold by our customers
. new product introductions or delays in product introductions by our
customers or their competitors
. size and timing of receipt of orders for and shipments of pharmaceutical
products
. changes in product mix
. operating efficiencies in manufacturing operations
. seasonality in demand for our products
. general business conditions in our markets, particularly in the
pharmaceutical sector
As a result of these and other factors, quarter-to-quarter comparisons of our
historical results of operations are not good indicators of future performance.
If our future operating results are below the expectations of stock market
analysts, or if we are unable to remain profitable, our stock price may
decline.
We depend on a single customer for a large portion of our revenues, and a
reduction in the level of business with this customer could seriously harm our
business
A single customer, Glaxo Wellcome, accounts for a large percentage of
Catalytica's revenues. In 1998, Glaxo Wellcome accounted for approximately 86%
of Catalytica's total revenues. In the six months ended June 30, 1999, Glaxo
Wellcome accounted for approximately 73% of Catalytica's total revenues, of
which 42% related to business under the original supply agreement and 31%
related to new business Catalytica has negotiated with Glaxo Wellcome since its
acquisition of the Greenville facility. Catalytica's top five customers
collectively accounted for approximately 92% of its revenues for the six months
ended June 30, 1999. Even though the portion of our revenues attributable to
Glaxo Wellcome is expected to decline over time, we anticipate that sales to
Glaxo Wellcome will continue to account for a significant portion of our
revenues for the foreseeable future. Our business would be seriously harmed if
we lost Glaxo Wellcome as a customer or suffered a large reduction in orders
from Glaxo Wellcome.
Our product sales depend on our customers to anticipate industry needs and
accurately forecast future demand for their products
We manufacture both intermediate products used in customers' finished
products and finished products for our customers. Typically, there is a
relatively lengthy lead time between signing a production contract and the
actual production of products under that contract. Accordingly, we rely upon
the ability of our customers to anticipate changing customer needs,
successfully market the products and obtain necessary regulatory approval. A
decrease in demand for our customers' products would lower demand for our
products. We cannot guarantee that our customers' product development efforts
will be successful, that required regulatory approvals can be obtained on a
timely basis, if at all, that products can be manufactured at acceptable cost
and with appropriate quality or that any products, if approved, can be
successfully marketed. If our customers are not successful in this regard, they
might reduce or eliminate their orders and our results of operations likely
would deteriorate.
15
<PAGE>
We may be held responsible for product liability claims and may be unable to
obtain sufficient product liability insurance
As a pharmaceutical and pharmaceutical intermediate manufacturer, we could
experience product liability claims for products we manufacture if we do not
meet customer specifications. Our customers generally agree to indemnify us
with respect to potential liability claims, other than claims related to our
failure to meet customer specifications.
We have product liability insurance but cannot guarantee that we will be
able to obtain sufficient levels of product liability insurance on acceptable
terms in the future. If we are held responsible for product liability and do
not have adequate insurance or are not properly indemnified, then our results
of operations could be harmed. Also, under the original Glaxo Wellcome supply
agreement, Catalytica Pharmaceuticals is obligated to maintain $100.0 million
of product liability insurance. If Catalytica Pharmaceuticals does not meet
this requirement, Glaxo Wellcome may terminate the supply agreement, which
would have a negative impact on our financial results.
Our operations must comply with environmental regulations, and any failure to
comply could result in extensive costs which would harm our business
Our research, development and manufacturing activities involve the use,
storage, transportation and disposal of many hazardous chemicals and are
subject to regulations governing air pollution and wastewater treatment. As a
result, our activities are subject to extensive federal, state and local laws
and regulations, some of which have recently changed. For example, in 1998, the
United States Environmental Protection Agency, or EPA, issued new regulations
for the pharmaceutical industry requiring the installation of "maximum
achievable control technology" for hazardous air pollution sources and
additional pretreatment systems for wastewater discharges. We currently are
evaluating the potential impact of these regulations on our operations and we
believe that these new regulations may require us to make large cash
expenditures. These and any other new regulatory changes could result in
renovations, improvements or other cash expenditures to bring our facilities
and operations into compliance. A failure to comply with present or future
environmental laws could result in:
. imposition of injunctions or orders to stop production and operations
. payment of fines, costs of remediation or damages
. restrictions on expansion of operations
. other expenditures as required to comply with environmental requirements
If our operations do not comply with environmental regulations for any
reason, any of these events could occur and the occurrence could harm our
financial condition.
Soil and groundwater contamination exists at our facilities, and the
contamination may result in large expenditures of cash and other resources
As the owner of the Greenville facility, Catalytica Pharmaceuticals is
legally liable for the existing contamination at the site. However, Glaxo
Wellcome, the previous owner, has agreed to pay the costs of remediation to the
extent contamination existed at the time it sold the property to Catalytica.
Despite its agreement with Glaxo Wellcome, Catalytica could be held responsible
for the contamination in an action brought by a governmental agency or a third
party. Catalytica's current operations and future expansion of the Greenville
facility could be slowed or prevented by required remediation activities at the
site.
Catalytica Pharmaceuticals' ongoing operations at the Greenville facility
also may cause additional contamination. The determination of the existence and
cost of any such additional contamination contributed by Catalytica
Pharmaceuticals could involve costly and time-consuming negotiations and
litigation. Additional contamination could harm Catalytica's business, results
of operations and financial condition.
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Similarly, Catalytica's Bay View facility has arsenic and volatile organic
compound contamination in the soil and groundwater. The site is subject to a
clean-up and abatement order issued by the Bay Area Regional Water Quality
Control Board. The order requires stabilization, containment and monitoring of
the contamination at the site and surrounding areas by the current owner of
the property, Rhone Poulenc, Inc. Although Catalytica has contractual rights
of indemnity from Rhone Poulenc and from Novartis, the prior owners/operators
of the facilities, Catalytica could be named in an action brought by a
governmental agency or a third party because of the contamination. If
Catalytica is determined to have contributed to the contamination, Catalytica
may be liable for any damage to third parties attributable to its
contamination, and may be required to indemnify Rhone Poulenc and Novartis for
any clean up costs or liability that they may incur as a result. Any
litigation or determination of the existence and cost of this contamination
would likely be costly and time-consuming.
The Wyckoff manufacturing site is listed under Michigan law as a site with
soil and groundwater contamination. Environmental assessments conducted on the
Wyckoff property have identified soil contamination by volatile organic
compounds and heavy metals. Wyckoff is legally liable under federal and state
law for the remediation of these areas of contamination. In addition, risks of
substantial environmental costs and liabilities are inherent in plant
operations and products produced by Wyckoff. Wyckoff's ongoing operations
could cause additional contamination which could harm Wyckoff's business,
results of operations and financial condition.
Environmental regulations may delay the commercialization of Catalytica's
catalytic combustion systems or increase the costs of bringing products to
market
The enactment and enforcement of environmental regulations at the federal,
state and local levels will strongly influence the demand for emissions
reduction systems, and thus will affect the rate at which industrial companies
adopt Catalytica's catalytic combustion systems. As a result, Catalytica's
revenues will depend, in part, on the environmental standards that government
authorities adopt for reducing emissions (including emissions of nitrogen
oxide) addressed by its products. Government authorities may revise existing
regulations in a manner that could diminish demand for Catalytica's products.
Moreover, new regulations may impose requirements that are not be met by
Catalytica's products or may necessitate costly redevelopment or modification
of its products. Also, certain industries or companies may seek to delay the
implementation of existing or new regulations, or acquire emissions credits
from other sources, which would delay or eliminate their need to purchase
emissions reduction products. If any of these circumstances arise, Catalytica
may not realize the expected returns on its investment in the catalytic
combustion business.
Some of Catalytica's manufacturing facilities are underutilized, and this
underutilization may harm our operating results
Currently, Catalytica's pharmaceutical production and sterile production
facilities at its Greenville, North Carolina facility are not fully utilized.
To utilize its manufacturing resources fully, Catalytica must successfully
obtain new pharmaceuticals customers, expand business with existing customers
and obtain necessary regulatory approvals for production of new products. As a
result of reductions in the level of business attributable to Glaxo Wellcome
and the long lead times required to obtain regulatory approvals to manufacture
at our pharmaceutical and sterile production facilities, if we are to fully
utilize our pharmaceutical and sterile production facilities, we must enter
agreements for additional business far enough in advance of production to
obtain required regulatory approvals. If we are unable to do these things, our
pharmaceutical and sterile production facilities will remain underutilized,
and this may harm our operating results.
Our success depends on the ability of our customers to develop new
pharmaceutical products and obtain required regulatory approvals for those
products
The success of our pharmaceutical production operations depends on
receiving orders from our customers for the production of active ingredients
and intermediates for use in their pharmaceutical products. The clinical
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development, testing and sales of these products is subject to regulation by
the FDA and other regulatory authorities in the United States and abroad. As a
result, we depend on our customers to both develop new pharmaceutical products
and obtain the required regulatory approvals. If our customers are unable to
develop new products or obtain required approvals, our pharmaceutical
production facilities may be underutilized and our results of operations may be
harmed.
Compliance with current Good Manufacturing Practices regulations is costly and
time-consuming, and our failure to comply could lead to delays in filling
product orders and loss of sales revenues
Our pharmaceutical production facilities must comply with the FDA's current
Good Manufacturing Practices ("cGMP") regulations. Additionally, some of our
customers, including Glaxo Wellcome, require us to adhere to cGMP regulations,
even if not required by the FDA. Compliance with cGMP regulations requires us
to expend time, money and effort in production, and to maintain precise records
and quality control. The FDA periodically inspects drug-manufacturing
facilities to ensure compliance with applicable cGMP requirements. If we fail
to comply with cGMP requirements, the FDA could take various actions,
including:
. suspension of manufacturing at the facility
. inspection of any lot of a particular product
. restrictions or delays on the release of the product
. orders to recall the lot or product
Any of these actions could cause delays in meeting customer orders, which
could result in loss of customers, product orders and sales revenues.
Ownership of Catalytica's stock is concentrated in one owner, and this owner
may prevent or delay a change of control of Catalytica or otherwise make
decisions contrary to the interests of other stockholders
As of June 30, 1999, Morgan Stanley Dean Witter Capital Partners and its
affiliates held approximately 32% of Catalytica's voting stock and 47% of our
total outstanding voting and non-voting stock Morgan Stanley Dean Witter can
convert a portion of its non-voting stock into voting stock only if the
conversion results in Morgan Stanley Dean Witter holding 40% or less of
Catalytica's outstanding voting stock. As a result of its stock ownership and
contractual rights, Morgan Stanley Dean Witter has significant influence over
all matters requiring stockholder approval, including the election of directors
and approval of major corporate transactions such as mergers, consolidations or
sales of assets. Morgan Stanley Dean Witter also has the right to designate
three nominees for election to Catalytica's board of directors and rights to a
separate class vote on certain merger and financing transactions. This
concentration of ownership and these contractual rights may allow Morgan
Stanley Dean Witter to require us to take actions, or delay or prevent us from
taking actions, such as entering into a change of control, that would otherwise
be in the stockholders' interest.
The sale by Morgan Stanley Dean Witter of shares of Catalytica's capital
stock could constitute a change of control under Catalytica's credit agreement,
which would trigger a default under the agreement. Although Morgan Stanley Dean
Witter has agreed not to trigger a change of control under the credit
agreement, the sale of shares by Morgan Stanley Dean Witter in breach of this
provision could cause Catalytica to default under its credit agreement. In that
event, Catalytica might not be able to obtain sufficient credit in a timely
fashion or on acceptable terms. In such event, its operations could be
adversely affected, causing product delays, loss of customers and deterioration
of financial results.
Many of our competitors have greater financial resources, research and
development experience and marketing ability
The market in which we compete is characterized by extensive research
efforts and rapid technological progress. We have numerous competitors in the
United States, Europe and Asia, many of whom have greater
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research and development capabilities, financial resources, managerial
resources, marketing experience and manufacturing experience. In the market
for intermediates and pharmaceutical products, our primary competition comes
from pharmaceutical companies that manufacture their own products and from
other chemical manufacturers such as Chirex Inc, DSM Fine Chemicals and Lonza
AG. If our competitors are successful in developing systems and processes that
are more effective than our own, then our ability to sell our products,
services, systems and processes would be harmed. Our competitors may develop
technologies, systems and processes that are more effective than ours or that
would render our technology, systems and processes less competitive or
obsolete. In addition, our success depends in part on our ability to sell
products to potential customers at an early stage of product development, and
there can be no assurance that we will be successful in these efforts.
We will experience substantial competition in connection with the
manufacture and sale of off-patent pharmaceutical products. We compete with
off-patent drug manufacturers, brand-name pharmaceutical companies that
manufacture off-patent drugs and manufacturers of new drugs that may compete
with our off-patent drugs. Because selling prices of off-patent drugs
typically decline as competition intensifies, the maintenance of profitable
operations will depend on our ability to maintain efficient production
capabilities and to develop and introduce new products in a timely manner.
In the combustion systems market, Catalytica's competition comes from large
gas turbine power generation manufacturers, such as Allison Engine Company,
General Electric and Solar Turbines as well as producers of post-combustion
emission clean-up technologies such as selective catalytic reduction systems.
Gas turbine manufacturers are developing competing dry-low-nitrogen oxide
systems for their own turbines. Many of Catalytica's competitors in the
combustion systems market are also Catalytica's potential customers.
Catalytica depends on its customers to help commercialize its products, and
would suffer loss of sales and revenues in the if these customers withdraw
their support or decide to pursue alternate technologies. Catalytica's ability
to gain market share may be limited because many of its competitors are
existing or potential customers.
If we are unable to protect and expand our intellectual property rights, our
competitive position will suffer
Our business depends on developing and maintaining a strong intellectual
property portfolio in the United States and abroad. We actively pursue patents
for our inventions in relevant business areas. Catalytica has 37 patents and
at least 20 pending patent applications in the United States and approximately
145 patents and patent applications abroad. Wyckoff has three patents and one
pending patent application in the United States. Our patent applications might
not result in the issuance of patents. Further, our existing and future
patents might not provide enough protection to protect our technology and
competitive position.
The success of our current products, as well as development of additional
products, depends on our ability to protect our intellectual property
portfolio and obtain additional patents without infringing the proprietary
rights of others. If we do not effectively protect our intellectual property,
our business could be materially harmed.
Even if we are able to obtain patents covering our technology, the patents
may be challenged, circumvented or invalidated. Competitors may develop
independently similar systems or processes or design around patents issued to
us. Also, patents issued in the United States may be unenforceable, or may not
provide as much protection, outside the United States. If any of our patents
are circumvented, invalidated or otherwise do not provide legal protection,
our competitors may be able to develop, manufacture and sell products which
compete directly with our products. In that case, our sales and financial
results could be harmed.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. However, these agreements might be breached, and in that event,
we might not have adequate remedies for the breach. Further, our trade secrets
might otherwise become known or be independently discovered by competitors.
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A third party claim of infringement of intellectual property could require us
to spend time and money to address the claim and could shut down some of our
operations
We could incur substantial costs in defending ourselves or our licensees in
litigation brought by others or in interference proceedings declared by the
United States Patent and Trademark Office. An adverse ruling, including an
adverse decision as to the priority of our inventions, would undercut our
intellectual property position and could ultimately have a negative impact on
our sales and financial position.
We may be required to obtain licenses to patents or other proprietary rights
held by third parties. However, these licenses might not be available on
acceptable terms, if at all. In that event, we could encounter delays in system
or process introductions while we attempt to design around the patents, or we
may be unable to continue product development in the particular field. In
either case, our competitive position would likely suffer, and our stock price
could decline as a result.
Catalytica Combustion Systems' products are in early stages of development and
its ability to develop an effective and commercially successful product
depends on the cooperative efforts of its strategic partners
Catalytica Combustion Systems' product XONON, is in the development stage
and must be thoroughly tested in gas turbines and integrated by original
equipment manufacturers into their gas turbine products before
commercialization. Whether the XONON system will ultimately be commercially
successful, and whether Catalytica Combustion Systems will ultimately be
profitable, will depend on a number of factors, including:
. its ability to overcome technical hurdles associated with the
incorporation of XONON into particular gas turbines to provide an
effective emissions reduction system
. willingness of gas turbine manufacturers to incorporate the XONON system
in their products
. prices and effectiveness of alternative emissions reduction systems
. economic conditions in the utilities and power generation sector
. changes in regulatory requirements, particularly emissions standards
governing gas turbines and power generation
In particular, Catalytica Combustion Systems' ability to complete research
and development and introduce XONON systems in the large gas turbine market
depends on the continued efforts of General Electric, the world leader in the
manufacture of large gas turbines. Catalytica also must develop and maintain
relationships with other gas turbine suppliers to commercially introduce XONON
systems in other gas turbine markets. If any major turbine manufacturers
terminate their relationship with Catalytica Combustion Systems, then
Catalytica may not be able to complete the development and introduction of the
XONON system for that part of the market.
Catalytica Combustion Systems has limited manufacturing and marketing
experience and will need to develop these capabilities or find strategic
partners to make and sell its products
Catalytica currently has limited manufacturing capability for its XONON
products. Catalytica expects to expand its manufacturing capability, which will
require capital expenditures. Further, to market any of our combustion system
products, we must develop marketing capability, either on our own or in
conjunction with others. Catalytica may not be able to develop an effective
marketing and sales organization or enter into marketing arrangements on
acceptable terms.
The GENXON joint venture may require additional funding and may not result in
successful products
Catalytica Combustion Systems' joint venture, GENXON, is not currently
profitable and may not become profitable in the future. GENXON might not
succeed in developing new combustion systems that will work effectively and
economically. Neither joint venture partner is contractually required to make
further capital infusions. If Catalytica's partner were to decide not to make
additional capital contributions, Catalytica would be faced with the
possibility of having to fund the joint venture on its own or find additional
sources of financing. In this event, additional financing might not be
available on acceptable terms, or at all. As a result, Catalytica's results of
operations and financial condition could be adversely affected.
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Failure to develop new manufacturing processes will negatively impact
Wyckoff's revenues and profitability
Wyckoff's results of operations depend, to a significant extent, on its
ability to successfully develop new manufacturing processes for pharmaceutical
products for which patent protection has expired ("off-patent" products) and
for new products being developed by branded pharmaceutical companies. After a
product loses patent protection, its price tends to decrease over time, which
results in pressures on the prices which can be charged by manufacturers of
chemical intermediates and bulk actives. If Wyckoff is unable to develop
manufacturing processes soon after products are off-patent, or if other
manufacturers develop alternative manufacturing processes, Wyckoff would be
required to compete with multiple manufacturers and would experience additional
pricing pressures in its sale of products to the generic market. With respect
to the branded pharmaceutical companies, Wyckoff's ability to develop new
manufacturing processes is a competitive advantage which is important in being
awarded manufacturing business. Failure to develop new manufacturing processes
in either of these markets may harm Wyckoff's gross margins and financial
results.
Interruption of supply of key raw materials could cause delays in meeting
product orders, loss of customers and increased costs of production
We purchase raw materials, primarily chemicals, from suppliers throughout
the world. These chemicals range from basic commodities to more sophisticated
advanced intermediates. In many instances we use only one supplier to get a
volume discount and to ensure the chemicals meet our stringent quality
standards. If the supply of a key raw material is interrupted for any reason,
this could have an adverse impact on our ability to manufacture a particular
active pharmaceutical ingredient or advanced intermediate for our customers. In
most situations, there are alternate suppliers throughout the world of any
chemical that we require. If there was a significant delay in identifying and
qualifying a new supplier or if there are no alternate suppliers, there could
be a loss of sales and of customers, and ultimately an increase in the cost of
production. Any of these events could have a material adverse effect on our
results of operations.
We do not have a long-term supply agreement with most of our suppliers. We
purchase the chemicals on a purchase order basis and forecast our needs based
on our customers' requirements. There can be no assurance that such suppliers
will continue to make available to us the required raw materials on reasonable
terms, if at all. The availability and price of raw materials may be subject to
curtailment or change due to limitations that may be imposed under new
legislation or governmental regulations, suppliers' allocations to meet demand
of other purchasers, interruptions in production by suppliers and other
conditions. In addition, raw materials used by us may be subject to significant
price fluctuations. A substantial increase in prices or a continued
interruption in supply would have a material adverse effect on our business and
results of operations.
If we, our suppliers or our customers do not successfully address the Year
2000 issue, we could experience a significant disruption of our financial
management and control systems or a lengthy interruption in our manufacturing
operations
We use a significant number of computer software programs and operating
systems in our internal operations, including applications used in our
financial, product development, order management and manufacturing systems. The
inability of computer software programs to accurately recognize, interpret and
process date codes designating the year 2000 and beyond could cause systems to
yield inaccurate results or encounter operating problems resulting in the
interruption of the business operations which they control. This could
adversely affect our ability to process orders, forecast production
requirements or issue invoices. A significant failure of the computer
integrated manufacturing systems, which monitor and control factory equipment,
would disrupt manufacturing operations and cause a delay in completion and
shipping of products. Moreover, if our critical suppliers' or customers'
systems or products fail because of a Year 2000 malfunction, it could impact
our operating results.
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Based on currently available information, our management does not believe
that the Year 2000 issues related to our internal systems will have a material
impact on our financial condition or overall trends in results of operations.
However, we are uncertain to what extent we may be affected by these matters.
A significant disruption of our financial management and control systems or a
lengthy interruption in our manufacturing operations caused by a Year 2000
related issue could result in a material adverse impact on our operating
results and financial condition. In addition, it is possible that a supplier's
failure to ensure Year 2000 capability would have a negative effect on our
results of operations.
Catalytica's charter and bylaws have provisions that may deter or delay a
change of control of Catalytica
Catalytica's certificate of incorporation and bylaws contain certain
provisions that could make the acquisition of Catalytica more difficult. These
provisions include:
. advance notice procedures for stockholders to nominate candidates for
election as directors of Catalytica
. special voting requirements for removal of directors
. authorization of preferred stock of Catalytica, the powers, preferences
and rights of which may be fixed by its board of directors without
stockholder approval
In addition, Catalytica is subject to Section 203 of the Delaware General
Corporation Law, which limits transactions between a publicly-held company and
"interested stockholders." Interested stockholders generally are those
stockholders who, together with their affiliates and associates, own 10% or
more of a company's outstanding capital stock. This provision of Delaware law
may delay or deter potential acquisitions of Catalytica which may otherwise be
in the stockholders' interest.
This proxy statement/prospectus contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995 with respect to Catalytica's and Wyckoff's financial condition,
results of operations and business, and on the expected impact of the merger
on Catalytica's financial performance. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements. In evaluating the merger, you
should consider carefully the above discussion of risks and uncertainties.
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SPECIAL MEETING OF WYCKOFF SHAREHOLDERS
Date, Time and Place of Meeting
The special meeting of the shareholders of Wyckoff will be held at Baseline
Middle School located at 7537 Baseline Road, South Haven, Michigan 49090, on
, 1999, at , local time.
Purpose of the Special Meeting
At the special meeting, Wyckoff shareholders will consider and vote upon a
proposal to approve the merger and the merger agreement. Wyckoff shareholders
also will be asked to consider and vote upon any other matters that are
properly submitted at the special meeting. Additionally, Wyckoff shareholders
could be asked to vote upon a proposal to adjourn the special meeting. An
adjournment could be used for the purpose of allowing additional time for the
soliciting of additional votes to approve the merger and the merger agreement.
The Wyckoff board has approved the merger agreement, believes that the terms
of the merger agreement are fair to, and in the best interests of, Wyckoff and
its shareholders, and recommends that Wyckoff shareholders vote "FOR" approval
of the merger and the merger agreement.
Record Date; Voting Rights; Proxies
Only holders of Wyckoff common stock at the close of business on
, 1999, the record date, are entitled to notice of and to vote
at the special meeting. As of the record date, there were shares of
Wyckoff common stock issued and outstanding, each entitled to one vote.
The accompanying form of proxy is for use at the special meeting if a
shareholder will be unable to attend the special meeting. All shares of Wyckoff
common stock represented by properly executed proxies will, unless the proxies
previously have been revoked, be voted in accordance with the instructions
indicated in the proxies. If no instructions are indicated, shares of Wyckoff
common stock represented by proxies will be voted "FOR" approval of the merger
and the merger agreement. Wyckoff does not know of any matters other than as
described in the notice of special meeting of shareholders that are to come
before the special meeting. If any other matter is properly presented for
action at the special meeting, the persons named in the enclosed form of proxy
will have the discretion to vote on the matters in accordance with their best
judgment. A shareholder who has given a proxy may revoke it at any time before
its exercise by giving written notice to the Secretary of Wyckoff, by signing
and returning a later dated proxy or by voting in person at the special
meeting. However, mere attendance at the special meeting will not by itself
have the effect of revoking the proxy. Votes cast by proxy or in person at the
special meeting will be tabulated by the inspector of election appointed for
the special meeting.
Solicitation of Proxies
Proxies are being solicited by and on behalf of the Wyckoff board. Wyckoff
will bear all expenses in connection with the solicitation. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Wyckoff in person or by telephone or other means of
communication. Directors, officers and employees of Wyckoff will not be
additionally compensated for, but may be reimbursed by Wyckoff for out-of-
pocket expenses incurred in connection with, the solicitation.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of all issued and outstanding shares of Wyckoff common stock entitled
to vote is necessary for a quorum at the special meeting. For purposes of
determining whether a quorum is present, the inspector of election will include
shares that are present or represented by proxy, even if the holders of the
shares abstain from voting on any particular matter.
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Required Vote
Approval of the merger and the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of Wyckoff common
stock entitled to vote at the special meeting. Also, Wyckoff shareholder
approval is a condition to completion of the merger under the merger agreement.
For purposes of determining whether the merger and the merger agreement have
been approved, the inspector of election will include failures to vote and
abstentions in the number of shares deemed to have voted on the merger at the
special meeting. Accordingly, failures to vote and abstentions will have the
effect of a "no" vote on the proposal to approve the merger and the merger
agreement.
As of July 14, 1999, Wyckoff's directors, executive officers and 10%
shareholders beneficially owned an aggregate of 127,542 shares of Wyckoff
common stock, or approximately 43.2% of the shares of Wyckoff common stock that
were issued and outstanding on that date. Each of the directors, executive
officers and 10% shareholders have entered into an agreement to vote all shares
of Wyckoff common stock beneficially owned by him in favor of approval of the
merger and the merger agreement.
The matters to be considered at the special meeting are important to you.
Accordingly, you are urged to read and carefully consider the information
presented in this proxy statement/prospectus, and to complete, date, sign and
promptly return the enclosed proxy card in the enclosed postage-paid envelope.
You should not send any stock certificates with your proxy cards.
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THE MERGER AND RELATED MATTERS
The following discussion summarizes the proposed merger and related matters.
The discussion is not, however, a complete statement of all provisions of the
merger agreement and related agreements. Detailed terms and conditions of the
merger and related matters are contained in the merger agreement, which is
attached to this proxy statement/prospectus as Annex I. Statements made in this
proxy statement/prospectus about the terms of the merger and related matters
are qualified in their entirety by reference to, and you are urged to read, the
more detailed information in the merger agreement and the other documents
attached to this proxy statement/prospectus.
Structure of the Merger
The merger agreement provides for a business combination between Catalytica
and Wyckoff in which a wholly-owned subsidiary of Catalytica will be merged
with and into Wyckoff. Wyckoff will survive the merger as a wholly-owned
subsidiary of Catalytica. Under the terms of the merger agreement, Wyckoff
shareholders will receive shares of Catalytica common stock in exchange for
their shares of Wyckoff common stock. The transaction is intended to qualify as
a pooling of interests for accounting purposes and as a tax-free reorganization
for federal income tax purposes.
Material Contacts and Board Deliberations
During 1998, the Wyckoff board of directors spent significant time
considering alternatives to grow Wyckoff. Ultimately the Wyckoff board decided
that Wyckoff should not continue to grow as an independent company as it had
for the previous 23 years, but that it should consider possible joint ventures,
strategic business alliances and business combinations. Four factors drove this
conclusion:
. rapidly growing opportunities with customers
. new and stronger competition
. the inability to grow fast enough as an independent company
. the need for shareholder liquidity
The Wyckoff board developed a short list of companies with whom a merger
might best satisfy its needs. Catalytica was included in the list. Upon
directions from the Wyckoff board, on February 2, 1999, Mr. James B.
Friederichsen, President and Chief Operating Officer of Wyckoff, had a
telephone discussion with Dr. James A. Cusumano, Catalytica's Chairman of the
Board, regarding possible alternatives for a business combination. A number of
possibilities were discussed generally and it was decided that representatives
of the two companies should meet for a more in-depth discussion. To facilitate
future discussions, Wyckoff and Catalytica signed a non-disclosure agreement on
February 5, 1999.
On February 10, 1999, Mr. Friederichsen met in New York with Dr. Cusumano
and two other Catalytica executives: Dr. Ricardo B. Levy, President and Chief
Executive Officer, and Mr. Lawrence W. Briscoe, Chief Financial Officer. These
Wyckoff and Catalytica representatives exchanged ideas concerning the future of
the industry and the strategic thrust of each company and expressed general
interest in the possibility of a merger.
On February 19, 1999, Dr. Levy telephoned Mr. Friederichsen to emphasize
that Catalytica was interested in the possibilities that a merger between the
two companies might offer. Dr. Levy then invited Mr. Friederichsen to visit
Catalytica's Greenville, North Carolina facility to better understand
Catalytica's scope of operation and to discuss matters further.
On March 10, 1999, Mr. Friederichsen met with Dr. Cusumano, Dr. Levy and Mr.
Briscoe along with Dr. Gabriel R. Cipau, President and Chief Executive Officer
of Catalytica Pharmaceuticals, at Catalytica's Greenville facility for further
business discussions.
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On March 18, 1999, the Wyckoff board met to consider various possibilities
related to a combination with Catalytica. Dr. Ronald L. Hartgerink, Wyckoff's
Chairman of the Board and Chief Executive Officer, reviewed an analysis of
strategic alternatives for Wyckoff. Dr. Hartgerink reviewed Wyckoff's strategic
position, alternatives for the future development of Wyckoff, important factors
in yielding either total or partial control of Wyckoff to outside interests and
the role of shareholder liquidity in determining the right path for Wyckoff's
future. The board discussed each of these topics in turn, focusing on the
possibility of a merger with Catalytica and comparing the businesses and
strategies of the two companies. The board also discussed the possibilities
represented by combinations with other companies. During these discussions the
board engaged in a full discussion of the alternatives, ultimately leading to
the unanimous conclusion that Wyckoff should enter into a letter of intent with
Catalytica. Following this conclusion the board emphasized the importance of
continuing Wyckoff's growth in South Haven, Michigan and retaining the vast
majority of Wyckoff employees and set acceptable ranges for a valuation for
Wyckoff. The board authorized Dr. Hartgerink and Mr. Friederichsen to negotiate
and enter into a letter of intent with Catalytica within the parameters
established by the board.
In late March, Mr. Friederichsen and Dr. Levy discussed a letter of intent
describing the basic terms of the merger, subject to due diligence
investigations and the negotiation of definitive documents. Financial and
business information was exchanged and various concepts for the structure of a
merger were discussed.
In early April 1999, Catalytica and Wyckoff formally engaged their attorneys
and auditors in the ongoing discussions concerning a merger between the two
companies.
On April 14 and 15, 1999, Dr. Cusumano, Dr. Levy, Mr. Briscoe, Dr. Cipau,
Mr. Richard Fleming, a Catalytica board member, and three other Catalytica
managers visited Wyckoff's offices for discussions regarding the merger. This
visit included tours of Wyckoff's facilities and due diligence activities.
During this visit, Wyckoff and Catalytica provided initial information
regarding their financial positions, markets, products and prospects for the
future.
Detailed due diligence activities covering all aspects of Wyckoff's
operation occurred during the week of April 19, 1999.
On April 21, 1999, the Catalytica board met and Catalytica's officers
updated the board on the status of the due diligence efforts and merger
negotiations with Wyckoff.
Throughout the remainder of April and early May, Mr. Friederichsen, Dr.
Hartgerink, Dr. Levy and Mr. Briscoe engaged in a number of telephone
discussions related to the letter of intent. The parties agreed to basic terms
of the merger at a meeting at Catalytica headquarters on May 3, 1999, subject
to a due diligence review to Catalytica's satisfaction and the negotiation of
definitive documents satisfactory to both parties.
On May 11, 1999, Catalytica and Wyckoff signed the letter of intent.
On May 20, 1999, the Wyckoff board authorized Dr. Hartgerink and Mr.
Friederichsen to negotiate definitive documents based on the terms contained in
the letter of intent, which included the fundamental requirements set by the
board at its March 18, 1999 meeting.
From May 20, 1999 to June 2, 1999, the parties continued to negotiate terms,
valuation and structure of the merger. Legal counsel for both parties began to
prepare and negotiate preliminary documents.
On June 2, 1999, Mr. Friederichsen, Dr. Hartgerink and Wyckoff's legal
counsel met in Chicago with Mr. Briscoe, another Catalytica manager and
Catalytica's legal counsel to negotiate the terms of the merger agreement and
other documents related to the merger.
From June 2, 1999 to July 14, 1999, the parties conducted extensive due
diligence of the other party's business and continued negotiations on the
merger agreement and other related documents.
On July 6, 1999, there was a telephonic meeting of the Catalytica board of
directors. The Catalytica board discussed with management the results of the
due diligence investigation and reviewed a draft of the merger agreement and
related documents. A representative of Wilson Sonsini Goodrich & Rosati P.C.,
Catalytica's
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counsel, responded to questions regarding the documents. After considering the
terms of the proposed transaction, the Catalytica board determined that the
merger was fair to Catalytica's stockholders and was in the best interests of
Catalytica and its stockholders. The Catalytica board then unanimously approved
the merger agreement and the merger.
On July 13, 1999, the Wyckoff board met to discuss the proposed merger and
the merger agreement and related documents. The board discussed the strategic
alternatives available to Wyckoff, including continuing to conduct its business
as an independent company, the stock exchange ratio as well as other provisions
contained in the merger agreement. The Wyckoff board reviewed, among other
things, the background of the proposed merger, the strategic rationale,
potential risks and benefits of the merger, financial and valuation analysis of
the transaction and the terms of the merger agreement. The board concluded
that, based on various considerations and assumptions, the exchange ratio was
fair to Wyckoff shareholders from a financial point of view. At the conclusion
of the meeting, each member of the board of directors approved the merger and
authorized the signing of the merger agreement, except for one director who was
absent due to illness.
On July 14, 1999, Wyckoff and Catalytica signed the merger agreement. On
July 15, 1999, the parties made a public announcement with respect to the
merger.
Joint Reasons for the Merger
The boards of directors of Catalytica and Wyckoff believe that the following
specific reasons support the merger:
. The combined company will be among the largest FDA-inspected chemical
manufacturers providing services to the pharmaceutical industry.
Currently, Catalytica's chemical manufacturing facility is at capacity
and is unable to offer new customers a full spectrum of services.
. The merger will enable customers to take advantage of a full spectrum of
services that include dosage form manufacturing and formulation
development capabilities and save administrative and other costs by
dealing with a single company for the supply of a product.
. The customer bases of the two companies are complimentary and have
little overlap. Each company supplies active pharmaceutical ingredients
to brand name and other "discovery" oriented pharmaceutical companies.
Wyckoff will also bring a substantial generic pharmaceutical customer
base to the combined company.
. The merger will contribute to the research and development, pilot scale
and chemical manufacturing capabilities that will better support
customer needs and help decrease the time required for customers to
bring new products to the market place.
Catalytica's Reasons for the Merger
The board of directors of Catalytica has unanimously approved the merger and
the merger agreement. In addition to the anticipated joint benefits described
above, the Catalytica board believes, for the following additional reasons,
that the merger will be beneficial to Catalytica:
. The merger supports Catalytica's long-range vision to become a large,
diversified corporation, capable of providing a broad range of products
and services to the pharmaceutical and biotechnology industries.
. The merger diversifies Catalytica's product and services offerings and
reduces dependence on the Greenville, North Carolina production
facilities. Catalytica's major competitors benefit from larger and
geographically diverse operations and the addition of capacity at a
second location may enhance Catalytica's competitive position.
. The merger will provide additional chemical manufacturing capacity and
allow Catalytica to achieve a scale of chemical operations competitive
with the scale of Catalytica's major competitors. The
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reactors at Catalytica's existing Greenville chemical manufacturing
facility are generally 500 to 1000 gallon reactors, which are suited for
the manufacture of pharmaceutical bulk actives of moderate volume and
high value, but are less appropriate for many larger volume products.
Wyckoff's manufacturing facilities include a number of 2000 to 4000
gallon reactors, which will enhance Catalytica's ability to manufacture
larger volume products.
. The merger provides Catalytica an opportunity to add an experienced
management team that will complement Catalytica Pharmaceuticals'
management team.
The Catalytica board also considered a variety of potentially negative
factors in its deliberations concerning the merger. These factors include:
. the potential loss of revenues following the merger as a result of
business overlap or confusion in the marketplace and the possible
exploitation of this confusion by competitors of Catalytica
. the possibility of management disruption associated with merger
. the risk that benefits sought to be achieved by merger might not be
realized
. the risks described above under "Risk Factors"
The foregoing discussion of the information and factors considered by the
Catalytica board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the merger, the
Catalytica board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. In the course of its deliberations, the Catalytica
board determined that the terms of the merger agreement are fair to, and that
the merger is in the best interests of, Catalytica and its stockholders.
Recommendation of Wyckoff's Board and Wyckoff's Reasons for the Merger
The Wyckoff board has determined that the terms of the merger agreement are
fair to, and in the best interests of, Wyckoff and its shareholders. In
reaching its determination, the Wyckoff board consulted with Wyckoff's
management, as well as its outside legal counsel, and considered the following
material factors:
. The merger gives Wyckoff's shareholders the opportunity to reduce their
exposure to the risks inherent in Wyckoff's reliance on a limited number
of products.
. Wyckoff faces difficulties in competing against larger companies with
more diversified product lines and greater financial resources.
. The consideration received by shareholders for their Wyckoff common
stock in the merger appropriately recognizes the significant value of
Wyckoff's business.
. The merger offers Wyckoff the opportunity to gain greater market
strength by combining with a large company, resulting in economies of
scale with respect to financial resources, product distribution
channels, a larger installed base of customers and marketing visibility.
. The merger gives Wyckoff the ability to utilize the resources of
Catalytica to develop additional products and new applications for
existing products and to develop those products more rapidly.
. Consolidation and integration of certain manufacturing, distribution,
sales and administrative operations and functions should reduce
operating costs.
. The merger will allow Wyckoff shareholders to achieve liquidity for
their shares.
. The merger is expected to be nontaxable to the shareholders of Wyckoff
for federal income tax purposes.
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. Certain employees may perceive the combined company, with its greater
financial resources and diversity of products, as being more stable with
a greater ability to provide financial incentives to recruit and retain
employees.
The Wyckoff board of directors also considered negative factors relating to
the merger, including:
. the risks that the benefits sought in the merger would not be fully
achieved
. the fact that employees may be concerned regarding their employment
status
. the risk that the merger would not be completed
. the effect of the public announcement of the merger on Wyckoff's sales
and operating results
The Wyckoff board of directors believes that the negative risks are
outweighed by the potential benefits of the merger. Accordingly, the Wyckoff
board recommends that you vote "FOR" approval of the merger agreement and the
merger.
The foregoing discussion of the information and factors considered by the
Wyckoff board is not intended to be exhaustive. In view of the wide variety of
factors considered, the Wyckoff board did not find it practicable to quantify,
or otherwise attempt to assign relative weights to, the specific factors
considered in making its determination that the merger is fair to, and in the
best interests of, Wyckoff and its shareholders.
Interests of Certain Persons in the Merger
Wyckoff shareholders should be aware that certain members of the Wyckoff
board and management have certain interests in the merger that may differ from
the interests of Wyckoff shareholders generally and that these interests may
influence their decisions in voting on the merger. The Wyckoff board was aware
of these interests before approving the merger agreement. These interests are
as follows:
. After the merger, Catalytica will cause Wyckoff to indemnify and hold
harmless all past and present officers, directors, employees and agents
of Wyckoff against all losses, claims, damages, expenses or liabilities
arising out of or related to any acts or omissions, or alleged acts or
omissions, occurring at or before the effective time of the merger to
the same extent and on the same terms and conditions currently provided
by Wyckoff.
. The stock options held by Wyckoff employees, including options held by
Wyckoff's officers and directors, will vest immediately upon completion
of the merger.
. Catalytica has agreed to honor, without modification, Mr.
Friederichsen's current employment agreement with Wyckoff upon
completion of the merger. In addition, in connection with the merger,
Catalytica and Mr. Friederichsen are in discussions regarding the
possible employment of Mr. Friederichsen as an officer of Catalytica
Pharmaceuticals and Wyckoff.
Completion and Effectiveness of the Merger
Completion of the merger will occur when all of the conditions to completing
the merger are satisfied or waived, including approval by Wyckoff shareholders.
The merger will become effective when the articles of merger are filed with the
Michigan Corporation, Securities and Land Development Bureau in accordance with
the Michigan Business Corporation Act.
We are working toward completing the merger as quickly as possible. We hope
to complete the merger in the fourth quarter of 1999.
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Conversion of Wyckoff Common Stock into Catalytica Common Stock
Under the merger agreement, upon completion of the merger and without any
action on the part of Catalytica, Wyckoff or any Wyckoff shareholder, each
share of Wyckoff common stock outstanding immediately before the merger will be
converted automatically into the right to receive shares of Catalytica common
stock. The exact number of shares of Catalytica common stock that you will
receive for each share of Wyckoff common stock you own will not be known until
the merger is completed, because it is based on Wyckoff's capitalization on
that date. However, based on Wyckoff's capitalization as of July 14, 1999, we
expect that each share of Wyckoff common stock will be exchanged for
approximately 14.16 shares of Catalytica common stock. Based on the closing
price of $12.875 for Catalytica common stock as reported on the Nasdaq National
Market on August 3, 1999, 14.16 shares of Catalytica common stock are worth
approximately $182.31.
No fraction of a share of Catalytica common stock will be issued. Each
holder of shares of Wyckoff common stock who would otherwise be entitled to
receive a fraction of a share of Catalytica common stock (after aggregating all
fractional shares of Catalytica common stock issuable to that holder) will be
entitled to receive from Catalytica an amount of cash (rounded up to the
nearest whole cent) equal to (a) the fraction multiplied by (b) $13.34375.
Effect on Wyckoff Stock Options
Upon completion of the merger, each outstanding option to purchase Wyckoff
common stock will be assumed by Catalytica. Each stock option will continue to
have the same terms and conditions it had immediately before completion of the
merger, except that
. the number of shares of Catalytica common stock issuable upon exercise of
the option will be adjusted based on the option exchange ratio, rounded down
to the nearest whole share
. the exercise price for the option will be adjusted based on the exchange
ratio, rounded up to the nearest whole cent
The exchange ratio will not be known until the merger is completed, because
it is based on Wyckoff's capitalization on that date. However, based on
Wyckoff's capitalization as of July 14, 1999, we expect that the option
exchange ratio will be approximately 14.16.
Illustration:
Based on the assumed exchange ratio of 14.16, a stock option to purchase 90
shares of Wyckoff common stock at an exercise price of $84.00 per share would,
upon completion of the merger, become a stock option to purchase 1,274 shares
of Catalytica common stock at an exercise price of $5.93 per share.
Catalytica will file immediately following completion of the merger a
registration statement on Form S-8 with the SEC to register shares of
Catalytica common stock issuable with respect to Wyckoff options assumed by
Catalytica.
Exchange of Wyckoff Stock Certificates for Catalytica Stock Certificates
When the merger is completed, Catalytica's exchange agent will mail to you a
letter of transmittal and instructions for surrendering Wyckoff stock
certificates in exchange for Catalytica stock certificates. When you surrender
your Wyckoff stock certificates to the exchange agent, together with the letter
of transmittal and any other required documents, your Wyckoff certificates will
be canceled and you will receive Catalytica stock certificates representing the
number of whole shares of Catalytica common stock (minus approximately 5.6% of
the shares, which will be placed in the escrow funds) to which you are entitled
under the merger agreement. You also will receive cash in lieu of fractional
shares of Catalytica common stock, without interest.
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You should not send your Wyckoff stock certificates to the exchange agent
until you have received transmittal forms. Do not return your Wyckoff stock
certificates with the enclosed proxy.
You are not entitled to receive any dividends or other distributions on
Catalytica common stock until the merger is completed and you have surrendered
your Wyckoff stock certificates in exchange for Catalytica stock certificates.
If any certificate for shares of Catalytica common stock is to be issued in
a name other than that in which the surrendered Wyckoff stock certificate is
registered, the surrendered Wyckoff stock certificate must be properly endorsed
and otherwise in proper form for transfer. In addition, the person requesting
the exchange will have to pay Catalytica or any agent designated by it any
transfer or other taxes required by reason of issuance of a certificate for
shares of Catalytica common stock in any name other than that of the registered
holder. Alternatively, the person requesting the exchange can establish to
Catalytica's satisfaction or any agent designated by it that the applicable tax
has been paid or is not required to be paid.
Stock Ownership Following the Merger
In the merger, an aggregate of 4,496,487 shares of Catalytica common stock
will be issued to Wyckoff shareholders and allocated to holders of options and
other rights to purchase Wyckoff stock. Based on the number of shares of
Catalytica common stock, including Catalytica's class A and class B common
stock, outstanding as of July 14, 1999, after giving effect to the issuance of
Catalytica common stock in connection with the merger, assuming exercise of all
Wyckoff stock options and other rights to purchase Catalytica common stock
before completion of the merger and assuming all shares will be released from
the escrow funds, the former holders of Wyckoff stock will hold approximately
7.7% of Catalytica's total outstanding shares of common stock after the merger.
This percent of ownership might be slightly higher or lower, as it will depend
on the capitalization of Wyckoff and Catalytica upon completion of the merger.
Listing on the Nasdaq National Market
Catalytica will cause the shares of Catalytica common stock issuable, and
those required to be reserved for issuance, in connection with the merger to be
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
Expenses
If the merger is completed, Catalytica will pay Wyckoff's fees and expenses
up to $350,000. If the merger is not completed, all fees and expenses incurred
by Catalytica and Wyckoff in connection with the merger will be paid by the
party incurring the fees and expenses.
Federal Income Tax Considerations
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of Wyckoff common stock for Catalytica
common stock in the merger. This discussion is based on currently existing
provisions of the Internal Revenue Code, existing Treasury Regulations and
current administrative rulings and court decisions, all of which could change.
Any change, which may or may not be retroactive, could alter the tax
consequences to Catalytica, Wyckoff or you as described in this proxy
statement/prospectus.
You should be aware that this discussion does not address all federal income
tax considerations that may be relevant to you in light of your particular
circumstances. These circumstances would include if you are a bank, insurance
company, tax-exempt organization, dealer in securities or a foreign person, if
you do not hold your Wyckoff stock as capital assets, if you acquire your
shares in connection with stock option or stock purchase plans or in other
compensatory transactions, if you hold Wyckoff capital stock as part of an
integrated investment (including a "straddle") comprised of shares of Wyckoff
capital stock and one or more other
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positions, or if you previously have entered into a constructive sale of
Wyckoff capital stock. In addition, the following discussion does not address
the tax consequences of the merger under foreign, state or local tax laws or
the tax consequences of transactions occurring before, after or concurrently
with the merger (whether or not the transactions are in connection with the
merger), including transactions in which you acquire Wyckoff stock or dispose
of Catalytica common stock (including the escrow shares). Accordingly, you are
urged to consult your own tax advisors as to the specific tax consequences of
the merger, including the applicable federal, state, local and foreign tax
consequences of the merger in your particular circumstances.
Completion of the merger is conditioned upon Catalytica and Wyckoff
receiving opinions from their respective tax counsel that the merger will be
treated as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. The tax opinions will be subject to assumptions,
limitations and qualifications, and are based upon the truth and accuracy of
factual representations of Catalytica, Pilot Acquisition Corporation and
Wyckoff. Assuming the merger qualifies as a reorganization, then, subject to
the assumptions, limitations and qualifications referred to in this proxy
statement/prospectus and in the tax opinions, the merger should result in the
following federal income tax consequences:
. No gain or loss will be recognized by you upon receipt of Catalytica
common stock solely in exchange for your Wyckoff common stock in the
merger (except to the extent you receive cash in lieu of a fractional
share of Catalytica common stock).
. The aggregate tax basis of the Catalytica common stock you will receive
in the merger (including the escrow shares and any fractional share of
Catalytica common stock not actually received) will be the same as the
aggregate tax basis of the Wyckoff common stock you will surrender.
. The holding period of the Catalytica common stock (including the escrow
shares) you will receive in the merger will include the period that you
held your Wyckoff common stock provided that the Wyckoff common stock
surrendered is held as a capital asset upon completion of the merger.
. If you receive a cash payment in lieu of a fractional share the payment
will be treated as if a fractional share of Catalytica common stock had
been issued to you and then redeemed by Catalytica. If you receive cash
you generally will recognize capital gain or loss upon this payment,
equal to the difference, if any, between your tax basis in the
fractional share and the amount of cash you receive.
. Neither Catalytica, Pilot Acquisition Corporation nor Wyckoff will
recognize gain solely as a result of the merger.
. A recipient of shares of Catalytica common stock could recognize gain to
the extent that such shares were considered to be received in exchange
for services or property (other than solely Wyckoff stock). All or a
portion of such gain may be taxable as ordinary income. Gain could also
have to be recognized to the extent that a Wyckoff shareholder was
treated as receiving (directly or indirectly) consideration other than
the common stock of Catalytica in exchange for such shareholder's
Wyckoff stock.
No ruling has been or will be obtained from the Internal Revenue Service in
connection with the merger. You should be aware that the tax opinions of
Catalytica's and Wyckoff's counsel do not bind the IRS and that the IRS is not
precluded from successfully asserting a contrary opinion. The tax opinions also
are subject to certain assumptions and qualifications and will be based on the
truth and accuracy of representations made by Catalytica, Pilot Acquisition
Corporation and Wyckoff, including representations in certificates to be
delivered to counsel by the officers of Catalytica, Pilot Acquisition
Corporation and Wyckoff.
A successful IRS challenge to the reorganization status of the merger would
require you to recognize taxable capital gain or loss with respect to each
share of Wyckoff common stock surrendered equal to the difference between your
tax basis in the share and the fair market value, upon completion of the
merger, of the Catalytica common stock received in exchange for your Wyckoff
common stock. In this event, your aggregate basis in the Catalytica common
stock that you receive would equal its fair market value upon completion of the
merger and the holding period for the stock would begin the day after
completion of the merger.
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Governmental and Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act,
and the rules promulgated thereunder by the Federal Trade Commission, the
merger cannot be completed until notifications have been given and certain
information has been furnished to the FTC or the Antitrust Division of the
Department of Justice and the waiting period has been satisfied. We have
furnished the notifications required under the HSR Act as well as other
information to the FTC and the Antitrust Division. At any time before or after
completed of the merger, and regardless of whether the HSR Act waiting period
has expired, the Antitrust Division, the FTC or any state or foreign
governmental authority could take action under the antitrust laws as it deems
necessary or desirable in the public interest. This action could include
seeking to enjoin the completed of the merger or seeking divestiture of Wyckoff
or businesses of Catalytica or Wyckoff by Catalytica. Private parties also may
seek to take legal action under the antitrust laws under certain circumstances.
Based on information available, we believe that the merger will be completed
in compliance with federal, state and foreign antitrust laws. We cannot
guarantee that a governmental authority will not challenge the merger on
antitrust grounds. If a challenge were made, we cannot guarantee that we would
prevail.
Accounting Treatment
We anticipate that the merger will be accounted for as a pooling of
interests.
Dissenters' Rights
Under Michigan law, a shareholder who does not vote in favor of certain
corporate actions may have the right to obtain an appraisal of those shares and
the right to receive cash in exchange for those shares. However, a shareholder
does not have rights of dissent in a merger if the shareholder receives cash or
shares of stock that are listed on a national securities exchange (e.g., the
New York Stock Exchange) or designated as national market system securities on
the Nasdaq National Market. Catalytica's common stock is designated as a
national market system security on the Nasdaq National Market. Accordingly,
Wyckoff shareholders do not have rights of dissent in the merger.
Resale of Catalytica Common Stock
The Catalytica common stock issued in the merger will be transferable under
the Securities Act except for shares issued to any Wyckoff shareholder who may
be deemed to be an "affiliate" of Wyckoff for purposes of Rule 145 under the
Securities Act. An affiliate generally includes directors, executive officers
and beneficial owners of 10% or more of a class of common stock of a company.
Wyckoff's affiliates have signed affiliate agreements providing, among other
things, that the affiliates will not transfer any Catalytica common stock
received in the merger except in compliance with the Securities Act and that
the resale of those shares of common stock is subject to restrictions. This
proxy statement/prospectus does not cover resales of shares of Catalytica
common stock received by any person, regardless of whether the person is an
affiliate.
Operations After the Merger
Catalytica currently plans to maintain the operations of Wyckoff as an
operating subsidiary of Catalytica. The directors of Pilot Acquisition
Corporation immediately before completion of the merger will become the
directors of the surviving corporation until their respective successors have
been elected and qualified or until their earlier resignation or removal. The
officers of Pilot Acquisition Corporation upon completion of the merger will be
the officers of the surviving corporation until their respective successors
have been appointed and qualified or until their earlier resignation or
removal. After the merger, Ronald L. Hartgerink and James B. Friederichsen are
expected to serve as officers of Catalytica Pharmaceuticals and Wyckoff.
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The Merger Agreement
Representations and Warranties
Wyckoff, Catalytica and Pilot Acquisition Corporation each made a number of
representations and warranties in the merger agreement regarding aspects of our
respective businesses, financial condition, structure and other facts relevant
to the merger.
Representations and Warranties of Wyckoff. Wyckoff's representations and
warranties include representations as to:
. Wyckoff's corporate organization, good standing and its qualifications
to do business
. Wyckoff's articles of incorporation and bylaws
. Wyckoff's capitalization
. authorization of the merger agreement and related matters
. the merger agreement's noncontravention of any charter document,
agreement or law
. regulatory filings, consents or approvals required to complete the
merger
. Wyckoff's financial statements
. Wyckoff's liabilities
. changes in Wyckoff's business since March 31, 1999
. Wyckoff's tax returns and taxes
. restrictions on the conduct of Wyckoff's business
. Wyckoff's title to the properties it owns and leases
. intellectual property and intellectual property rights
. Wyckoff's material agreements, contracts and commitments
. the absence of material interested party transactions with officers,
directors or certain shareholders
. required governmental authorizations
. litigation involving Wyckoff
. accounts receivable and inventory
. accuracy and completeness of minute books
. environmental compliance
. payments, if any, required to be made by Wyckoff to brokers and agents
on account of the merger
. Wyckoff's employee benefit plans
. Wyckoff's insurance coverage
. Wyckoff's compliance with applicable laws
. indemnification obligations
. outstanding orders or commitments
. information supplied by Wyckoff in this proxy statement/prospectus and
related registration statement filed by Catalytica
. availability of materials and parts
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The representations of Wyckoff survive the completion of the merger and
expire on the earlier of the date of the auditor's report for the first audit
of Catalytica and Wyckoff's combined financial statements after the completion
of the merger or six months following the completion of the merger.
Representations and Warranties of Catalytica and Pilot Acquisition
Corporation. The representations and warranties of Catalytica and Pilot
Acquisition Corporation include representations as to:
. corporate organization, corporate power and qualification to do business
. certificate of incorporation and bylaws
. authorization of the merger agreement by Catalytica and Pilot
Acquisition Corporation
. the merger agreement's noncontravention of any charter document,
agreement or law
. capitalization of Catalytica and Pilot Acquisition Corporation
. Catalytica's filings with the SEC
. changes in Catalytica's business since March 31, 1999
. payments, if any, required to be made by Catalytica to brokers and
agents on account of the merger
. stock duly listed on Nasdaq National Market
. litigation involving Catalytica
. information supplied by Catalytica in this proxy statement/prospectus
and its related registration statement
. regulatory filings, consents or approvals required to complete the
merger
. certain post-merger operations
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read the sections of the
merger agreement entitled "Representations and Warranties of the Company" and
"Representations and Warranties of Parent and Sub." The merger agreement is
attached as Annex I to this proxy statement/prospectus.
Conduct of Wyckoff's Business Before Completion of the Merger
Wyckoff agreed that, until the earlier of completion of the merger or
termination of the merger agreement and unless Catalytica consents in writing,
Wyckoff will use commercially reasonable efforts consistent with past practices
and policies to:
. preserve its present business organization intact
. keep available the services of its present executive officers and key
employees
. preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others with which it has business dealings
Wyckoff also agreed that, until the earlier of the completion of the merger
or termination of the merger agreement, unless Catalytica consents in writing,
Wyckoff will conduct its business in compliance with certain specific
restrictions relating to the following:
. Wyckoff's intellectual property
. employees and employee benefits, including bonuses or special
remuneration
. stock options
. the issuance of dividends or other distributions
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. the issuance and redemption of securities
. modification of Wyckoff's articles of incorporation and bylaws
. the acquisition of assets or other entities
. the sale, lease, license and disposition of assets
. incurring debt, other than borrowings under existing credit agreements
. capital expenditures
. entering into or modifying of contracts
The agreements related to the conduct of Wyckoff's business in the merger
agreement are complicated and not easily summarized. You are urged to carefully
read the section of the merger agreement entitled "Conduct of Business of the
Company."
No Solicitation
Until the merger is completed or the merger agreement is terminated, Wyckoff
has agreed not to directly or indirectly take any of the following actions:
. solicit, encourage, initiate or participate in any discussions or
negotiations regarding any proposal to acquire all, substantially all or
a significant portion of Wyckoff's business, properties or technologies
. disclose any information not customarily disclosed to any person
concerning Wyckoff's business, technologies or properties
. assist or cooperate with any person to make any proposal to purchase all
or a material portion of Wyckoff's capital stock or assets
. enter into any agreement relating to the acquisition of all or any
significant portion of Wyckoff
For purposes of this restriction, any action by an officer, director, agent,
representative or affiliate of Wyckoff is considered to be a breach by Wyckoff.
Wyckoff has agreed to promptly inform Catalytica of any offer, proposal or
request relating to an acquisition proposal, including information with respect
to the identity of the party making the offer or proposal and the specific
terms of the offer or proposal. Wyckoff further agreed to keep Catalytica
informed of any amendments or modifications to the acquisition offer or
proposal.
Conditions to the Merger
Joint Conditions to Completion of the Merger. The obligations of Catalytica
and Wyckoff to complete the merger and the other transactions contemplated by
the merger agreement are subject to the satisfaction of each of the following
conditions:
. the registration statement of which this proxy statement/prospectus
forms a part must be effective, no stop order suspending its
effectiveness can be in effect and no proceedings for suspension of its
effectiveness can be pending before or threatened by the SEC
. the Wyckoff shareholders must approve the merger agreement and the
merger
. no law, regulation or order can be enacted or issued which has the
effect of making the merger illegal or otherwise prohibiting completion
of the merger on the terms in the merger agreement
. all waiting periods under the applicable antitrust laws must have
expired or be terminated
36
<PAGE>
. the shares of Catalytica common stock to be issued in the merger must be
authorized for listing on the Nasdaq National Market, subject to notice
of issuance
. Catalytica and Wyckoff must each receive from their respective tax
counsel an opinion that the merger will be a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code
. Catalytica and Wyckoff must each receive from their respective
accountants a letter that those firms concur with Catalytica's and
Wyckoff's management as to the appropriateness of pooling of interests
accounting for the merger under Accounting Principles Board Opinion No.
16
. each of Catalytica's and Wyckoff's affiliates must have entered into an
affiliate agreement and each of the agreements must be in effect as of
the date of the merger
Wyckoff's Conditions to Completion of the Merger. Wyckoff's obligations to
complete the merger and the other transactions contemplated by the merger
agreement are subject to the satisfaction or waiver of each of the following
additional conditions before completion of the merger:
. Catalytica's representations and warranties must be true and correct as
of the date the merger is to be completed as if made at that time
. Catalytica must comply in all material respects with all of its
agreements required by the merger agreement to be complied with at or
before completion of the merger
. No material adverse effect with respect to Catalytica can have occurred
since July 14, 1999
. Wilson Sonsini Goodrich & Rosati, P.C., counsel to Catalytica, must
execute and deliver to Wyckoff a legal opinion
Catalytica's Conditions to Completion of the Merger. Catalytica's
obligations to complete the merger and the other transactions contemplated by
the merger agreement are subject to the satisfaction or waiver of each of the
following additional conditions before completion of the merger:
. Wyckoff's representations and warranties must be true and correct as of
the date the merger is to be completed as if made at that time
. Wyckoff must comply in all material respects with all of its agreements
required by the merger agreement to be complied with at or before
completion of the merger
. no material adverse effect with respect to Wyckoff can have occurred
since July 14, 1999. For this purpose a material adverse effect will be
considered to occur if there is a material adverse change in Wyckoff's
actual or anticipated sales or profitability as compared to Wyckoff's
financial projections that were provided to Catalytica before the date
of the merger agreement
. Warner Norcross & Judd LLP, counsel to Wyckoff, must execute and deliver
to Catalytica a legal opinion
Termination
The merger agreement may be terminated at any time before completion of the
merger, whether before or after approval of the merger agreement and the merger
by Wyckoff shareholders:
. by mutual written consent of Catalytica and Wyckoff
. by Catalytica or Wyckoff if the merger is not completed before January
15, 2000, except that this right to terminate the merger agreement is
not available to any party whose action or failure to act has resulted
in the merger not occurring on or before this date and that action or
failure to act is a breach of the merger agreement
37
<PAGE>
. by Catalytica or Wyckoff if there is any unappealable order of a court
or governmental authority having jurisdiction over either of us
permanently enjoining, restraining or prohibiting the completion of the
merger
. by Catalytica if there is any rule or order enacted by any governmental
authority, which would in any material respect (a) prohibit Catalytica's
or Pilot Acquisition Corporation's ownership or operation of a material
portion of the business of Wyckoff, or (b) compel Catalytica or Wyckoff
to dispose of or hold separate all or a material portion of the business
or assets of Wyckoff, Catalytica, Catalytica Pharmaceuticals or
Catalytica Combustion Systems
. by Catalytica, upon a material breach by Wyckoff of any representation,
warranty, covenant or agreement in the merger agreement, unless the
breach is curable by Wyckoff, in which case Catalytica may not terminate
the merger agreement for 20 days after delivery of written notice from
Catalytica to Wyckoff of the breach
. by Wyckoff, upon a material breach by Catalytica of any representation,
warranty, covenant or agreement in the merger agreement, unless the
breach is curable by Catalytica, in which case Wyckoff may not terminate
the merger agreement for 20 days after delivery of written notice from
Wyckoff to Catalytica of the breach
. by Catalytica if an event having a material adverse effect on Wyckoff
has occurred after the date of the merger agreement
. by Catalytica, if a majority of Wyckoff's shareholders do not approve
the merger agreement
Payment of Termination Fee
Wyckoff will pay Catalytica a termination fee of $4 million if (a)
Catalytica is not in material breach of its obligations under the merger
agreement, (b) the merger agreement is terminated and (c) any of the following
events occurs:
. Wyckoff's shareholders fail to approve the merger by the required vote
and before December 31, 1999, Wyckoff or any of its officers, directors
or affiliates participates in any negotiations or discussions with
respect to any offer or proposal to acquire all, substantially all or a
significant portion of Wyckoff's business, properties or technologies or
more than 20% of Wyckoff's capital stock and these discussions lead to a
change of control of Wyckoff;
. a majority of Wyckoff's board of directors does not recommend or changes
its recommendation concerning the merger, or discloses in any way its
intention not to recommend or to change its recommendation; or
. Wyckoff:
. solicits, encourages, initiates or participates in any discussions
or negotiations regarding any proposal to acquire all, substantially
all or a significant portion of Wyckoff's business, properties or
technologies;
. discloses any information not customarily disclosed to any person
concerning Wyckoff's business, technologies or properties;
. assists or cooperates with any person to make any proposal to
purchase all or a material portion of Wyckoff's capital stock or
assets; or
. enters into any agreement relating to the acquisition of all or any
significant portion of Wyckoff.
Extension, Waiver and Amendment of the Merger Agreement
Catalytica, Wyckoff and Pilot Acquisition Corporation may amend the merger
agreement at any time before completing the merger.
38
<PAGE>
Either Catalytica and Pilot Acquisition Corporation, on the one hand, or
Wyckoff, on the other hand, may extend the other party's time for the
performance of any of the obligations or other acts required by the merger
agreement, waive any inaccuracies in the other party's representations and
warranties and waive compliance by the other party with any of the agreements
or conditions in the merger agreement.
Indemnification of Wyckoff Officers and Directors
After completion of the merger, Catalytica will cause Wyckoff to indemnify
Wyckoff's directors and officers for acts or omissions occurring before the
merger to the same extent and on the same terms and conditions as provided in
Wyckoff's articles of incorporation and bylaws. After the merger, Catalytica
will provide directors and officers of Wyckoff with the same coverage and
amounts of directors' and officers' liability insurance as Catalytica provides
to directors and officers of Catalytica's other subsidiaries.
Escrow Funds and Indemnity
The following is a brief summary of the escrow agreements, which are
attached to this proxy statement/prospectus as Annex III and Annex IV and
incorporated herein by reference. This summary is qualified in its entirety by
reference to the escrow agreements.
At completion of the merger, 224,824 shares of Catalytica common stock
issuable to Wyckoff shareholders, which amount is approximately 5.6% of the
shares at Catalytica common stock issuable to Wyckoff shareholders in the
merger, will be registered in the name of and deposited with U.S. Bank Trust,
N.A., as escrow agent. We have agreed to establish two escrow funds governed by
two separate agreements.
Under the terms of the escrow agreement attached to this proxy
statement/prospectus as Annex III, 179,860 shares of Catalytica common stock
will be deposited into the first escrow fund. The first escrow fund will be
available solely to compensate Catalytica for any losses it incurs as a result
of any breach of Wyckoff's representations, warranties or covenants in the
merger agreement or any failure by Wyckoff to perform or comply with its
covenants in the merger agreement. Catalytica will not receive any shares from
the first escrow fund unless and until Catalytica suffers cumulative losses in
excess of $150,000, in which case Catalytica may receive from the first escrow
fund the entire amount of its cumulative losses.
Under the terms of the special purpose escrow agreement attached to this
proxy statement/prospectus as Annex IV, 44,964 shares of Catalytica common
stock will be deposited into the second escrow fund. The second escrow fund
will be available to compensate Catalytica for any losses it incurs related to
a specific intellectual property matter.
The escrow shares will be contributed to the escrow funds on behalf of each
Wyckoff shareholder in proportion to the aggregate number of shares of
Catalytica common stock that the holder would otherwise be entitled to receive
under the merger agreement. Shareholders will have voting rights with respect
to the escrow shares while in escrow and will receive cash dividends, if any,
attributable to the escrow shares. Any distribution of securities with respect
to shares held in escrow will be placed in the escrow funds. If Catalytica is
entitled to receive any escrow shares from the escrow funds, any share
dividends paid on these shares also will be received by Catalytica.
For purposes of compensating Catalytica for its losses, the escrow shares
will be valued at $13.34375. Subject to resolution of unsatisfied claims of
Catalytica, the first escrow fund related to breaches of a representation and
warranty or covenant will terminate at 5:00 p.m., P.S.T., on the date that is
the earlier of (a) the date of the auditor's report for the first audit of
Catalytica's financial statements reflecting combined operations of Catalytica
and Wyckoff following completion of the merger or (b) the six month anniversary
of completion of the merger. Subject to resolution of unsatisfied claims of
Catalytica, the second escrow fund related to a specific intellectual property
matter will terminate at 5:00 p.m., P.S.T., on July 14, 2002 the third
anniversary of the merger agreement.
39
<PAGE>
After completion of the merger, the escrow shares will be the exclusive
remedy for Catalytica to recover for any losses it suffers by reason of
Wyckoff's breach of any representation, warranty or covenant or due to
intellectual property matters.
By approving the merger agreement, you will be considered to have consented
to the appointment of John L. Urness to act as the securityholder agent on
behalf of Wyckoff shareholders to:
. authorize delivery of escrow shares to Catalytica in satisfaction of
claims brought by Catalytica
. to object to delivery of shares
. to agree to negotiate and enter into settlements and compromises with
respect to any claims
. to take other action on behalf of Wyckoff shareholders, all as more
fully described in the merger agreement
The escrow funds and rights with respect to them are complicated and not
easily summarized. You are urged to carefully read the escrow agreements
attached to this proxy statement/prospectus as Annex III and Annex IV for a
more detailed explanation.
The Voting Agreements
In connection with the merger, Wyckoff's directors and officers and a 10%
shareholder of Wyckoff entered into voting agreements, a form of which is
attached to this proxy statement/prospectus as Annex II. By entering into the
voting agreements these Wyckoff shareholders have irrevocably appointed
Catalytica as their lawful attorney and proxy. These proxies give Catalytica
the limited right to vote the shares of Wyckoff common stock beneficially owned
by these shareholders, including shares of Wyckoff common stock acquired after
the date of the voting agreements, in favor of approval of the merger
agreement, the merger and each other matter that could reasonably be expected
to facilitate the merger. These Wyckoff shareholders may vote their shares of
Wyckoff common stock on all other matters.
As of July 14, 1999, the Wyckoff shareholders who have entered into voting
agreements collectively beneficially owned 127,542 shares of Wyckoff common
stock, which represented approximately 43.2% of the outstanding Wyckoff common
stock. None of the Wyckoff shareholders who signed the voting agreements were
paid additional consideration in connection with signing the agreements.
Each Wyckoff shareholder who is a party to a voting agreement agreed not to
sell the Wyckoff stock and options owned, controlled or acquired by that person
until the earlier of the termination of the merger agreement or the date of the
merger, unless the transfer is not prohibited by any affiliate agreement
between the shareholder and Catalytica and each person to whom any shares or
any interest in any shares are transferred agrees to be bound by the terms and
provisions of the voting agreement. The voting agreements will terminate upon
the earlier of the termination of the merger agreement and the date of the
merger.
Wyckoff Affiliate Agreements
Each director and officer of Wyckoff and a 10% shareholder of Wyckoff has
signed an affiliate agreement. Under the affiliate agreements, these persons
have agreed not to sell or otherwise dispose of, or to reduce their risk
relative to, any shares of Wyckoff common stock owned by them during the period
beginning on July 14, 1999 and ending two trading days after Catalytica
publicly announces financial results covering at least 30 days of combined
operations of Catalytica and Wyckoff. Under the affiliate agreements,
Catalytica also is entitled to place appropriate legends on the certificates
evidencing any Catalytica common stock to be received by these persons and to
issue stop transfer instructions to the transfer agent for Catalytica common
stock. Further, these persons have acknowledged that the resale restrictions
imposed by Rule 145 under the Securities Act will apply to the shares of
Catalytica common stock they receive in the merger.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
We have derived the following selected unaudited pro forma combined
financial information of Catalytica and Wyckoff from the unaudited pro forma
condensed combined financial statements included in this proxy
statement/prospectus, which gives effect to the merger as a pooling of
interests. You should read this information in conjunction with the unaudited
pro forma financial statements and the related notes. We present the unaudited
pro forma financial information for illustrative purposes only. This
information is not necessarily indicative of the operating results or financial
position that would have occurred if the merger had been completed. Also, it
does not necessarily represent or predict future operating results or the
financial position of the combined companies.
We have derived the selected consolidated balance sheet data as of June 30,
1999 and June 30, 1998 and the selected consolidated statement of operations
data for the fiscal years ended June 30, 1997, June 30, 1998 and June 30, 1999
for Wyckoff from the audited consolidated financial statements of Wyckoff
appearing elsewhere in this proxy statement/prospectus. We have derived the
selected historical consolidated financial information for the six months ended
June 30, 1998 and June 30, 1999 for Wyckoff from the unaudited financial
statements of Wyckoff included in this proxy statement/prospectus. The
unaudited consolidated financial statements have been prepared by Wyckoff on a
basis consistent with the audited consolidated financial statements appearing
elsewhere in this proxy statement/prospectus and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for fair representation of such data. The results of operations for
the six months ended June 30, 1999 are not necessarily indicative of results to
be expected for any subsequent period.
We present the unaudited pro forma financial information for illustrative
purposes only. This information is not necessarily indicative of the operating
results or financial position that would have occurred if the merger had been
completed. In addition, it does not necessarily represent or picture future
operating results or the financial position of the combined companies.
41
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
Reflecting Catalytica, Inc. After Giving Effect to the Merger
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended Six Months Ended
December 31, June 30,
--------------------------- ------------------
1998 1997 1996 1999 1998
-------- -------- ------- -------- --------
(1) (1)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.............. $390,175 $205,776 $38,854 $203,766 $200,421
Research revenues.......... 16,284 6,599 6,501 10,314 4,165
-------- -------- ------- -------- --------
Total revenues........... 406,459 212,375 45,355 214.080 204,586
Costs and expenses:
Cost of sales.............. 316,820 176,546 28,751 157,939 165,915
Research and development... 32,366 11,007 10,870 18,994 10,910
Selling, general and
administrative............ 21,029 11,306 8,047 13,422 9,413
-------- -------- ------- -------- --------
Total costs and
expenses................ 370,215 198,859 47,668 190,355 186,238
Operating income (loss)...... 36,244 13,516 (2,313) 23,725 18,348
Interest income.............. 2,894 1,450 1,179 1,322 1,555
Interest expense............. (9,569) (6,006) (960) (4,160) (5,312)
Gain on sale of assets....... -- -- 900 -- --
Loss on joint ventures....... (3,827) (4,355) -- (975) (2,307)
-------- -------- ------- -------- --------
Income (loss) before income
taxes....................... 25,742 4,605 (1,194) 19,912 12,284
Provision for income taxes... (2,925) (1,425) (1,296) (4,015) (1,387)
Net income (loss) before
common stock redemption..... 22,817 3,180 (2,490) -- --
Less premium paid on
redemption of class B common
stock....................... -- (3,750) -- -- --
-------- -------- ------- -------- --------
Net income (loss)
attributable to common
shareholders................ $ 22,817 $ (570) $(2,490) $15,897 $10,897
======== ======== ======= ======== ========
Net income (loss) per share:
Basic...................... $ 0.40 $ (0.02) $ (0.10) $ 0.27 $ 0.19
======== ======== ======= ======== ========
Diluted.................... $ 0.34 $ (0.02) $ (0.10) $ 0.23 $ 0.16
======== ======== ======= ======== ========
Number of shares used in
computing net income (loss)
per share:
Basic...................... 57,605 37,744 23,779 57,973 57,489
======== ======== ======= ======== ========
Diluted.................... 63,692 37,744 23,779 63,674 63,432
======== ======== ======= ======== ========
</TABLE>
- --------
(1) See note 2 to the historical financial statements.
See accompanying notes to unaudited pro forma condensed combined financial
statements.
42
<PAGE>
Unaudited Pro Forma Combined Condensed Consolidated Balance Sheets
Reflecting Catalytica, Inc. After Giving Effect to the Merger
As of June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Catalytica Wyckoff Pro Forma
Actual Actual Adjustments Total
---------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 46,441 $ 290 $ 46,731
Short-term investments............. 5,116 -- 5,116
Accounts receivable, net........... 23,306 8,240 31,546
Accounts receivable from joint
venture........................... 572 -- 572
Notes receivable from employees.... 305 -- 305
Inventory:
Raw materials.................... 38,230 2,303 40,533
Work in process.................. 42,335 2,102 44,437
Finished goods................... 11,573 3,108 14,681
-------- ------- --------
92,138 7,513 99,651
Deferred tax asset................. 2,867 -- 2,867
Prepaid expenses and other
assets............................ 4,199 127 4,326
-------- ------- --------
Total current assets........... 174,944 16,170 191,114
Property, plant and equipment:
Land............................... 5,391 1,139 6,530
Equipment.......................... 135,785 34,261 170,046
Buildings and leasehold
improvements...................... 67,901 12,562 80,463
-------- ------- --------
209,077 47,962 257,039
Less accumulated depreciation and
amortization....................... (34,770) (20,503) (55,273)
-------- ------- --------
174,307 27,459 201,766
Other assets........................ 2,529 153 2,682
-------- ------- --------
$351,780 $43,782 $395,562
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 19,080 $ 2,644 $ 21,724
Accrued payroll and related
expenses.......................... 14,077 858 14,935
Deferred revenue................... 4,069 -- 4,069
Other accrued liabilities.......... 13,855 515 1,000 15,370
Current portion of long-term
debt.............................. 8,201 1,000 9,201
Current portion of bonds............ -- 2,464 2,464
Income taxes payable................ 438 819 (180) 1,077
-------- ------- ----- --------
Total current liabilities...... 59,720 8,300 820 68,840
Long-term debt...................... 59,500 6,176 65,676
Long-term portion of bonds.......... -- 4,646 4,646
Non-current deferred revenue........ 1,414 -- 1,414
Deferred tax liability.............. -- 2,598 2,598
Other liabilities................... 1,125 388 1,513
Minority interest................... 41,000 -- 41,000
Class A and B common stock.......... 97,079 -- 97,079
Stockholders' equity:
Common stock....................... 28 284 (284) 28
Additional paid-in capital......... 105,810 2,095 284 108,189
Deferred compensation.............. (219) -- (219)
Retained earnings (accumulated
deficit).......................... (13,677) 19,295 (820) 4,798
-------- ------- ----- --------
Total stockholders' equity..... 91,942 21,674 (820) 112,796
-------- ------- ----- --------
$351,780 $43,782 -- $395,562
======== ======= ===== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
43
<PAGE>
Notes To Unaudited Pro Forma
Combined Condensed Financial Statements
Note 1. Pro Forma Basis of Presentation
Since the fiscal years of Catalytica and Wyckoff differ, the financial
statements of Wyckoff have been recast for the most recently completed fiscal
year of Catalytica and are presented for the 12-month period ended December 31,
1998. The periods combined for purposes of the unaudited pro forma condensed
financial statements are as follows:
<TABLE>
<CAPTION>
Catalytica Wyckoff
---------- -------
<S> <C>
Fiscal year ended December 31, 1998 Twelve months ended December 31, 1998
Fiscal year ended December 31, 1997 Fiscal year ended June 30, 1998
Fiscal year ended December 31, 1996 Fiscal year ended June 30, 1997
Six months ended June 30, 1999 Six months ended June 30, 1999
Six months ended June 30, 1998 Six months ended June 30, 1998
</TABLE>
Wyckoff's results of operations for the six month period ended June 30, 1998
have been included in the unaudited pro forma results of operations for the
years ended December 31, 1997 and December 31, 1998.
These unaudited pro forma condensed combined financial statements assume the
issuance of 4,496,487 shares of Catalytica common stock in exchange for
Wyckoff's common stock and options outstanding in connection with the merger,
based on the exchange amount:
<TABLE>
<S> <C>
Number of shares of Catalytica common stock exchanged............ 4,496,487
Number of shares of Catalytica common stock and equivalents
outstanding as of June 30, 1999................................. 53,607,085
----------
Number of shares of combined company common stock
outstanding after the completion of the merger at June 30,
1999............................................................ 58,103,572
==========
</TABLE>
Note 2. Unaudited Pro Forma Condensed Combined Balance Sheet
Catalytica and Wyckoff estimate they will incur future direct transaction
costs of approximately $1.0 million associated with the merger, consisting
primarily of transaction fees for attorneys, accountants, financial printing
and other related charges. These nonrecurring transaction costs will be charged
to operations as incurred. These charges have been reflected in the unaudited
pro forma condensed combined balance sheet but they are not reflected in the
Unaudited Pro Forma Condensed Combined Statements of Operations.
It is expected that following the merger, the combined company will incur
significant additional costs or charges, which are not currently reasonably
estimable, to reflect costs associated with integrating the two companies.
These costs or charges have not been reflected in the unaudited pro forma
condensed combined balance sheet or statements of operations as these costs
cannot be accurately estimated at this time pending finalization of certain
operating decisions by management as to the manner and timing of consolidating
the operations. There can be no assurance that the combined company will not
incur additional merger-related costs or charges or that management will be
successful in its efforts to integrate the operations of the two companies.
44
<PAGE>
Notes To Unaudited Pro Forma
Combined Condensed Financial Statements--(Continued)
Note 3. Unaudited Pro Forma Net Income (Loss) Per Share
The following table reconciles the number of shares used in the pro forma
per share calculations to the numbers set forth in Catalytic and Wyckoff
historical statements of operations:
Shares used in Pro Forma Per Share Calculations
(in thousands)
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended Ended June
December 31, 30,
-------------------- -------------
1998 1997 1996 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares used in Basic per share calculations
Historical -- Catalytica................... 53,109 33,248 19,283 53,477 52,993
Historical -- Wyckoff...................... 284 284 285 284 284
As converted -- Wyckoff.................... 4,496 4,496 4,496 4,496 4,496
Pro forma combined......................... 57,605 37,744 23,779 57,973 57,489
Shares used in Diluted per share
calculations
Historical -- Catalytica................... 59,196 33,248 19,283 59,178 58,936
Historical -- Wyckoff...................... 287 287 288 287 286
As converted -- Wyckoff.................... 4,496 4,496 4,496 4,496 4,496
Pro forma combined......................... 63,692 37,744 23,779 63,674 63,432
</TABLE>
45
<PAGE>
CATALYTICA'S BUSINESS
The discussion in this proxy statement/prospectus contains forward-looking
statements which involve risks and uncertainties. Catalytica's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Risk
Factors," as well as those discussed elsewhere in this proxy
statement/prospectus.
Overview
Catalytica uses its proprietary technologies to optimize manufacturing and
solve environmental problems in high growth industries. Catalytica's core
expertise is in the use of catalysts. In addition, it also has developed or
acquired technologies for manufacturing processes that:
. eliminate certain hazardous materials in the production of products
. enable chemical reactions to proceed more rapidly
. increase manufacturing yields
. eliminate or minimize the formation or use of environmental pollutants
Catalytica believes that there are numerous untapped opportunities for the
use of its proprietary technologies. Catalytica has chosen to focus on markets
that offer substantial opportunity, such as the pharmaceutical manufacturing
industry and the power generation market, and where its proprietary
technologies can offer a competitive advantage.
Catalytica operates its business through three subsidiaries:
. Catalytica Pharmaceuticals, Inc. provides drug development,
manufacturing and packaging services to the pharmaceutical and biotech
industries. Catalytica owns approximately 94% of
Catalytica Pharmaceuticals' outstanding stock. The remaining 6% is held
by Glaxo Wellcome, Pfizer and Catalytica employees. In 1998, Catalytica
derived approximately 98% of its consolidated revenues from Catalytica
Pharmaceuticals' operations.
. Catalytica Combustion Systems, Inc. develops, manufactures and markets
XONON, a catalytic system, for the industrial gas turbine market. XONON
enables the production of clean, cost-effective electricity. Catalytica
owns 85% of Catalytica Combustion Systems outstanding stock. The
remaining 15% is held by Enron.
. Catalytica Advanced Technologies, Inc. acts as the incubator for new
areas of business for Catalytica. It explores business opportunities
that exploit Catalytica's proprietary technologies by research and
development and consulting services, primarily for the petroleum and
petrochemical industries. Catalytica owns 100% of Catalytica Advanced
Technologies' outstanding stock.
Catalytica Pharmaceuticals, Inc.
Catalytica Pharmaceuticals, formerly Catalytica Fine Chemicals, has provided
research, development and optimization of manufacturing processes for
pharmaceutical companies since 1992.
In December 1993, recognizing the increasing trend towards outsourcing of
drug manufacturing, Catalytica Pharmaceuticals acquired a drug manufacturing
facility in East Palo Alto, California. The acquisition enabled Catalytica
Pharmaceuticals to provide pharmaceutical companies with outsourced
manufacturing of drug intermediates -- key chemical ingredients along the
pathway to the active pharmaceutical ingredient in drugs.
46
<PAGE>
In July 1997, Catalytica Pharmaceuticals acquired a drug development,
manufacturing and packaging facility in Greenville, North Carolina from Glaxo
Wellcome. The Greenville facility enables Catalytica Pharmaceuticals to offer a
fully integrated drug development, manufacturing and packaging service to
pharmaceutical and biotechnology companies.
Industry Overview
Catalytica Pharmaceuticals seeks to capitalize on the dynamic changes in the
pharmaceutical industry by providing a broad range of manufacturing services to
pharmaceutical companies. These changes include:
. Increased Cost of Drug Development. The cost of research and development
required to bring a new drug to market has increased from an average of
$231 million in 1987 to $500 million in 1997. This increase has prompted
pharmaceutical companies to seek ways to contain costs and increase
productivity throughout all phases of the drug development process.
. Greater Focus on Time to Market. Pharmaceutical companies gain
competitive advantage by being the first to market with a new drug.
Also, the more new drugs that they discover, the more likely that these
drugs will contribute to revenue. As a result, pharmaceutical companies
have increased their focus on reducing the "time to market" for a drug.
Several pharmaceutical companies have announced their intentions to
bring three to five new chemical entities, drugs with a unique chemical
profile from those already on the market, to the market each year. This
is faster than the current industry average of less than one new
chemical entity introduced per year. To shorten the time to market for a
new drug, drug companies are outsourcing some of their production
functions to firms that are capable of scaling up production quickly
across the full spectrum of activities, from production of small
research quantities to commercial volumes.
. Greater Price Pressure. The increase in sales of lower-priced generic
drugs has resulted in greater price competition. Over the next few years
a large number of branded drugs will come off-patent, creating added
competition from multiple generic alternatives. In addition, the effort
by managed health care companies and public programs, such as Medicare
and Medicaid, to control healthcare costs has put additional price
pressure on pharmaceutical companies. Price pressures and competition
from lower-priced generic products have caused pharmaceutical companies
to scrutinize their manufacturing operations to better use resources and
reduce manufacturing costs.
. Increased Government Regulation. New regulations governing all aspects
of drug development, manufacturing and marketing, as well as waste
disposal and environmental matters, have contributed to the costs of
drug manufacturing.
For pharmaceutical companies, these factors have made the outsourcing of drug
development, clinical research, manufacturing and packaging more attractive.
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Catalytica Pharmaceuticals' Strategy
Catalytica Pharmaceuticals seeks to provide fully integrated drug
development and manufacturing services that are high-quality, cost-effective,
reliable and responsive to customer needs. Its services span the spectrum of
the pharmaceutical drug development and manufacturing process, from the time
the new chemical entity is discovered by pharmaceutical or biotechnology
companies to the custom production of the final commercial supply of the drug.
These services include:
<TABLE>
<CAPTION>
Service Description of Service
------- ----------------------
<C> <S>
Chemical process development Determination of economical,
efficient and safe ways to make the
new chemical entity.
Pilot scale production Scale-up of the production process of
the new chemical entity, from small
batches required for research to
larger batches required for clinical
trials and eventually for manufacture
of commercial-scale quantities of the
drug.
Custom chemical manufacturing Manufacture of key intermediates
along the pathway toward the active
pharmaceutical ingredients as well as
the manufacture of the active
pharmaceutical ingredient.
Drug formulation development Determination of the formulation of
essential ingredients to create a
tablet, capsule, sterile solution,
ointment, liquid or cream that allows
the drug to be absorbed or
administered effectively and remain
potent through its shelf life.
Full-scale commercial production of Manufacture of the final dosage
sterile and non-sterile dosage form drug forms, including tablets, gel
products capsules, sterile vials of injectable
products, topical ointments, liquids
or creams.
Packaging of final drug products Packages final products in a variety
of configurations, such as large
bottles, individual blister packs,
tubes, sample packs and single use
packages.
</TABLE>
By providing this range of services to its customers, Catalytica
Pharmaceuticals believes that it can develop and maintain close relationships
with its customers, provide a highly valued service to the pharmaceutical
industry and create long-standing relationships that engender confidence in its
capabilities.
Customers
Catalytica Pharmaceuticals' customers include leading pharmaceutical and
biotechnology companies, such as:
. Allergan, Inc.
. Amgen, Inc.
. Astra USA, Inc.
. CV Therapeutics, Inc.
. Glaxo Wellcome, Inc.
. IDEC Pharmaceuticals
. Medeva Pharmaceuticals
. Merck and Company
. Monarch Pharmaceuticals
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. Pfizer, Inc.
. Rhone Poulenc-Rorer
. Triangle Pharmaceuticals
. Vertex Pharmaceuticals, Inc.
. Warner Lambert Company
Glaxo Wellcome is Catalytica Pharmaceuticals' largest single customer. In the
first half of 1999, revenues from Glaxo Wellcome accounted for approximately
73% of Catalytica's total revenues. In 1998, revenues from Glaxo Wellcome
accounted for approximately 86% of Catalytica's total revenues.
In the past two years, Catalytica Pharmaceuticals has obtained new contracts
from customers that provide a foundation for future sales. Due to FDA
regulatory requirements regarding validation of manufacturing processes for a
specific drug, it generally takes at least 18 to 24 months between the date
that a supply agreement is signed and the manufacture of products under the
agreement. Several of Catalytica's new supply agreements are currently in
various phases of the validation process. Catalytica believes that compared
with 1998, there will be an increase in the percent contribution of non-Glaxo
Wellcome business to revenues in 1999 and beyond.
Catalytica Pharmaceuticals collaborates with a number of its customers in
the development of efficient manufacturing processes at various stages,
including chemical process development, pilot scale production processes and
drug formulation development. For example, in early 1996, Catalytica
Pharmaceuticals entered into a five-year cooperative process research and
development program with Pfizer to establish economically viable synthetic
methods for drug candidates in their pipeline. At the initiation of the
agreement, Pfizer also made an equity investment in Catalytica Pharmaceuticals.
In 1998, the parties expanded the relationship to include the development of
new drug formulations. Catalytica Pharmaceuticals also has development
agreements with several other pharmaceutical and biotechnology companies,
including CV Therapeutics, Eli Lilly, IDEC, Pozen, RPR, Triangle
Pharmaceuticals and Vertex.
Operations and Manufacturing
Catalytica Pharmaceuticals' operations are conducted at its facilities in
Greenville, North Carolina and East Palo Alto, California. Both facilities
operate under cGMP, and supply FDA-approved products to their customers.
The Greenville Facility
In July 1997, Catalytica Pharmaceuticals acquired the Greenville facility
from Glaxo Wellcome. The facility has 584 acres of land and 49 buildings with a
total of approximately 1.8 million square feet of space. As of June 30, 1999,
there were approximately 1,350 employees at the Greenville facility, many of
whom were existing employees hired in connection with the acquisition.
Catalytica Pharmaceuticals also hired new personnel to perform research,
development, contract support, marketing, sales and administrative functions.
The Greenville facility has research and development facilities as well as
three distinct manufacturing operations -- chemical manufacturing,
pharmaceutical dosage form production and sterile dosage form production:
. Chemical Manufacturing. The chemical manufacturing operation has 41,000
gallons of multipurpose chemical reactor capacity and prepares a wide
variety of drug substances in bulk form, primarily by chemical
synthesis. The facilities are capable of a number of reaction steps and
phases from the processing of raw materials through the separation,
purification, drying and shipping of active pharmaceutical ingredients.
The resulting active pharmaceutical ingredients are delivered to
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<PAGE>
Catalytica's pharmaceutical or sterile production facilities for dosage
form manufacture and packaging or the bulk active pharmaceutical
ingredient is shipped off-site to customers. The chemical manufacturing
facilities are currently operating at near full capacity, with the
majority of production capacity committed to production of products for
Glaxo Wellcome. Catalytica Pharmaceuticals has also committed some
capacity for other customers.
. Pharmaceutical Production. The pharmaceutical production facilities
blend, mix and/or combine the bulk active drug with other substances to
create a final dosage form of the drug -- such as tablets, capsules,
creams, ointments and liquids -- and package these products for
distribution. The dosage form of a finished drug must be formulated to
provide bio-availability, efficacy, stability and means for identifying
or labeling each tablet or capsule. Catalytica's pharmaceutical
production facility is capable of packaging in hospital unit dose packs,
samples, blister packages, plastic or glass bottles, pouches, tubes or
foil packs. Catalytica Pharmaceuticals packages the drugs for
prescription use or over-the-counter sales and dates and tracks them
through the distribution system by batch and/or lot number. Catalytica
Pharmaceuticals produces final doses and packaging for a number of major
pharmaceutical clients, including Allergan, Glaxo Wellcome, Medeva,
Monarch and Warner Lambert. There is currently manufacturing capacity
available at the pharmaceutical facility.
. Sterile Production. The sterile production facilities produce primarily
intravenous and intramuscular drugs that are administered to the patient
through injection. The sterile production facilities are isolated from
other portions of the plant to minimize microbial contamination.
Catalytica Pharmaceuticals has signed agreements for production of
sterile products with a number of biotechnology and pharmaceutical
companies, including Amgen, Astra, Eli Lilly, Glaxo Wellcome and
Monarch. Due to the long lead time required to obtain regulatory
approvals for sterile manufacturing, production of products under these
contracts generally starts at least 18-24 months after the execution of
the contract. Catalytica Pharmaceuticals believes the time and cost
necessary to build and receive regulatory certification of a new sterile
production facility creates a significant barrier to entry by new
competitors. There is currently excess capacity available at the sterile
production facilities.
The Bay View Facility
Catalytica Pharmaceuticals' Bay View facility is a multi-purpose, commercial
scale chemical manufacturing plant located in East Palo Alto, California.
Catalytica Pharmaceuticals acquired the facility from Novartis in December
1993. The facility has 12,000 gallons of chemical reactor capacity and prepares
chemical intermediates along the pathway for active pharmaceutical ingredients
by chemical synthesis. It is capable of a number of reaction steps and phases
from the purification of raw materials through the separation, purification,
drying and shipping of bulk drug intermediates.
Relationship with Glaxo Wellcome
Catalytica Pharmaceuticals purchased the Greenville facility from Glaxo
Wellcome in July 1997. At the closing of the acquisition, Glaxo Wellcome
subcontracted or assigned contracts with existing customers of the Greenville
facility to Catalytica Pharmaceuticals. At the same time, Catalytica
Pharmaceuticals entered into a five-year supply agreement for the manufacture
of products for Glaxo Wellcome. Under the supply agreement, Glaxo Wellcome
provides periodic forecasts of its future demand for various products.
Catalytica Pharmaceuticals produces the products, if the required production
capacity does not exceed the capacity allocated to Glaxo Wellcome. For
production requests in excess of the capacity allocated to Glaxo Wellcome,
Catalytica Pharmaceuticals will try to accommodate Glaxo Wellcome's requests
and will negotiate pricing on market-based terms.
Under the original supply agreement, Glaxo Wellcome's payments to Catalytica
Pharmaceuticals will decrease over time. Catalytica Pharmaceuticals estimates
that aggregate payments (including reimbursements
50
<PAGE>
for the cost of materials) by Glaxo Wellcome under the original supply
agreement could be as much as $800.0 million over the five-year life of the
agreement.
The supply agreement provides that pharmaceutical production will occur
until December 2000 for cytotoxics and certain specialty products. The
provisions of the original supply agreement related to the production of
chemical and sterile products may be terminated by either party with two years'
prior written notice. Either party may terminate the supply agreement in the
event of a material uncured default by the other party. Glaxo Wellcome also may
terminate the agreement upon a change of control of Catalytica or Catalytica
Pharmaceuticals. Catalytica has guaranteed Catalytica Pharmaceuticals'
obligations under the supply agreement.
After entering into the original supply agreement, Catalytica
Pharmaceuticals has agreed to produce additional products for Glaxo Wellcome.
Those agreements have been documented as amendments to the original supply
agreement. In June 1998, Catalytica Pharmaceuticals agreed to increase the
chemical capacity available for the manufacturer of Glaxo Wellcome products
through 1999. The amendment provides for guaranteed payments by Glaxo Wellcome
and is expected to result in additional revenues for Catalytica Pharmaceuticals
of approximately $50.0 million. To accommodate Glaxo Wellcome's increased
production needs, the parties jointly paid for the addition of certain capital
equipment to the Greenville facility.
In the first quarter of 1999, Catalytica Pharmaceuticals agreed to extend
production of certain Glaxo Wellcome products in its pharmaceutical and sterile
production facilities. This amendment does not have minimum purchase
requirements but does provide for higher unit prices if Glaxo Wellcome were to
purchase less than specified volume levels. Based on current forecasts,
Catalytica expects revenues under this amendment to be approximately $70.0
million in 1999 and 2000. As a part of this amendment, Glaxo Wellcome obtained
an option to extend the production of pharmaceutical products for two
additional years and the production of its sterile products for four additional
years beyond the current expiration date in December 2000.
Environmental Matters
Catalytica Pharmaceuticals and Glaxo Wellcome are working with the EPA and
the North Carolina Department of Environmental and Natural Resources to
investigate, identify and remediate contamination in the soil and groundwater
at the Greenville facility. To date, the investigation has identified 17
different areas of the Greenville facility where contamination by solvents,
petroleum hydrocarbons and pesticides has or may have occurred. Of these 17
areas, at least six have been identified as requiring further investigation and
remediation. Catalytica Pharmaceuticals does not currently know how much
remediation will be required at the site in the future, or the cost of the
remediation.
As the owner of the Greenville facility, Catalytica Pharmaceuticals is
liable for such contamination. However, at the time of the acquisition,
Catalytica Pharmaceuticals and Glaxo Wellcome entered into an agreement
providing that Glaxo Wellcome will be primarily liable for and will perform, at
its cost, the remediation required by law for contamination of the soil and
groundwater existing at the Greenville facility at the time of the acquisition.
The agreement also releases Glaxo Wellcome from liabilities relating to
asbestos materials. Catalytica Pharmaceuticals also has agreed to provide Glaxo
Wellcome access to the Greenville facility as required for the remediation.
Despite the environmental agreement with Glaxo Wellcome, Catalytica may
incur unreimbursed costs or suffer interference with its operations as a result
of the investigation and remediation activities. Catalytica's future
development and expansion of the Greenville facility also may be slowed or
prevented by the investigation and remediation activities.
51
<PAGE>
Also, Catalytica Pharmaceuticals' ongoing operations at the Greenville
facility could cause additional contamination. Determining the existence and
extent of additional contamination contributed by Catalytica, if any, could
lead to protracted investigations, negotiations and litigation which would be a
drain on financial resources and management time. Any contamination caused by
Catalytica could materially adversely affect its business, results of
operations and financial condition.
Catalytica's Bay View facility has arsenic and volatile organic compound
contamination in the soil and groundwater. The site is subject to a clean up
and abatement order issued by the Bay Area Regional Water Quality Control
Board. The order requires stabilization, containment and monitoring of the
contamination at the site and surrounding areas by the current owner of the
property, Rhone Poulenc, Inc. Although Catalytica has contractual rights of
indemnity from Rhone Poulenc and from Novartis, the prior owner/operator of the
facility, Catalytica could be named in an action brought by a governmental
agency or a third party because of the contamination.
Catalytica Pharmaceuticals' Intellectual Property
Catalytica regards the protection of its intellectual property as important
to its future success and relies on a combination of patent, trademark, trade
secret and other intellectual properties, nondisclosure agreements and other
protective measures to protect its proprietary rights. The patent portfolio
held by Catalytica Pharmaceuticals includes ownership of eight United States
patents and patent applications, including six issued or allowed patents, and
over 40 foreign patent applications. Catalytica Pharmaceuticals also possesses
a substantial body of know-how and trade secrets useful in the manufacture of
bulk active pharmaceuticals, and the formulation and packaging of final dosage
form ethical and over-the-counter pharmaceuticals and including sterile
products.
Competition
Catalytica believes that several factors are important to compete in the
pharmaceutical development and manufacturing services industry, including:
. price of services and products
. reliability and timeliness of meeting customer orders
. product quality
. compliance with environmental and FDA regulations
. technical ability and capacity to produce a range of quantities from
small batches to large commercial quantities
Catalytica Pharmaceuticals' primary competition is from pharmaceutical
companies that produce their own drugs and other contract drug manufacturers,
including Bayer, Cambrex, Chirex, Lonza AG, Oread and Patheon, which provide
either drug development or manufacturing services to the pharmaceutical
industry. Some of Catalytica Pharmaceuticals' competitors have substantially
greater financial resources and experience than Catalytica Pharmaceuticals.
However, except for major pharmaceutical companies, we are not aware of any
competitors that have the same broad range of research, development,
manufacturing and packaging capabilities as Catalytica.
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<PAGE>
Catalytica Pharmaceuticals' Executive Officers and Directors
The directors and executive officers of Catalytica Pharmaceuticals are:
<TABLE>
<CAPTION>
Name Age Position with Catalytica
- ---- --- ------------------------
<S> <C> <C>
James A. Cusumano......... 57 Chairman of the Board and Chief Strategic Officer
Gabriel R. Cipau.......... 58 President, Chief Executive Officer and Director
Lawrence W. Briscoe....... 55 Chief Financial Officer and Director
Barry M. Bloom............ 70 Director
Richard Fleming........... 75 Director
Thomas L. Gutshall........ 61 Director
Ricardo B. Levy........... 54 Director
Ernest Mario.............. 61 Director
</TABLE>
Gabriel R. Cipau, Ph.D. was promoted to Chief Executive Officer of
Catalytica Pharmaceuticals in October 1998 and now holds the titles of
President, Chief Executive Officer and director of Catalytica Pharmaceuticals.
He joined Catalytica in August 1996 as a consultant, and in August 1997 he
became President and Chief Operating Officer of Catalytica Pharmaceuticals and
a member of the Catalytica Pharmaceuticals board of directors. Previously,
Dr. Cipau was President and Chief Executive Officer of Copley Pharmaceutical,
Inc. from July 1995 until August 1996, and President and Chief Executive
Officer of Nippon Wellcome K.K. from September 1993 until July 1995, and
Executive Director of Wellcome plc. From 1970 until 1993, he held various
positions at Burroughs Wellcome Co., including Senior Vice President Production
and Engineering. Dr. Cipau holds Ph.D. and B.S. degrees in chemical engineering
and physics from Polytechnic Institute, Timisoara, Romania, an M.B.A degree
from Duke University, and an M.S. in chemistry from East Carolina University.
Barry M. Bloom, Ph.D., has been a director of Catalytica Pharmaceuticals
since February 1995. He retired in September 1993 from Pfizer where he was most
recently Executive Vice President, Research and Development since 1992, and a
member of the board of directors since 1971. Dr. Bloom was with Pfizer since
1952, where he served in executive level positions since 1971. He is a member
of several corporate board of directors, including Cubist Pharmaceuticals,
Inc., Neurogen Corp., Incyte Pharmaceuticals, Inc. and Vertex Pharmaceuticals,
Inc. Dr. Bloom was a member of the United States Congressional Commission on
the Federal Drug Approval Process and the Pharmaceutical Manufacturers
Association Commission on Drugs for Rare Diseases. He has a Ph.D. in organic
chemistry from the Massachusetts Institute of Technology.
Thomas L. Gutshall has been a director of Catalytica Pharmaceuticals since
February 1995. He has been Chief Executive Officer and Chairman of Cepheid
since August 1996. Mr. Gutshall was President and Chief Operating Officer of CV
Therapeutics, Inc. from January 1995 to August 1996, and has 35 years of
experience in specialty chemicals, pharmaceuticals and diagnostics. Mr.
Gutshall served in executive level positions with Syntex Corp. from 1981 to
1994, most recently as Executive Vice President from June 1989 to August 1996.
He previously served with Mallinckrodt Inc., lastly as Vice President and
General Manager, Drug and Cosmetic Chemicals Division. Mr. Gutshall has a B.S.
in chemical engineering from the University of Delaware and is an alumnus of
the Harvard Executive Marketing Program.
Lawrence W. Briscoe, James A. Cusumano, Ph.D., Richard Fleming, Ricardo B.
Levy, Ph.D. and Ernest Mario, who are directors of Catalytica Pharmaceuticals,
are also officers and/or directors of Catalytica. For information on the
business backgrounds of Messrs. Briscoe, Cusumano, Fleming, Levy and Mario, see
"Catalytica Management and Executive Compensation."
Catalytica Combustion Systems, Inc.
Overview
Catalytica Combustion Systems has developed XONON, a pollution prevention
system that reduces emissions, such as nitrogen oxide, carbon monoxide and
unburned hydrocarbons, produced by natural gas
53
<PAGE>
turbines. Catalytica Combustion Systems is working with original equipment
manufacturers to incorporate the XONON system into their gas turbine products
for use by utilities and other public and private users of gas turbines.
Industry Background
With the advent of deregulation in the United States and growing
industrialization throughout the world, the power generation industry faces a
growing demand for power. At the same time, new environmental regulations
require that power be generated in compliance with emissions standards.
One solution is the use of turbines that burn natural gas, which is
generally cleaner and more efficient than other fossil fuels when combined with
steam turbines. Natural gas turbines also generally have shorter construction
times and lower aggregate costs of installation per kilowatt than alternative
power generation methods. Nevertheless, without pollution prevention or clean-
up processes, gas turbines generate nitrogen oxide emissions, a major
contributor of air pollution, of 75 to 200 parts per million. These levels are
not acceptable in many areas of the United States. For example, several
metropolitan areas have permit requirements that require newly installed gas
turbines to achieve nitrogen oxide emission levels of five parts per million or
lower. Clean-up processes can reduce emissions, but result in increased costs
and require the use of caustic chemicals.
Gas turbine suppliers, such as ABB, General Electric Power Systems, Kawasaki
and Pratt & Whitney Canada, Rolls Royce (through its subsidiary Allison Engine
Company), Seimens-Westinghouse and Solar Turbine, offer products for the
following markets:
. Utility Power Generation. The utility power generation market consists
mainly of public utilities and wholesale generating companies that
operate large turbines ranging from 50 to 250 megawatts, with an average
size of approximately 100 megawatts. General Electric and its affiliates
are estimated to have over a 60% share of the worldwide public utility
power generation market. A subset of the power generation market is the
private sector, also referred to as the distributed power segment, which
consists of smaller turbines located close to, or at, the power user's
site. The turbines utilized in this segment range in size from under one
megawatt to 50 megawatts, with an average size of approximately 15 to 20
megawatts. General Electric and Solar currently have a majority share of
this market. Other participants include Allison, European Gas Turbines,
Kawasaki and Pratt & Whitney.
. Industrial Applications. The industrial applications market is comprised
of small and medium-size gas turbines generally ranging from less than
one to 25 megawatts, with an average turbine size of approximately 10
megawatts. The principal users of these turbines are non-utility
industrial power generators and mechanical drive turbines such as those
used for processing and transmission of natural gas in pipelines. Rolls-
Royce and Solar together have a majority share of this market. Other
suppliers include ABB, European Gas Turbines and General Electric.
Market
The XONON module is designed to fit inside each combustor on a gas turbine.
Large turbines, such as those used in utility power generation, require an
average of 10 to 18 combustors per turbine, while smaller industrial turbines
require one or more combustors. Catalytica Combustion Systems intends to sell
XONON products and replacement modules to OEMs for installation in new and
existing turbines. The sales of replacement modules is based upon an average
expected life of approximately 8,000 operating hours, or one year, of full-time
operation.
According to PowerData, a market information service, total gas turbine
sales worldwide from 1990 to 1997 averaged approximately 950 turbines per year.
This sales volume includes both the utility generation and industrial
applications segments. PowerData also forecasted total worldwide gas turbine
sales from 1998 to 2007 at an average of approximately 1,100 turbines per year.
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<PAGE>
Catalytica believes gas turbine sales will continue to be strong, and that
there will be increasing demand for turbines with ultra-low emissions for
siting in populations centers and other areas with strict emissions control
regulations.
Regulatory Overview
Current federal law governing air pollution generally does not mandate the
specific means for controlling emissions. Federal law, instead, creates ambient
air quality standards for individual geographic regions to attain in light of
the general level of air pollution in the region. State and local authorities
determine specific strategies for reducing emissions or specific pollutants to
meet federal standards. State and local authorities also adopt performance
standards for all major new and modified sources of air pollution in areas that
do not meet ambient air quality standards. Generally, the more polluted the air
in a particular region becomes, the more stringent the emission restrictions.
Under the Clean Air Act, the EPA establishes ambient air quality standards.
Areas which meet the standards are considered "attainment areas," while areas
not meeting the standards are considered "non-attainment areas." In non-
attainment areas, regulations require that the emissions of a new gas turbine
be "offset," that is, the user must offset the entire emissions of the project
so that there is no net increase of emissions for the area. There is often a
multiplier applied to the new emissions, so that the new project combined with
the "offset" must actually provide a net decrease in emissions.
One way to meet the offset requirements is to make contemporaneous
reductions of emissions at the same facility, by placing controls on existing
equipment at the location or taking existing equipment out of service. If it is
not feasible to make offsetting reductions at the facility, then the user must
obtain emission reduction credits from its own or someone else's locations to
offset the emissions from the project. There is a developing market for
credits, which provides economic value to users with credits available and
establishes the cost for those who must acquire credits.
In 1997, the EPA issued more stringent air quality standards for ground-
level ozone (smog) and particulate matter (soot). Since nitrogen oxide is both
a principal component of smog and a contributor to the formation of fine
particulate matter, nitrogen oxide reduction at power generation facilities is
important to the regulation of air quality. In addition to environmental
requirements in the United States, there are increasing restrictions on
emissions abroad, particularly in Japan and Western Europe.
Competing Pollution Control Approaches
Natural gas turbine combustors typically operate at a peak flame temperature
of about 3,270 degrees Fahrenheit. Without emissions controls or clean-up
processes, combustion at these temperatures results in nitrogen oxide emissions
of between 75 and 200 parts per million.
Reducing the combuster operating temperature to 2,700 degrees virtually
eliminates production of nitrogen oxide. However, current technologies are
unable to achieve this temperature reduction without dramatically reduced
efficiencies. Two methods that have been used to reduce combustor temperature
are "wet controls" and "lean pre-mix." However, neither method can reduce
combustion temperature below 2,700 degrees, and therefore a post-combustion
clean-up process is required to achieve very low emission levels.
. Wet controls, a once-popular method for reducing nitrogen oxide, reduce
the peak flame combustor temperature by injecting water or steam into
the turbine combustor. Nitrogen oxide emission levels can be reduced to
about 40 parts per million with water and about 25 parts per million
with steam injection. However, the use of water and steam requires that
purified water be available at the site location. Capital and operating
costs can increase if pure water is not available and water clean-up is
required. Additionally, corrosion induced by water impurities can cause
serious turbine damage.
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<PAGE>
These problems, as well as the relatively high levels of nitrogen oxide
still produced, have limited the use of wet controls as a nitrogen oxide
emissions control technology.
. Lean pre-mix is a combustion process in which natural gas and air are
premixed before entering the combustor to reduce the amount of fuel in
the mix. Turbine manufacturers utilizing this approach have achieved
emission levels of approximately 15 to 25 parts per million and may
achieve emission levels of approximately nine to 15 parts per million in
the next product generation. Compared to wet controls, the initial costs
of this method are moderate to high and operating costs are low to
moderate. However, operating costs may increase as emissions are reduced
below 25 parts per million, due to induced noise or vibrations, which
adversely affect reliability. In many areas, these lower levels are
still not adequate to meet the emissions standards.
The most common post combustion clean-up process is selective catalytic
reduction, which reduces nitrogen oxide emissions by approximately 80%. For
example, a turbine with nitrogen oxide emissions at 25 parts per million can
be reduced by 80%, to about five parts per million, with the addition of a
selective catalytic reduction unit. Capital and operating costs of this
approach add significantly to the overall cost of producing power. In
addition, the natural gas turbine operator must store and handle large
quantities of ammonia, a toxic, hazardous substance.
Catalytica Combustion Systems' Solution
In contrast to competing pollution control approaches, Catalytica
Combustion Systems' XONON system is the only pollution prevention technology,
as opposed to post-combustion clean-up technology, that has a demonstrated
ability to reduce nitrogen oxide emissions to less than three parts per
million and essentially eliminate formation of carbon monoxide or unburned
hydrocarbons.
XONON is installed in the combustor of a gas turbine. Through a proprietary
flameless process, XONON enables fuel and air to react on the surface of a
catalyst to produce energy to drive the turbine. Catalytica Combustion Systems
believes that the XONON system provides the lowest level of emissions
achievable with any pollution prevention technology across a broad range of
gas turbine operating conditions. Catalytica has operated the XONON system at
two field demonstration sites. In December 1997, AGC, a builder of small co-
generation plants of greater than three megawatts power generation,
successfully ran XONON on one of their engines for 1,200 hours, at varying
power output levels. AGC's results documented less than three parts per
million of nitrogen oxides throughout the 1,200 hour run. In October 1998,
Catalytica Combustion Systems announced that Silicon Valley Power had
commissioned a Kawasaki turbine using the XONON system to produce power for
the public electric power grid. The results of XONON's operation from Silicon
Valley Power have reconfirmed the operating viability of XONON in commercial
gas turbines and the emissions reduction benefits. Catalytica believes that
XONON will meet the benchmarks which the EPA and state and local regulatory
authorities will set for emissions control technologies for specific
installations.
Catalytica Combustion Systems has tested the durability of the XONON system
for over 7,000 hours at atmospheric pressure and for over 2,500 hours in
operating gas turbines with no degradation in system performance. A series of
tests conducted by AGC, General Electric, Silicon Valley Power and Solar
support these results. Catalytica Combustion Systems believes that the XONON
system provides superior emissions reduction compared to alternative clean-up
technologies.
Ownership and Collaborative Relationships
In January 1998, Enron, a leading buyer of stationary gas turbines,
announced that it intends to use the XONON system in its utility power
generation, distributed power generation and pipeline compressor applications.
At the same time, Enron Ventures, a wholly-owned subsidiary of Enron,
purchased a 15% equity interest in Catalytica Combustion Systems for $30.0
million. Enron Ventures also received a three-year option to purchase an
additional 4.9% equity interest for $14.4 million. Pursuant to the terms of
the investment,
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<PAGE>
Thomas E. White, the Vice-Chairman of Enron Energy Services, was appointed to
the board of directors of Catalytica Combustion Systems.
Catalytica Combustion Systems also has entered into several collaborative
relationships with leading industry players to produce and sell the XONON
system in specific manufacturers' turbines. To date, Catalytica Combustion
Systems has entered into the following collaborative relationships:
. In November 1998, Catalytica Combustion Systems signed an agreement with
General Electric, the world's largest manufacturer of natural gas
turbines, for the development and marketing of the XONON system in new
and existing General Electric turbines. Under the terms of the
agreement, General Electric Power Systems and Catalytica agreed to
cooperate in the design, application and commercialization of the XONON
system for both new and installed General Electric E-class and F-class
turbines, which are large turbines used principally in power generation.
The parties previously had been working together on the application of
the XONON system in gas turbines since 1991.
. In October 1996, Catalytica Combustion Systems and Woodward Governor
Company formed a joint venture called GENXON to develop combustion
systems based on the XONON technology for the retrofit of installed,
out-of-warranty gas turbines. Each company contributed a limited license
for use of their respective technologies for the retrofit of out-of-
warranty turbines not supported by original equipment manufacturers.
GENXON plans to deliver an integrated product that includes Catalytica
Combustion Systems' technology for low nitrogen oxide emissions and
Woodward's control systems. To date, the parties have contributed an
aggregate of $23.9 million to the joint venture, of which Woodward
contributed $15.0 million and Catalytica contributed $8.9 million.
. Catalytica Combustion Systems also is working with Allison, Kawasaki,
Pratt & Whitney, Rolls-Royce and Solar to investigate the application of
the XONON system to small and medium-sized gas turbines. Because of the
large installed base of Allison, Kawasaki and Solar turbines, Catalytica
believes there may be a significant retrofit market opportunity for many
of these turbines located in areas with increasing emissions
regulations.
In January 1995, Catalytica Combustion Systems entered into a cross-license
agreement with Tanaka Kikinzoku Kogyo K.K., a Japanese precious metals company.
The agreement provides that Catalytica Combustion Systems has the exclusive
right to commercialize jointly-owned patents and technology for large turbines
worldwide and small turbines outside of Asia. The agreement also provides that
Tanaka has the exclusive right to commercialize this technology in automobiles
worldwide and in small turbines in Asia. In both cases, the licensed party is
obligated to pay a modest royalty for net product sales using the base unit
price of the licensed product (minus precious metals cost) as a basis. In each
case, it is possible to sell catalytic combustion products into the other
party's areas of exclusivity, provided an additional royalty is paid.
Catalytica Combustion Systems Patents
Catalytica Combustion Systems regards the protection of its intellectual
property as critical to its future success and relies on a combination of
patent, trademark, trade secret and other intellectual properties,
nondisclosure agreements and other protective measures to protect its
proprietary rights. Catalytica has an active patent program for its technology.
A total of 15 patents have been issued and six patent applications are pending
in the United States related to Catalytica Combustion Systems' catalytic
combustion technology. Catalytica Combustion Systems also has filed
applications in foreign countries that may represent significant market
opportunities. These patents and patent applications apply to various aspects
of its catalytic combustion technology, including catalyst compositions,
catalyst structure and design, multistage catalytic combustion concepts and
certain modifications to gas turbine combustors.
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Competition
Catalytica Combustion Systems expects to compete with providers of "lean
pre-mix" systems, including Allison, General Electric and Solar, and with
manufacturers of emissions clean-up systems, such as selective catalytic
reduction. Most of its competitors have substantially greater financial
resources and larger research and development staffs. The turbine manufacturers
are also potential customers of Catalytica Combustion Systems. Catalytica
Combustion Systems expects to rely on these customers to help commercialize its
products. If turbine manufacturers focus solely on their own solutions and
products and do not adopt and promote Catalytica's technologies, Catalytica
Combustion Systems' competitive position and sales prospects would be
materially adversely affected.
Catalytica Combustion Systems' Management and Directors
The executive officers and directors of Catalytica Combustion Systems are:
<TABLE>
<CAPTION>
Position with
Name Age Catalytica Combustion Systems
---- --- -----------------------------
<S> <C> <C>
Dennis A. Orwig............................ 53 President, Chief Executive Officer and director
Lawrence W. Briscoe........................ 55 Chief Financial Officer and director
Ralph A. Dalla Betta....................... 54 Vice President and Chief Scientist
William B. Ellis........................... 59 Director
Frederick O'Such........................... 61 Director
Ricardo B. Levy............................ 54 Director
John A. Urquhart........................... 70 Director
Thomas E. White............................ 55 Director
</TABLE>
Dennis A. Orwig joined Catalytica Combustion Systems in April 1996 as
Executive Vice President, and was named President and director of Catalytica
Combustion Systems in June 1996. Before Catalytica Combustion Systems, he spent
three years as an executive in the Office-of-the-President of Elliott Company,
a manufacturer of products for the power generation and petrochemical
industries. From 1989 to 1993, Mr. Orwig served as President and Chief
Executive Officer of ABB Power Generation, Inc. He previously served as Vice-
President and General Manager of Combustion Engineering Corporation and in
various executive positions at AccuRay Corporation. Mr. Orwig holds B.S.
degrees in chemical engineering and pulp and paper science from Miami
University, and has an advanced degree from Duke University.
William B. Ellis joined the board of directors of Catalytica Combustion
Systems in September 1995. Mr. Ellis is a Senior Fellow of the Yale University
School of Forestry and Environmental Studies. Mr. Ellis retired as chairman of
Northeast Utilities in 1995, where he also served as Chief Executive Officer
from 1983 to 1993. Mr. Ellis joined Northeast Utilities in 1976 as its Chief
Financial Officer. Mr. Ellis was a partner with McKinsey & Co. from 1969 to
1976. Mr. Ellis serves on several other boards of directors, including the
Connecticut Mutual Life Insurance Company and Radian Corporation. He has a
Ph.D. in chemical engineering from the University of Maryland.
Frederick O'Such has served as a director of Catalytica Combustion Systems
since 1995. He served as Group Vice President with Gulton Industries, Inc. from
1963 to 1970. From 1970 to 1981, Mr. O'Such served as Group President and Vice
President-Corporate Development with Envirotech Corporation. From 1981 to 1986,
Mr. O'Such served as Chief Executive Officer of Xertex Corporation. Mr. O'Such
currently is President and Chief Executive Officer of Xertex Capital. Mr.
O'Such is a member of several boards of directors, and holds an M.B.A. from
Harvard University and a B.S. in chemical engineering from Lehigh University.
Thomas E. White joined the board of Catalytica Combustion Systems in January
1998. Mr. White was named Chairman and Chief Executive Officer of Enron Power
Corp., a wholly-owned subsidiary of Enron Corp. in 1991 and assumed the title
of Vice Chairman at Enron Operations Corp. in 1993 and Enron
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Energy Services in 1998. Mr. White joined Enron Corp. in 1990 after retiring as
a Brigadier General from the United States Army, following 23 years of military
service. Mr. White holds a B.S. in engineering from the United States Military
Academy and an M.S. in operations research from the United States Naval Post
Graduate School.
Lawrence W. Briscoe, Ralph A. Dalla Betta, Ricardo B. Levy, Ph.D. and John
A. Urquhart, who are officers and/or directors of Catalytica Combustion
Systems, are also officers and/or directors of Catalytica. For information on
their business backgrounds, see "Catalytica Management and Executive
Compensation."
Catalytica Advanced Technologies, Inc.
Catalytica Advanced Technologies is located in Mountain View, California,
and engages in R&D activities with the goal of identifying and developing new
commercial opportunities for the application of Catalytica's core catalytic
technologies. Catalytica Advanced Technologies also is reviewing opportunities
to use Catalytica Combustion Systems' XONON system in applications other than
gas turbines.
In 1998, Catalytica Advanced Technologies formed a joint venture with United
Catalysts, Inc., a subsidiary of the Sud-Chemie Group, a German chemical
company, for the custom manufacturing, process development and marketing of
organometallic catalysts for the plastics industry. The joint venture, called
Single-Site Catalysts L.L.C., is working with a new class of chemical compounds
that produce highly controlled polymerization reactions for the manufacture of
polymers, using proprietary synthesis technology developed by Catalytica. Sud-
Chemie Group contributed the initial capital to the venture and will be
responsible for marketing and sales of organometallic catalysts. Catalytica
Advanced Technologies contributed its proprietary production technology in
developing and manufacturing single-site catalysts as well as its relationships
with its existing customers.
In 1998, Catalytica Advanced Technologies and McDermott Technology began
collaborating on projects to develop and commercialize fuel processing
technology for fuel cells, including the reforming of gasoline and natural gas
for transportation and stationary power applications. In September 1998, the
companies were awarded a contract by the California Energy Commission to
include the development of a gasoline desulfurizer used to prepare gasoline for
conversion to hydrogen for fuel cell-powered vehicles. In June 1999, the
parties expanded their relationship to include the development of a compact
catalytic fuel processor for use with fuel cells in transportation
applications. Under the terms of the new agreement, which also is being
partially funded through a United States Department of Energy grant, the
partners will develop a compact, fully integrated system capable of processing
multiple fuels into a hydrogen-rich gas suitable for powering proton exchange
membrane fuel cells.
In June 1999, Catalytica Advanced Technologies and CombiChem, Inc. formed a
limited liability company, Aperion LLC, to provide catalytic-based
combinatorial discovery services to the materials and process industries. The
two companies combined their respective proprietary and patented technologies
in the joint venture to enable rapid screening of catalysts and computational,
or computer aided, evaluation of processes and products that are designed to
optimize the manufacture of a wide variety of important industrial products.
Catalytica's Properties
Catalytica's headquarters and R&D facility, based in Mountain View,
California, occupy four buildings covering approximately 85,000 square feet.
Catalytica's lease expires on December 31, 2003, after which Catalytica has an
option to extend the lease for five years, with a five-year option for renewal.
Catalytica's R&D facility is adequate for Catalytica's needs for the
foreseeable future.
Catalytica's Pharmaceuticals' manufacturing facilities are located in
Greenville, North Carolina and East Palo Alto, California. The facility located
in Greenville, North Carolina comprises 584 acres of land,
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approximately 165 of which are occupied by 49 buildings totaling 1.8 million
square feet of space. The Catalytica facility in East Palo Alto, California is
on approximately five acres. Catalytica owns the buildings and leases the land
at the site from Rhone Poulenc Inc. The lease term expires on November 30,
2008, after which Catalytica has an option to extend the lease for two five-
year periods.
Catalytica's Legal Proceedings
In October 1996, GENXON entered into a technical services agreement with the
City of Glendale in California for the retrofit of one of the City's gas
turbines with the XONON system for a total turnkey price of $700,000. GENXON
did not complete the agreed upon retrofit and returned the engine to the City
in its original state. The parties are currently discussing alternatives to
resolve contractual issues related to the project, which resolution is not
anticipated to have a material adverse financial impact on Catalytica.
Catalytica's Employees
As of June 30, 1999, Catalytica and its subsidiaries employed approximately
1,475 employees. Catalytica is not subject to any collective bargaining
agreements and believes that it maintains good relations with its employees.
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CATALYTICA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained in this section, the
discussion in this proxy statement/prospectus contains forward-looking
statements that involve risks and uncertainties regarding Catalytica's
strategy, financial performance and revenue sources. Catalytica's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed in the "Risk Factors" section of
this proxy statement/prospectus. You should consider the following factors
carefully in evaluating an investment in the common stock offered by this proxy
statement/prospectus.
Overview
Catalytica builds business in high growth industries where its technologies
optimize manufacturing and solve environmental problems. To enhance its market
focus, and increase flexibility for strategic financial arrangements and
business partnerships, Catalytica has created three operating subsidiaries:
Catalytica Pharmaceuticals, Catalytica Combustion Systems and Catalytica
Advanced Technologies.
On July 31, 1997, Catalytica Pharmaceuticals acquired a pharmaceutical
manufacturing facility located in Greenville, North Carolina from Glaxo
Wellcome in exchange for:
. $244.7 million in cash
. 250,000 shares of junior preferred stock of Catalytica Pharmaceuticals
convertible into Catalytica common stock
. warrants to purchase 2,000,000 shares of Catalytica common stock at an
exercise price of $12.00 per share
. 10% of the earnings before interest and taxes before July 31, 2007, in
excess of an aggregate cumulative amount of $10.0 million, attributable
to the sterile production operations portion of the Greenville facility,
up to a limit of $25.0 million.
Upon consolidation of Catalytica Pharmaceuticals into Catalytica, the junior
preferred stock issued to Glaxo Wellcome is reflected as $3.0 million of
minority interest.
To raise the cash needed to complete the acquisition, Catalytica used a
combination of equity and debt financing. At the closing of the acquisition,
Catalytica sold 13,270,000 shares of its class A common stock and 16,730,000
shares of its class B common stock to Morgan Stanley Dean Witter Capital
Partners III, L.P. and two affiliated funds, at a price of $4.00 per share, for
an aggregate of $120.0 million. The class A and B common stock are convertible
into Catalytica common stock on a share for share basis. In November 1997,
Catalytica repurchased 5,000,000 shares of the class B common stock from Morgan
Stanley Dean Witter 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.
At the same time, Catalytica, The Chase Manhattan Bank and Chase Securities
Inc. entered into a credit agreement by which a syndicate of banks led by Chase
agreed to lend Catalytica Pharmaceuticals an aggregate of up to $200.0 million.
The debt facilities consisted of a senior secured term loan facility in an
aggregate principal amount of $125.0 million and a senior secured revolving
facility in an aggregate principal amount of $75.0 million. In the quarter
ended June 30, 1998, this credit agreement was amended to increase the
revolving debt facility from $75.0 million to $100.0 million. In addition, the
term debt facility was reduced from its original balance of $125.0 million to
$75.0 million. In the second quarter of 1998, Catalytica also entered into an
interest rate swap, derivative transaction which fixed the LIBOR benchmark rate
used to calculate Catalytica's borrowing cost at 5.90% plus the spread in the
credit
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agreement for four years on $50.0 million of the term debt facility. As of June
30, 1999 and December 31, 1998, nothing was outstanding under the revolving
debt facility and $65.0 million ($75.0 million at December 31, 1998) was
outstanding under the term debt facility. See Note 7 to Catalytica's
Consolidated Financial Statements.
The additional facilities, employees and business volumes resulting from the
acquisition of the Greenville facility have substantially increased
Catalytica's expenses and working capital requirements and placed increased
burdens on Catalytica's management resources. Furthermore, the success of
Catalytica's future results depends, in significant part, on the levels of new
manufacturing business developed by Catalytica Pharmaceuticals. If Catalytica
Pharmaceuticals does not continue to obtain additional new business, which
could include additional business from Glaxo Wellcome, on terms sufficient to
offset the costs associated with operating and maintaining the Greenville
facility and servicing outstanding debt, Catalytica'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 effect on the consolidated results of
operations of Catalytica, and the results of operations of Catalytica's other
businesses are expected to only modestly impact consolidated results for fiscal
1999. The anticipated revenues from the original supply agreement with Glaxo
Wellcome and its subsequent amendments and contracts with other pharmaceutical
customers are expected to allow Catalytica and Catalytica Pharmaceuticals to
achieve continued profitable operations throughout 1999, offsetting losses from
continued investments in Catalytica Combustion Systems and Catalytica Advanced
Technologies. After 1999, Catalytica Pharmaceuticals' profitability will depend
in part on its success and timing in continuing to obtain additional new
business, including possible new agreements with Glaxo Wellcome. Profitability
on a consolidated basis will depend on the operating results of each of
Catalytica's subsidiaries, particularly the rate of commercial success of
Catalytica Combustion Systems.
Manufacturing at the Greenville facility is conducted in three operations:
chemical manufacturing operations, pharmaceutical production operations and
sterile production operations. There is underutilization of manufacturing
capacity at the pharmaceutical production operations and sterile production
operations facilities. Due to 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 these facilities in 1999. 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
Catalytica'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 chemical reactor capacity set up in a wide
range of reactor sizes operating under cGMP. This facility was acquired in 1993
from Novartis (formerly Sandoz).
On May 8, 1996, Pfizer Inc. infused $15.0 million in Catalytica
Pharmaceuticals in exchange for a 15% equity interest in Catalytica
Pharmaceuticals and a five-year, $7.0 million R & D commitment to develop new
processes and technology for the manufacture of Pfizer products. In connection
with the investment, Catalytica Pharmaceuticals issued 150,000 shares of series
B preferred stock, which is convertible into Catalytica common stock. Before
this investment, Catalytica Pharmaceuticals was a wholly-owned subsidiary of
Catalytica. Under the terms of the Greenville acquisition, Glaxo Wellcome
received approximately a 1.5% equity interest in Catalytica Pharmaceuticals and
Catalytica purchased additional shares of Catalytica Pharmaceuticals, which
resulted in Pfizer's ownership interest decreasing to approximately 4.4%.
Catalytica currently owns 94% of the outstanding equity interest in Catalytica
Pharmaceuticals, and Catalytica Pharmaceutical employees own the remaining
0.1%. Upon consolidation of Catalytica Pharmaceuticals into Catalytica, the
series B preferred stock issued to Pfizer is reflected as $8.0 million of
minority interest.
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On October 15, 1996, Catalytica 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 Power Systems, LLC, was formed to
upgrade the combustion systems of installed turbines with the XONON product,
which is designed to reduce emissions from natural gas turbines in the power
generation and mechanical drive markets.
After the initial funding of $10.0 million ($2.0 million from Catalytica
Combustion Systems and $8.0 million from Woodward) in the quarter ended
September 30, 1997, continued funding of the joint venture has occurred on an
equal basis with each joint venture partner contributing an equal amount on a
quarterly basis. For the year ended December 31, 1998, Catalytica Combustion
Systems contributed $4.4 million in cash, of which $0.5 million was accrued by
the Company in 1997 and paid in 1998, and Woodward contributed $4.4 million,
bringing the total combined investment in the joint venture to $22.6 million as
of December 31, 1998. Although Catalytica believes that Catalytica 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, purchased a 15% minority interest in Catalytica Combustion Systems
for $30.0 million. Catalytica 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 Catalytica Combustion Systems
for $14.4 million. In connection with the stock purchase agreement, Catalytica
entered into a share exchange agreement, providing Enron the right to exchange
the series B preferred stock of Catalytica Combustion Systems for Catalytica
common stock. After the five-year anniversary of the agreement, if Catalytica
Combustion Systems has not undertaken a public offering in which Catalytica
Combustion Systems receives proceeds of at least $20.0 million, Enron shall
have the right to require Catalytica to exchange all of the outstanding shares
of series B preferred stock for shares of Catalytica 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 Catalytica Combustion Systems
into Catalytica, the series B preferred stock issued to Enron is reflected as
$30.0 million of minority interest.
Catalytica's business was not profitable until the second half of 1997. As
of June 30, 1999, Catalytica had an accumulated deficit of $13.7 million,
compared to $27.1 million at December 31, 1998. To achieve continued profitable
operations, Catalytica must, among other things, successfully manage the
operations of its Greenville facility, develop additional business with other
customers and, to a lesser extent, successfully develop, manufacture, introduce
and market or license its combustion systems and catalytic processes.
Catalytica initiated efforts in the pharmaceuticals development area in 1992
and began manufacturing, marketing and selling pharmaceutical intermediates in
1994 with the acquisition of the Bay View facility, and substantially increased
its manufacturing and marketing of pharmaceutical products in 1997 with the
acquisition of the Greenville facility.
Results of Operations
Six Months Ended June 30, 1999 and June 30, 1998
Net revenues for the six months ended June 30, 1999 increased by 2.3%, when
compared with the revenues in the same period in fiscal 1998. Product sales
decreased by 0.2%, during the six months ended June 30, 1999, when compared
with the same period for 1998. Although there was a slight decrease in product
sales for the first six months of 1999, attributable to a scheduled reduction
in certain products under the original Glaxo Wellcome supply agreement and some
change in product mix, these factors were largely offset by continued expansion
of sales to Warner Lambert and other new customers.
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During the six months ended June 30, 1999, 73% of Catalytica's revenues were
derived from sales to Glaxo Wellcome, of which 42% was derived from sales to
Glaxo Wellcome under the original supply agreement. During the six months ended
June 30, 1998, 89% of Catalytica's revenues were derived from sales to Glaxo
Wellcome, of which 86% was derived from sales to Glaxo Wellcome under the
original supply agreement. As part of the original supply agreement and
amendments, Glaxo Wellcome guarantees a specified minimum level of revenues in
each year of the agreement. If the minimum level of revenues exceeds amounts
billed at the time of product shipments, Catalytica receives additional
payments from Glaxo Wellcome which help offset fixed manufacturing costs
associated with manufacturing capacity reserved for Glaxo Wellcome as required
in the supply agreement. See Note 2 to Notes to Catalytica's Consolidated
Financial Statements.
Research revenues increased by 81%, for the six months ended June 30, 1999,
when compared with the same period for 1998, due to an increase in new research
partners and related funded research activities at Catalytica Pharmaceuticals.
However, the increase was partially offset by a decrease in Catalytica Advanced
Technologies' research revenue as it decreased its emphasis on contract
research and focused its efforts on new technologies through joint ventures.
The increase in research revenue also was offset by a decrease in Catalytica
Combustion Systems' revenue for the six months ended June 30, 1999, when
compared to the same period in 1998 primarily due to a $0.5 million technology
milestone payment from GENXON to Catalytica Combustion Systems in the second
quarter of 1998, and a slight decrease in external research funding in 1999.
Interest income decreased 15% for the six months ended June 30, 1999, when
compared to the same period in 1998. The decrease in interest income for the
first six months of 1999 is primarily due to lower average cash and investment
balances in 1999 attributable to payments on the Chase credit agreement,
internal funding of Catalytica Combustion Systems' XONON technology, payments
of employee incentive bonuses and quarterly estimated tax payments.
Cost of sales decreased 5% for the first six months of 1999 when compared to
cost of sales in the same period in 1998. This decrease in cost of sales
reflects slightly lower product sales, a change in product mix and improved
manufacturing efficiencies. The change in product mix and improved
manufacturing efficiencies are expected to continue to favorably impact margins
throughout 1999. Margins on pharmaceutical products are subject to fluctuations
from quarter to quarter due to various factors, including the mix of products
being manufactured, manufacturing efficiencies, the length of down-time
associated with setting up new production runs and numerous other variables.
Research and development expenses increased 37% for the six months ended
June 30, 1999, as compared to R&D expenses in the same period in 1998. This
increase in R&D expenses directly corresponds to an increase in R&D income
attributable to increased staffing and R&D expenses at the Greenville facility,
which is expanding the R&D services it provides with respect to both chemical
process and formulation development. These activities are important as
Catalytica continues to obtain new R&D customers who are becoming a meaningful
source of revenues. The increase in R&D expenses in the pharmaceutical segment
was offset slightly by lower R&D expenses at Catalytica Advanced Technologies
due to a shift in emphasis from contract research to development of new
technologies through joint ventures. Catalytica's R&D expenses are expected to
increase further in 1999 as Catalytica continues to invest in its R&D
capabilities, especially in Catalytica Pharmaceuticals.
Selling, general and administrative expenses increased 44% for the six
months ended June 30, 1999, compared with the same period in 1998. SG&A
expenses increased due to higher expenditures on sales and marketing personnel
for the Greenville facility, higher employee incentive costs related to
Catalytica's performance and costs associated with the Wyckoff merger. SG&A
expenses also have increased in Catalytica Combustion Systems as it focuses on
commercialization of the XONON technology. SG&A expenses are expected to
increase moderately in the remainder of 1999, due in part to costs associated
with the merger.
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Interest expense decreased 22%, for the six months ended June 30, 1999, when
compared to the same period in 1998. The decrease in interest expense at June
30, 1999, is attributable to a reduction of approximately $20.0 million in
debt, when compared to June 30, 1998. On June 7, 1999, Catalytica made an early
debt payment on the Chase credit facility of $10.0 million.
Catalytica Combustion Systems recognized its 50% share of the GENXON loss of
$2.0 million for the six months ended June 30, 1999, which amounted to a $1.0
million loss for Catalytica Combustion Systems. During the comparable period in
1998, Catalytica Combustion System's share of GENXON's losses of $4.6 million
amounted to $2.3 million. Accordingly, losses on the joint venture were
recognized in the results of operations. The reduction in GENXON losses during
1999 primarily is due to a reduction in Kawasaki Heavy Industries Ltd.
development costs as that program enters the test phase and an increase in
external funding on other research projects. The reduced level of Catalytica's
expenditures related to GENXON losses will continue throughout 1999.
The provision for income taxes for the six months ended June 30, 1999 was
18%, compared with 10% for the corresponding period in 1998. The increase in
the estimated annual tax rate is due primarily to Catalytica's recent
profitability, resulting in increased state income taxes relating to the
Greenville facility coupled with the federal tax. Catalytica's effective tax
rate is expected to continue to be 18% throughout 1999. In the following year,
if Catalytica continues to be profitable, the effective tax rate will increase
further.
Year 2000 Readiness Disclosure
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 six months,
computer systems, software ("IT Systems") and other equipment, such as
telephones, office equipment and manufacturing equipment used by Catalytica,
may need to be upgraded, repaired or replaced to comply with "Year 2000" and
"leap year" requirements. Catalytica's existing systems are not yet completely
Year 2000 compliant. As a result, Catalytica is continuing to modify the
systems.
Catalytica 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 the following three categories:
. Business Information Technology Systems are 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 are systems or devices that include an intelligent
processor or chip that is not programmable or cannot be modified without
hardware changes.
These systems generally are 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 and
telecommunications devices).
The chart below shows Catalytica's status of compliance at June 30, 1999 and
internal target dates for compliance. Catalytica 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 financial systems (general ledger, purchasing, accounts
payable, accounts receivable, and fixed assets) and material requirements
planning systems, are currently 100% compliant. Remaining critical and non-
critical
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business systems will be completed in the third quarter of 1999 and cosmetic
changes to reports and displays will be completed in the fourth quarter of
1999.
Year 2000 Status as of June 30, 1999
Resolution Phases
<TABLE>
<CAPTION>
Exposure Type Assessment Remediation Testing Implementation
- ------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Business Information 100% Complete 88% Complete 81% Complete 74% Complete
Technology Systems
Expected Completion August 1999 November 1999 December 1999
Manufacturing 100% Complete 98% Complete 93% Complete 86% Complete
Automation Systems
Expected Completion August 1999 September 1999 October 1999
Embedded Systems 100% Complete 99% Complete 99% Complete 99% Complete
Expected Completion September 1999 September 1999 October 1999
</TABLE>
Assessment of potential problems in business information technology systems
is complete; assessment of manufacturing automation systems and embedded
systems was completed in the fourth quarter of 1998. Testing and remediation of
business information technology systems, manufacturing automation systems and
embedded systems is in progress. Catalytica anticipates successful completion
of all phases of these efforts during 1999.
As part of Catalytica's review to assure Year 2000 compliance, it has formed
a task force to oversee Year 2000 and leap year issues. The task force has
reviewed all IT Systems and non-IT Systems that have not been determined to be
Year 2000 and leap year compliant and has identified and begun implementation
of solutions to ensure compliance. Remediation of problems discovered will be
accomplished through internal efforts, vendor upgrades, replacement or
decommissioning of obsolete systems and equipment. External and internal costs
associated with these efforts are expected to reach $7.0 million. In
conjunction with the purchase of the Greenville facility, Glaxo Wellcome has
agreed to reimburse Catalytica for $4.0 million of these costs. As of June 30,
1999, Catalytica has spent $5.7 million on costs associated with the Year 2000
effort, of which $4.0 million has been reimbursed by Glaxo Wellcome. Costs
related to Year 2000 remediation are not expected to have a material effect on
Catalytica's results of operations or financial condition.
Catalytica has contacted its major customers, vendors and service suppliers
whose systems failures potentially could have a significant impact on
Catalytica's operations, to verify their Year 2000 readiness to determine
Catalytica's potential exposure to Year 2000 issues. Catalytica has been
informed by 81% of its major customers, vendors and service suppliers that they
expect to be Year 2000 compliant by the year 2000.
Any failure of these third parties' systems to achieve timely Year 2000
compliance could have a material adverse effect on Catalytica's business,
financial condition, results of operation and prospects. Year 2000 problems
could affect many of Catalytica's production, distribution, plant equipment,
financial and administrative operations. Systems critical to the business that
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 have occurred in the first half of 1999,
contingency plans are in place at the end of the second quarter of 1999. Based
on current plans and efforts to date, Catalytica does not anticipate that Year
2000 problems will have a material effect on the results of operations or
financial condition.
The state of compliance of certain of Catalytica's third-party suppliers of
services such as telephone companies, long distance carriers, financial
institutions and electric companies has not been determined. The
66
<PAGE>
failure of any one of such third party suppliers to be Year 2000 compliant
could severely disrupt Catalytica's ability to carry on its business as well as
disrupt the business of its customers.
Failure to provide Year 2000 and leap year compliant business solutions to
customers or to receive business solutions from suppliers could result in
liability to Catalytica or otherwise have a material adverse effect on the
business, results of operations, financial condition and prospects. Catalytica
could be affected through disruptions in the operation of the enterprises with
which it interacts or from general widespread problems or an economic crisis
resulting from non-compliant Year 2000 systems. Despite Catalytica's efforts to
address the Year 2000 effect on its internal systems and business operations,
such effect could result in a material disruption of the business or have a
material adverse effect on business, results of operations or financial
condition. See "Risk Factors -- If we, our suppliers or our customers do not
successfully address the Year 2000 issue, we could experience a significant
disruption of our financial management and control systems or a lengthy
interruption in our manufacturing operations."
Liquidity and Capital Resources
Total cash, cash equivalents and short-term investments were $51.6 million
as of June 30, 1999, as compared with $47.6 million as of December 31, 1998.
The increase largely reflects cash generated through normal operating
activities, partially offset by investments in property and equipment and a
$10.0 million early payment on the Chase credit agreement. Catalytica expects
to spend approximately $30.0 million in 1999 for capital expenditures,
primarily at Catalytica Pharmaceuticals. Because of its cash position of $51.6
million, including short-term investments, its available line of credit of
$100.0 million as of June 30, 1999, and the anticipated cash flow from
operations in 1999, Catalytica believes that it has adequate funds to meet its
working capital needs and debt repayment obligations for at least the next 12
months.
In the second quarter of 1998, Catalytica entered into a $50.0 million
interest rate swap agreement to reduce Catalytica's exposure to fluctuations in
short-term interest rates. This agreement effectively fixed the LIBOR benchmark
rate used to calculate Catalytica's borrowing cost at 5.90% for four years on
$50.0 million of the term debt facility. Catalytica accounts for this agreement
as a hedge and accrues the interest rate differential as interest expense on a
monthly basis. Catalytica does not hold or transact in such financial
instruments for purposes other than risk management.
Results of Operations
Fiscal Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
For the Year Ended
December 31, Annual % Change
------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- ------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................... $358,872 $174,347 $ 9,813 106% 1,677%
Research and development
contracts...................... 16,284 6,599 6,501 147% 2%
-------- -------- -------
Total revenues................ $375,156 $180,946 $16,314 107% 1,009%
</TABLE>
The significant increase in revenue of 107% from 1997 to 1998 is due to an
increase in product sales attributable to a full year of operations at the
Greenville facility and the related supply agreement with Glaxo Wellcome. On
July 31, 1997, Catalytica purchased the facility from Glaxo Wellcome. This
purchase, including the related original supply agreement and subsequent
amendments, enabled Catalytica to substantially increase its product revenues
beginning in August 1997. As part of the original supply agreement and its
subsequent amendments, Glaxo Wellcome guarantees a specified minimum level of
revenues in each year of the five-year term of the agreement. If the minimum
level of revenues exceeds revenues as a result of product shipments, Catalytica
receives additional payments from Glaxo Wellcome. These payments help offset
fixed manufacturing costs associated with manufacturing capacity reserved for
Glaxo Wellcome as required in the original supply
67
<PAGE>
agreement. See Note 2 to Catalytica's Consolidated Financial Statements. During
1998, $309.8 million of product revenues were covered by the Glaxo Wellcome
guaranteed revenue under the original supply agreement and subsequent
amendments. Of Catalytica's product revenues, 90% were derived from sales to
Glaxo Wellcome. The remaining $11.5 million of product shipments to Glaxo
Welcome were sales related to new contracts not covered by the original supply
agreement and subsequent amendments. During 1998, Catalytica also used its
capacity at its Bay View facility to produce products for Glaxo Wellcome and
various other pharmaceutical and fine chemical customers including Merck,
Novartis, Pfizer and Pharmacia & Upjohn. Product revenues for 1998 attributable
to customers other than Glaxo Wellcome were 10% of total revenue.
The purchase of the Greenville facility and the related original supply
agreement also enabled Catalytica to substantially increase its product revenue
for the last two quarters of 1997, and caused product sales to increase 1,677%
from 1996 to 1997. In 1997, 90% of Catalytica's product revenues were derived
from sales to Glaxo Wellcome including $156.4 million which was part of the
guaranteed revenue contract and an additional $0.8 million outside the
guaranteed revenue contract. During 1997, Catalytica used its capacity at its
Bay View facility to produce products for various other pharmaceutical and fine
chemical customers including Bristol Meyers Squibb, Novartis and Pfizer.
Product revenues for 1997 attributable to customers other than Glaxo Wellcome
were 10% of total revenue.
To more clearly reflect its R&D activities, Catalytica reclassified
approximately $8.6 million of product research revenues for the year ended
December 31, 1998. Based on this reclassification, R&D contract revenue
increased 147% from 1997 to 1998, of which 130% was due to the
reclassification. The remaining 17% increase reflects an increase in new
research partners and related funded research activities at Catalytica
Pharmaceuticals. This increase also reflects an increase in funded research
associated with Catalytica Advanced Technologies and Catalytica Combustion
Systems. R&D contract revenue increased 2% from 1996 to 1997 that, to a large
degree, reflected a $0.5 million reimbursement from the GENXON joint venture in
1997 for R&D expenses incurred before the formation of the joint venture by
Catalytica Combustion Systems. Research revenue in 1997 also benefited from a
full year of revenue under the Pfizer research agreement. See Note 2 to Notes
to Catalytica's Consolidated Financial Statements. This increase in research
revenue, however, was partially offset by a decrease in Catalytica Combustion
Systems' research revenue over 1996.
<TABLE>
<CAPTION>
For the Year Ended December 31, Annual % Change
-------------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income............ $ 2,894 $ 1,450 $ 1,179 100% 23%
</TABLE>
Interest income increased 100% in 1998 due to increased cash balances
related to the Enron cash investment in Catalytica Combustion Systems which has
restrictions related to its use such that these funds cannot be used to retire
debt in other Catalytica subsidiaries such as Catalytica Pharmaceuticals. See
Note 1 of Notes to Catalytica's Consolidated Financial Statements. Interest
income increased 23% in 1997 compared to 1996. Although balances in cash and
short-term investments were reduced during the first two quarters of 1997, as
cash was used to support Catalytica's operations, cash and investments
increased in the second half of 1997 due to increases in cash balances
resulting from debt and equity financing related to the Greenville acquisition
and through increased product sales. Interest income is expected to be
moderately lower in 1999, reflecting lower average cash balances in Catalytica
Combustion Systems as it continues to invest its funds in R&D activities.
<TABLE>
<CAPTION>
For the Year Ended
December 31, Annual % Change
-------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- ------ --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Costs and Expenses:
Costs of goods sold........... $294,716 $155,092 $9,073 90% 1,609%
Research and development...... 30,630 9,556 9,707 221% (2%)
Selling, general and
administrative............... 16,875 7,302 4,452 131% 64%
Interest expense.............. 8,931 5,422 353 65% 1,436%
Gain on sale of assets........ -- -- (900) -- --
Loss on joint ventures........ (3,827) (4,355) -- (12%) --
</TABLE>
68
<PAGE>
Cost of Goods Sold: The 90% increase in cost of sales in 1998 reflects a
full year of product sales attributable to the Greenville facility and the
related supply agreement with Glaxo Wellcome and its subsequent amendments. In
contrast, the Greenville facility acquisition contributed to five months of
cost of sales in 1997. In addition, operating margins in 1998 as compared to
1997 were favorably influenced by product mix. Operating margins are highly
dependent upon the material content in sales covered by the guaranteed revenue
contract as the cost of materials is passed directly on to Glaxo Welcome.
Therefore, any change in material mix can significantly impact gross margins.
The increase in cost of goods sold for 1997 over 1996 reflects increased
physical volume of product sales of pharmaceutical products primarily due to an
increase in sales attributable to the Greenville facility acquisition. 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: To more clearly reflect its R&D activities,
Catalytica reclassified approximately $8.0 million from cost of sales to R&D
costs for the year ended December 31, 1998. R&D expenses increased 221% in 1998
over 1997, of which 115% was due to the reclassification. The remaining 106%
increase is largely attributable to R&D expenses associated with a full year of
operations at the Greenville facility as well as an increase in new research
partners and related funded research activities at Catalytica Pharmaceuticals.
To a lesser degree, the increase in R&D activity was associated with Catalytica
Combustion Systems. Although reported R&D expenses for 1997 were down slightly
from the previous years' level, the actual level of research activity occurring
at Catalytica increased during 1997. This increase in research activity is not
reflected on Catalytica's financial statements largely due to an allocation of
certain catalytic combustion research and development costs from Catalytica to
the GENXON joint venture beginning in the second half of 1996. See Note 3 of
Notes to Catalytica's Consolidated Financial Statements. This transfer of R&D
funding occurred beginning August 1, 1996, and resulted in a shift of
approximately $2.5 million in 1998, $2.6 million in 1997 and $1.8 million in
1996 of R&D costs being financed by the joint venture rather than Catalytica.
Of Catalytica's R&D expenses for 1998, approximately 16% were utilized to
develop Catalytica's combustion systems technology, approximately 70% were
spent on Catalytica's pharmaceuticals technologies and approximately 14% were
spent on various other technologies, most of which were performed at the
specific request of, and funded by, third parties. The comparable division of
R&D expenditures among Catalytica's businesses for 1997 were approximately 22%
for combustion systems technology, approximately 38% for pharmaceuticals
technologies and approximately 40% for various other technologies, also at the
specific request of, and funded by, third parties.
Selling, General and Administrative: SG&A expenses increased 131% for the
year ended 1998 compared to 1997 largely due to SG&A costs incurred by a full
year of operations at the Greenville facility. In addition, SG&A expenses
increased as Catalytica has expanded its sales and marketing personnel to
obtain new customers for production of its products at the Greenville facility,
to reduce the available capacity in the Greenville facility and to develop the
market for its combustion systems products. SG&A expenses increased from 1996
to 1997 by 64% primarily due to SG&A costs incurred at the Greenville facility
starting on August 1, 1997.
Interest Expense: Net interest expense increased 65% for the year ended 1998
over 1997 due to a full year of interest payments on debt associated with the
July 31, 1997 acquisition of the Greenville facility. In the quarter ended June
30, 1998, the credit agreement was amended to increase the revolving debt
facility from $75.0 million to $100.0 million. In addition, the term debt
facility was reduced from its original balance of $125.0 million to $75.0
million. In the second quarter of 1998, Catalytica also entered into an
interest rate swap derivative transaction. See "-- Overview." At the end of
1998, nothing was outstanding on the revolving debt facility, and $75.0 million
was outstanding on the term debt facility. Catalytica expects to decrease its
interest expense in 1999 due to lower average levels of outstanding
indebtedness.
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<PAGE>
The increase in interest expense in 1997 compared to 1996 was due to the
initiation of the Chase term debt
facility for $125.0 million, and borrowings under the Chase revolving debt
facility totaling $14.6 million both of which occurred on July 31, 1997, as
part of the Greenville facility acquisition. Under the terms of the Chase debt
facilities, all of Catalytica's previous outstanding debt was paid off before
the funding of the Chase debt. By the end of 1997, all of the revolving debt
facility was paid off leaving only the $125.0 million outstanding.
Gain on Sale of Assets: The $0.9 million gain on sale of assets in 1996
represents the net realized gain over book value on the sale of Advanced Sensor
Device's assets to Monitor Labs, Inc. on June 28, 1996 See Note 3 of Notes to
Catalytica's Consolidated Financial Statements.
Loss on Joint Ventures: On January 3, 1997, Catalytica Combustion Systems
made its first cash infusion of $1.0 million into the GENXON joint venture.
Catalytica Combustion Systems has recognized its 50% share of GENXON losses of
$3.7 million in 1998 and $4.4 million in 1997. Although Catalytica expects to
make additional capital contributions during 1999 which will result in the
allocation of additional losses to Catalytica, neither joint venture partner is
contractually required to make further capital infusions. See Note 3 of Notes
to Catalytica's Consolidated Financial Statements. Catalytica anticipates that
GENXON will continue to generate losses in 1999, and Catalytica will record its
share of these losses to the extent of its capital contribution.
On November 1, 1998, Catalytica Advanced Technologies entered into an
operating agreement with United Catalysts, Inc. to form Single-Site Catalysts,
L.L.C., a Delaware limited liability company. Catalytica Advanced Technologies
was required to contribute inventory and equipment valued at $150,000 and a
license agreement. United Catalysts agreed to contribute a license and $5.0
million in capital to be paid in varying installments over the next several
years. Single-Site Catalysts incurred a loss in 1998 and Catalytica anticipates
that the joint venture will continue to generate losses in 1999. Catalytica has
recorded its share of these losses to the extent of its capital contribution of
$150,000 in 1998. However, the operating agreement does not require any further
capital contributions by Catalytica Advanced Technologies beyond its initial
$150,000 contribution. Therefore, no further losses will be recorded by
Catalytica unless it decides to invest additional capital beyond the initial
$5.0 million commitment by its joint venture partner.
<TABLE>
<CAPTION>
For the Year Ended December 31, Annual % Change
---------------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss):
Income (loss) before
income taxes........... $ 23,071 $ 669 $ (5,192) 3,349% 1,129%
Provision for income
taxes.................. (2,308) (359) -- 543% --
---------- ---------- ----------
Income (loss) before
stock redemption....... 20,763 310 (5,192) 6,598% 1,060%
Less premium paid on
stock redemption....... -- (3,750) -- -- --
---------- ---------- ----------
Income (loss)
attributable to common
stockholders........... $ 20,763 $ (3,440) $ (5,192) 704% 34%
Basic earnings (loss)
per share............. $ 0.39 $ (0.10) $ (0.27) 490% 63%
Diluted earnings (loss)
per share............. $ 0.33 $ (0.10) $ (0.27) 430% 63%
</TABLE>
Catalytica reported "Income (loss) before stock redemption" in 1998 of $20.8
million as compared to income of $0.3 million and a loss of $5.2 million in
1997 and 1996, respectively. The increase in income in 1998 and 1997 was due to
operations at the Greenville facility and the related supply agreement with
Glaxo Wellcome. The increase in 1998 also was favorably impacted by incremental
new business with Glaxo Welcome beyond the original supply agreement plus new
business with other pharmaceutical companies. Although Catalytica was at the
break-even level for 1997 in total, Catalytica recorded a profit of $0.7
million and $3.7 million in the third and fourth quarters of 1997. These
profits offset losses of $2.3 million and $1.8 million in the first and second
quarters of 1997. Catalytica expects continued profitability in 1999. The
extent of profitability will depend on the operating results of Catalytica
Pharmaceuticals, including the ability to
70
<PAGE>
control operating expenses and the extent of losses arising from continued
investment in Catalytica Combustion Systems, GENXON and to a lesser extent,
Catalytica Advanced Technologies. Beyond 1999, profitability largely will
depend upon Catalytica's ability to continue to obtain new supply agreements
from new and/or existing customers to replace Glaxo Wellcome products that will
be phased out under the terms of the original supply agreement. See Note 2 of
Notes to Catalytica's Consolidated Financial Statements. To a lesser degree,
profitability will depend upon successfully developing Catalytica's catalytic
combustion processes.
During the fourth quarter of 1997, Catalytica repurchased 5,000,000 shares
of class B common stock from Morgan Stanley Dean Witter, using $23.8 million
proceeds that it received from the exercise of outstanding warrants. The stock
originally was issued to Morgan Stanley Dean Witter at $4.00 per share.
Catalytica repurchased the stock at $4.75 per share. Catalytica recorded the
difference of $0.75 per share as a premium paid on common stock redemption, and
reduced income available to common stockholders by $3.75 million. When the
common stock redemption premium is deducted from income, the net income
attributable to common stockholders is reduced to a loss of $3.44 million.
Consequently, the basic and diluted net loss per share for the year is $0.10
per share. The repurchase of these shares from Morgan Stanley Dean Witter was a
one-time transaction, and the Company does not expect any similar transactions
to occur in 1999.
The provision for income taxes for the year ended December 31, 1998 as a
percentage of pre-tax income was approximately 10% as compared to 54% for 1997
and 0% in 1996. The increase in the estimated annual tax rate between 1996 and
1997 is due primarily to Catalytica's profitability at its Greenville facility
resulting in franchise and state income tax expenses coupled with the effect of
the federal alternative minimum tax. In 1998, the percentage of tax decreased
as a percentage of pretax income due to the use of prior net operating losses
to offset state and federal taxable income. Catalytica anticipates the
effective tax rate for 1999 will be less than the combined state and federal
statutory rates due to the availability of net operating loss carryforwards. In
future years, if Catalytica continues to be profitable, the effective tax rate
will increase.
Recently Issued Accounting Standards
Effective January 1, 1998, Catalytica 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. Catalytica has
no comprehensive earnings adjustments for the year ended December 31, 1998, and
thus total comprehensive earnings is equal to net earnings (loss).
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
which was adopted in fiscal 1998. This statement establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Catalytica operates primarily in the pharmaceuticals and combustion systems
industries. Catalytica has determined the operating segments based upon how the
business is managed and operated. Catalytica Pharmaceuticals and Catalytica
Combustion Systems operate as independent subsidiaries with their own sales,
research and development and operations departments. See Note 1 of Notes to
Catalytica's Consolidated Financial Statements.
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<PAGE>
Future Results
This section contains forward-looking statements regarding Catalytica's
operating results which involve risks and uncertainties. Catalytica's actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth below and under
"Risk Factors."
A significant portion of Catalytica's product sales at its Greenville
facility is generated through a supply agreement with Glaxo Wellcome. This
supply agreement, including two subsequent amendments signed in 1998 and a
third amendment signed in the first quarter of 1999, calls for a generally
declining level of product shipments over the five-year term of the agreement.
The anticipated revenues from the supply agreement and its subsequent
amendments and additional product revenues from business with new and/or
existing customers are expected to be sufficient to allow Catalytica to remain
profitable in 1999. Catalytica believes that its cash flows, coupled with the
available credit line of $100.0 million, will be sufficient to permit necessary
capital expenditures, support changes in working capital and continue to reduce
indebtedness incurred in connection with the acquisition. Profitability after
1999 will depend on its success and timing in continuing to obtain new
customers, including possible new agreements with Glaxo Wellcome. There is
excess manufacturing capacity immediately available at the pharmaceutical and
sterile production facilities. Because of the long lead times required to
establish necessary regulatory approvals to manufacture at these facilities,
Catalytica Pharmaceuticals anticipates delayed recognition of revenue from new
business in these facilities. Catalytica Pharmaceuticals' inability to fill the
available capacity or to reduce costs commensurate with lower levels of
capacity utilization would have a material adverse effect on Catalytica's
consolidated results of operations.
Catalytica Pharmaceuticals estimates that aggregate payments (including the
cost of materials) by Glaxo Wellcome under the original supply agreement will
total approximately $800.0 million over the five-year life of the agreement.
Subsequent amendments to the original supply agreement have provided for
$63.9 million in additional revenue up to June 30, 1999, and may provide for
approximately $56.1 million in revenue over a one and one-half year period
commencing in July 1999. A portion of this additional revenue has been
guaranteed by Glaxo Wellcome. However, the majority of this additional revenue
is based on forecasts by Glaxo Wellcome for production of product as defined in
the amended agreement. The forecasted revenues are subject to fluctuations
based on production demands by Glaxo Wellcome. Under the original supply
agreement and amendments, Glaxo Wellcome has guaranteed that revenues paid to
Catalytica Pharmaceuticals will meet certain minimum levels through 2001
("Minimum Revenues") and that Glaxo Wellcome will pay to Catalytica
Pharmaceuticals any difference between the specified minimum level and the
amount due for shipment of products at the prices set forth in the original
supply agreement. The Minimum Revenues, which include compensation for
transition services Catalytica Pharmaceuticals has agreed to provide Glaxo
Wellcome, and which exclude the cost of materials, in each of the five years
are as set forth below in millions of dollars.
<TABLE>
<CAPTION>
August 1 -
December 31,
------------
1997 1998 1999 2000 2001 Total
------------ ------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Supply agreement and
amendments..................... $77.0 $173.4 $113.8 $72.6 $22.6 $459.4
</TABLE>
The price for each product, excluding the cost of materials, is set forth in
the supply agreement and its subsequent amendments. The supply agreement and
its subsequent amendments require that Glaxo Wellcome reimburse Catalytica
Pharmaceuticals based on the invoice price of raw materials used in the
manufacture of products delivered to Glaxo Wellcome. This agreement states that
Minimum Revenues are to be calculated by comparing the amount billed for
products shipped during the year to the stipulated Minimum Revenue amount for
that year. The Minimum Revenue on an annual basis is not subject to adjustment.
The terms of the original supply agreement and its subsequent amendments
provide for certain declines in prices over time. If during the term of the
supply agreement and its subsequent amendments Catalytica Pharmaceuticals
cannot decrease its variable and fixed operating expenses commensurate with the
price declines or obtain new higher margin
72
<PAGE>
business to offset the impact of such declines, Catalytica Pharmaceuticals' and
Catalytica's results of operations would be adversely affected. Under the terms
of the supply agreement and its subsequent amendments, Glaxo Wellcome is to
provide periodic forecasts of its future demand for certain products and
Catalytica Pharmaceuticals is committed to produce the products required, with
certain limitations, provided the required production capacity does not exceed
the capacity committed to Glaxo Wellcome. For production requests in excess of
the capacity committed to Glaxo Wellcome, Catalytica Pharmaceuticals has agreed
to undertake to accommodate Glaxo Wellcome's requests with pricing to be
negotiated on terms that reflect then market pricing.
The additional facilities, employees and business volumes at the Greenville
facility substantially increased the expenses and working capital requirements
and placed substantial burdens on Catalytica's management resources on a
consolidated basis. Catalytica's R&D expenses and SG&A expenses increased
significantly as Catalytica established the necessary infrastructure for
operations at the Greenville facility. Catalytica's ability to offset these
increased expenses depends, in significant part, on the levels of manufacturing
business developed by Catalytica Pharmaceuticals. If Catalytica Pharmaceuticals
does not continue to attract additional customers, on terms sufficient to
offset the costs associated with operating and maintaining the Greenville
facility, Catalytica's consolidated results of operations and financial
condition would be materially adversely affected.
Catalytica faces challenges in advancing its R&D programs from bench and
pilot scale to cost-effective commercial products and processes. There can be
no assurance that Catalytica will successfully address the challenges that will
arise during the development of each of its programs. Catalytica expects to
continue certain of its R&D programs, which include the self-funded programs
that are not covered by payments from collaborative partners. Catalytica
believes its internally funded research projects have the potential to lead to
commercial sales in the next few years. Catalytica anticipates that research
that does not have the potential for near-term commercialization will be
conducted only when funded by collaborative partners.
Catalytica expects that future operating results will fluctuate from quarter
to quarter, as a result of differences in the amount and timing of expenses
incurred and the revenues received. In particular, Catalytica's operating
results are affected by the size of and timing of receipt of orders for and
shipments of its pharmaceutical products, as well as the amount and timing of
payments and expenses under Catalytica's R&D contracts. Catalytica has
increasingly relied on product sales for its revenues. Continued profitable
operations, especially after 1999, will depend on Catalytica's continued
success and timing in obtaining new customers, including possible new
agreements with Glaxo Wellcome. To a lesser extent, profitability also will
depend on Catalytica's ability to successfully develop, manufacture, introduce,
and market or license its combustion systems technology. There can be no
assurance that Catalytica will be able to achieve profitability on a sustained
basis. Catalytica's operating results will continue to be substantially
dependent on the operating results of Catalytica Pharmaceuticals.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
1998 1997 1996
-------- --------- -------
(dollars in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments.................................... $ 47,585 $ 47,067 $23,821
Working capital................................. 113,186 87,425 23,904
Cash provided by (used in)
Operating activities.......................... 49,547 39,785 (778)
Investing activities.......................... (27,676) (262,290) 4,187
Financing activities.......................... (14,628) 242,114 7,110
-------- --------- -------
Net increase in cash and cash equivalents....... $ 7,243 $ 19,609 $10,519
Current ratio................................... 2.78 1.97 3.61
</TABLE>
73
<PAGE>
Total cash and cash equivalents plus short-term investments increased
slightly in 1998 compared to 1997. Most of the cash generated from earnings net
of depreciation during 1998 ($32.3 million) was invested back into the business
and used for acquisition of plant and equipment ($31.4 million). The net
increase in cash can be attributed to the $30.0 million investment in
Catalytica Combustion Systems by Enron for a 15% ownership in Catalytica
Combustion Systems coupled with a net increase in various working capital items
associated with the pharmaceutical business, which was largely offset by
payments of $50.0 million on the Chase term debt facility. See Note 7 to Notes
to Catalytica's Consolidated Financial Statements.
Before 1997, Catalytica financed its operations through private placements
of equity securities, an initial public offering of its common stock on
February 8, 1993, a secondary public offering on November 3, 1995, a $15.0
million cash infusion from Pfizer on May 8, 1996, revenues from collaborative
research agreements and, starting in 1994, product revenues. During the past
several years, Catalytica 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, Catalytica entered
into the Chase credit agreement. In the second quarter of 1998 this credit
agreement was amended to permit Catalytica Pharmaceuticals to borrow up to an
aggregate of $175.0 million. The debt facilities consisted of a senior secured
term loan facility in an aggregate principal amount of $75.0 million and a
senior secured revolving facility in an aggregate principal amount of $100.0
million. The term debt facility will mature on December 31, 2002, and amortizes
in quarterly installments beginning on December 31, 1999 in aggregate annual
amounts of:
. $10.0 million in the fourth quarter of 1999,
. $15.0 million in the year 2000,
. $20.0 million in the year 2001
. $30.0 million in the year 2002.
The revolving debt facility matures on December 31, 2002. As of December
31, 1998, nothing was outstanding under the revolving debt facility and $75.0
million was outstanding under the term debt facility.
In 1998, Catalytica made payments of $50.0 million on the original Chase
term debt facility. As of December 31, 1998, Catalytica was in compliance with
various covenants and other restrictions contained in the Chase credit
agreement and believes that it will remain in compliance.
In the second quarter of 1998 following the restructuring of the credit
agreement, Catalytica entered into a $50.0 million interest rate swap,
derivative transaction to reduce Catalytica's exposure to fluctuations in
short-term interest rates. This interest rate swap transaction effectively
fixed the LIBOR benchmark rate used to calculate Catalytica's borrowing cost at
5.9% for four years on $50.0 million of the term debt facility. Catalytica
accounts for this interest rate swap as a hedge, and accrues the interest rate
differential as interest expense on a monthly basis. Catalytica does not hold
or transact in financial instruments for purposes other than risk management.
Catalytica'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 $125.0 million of long-term
indebtedness, of which $75.0 million was outstanding as of December 31, 1998.
Catalytica and Catalytica Advanced Technologies 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 Catalytica's ability to
obtain additional financing for working capital, acquisitions or other purposes
and could make Catalytica Pharmaceuticals and Catalytica more vulnerable to
economic downturns and competitive pressures. Catalytica's future capital
requirements will depend on many factors, including Catalytica Pharmaceuticals'
level of business beyond the supply agreement and its subsequent amendments
with Glaxo Wellcome, the rate of commercialization of Catalytica's catalytic
combustion systems and the need to expand manufacturing
74
<PAGE>
capacity for pharmaceutical or combustion systems business. Catalytica expects
to spend approximately $30.0 to $35.0 million during 1999 for capital
expenditures, primarily at Catalytica Pharmaceuticals.
The increase in cash and cash equivalents in 1997 is largely due to an
increase in various working capital items associated with the Greenville
acquisition. The Greenville acquisition itself was financed with borrowings
against various credit facilities as discussed above, funds received from the
sale of common stock to Morgan Stanley Dean Witter, and through stock option
and warrant exercises.
During 1996, Catalytica obtained various lines of credit to fund capital
purchases and future working capital needs. One of these lines of credit
collateralized with accounts receivable was $3.5 million at December 31, 1996.
On July 31, 1997, this line of credit was repaid with borrowings under the
Chase credit facility entered into in connection with the acquisition.
As discussed in "--Overview" above, on July 31, 1997, Catalytica sold
13,270,000 shares of its class A common stock and 16,730,000 shares of its
class B common stock to Morgan Stanley Dean Witter, at a price of $4.00 per
share, for an aggregate of $120.0 million.
The funds raised through the equity and debt financing were used to acquire
the Greenville facility for $244.7 million in cash. This purchase also involved
other equity consideration, and potential future payments related to the
sterile production facility. See Note 2 of Notes to Catalytica's Consolidated
Financial Statements.
Catalytica distributed, at no cost, to each holder of common stock of record
as of August 22, 1997, one warrant for each three shares of common stock held
by the stockholder. The total number of warrants issued was 6,947,275. Of the
warrants issued to stockholders, 6,922,996 were exercised leaving 24,279 that
were not exercised when they expired on October 31, 1997.
The exercise of the warrants generated gross proceeds of $27.7 million.
Catalytica used $23.8 million of the proceeds to repurchase an aggregate of
5,000,000 shares of its class B common stock issued to Morgan Stanley Dean
Witter on July 31, 1997. The premium paid for the repurchase is reflected in
Catalytica's earnings per share calculation for the period ending December 31,
1997. Catalytica's earnings per share for the year ended December 31, 1997,
were reduced by $0.10 due to this repurchase.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Swaps
In the second quarter of 1998, following the restructuring of the Chase
credit agreement, Catalytica entered into a $50.0 million interest rate swap,
derivative transaction to reduce Catalytica's exposure to fluctuations in
short-term interest rates. This interest rate swap transaction effectively
fixed the LIBOR benchmark rate used to calculate Catalytica's borrowing cost at
5.9% for four years on $50.0 million of the debt facilities. Catalytica
accounts for this interest rate swap as a hedge, and accrues the interest rate
differential as interest expense on a monthly basis. In accordance with the
accrual method of accounting, Catalytica does not recognize the changes in the
derivative's fair value in the financial statements. If the designated debt
obligation is extinguished early, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment gain
or loss. Any swap agreements that are not designated with outstanding debt or
notional amounts, or durations, of interest-rate swap agreements in excess of
the principal amounts, or maturities, of the underlying debt obligations would
be recorded as an asset or liability at fair value, with changes in fair value
recorded in other income or expense (the fair value method). Catalytica does
not hold or transact in such financial instruments for purposes other than risk
management.
The notional principal amount for the off-balance-sheet instrument provides
one measure of the transaction volume outstanding as of year end, and does not
represent the amount of Catalytica's exposure to credit or
75
<PAGE>
market loss. Catalytica believes its gross exposure to potential accounting
loss on this transaction if all counterparties failed to perform according to
the terms of the contract, based on then-current interest rates at each date,
would have no material financial impact. Catalytica's exposure to credit loss
and market risk will vary over time as a function of interest rates.
The estimate of fair value at December 31, 1998 is $1.3 million and is based
on a price quote obtained from a third party. The amounts ultimately realized
upon settlement of the financial instrument, together with the gains and losses
on the underlying exposure, will depend on actual market conditions during the
remaining life of the instrument.
With the interest rate swap, which qualifies as an accounting hedge,
Catalytica either makes or receives payments on the interest rate differential
between 5.9% and the actual interest paid on its debt which has a floating
interest rate based on the three-month United States dollar LIBOR rate. As a
result, the swap effectively converts $50.0 million of Catalytica's floating-
rate debt to a four-year fixed-rate debt. The maturity date for the swap is
June 10, 2002. For the year ended December 31, 1998, the interest rate swap
classified as receive-fixed swap had an average receive rate of 5.59%. The pay
rate on the swap is 5.9%. The gain or loss on the swap is recognized in net
interest expense in the same period as the hedged transaction. The actual
incurred loss totaled approximately $87,000 as of December 31, 1998.
76
<PAGE>
CATALYTICA'S MANAGEMENT AND EXECUTIVE COMPENSATION
The following table sets forth certain information concerning Catalytica's
current executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ricardo B. Levy................ 54 President, Chief Executive Officer and
Director
James A. Cusumano.............. 57 Chairman of the Board and Chief Strategic
Officer
Lawrence W. Briscoe............ 55 Vice President, Finance and Administration,
and Chief Financial Officer
Ralph A. Dalla Betta........... 54 Vice President and Chief Scientist
John M. Hart................... 52 Vice President, Human Resources
Richard Fleming(2)............. 75 Director
Alan E. Goldberg............... 44 Director
Howard I. Hoffen(1)(2)......... 35 Director
Ernest Mario(1)................ 61 Director
John A. Urquhart............... 70 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Ricardo B. Levy, a founder of Catalytica and a director since 1974, served
as Chief Operating Officer from Catalytica's inception in 1974 until August
1991, when he became President and Chief Executive Officer. Before founding
Catalytica, Dr. Levy was a founding member of Exxon's Chemical Physics Research
Team. Dr. Levy is an alumnus of Princeton and Harvard University's Executive
Management Program, and has a Ph.D. in chemical engineering from Stanford
University.
James A. Cusumano, a founder of Catalytica and a director since 1974, served
as President of Catalytica from its inception in 1974 until 1985, when he
became Chairman of the Board and Chief Technical Officer. In 1998, Dr. Cusumano
became Chief Strategic Officer. From 1992 to 1998 he served as President and
Chief Executive Officer of Catalytica Pharmaceuticals. Dr. Cusumano served as
director of Catalysis Research and Development at Exxon's Corporate Research
Laboratory from 1967 to 1974. Dr. Cusumano has a Ph.D. in physical chemistry
from Rutgers University.
Lawrence W. Briscoe joined Catalytica in July 1994 as Chief Financial
Officer and Vice President, Finance and Administration. Before joining
Catalytica, he held various executive and financial positions including
President and Chief Operating Officer and director of Brae Corporation, Vice
President of Corporate Development at Transamerica Corp. and Chief Executive
Officer of United States Commercial Telephone Corp. Mr. Briscoe has an M.B.A.
from Stanford University, an M.S. in business from the University of Southern
California and a B.S. in electrical engineering from the University of
Missouri.
Ralph A. Dalla Betta, Ph.D., joined Catalytica in 1976 and serves as the
Chief Scientist of Catalytica and Vice President of Catalytica Combustion
Systems. Dr. Dalla Betta's major interests are in the design and synthesis of
heterogeneous catalysts, the detailed characterization of catalyst structure
and surface properties and catalyst testing. Before joining Catalytica, Dr.
Dalla Betta spent four years at Ford Motor Company where he worked on emissions
control catalysis in the period when catalytic converters were first applied
commercially to automobiles. His development work has included catalytic
combustion systems that produce low nitrogen oxide emissions, selective
hydrogenation catalyst systems and a rapid technique for measuring noble metal
surface areas for analyzing vehicle emissions control catalysts. Dr. Dalla
Betta has a Ph.D. in physical chemistry from Stanford University.
77
<PAGE>
John M. Hart joined Catalytica in 1998 after serving as a consultant in
human resources strategic planning, management and organization development to
several major corporations. Before that time, Mr. Hart was Senior Vice
President, Human Resources for USL Capital, Inc., the financial services
company of Ford Motor Company, and between 1991 and 1993, he held a similar
position at U.S.F. & G. Corporation. Between 1984 and 1991, Mr. Hart was Senior
Vice President at Heller International. Mr. Hart has a B.S. in management
science from Rensselaer Polytechnic Institute and an M.B.A. from Fairleigh
Dickenson University.
Richard Fleming has been a director of Catalytica Pharmaceuticals since
1995. Mr. Fleming has been a director of Catalytica since 1985 and also serves
as an advisor and consultant to Catalytica. Mr. Fleming was President and Chief
Executive Officer of Catalytica from 1985 through August 1991. From 1969 to
1980, Mr. Fleming served at Air Products and Chemicals, most recently as
Executive Vice President. From 1980 to 1981, he served as President and Chief
Operating Officer of GAF Corporation, a chemical company. He has served as
President and Chief Executive Officer of Richard Fleming Associates, Inc., a
consulting firm, since May 1981 and is past Vice Chairman for Membership and
Fiscal Affairs of the Chemical Industry Institute of Toxicology. Mr. Fleming
has an M.S. in chemical engineering from New York University.
Alan E. Goldberg has been a director of Catalytica since August 1997. Mr.
Goldberg is Chairman and Chief Executive Officer of Morgan Stanley Dean Witter
Dean Witter Capital Partners, and Head of Morgan Stanley Dean Witter Dean
Witter Private Equity. Mr. Goldberg joined Morgan Stanley Dean Witter in 1979.
He was elected Vice President in 1984 and in July 1984, he participated in the
formation of the Private Equity Business. He was promoted to Principal in 1986
and elected Managing Director in 1988. He also serves as a director of Equant
N.V., Smurfit-Stone Container Corporation, and Allegiance Telecom Inc. and
several privately held companies. Mr. Goldberg received his B.A. in philosophy
and economics in 1975 from New York University. In 1979, he earned an M.B.A.
from New York University and a J.D. from Yeshiva University. Mr. Goldberg
became a member of the New York Bar in 1979.
Howard I. Hoffen has been a director of Catalytica since August 1997. Mr.
Hoffen is a Managing Director of MSDW Capital Partners IV, Inc. and Morgan
Stanley Dean Witter Dean Witter. He joined Morgan Stanley Dean Witter in 1985
and Private Equity in 1986. Mr. Hoffen is a director of Somerset Energy and
Union Drilling. Mr. Hoffen has a B.S. from Columbia University and an M.B.A.
from the Harvard Business School.
Ernest Mario, Ph.D. has been a director of Catalytica Pharmaceuticals and
Catalytica since July 1996. Dr. Mario has been Co-Chairman and Chief Executive
Officer of ALZA since August 1993. Before joining ALZA, Dr. Mario was Deputy
Chairman and Chief Executive Officer of Glaxo Holding p.l.c., having served in
a variety of executive positions with Glaxo, Inc., beginning in 1986. From 1977
to 1984, he held various executive level positions with Squibb Corporation,
ending as President and Chief Executive Officer of Squibb Medical Products. Dr.
Mario is a member of the board of directors of several companies, including
Advanced Technology Labs, COR Therapeutics and Pharmaceutical Product
Development Co. Dr. Mario has a Ph.D. and M.S. in physical sciences from the
University of Rhode Island, and a B.S. in pharmacy from Rutgers University. He
is a licensed pharmacist in the states of New York and Rhode Island, and an
adjunct professor of pharmacy at the University of Rhode Island.
John A. Urquhart has been a director of Catalytica and Catalytica Combustion
Systems since April 1997 and has served as a special board advisor to
Catalytica Combustion Systems since July 1995. He currently serves as Senior
Advisor to the Chairman of Enron Corporation, a global integrated natural gas
company, and also has served as the Vice Chairman of Enron from 1990 to 1998.
Mr. Urquhart also serves on a number of other corporate boards of directors,
including Enron, Aquarion Company, Hubbell Incorporated, TECO Energy, Inc.,
Weir Group PLC and Tampa Electric Co. He previously served as the Senior Vice
President of Industrial and Power Systems at General Electric. In addition, he
served five years as a Committee Member on the Board of the United States
Council for Energy Awareness.
78
<PAGE>
Catalytica Executive Compensation
The following table shows, as to (a) the Chief Executive Officer of
Catalytica, and (b) each of the four other most highly compensated executive
officers of Catalytica whose salary plus bonus exceeded $100,000 in 1998 (the
"Catalytica Named Executive Officers"), information concerning all reportable
compensation awarded to, earned by or paid to each for services to Catalytica
in all capacities during the fiscal year ended December 31, 1998, as well as
such compensation for each such individual for Catalytica's previous two fiscal
years (if the person was an executive officer of Catalytica during any part of
the most recent fiscal year).
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
Fiscal ----------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ricardo B. Levy............................ 1998 $330,000 $315,000 38,000 $33,450(1)
President and Chief 1997 229,000 76,000 60,000 17,064(2)
Executive Officer 1996 218,000 7,000 40,000 17,264(3)
James A. Cusumano.......................... 1998 300,000 245,000 3,000 29,547(1)
Chairman of the Board 1997 210,000 64,000 60,000 16,052(2)
and Chief Strategic Officer 1996 206,000 4,140 10,000 15,891(3)
Lawrence W. Briscoe........................ 1998 250,000 178,000 19,000 4,000(1)
Vice President, Finance and Administration 1997 198,000 54,000 100,000 4,000(2)
and Chief Financial Officer 1996 188,000 4,500 35,000 4,000(3)
Ralph A. Dalla Betta....................... 1998 166,000 16,000 1,500 11,680(1)
Vice President and Chief Scientist 1997 162,000 3,000 -- 10,808(2)
1996 152,000 1,000 10,000 10,640(3)
John M. Hart(4)............................ 1998 85,432 30,000 40,000 --
Vice President, Human Resources 1997 -- -- -- --
1996 -- -- -- --
</TABLE>
- --------
(1) Includes (a) $4,000 contributed by Catalytica to each Catalytica Named
Executive Officer's account under the defined contribution pension plan and
(b) the following amounts contributed by Catalytica to the Catalytica Named
Executive Officer's account under the supplemental severance benefits plan:
$29,450 to the account of Dr. Levy; $25,547 to the account of Dr. Cusumano;
and $7,680 to the account of Dr. Dalla Betta.
(2) Includes (a) $4,000 contributed by Catalytica to each Catalytica Named
Executive Officer's account under the defined contribution pension plan and
(b) the following amounts contributed by Catalytica to the Catalytica Named
Executive Officer's account under the supplemental severance benefits plan:
$13,064 to the account of Dr. Levy; $12,052 to the account of Dr. Cusumano;
and $6,808 to the account of Dr. Dalla Betta.
(3) Includes (a) $4,000 contributed by Catalytica to each Catalytica Named
Executive Officer's account under the defined contribution pension plan and
(b) the following amounts contributed by Catalytica to the Catalytica Named
Executive Officer's account under the supplemental severance benefits plan:
$13,264 to the account of Dr. Levy; $11,891 to the account of Dr. Cusumano;
and $6,640 to the account of Dr. Dalla Betta.
(4) Mr. Hart joined Catalytica on September 3, 1998. On an annualized basis,
Mr. Hart's salary and bonus for 1998 would have been $220,000.
79
<PAGE>
Catalytica Director Compensation
Directors who are not officers of Catalytica, with the exception of Messrs.
Hoffen and Goldberg, each receive an annual retainer for their services in the
amount of $20,000 per year, plus reimbursement of expenses. Mr. Fleming, Dr.
Mario and Mr. Urquhart each serve as director for one of the subsidiaries of
Catalytica, as well, and receive similar compensation for that service. During
the fiscal year ended December 31, 1998, Mr. Fleming, Dr. Mario and Mr.
Urquhart each received $40,000 in connection with their services as directors
of Catalytica and its subsidiaries.
During the year ended December 31, 1998, Catalytica paid approximately
$260,250 to Richard Fleming Associates, a consulting organization of which
Richard Fleming, a director of Catalytica, is the President and Chief Executive
Officer. These payments were for services provided to Catalytica by Mr. Fleming
in his capacity as a consultant to Catalytica at a rate of $20,000 per month
from January through December. Moreover, additional consulting fees were paid
for the period of July through September in the amount of $20,250 in
conjunction with further assistance provided to Catalytica on various
development programs and in identifying and investigating new business
opportunities.
During the fiscal year ended December 31, 1998, Mr. Fleming, Dr. Mario and
Mr. Urquhart each received options to purchase 4,000 shares of common stock at
an exercise price of $11.875 per share. Mr. Fleming's, Dr. Mario's and Mr.
Urquhart's options become exercisable at the rate of one-twelfth of the shares
subject to the option at the end of each month that the director remains on the
board following the date of grant such that the options become fully vested
within one year of the date of grant.
Certain directors who served on the board of directors of a subsidiary or
acted as a consultant to that subsidiary received stock options during the
fiscal year ended December 31, 1998. Mr. Fleming and Dr. Mario each received
options to purchase 5,000 shares of Catalytica Pharmaceutical at an exercise
price of $16.50 per share. Mr. Urquhart received options to purchase 4,000
shares of Catalytica Combustion Systems at an exercise prices of $12.00 per
share.
80
<PAGE>
Option Grants in the Last Fiscal Year
Catalytica Option Grants in the Last Fiscal Year
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1998 to each of the Catalytica Named Executive
Officers:
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential
Realizable Value
at Assumed Annual
% of Total Rates of Stock
Number of Options Price
Securities Granted to Appreciation for
Underlying Employees Option Term (3)
Options in Fiscal Exercise Price Expiration -----------------
Name Granted (1) Year (2) ($/sh.) Date 5% 10%
---- ----------- ---------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ricardo B. Levy......... 38,000 6.7% $12.81 4/1/08 $306,133 $775,802
James A. Cusumano....... 3,000 0.5% 12.81 4/1/08 24,168 61,248
Lawrence W. Briscoe..... 19,000 3.3% 12.81 4/1/08 153,067 387,901
Ralph A. Dalla Betta.... 1,500 0.3% 12.81 4/1/08 12,084 30,624
John M. Hart............ 40,000 7.0% 10.63 9/3/08 267,406 677,659
</TABLE>
- --------
(1) These options were granted under Catalytica's stock option plan. Options
granted under the plan generally have a ten-year term. Generally, 12.5% of
the grant becomes exercisable six months after the date of grant. The
balance of the grant then vests monthly, with full exercisability occurring
on the fourth anniversary date. The per share exercise price is the Nasdaq
National Market closing price for Catalytica's common stock on the date of
grant. Unless otherwise determined by the board of directors, the plan
provides for the automatic acceleration of vesting of all outstanding
options (such that they become exercisable in full) in the event of a
change in control.
(2) Based on options to purchase an aggregate of 570,785 shares granted to
employees during 1998.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the 10-year option term. These numbers are
calculated based on the requirements promulgated by the SEC and do not
reflect Catalytica's estimate of future stock price.
81
<PAGE>
Subsidiary Option Grants in the Last Fiscal Year
The following table sets forth the stock options granted by two of
Catalytica's subsidiaries, Catalytica Pharmaceuticals and Catalytica Combustion
Systems during the fiscal year ended December 31, 1998 to each of the
Catalytica Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------
Potential
Realizable Value at
% of Total Assumed Annual
Number of Options Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise for Option Term(3)
Options in Fiscal Price Expiration -------------------
Name Subsidiaries Granted(1) Year(2) ($/sh.) Date 5% 10%
- ---- ------------ ---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ricardo B. Levy......... Catalytica Pharmaceuticals 2,000 0.4% $16.50 4/1/08 $ 20,754 $ 52,594
Catalytica Combustion Systems 2,400 1.3 12.00 4/1/08 18,112 45,900
James A. Cusumano....... Catalytica Pharmaceuticals 20,000 4.1 16.50 4/1/08 207,535 525,935
Catalytica Combustion Systems 1,500 0.8 12.00 4/1/08 11,320 28,687
Lawrence W. Briscoe..... Catalytica Pharmaceuticals 5,000 1.0 16.50 4/1/08 51,884 131,484
Catalytica Combustion Systems 1,200 0.6 12.00 4/1/08 9,056 22,950
Ralph A. Dalla Betta.... Catalytica Pharmaceuticals 700 0.1 16.50 4/1/08 7,264 18,408
Catalytica Combustion Systems 11,000 5.9 12.00 4/1/08 83,014 210,374
Catalytica Combustion Systems 750 0.4 5.60 1/30/08 2,641 6,694
John M. Hart............ Catalytica Pharmaceuticals 15,000 3.1 22.00 9/3/08 207,535 525,935
Catalytica Combustion Systems 15,000 8.0 14.50 9/3/08 136,785 346,639
</TABLE>
- --------
(1) These options were granted under each of Catalytica Pharmaceuticals' and
Catalytica Combustion Systems' stock option plans. Options granted under
the subsidiaries' plans generally have a 10-year term and vest ratably over
a four-year period. The per share exercise price is based on the fair
market value of the subsidiary's common stock on the date of grant, as
determined by the subsidiary's board of directors. Unless otherwise
determined by the board of directors, the subsidiary plans provide for the
automatic acceleration of vesting of all outstanding options (such that
they become exercisable in full) in the event of a change in control.
(2) The percent of total options granted to employees during the fiscal year is
based on the total number of options issued to employees at each
subsidiary. The percent of total options granted to employees of Catalytica
Pharmaceuticals during 1998 is based on options to purchase an aggregate of
492,255 shares. The percent of total options granted to employees of
Catalytica Combustion Systems during 1998 is based on options to purchase
an aggregate of 187,950 shares.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of a 10-year option term. These numbers are calculated
based on the requirements promulgated by the SEC and do not reflect
Catalytica's estimate of future stock price.
82
<PAGE>
Catalytica Subsidiaries' Summary Stock Option Table
The following table sets forth the stock options granted by Catalytica's
subsidiaries in the years ended December 31, 1996, December 31, 1997 and
December 31, 1998 to the Catalytica Named Executive Officers of Catalytica.
<TABLE>
<CAPTION>
Long Term Compensation Awards
-------------------------------------------
Securities Securities
Securities Underlying Underlying
Underlying Catalytica Catalytica
Catalytica Combustion Advanced
Fiscal Pharmaceuticals Systems Technologies
Name and Principal Position Year Options(#)(1) Options(#)(2) Options(#)(3)
- --------------------------- ------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
Ricardo B. Levy ............ 1998 2,000 2,400 --
President and Chief
Executive Officer 1997 86,000 20,500 --
1996 2,000 4,500 3,000
James A. Cusumano........... 1998 20,000 1,500 --
Chairman of the Board and 1997 80,000 -- --
Chief Strategic Officer 1996 14,000 4,000 3,000
Lawrence W. Briscoe......... 1998 5,000 1,200 --
Vice President, Finance and
Administration 1997 30,000 -- --
and Chief Financial Officer 1996 1,600 4,000 3,000
Ralph A. Dalla Betta........ 1998 700 11,750 --
Vice President and Chief
Scientist 1997 -- -- --
1996 -- 25,000 --
John M. Hart................ 1998 15,000 15,000 --
Vice President, Human
Resources 1997 -- -- --
1996 -- -- --
</TABLE>
- --------
(1) Represents long term compensation awards by Catalytica Pharmaceuticals.
(2) Represents long term compensation awards by Catalytica Combustion Systems.
(3) Represents long term compensation awards by Catalytica Advanced
Technologies.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
Catalytica Option Exercises and Year-End Values
The following table sets forth, for each of the Catalytica Named Executive
Officers, information with respect to Catalytica stock options exercised during
the fiscal year ended December 31, 1998 and stock options held at fiscal year
end:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal Year In-the-Money Options at
Name Acquired on Value End Fiscal Year End(2)
- ---- Exercise Realized ------------------------- -------------------------
(#) (1) Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ricardo B. Levy......... -- -- 51,999 137,334 $581,578 $1,355,450
James A. Cusumano....... -- -- 24,333 64,667 234,220 572,300
Lawrence W. Briscoe..... 33,000 $372,375 52,851 112,249 673,608 1,390,787
Ralph A. Dalla Betta.... -- -- 7,871 15,205 109,361 206,504
John M. Hart............ -- -- -- 40,000 -- 295,000
</TABLE>
- --------
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1998, minus the
exercise price.
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Catalytica Subsidiaries' Option Exercises and Year-End Values
The following table sets forth, for each of the Catalytica Named Executive
Officers, information with respect to Catalytica subsidiaries' stock options
exercised during the fiscal year ended December 31, 1998 and stock options held
at fiscal year end:
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Name Fiscal Year End at Fiscal Year End(2)
- ---- ----------------------------------- ----------------------------
Subsidiaries Exercisable(1) Unexercisable Exercisable(1) Unexercisable
------------ ---------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Ricardo B. Levy......... Catalytica Pharmaceuticals 40,167 61,833 $ 644,475 $ 883,325
Catalytica Combustion Systems 34,004 18,396 461,367 206,583
Catalytica Advanced Technologies -- 16,000 -- --
James A. Cusumano....... Catalytica Pharmaceuticals 154,292 79,708 2,840,413 1,011,787
Catalytica Combustion Systems 20,292 3,208 283,214 30,736
Catalytica Advanced Technologies -- 12,000 -- --
Lawrence W. Briscoe..... Catalytica Pharmaceuticals 41,592 5,008 768,490 30,890
Catalytica Combustion Systems 20,731 2,969 289,990 30,260
Catalytica Advanced Technologies -- 14,000 -- --
Ralph A. Dalla Betta.... Catalytica Pharmaceuticals 117 583 410 2,040
Catalytica Combustion Systems 91,125 20,625 1,259,696 184,479
Catalytica Advanced Technologies -- -- -- --
John M. Hart............ Catalytica Pharmaceuticals -- 15,000 -- --
Catalytica Combustion Systems -- 15,000 -- --
Catalytica Advanced Technologies -- -- -- --
</TABLE>
- --------
(1) Catalytica subsidiaries' stock option plans, except for Catalytica Advanced
Technologies, provide for stock options to be exercisable effective in
1998.
(2) Market value of underlying securities at December 31, 1998, minus the
exercise price.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consisted of Mr. Hoffen and Dr. Mario in 1998. No
executive officer of Catalytica serves as a member of the board of directors or
on the compensation committee of any entity that has an executive officer
serving as a member of Catalytica's board of directors or Compensation
Committee.
During the year ended December 31, 1998, Catalytica paid approximately
$260,250 to Richard Fleming Associates, a consulting organization of which
Richard Fleming, a director of Catalytica, is the President and Chief Executive
Officer. These payments were for consulting services provided to Catalytica by
Mr. Fleming at a rate of $20,000 per month from January through December 1998
plus expenses and additional consulting for the months of July through
September in the aggregate amount of $20,250. Mr. Fleming provided assistance
to Catalytica on various development programs and in identifying and
investigating new business opportunities.
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OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND MANAGEMENT OF CATALYTICA
The following table sets forth certain information regarding beneficial
ownership of Catalytica as of July 14, 1999 by:
. each person and entity known by Catalytica to own beneficially more than
5% of Catalytica's voting common stock
. each of the directors of Catalytica
. each of the Catalytica Named Executive Officers
. by all of Catalytica's directors and executive officers as a group
The percentage ownership is based on 41,877,226 shares of Catalytica common
stock, which includes 13,270,000 shares of class A common stock, that were
outstanding as of July 14, 1999. The number of shares beneficially owned is
determined in accordance with Rule 13d-3 of the Exchange Act and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under this rule, beneficial ownership includes any shares as to which
the individual or entity has voting power or investment power and any shares
that the individual has the right to acquire within 60 days of July 14, 1999
through the exercise of any stock option or other right.
Unless otherwise noted below, the persons and entities named in the table
have sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable, and have addresses
of c/o Catalytica, 430 Ferguson Drive, Mountain View, California 94043.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent of Class
Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------- ------------------ ------------------
<S> <C> <C>
Morgan Stanley Dean Witter Capital
Partners III, L.P. (1)................ 13,270,000 31.7%
Alan Goldberg/Howard Hoffen
1221 Avenue of the Americas
New York, New York 10020
Franklin Resources, Inc................ 2,579,959 6.2
777 Mariners Island Blvd.
San Mateo, California 94404
Ricardo B. Levy (2).................... 854,279 2.0
James A. Cusumano (3).................. 759,631 1.8
Richard Fleming (4).................... 525,074 1.3
Ralph Dalla Betta (5).................. 437,685 1.0
Lawrence W. Briscoe (6)................ 102,576 *
John A. Urquhart (7)................... 22,222 *
Ernest Mario (8)....................... 21,667 *
John M. Hart (9)....................... 10,945 *
All executive officers and directors as
a group (11 persons) (10)............. 16,006,381 38.2%
</TABLE>
- --------
(1) Represents 13,270,000 voting shares of class A common stock held by Morgan
Stanley Dean Witter and two affiliated funds. Excludes 11,730,000 non-
voting shares of class B common stock also held by Morgan Stanley. Messrs.
Goldberg and Hoffen are Managing Directors of Morgan Stanley Dean Witter
Dean Witter. Messrs. Goldberg and Hoffen disclaim beneficial ownership of
the shares owned by Morgan Stanley Dean Witter.
(2) Includes shares held by the following trusts, for which Dr. Levy serves as
trustee: (a) 680,877 shares held by the Levy Family Trust; (b) 38,757
shares held by the Polly Jean Cusumano Trust; and (c) 37,208 shares held
by the Doreen Ann Nelson Trust. Dr. Levy disclaims beneficial ownership
for the shares owned by the Polly Jean Cusumano Trust and the Doreen Ann
Nelson Trust. Also includes 97,437 shares issuable upon exercise of
options held by Dr. Levy, which options are exercisable within 60 days of
July 14, 1999.
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<PAGE>
(3) Includes shares held by the following trusts, of which Dr. Cusumano serves
as trustee: (a) 487,232 shares held by the Cusumano Family Trust; (b)
114,028 shares held by the Brian K. Levy Trust; and (c) 115,350 shares
held by the Tamara Levy Trust. Dr. Cusumano disclaims beneficial ownership
of the shares owned by the Brian K. Levy Trust and the Tamara Levy Trust.
Also includes 43,021 shares issuable upon exercise of options held by Dr.
Cusumano, which options are exercisable within 60 days of July 14, 1999.
(4) Includes 6,667 shares issuable upon exercise of options held by Mr.
Fleming, which options are exercisable within 60 days of July 14, 1999.
(5) Includes 14,741 shares issuable upon exercise of options held by Dr. Dalla
Betta, which options are exercisable within 60 days of July 14, 1999.
(6) Includes 82,576 shares issuable upon exercise of options held by Mr.
Briscoe, which options are exercisable within 60 days of July 14, 1999.
(7) Includes 22,222 shares issuable upon exercise of options held by Mr.
Urquhart, which options are exercisable within 60 days of July 14, 1999.
(8) Includes 21,667 shares issuable upon exercise of options held by Dr.
Mario, which options are exercisable within 60 days of July 14, 1999.
(9) Includes 10,475 shares issuable upon exercise of options held by Mr. Hart,
which options are exercisable within 60 days of July 14, 1999.
(10) Includes 300,473 shares issuable upon exercise of options held by three
directors and six executive officers, which options are exercisable within
60 days of July 14, 1999.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions of Catalytica
Morgan Stanley Dean Witter Equity Funds
In June 1997, Catalytica entered into a stock purchase agreement with Morgan
Stanley Dean Witter, pursuant to which Catalytica sold 30,000,000 shares of
class A common stock and class B common stock to the equity funds for an
aggregate purchase price of $120.0 million. The proceeds were used to fund the
acquisition of the pharmaceutical manufacturing facility in Greenville, North
Carolina from Glaxo Wellcome. Under the terms of the stock purchase agreement,
the equity funds are entitled to certain registration rights, which came into
effect on July 1, 1998, and certain rights of repurchase, which will come into
effect on July 1, 2005.
The stock purchase agreement also provides that the equity funds are
entitled to designate as nominees for election:
. three persons to Catalytica's board of directors for so long as the
equity funds own at least 30% of the outstanding common stock of
Catalytica
. two persons to Catalytica's board of directors for so long as such funds
own between 10% and 30% of the outstanding common stock of Catalytica or
. one person to Catalytica's board of directors for so long as they own
between 6% and 10% of the outstanding common stock of Catalytica.
These percentages are calculated assuming conversion of the class A and class
B common stock into common stock of Catalytica.
In August 1997, pursuant to the stock purchase agreement, Catalytica amended
its bylaws to increase the size of the board of directors from seven to nine
and nominated Messrs. Hoffen and Goldberg for election to the board of
directors. Messrs. Hoffen and Goldberg subsequently were elected as directors
in connection with the 1998 Annual Meeting of Stockholders. In April 1999, the
board of directors amended its bylaws to decrease the size of the board of
directors from nine to seven.
In October 1997, Catalytica redeemed an aggregate of 5,000,000 shares of
class B common stock held by the equity funds at a redemption price of $4.75
per share. The repurchase was made with the proceeds received by Catalytica in
connection with the exercise of warrants issued in August 1997 in connection
with the acquisition of the pharmaceutical manufacturing facility in
Greenville, North Carolina.
Change of Control Severance Agreements
In April 1999, Catalytica entered into change of control severance
agreements with the following executive officers of Catalytica: Messrs.
Briscoe, Cusumano, Hart and Levy. The agreements provide for the following
benefits in the event of involuntary termination:
. twice the officer's annual compensation
. pro rata payment of the projected bonus
. continued employee benefits for up to two years from the date of
termination
. accelerated vesting of all outstanding options held by the executive
officer
Certain Relationships and Related Transactions of Wyckoff
Arthur R. Whale, a director of Wyckoff, is a partner in the law firm of
Baker & Daniels, located in Indianapolis, Indiana. Baker & Daniels has provided
patent legal services to Wyckoff in the past.
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<PAGE>
Winston E. Miller, a director of Wyckoff, is a partner in the law firm of
Miller, Morriss & Pappas, located in East Lansing, Michigan. Miller, Morriss &
Pappas has provided legal services to Wyckoff in the past.
James B. Friederichsen's employment agreement with Wyckoff provides for the
grant of 2,000 stock options to Mr. Friederichsen. One-third of the options
have vested and the remaining two-thirds will vest in annual increments on June
30, 2000 and June 30, 2001. At completion of the merger, Mr. Friederichsen's
unvested options will become fully vested. In addition, Catalytica has agreed
to assume Mr. Friederichsen's existing employment agreement with Wyckoff at
completion of the merger.
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<PAGE>
WYCKOFF'S BUSINESS
The discussion in this proxy statement/prospectus contains forward-looking
statements which involve risks and uncertainties. Wyckoff's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Risk
Factors," as well as those discussed elsewhere in this proxy
statement/prospectus.
Overview
Wyckoff develops, manufactures and markets a broad range of active
pharmaceutical ingredients and advanced fine chemical ingredients. Wyckoff
sells its products and custom synthesis services worldwide to a number of
pharmaceutical companies that sell both branded and generic products, as well
as to cosmetic companies and other fine chemical end-users. Wyckoff, which was
established in 1976, has built a reputation for quality and rapid response over
its 23 years of service. Wyckoff currently is expanding its product range,
management and technology teams and manufacturing and process research
facilities to achieve an even broader base of business in the future.
Wyckoff's facilities are located on 40 acres of land in South Haven,
Michigan, which has available acreage for additional expansions. The South
Haven site is a cGMP-compliant and FDA-inspected facility. Wyckoff also
maintains sales offices in Wisconsin and New Jersey and has strategically-
located international sales agents.
Wyckoff seeks to enhance the position that it has built over the past
several years and to become one of the leading suppliers of active
pharmaceutical ingredients to branded and generic pharmaceutical companies.
Wyckoff's business philosophy is to contribute to products which help ease
pain, cure diseases and save lives in a safe and environmentally responsible
manner.
Wyckoff's internal expansion has contributed to sales growth over the past
five years at a compounded rate of 14% per year. In addition, Wyckoff currently
is expanding its chemical manufacturing capacity, developing larger alliances
and diversifying into new areas, such as parenterals (injectible-grade
pharmaceutical ingredient) and nutriceuticals (nutritional supplements
manufactured under FDA regulations).
Industry Background
The American and global populations' increased life expectancy and desire
for a more healthy and vigorous lifestyle may increase demand for health care
products and support growth of the pharmaceutical and health care industry. The
following trends in the pharmaceutical and health care industry are expected to
create opportunities for Wyckoff in the future:
. the increasing practice of many pharmaceutical companies to "out-source"
much of their active pharmaceutical ingredients and advanced
intermediate products requirements
. the increasing use of generic drugs due to an emphasis on reducing
health care costs and patent expirations
. the increasing costs of drug development, emphasis on reducing time to
market for new drugs and increasing government regulation of
pharmaceutical production
Wyckoff's Strategy
Wyckoff believes that it is well-positioned to capitalize on these trends
and to achieve its growth objectives based upon the following competitive
advantages:
. A Strong Reputation. Over the years Wyckoff has established a well-
respected reputation as a partner to pharmaceutical companies, due to
Wyckoff's consistent quality, reliability, regulatory
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<PAGE>
compliance, confidentiality, response time and value. Wyckoff has strong
interactive relationships with a number of large pharmaceutical
companies.
. Manufacturing and Process Development Flexibility. Wyckoff currently
produces over 45 products at its South Haven site. Wyckoff's current
annual sales volumes by product range from less than 10 kilograms per
year to 200,000 kilograms per year. Wyckoff's broad range of products,
coupled with its flexible and cGMP-compliant and FDA-inspected
production capacity, allows it to respond quickly to customer needs and
the demands of the marketplace.
. Superior Research and Product and Process Development. Virtually all of
the products sold by Wyckoff are produced using processes either fully
developed internally or developed under exclusive and confidential
collaboration with its customer or industry partners. Wyckoff has
amassed a strong interactive team of chemists and chemical process
engineers to satisfy this critical element of the business.
Operations
Wyckoff develops and supplies pharmaceutical products to generic and brand
name pharmaceutical companies. Wyckoff's manufacturing operations include
production of active pharmaceutical ingredients and intermediates for new drug
applications, established prescription drugs, over-the-counter products and
products for cosmetic companies. Wyckoff's current manufacturing capacity is
52,500 reactor gallons, and it is expanding its operations by an additional
15,000 to 20,000 reactor gallons. Wyckoff's manufacturing facilities include a
number of 2,000 to 4,000 gallon reactors, which are useful for manufacturing
large commercial volumes of products.
Research and Development
Wyckoff currently has 20 scientists and engineers engaged in development
and pilot scale-up activities for 13 developmental products that hold
significant potential as innovative products for both the pharmaceutical
industry and Wyckoff. These products treat the following therapeutic areas:
antibiotics, anti-psychotic, anti-depressant, protease inhibitor, antianginal
and osteoporosis treatment. Wyckoff's customers for these products include a
number of the world's largest and best-known pharmaceutical companies.
Sales and Marketing
Wyckoff sells and markets its products from its headquarters in Michigan,
from regional sales offices in New Jersey and Wisconsin and from sales agents
located abroad. Wyckoff's customers for current and developmental products
include:
. Abbott
. Bayer AG
. Bristol Myers Squibb
. Clairol
. Mylan Laboratories
. Parke Davis
. Pharmacia & Upjohn
. Roxane
. Schein
. Schering Plough
. Teva
. Watson
. 3M Pharmaceuticals
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Raw Materials and Supply
Wyckoff purchases a variety of raw materials used in the production of its
products from numerous global sources. Wyckoff does not rely on a single source
for any raw material that is critical to its business or for raw materials that
are difficult to obtain. Wyckoff believes it has been able to purchase its raw
materials at competitive prices.
Technology
Wyckoff depends heavily upon its technological strength to drive the
development of its business. Wyckoff currently owns three United States patents
that have varying durations which apply to portions of its manufacturing
processes. Wyckoff also licenses technology from third parties in connection
with the manufacture of Wyckoff products.
Although Wyckoff has patented a few of its processes and has licenses to use
the technology of third parties, it relies upon its own proprietary know-how,
including processes and techniques which it has developed over years of
research and experience. Wyckoff seeks to protect its unpatented technology and
know-how in part by requiring confidentiality and non-disclosure agreements
with its employees. There can be no guarantee that these agreements will be
enforceable and will not be breached, or that Wyckoff's trade secrets will not
otherwise be disclosed to, or discovered by, competitors.
Competition
Competitive factors in Wyckoff's market include:
. quality and speed of service
. price and value
. breadth of capability
. regulatory compliance, including compliance with requirements of the FDA
and the EPA
. established relationships
. reliability of supply
. reputation for the above factors
In addition, Wyckoff's success depends on its ability to secure
relationships with potential customers that have new pharmaceutical products in
the early stages of development. Once this type of relationship is established
and Wyckoff has positioned itself as a primary supplier for a product, it gains
competitive advantages, based upon its:
. significant investments in plant and equipment, process development and
relevant permits
. expertise in solving technical problems
. specialized manufacturing and product formulation expertise at low cost
. lengthy product development work
. lengthy approval processes by customers, government authorities and
other parties
. customers' reluctance to rely upon marginal or unproven suppliers of
expensive and highly regulated pharmaceutical intermediates and active
ingredients
Wyckoff encounters significant competition from small to mid-sized fine
chemical companies, large multi-national chemical companies and the
pharmaceutical companies themselves. Many of these competitors have
substantially greater financial resources, technical skills and marketing
experience than Wyckoff.
Wyckoff's competitors include firms such as Cambrex, DSM, ISP, Lonza AG, a
number of small Italian and Spanish fine chemical companies and, occasionally,
chemical manufacturers located in India or China.
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<PAGE>
Environmental and Safety Regulations
Production of essentially all of Wyckoff's products involves the use,
storage, disposal and transportation of toxic and hazardous materials.
Wyckoff's operations are subject to extensive federal, state and local laws and
regulations governing the environment and maintenance of safe and hygenic
conditions in the workplace, including regulations of the EPA, the Michigan
Department of Environmental Quality and of federal and state occupational
health and safety agencies.
Wyckoff's policy and practice is to comply with all requirements of
applicable environmental, health and safety laws, regulations and cGMP. In many
cases compliance only can be achieved by capital expenditures. Wyckoff made
capital expenditures related to compliance of approximately $272,000 in 1996,
$151,000 in 1997 and $156,000 in 1998. Wyckoff anticipates that it will spend
approximately $1.6 million in 1999 related to regulatory compliance in
connection with the construction of a new plant. Wyckoff anticipates that both
capital and expense requirements will increase in the coming years as a result
of continued changes in environmental and health and safety laws. Wyckoff
considers costs for environmental compliance and providing safe operating
conditions for its employees to be a normal cost of doing business, and
includes recovery of these costs in its pricing decisions.
Risks of substantial environmental costs and liabilities are inherent in
plant operations and products produced by Wyckoff, as they are with other
companies engaged in chemical processing, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, current
legislation and common law tends to hold chemical companies primarily
responsible for proper disposal of their chemical waste and discharges even
when transferred to third party disposal and treatment facilities. Other future
developments, such as increasingly strict environmental, health and safety laws
and regulations and enforcement policies, could result in substantial costs and
liabilities to Wyckoff and could subject Wyckoff's handling, manufacture, use,
reuse or disposal of substances or pollutants at its facilities to more
rigorous scrutiny than at present. Wyckoff is fully aware of these risks and
monitors the risks closely.
The Wyckoff manufacturing site is listed under Michigan law as a site with
soil and groundwater contamination. Environmental assessments conducted on the
site have identified soil contamination by volatile organic compounds and heavy
metals. According to a third party environmental consultant retained by
Catalytica in connection with the merger, the costs associated with further
investigation and remediation of the contamination is estimated to be less than
$2.0 million.
A significant portion of the soil contamination that exists at the site is
on property acquired by Wyckoff between 1995 and 1997, which Wyckoff currently
is not using. The State of Michigan has approved a plan for the clean-up of
environmentally contaminated sites which are not currently in use. Wyckoff
believes that a portion of the investigation and remediation costs for the
Wyckoff site may be eligible for reimbursement under the statewide clean-up
plan.
FDA and Related Regulations
Wyckoff is subject to extensive regulation by several regulatory
authorities, principally the FDA and corresponding state agencies, and to
stringent safety standards.
Wyckoff's manufacturing facilities are subject to regulations with respect
to the registration of facilities by the FDA and compliance with cGMP
standards. Wyckoff is therefore subject to periodic in-depth inspections to
assure its ongoing compliance with these standards. Wyckoff believes that it
operates in compliance with cGMP.
The FDA also has broad regulatory powers with respect to pre-clinical and
clinical testing of new pharmaceutical products and the manufacturing,
marketing and advertising of those products. All new projects with brand name
pharmaceutical companies will require FDA approval.
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<PAGE>
Wyckoff also is subject to comprehensive compliance audits by many of its
customers on a periodic basis. Wyckoff's or any other company's ability to
supply the pharmaceutical industry is dependent upon the favorable results of
such inspections.
Wyckoff's Employees
Currently Wyckoff has approximately 165 full-time employees, most of whom
are based in South Haven, Michigan. There are no collective bargaining
agreements in place although Wyckoff has in the past experienced unsuccessful
efforts by some of its employees to unionize. Wyckoff believes its work force
and managerial and technical teams to be strong and it employee relations
satisfactory.
Wyckoff's Properties
Wyckoff has approximately 105,000 square feet of office, manufacturing and
R&D facilities in South Haven, Michigan, all of which is owned by Wyckoff.
Wyckoff believes these facilities to be in good condition, well maintained and
adequate for its current needs. Wyckoff also leases a small sales office in
Wisconsin.
Legal Proceedings
From time to time Wyckoff may be exposed to or a subject of legal
proceedings and claims that arise in the ordinary course of business. However,
management does not expect that any of the current proceedings will have a
material effect on Wyckoff's financial condition or results of operations.
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WYCKOFF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained in this section, the
discussion in this proxy statement/prospectus contains forward-looking
statements that involve risks and uncertainties regarding Wyckoff's strategy,
financial performance and revenue sources. Wyckoff's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, as well as those discussed in the "Risk Factors" section of this proxy
statement/prospectus. You should consider the following factors carefully in
evaluating an investment in the common stock offered by this proxy
statement/prospectus.
Overview
Wyckoff develops, manufactures and markets a broad range of active
pharmaceutical ingredients and advanced fine chemical ingredients, offering its
own proprietary products and a custom synthesis service to a number of
pharmaceutical companies that sell both branded and generic products, as well
as to cosmetic companies and other fine chemical end users. Established in
1976, Wyckoff has built a reputation for quality and rapid response over its 23
years of service, and is currently expanding its product range, management and
technology teams and manufacturing and process research facilities to achieve a
broader base of business. Information provided below for the years 1999, 1998
and 1997 is for the fiscal year ended June 30 in each of those years.
Results of Operations
<TABLE>
<CAPTION>
For the Years Ended Annual %
June 30, Change
----------------------- -----------
1999/ 1998/
1999 1998 1997 1998 1997
------- ------- ------- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............................. $36,524 $31,429 $29,041 16% 8%
</TABLE>
Historically, the majority of Wyckoff's sales have been to generic
pharmaceutical companies and several fine chemical companies. The generic
pharmaceutical industry is very price competitive. Consequently, the price that
Wyckoff is able to charge on several key products has decreased over the last
several years.
The 16% increase in sales from 1998 to 1999 is due primarily to the
shipments of two new products that are in its customers' product development
stage. One product, which accounted for Wyckoff sales of approximately $2.1
million in 1999, is a generic pharmaceutical that will come off patent in
November 2001. In addition, Wyckoff also sold trial quantities of four other
products to generic pharmaceutical companies for pharmaceuticals that will come
off patent over the next several years. The sales of these products, which were
approximately $200,000 in 1999, represent potential future business for
Wyckoff.
The other new product is an advanced intermediate for a brand name
pharmaceutical company which accounted for Wyckoff sales of approximately $2.0
million in 1999. This product is in Phase III clinical trials. Wyckoff also
shipped trial quantities of four other advanced intermediates to pharmaceutical
companies for products in early stages of development. The total of these sales
was $483,000 in 1999. The eventual commercial sale of these products cannot be
predicted at this time because of the high degree of uncertainty during
clinical trials.
The 1998 sales increase of approximately $2.4 million or 8% over the amount
reported for 1997 was due primarily to the sale of development quantities of an
anti-fungal product of approximately $1.6 million. This product is coming off
patent in June 2000. Wyckoff also sold two advanced intermediates products
which are in Phase III clinical trials to a brand name pharmaceutical company
in the amount of $738,000.
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<TABLE>
<CAPTION>
Annual %
For the Years Ended June 30, Change
-------------------------------- -----------
1999/ 1998/
1999 1998 1997 1998 1997
--------- --------- --------- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Costs of goods sold............. $ 24,951 $ 21,454 $ 19,678 16% 9%
Research and development........ 1,810 1,451 1,163 25% 25%
Selling, general and
administrative................. 4,974 4,004 3,595 24% 11%
Net interest expense............ 608(1) 584 607 4% (4%)
</TABLE>
- --------
(1) excludes capitalized interest of $202,000
Cost of Goods Sold: The 16% increase in cost of goods sold in 1999 compared
to 1998 is consistent with the increase in sales. The cost of goods sold
consists primarily of purchased chemicals used in the manufacturing process and
manufacturing costs required to manufacture the chemicals. The average raw
material portion of the costs is approximately 40% to 45% of the total cost of
goods depending on the product mix. The yearly increase in cost of the
manufacturing process generally is semi-linear with the increase in sales.
However, when Wyckoff exceeds its capacity level and it becomes necessary to
expand, the incremental costs for expansion will increase faster than the sales
revenue until the production volume catches up in subsequent years. Wyckoff
experienced significant additional costs in fiscal year 1999 as it completed
the construction and partial start-up of a new manufacturing facility. These
costs were related to higher depreciation expense and additional manufacturing
personnel.
The 9% increase in cost of goods sold in 1998 compared to 1997 was
consistent with the increase in sales with no significant variations from the
prior year.
Process R&D expenses increased 25% in 1999 compared to the amounts reported
for 1998. These costs primarily were related to an expansion of the R&D effort
through increases in the number of process research chemists hired by Wyckoff.
The hiring of additional personnel was in connection with Wyckoff's strategy to
take advantage of the trend by brand name pharmaceutical companies to out-
source a portion of their chemical manufacturing. The 25% increase in 1998
compared to 1997 also was due to increases in personnel expenses related to
this strategy.
Selling, General and Administrative: SG&A expenses increased $970,000 or 24%
for the year ended 1999 compared to the amounts reported for 1998. This
increase over the prior year was due primarily to a $536,000 bonus paid to
employees. This bonus was based on Wyckoff's meeting specific performance
targets established by the board of directors. Wyckoff did not pay a bonus to
employees in fiscal 1998. The 11% increase in SG&A expenses in 1998 compared to
1997 was consistent with the sales increase.
Interest Expense: In 1999 the interest expense was $810,000, a 39% increase
over 1998 due to the increased bank borrowings in connection with the
construction of the new manufacturing facility and addition to the R&D center.
Of this amount, Wyckoff capitalized $202,000 of the interest expense as part of
the construction costs. This resulted in a net interest expense of $608,000. In
October of 1998, Wyckoff entered into an interest rate swap derivative
transaction at a fixed rate of 4.97%. This swap relates to the variable rate
demand notes issued by Wyckoff in February 1997 in the approximate amount of
$10.2 million, of which $7.1 million was outstanding as of June 30, 1999.
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<PAGE>
<TABLE>
<CAPTION>
For the Years Ended Annual %
June 30, Change
---------------------- -----------
1999/ 1998/
1999 1998 1997 1998 1997
------ ------ ------ ----- -----
(dollars in thousands except per
share data)
<S> <C> <C> <C> <C> <C>
Net income:
Income before income taxes............... $4,181 $3,936 $3,998 6% (2%)
Provision for income taxes............... (1,290) (1,066) (1,296) 21% (18%)
------ ------ ------
Net income .............................. $2,891 $2,870 $2,702 1% 6%
Basic earnings per share................. $10.19 $10.09 $ 9.47 1% 7%
Diluted earnings per share............... $10.08 $10.00 $ 9.39 1% 6%
</TABLE>
Wyckoff reported income of approximately $2.9 million in 1999, $2.9 million
in 1998 and $2.7 million in 1997. Wyckoff's ability to maintain and increase
its net income will be impacted by prices in the generic pharmaceutical market,
including pricing on current existing commercial products and new off patent
products in future years. Wyckoff's net income also will depend on the prices
Wyckoff negotiates with brand name pharmaceutical companies for projects in
Phase II and III development. These early stage development projects have a
lower probability of becoming commercial products than the generic products
since they are new products which require FDA approval. Due to the nature of
the industry, Wyckoff cannot predict which products will become commercialized.
Because of this uncertainty, Wyckoff bids on these projects in the early stage
of development with the target to make a reasonable profit.
The provision for income taxes for the year ended June 30, 1999 as a
percentage of pretax income was approximately 31% as compared to 27% for 1998
and 32% in 1997. The fluctuation in the effective tax rate is due primarily to
the amount of the R&D tax credit Wyckoff was able to take in each tax year. In
addition, in January 1998 Wyckoff formed a subsidiary, Wyckoff Chemical Foreign
Sales Corporation, through which Wyckoff's foreign sales are made. This
arrangement has lowered Wyckoff's effective tax rate on foreign sales.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------
<S> <C> <C> <C>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash.......................................... $ 290 $ 305 $ 966
Working capital............................... 7,870 7,722 7,753
Cash provided by
operating activities:........................ 4,196 4,901 5,378
Investing activities........................ (9,212) (4,247) (3,529)
Financing activities........................ 5,001 (1,315) (1,327)
-------- --------- ---------
Net increase (decrease) in cash............... $ (15) $ (661) $ 522
Current ratio................................. 1.95 2.65 2.79
</TABLE>
Wyckoff has generated cash flow from operations of approximately
$4.2 million in 1999, $4.9 million in 1998 and $5.4 million in 1997. Cash from
operations, after deduction for the annual dividend payment to shareholders of
$337,000 in 1999 ($342,000 in 1998 and 1997) and repayment of scheduled debt,
was reinvested into the business primarily for the purchase of production
equipment and for the expansion of R&D laboratory and manufacturing production
facilities. Wyckoff reinvested approximately $9.2 million in 1999, $4.3 million
in 1998 and $3.5 million in 1997. During these periods Wyckoff has borrowed
from its bank through term loans an amount needed to finance Wyckoff's growth.
Wyckoff also refinanced its bank debt through the issuance of variable rate
demand notes, series 1997 in the approximate amount of $10.2 million through
First of America Brokerage Service, Inc. (which subsequently became NatCity
Investments, Inc.) In
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<PAGE>
1997 Wyckoff used approximately $8.3 million of those proceeds to pay off its
then existing term loan. Wyckoff did not raise any funds through public or
private equity offerings.
Wyckoff currently has a revolving term loan with its bank in the amount of
$7.5 million of which Wyckoff had, as of June 30, 1999, $6.2 million
outstanding. Wyckoff also has a line of credit for working capital with its
bank in the amount of $2.5 million. As of June 30,1999 Wyckoff had $1.0 million
outstanding against that line of credit.
Wyckoff has adequate liquidity to support its current operations and working
capital needs and debt repayment for the next 12 months. In the longer term,
additional credit facilities or sale of equity may be required to finance
additional growth.
Year 2000 Readiness Disclosure
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, computer systems, application
software and other equipment (e.g. telephone PBX and voicemail, office
equipment and manufacturing equipment) used by Wyckoff has been upgraded,
repaired or replaced to prepare for the "Year 2000" and "leap year"
requirements. Wyckoff's business computing systems are Year 2000 tolerant, but
continued verification is still required. This verification process is expected
to be complete by November 1999.
Wyckoff has conducted an internal review of its internal systems (e.g.
manufacturing, finance, human resources, payroll, laboratory and other
systems). The systems affected by the Year 2000 problem are divided into three
categories.
. Business Information Systems are any midrange, micro or PC-based
computer system used for 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, directly by the vendor or by an
authorized third party service group.
. Embedded Controller Systems are systems or devices that include an
intelligent processor or chips that are not programmable or cannot be
modified without hardware changes. These systems generally are 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 and telecommunications
equipment).
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<PAGE>
The following is a chart showing Wyckoff's status of Year 2000 readiness as
of June 30, 1999 and internal target dates for project completion. Wyckoff 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 financial systems (general ledger,
purchasing, payroll, accounts payable, accounts receivable, and fixed assets)
have completed the assessment stage and are being remediated and tested as
described in the table below. Any remaining critical or non-critical business
systems are expected to be completed by December 1999. Cosmetic changes to
reports and displays are expected to be completed in November and December
1999.
Year 2000 Status as of June 30, 1999
Resolution Phases
<TABLE>
<CAPTION>
Exposure Type Assessment Remediation Testing Implementation
------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Business Information
Systems................ 100% Complete 97% Complete 80% Complete 76% Complete
Expected Completion..... November 1999 November 1999 December 1999
Manufacturing Systems .. 100% Complete 100% Complete 95% Complete 90% Complete
Expected Completion..... November 1999 November 1999
Embedded Controller
Systems................ 100% Complete 100% Complete 95% Complete 90% Complete
Expected Completion..... November 1999 November 1999
</TABLE>
Testing and remediation of business information systems, manufacturing
automation systems and embedded controller systems are in progress. Wyckoff
anticipates successful completion of all phases of these Year 2000 preparations
before December 31, 1999.
Wyckoff has contacted its vendors and service suppliers whose systems
failures potentially could have a significant impact on Wyckoff's operations,
to verify their Year 2000 readiness to determine Wyckoff's potential exposure
to Year 2000 issues. Wyckoff has been informed by approximately 90% of its
vendors and service suppliers that they expect to be Year 2000 ready by the
year 2000.
Any failure of these third parties' systems to achieve timely Year 2000
readiness could have a material adverse effect on Wyckoff's business operation,
financial condition and future prospects. Year 2000 problems could affect many
of Wyckoff's production, distribution, plant, financial and administrative
operations. Systems critical to the business that have been identified as not
Year 2000 compliant are either being replaced or corrected through programming
or hardware modifications.
The state of compliance of certain of Wyckoff's third-party suppliers of
services, such as telephone companies, long distance carriers, financial
institutions and electric companies, has not been determined. The failure of
any one of these third party suppliers to be Year 2000 ready could severely
disrupt Wyckoff's ability to carry on its business as well as disrupt the
business of its customers.
Future Results
This section contains certain forward-looking statements regarding Wyckoff's
operating results that involve risks and uncertainties. Wyckoff's actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth here and under
"Risk Factors."
Outlook for the Generic Pharmaceutical Industry
A significant portion of Wyckoff's current product sales are to the generic
pharmaceutical industry. Wyckoff supplies this industry with active
pharmaceutical ingredients. The generic pharmaceutical industry has significant
growth potential based on the number of off-patent products over the next
several years. The
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<PAGE>
industry also is expected to grow due to the continuing pressure to lower
medical costs particularly related to pharmaceuticals products because these
expenses generally are not reimbursable for retirees. In addition, the
demographics of the United States' population shows a high percentage of the
population reaching retirement over the next 20 years. Retirees are the highest
users of prescription drugs and are expected to increase their demand for
pharmaceutical products, especially generics. Wyckoff has positioned itself
with the top tier generic companies, including Mylan Pharmaceutical, Schein
Pharmaceuticals, Teva Pharmaceuticals USA and Watson Laboratories, to be able
to take advantage of this opportunity.
Wyckoff recently has focused on generic products that have more complex
molecular structure which are consequently more difficult to manufacture.
Management believes that these products will have limited global competition
and should return Wyckoff a higher profit margin over the product's life cycle
than the less complex, commodity type products. While there is no certainty
that Wyckoff will be successful in producing these complex products, Wyckoff's
long history in this industry and its reputation should enable it to continue
to grow this business in a profitable manner over the next several years.
Wyckoff currently has shipped developmental quantities for five active
pharmaceutical ingredients which will be coming off patent over the next
several years to many of the top tier generic companies.
There is also significant reluctance for the generic companies to qualify
more than one source for an active pharmaceutical ingredient during its
submission of an abbreviated new drug application because of the additional
cost required. Therefore, once Wyckoff has been approved by the generic company
as its active pharmaceutical ingredient supplier, a long term supply
relationship generally develops. This relationship is not contractual but is
based on business needs of the customer and Wyckoff.
Generic commercial products are mature pharmaceuticals which generally have
consistent yearly sales but have a tendency to decline in volume and price over
time. This volume decline is due to the following factors: (a) less sales
promotion by the innovator company once the product goes generic which results
in less prescriptions being written for that product; (b) entry of a new drug
in the consumer market in the same therapeutic category which may be more
effective or have less adverse side affects; and (c) a more effective drug
delivery system. The decline in price over time is symptomatic of the generic
industry.
Outsourcing by Brand-Name Companies
There is a strong trend in the pharmaceutical industry for large
pharmaceutical companies to outsource certain aspects of their business
activities to companies that have specific technical expertise. This allows the
pharmaceutical companies to focus their resources on R&D and marketing. With
respect to chemical manufacturing, the brand name pharmaceutical companies are
developing strategic partnerships with selected independent active ingredient
manufacturers who are cGMP compliant and are in compliance with all regulatory
agencies including but not limited to the FDA, the EPA and state and federal
occupational health and safety agencies. These companies primarily are located
in North America and Western Europe. Wyckoff believes this trend will continue
and it has, over the last several years, developed strategic partnerships with
several brand name companies under confidentiality agreements.
In connection with these partnerships, Wyckoff currently is working with a
number of major pharmaceutical companies in developing chemical synthetic
routes for the manufacture of advanced intermediate pharmaceuticals for
projects in Phase I, II and III clinical trials. Wyckoff supplies small
quantities of advanced intermediate chemical with the eventual goal of being a
supplier of the product to the pharmaceutical company once the product receives
approval of the FDA and becomes a commercial product. Wyckoff would then make
the advanced intermediates and ship the product to the pharmaceutical company
which would use this material in manufacturing active pharmaceutical
ingredients in its facility. At this time, none of the projects Wyckoff has
worked on has become commercial because the products are still in the
developmental stage. However, Wyckoff has ongoing projects with pharmaceutical
companies for four projects which are in Phase III stage of development. There
are an additional five projects in Phase I or II stages.
These projects are on a purchase order basis and the pharmaceutical
companies are not required to use Wyckoff if the product is approved by the
FDA. However, as a practical matter, there is a high probability that
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<PAGE>
Wyckoff would participate in the commercial production due to the technical
expertise it will have gained in manufacturing that product during the early
stages of process development and the strong interaction between both
companies' technical personnel. However, Wyckoff will have to be price
competitive when the pharmaceutical company is ready to begin commercial
production. If Wyckoff is selected as the supplier for the advanced
intermediate, Wyckoff should experience a long-term supply relationship with
limited price pressure because the pharmaceutical companies place strong
emphasis on reliability of supply rather than solely on price.
Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Swaps
In October 1998, Wyckoff entered into a $9.0 million interest rate swap
derivative transaction to reduce Wyckoff's exposure to fluctuations in short-
term interest rates. This interest rate swap transaction effectively fixed the
rate used to calculate Wyckoff's borrowing cost at 4.97% for four and one-half
years on $9.0 million of the variable rate demand notes, series 1997. Wyckoff
accounts for this interest rate swap as a hedge, and accrues the interest rate
differential as interest expense on a monthly basis. In accordance with the
accrual method of accounting, there is no recognition in the financial
statements for changes in the derivative's fair value. In the event of the
early extinguishment of a designated debt obligation, any realized or
unrealized gain or loss from the swap would be recognized in income coincident
with the extinguishment gain or loss. Any swap agreements that are not
designated with outstanding debt or notional amounts (or duration) of interest-
rate swap agreements in excess of the principal amounts (or maturities) of the
underlying debt obligations would be recorded as an asset or liability at fair
value, with changes in fair value recorded in other income or expense (the fair
value method). Wyckoff does not hold or transact in such financial instruments
for purposes other than risk management.
The notional principal amount for the off-balance-sheet instrument provides
one measure of the transaction volume outstanding as of year end, and does not
represent the amount of Wyckoff's exposure to credit or market loss. Wyckoff
believes its gross exposure to potential accounting loss on this transaction if
all counter-parties failed to perform according to the terms of the contract,
based on then-current interest rates at each respective date, would have no
material financial impact. Wyckoff's exposure to credit loss and market risk
will vary over time as a function of interest rates.
The estimate of fair value of the interest rate swap is $100,000 and is
based on a price quote obtained from a third party. The amounts ultimately
realized upon settlement of the financial instrument, together with the gains
and losses on the underlying exposure, will depend on actual market conditions
during the remaining life of the instrument.
With the interest rate swap, which qualifies as an accounting hedge, Wyckoff
either makes or receives payments on the interest rate differential between
4.97% and the actual interest paid on its debt which has a floating interest
rate based on a weekly rate. As a result, the swap effectively converts $9.0
million of Wyckoff's floating-rate four and one-half year debt to a fixed-rate
debt. The maturity date for the swap is February 2, 2004. For the year ended
June 30, 1999, the interest rate swap classified as receive-fixed swap had an
average receive rate of 4.96% based on the weighted average daily rate of 30
day commercial paper. The pay rate on the swap is 4.97%. The gain or loss on
the swap is recognized in net interest expense in the same period as the hedged
transaction. The actual incurred loss totaled approximately $2,000 as of June
30, 1999.
Currency Risk
Wyckoff currently invoices its customers in United States dollars and
generally is invoiced by its foreign suppliers in United States dollars.
However, with the new Euro currency, future foreign transactions may be
denominated in a currency other than United States dollars which could result
in currency gains or losses on the transaction.
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WYCKOFF'S MANAGEMENT
Wyckoff's current executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald L. Hartgerink.............. 57 Chief Executive Officer and Chairman
of the Board
Elmer E. Hartgerink............... 82 Vice Chairman of the Board
James B. Friederichsen............ 57 President and Chief Operating Officer and Director
Thomas J. Gambon.................. 48 Chief Financial Officer
Melvin Flaming.................... 56 Vice President of Sales and Marketing
Philip W. Ranck................... 56 Vice President of Manufacturing
Andrew G. Zeiler.................. 56 Vice President of Research and Development
and Director
Michael D. Annett................. 52 Director of Human Resources and Corporate Secretary
Harwood C. Stiles................. 48 Director of Quality Assurance and Regulatory Affairs
Robert E. McClendon............... 74 Director
Winston E. Miller................. 77 Director
Roger J. Gemmen................... 64 Director
John L. Urness.................... 65 Director
Arthur R. Whale................... 76 Director
</TABLE>
Ronald L. Hartgerink has served as a director of Wyckoff since February
1989, as Chairman of the Board since April 1999 and as Chief Executive Officer
since 1990. Mr. Hartgerink served as President of Wyckoff from 1990 to April
1999. Before joining Wyckoff, Mr. Hartgerink held leadership positions for 20
years with various research and development laboratories of Exxon Corp. Mr.
Hartgerink serves as a director of Shoreline Bank. Mr. Hartgerink is the son of
Elmer E. Hartgerink, a director and the Vice Chairman of Wyckoff. Mr.
Hartgerink holds a Ph.D in organic chemistry from the University of California,
Berkeley, and a B.S. in chemistry from Hope College, Holland, Michigan.
Elmer E. Hartgerink has served as a director of Wyckoff since 1979 and as
Vice Chairman of the Board since April 1999. From 1979 to April 1999, Mr.
Hartgerink served as Wyckoff's Chairman of the Board. Before joining Wyckoff,
Mr. Hartgerink held various management positions with Miles Laboratories, Inc.,
a pharmaceutical company. Mr. Hartgerink holds a B.S. in chemistry from Hope
College, Holland, Michigan, and a M.S. in organic chemistry from Washington
University, St. Louis, Missouri. Mr. Hartgerink is the father of Ronald L.
Hartgerink, Chairman of the Board and Chief Executive Officer of Wyckoff.
James B. Friederichsen has served as a director of Wyckoff since January
1997 and as President and Chief Operating Officer of Wyckoff since December
1998. Before joining Wyckoff, Mr. Friederichsen was Vice President of the
specialty chemicals group of Ferro Corporation from 1994 to 1998. In that
position, Mr. Friederichsen was responsible for the strategic growth of the
group, which increased sales from $200.0 million to $330.0 million during his
tenure. Mr. Friederichsen holds a B.S. in mechanical engineering from Georgia
Institute of Technology and an M.B.A. in finance from Louisiana State
University.
Thomas J. Gambon has served as Wyckoff's Chief Financial Officer since 1987.
Mr. Gambon has more than 20 years of experience in corporate finance. Before
joining Wyckoff, Mr. Gambon held various corporate finance positions with
Kaydon Corporation, a precision bearing manufacturer located in Muskegon,
Michigan, and McGraw-Edison, a multi-national manufacturer of electrical
generation and power equipment located in Chicago, Illinois. Mr. Gambon holds a
B.S. in accounting and finance from Northern Illinois University.
Melvin Flaming has served as Wyckoff's Vice President of Sales and Marketing
since October 1993. Before joining Wyckoff, Mr. Flaming held a similar position
with B.I. Chemicals, Inc., a leading manufacturer and worldwide distributor of
fine chemicals, organic intermediates and specialty chemicals with annual
domestic sales of $64.0 million. Mr. Flaming has more than 24 years of sales
and marketing experience in the fine and specialty chemical industries. Mr.
Flaming holds a B.S. in liberal arts from Wichita State University, Wichita,
Kansas.
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<PAGE>
Philip W. Ranck has served as Wyckoff's Vice President of Manufacturing
since December 1993. Before joining Wyckoff, Mr. Ranck served as Vice President
and Chief Operating Officer of Orsynex Corp., Columbus, Ohio, which produces
bulk drug actives and specialty organics for pharmaceutical, biotech, research
and industrial applications. Mr. Ranck holds a B.S. in chemical engineering
from Purdue University, Lafayette, Indiana.
Andrew G. Zeiler has served as a director of Wyckoff since 1983. He has also
served as Wyckoff's Vice President of Research and Development since May 1980,
during which time he was responsible for the development of research, quality
control and analytical services at Wyckoff. Mr. Zeiler came to Wyckoff with
more than 10 years of research and development experience in the pharmaceutical
industry. Mr. Zeiler holds a Ph.D. in organic chemistry from Ohio University.
Michael D. Annett has served as Wyckoff's Director of Human Resources since
January 1988 and as Wyckoff's Corporate Secretary since February 1991. Before
joining Wyckoff, Mr. Annett held various human resources positions with Kaydon
Corporation, Muskegon, Michigan, and National Motor Castings, a manufacturer of
castings for the automobile industry located in South Haven, Michigan. Mr.
Annett holds a M.A. in psychology from Spalding University, Louisville,
Kentucky, and a B.S. in zoology from Miami University, Oxford, Ohio.
Harwood C. Stiles has served as Wyckoff's Director of Quality Assurance and
Regulatory Affairs since December 1997. From 1992 to 1997, Mr. Stiles served as
Manager of Quality Assurance at Wyckoff. Mr. Stiles has more than 25 years of
experience in quality assurance positions in the pharmaceutical, medical
device, food and chemical industries. Mr. Stiles also serves on the board of
the National Pharmaceutical Alliance and the National Association of
Pharmaceutical Manufacturers and holds a B.S. in biology from Ohio State
University.
Robert E. McClendon has served as a director of Wyckoff since 1985. Mr.
McClendon is a majority owner and Chairman of the Board of Do-It Corp., a
manufacturer of plastic display tabs located in South Haven, Michigan. Mr.
McClendon is also a director of Shoreline Bays, a South Haven, Michigan company
that leases warehouse and manufacturing space. Mr. McClendon holds a B.A. in
physics and math from the University of California, Berkeley and pursued
graduate studies in physics at the University of New Mexico, Albuquerque, New
Mexico.
Winston E. Miller has served as a director of and General Counsel to Wyckoff
since its formation in 1976. Mr. Miller has been a partner with the law firm of
Miller, Morriss and Pappas, located in Lansing, Michigan, since 1956.
Mr. Miller is also a shareholder and Chairman of the Board of Biomedical
Frontiers, a company that specializes in new drug development. Mr. Miller holds
a M.S. in chemistry and a law degree, both from the University of Michigan.
Roger J. Gemmen has served as a director of Wyckoff since its formation in
1976. Dr. Gemmen is a general surgeon and Chief of Surgery of United Clinics
and District Hospital of Faribault County, Minnesota. Dr. Gemmen also served as
Chief of Surgery at Holy Family Hospital, Estherville, Iowa, from 1995 to 1998
and Newman Memorial Hospital, Shattuck, Oklahoma, from 1990 to 1995. Dr. Gemmen
received his M.D. from the George Washington University Medical School,
Washington, D.C.
John L. Urness has served as a director of Wyckoff since its formation in
1976. From 1980 to 1982, Mr. Urness was Vice President of Manufacturing for
Wyckoff and from 1976 to 1980 he was Director of Manufacturing for Quaker Oats.
Mr. Urness has owned and operated Star Mercedes since 1982, an automobile
dealership located in Bristol, Illinois. Mr. Urness holds a B.S. in chemical
engineering from the University of Minnesota.
Arthur R. Whale has served as a director of Wyckoff since 1985. Mr. Whale is
a partner with the Indianapolis law firm of Baker & Daniels, with which he has
been affiliated since 1986. From 1975 to 1985, Mr. Whale was the General Patent
Counsel and Assistant Secretary with Eli Lilly and Company. Mr. Whale holds a
B.S. in chemical engineering from Northwestern University and a law degree from
George Washington University.
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<PAGE>
OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF WYCKOFF
The following table sets forth certain information regarding beneficial
ownership of Wyckoff common stock as of July 14, 1999 by
. each director and officer of Wyckoff
. each person known by Wyckoff to own more than 5% of outstanding shares
of Wyckoff common stock
. all directors and executive officers of Wyckoff as a group
This table is based on information provided to Wyckoff by Wyckoff's directors,
officers and 5% shareholders. Percent of ownership calculations are based on
283,929 shares of Wyckoff common stock outstanding and 41,877,226 shares of
Catalytica's voting common stock each as of July 14, 1999.
<TABLE>
<CAPTION>
Percent of
Outstanding Percent of
Wyckoff Outstanding
Common Stock Catalytica Voting
Name and Address of Number of Shares Owned Before Common Stock
Beneficial Owner Beneficially Owned (1) Merger Owned After Merger
------------------- --------------------- ------------ ------------------
<S> <C> <C> <C>
Roger J. Gemmen (2)..... 33,975 12.0% 1.1%
Kenneth K. Wyckoff (3).. 28,319 10.0 1.0
Hope College (4)........ 19,800 7.0 *
Ronald L.
Hartgerink (5)......... 14,522 5.1 *
Elmer E.
Hartgerink (6)......... 11,744 4.1 *
John L. Urness (7)...... 9,506 3.3 *
Arthur R. Whale (8)..... 8,540 3.0 *
Andrew G. Zeiler (9).... 7,550 2.7 *
Winston E. Miller (10).. 5,791 2.0 *
Thomas J. Gambon (11)... 1,572 * *
Philip W. Ranck (12).... 1,062 * *
Melvin D. Flaming (13).. 1,062 * *
Robert E.
McClendon (14)......... 1,040 * *
James B.
Friederichsen (15)..... 1,027 * *
Michael D. Annett (16).. 1,010 * *
Harwood C. Stiles (17).. 822 * *
All directors and
executive officers as
a group (14 persons)
(18)................... 99,223 34.9% 3.4%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by an
individual, the aggregate number of shares of common stock subject to
options held by that individual that are currently exercisable within 60
days of July 14, 1999 are deemed outstanding. Shares issuable upon the
exercise of options are considered outstanding for computing the percent
of the individual holding the options but are not deemed outstanding for
computing the percent of any other person. To Wyckoff's knowledge, except
as set forth in the footnotes to this table, each party named in the table
has sole voting and investment power with respect to the shares set forth
opposite that party's name.
(2) The shares beneficially owned by Mr. Gemmen include options to purchase
540 shares of Wyckoff common stock. Mr. Gemmen's address is 1421 Kalamazoo
Street, South Haven, Michigan 49090.
(3) The shares beneficially owned by Mr. Wyckoff include (a) 16,319 shares
held by the Kenneth K. Wyckoff Trust, a grantor trust of which Mr. Wyckoff
is sole trustee and (b) 12,000 shares held by the
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Kathleen V. Wyckoff Trust, a grantor trust of which Mr. Wyckoff is sole
trustee. Mr. Wyckoff's address is 1421 Kalamazoo Street, South Haven,
Michigan 49090.
(4) Hope College's address is Attn. Barry L. Werkman, 145 East 12th Street,
Holland, Michigan 49423.
(5) The shares beneficially owned by Mr. Hartgerink include (a) 1,650 shares
held in Mr. Hartgerink's individual retirement account through Shoreline
Bank, (b) 4,050 shares held by the Barbara F. Hartgerink Trust, a
declaratory trust of which Mr. Hartgerink is successor trustee, (c) 7,622
shares held by the Margaret G. Hartgerink Trust, an irrevocable trust of
which Mr. Hartgerink is sole trustee and (d) options to purchase 1,200
shares of Wyckoff common stock. Mr. Hartgerink's address is
1421 Kalamazoo Street, South Haven, Michigan 49090.
(6) The shares beneficially owned by Mr. Hartgerink include (a) 10,334 shares
held by the Elmer E. Hartgerink Trust, a declaratory trust of which Elmer
E. Hartgerink is the sole trustee, (b) 600 shares owned by Esther
Hartgerink and (c) options to purchase 810 shares of Wyckoff common
stock. Mr. Hartgerink disclaims beneficial ownership of the shares held
by the Margaret G. Hartgerink Trust, an irrevocable trust of which Mr.
Hartgerink is a beneficiary.
(7) The shares beneficially owned by Mr. Urness include options to purchase
540 shares of Wyckoff common stock.
(8) The shares beneficially owned by Mr. Whale include options to purchase
540 shares of Wyckoff common stock.
(9) The shares beneficially owned by Mr. Zeiler include (a) 3,250 shares held
by the Andrew Zeiler Trust No. 1, a grantor trust of which Mr. Zeiler is
the sole trustee, (b) 3,250 shares held by the Virginia M. Zeiler Trust
No. 1, a grantor trust of which Virginia Zeiler is sole trustee and (c)
options to purchase 1,050 shares of Wyckoff common stock.
(10) The shares beneficially owned by Mr. Miller include options to purchase
540 shares of Wyckoff common stock.
(11) The shares beneficially owned by Mr. Gambon include (a) 626 shares
jointly held by Deborah A. Gambon and Mr. Gambon, (b) 100 shares held in
Mr. Gambon's individual retirement account through Shoreline Bank, (c) 12
shares owned by Jennifer A. Gambon, (d) 12 shares owned by Mark E.
Gambon, (e) 12 shares owned by Lauren V. Gambon and (f) options to
purchase 810 shares of Wyckoff common stock.
(12) The shares beneficially owned by Mr. Ranck include options to purchase
1,050 shares of Wyckoff common stock.
(13) The shares beneficially owned by Mr. Flaming include options to purchase
1,050 shares of Wyckoff common stock.
(14) The shares beneficially owned by Mr. McClendon include options to
purchase 540 shares of Wyckoff common stock.
(15) The shares beneficially owned by Mr. Friederichsen include options to
purchase 1,027 shares of Wyckoff common stock.
(16) The shares beneficially owned by Mr. Annett include options to purchase
810 shares of Wyckoff common stock.
(17) The shares beneficially owned by Mr. Stiles include options to purchase
810 shares of Wyckoff common stock.
(18) The shares beneficially owned by all directors and executive officers as
a group include options to purchase 11,317 shares of Wyckoff common
stock.
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DESCRIPTION OF CATALYTICA CAPITAL STOCK
The authorized capital stock of Catalytica consists of (a) 120,000,000
shares of common stock, of which 73,000,000 have been designated common stock,
$0.001 par value, 30,000,000 have been designated class A common stock, $0.001
par value, and 17,000,000 have been designated class B common stock, $0.001 par
value, and (b) 5,000,000 shares of preferred stock, $0.001 par value, of which
100,000 shares have been designated as series A preferred stock.
Catalytica Common Stock
As of July , 1999, there were 53,607,226 shares of common stock
outstanding, including Catalytica's class A and class B common stock. After
giving effect to the transactions contemplated by the merger agreement, and
assuming no other issuances of common stock after June 14, 1999, there will be
approximately 58,103,713 shares of Catalytica common stock outstanding at the
time of the merger. Holders of Catalytica common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders except that, upon
giving of a notice required by law, stockholders may cumulate their votes in
elections of directors. Subject to preferences that may be applicable to the
class A and class B common stock described below and any preferred stock that
may be issued in the future, the holders of common stock are entitled to
receive dividends as may be lawfully declared and paid by the board of
directors.
If there occurs a liquidation, dissolution or winding up of Catalytica, and
subject to the prior rights of holders of the class A common stock and class B
common stock described below and any outstanding shares of preferred stock, the
holders of shares of common stock are entitled to receive pro rata all of the
remaining assets of Catalytica available for distribution to its stockholders.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of Catalytica common stock are fully paid and
non-assessable, and the shares of Catalytica common stock to be issued in the
merger will be fully paid and non-assessable. Each share of Catalytica common
stock has associated with it certain rights to acquire shares of Catalytica
capital stock under the Catalytica stockholder rights plan described below.
Catalytica Preferred Stock
Catalytica has 5,000,000 shares of preferred stock authorized, none of which
are outstanding as of the date of this proxy statement/prospectus. Catalytica's
board of directors has the authority to issue these shares of preferred stock
in one or more series and to fix the rights, qualifications, preferences,
privileges, limitations and restrictions of the preferred stock, including
dividend rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, number of shares in the series and designation of the
series, without any vote or action by the stockholders, subject to the class A
common stockholder's right to a class vote as described below. The Catalytica
board of directors, without approval of the common stockholders, may issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of common stock. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of Catalytica. Catalytica has initially designated 100,000 shares of
series A participating preferred stock, par value $0.001 per share, for
potential issuance pursuant to the exercise of rights under the rights plan, as
described below.
Catalytica Class A Common Stock
As of July 14, 1999, there were 13,270,000 shares of class A common stock
outstanding, all of which were held by Morgan Stanley Dean Witter and its
affiliates. The class A common stock has the following rights and preferences:
Voting
The class A common stock votes together with the common stock as a single
class on all matters submitted to a vote of the common stock holders . Holders
of class A common stock are entitled to the number
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of votes equal to the number of shares of common stock into which their shares
of class A common stocks are convertible. Also, if Morgan Stanley Dean Witter
owns in the aggregate not less than 20% of Catalytica's outstanding common
stock, the holders of the class A common stock are entitled to a separate class
vote for:
. the issuance of any stock that has rights senior to or in parity with
the class A or class B common stock
. any changes to Catalytica's certificate of incorporation that would
adversely affect the rights of the class A or class B common stock
. any merger or consolidation that has an effect on the class A or class B
common stock substantially similar to the first two bullets above
. arrangements which would affect the capital structure or financing of
the operations of Catalytica in excess of $5.0 million annually, other
than an extension or renewal of any existing indebtedness
. changes to the aggregate cash or equity compensation of senior corporate
officers of Catalytica and its subsidiaries
. merger or consolidation of Catalytica with or into another corporation
or the sale, transfer or lease of all or substantially all of the assets
of Catalytica
Dividends
If a dividend is paid on the common stock, the holders of the class A common
stock are entitled to receive an amount equal to the amount which would have
been paid had the class A common stock been converted to common stock before
the dividend was paid.
Conversion
Each share of class A common stock may be converted at the option of the
holder into shares of common stock at the then-effective conversion price. Each
share of class A common stock will automatically convert into common stock (a)
upon any transfer by Morgan Stanley Dean Witter, including any distribution to
its partners or affiliated entities or (b) if less than 10% of the shares of
class A common stock initially issued are outstanding. The class A common stock
will convert into common stock on a one-for-one basis, subject to adjustment as
described below.
Liquidation Preference
The liquidation preference of the class A common stock ranks senior to
Catalytica's common stock and preferred stock, unless agreed to by Morgan
Stanley Dean Witter. The liquidation preference of the class A common stock
will be equal to the greater of (a) $4.00 per share plus any accrued and unpaid
dividends and (b) the amount that holders would have received in the
liquidation had the class A common stock been converted to common stock before
the liquidation. Any merger, consolidation or other business combination which
results in Catalytica stockholders immediately before the transaction owning
less than 50% of the total voting power of the surviving corporation or the
sale of all or substantially all of Catalytica's assets will trigger the
liquidation preference.
Right to Request Repurchase
At any time after July 1, 2005, the holders of the class A common stock will
have the right to require Catalytica, upon six months' written notice, to
repurchase during any one-year period beginning July 1 and ending June 30, up
to one-third of the initial outstanding shares of class A common stock and
class B common stock for an amount in cash equal to the liquidation preference.
In addition, upon a change of control, Morgan Stanley Dean Witter shall have
the right to cause Catalytica to purchase all of the shares of class A common
stock and class B common stock initially acquired by Morgan Stanley Dean Witter
at the liquidation preference.
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Board Representation
The holders of class A and class B common stock are entitled to designate as
nominees for election:
. three persons to Catalytica's board of directors for so long as the
equity funds own at least 30% of the outstanding common stock of
Catalytica
. two persons to Catalytica's board of directors for so long as such funds
own between 10% and 30% of the outstanding common stock of Catalytica or
. one person to Catalytica's board of directors for so long as they own
between 6% and 10% of the outstanding common stock of Catalytica.
The percentages are calculated assuming conversion of the class A and class
B common stock into common stock of Catalytica.
Other Terms
Appropriate adjustments shall be made to the liquidation and conversion
rights of the class A common stock in cases of (a) stock splits,
reclassifications, stock dividends, rights offerings and similar events to
existing holders of common stock and (b) issuance of common stock or securities
convertible into common stock at less than fair market value at the time of
issuance, except shares or options issued:
. upon conversion of the class A common stock or class B common stock
. to employees, officers, directors and consultants of Catalytica pursuant
to employee stock incentive plans or agreements
. as a dividend or distribution on the class A common stock or class B
common stock
. in connection with the acquisition of the assets or voting securities of
another corporation or entity
. upon exercise of warrants issued to Glaxo Wellcome
. to an underwriter in a transaction that results in gross proceeds in
excess of $5.0 million to Catalytica.
Catalytica's Class B Common Stock
As of July 14, 1999 there were 11,730,000 shares of class B common stock
outstanding, all of which were held by Morgan Stanley Dean Witter Capital
Partners and its affiliates.
The class B common stock has the same powers, preferences and rights as the
class A common stock, except that the class B common stock is convertible into
class A common stock and has no voting rights (except as required by Delaware
law and for changes to Catalytica's certificate of incorporation which would
adversely affect the rights, powers or privileges of the class B common stock).
The shares of class B common stock will, upon any transfer of the shares by
Morgan Stanley Dean Witter, be automatically converted into common stock. The
shares of class B common stock are convertible at the option of Morgan Stanley
Dean Witter into common stock or class A common stock only if the conversion
results in Morgan Stanley Dean Witter holding 40% or less of Catalytica's
outstanding voting securities.
Warrants
In connection with the acquisition of the Greenville facility, Catalytica
issued warrants to Glaxo Wellcome to purchase 2,000,000 shares of Catalytica's
common stock at an exercise price of $12.00 per share. These warrants expire on
July 31, 2003.
Registration Rights
In July 1997, Glaxo Wellcome was granted certain registration rights in
connection with the issuance of a warrant to purchase 2,000,000 shares of
Catalytica's common stock. In particular, if Catalytica proposes to register
any of its securities under the Securities Act, either for its own account or
the account of other security holders exercising registration rights, Glaxo
Wellcome is entitled to notice of the registration and is entitled to
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include shares of its common stock in the registration. In these situations,
the underwriters have the right to limit the number of shares included in the
registration statement based on marketing factors. In addition, Glaxo Wellcome
may require Catalytica to file a registration statement on Form S-3 under the
Securities Act with respect to all 2,000,000 shares, if the anticipated
aggregate price to the public of the registration statement would exceed $1.0
million. Catalytica is required to use commercially reasonable efforts to
effect the registration, subject to certain conditions and limitations,
including, but not limited to, applicable securities laws.
In addition, Morgan Stanley Dean Witter has the right to request that
Catalytica register shares of common stock issuable upon conversion of the
class A and class B common stock held by it with an aggregate offering price
of at least $15.0 million. Morgan Stanley Dean Witter is entitled to four
registration requests. A registration request may not be made within six
months of any other registration request. In addition, if Catalytica proposes
to register any of its securities for its own account or the account of any of
its stockholders (other than certain registrations relating solely to a stock
option or other similar employee benefit plan), Morgan Stanley Dean Witter
will have the right, upon a timely request and subject to a right of priority
in favor of Catalytica, to include the common stock issuable upon conversion
of the class A and class B common stock in the registration. The expenses of
registration will be borne by Catalytica, but any underwriters' fees,
discounts or commissions will be borne by Morgan Stanley Dean Witter.
Exchange Rights held by Stockholders of Catalytica Pharmaceuticals and
Catalytica Combustion Systems
Enron, Glaxo Wellcome and Pfizer, the holders of preferred stock of
Catalytica Pharmaceuticals and Catalytica Combustion Systems, are entitled to
exchange their preferred stock into Catalytica common stock if certain terms
and conditions are met. The exchange rate is based upon the fair value of the
preferred stock and the market value of Catalytica's common stock at the time
of the exchange.
Catalytica Stockholder Rights Plan
Under Catalytica's stockholder rights plan, each share of Catalytica common
stock has associated with it rights to acquire shares of series A
participating preferred stock. The rights are triggered and become exercisable
upon the earlier of:
. 10 days (or a later date as determined by the board of directors)
following a public announcement that a person or group of affiliated or
associated persons (an "acquiring person") has acquired, or obtained the
right to acquire, beneficial ownership of 20% or more of the outstanding
Catalytica common stock
. 10 business days (or a later date as determined by the board of
directors) following the commencement of, or announcement of an
intention to make, a tender or exchange offer for 20% or more of the
beneficial ownership of the outstanding common stock of Catalytica by an
acquiring person
If the rights are triggered, each right will provide its holder, other than
a holder who is an acquiring person, the right to purchase that number of
shares of Catalytica common stock having a market value at the time equal to
twice the exercise price, upon payment of the exercise price of $25.00 per
right. In addition, in the event of certain business combinations, the rights
permit the purchase of shares of common stock of an acquirer at a 50% discount
from the market price at the time. The Catalytica board of directors has the
right to redeem the rights at a price of $0.001 per right at any time before
the close of business on the tenth day after the first public announcement
that a person has become an acquiring person, or at a later time as determined
by the Catalytica board of directors. If the rights are triggered under
certain circumstances, the Catalytica board of directors may elect to exchange
each right (other than rights held by an acquiring person) for one share of
Catalytica common stock. The rights expire on October 23, 2006. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Catalytica.
Transfer Agent and Registrar
The Transfer Agent and Registrar for Catalytica's common stock is
ChaseMellon Shareholder Services, L.L.C.
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DESCRIPTION OF WYCKOFF CAPITAL STOCK
Wyckoff's authorized capital stock consists of 5,000,000 shares of common
stock, without par value. On July 14, 1999, 283,929 shares of common stock were
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of shareholders. Shareholders do not have the
right to cumulate their votes. The holders of outstanding shares are entitled
to receive dividends out of assets legally available for distribution times and
in amounts as the Wyckoff board may from time to time determine. If Wyckoff
liquidates, dissolves or is wound up, the holders of shares of Wyckoff common
stock are entitled to receive pro rata all of the remaining assets of Wyckoff
available for distribution to shareholders. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of
Wyckoff common stock are fully paid and non-assessable. The shareholders have
no preemptive or subscription rights to purchase any securities of Wyckoff.
Wyckoff does not have preferred stock.
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COMPARISON OF RIGHTS OF HOLDERS OF CATALYTICA COMMON STOCK
AND WYCKOFF COMMON STOCK
If the merger is completed, you will become stockholders of Catalytica. The
rights of Catalytica stockholders are governed by Catalytica's certificate of
incorporation and bylaws. These documents differ in certain material respects
from Wyckoff's articles of incorporation and bylaws. In addition, the rights of
stockholders of Catalytica, a Delaware corporation, are governed by Delaware
law, whereas the rights of shareholders of Wyckoff, a Michigan corporation, are
governed by Michigan law.
The following comparison of Delaware corporate law, Catalytica's certificate
of incorporation and bylaws, on the one hand, and Michigan corporate law,
Wyckoff's articles of incorporation and bylaws, on the other, is not intended
to be complete and is qualified in its entirety by reference to Catalytica's
certificate of incorporation and bylaws and Wyckoff's articles of incorporation
and bylaws. Copies of these documents are available upon request.
Preferential Rights of Holders of Catalytica's Class A Common Stock
The rights of holders of Catalytica common stock are subject to the rights
of Morgan Stanley Dean Witter as sole holder of Catalytica's class A common
stock. Morgan Stanley Dean Witter has rights to representation on Catalytica's
board of directors and rights to a separate class vote on certain merger and
financing transactions. See "Description of Catalytica Capital Stock--
Catalytica Class A Common Stock."
Amendments to Catalytica's and Wyckoff's Corporate Charters
The board of directors of a Delaware corporation must propose an amendment
to the certificate of incorporation before stockholders have the option to
amend the certificate. Shareholders of a Michigan corporation, on the other
hand, can amend the articles of incorporation without prior action by the
board. Both Delaware and Michigan law require a majority vote of the
outstanding stock entitled to vote to amend the corporate charter.
Amendments to Bylaws
Delaware law provides that (a) the stockholders have the power to amend the
bylaws of a corporation and (b) a corporation's certificate of incorporation
may provide the board of directors with the authority to amend the bylaws,
subject to the stockholders' right to do the same. Catalytica's certificate of
incorporation provides that the bylaws may be amended by a majority of the
board or a majority of the stockholders entitled to vote on the election of
directors.
Michigan law provides that the shareholders or the board of directors of a
corporation may amend the bylaws, unless the corporation's articles of
incorporation provide that the power to adopt new bylaws is reserved
exclusively to the shareholders or that the bylaws or any particular bylaw will
not be altered or repealed by the board. Wyckoff's bylaws provide that a
majority of the board or the shareholders entitled to vote can amend the
bylaws.
Dividends
Delaware law permits a corporation to pay dividends out of surplus, or, if
there is no surplus, out of net profits for the fiscal year in which the
dividends are declared and/or for the preceding fiscal year. However, if the
amount of capital of the corporation following the declaration and payment of
the dividend is less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets, the directors may not declare and pay out a dividend
from the corporation's net profits.
Michigan law provides that distributions are prohibited if (a) the
corporation would not be able to pay its debts as the debts become due in the
usual course of business or (b) unless the articles permit otherwise, the
corporation's total assets would be less than the sum of the corporation's
liabilities and an amount required to
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satisfy preferential rights upon a distribution of shareholders whose
preferential rights are superior to those receiving the distribution.
Limitation of Personal Liability of Directors
Delaware law provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director for monetary
damages for breach of fiduciary duty but not for:
. breach of the duty of loyalty to the corporation or its stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or knowing violation of the law
. violation of certain provisions of Delaware law
. any transaction from which the director derived an improper personal
benefit
. any act or omission before the adoption of such a provision in the
certificate of incorporation
Catalytica's certificate of incorporation provides that, to the fullest
extent permitted by law, a director will not be liable to Catalytica or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director.
Similarly, Michigan law provides that a corporation's articles of
incorporation may include a provision limiting the personal liability of a
director. Michigan law provides that a corporation can not limit the liability
of a director for:
. the amount of a financial benefit received by a director to which the
director is not entitled
. the intentional infliction of harm on the corporation or its
shareholders
. an illegal dividend or distribution
. an intentional criminal act
Wyckoff's articles of incorporation provide that, to the fullest extent
provided by law, a director will not be liable to Wyckoff or its shareholders
for monetary damages in breach of the director's fiduciary duties.
Indemnification
Under Delaware law, a corporation may indemnify a director, officer,
employee or agent who is a party to a lawsuit by virtue of his position with
the corporation, except for a derivative action by or in the right of the
corporation, for expenses, judgments, fines and settlements. Before a
corporation can indemnify that person, a majority of disinterested directors,
independent legal counsel or a majority of the stockholders must determine that
the person acted in good faith and in a manner that person reasonably believed
to be in the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. In a derivative action, a Delaware corporation only can
indemnify the person for expenses incurred in his or her defense or settlement,
and not the amount of the settlement itself. Without court approval, however,
no indemnification may be made in any derivative action in which the person is
found liable for negligence or misconduct in the performance of the person's
duty to the corporation. A Delaware corporation must indemnify a director,
officer, employee or agent when that person has successfully defended the
lawsuit on the merits or otherwise.
Under Michigan law, a corporation may indemnify a director, officer,
employee or agent in a similar, but not identical, manner as a Delaware
corporation. A Michigan corporation, unlike a Delaware corporation, can
reimburse amounts paid in settlement of a derivative action. As noted above,
only expenses can be reimbursed for a settled derivative lawsuit in Delaware.
Michigan law also contains a provision specifically mandating court-ordered
indemnification where the court believes the person seeking indemnification
reasonably is entitled to be reimbursed, based on all relevant circumstances.
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Interested Director Transactions
Under both Delaware and Michigan law, contracts or transactions between a
corporation and its directors or any other entity in which its directors have a
financial interest are not void or voidable merely because of the interest or
because the director is present at the board meeting that authorizes or
approves the contract or transaction, if conditions, such as disclosure and
approval, are met. Under both Delaware and Michigan law, either (a) the
stockholders or the board must approve any contract or transaction after full
disclosure of the material facts or (b) the contract or transaction must have
been fair to the corporation at the time it was approved. In Delaware, the
board or stockholder approval must be made in good faith.
Under both Delaware and Michigan law, if board approval is sought, the
transaction must be approved by an affirmative vote of the majority of
disinterested directors (even if less than a quorum). In Michigan, an
affirmative vote of all disinterested independent directors also qualifies as
board approval. Under Michigan law, if shareholder approval is sought, the
transaction must be approved by the majority of votes cast by disinterested
shareholders. A majority of the shares held by disinterested shareholders
constitutes a quorum.
Derivative Actions
A derivative lawsuit is one brought by a stockholder on a corporation's
behalf, alleging that someone has injured the corporation. Courts treat a
derivative lawsuit as being brought by the corporation itself, since the injury
the lawsuit seeks to repair is an injury to the corporation. Both Delaware and
Michigan provide rules on when and how a stockholder can bring a derivative
suit on behalf of a corporation. In Delaware, a stockholder usually must demand
that the corporation bring the lawsuit itself. If the corporation refuses to
bring the lawsuit, the stockholder can then bring a derivative suit. Delaware
courts have stated that a stockholder may be excused from demanding that the
corporation bring the lawsuit if it would be futile for the stockholder to make
the demand. In addition, the plaintiff must have owned stock in the corporation
at the time of the transaction giving rise to the lawsuit.
Michigan law requires a shareholder to demand that the corporation bring a
derivative lawsuit and provides a system for evaluating shareholder demands.
Under this system, whether the lawsuit would be in the best interests of the
corporation is determined by any one of four different sources, with certain
limitations placed on each:
. disinterested directors
. majority vote of a committee of two or more disinterested directors if
appointed by a majority of disinterested directors
. panel of disinterested persons appointed by the court upon the
corporation's motion
. all disinterested independent directors
If bringing the lawsuit would not be in the best interests of the
corporation, the court will dismiss the lawsuit.
Michigan, like Delaware, requires that the plaintiff have been a shareholder
at the time of the transaction giving rise to the lawsuit. Michigan further
requires that, with limited exceptions, the plaintiff continue to own shares in
the corporation until the lawsuit is resolved.
Attachment of Shares
Delaware law provides that the stock of a corporation may be attached by any
Delaware court, thereby giving Delaware courts jurisdiction over nonresident
holders of stock of corporations organized in Delaware. Michigan law has no
comparable provision.
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Filling Vacancies in the Board of Directors
Under both Delaware and Michigan law, vacancies resulting from an increase
in the number of directors may be filled by a majority vote of the directors
then in office, even if the number of directors in office is less than a
quorum. Both Delaware and Michigan law also provide that unless the certificate
or articles of incorporation or bylaws otherwise provide, vacancies occurring
due to the removal of directors with or without cause may be filled by a
majority vote of the directors then in office. In addition, under Delaware law,
if, at the time of filling any vacancy or newly created directorship, the
directors then in office constitute less than a majority of the entire board of
directors, a court may, upon application of any stockholders holding at least
10% of the total number of shares outstanding at the time and entitled to vote,
summarily order an election to be held to fill the vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
Catalytica's bylaws provide that vacancies created by the removal of a
director by the vote or written consent of the stockholders or by court order
may be filled only by a vote or written consent of the majority of the shares
entitled to vote. Wyckoff's bylaws do not have a similar provision.
Stockholder/Shareholder Meetings
Under Delaware law, if an annual meeting is not held within 30 days of the
date set for the meeting, or if not held for a period of 13 months after the
last annual meeting, a court may, upon the application of any stockholder or
director, order a meeting to be held. Michigan law provides that if a
corporation's annual meeting is not held for 90 days after the designated date
or for 15 months after its last annual meeting, a court may order the meeting
or election to be held upon application by a shareholder.
Under Delaware and Michigan law, special meetings of stockholders or
shareholders may be called by the board of directors and persons authorized by
the charter or the bylaws. Both Catalytica's and Wyckoff's bylaws provide that
special meetings may be called at any time by the chairperson or president or
by holders of 10% of the shares entitled to vote.
Cumulative Voting
If a corporation has cumulative voting provisions, each share of stock is
entitled to the number of votes equal to the number of directors to be elected.
A shareholder may then cast all votes for a single candidate or may allocate
them among as many candidates as the shareholder may choose. Without cumulative
voting, the holders of a majority of the shares present at any annual meeting
or any special meeting held to elect directors would have the power to elect
the directors, and no person could be elected without the support of holders of
a majority of the shares voting at the meeting.
Under both Delaware and Michigan law, cumulative voting in the election of
directors is not mandatory but is a permitted option. Catalytica's charter
provides that stockholders are entitled to cumulate votes if the candidates'
names have been properly placed in nomination and if the stockholder requesting
cumulative voting has given notice before the commencement of the voting of the
stockholder's intention to cumulate votes. In contrast, Wyckoff's bylaws
provide that shareholders may not cumulate votes.
Stockholders' List
Under Delaware law, a stockholders' list must be prepared at least 10 days
before the relevant stockholders' meeting. Stockholders, as well as their
agents or attorneys, are entitled to inspect and copy the list for proper
purposes. Under Michigan law, a shareholders' list need only be prepared in
time for, and be available for inspection at, the shareholders' meeting.
Action by Written Consent
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action which may be taken at a meeting of stockholders may be
taken without a vote, without a meeting and without prior notice,
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with the written consent of the minimum number of votes that would be necessary
to take the action at a meeting at which all shares entitled to vote were
present and voted. Catalytica's charter does not provide otherwise.
Under Michigan law, any shareholder action required or permitted to be taken
by shareholder vote may be taken with the unanimous written consent of the
shareholders. The articles of incorporation may provide that shareholder action
may be taken upon the written consent of holders of the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Wyckoff's articles
do not so provide.
Vote Required for Mergers
Delaware and Michigan law generally require the affirmative vote of a
majority of a corporation's outstanding shares entitled to vote, unless the
charter requires a greater percentage, to authorize a merger, share exchange or
sale of all or substantially all of its assets. However, unless required by its
charter, no stockholder vote is required of a corporation surviving a merger
if: (a) the corporation's charter is not amended by the merger; (b) each share
of stock of the corporation will be an identical share of the surviving
corporation after the merger; and (c) under Delaware law, the number of shares
to be issued in the merger does not exceed 20% of the corporation's outstanding
common stock immediately before the effective date of the merger. Neither
Catalytica's nor Wyckoff's charter requires a supermajority vote to approve a
merger.
Dissenters' Rights
Under Delaware law, a dissenting stockholder may demand appraisal of the
fair value of his or her shares if the stockholder has voted against a merger
or consolidation. Delaware law does not provide appraisal rights in connection
with sales of substantially all of the assets of a corporation.
Under Michigan law, a shareholder who does not vote in favor of certain
corporate actions may have the right to obtain an appraisal of those shares in
certain circumstances, and the right to receive cash in exchange for those
shares. Michigan law recognizes rights of dissent in connection with certain
amendments to the articles of incorporation, mergers, consolidations, sales or
other dispositions of all or substantially all of the assets of a corporation,
certain acquisitions for stock and approval of a control share acquisition.
The primary exception to the rights of appraisal or dissent under both
Delaware and Michigan law is the "market out" exception. Under the "market out"
exception in Delaware, a stockholder of a corporation whose stock is listed on
a national securities exchange, designated as a national market system security
on the Nasdaq National Market or held by more than 2,000 stockholders of record
will not have appraisal rights if the stock received in the merger is listed on
a national securities exchange, designated as a national market system or
widely held. In Michigan, a shareholder does not have rights of dissent if the
shareholder receives in connection with a merger cash or shares that are listed
on a national securities exchange or designated as a national market system
security.
Transfer of Assets to Another Entity
Delaware law requires approval by the board of directors and a majority of
the outstanding shares entitled to vote for any sale, lease or exchange of all
or substantially all corporate assets. Michigan law requires shareholder
approval for those transfers of assets which are not in the corporation's usual
and regular course of business.
114
<PAGE>
Stockholder Rights Plan
The board of directors of Catalytica has adopted a stockholder rights plan.
This plan is designed to protect the stockholders of Catalytica against
unsolicited attempts to acquire control of Catalytica in a manner that does not
offer a fair price to all stockholders. See "Description of Catalytica Capital
Stock--Catalytica Stockholders Rights Plan."
Wyckoff has not adopted a similar shareholder rights plan.
State Anti-Takeover Laws
The laws of Delaware and Michigan differ in their treatment of certain anti-
takeover measures.
Catalytica is subject to Section 203 of the Delaware General Corporation Law
which may make it more difficult for a person who would be an "interested
stockholder," as defined in Section 203, in Catalytica, to effect various
business combinations, such as a merger, sale of assets or stock transfer to an
interested stockholder, with Catalytica for a three-year period. Under Delaware
law, a corporation's certificate of incorporation or bylaws may exclude a
corporation from the restrictions imposed by Section 203. Catalytica's
certificate of incorporation and bylaws do not exclude Catalytica from the
restrictions imposed under Section 203.
Wyckoff is subject to the Fair Price Act under Michigan law, which has
similar provisions making it more difficult for an "interested shareholder," as
defined in Chapter 7A of the Fair Price Act, to effect similar types of
business combinations.
Delaware and Michigan law differ in the following respects:
. An "interested shareholder" is a shareholder who holds 15% of the
outstanding voting stock under Delaware law and 10% under Michigan law.
. Section 203 does not apply if the business combination is approved by
holders of 2/3 of the disinterested shares. Chapter 7A requires approval
by 90% of the shares entitled to vote and 2/3 of the disinterested
shares.
. Section 203 does not apply if the interested person acquires 85% of the
voting stock of the corporation. Thus, Section 203 provides a mechanism
for an acquirer to make a tender offer for shares of the corporation and
attain an 85% response. Chapter 7A does not contain such a provision.
. Section 203 does not prevent the interested stockholder from replacing
the board of directors of the corporation and obtaining the required
approval for the business combination.
. Section 203 does not apply after the board of directors approves a
competing bid.
Dissolution
Under Delaware law, until the board approves a proposal to dissolve, a
dissolution must be unanimously approved by all the stockholders entitled to
vote on the dissolution. If the board approves the dissolution, it may be
approved by a simple majority of the outstanding shares of the corporation's
stock entitled to vote. In the event of such board-initiated dissolution,
Delaware law allows a corporation to include in its certificate of
incorporation a supermajority voting requirement in connection with
dissolution. Catalytica's charter does not include this provision.
Under Michigan law, to dissolve a corporation by shareholder vote, the board
must first recommend the dissolution to the shareholders. The dissolution must
then be approved by the affirmative vote of the holders of a majority of the
shares entitled to vote.
115
<PAGE>
EXPERTS
The consolidated financial statements of Wyckoff for the years ended June
30, 1999, 1998 and 1997 included in this proxy statement/prospectus have been
included in reliance on the report of BDO Seidman LLP, independent accountants,
given upon the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Catalytica at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
appearing in this proxy statement/prospectus have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon the report given on the
authority of such firm as experts in accounting and auditing.
The financial statements of GENXON Power Systems, L.L.C. as of September 30,
1998 and 1997 and for the year ended September 30, 1998 and for the period from
October 21, 1996 (since inception) to September 30, 1997 included in this proxy
statement/prospectus have been so included in reliance on the report (which
contains an explanatory paragraph relating to Genxon Power Systems, L.L.C.'s
ability to continue as a going concern as described in Note 2 to the Notes to
GENXON Financial Statements) of PricewaterhouseCoopers, L.L.P., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the Catalytica common stock issuable in the merger will be
passed on by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Warner Norcross & Judd LLP, Grand Rapids, Michigan, is acting as counsel for
Wyckoff in connection with certain legal matters relating to the merger and the
transactions contemplated thereby.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This proxy statement/prospectus contains "forward-looking statements" within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to expectations concerning matters that are not
historical facts. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot give any assurance that
the expectations will prove to be correct. Important factors that could cause
actual results to differ materially from these expectations are disclosed in
this proxy statement/prospectus under "Risk Factors" and elsewhere.
In evaluating the merger, you should carefully consider the discussion of
risks and uncertainties in the section entitled "Risk Factors" beginning on
page 13 above.
116
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Catalytica files annual, quarterly and other current reports, proxy
statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the public reference rooms
of the SEC located at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, IL 60661
</TABLE>
Copies of this material also can be obtained from the SEC Public Reference
Section at the Washington, D.C. address noted above at prescribed rates.
Information regarding the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that
contains reports, proxy statements and other information regarding Catalytica.
The address of the website is http://www.sec.gov.
Catalytica has filed with the SEC a registration statement on Form S-4 under
the Securities Act with respect to the common stock to be issued in the merger.
This proxy statement/prospectus does not contain all of the information set
forth in the registration statement because certain parts of the registration
statement are omitted in accordance with the rules and regulations of the SEC.
For further information with respect to Catalytica, refer to the registration
statement and the exhibits and schedules filed therewith. The registration
statement and exhibits are available for inspection and copying as noted above.
Catalytica's common stock is quoted for trading on the Nasdaq National
Market under the symbol "CTAL." Accordingly, reports, proxy statements and
other information concerning Catalytica may be inspected at:
The National Association of Securities Dealers
1753 K Street, N.W.
Washington, D.C. 20006
Wyckoff shareholders can call Ronald L. Hartgerink, Chairman and Chief
Executive Officer of Wyckoff, at (616) 637-8474 with any questions about the
merger.
We have not authorized anyone to give any information or to make any
representation other than as contained in this proxy statement/prospectus in
connection with the merger and related transactions. If anyone gives any
information or makes representations, you must not regard it as having been
authorized by Catalytica or Wyckoff. Neither the delivery of this proxy
statement/prospectus nor any distribution of securities made hereunder shall,
under any circumstances, create an implication that there has been no change in
the facts herein set forth since the date of this proxy statement/prospectus.
This proxy statement/prospectus does not constitute an offer to sell or a
solicitation of an offer to buy securities where, or to any person to whom, it
is unlawful to make such an offer or solicitation.
117
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements of Wyckoff Chemical Company, Inc.:
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Summary of Accounting Policies............................................. F-8
Notes to Consolidated Financial Statements................................. F-10
Financial Statements of Catalytica, Inc.:
Report of Ernst & Young LLP, Independent Auditors.......................... F-18
Consolidated Statements of Operations...................................... F-19
Consolidated Balance Sheets................................................ F-20
Consolidated Statements of Cash Flows...................................... F-22
Consolidated Statements of Stockholders' Equity............................ F-24
Note to Consolidated Financial Statements.................................. F-25
Financial Statements of Genxon Power Systems, L.L.C.:
Report of Independent Accountants.......................................... F-51
Balance Sheets............................................................. F-52
Statements of Operations................................................... F-53
Statements of Members' Capital............................................. F-54
Statements of Cash Flows................................................... F-55
Note to Financial Statements............................................... F-56
Financial Statement Schedules:
Catalytica, Inc............................................................ F-59
Wyckoff Chemical Company, Inc.............................................. F-60
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Wyckoff Chemical Company, Inc.
South Haven, Michigan
We have audited the consolidated balance sheets of Wyckoff Chemical Company,
Inc. and Subsidiary (the Company) as of June 30, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1999. Our audits also
included the financial statement schedule listed in the Index to the Financial
Statements. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wyckoff
Chemical Company, Inc. and Subsidiary, at June 30, 1999 and 1998, and the
results of its operations and its cash flows for the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
BDO Seidman LLP
July 23, 1999
Kalamazoo, Michigan
F-2
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Assets (Notes 4 and 5)
Current:
Cash................................................. $ 290,000 $ 305,000
Accounts receivable, less allowance of $34,000 and
$22,000............................................. 8,240,000 5,618,000
Inventories (Note 3)................................. 7,513,000 6,307,000
Prepaid expenses..................................... 127,000 164,000
----------- -----------
Total Current Assets................................... 16,170,000 12,394,000
----------- -----------
Property and Equipment:
Land and improvements................................ 1,139,000 1,104,000
Buildings and improvements........................... 11,276,000 8,208,000
Machinery and equipment.............................. 34,261,000 25,399,000
Construction projects in progress (estimated cost to
complete $4,096,000 as of June 30, 1999)............ 1,286,000 3,878,000
----------- -----------
47,962,000 38,589,000
Less accumulated depreciation........................ 20,503,000 17,589,000
----------- -----------
Net Property and Equipment............................. 27,459,000 21,000,000
----------- -----------
Other--Bond issue costs (net of accumulated
amortization of $66,000 and $30,000).................. 153,000 178,000
----------- -----------
$43,782,000 $33,572,000
=========== ===========
</TABLE>
F-3
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ -----------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.................................... $ 2,644,000 $ 1,853,000
Line-of-credit (Note 4)............................. 1,000,000 500,000
Accruals:
Compensation and taxes thereon.................... 858,000 345,000
Profit sharing.................................... 213,000 145,000
Taxes other than income taxes..................... 50,000 61,000
Other............................................. 220,000 75,000
Income taxes...................................... 819,000 311,000
Interest.......................................... 32,000 42,000
Current portion of long-term debt (Note 5).......... 2,464,000 1,340,000
------------ -----------
Total Current Liabilities............................. 8,300,000 4,672,000
Long-Term Debt, less current portion (Note 5)......... 10,822,000 7,109,000
Postretirement Benefits (Note 9)...................... 388,000 349,000
Deferred Income Taxes (Note 7)........................ 2,598,000 2,358,000
------------ -----------
Total Liabilities..................................... 22,108,000 14,488,000
------------ -----------
Commitments (Notes 8 and 9)
Shareholders' Equity:
Common stock (5,000,000 shares authorized; 283,929
shares outstanding at June 30, 1999 and 283,488
shares outstanding at
June 30, 1998) (Note 6)............................ 284,000 283,000
Additional paid-in capital.......................... 2,095,000 2,060,000
Retained earnings................................... 19,295,000 16,741,000
------------ -----------
Total Shareholders' Equity............................ 21,674,000 19,084,000
------------ -----------
$ 43,782,000 $33,572,000
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales................................. $36,524,000 $31,429,000 $29,041,000
Cost of Sales............................. 24,951,000 21,454,000 19,678,000
----------- ----------- -----------
Gross profit............................ 11,573,000 9,975,000 9,363,000
Research and Development Expenses......... 1,810,000 1,451,000 1,163,000
Selling and Administrative Expenses....... 4,974,000 4,004,000 3,595,000
----------- ----------- -----------
Operating profit.......................... 4,789,000 4,520,000 4,605,000
Interest Expense, net of interest
income of $51,000, $111,000
and $120,000............................. 608,000 584,000 607,000
----------- ----------- -----------
Income before taxes on income............. 4,181,000 3,936,000 3,998,000
Taxes on Income (Note 7).................. 1,290,000 1,066,000 1,296,000
----------- ----------- -----------
Net Income.............................. $ 2,891,000 $ 2,870,000 $ 2,702,000
=========== =========== ===========
Net Income per Share (Note 11):
Basic................................... $ 10.19 $ 10.09 $ 9.47
=========== =========== ===========
Diluted................................. $ 10.08 $ 10.00 $ 9.39
=========== =========== ===========
Number of shares used in computing net
income
per share:
Basic................................... 283,614 284,324 285,317
=========== =========== ===========
Diluted................................. 286,835 287,045 287,793
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------- Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996.. 285,185 $285,000 $2,234,000 $11,853,000 $14,372,000
Issuance of common
stock................ 269 -- 21,000 -- 21,000
Net income............ -- -- -- 2,702,000 2,702,000
Dividends, $1.20 per
share................ -- -- -- (342,000) (342,000)
------- -------- ---------- ----------- -----------
Balance, June 30, 1997.. 285,454 285,000 2,255,000 14,213,000 16,753,000
Issuance of common
stock................ 76 -- 7,000 -- 7,000
Repurchase of common
stock................ (2,042) (2,000) (202,000) -- (204,000)
Net income............ -- -- -- 2,870,000 2,870,000
Dividends, $1.20 per
share................ -- -- -- (342,000) (342,000)
------- -------- ---------- ----------- -----------
Balance, June 30, 1998.. 283,488 283,000 2,060,000 16,741,000 19,084,000
Issuance of common
stock................ 441 1,000 35,000 -- 36,000
Net income............ -- -- -- 2,891,000 2,891,000
Dividends, $1.20 per
share................ -- -- -- (337,000) (337,000)
------- -------- ---------- ----------- -----------
Balance, June 30, 1999.. 283,929 $284,000 $2,095,000 $19,295,000 $21,674,000
======= ======== ========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities (Note 10):
Net income............................ $ 2,891,000 $ 2,870,000 $ 2,702,000
Adjustments to reconcile net income to
cash provided by operating
activities:
Depreciation and amortization....... 3,440,000 2,965,000 2,688,000
Bad debts........................... 12,000 10,000 (33,000)
(Gain) loss on sale of assets....... 20,000 (2,000) 1,000
Stock option expense................ 10,000 -- 7,000
Stock compensation plan expense..... 25,000 7,000 14,000
Postretirement benefit expense...... 39,000 83,000 45,000
Deferred income taxes............... 240,000 208,000 284,000
Changes in assets and liabilities:
Accounts receivable............. (2,634,000) (832,000) 719,000
Inventories..................... (1,206,000) (112,000) (1,200,000)
Prepaid expenses and other
assets......................... (61,000) (41,000) (274,000)
Accounts payable................ 207,000 (211,000) 39,000
Accruals........................ 1,213,000 (44,000) 386,000
----------- ----------- -----------
Cash Provided by Operating Activities... 4,196,000 4,901,000 5,378,000
----------- ----------- -----------
Investing Activities:
Capital expenditures.................. (9,217,000) (4,251,000) (3,534,000)
Proceeds from sale of property and
equipment............................ 5,000 4,000 5,000
----------- ----------- -----------
Cash Used in Investing Activities....... (9,212,000) (4,247,000) (3,529,000)
----------- ----------- -----------
Financing Activities:
Dividends paid........................ (337,000) (342,000) (342,000)
Net receipts/payments under line-of-
credit agreement..................... 500,000 500,000 (1,278,000)
Principal payments of long-term debt.. (1,339,000) (1,269,000) (8,334,000)
Issuance of long-term debt............ 6,176,000 -- 8,627,000
Issuance of common stock.............. 1,000 -- --
Purchase of common stock.............. -- (204,000) --
----------- ----------- -----------
Cash Provided by (Used in) Financing
Activities............................. 5,001,000 (1,315,000) (1,327,000)
----------- ----------- -----------
Increase (Decrease) in Cash............. (15,000) (661,000) 522,000
Cash, beginning of year................. 305,000 966,000 444,000
----------- ----------- -----------
Cash, end of year....................... $ 290,000 $ 305,000 $ 966,000
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Wyckoff
Chemical Company, Inc. and its subsidiary, Wyckoff Chemical Foreign Sales
Corporation. All material intercompany accounts and transactions are
eliminated.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Estimates
The preparation of consolidated 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 the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
Revenue Recognition
Revenue consists of product sales and is recognized upon shipment of
products.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs expensed
during the years ended June 30, 1999, 1998 and 1997, were $43,000, $102,000 and
$56,000, respectively.
Employee Benefit Plan
The Company has established an employee benefit plan under Internal Revenue
Code Section 501(c)(9) to provide accident and health insurance benefits to all
of its eligible employees. During the year ended June 30, 1997, the Company
changed its employee benefit plan from a self-funded plan to a fully insured
plan whereby monthly premiums are paid to an insurance carrier.
Taxes on Income
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amount and the
tax basis of assets and liabilities.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Earnings Per Share
Earnings per share is presented in accordance with 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 consolidated statements of
income. In general, Basic EPS excludes dilution created by common stock
equivalents. Diluted EPS reflects the potential dilution created by common
stock equivalents. All periods presented herein have been adjusted to reflect
the calculation of EPS in accordance with SFAS No. 128. See Note 11 for
reconciliation of the numerators and denominators for the Basic EPS and Diluted
EPS calculations.
Stock Based Compensation
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
Accounting for Stock-Based Compensation, which provides an alternative to APB
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation to employees. The Company has elected to account for
stock-based compensation to employees in accordance with APB Opinion 25.
Comprehensive Income
Effective April 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. As the
Company has no components of other comprehensive income, there are no
disclosure requirements involved in the Company's adoption of this Statement.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on results of operations or the financial position of the Company.
Segment Information
The Company adopted Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, in fiscal 1999. Statement No. 131
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise, and establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or group, in deciding how to allocate
resources and in assessing performance. The Company has determined that under
Statement No. 131, it operates in one segment of pharmaceutical manufacturing.
The Company's customers and operations are primarily in the United States.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
The Company develops, manufactures and markets a broad range of active
pharmaceutical ingredients and advanced fine chemical ingredients. The Company
sells its products and custom synthesis services worldwide through Wyckoff
Chemical Company, Inc. and its subsidiary Wyckoff Chemical Foreign Sales
Corporation to a number of pharmaceutical companies that sell both branded and
generic products, as well as to cosmetic companies and other fine chemical end-
users.
2. Concentrations of Credit Risk
A significant portion of the Company's business activity is comprised of
sales to a relatively few number of customers.
One customer in 1999, one customer in 1998 and three customers in 1997,
accounted for 10% or more of the Company's revenues as follows:
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
Customer 1999 1998 1997
-------- ---- ---- ----
<S> <C> <C> <C>
A.......................................................... 12% 8% 10%
B.......................................................... 8% 15% 19%
C.......................................................... 3% 7% 11%
</TABLE>
Concentrations of credit risk with respect to accounts receivable are
limited due to performance of on-going customer credit evaluations.
Historically, the Company has not experienced large losses related to trade
receivables from individual customers or from groups of customers in any
geographic areas.
The Company also has a significant portion of its business activity in sales
to foreign customers. Foreign sales for the years ended June 30, 1999, 1998 and
1997, comprise 13%, 16% and 10% of total sales, respectively. Historically, the
Company has not experienced losses related to trade receivables from foreign
sales.
3. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Finished products......................................... $3,108,000 $3,893,000
Work-in-process........................................... 2,102,000 990,000
Raw materials............................................. 2,303,000 1,424,000
---------- ----------
Total Inventories......................................... $7,513,000 $6,307,000
========== ==========
</TABLE>
F-10
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Line-of-Credit to Bank
At June 30, 1999, the Company has a $2,500,000 working capital line-of-
credit agreement with interest charged at the bank's prime rate (effectively
7.75%) at June 30, 1999. The outstanding borrowings at June 30, 1999 and 1998,
were $1,000,000 and $500,000. The working capital line-of-credit expires on
October 31, 1999.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Variable Rate Demand Notes, Series 1997, monthly
principal payments of $109,167, with variable interest
based on the market rate for similar bonds, (5.11% at
June 30, 1999), due February 1, 2004.................... $7,110,000 $8,449,000
$7,500,000 revolving secured term loan agreement with
interest charged at the bank's prime rate (effectively
7.75%) at June 30, 1999. The term loan is secured by
substantially all assets of the Company except real
estate. At October 31, 1999, the agreement provides for
the ability to convert to a long-term loan with
principal and interest payments over five years......... 6,176,000 --
----------- ----------
13,286,000 8,449,000
Less current portion.................................... 2,464,000 1,340,000
----------- ----------
Total Long-Term Debt.................................... $10,822,000 $7,109,000
=========== ==========
</TABLE>
On February 1, 1997, the Company issued, through First of America Brokerage
Service, Inc. (which subsequently became NatCity Investments, Inc.), Variable
Rate Demand Notes, Series 1997, to pay off its existing debt obligations. The
notes are secured by substantially all of the Company's assets and a letter of
credit from National City Bank for $10,454,000. The funds are available to the
Company for certain capital projects as defined in the financing agreement. The
remaining proceeds from the 1997 bond issuance were spent during the fiscal
year ended June 30, 1998, on qualified capital projects detailed in the
financing agreement. Interest is payable at alternative interest rate options
and the Company has the option to convert the variable interest rate to a fixed
rate under certain conditions defined in the financing agreement. The agreement
places certain restrictions on the Company relating to, among other things,
working capital, net worth, dividends and capital expenditures. The Company was
in violation of the capital expenditure covenants at June 30, 1999, but
received a waiver from the bank.
During the fiscal year ended June 30, 1999, the Company entered into a
$9,000,000 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 benchmark rate (based on the weighted average
daily rate of 30-day commercial paper) used to calculate the Company's
borrowing cost at 4.96% for 4.5 years on $9,000,000 of the Variable Rate Demand
Notes, Series 1997. The Company accounts for this interest rate swap as a
hedge, and accrues the interest rate differential as an adjustment to interest
expense on a monthly basis.
F-11
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate amounts of long-term debt due in each of the next five years
are as follows (current maturities related to the revolving secured term loan
have been assumed based on the five-year conversion option):
<TABLE>
<CAPTION>
Variable Revolving
Rate Secured
Demand Notes Term Loan
------------ ----------
<S> <C> <C>
2000................................................... $1,411,000 $1,053,000
2001................................................... 1,455,000 1,136,000
2002................................................... 1,530,000 1,228,000
2003................................................... 1,615,000 1,326,000
2004................................................... 1,705,000 1,433,000
---------- ----------
7,716,000 6,176,000
Less: Bond sinking Fund................................ (606,000) --
---------- ----------
$7,110,000 $6,176,000
========== ==========
</TABLE>
The Company is required to make monthly payments to a bond sinking fund held
in a trust to retire the bonds. The payments are based on a principal amount
and variable rate of interest. The aggregate amounts of payments to the bond
sinking fund due in each of the next five years are equal to the long-term debt
amounts noted above.
6. Stock Option Plans
During the fiscal year ended June 30, 1993, the Company established the
Wyckoff Chemical Company, Inc. 1993 Stock Option Plan (the "Plan"). Shares
reserved for the issuance of options under the Plan total 35,000. The Plan is
administered by a committee appointed by the Board of Directors. Under the
Plan, the Committee may grant stock options which are Incentive Stock Options
("ISOs") as defined in the Internal Revenue Code or options which do not
qualify as ISOs to outside directors of the Company.
The exercise price of options granted under the Plan may not be less than
100% of the fair market value of the common stock on the date the option is
granted. The grantee's right to exercise these options shall vest at a rate of
33 1/3% per year for the first three years as follows: 1/3 on and after six
months following the date of grant, 2/3 on and after one year from the date of
grant, and the final 1/3 on and after two years from the date of grant. These
options may be exercised at any time, in whole or in part during its term, to
the extent vested. The options expire 10 years from date of grant.
<TABLE>
<CAPTION>
ISO Nonqualified
--------------- -------------
Option Option
Price Price
per per
Date Granted Shares Share Shares Share
------------ ------ ------- ------ ------
<S> <C> <C> <C> <C>
June 30, 1997.................................... 25,915 $ 81.75 3,780 $82.00
Granted........................................ 3,375 85.00 -- --
Exercised...................................... -- -- -- --
Lapsed......................................... (315) (81.75) -- --
------ ------- ----- ------
June 30, 1998.................................... 28,975 82.13 3,780 82.00
Granted........................................ 2,180 85.00 -- --
Exercised...................................... (185) 78.00 -- --
Lapsed......................................... (1,260) (82.13) -- --
------ ------- ----- ------
June 30, 1999.................................... 29,710 $ 81.43 3,780 $82.00
====== ======= ===== ======
</TABLE>
F-12
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 1999, there were 1,510 shares of common stock reserved for
future grants.
The fair value of these options was estimated at the date of grant using a
Black-Scholes multiple option pricing model using the following assumptions:
(1) risk free interest rate--6%; (2) dividend yield--$1.30; (3) volatility
factor--0; and (4) weighted average expected life 5.0 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the related effects would not
be material.
7. Taxes on Income
Provisions for federal income taxes in the consolidated statements of income
are comprised of the following components:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current, net of business tax credits,
utilization of alternative minimum tax (AMT)
credit carryforwards, and foreign sales
corporation tax savings..................... $1,050,000 $ 858,000 $1,012,000
Deferred..................................... 240,000 208,000 284,000
---------- ---------- ----------
Total Taxes on Income........................ $1,290,000 $1,066,000 $1,296,000
========== ========== ==========
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The sources of
these differences and their tax effects are as follows:
<CAPTION>
Year Ended June 30,
---------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation................................. $ 435,000 $ 165,000 $ 268,000
Property taxes............................... 20,000 13,000 --
Legal accrual................................ (51,000) -- --
Inventory:
Uniform Capitalization Rules............... -- 26,000 --
Obsolescence reserve....................... (115,000) -- --
Other........................................ (49,000) 4,000 16,000
---------- ---------- ----------
Temporary Differences........................ $ 240,000 $ 208,000 $ 284,000
========== ========== ==========
</TABLE>
F-13
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net deferred income tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Depreciation...................................... $2,887,000 $2,452,000
Property taxes.................................... 112,000 92,000
Other............................................. (103,000) (64,000)
Legal accrual..................................... (51,000) --
Inventory -
Obsolescence reserve............................ (115,000) --
Postretirement benefits........................... (132,000) (122,000)
---------- ----------
Long-Term Deferred Income Taxes................... $2,598,000 $2,358,000
========== ==========
</TABLE>
The effective tax rate on income was different than the federal statutory
tax rate. The following summary reconciles federal taxes at the statutory tax
rate with the effective tax rate:
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate......................................... 34% 34% 34%
Decreases in taxes resulting from research and development
credit........................................................ (2) (6) (2)
Tax benefit derived from foreign sales corporation............. (1) (1) --
--- --- ---
Taxes on Income--Effective Rate................................ 31% 27% 32%
=== === ===
</TABLE>
8. Profit-Sharing and 401(k) Plan
The Company has a profit-sharing and 401(k) plan covering all qualified
employees. The Company matches employee contributions at a rate of 100% up to
4.6% of the employee's base salary. The Company's contributions to the plan are
discretionary and are determined annually by the board of directors. Amounts
paid or accrued amounted to $294,000 in 1999, $293,000 in 1998 and $191,000 in
1997.
9. Postretirement Benefits
The Company provides postretirement healthcare benefits to eligible
retirees. To qualify, the retiree must have provided at least 10 years of
service with the Company, and be at least 65 years of age.
During the fiscal year ended June 30, 1999, the Company adopted SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132 supersedes SFAS No. 106, which the Company used in prior years to
report postretirement benefits.
F-14
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has recorded a long-term liability at June 30, 1999 and 1998, of
$388,000 and $349,000 for postretirement benefits. During the years ended June
30, 1999, 1998 and 1997, the Company made cash expenditures of approximately
$8,000, $4,000 and $9,000, respectively, to fund benefits for current retirees.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year......... $349,000 $266,000 $175,000
Service cost.................................... 63,000 58,000 54,000
Interest cost................................... 23,000 17,000 13,000
Actuarial gain.................................. 6,000 -- --
Benefits paid................................... (8,000) (4,000) (9,000)
Other........................................... (45,000) 12,000 33,000
-------- -------- --------
Benefit Obligation at End of Year................. $388,000 $349,000 $266,000
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in Plan Assets:
Fair value of plan
assets at beginning of
year................... $ -- $ -- $ --
Employer contribution... 8,000 4,000 9,000
Benefits paid........... (8,000) (4,000) (9,000)
-------- -------- --------
Fair Value of Plan Assets
at End of Year........... $ -- $ -- $ --
======== ======== ========
Funded status............. $388,000 $349,000 $266,000
Unrecognized net actuarial
loss..................... 16,000 54,000 --
-------- -------- --------
Accrued Benefit Cost...... $404,000 $403,000 $266,000
======== ======== ========
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted-Average
Assumptions as of June
30:
Discount rate........... 7.50% 7.50% 7.50%
Expected return on plan
assets................. N/A N/A N/A
Rate of compensation
increase............... N/A N/A N/A
</TABLE>
F-15
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For measurement purposes, the following annual percentage increases apply:
<TABLE>
<CAPTION>
Annual
Year Ended June 30, Factor
------------------- ------
<S> <C>
2000............................................................... 9.00%
2001............................................................... 8.25%
2002............................................................... 7.50%
2003............................................................... 6.75%
2004 and thereafter................................................ 6.50%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost:
Service cost......................................... $63,000 $58,000 $54,000
Interest cost........................................ 23,000 17,000 13,000
Recognized net actuarial loss........................ 3,000 -- --
------- ------- -------
Net Periodic Benefit Cost.............................. $89,000 $75,000 $67,000
======= ======= =======
</TABLE>
The Company has a postretirement healthcare benefit plan that is a non-
contributory plan. The accounting for the healthcare plan anticipates future
cost increases that may impact the plan and are expected to be funded by the
Company.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plan. A one-percentage-point change in assumed
healthcare cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components..................................... $101,000 $ 72,000
======== ========
Effect on postretirement benefit obligation..... $442,000 $341,000
======== ========
</TABLE>
10. Supplemental Disclosure of Cash Flow Information
Supplemental information on cash paid for interest and income taxes during
the year is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1999 1998 1997
---------- -------- ----------
<S> <C> <C> <C>
Income taxes paid................................ $1,798,000 $615,000 $1,055,000
========== ======== ==========
Interest paid.................................... $ 546,000 $701,000 $ 659,000
========== ======== ==========
</TABLE>
Several fixed asset purchases remained in accounts payable at year-end, and
is considered a non-cash investing activity, as follows:
<TABLE>
<CAPTION>
Year Ended June
30,
------------------
1999 1998 1997
-------- ---- ----
<S> <C> <C> <C>
Fixed assets................................................. $584,000 $-- $--
======== ==== ====
</TABLE>
F-16
<PAGE>
WYCKOFF CHEMICAL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Calculation of Earnings per Share
A reconciliation of the numerators and denominators for the Basic and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for Basic and Diluted EPS--
Income available to common shareholders... $2,891,000 $2,870,000 $2,702,000
========== ========== ==========
Denominator--
Denominator for Basic EPS--
Weighted-average shares................... 283,614 284,324 285,317
Effect of dilutive securities--
Wyckoff Chemical Company, Inc. employee
stock options............................ 3,221 2,721 2,476
---------- ---------- ----------
Denominator for Adjusted Weighted-Average
Shares....................................... 286,835 287,045 287,793
========== ========== ==========
Basic earnings per share...................... $ 10.19 $ 10.09 $ 9.47
Diluted earnings per share.................... $ 10.08 $ 10.00 $ 9.39
========== ========== ==========
</TABLE>
12. Litigation
The Company has been named as a defendant in a lawsuit arising in the normal
course of business. The Company disputes the validity of it being named as a
defendant in the lawsuit and management believes that a resulting liability, if
any, will not have a material adverse effect on the Company's financial
statements.
13. Subsequent Event
Subsequent to year-end June 30, 1999, the Company entered into a merger
agreement with Catalytica, Inc. The merger, if approved by the Company's
shareholders, will result in the issuance of Catalytica, Inc., stock to
Wyckoff's current shareholders in exchange for their stock.
14. Quarterly Financial Data (Unaudited)
The following table summarizes the Company's quarterly results of operations
for the years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------- --------------------- --------------------- ----------------------
1999 1998 1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $6,749,000 $6,401,000 $8,178,000 $8,653,000 $7,886,000 $8,148,000 $13,711,000 $8,227,000
Gross profit............ 1,233,000 1,774,000 2,698,000 2,933,000 2,015,000 2,889,000 5,627,000 2,379,000
Net income (loss)....... (184,000) 305,000 625,000 952,000 208,000 860,000 2,242,000 753,000
Basic earnings per
share.................. $ (0.65) $ 1.07 $ 2.20 $ 3.35 $ 0.73 $ 3.03 $ 7.90 $ 2.64
Diluted earnings per
share.................. $ (0.65) $ 1.06 $ 2.18 $ 3.31 $ 0.72 $ 3.00 $ 7.81 $ 2.63
</TABLE>
F-17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders Catalytica, Inc.
We have audited the accompanying consolidated balance sheets of Catalytica,
Inc. as of December 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index to the financial
statements of Catalytica, Inc. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Catalytica, Inc. at December 31, 1998 and December 31, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 29, 1999
F-18
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended
December 31, For the six months ended
--------------------------- --------------------------
June 30, June 30,
------------ ------------
1998 1997 1996 1999 1998
-------- -------- ------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales......... $358,872 $174,347 $ 9,813 $ 182,169 $ 182,512
Research and
development
contracts............ 16,284 6,599 6,501 10,314 5,699
-------- -------- ------- ------------ ------------
Total revenues...... 375,156 180,946 16,314 192,483 188,211
Costs and expenses:
Cost of product
sales................ 294,716 155,092 9,073 143,959 151,685
Research and
development.......... 30,630 9,556 9,707 18,105 13,218
Selling, general and
administrative....... 16,875 7,302 4,452 10,471 7,256
-------- -------- ------- ------------ ------------
Total costs and
expenses........... 342,221 171,950 23,232 172,535 172,159
Operating income
(loss)................. 32,935 8,996 (6,918) 19,948 16,052
Interest income......... 2,894 1,450 1,179 1,322 1,555
Interest expense........ (8,931) (5,422) (353) (3,896) (5,019)
Gain on sale of assets.. -- -- 900 -- --
Loss on joint ventures.. (3,827) (4,355) -- (975) (2,307)
-------- -------- ------- ------------ ------------
Income (loss) before
income taxes........... 23,071 669 (5,192) 16,399 10,281
Provision for income
taxes.................. (2,308) (359) -- (2,952) (997)
-------- -------- ------- ------------ ------------
Net income (loss) before
common stock
redemption.............. 20,763 310 (5,192) 13,447 9,284
Less premium paid on
redemption of
Class B common stock.... -- (3,750) -- -- --
-------- -------- ------- ------------ ------------
Income (loss)
attributable to common
shareholders............ $ 20,763 $ (3,440) $(5,192) $ 13,447 $ 9,284
======== ======== ======= ============ ============
Net income (loss) per
share:
Basic................. $ 0.39 $ (0.10) $ (0.27) $ 0.25 $ 0.18
======== ======== ======= ============ ============
Diluted............... $ 0.33 $ (0.10) $ (0.27) $ 0.21 $ 0.15
======== ======== ======= ============ ============
Number of shares used in
computing net income
(loss) per share:
Basic................. 53,109 33,248 19,283 53,477 52,993
======== ======== ======= ============ ============
Diluted............... 59,196 33,248 19,283 59,178 58,936
======== ======== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
CATALYTICA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 42,392 $ 35,149 $ 46,441
Short-term investments................. 5,193 11,918 5,116
Accounts receivable, net of allowance
for doubtful accounts of $1,700 at
June 30, 1999 and December 31, 1998
($600 at December 31, 1997)........... 34,456 12,640 23,306
Accounts receivable from joint
ventures, net of allowance for
doubtful accounts of $106 at June 30,
1999 ($87 at December 31, 1998, none
at December 31, 1997)................. 1,121 967 572
Notes receivable from employees, net of
allowance for doubtful notes of $25 at
June 30, 1999 and December 31, 1998
(none at December 31, 1997)........... 282 405 305
Inventory:
Raw materials........................ 38,614 52,648 38,230
Work in process...................... 41,256 54,883 42,335
Finished goods....................... 8,979 6,714 11,573
-------- -------- --------
88,849 114,245 92,138
Deferred tax asset....................... 2,867 166 2,867
Prepaid expenses and other assets........ 1,578 1,939 4,199
-------- -------- --------
Total current assets............... 176,738 177,429 174,944
Property, plant and equipment:
Land................................... 5,391 5,391 5,391
Equipment.............................. 124,735 99,744 135,785
Buildings and leasehold improvements... 65,398 59,344 67,901
-------- -------- --------
195,524 164,479 209,077
Less accumulated depreciation and
amortization............................ (27,882) (15,075) (34,770)
-------- -------- --------
167,642 149,404 174,307
Other assets............................. 3,016 2,040 2,529
-------- -------- --------
$347,396 $328,873 $351,780
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
CATALYTICA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 19,984 $ 23,281 $ 19,080
Accrued payroll and related expenses... 16,497 5,768 14,077
Deferred revenue....................... 4,479 1,848 4,069
Other accrued liabilities.............. 8,116 8,250 13,855
Current portion of long-term debt...... 10,770 50,332 8,201
Income taxes payable................... 3,706 525 438
-------- -------- --------
Total current liabilities............ 63,552 90,004 59,720
Long-term debt........................... 67,007 75,069 59,500
Non-current deferred revenue............. 2,181 3,611 1,414
Other long-term liabilities.............. -- -- 1,125
Minority interest........................ 41,000 11,000 41,000
Commitments and Contingencies
Class A and B common stock subject to
mandatory redemption:
Class A--30,000,000 shares authorized,
13,270,000 issued and outstanding at
June 30, 1999, December 31, 1998 and
1997.................................. 51,452 51,452 51,452
Class B--17,000,000 shares authorized,
11,730,000 issued and outstanding at
June 30, 1999, December 31, 1998 and
1997.................................. 45,627 45,627 45,627
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized, none
issued and outstanding.............. -- -- --
Common Stock, $.001 par value;
120,000,000 shares authorized including
30,000,000 Class A and 17,000,000 Class
B, 28,607,085 shares of common stock
issued and outstanding at June 30, 1999,
(28,406,087 in 1998 and 27,941,729 in
1997). See Class A and B common stock
above................................... 28 28 28
Additional paid-in capital............... 103,954 100,375 105,810
Deferred compensation.................... (281) (406) (219)
Accumulated deficit...................... (27,124) (47,887) (13,677)
-------- -------- --------
Total stockholders' equity........... 76,577 52,110 91,942
-------- -------- --------
$347,396 $328,873 $351,780
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
----------------------------- ------------------
1998 1997 1996 1999 1998
-------- --------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ 20,763 $ 310 $ (5,192) $ 13,447 $ 9,284
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activity:
Depreciation and
amortization............ 11,491 5,754 944 6,601 7,078
Deferred income taxes.... (2,701) (166) -- -- --
Losses in joint
ventures................ 3,827 4,355 -- 975 2,308
Changes in:
Accounts receivable..... (21,816) (8,696) (387) 11,150 (7,535)
Accounts receivable from
related party.......... -- -- (865) -- --
Accounts receivable from
joint venture.......... (154) (102) -- 549 696
Inventory............... 25,396 5,995 (2,563) (3,289) 13,480
Prepaid expenses, and
other current assets... 1,061 136 (310) (1,521) (1,948)
Accounts payable........ (3,297) 21,226 716 (904) (5,967)
Accrued payroll and
related expenses....... 10,729 4,395 (20) (2,420) 3,891
Deferred revenue........ 1,201 (1,248) 6,540 (1,177) (787)
Other accrued
liabilities............ 3,047 7,826 359 3,596 (2,055)
-------- --------- -------- -------- --------
Net cash provided by (used
in) operating activities... $ 49,547 $ 39,785 $ (778) $ 27,007 $ 18,445
Cash flows from investing
activities:
Purchases of investments.. (37,202) (25,099) (22,748) (15,112) (23,762)
Maturities of
investments.............. 44,431 21,532 30,500 15,172 24,000
Investment in joint
ventures................. (3,827) (4,355) -- (975) (2,308)
Acquisition of property
and equipment............ (31,357) (6,347) (3,565) (13,668) (7,558)
Disposition of property
and equipment............ 272 -- -- 85 125
Proceeds from sale of
property and equipment... 7 -- -- 3 --
Acquisition of Glaxo
Wellcome inventory....... -- (116,823) -- -- --
Acquisition of Glaxo
Wellcome property, plant
and equipment............ -- (131,198) -- -- --
-------- --------- -------- -------- --------
Net cash provided by (used
in) investing activities... $(27,676) $(262,290) $ 4,187 $(14,495) $ (9,503)
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Increase (decrease) in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30
--------------------------- ------------------
1998 1997 1996 1999 1998
-------- -------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Net receipts on (issuance
of) notes receivable from
employees.................. $ (583) $ (92) $ (206) $ (243) $ (1,067)
Additions to debt
obligations................ 2,700 137,726 4,213 -- 2,700
Payments on debt
obligations................ (50,324) (20,501) (5,278) (10,076) (40,058)
Minority investment......... 30,000 -- 8,000 -- 30,000
Issuance of Class A and B
common stock, net.......... -- 117,679 -- -- --
Repurchase of Class B common
stock...................... -- (23,750) -- -- --
Issuance of common stock by
exercise of warrant
dividend................... -- 27,692 -- -- --
Issuance of common stock.... 3,579 3,360 381 1,856 1,664
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities......... $(14,628) $242,114 $ 7,110 $ (8,463) $ (6,761)
-------- -------- ------- -------- --------
Net increase in cash and cash
equivalents.................. 7,243 19,609 10,519 4,049 2,181
Cash and cash equivalents at
beginning of year............ 35,149 15,540 5,021 42,392 35,149
-------- -------- ------- -------- --------
Cash and cash equivalents at
end of year.................. $ 42,392 $ 35,149 $15,540 $ 46,441 $ 37,330
======== ======== ======= ======== ========
Additional disclosure of non-
cash financing and operating
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 $ -- $ -- $ --
======== ======== ======= ======== ========
Issuance of Catalytica
common stock to Shearson
Lehman for services
provided in conjunction
with issuance of Class A &
B common stock............. $ -- $ 600 $ -- $ -- $ --
======== ======== ======= ======== ========
Deferred Compensation....... $ -- $ 500 $ -- $ -- $ --
======== ======== ======= ======== ========
Supplemental disclosure of
cash flow information:
Interest paid............... $ 8,335 $ 4,667 $ 353 $ 2,502 $ 4,958
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CATALYTICA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------- Paid-in Deferred Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Equity
---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 19,190,222 $19 $ 65,101 $ (86) $(43,005) $22,029
Sale of common stock.... 206,852 -- 358 -- -- 358
Expense recorded from
acceleration of stock
options................ -- -- 23 -- -- 23
Amortization of deferred
compensation........... -- -- -- 45 -- 45
Net loss................ -- -- -- -- (5,192) (5,192)
---------- --- -------- ----- -------- -------
Balance at December 31,
1996................... 19,397,074 19 65,482 (41) (48,197) 17,263
Sale and issuance of
common stock........... 1,413,506 2 3,958 -- -- 3,960
Issuance of warrants to
Glaxo Wellcome......... -- -- 6,500 -- -- 6,500
Net exercise of warrants
issued in connection
with public offering... 208,153 -- -- -- -- --
Exercise of warrant
dividends.............. 6,922,996 7 27,685 -- -- 27,692
Premium paid in
connection with
repurchase of Class B
common stock........... -- -- (3,750) -- -- (3,750)
Issuance of below market
stock options.......... -- -- 500 (500) -- --
Amortization of deferred
compensation........... -- -- -- 135 -- 135
Net income.............. -- -- -- -- 310 310
---------- --- -------- ----- -------- -------
Balance at December 31,
1997................... 27,941,729 28 100,375 (406) (47,887) 52,110
Sale and issuance of
common stock........... 464,358 -- 3,289 -- -- 3,289
Issuance of stock
options to
consultants............ -- -- 290 -- -- 290
Amortization of deferred
compensation........... -- -- -- 125 -- 125
Net income.............. -- -- -- -- 20,763 20,763
---------- --- -------- ----- -------- -------
Balance at December 31,
1998................... 28,406,087 28 103,954 (281) (27,124) 76,577
Sale and issuance of
common stock
(unaudited)............ 200,998 -- 1,825 -- -- 1,825
Issuance of stock
options to consultants
(unaudited)............ -- -- 31 -- -- 31
Amortization of deferred
compensation
(unaudited)............ -- -- -- 62 -- 62
Net income (unaudited).. -- -- -- -- 13,447 13,447
---------- --- -------- ----- -------- -------
Balance at June 30, 1999
(unaudited)............ 28,607,085 $28 $105,810 $(219) $(13,677) $91,942
========== === ======== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information as of June 30, 1999, and for the six months ended June 30, 1999
and 1998 is unaudited.
Note 1. Description of Business and Significant Accounting Policies
Description of Business. Catalytica, Inc. ("Catalytica" or "the Company")
builds business in high growth industries where the Company's technologies
optimize manufacturing and solve environmental problems. To enhance its market
focus, and increase flexibility for strategic financial arrangements and
business partnerships, the Company has created three operating subsidiaries:
Catalytica Pharmaceuticals, Inc. ("Catalytica Pharmaceuticals"), Catalytica
Combustion Systems, Inc. ("Combustion Systems"), and Catalytica Advanced
Technologies, Inc. ("Advanced Technologies").
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries after
elimination of all significant intercompany accounts and transactions. Certain
amounts from 1997 and 1996 have been reclassified to reflect 1998 and 1997
presentation, respectively.
Reclassification. To more clearly reflect its investment in research and
development ("R&D") activities, the Company reclassified approximately $8.0
million from cost of sales to R&D costs for the year ended December 31, 1998,
to conform to the current period presentation. In addition, the Company has
reclassified $8.6 million of related product sales to research revenues for the
year ended December 31, 1998, to conform to the current period presentation.
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.
Unaudited Interim Financial Information. The accompanying consolidated
financial statements at June 30, 1999, and for the six months ended June 30,
1999, and 1998, are unaudited but include all adjustments (consisting of normal
recurring accruals) which, in the opinion of management, are necessary to
present fairly the Company's financial position at June 30, 1999, and the
operating results and cash flows for the six months ended June 30, 1999, and
1998. Results for the six months ended June 30, 1999, and are not necessarily
indicative of results for the entire fiscal year.
Financial Instruments
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on
deposit with banks and money market instruments. As a result of a $30 million
investment by Enron Ventures Corporation in Combustion Systems (See Note 3),
and covenants associated with the Chase Credit Agreement (See Note 7), certain
restrictions have been placed on the use of the Company's cash and investments.
Of the Company's $42.4 million in cash and cash equivalents, $17.7 million may
only be used for Combustion Systems' operations, and the remaining $24.7
million may be used for Catalytica Pharmaceuticals and other operations in the
Company, excluding Combustion Systems. These same restrictions apply to any
short and long term investments (See Investments below). The entire $5.2
million in short term investments is associated with Combustion Systems,
therefore, these funds can also only be used within the Combustion Systems'
operations.
Investments. 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 (none
at December 31, 1998); investments with maturities of three months or less at
the date of purchase which are held-to-maturity ($5.2 million at December 31,
1998) and investments with maturities greater than three
F-25
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
months which are available-for-sale (none at December 31, 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
December 31, 1998). All investments at December 31, 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.
As of December 31, 1998, the average portfolio duration is approximately .85
months.
Interest Rate Swap. In the second quarter of 1998 following the
restructuring of the Chase Credit Agreement (see Note 7), the Company entered
into a $50 million interest rate swap 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 5.90% for 4 years on $50 million of the Term Debt Facility.
The Company accounts for this interest rate swap as a hedge, and accrues the
interest rate differential as an adjustment to interest expense on a monthly
basis. In accordance with the accrual method of accounting, there is no
recognition in the financial statements for changes in the derivative's fair
value. In the event of the early extinguishment of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income coincident with the extinguishment gain or loss. Any swap
agreements that are not designated with outstanding debt or notional amounts
(or durations) of interest-rate swap agreements in excess of the principal
amounts (or maturities) of the underlying debt obligations would be recorded as
an asset or liability at fair value, with changes in fair value recorded in
other income or expense (the fair value method). The Company does not hold or
transact in such financial instruments for purposes other than risk management.
For the year ended December 31, 1998, the interest rate swap classified as a
receive-fixed swap had a weighted-average receive rate of 5.59%. The pay rate
on the swap was 5.90%. The gain or loss on the swap is recognized in net
interest expense in the same period as the hedged transaction. The actual
incurred loss totaled approximately $87,000 as of December 31, 1998.
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
investments in cash equivalents, short-term and long-term investments, and
trade receivables. The Company uses local banks and various investment firms to
invest its excess cash, principally in commercial paper and money market funds,
to provide a diversified portfolio of investments with strong credit ratings.
The Company is exposed to credit risks in the event of default by the financial
institutions or issuers of investments to the extent recorded on the balance
sheet. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
Inventories. All inventories are stated at the lower of cost (first-in,
first-out) or market. Inventory write-downs are based on the Company's best
estimates.
On July 31, 1997, Catalytica Pharmaceuticals purchased $116.8 million of
inventory as part of the acquisition of the pharmaceutical manufacturing
facility from Glaxo Wellcome Inc.
Property, Plant, and Equipment. On July 31, 1997, Catalytica Pharmaceuticals
purchased from Glaxo Wellcome (a) all the land, buildings and improvements
thereon and certain rights relating thereto compromising the pharmaceutical
manufacturing facility of Glaxo Wellcome located in Greenville, North Carolina
("Greenville Facility"), containing approximately 584 acres of land, and (b)
substantially all of the machinery, equipment, furniture, fixtures,
transportation and distribution equipment, waste treatment facilities,
computers, analytical equipment, instruments, communication equipment, control
systems, spare parts, supplies, materials
F-26
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and all other items of tangible personal property owned by Glaxo Wellcome and
located at the Greenville Facility. The Company recorded $147.1 million of
property, plant, and equipment in connection with the acquisition of the
Greenville Facility ("Acquisition").
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line basis over the lesser of the useful lives of the
respective assets or the lease term, if applicable (generally 3-15 years).
Expenditures for maintenance and repairs are generally charged to expense as
incurred. In 1998, $16.6 million was charged to repair and maintenance expense.
Advertising. Advertising costs are expensed as incurred. Advertising costs
were $539,000, $165,000, and $49,000 for the years ended December 31, 1998,
1997, and 1996 respectively.
Revenues. Revenues consist of both product sales and research revenues. All
product revenues are recognized upon shipment. Approximately 96% of revenues
are related to pharmaceutical product sales for the year ended December 31,
1998. During 1998, approximately 90% of the Company's product revenues were
derived from sales to Glaxo Wellcome. As of December 31, 1998, and December 31,
1997, respectively, a receivable in the amount of $16.1 million and $11.8
million was outstanding from Glaxo Wellcome. Glaxo Wellcome has guaranteed that
revenues paid to Catalytica Pharmaceuticals will meet a specified level or that
Glaxo Wellcome will pay to Catalytica Pharmaceuticals any shortfall. The
guaranteed revenues, which include compensation for transition services
Catalytica Pharmaceuticals has agreed to provide Glaxo Wellcome, and which
exclude the cost of materials, in the next several years are as set forth below
in millions of dollars:
<TABLE>
<CAPTION>
August 1 -
December 31,
1997 1998 1999 2000 2001 Total
------------ ------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Supply agreement and certain
amendments..................... $77.0 $173.4 $113.8 $72.6 $22.6 $459.4
</TABLE>
The Supply Agreement and certain subsequent amendments state that guaranteed
revenues are to be calculated by comparing the agreed upon product prices
billed on invoices for the year to the stipulated guaranteed revenue amount for
the specific year in agreement.
Approximately 4% of the Company's revenues in 1998 were derived from
research and development contracts. Most of the Company's research and
development contracts are subject to periodic review by the funding partner,
which may result in modifications, including reduction or termination of
funding. There can be no assurance that the Company will continue to receive
research and development funding, and the Company expects that it will rely
increasingly on product sales for its revenues.
Research revenues are earned as contractual services are performed in
connection with collaborative arrangements and are recognized in accordance
with contract terms, principally based on reimbursement of total costs and
expenses incurred. In return for funding development, collaborative partners
receive certain rights in the commercialization of the resulting technology.
Costs of $7.5 million, $6.3 million, and $6.2 million related to research
revenues were included in total costs and expenses for each of the three years
ended December 31, 1998, 1997, and 1996, respectively. Unbilled revenues
related to work performed under collaborative arrangements were approximately
$0.5 million at December 31, 1998 ($1 million at December 31, 1997) and are
included in accounts receivable on the accompanying balance sheet. Most amounts
unbilled at December 31, 1998, were billed in January 1999.
F-27
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Major Customer Information. Revenues from major customers from all sources
of revenue representing more than 10% of revenues in any of the past three
years are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
Customer 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Glaxo Wellcome................................................ 86% 87% --
Pharmacia Upjohn (formerly Upjohn)............................ -- -- 17%
Merck & Co.................................................... -- 1% 13%
Novartis...................................................... 1% 3% 11%
Pfizer, Inc................................................... 3% 2% 11%
</TABLE>
Research and Development. All costs for research and development activities
are expensed in the year incurred. Such costs include proprietary research and
development expenses associated with revenues from research and development
agreements. Approximately 16% of the Company's 1998 research and development
expenses were spent to develop the Company's combustion systems technology,
approximately 70% were spent on pharmaceuticals technology, and approximately
14% were spent on other technologies, much of which was performed at the
specific request of, and funded by, third parties.
Income Taxes. The Company accounts for income taxes under the liability
method in accordance with Statements of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes"(see Note 8). Income taxes have been
provided and tax credits have been recognized based on tax laws in effect at
the dates of the financial statements.
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. In general, Basic EPS
excludes dilution created by common stock equivalents and is a function of the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution created by common stock equivalents. For
the periods ended December 31, 1997, and 1996, 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. Weighted average shares outstanding
includes Class A and B common shares as the Company considers Class A and B to
be the equivalent of common stock. All periods presented herein have been
adjusted to reflect the calculation of EPS in accordance with SFAS No. 128.
F-28
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerators and denominators for the Basic and
Diluted EPS calculations follows:
Earnings (Loss) per Share
(In thousands, except per share amounts)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Six months
ended June 30, December 31, 1998
---------------- -------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share:
Net income (loss) before common
stock redemption.............. $13,447 $ 9,284 $20,763 $ 310 $(5,192)
Premium paid on redemption of
Class B common stock (*)...... -- -- -- (3,750) --
------- ------- ------- ------- -------
Income (loss) attributable to
common shareholders 13,447 9,284 20,763 (3,440) (5,192)
Less: Reduction of Catalytica
Pharmaceuticals income
attributable to holders of
subsidiary stock options...... (1,116) (561) (1,380) -- --
------- ------- ------- ------- -------
Numerator for diluted earnings
(loss) per share.............. $12,331 $ 8,723 $19,383 $(3,440) $(5,192)
------- ------- ------- ------- -------
Denominator:
Denominator for basic earnings
(loss) per share:
Weighted-average shares........ 53,477 52,993 53,109 33,248 19,283
------- ------- ------- ------- -------
Effect of dilutive securities:
Catalytica, Inc. employee
stock options................ 625 745 807 -- --
Catalytica Pharmaceuticals
Convertible Preferred Stock.. 1,654 1,691 1,683 -- --
Catalytica Pharmaceuticals
Convertible Junior Preferred
Stock........................ 558 570 568 -- --
Catalytica Combustion Systems,
Inc. Convertible Preferred
Stock........................ 2,645 2,664 2,651 -- --
Catalytica, Inc. warrants
issued to Glaxo
Wellcome, Inc................ 219 273 378 -- --
------- ------- ------- ------- -------
Dilutive potential common
shares..................... 5,701 5,943 6,087 -- --
Denominator for diluted earnings
(loss) per share
Adjusted weighted-average
shares and assumed
conversions.................. 59,178 58,936 59,196 33,248 19,283
------- ------- ------- ------- -------
Basic earnings (loss) per
share.......................... $ 0.25 $ 0.18 $ 0.39 $ (0.10) $ (0.27)
======= ======= ======= ======= =======
Diluted earnings (loss) per
share.......................... $ 0.21 $ 0.15 $ 0.33 $ (0.10) $ (0.27)
======= ======= ======= ======= =======
</TABLE>
- --------
* Income (loss) available to common shareholders reflects a reduction from
1997 net income of $3.75 million relating to the call premium paid for the
repurchase of five million shares of Series B common stock with proceeds
received from the exercise of warrants issued to shareholders as a
dividend. See Note 11.
F-29
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, and 1996, potentially dilutive
securities of 2,649,000 and 2,286,000, respectively, were outstanding and not
included in the diluted earnings per share computation because they are
antidilutive.
Stock-Based Compensation. In 1995, the FASB issued Statement No. 123,
Accounting for Stock-Based Compensation, which provides an alternative to APB
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation to employees. The Company has elected to account for
stock-based compensation to employees in accordance with APB Opinion 25,
providing only pro forma disclosures required by Statement 123. See Note 11.
Comprehensive Income. 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. As the Company has no components of other comprehensive income, there
are no disclosure requirements involved in the Company's adoption of this
Statement.
Impact of Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 2000. Management expects to adopt in fiscal year
beginning January 1, 2001 and does not anticipate that the adoption of the new
Statement will have a significant effect on results of operations or the
financial position of the Company.
Segment Disclosures. In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which was adopted by the Company in the first quarter of
fiscal 1998. This Statement establishes standards for the way that public
business enterprises report information about reportable operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
F-30
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company operates primarily in the pharmaceuticals and combustion systems
industries. The Company has determined the reportable operating segments based
upon how the business is managed and operated. Catalytica Pharmaceuticals and
Combustion Systems operate as independent subsidiaries of the Company with
their own sales, research and development and operations departments. Each
subsidiary manufactures and distributes distinct products with different
production processes. As such, the following table discloses revenues,
operating income, and identifiable assets for the above named operating
segments. Advanced Technologies is combined with Corporate as it does not meet
the requirements for separate disclosure.
<TABLE>
<CAPTION>
Six months ended
June 30, December 31, 1998
------------------ ---------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues
Catalytica Pharmaceuticals.. $191,098 $184,781 $368,877 $175,807 $10,127
Combustion Systems.......... 511 1,324 2,707 1,950 2,702
Corporate and other
subsidiary................. 874 2,106 3,572 3,189 3,485
-------- -------- -------- -------- -------
Total Revenues............ $192,483 $188,211 $375,156 $180,946 $16,314
======== ======== ======== ======== =======
Operating Income
Catalytica Pharmaceuticals.. $ 23,986 $ 17,899 $ 37,398 $ 9,258 $(3,738)
Combustion Systems.......... (2,759) (1,272) (3,014) (478) (2,216)
Corporate and other
subsidiary................. (1,279) (575) (1,449) 216 (964)
-------- -------- -------- -------- -------
Total Operating Income.... $ 19,948 $ 16,052 $ 32,935 $ 8,996 $(6,918)
======== ======== ======== ======== =======
Identifiable Assets
Catalytica Pharmaceuticals.. $318,372 $292,233 $300,264 $305,565 $24,147
Combustion Systems.......... 23,985 29,913 27,402 2,011 2,339
Corporate and other
subsidiary................. 9,423 11,861 19,730 21,297 14,517
-------- -------- -------- -------- -------
Total Assets.............. $351,780 $334,007 $347,396 $328,873 $41,003
======== ======== ======== ======== =======
</TABLE>
Note 2. Catalytica Pharmaceuticals, Inc.
On July 31, 1997 the Company purchased from Glaxo Wellcome a pharmaceuticals
manufacturing facility in Greenville, North Carolina for (a) $244.7 million in
cash; (b) 250,000 shares of Junior Preferred Stock of Catalytica
Pharmaceuticals; (c) warrants to purchase 2,000,000 shares of Common Stock of
Catalytica at an exercise price of $12.00 per share exercisable for six years
after the closing of the acquisition ("Closing") and (d) 10% of the earnings
before interest and taxes in excess of an aggregate cumulative amount of $10
million attributable to the sterile products portion of the Greenville Facility
for a period of ten years following the Closing, up to an aggregate cumulative
payment to Glaxo Wellcome of an additional $25 million.
The cash purchase price reflects the parties' agreement to a reduction in
the cash consideration of approximately $6.4 million in exchange for the
assumption by the Company and Catalytica Pharmaceuticals of certain liability
associated with the abatement of asbestos or asbestos containing materials
("ACM") present at the Greenville Facility and post-closing employee workplace
exposure. As a result of the Acquisition, Catalytica recorded $116.8 million of
inventory, $147.1 million of property, plant, and equipment, and the assumption
of the aforementioned asbestos liability of $6.4 million. During 1998, the
Company began performing some asbestos abatement, and the asbestos liability
was reduced by $0.6 million. See Note 5.
The Junior Preferred Stock of Catalytica Pharmaceuticals issued to Glaxo
Wellcome has the following rights: (a) a non-cumulative dividend preference and
a liquidation preference, both junior to the outstanding
F-31
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred stock of Catalytica Pharmaceuticals and the Catalytica
Pharmaceuticals Series C Preferred Stock which was issued to the Company in
connection with the Acquisition; (b) the right to convert into shares of
Catalytica Pharmaceuticals Common Stock on a one-for-one basis (subject to
adjustment in the case of stock splits, reclassifications, stock dividends and
rights offerings to existing holders of Common Stock and similar events and in
the event of Common Stock issuances below the then fair market value except for
issuances pursuant to Catalytica Pharmaceuticals' employee benefit plans) at
any time at the option of the holder and automatically upon the closing of an
underwritten public offering which results in gross proceeds of at least $10
million to Catalytica Pharmaceuticals; (c) each share of Junior Preferred Stock
shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such shares of Junior Preferred Stock could then be
converted; and (d) if Catalytica Pharmaceuticals shall not have consummated an
underwritten public offering which results in gross proceeds of at least $10
million to Catalytica Pharmaceuticals within five years of the consummation of
the Acquisition, the Junior Preferred Stock shall be exchangeable, at the
option of Glaxo Wellcome, into shares of Common Stock of the Company having a
market value at that time equal to the value of the preferred stock. Upon
consolidation of Catalytica Pharmaceuticals into Catalytica, Inc., the Junior
Preferred Stock issued to Glaxo Wellcome is reflected as $3 million of minority
interest in Catalytica, Inc.
In connection with the sale of the Greenville Facility, Glaxo Wellcome
entered into a Supply Agreement under which Catalytica Pharmaceuticals
manufactures products for Glaxo Wellcome over the next several years. In 1998
the Company signed two amendments to the original Supply Agreement, and a third
amendment was signed in the first quarter of 1999. Catalytica Pharmaceuticals
estimates that aggregate payments (including the cost of materials) by Glaxo
Wellcome under the original Supply Agreement will total approximately
$800 million over a five-year period. Subsequent amendments to the original
supply agreement may provide for approximately $120 million in revenue over a
two and one-half year period commencing July 1998. Glaxo Wellcome has
guaranteed that revenues paid to Catalytica Pharmaceuticals under the original
Supply Agreement will meet a specified level of minimum revenue or that Glaxo
Wellcome will pay to Catalytica Pharmaceuticals any shortfall. A portion of the
$120 million additional revenue has also been guaranteed by Glaxo Wellcome,
however; the majority of this additional revenue is based on forecasts by Glaxo
Wellcome for production as defined in the amended agreements. As such, the
forecasted revenues are subject to fluctuations based on production demand by
Glaxo Wellcome. The minimum revenues, which include compensation for transition
services Catalytica Pharmaceuticals has agreed to provide Glaxo Wellcome, and
which exclude the cost of materials, over the five years beginning in 1997,
total $459.4 million. As of December 31, 1998 and 1997, a receivable in the
amount of $16.0 million and $11.8 million, respectively, was outstanding from
Glaxo Wellcome.
On May 8, 1996, Pfizer Inc. ("Pfizer") entered into a Collaborative Research
and License Agreement and a Stock Purchase Agreement with Catalytica
Pharmaceuticals, Inc. which included the purchase of 150,000 shares of Series B
Preferred Stock by Pfizer. The holders of the Series B Preferred Stock shall be
entitled to receive non-cumulative dividends at a rate of $6.00 per share, per
annum, when and if declared by the Board of Directors. In consideration of the
$15 million paid, Catalytica Pharmaceuticals is also obligated to perform
specified agreed upon research for a five year period. Accordingly, Catalytica
recognized Pfizer's minority interest in Catalytica Pharmaceuticals at $8
million and recorded deferred revenue of $7 million to be recognized as
research is performed. As of June 30, 1999, December 31, 1998 and 1997, $8.9
million, $1.4 million and $1.5 million, respectively, of research was performed
and recognized as revenue. The deferred revenue balance pertaining to Pfizer is
$3.6 million, and $5.0 million at December 31, 1998, and 1997, respectively.
In conjunction with the Stock Purchase agreement, the Company entered into a
Share Exchange agreement, providing Pfizer the right to exchange the Series B
Preferred Stock of the Company for Catalytica, Inc. ("Catalytica") Common
Stock. After the three year anniversary of the agreement, Pfizer shall have the
F-32
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
right to require the Company to exchange all of the outstanding shares of
Series B Preferred Stock for that number of shares of Common Stock based upon a
determined exchange rate. The exchange rate is based upon the fair value of the
Preferred Stock and the market value of Catalytica's Common Stock at the time
of conversion. In the event of insolvency of the Catalytica Pharmaceuticals,
Pfizer may convert $4.2 million of Series B Preferred Shares into 700,000
shares of Catalytica's Common Stock.
Note 3. Catalytica Combustion Systems, Inc.
On January 14, 1998, Enron Ventures Corporation, a wholly owned subsidiary
of Enron Corporation ("Enron"), purchased a 15% minority interest in Combustion
Systems for $30 million in cash in which Enron received 1,339,286 shares of
Combustion Systems' Series B Preferred Stock. In addition, Enron also received
a three-year option to purchase an additional 4.9% of Combustion Systems for
$14.4 million in cash. In conjunction 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 at least $20 million in gross proceeds, 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 Common Stock based upon a
determined exchange rate. The exchange rate is based upon the fair value of the
Preferred Stock and the market value of Catalytica's Common Stock at the time
of conversion. Upon consolidation of Combustion Systems into Catalytica, Inc.,
the Series B Preferred Stock issued to Enron is reflected as $30 million of
minority interest.
Joint Venture (GENXON). On October 15, 1996, Catalytica's subsidiary
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, GENXONTM 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.
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. In addition
to the initial capital commitment made by Combustion Systems and Woodward,
Combustion Systems has contributed to the joint venture an exclusive license
for the use of its catalytic combustion technologies valued at $8 million, and
Woodward contributed to the joint venture an exclusive license for the use of
its instrumentation and control systems for gas turbine catalytic combustion
valued at $2 million. The 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 an equal amount quarterly. For the year
ended December 31, 1998, Combustion Systems contributed $4.4 million in cash,
of which $0.5 million was accrued by the Company in 1997 and paid in 1998, and
Woodward Governor Company contributed $4.4 million, bringing the total combined
investment in the joint venture to $22.6 million as of December 31, 1998.
Combustion Systems began accounting for its share of the joint venture gain or
loss upon the first cash infusion totaling $1.0 million, which occurred on
January 3, 1997 upon completion of a milestone. Prior to January 3, 1997, the
joint venture was being funded entirely by Woodward Governor. For the year
ended December 31, 1998, the Company recorded losses of $3.7 million on the
joint venture.
F-33
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following information summarizes GENXON's financial position for the
year ended September 30, 1998, and the unaudited quarter ended December 31,
1998:
<TABLE>
<CAPTION>
Year Ended Quarter Ended
September 30, 1998 December 31, 1998
------------------ -----------------
(Unaudited)
(in thousands)
<S> <C> <C>
Total revenues..................... $ 204 $ 386
======== ========
Net loss........................... $ (9,615) $ (1,246)
======== ========
Current assets..................... $ 1,077 $ 1,487
Long-term assets................... 1,018 968
-------- --------
Total assets..................... $ 2,095 $ 2,455
======== ========
Current liabilities................ $ 786 $ 1,243
Members' capital................... 1,309 1,212
-------- --------
Total liabilities and members'
capital......................... $ 2,095 $ 2,455
======== ========
</TABLE>
Note 4. Catalytica Advanced Technologies, Inc.
Joint Ventures
Joint Venture (Single-Site Catalysts, L.L.C.). On November 1, 1998, Advanced
Technologies entered into an operating agreement with United Catalysts, Inc.
("United Catalysts") to form Single-Site Catalysts, L.L.C., a Delaware limited
liability company ("Single-Site Catalysts"). Advanced Technologies was required
to contribute inventory and equipment valued at $0.15 million and a License
Agreement. United Catalysts agreed to contribute a License Agreement and $5
million in capital to be paid in varying installments over the next several
years. Single-Site Catalysts incurred a loss in 1998 and the Company
anticipates that the joint venture will continue to generate losses during
1999. The Company has recorded its share of these losses to the extent of its
capital contribution of $0.15 million in 1998. However, the operating agreement
does not require any further capital contributions by Advanced Technologies
beyond it's initial $0.15 million contribution. Therefore, no further losses
will be recorded by the Company unless it decides to invest additional capital.
Advanced Sensor Devices. On June 28, 1996, Catalytica completed the sale of
substantially all the business of its wholly owned subsidiary, Advanced Sensor
Devices, Inc. ("ASD"), to Monitor Labs, Inc. ASD produced continuous emission
monitors ("CEMs") based on proprietary catalytic sensors. The terms for selling
substantially all of ASD's assets included an initial payment of approximately
$1.1 million at the closing, an additional $0.5 million paid upon certification
for the CEM product which occurred in December 1996, and a royalty stream based
on future revenues. For the year ended December 31, 1996, Catalytica realized a
$0.9 million gain on the sale of ASD's assets.
Note 5. Environmental Regulations
On November 30, 1993, the Company entered into a ground lease with Rhone
Poulenc, Inc. to lease the surface of the pharmaceuticals manufacturing
facility in East Palo Alto, California ("site"). Because there is significant
soil and groundwater contamination caused by past activities on the Site, Rhone
Poulenc Inc. is remediating the soil and groundwater of the Site pursuant to an
order from the Bay Area Regional Water Quality Control Board ("RWQCB").
Pursuant to the ground lease with Rhone Poulenc Inc., the Company has received
an indemnity for the contamination that is the subject of the RWQCB's order.
F-34
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A moderate amount of asbestos containing material ("ACM") is present at the
Greenville Facility. The Company believes that the ACM, in its present
condition, does not require abatement. Abatement is only required if
renovations are performed in those areas containing ACM. The Company assumed
the $6.4 million liability associated with the abatement of the ACM present at
the Greenville Facility under the purchase agreement with Glaxo Wellcome.
During 1998, the Company began performing some asbestos abatement, and the
asbestos liability was reduced by $0.6 million. The asbestos liability has not
been reduced further in 1999. The Company had a reserve totaling $5.8 million
at December 31, 1998, and $6.4 million at December 31, 1997, netted against
property, plant, and equipment which the Company believes is adequate to cover
the cost of remedial clean-up should further renovations ever be performed in
those areas containing ACM.
In connection with the sale of the pharmaceutical manufacturing facility in
Greenville, North Carolina to the Company (see Note 2), Glaxo Wellcome agreed
to perform, at its own cost, remediation required by law associated with soil
and groundwater contamination existing at the Greenville Facility as of the
date of the acquisition, July 31, 1997. Catalytica Pharmaceuticals is required
to provide access to the Greenville Facility and certain facility services
required by the remediation efforts, subject to reimbursement by Glaxo
Wellcome.
Many of the pharmaceuticals products the Company manufactures, or will
manufacture in the future, and the final drug products in which they are used,
are subject to regulation for safety and efficacy by the FDA and foreign
regulatory authorities before such products can be commercially marketed. The
process of obtaining regulatory clearances for marketing is uncertain, costly,
and time-consuming. The Company cannot predict how long the necessary
regulatory approvals will take, or if its customers will ever obtain such
approval for their products. To the extent the Company's customers do not
obtain the necessary regulatory approvals for marketing new products, the
Company's pharmaceutical product sales will be adversely affected.
The rate at which the Company's catalytic combustion systems are adopted by
industrial companies will be heavily influenced by the enactment and
enforcement of environmental regulations at the federal, state, and local
levels. Federal law requires state and local authorities to determine specific
strategies for reducing emissions or specific pollutants. Among other
strategies, state and local authorities in all areas which do not meet ambient
air quality standards must adopt performance standards for all major new and
modified sources of air pollution. The more polluted the air in a particular
region has become, the more stringent such controls must be. The Company's
revenues will depend, in part, on the standards, permit requirements, and
programs these state and local authorities promulgate for reducing emissions
(including emissions of NOx) addressed by the Company's combustion systems.
Demand for the Company's systems and processes will be affected by how quickly
the standards are implemented and the level of reductions required. There can
be no assurance that these regulations will ever be adopted.
Note 6. Pension and Profit Sharing Plans
The Company has a defined contribution pension plan and a nonqualified
pension plan for employees meeting certain requirements, based on a defined
percentage of the employees' compensation and an employer match for the defined
contribution plan. Pension expense amounted to approximately $0.7 million,
$0.45 million, and $0.3 million, for each of the three years ended December 31,
1998, 1997, and 1996, respectively.
The Company has a qualified contributory savings plan as allowed under
401(k) in the Internal Revenue Code. The plan permits participant contributions
and requires a minimum contribution from the Company based on the participant's
contribution. Participants may elect to defer up to 15% of their annual
compensation through participation in the plan. Total contribution expense was
$2.2 million in 1998, $0.9 million in 1997, and none in 1996.
F-35
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 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 million (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 million and a senior secured revolving
facility (the "Revolving Debt Facility") in an aggregate principal amount of
$75 million. In the quarter ended June 30, 1998, this Credit Agreement was
amended to increase the Revolving Debt Facility from $75 million to $100
million. In addition, the Term Debt Facility was reduced from its original
balance of $125 million to $75 million. Up to $20 million 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
6.00% as of December 31, 1998. As of December 31, 1998, nothing was outstanding
under the Revolving Debt Facility and $75 million was outstanding under the
Term Debt Facility.
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 December 31, 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 million 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 5.90% for 4 years on $50 million of the Debt Facilities. The Company
accounts for this interest rate swap as a hedge, and accrues the interest rate
differential as an adjustment to interest expense on a monthly basis. See Note
1.
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 amounts of (a) $0.7 million on December
31, 1999; (b) $1 million on December 31, 2000; and (c) $ 1 million on December
31, 2001.
As of December 31, 1996, Catalytica Pharmaceuticals had a working capital
line of credit ($2.3 million outstanding at December 31, 1996) and two
equipment based term loans ($0.9 million and $0.5 million outstanding at
December 31, 1996). On July 31, 1997, upon the acquisition of the Greenville
Facility (See Note 2), the working capital line of credit and the term loans
were repaid at the amounts outstanding on that date ($3.5 million, $0.8
million, and $0.5 million).
The fair value of debt is based on pricing models or securities with similar
terms, and approximates carrying value.
At December 31, 1998, future minimum principal payments on debt were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999.............................................................. $10,770
2000.............................................................. 16,007
2001.............................................................. 21,000
2002.............................................................. 30,000
-------
$77,777
=======
</TABLE>
F-36
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Income Taxes
The provision for income taxes in 1998 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Current:
Federal................................................. $ 3,344 $ 41
State................................................... 1,665 484
------- -----
5,009 525
Deferred:
Federal................................................. (2,622) (19)
State................................................... (79) (147)
------- -----
(2,701) (166)
------- -----
Total Provision....................................... $ 2,308 $ 359
======= =====
</TABLE>
The provision for income taxes reconciles to the amount computed by applying
the Federal statutory rate to income before provision for income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- --------
<S> <C> <C> <C>
Income (loss) before provision for income taxes.. $23,071 $ 669 $ (5,192)
======= ===== ========
Federal statutory rate (35% in 1998, 34% in 1997
and 1996)....................................... $ 8,075 $ 227 $ (1,765)
State taxes, net of federal benefit.............. 1,268 330 --
Losses not currently benefited................... -- -- 1,765
Benefit of net operating losses.................. (7,461) (198) --
Other............................................ 426 -- --
------- ----- --------
Provision for income taxes....................... $ 2,308 $ 359 $ --
======= ===== ========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Capitalized R&D costs............................... $ 114 $ 2,000
Net operating loss carryforwards.................... 6,639 14,100
Credit carryforwards................................ -- 200
Nondeductible reserves.............................. 3,749 1,300
Other, net.......................................... 2,194 300
------- --------
Total deferred tax assets............................. $12,696 $ 17,900
Valuation allowance................................... (9,829) (17,734)
------- --------
Net deferred tax assets............................... $ 2,867 $ 166
======= ========
</TABLE>
The realization and amount of any tax benefit from the deferred tax asset of
$12.7 million is dependent upon the generation of future taxable income and the
tax rate in effect in such years. Accordingly, due to the uncertainty of
realizing future taxable earnings, a valuation allowance has been established
for a portion of the deferred tax asset. The valuation allowance decreased by
$7.9 million in 1998, and increased by $0.6 million during 1997. Approximately
$1.2 million of the valuation allowance for deferred tax assets relates to
benefits of stock option deductions which, when recognized, will be allocated
directly to contributed capital.
F-37
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, for federal income tax purposes, the Company has net
operating loss carryforwards of approximately $19 million, which expire in the
years 2009 through 2012. The net operating loss carryforwards differ from the
accumulated deficit as a result of temporary differences in the recognition of
certain revenue and expense items for financial and federal tax reporting
purposes, primarily consisting of expenses not currently deductible for tax
reporting purposes.
Note 9. Leases, Commitments, and Contingencies
Operating Leases
Catalytica leases its research and office facilities in Mountain View, Ca
under an operating lease agreement that expires on December 31, 2003, after
which the Company has the option for a five-year extension. The pharmaceuticals
manufacturing facility in East Palo Alto, Ca is owned by the Company; however,
the land at the facility is leased under a ground lease agreement commencing
November 30, 1993 for an initial term of 15 years. The lease expires on
November 30, 2008, after which the Company has two five-year options to extend
the lease term, and one four-year option to extend the lease term after
expiration of the first two option periods. All land and buildings at the
pharmaceuticals manufacturing facility in Greenville, North Carolina, are owned
by the Company.
The aggregate minimum annual commitments under all operating leases as of
December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................... $4,661
2000............................................................... 1,502
2001............................................................... 1,193
2002............................................................... 999
2003............................................................... 986
and thereafter..................................................... 189
------
$9,530
======
</TABLE>
Rent expense, consisting of building and equipment rent, was $2.6 million,
$1.4 million, and $0.7 million for each of the three years ended December 31,
1998, 1997, and 1996, respectively.
Research Collaborations
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. The Pfizer
drugs are at varying stages of approval by the Food and Drug Administration,
ranging from Phase II clinical trials through the New Drug Application stage.
See Note 2 for a description of the collaborative research and license
agreement. 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.
The Company has entered into research collaborations with companies whereby
potential future payments may be due to selective collaborative partners if the
Company achieves certain commercial milestones as defined in the collaborative
agreements.
Supply Agreement
As mentioned in Note 2, in connection with the purchase of the Greenville
Facility, Glaxo Wellcome entered into a Supply Agreement under which Catalytica
Pharmaceuticals will manufacture products for Glaxo
F-38
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Wellcome over the next several years. In 1998 the Company signed two amendments
to the original Supply Agreement, and a third amendment was signed in the first
quarter of 1999.
Note 10. Related Party Transactions
Enron Ventures Corporation. As discussed in Note 3, Enron purchased a 15%
minority interest in Combustion Systems for $30 million in cash. Enron also
received a three-year option to purchase an additional 4.9% of Combustion
Systems for $14.4 million in cash. 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.
Glaxo Wellcome. As discussed in Note 2, Glaxo Wellcome holds 250,000 shares
of Junior Preferred Stock of Catalytica Pharmaceuticals (1.5% of Catalytica
Pharmaceuticals) and warrants to purchase 2,000,000 shares of Common Stock of
Catalytica. Under a Supply Agreement and its subsequent amendments, Catalytica
Pharmaceuticals currently manufactures products for Glaxo.
Morgan Stanley Dean Witter Capital Partners ("MSDWCP"). In conjunction with
the purchase of the Greenville Facility, the Company issued 30,000,000 shares
of Class A and Class B Common Stock to MSDWCP for an aggregate purchase price
of $120 million. The Company subsequently repurchased 5,000,000 shares of Class
B Common Stock from MSDWCP at a price of $4.75 per share. At December 31, 1998,
MSDWCP owned approximately 32% of the Company's outstanding voting securities
and approximately 47% of the Company's outstanding securities (See Note 11).
Pursuant to this Investment Agreement, MSDWCP has certain rights to cause the
Company to include as nominees for the Company's Board of Directors, up to
three directors for so long as MSDWCP owns not less than 30% of the outstanding
common stock of the Company. MSDWCP has designated two MSDWCP nominees as
directors. In the event MSDWCP's beneficial ownership of outstanding common
stock is less than 30% but equal to or greater than 10%, MSDWCP shall be
entitled to elect up to two directors. In the event MSDWCP's beneficial
ownership is less than 10% but equal to or greater than 6%, MSDWCP shall be
entitled to elect one director. The Company has also agreed that MSDWCP will be
represented on each committee of the Board of Directors.
Pfizer Inc. As discussed in Note 2, Pfizer holds 150,000 shares of
Catalytica Pharmaceuticals Series B Preferred Stock (4.4% of Catalytica
Pharmaceuticals). Catalytica Pharmaceuticals currently manufactures
intermediates for Pfizer and performs research for Pfizer under a collaborative
research and license agreement.
GENXON(TM) Power Systems, LLC. As discussed in Note 3, Catalytica Combustion
Systems Inc. ("Combustion Systems") and Woodward Governor Company ("Woodward")
have established GENXON, a joint venture, to serve the gas turbine retrofit
market. GENXON reimburses Catalytica and Woodward for work performed on its
behalf.
Single-Site Catalysts. Catalytica Advanced Technologies formed an equally
owned joint venture with United Catalysts, Inc. for the custom manufacturing,
process development, and marketing of organometallic catalysts. Single-Site
Catalysts reimburses Catalytica Advanced Technologies and United Catalysts for
work performed on its behalf.
Note 11. Capital Stock
Common Stock
On July 29, 1997, the shareholders of the Company approved an increase in
the authorized number of shares of the Company's Common Stock from 40,000,000
to 120,000,000 shares. 30,000,000 of those shares
F-39
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were approved as a new class of Common Stock of the Company, to be designated
Class A Common Stock at a par value $0.001 per share. 17,000,000 of the shares
were approved as a new class of nonvoting Common Stock of the Company, to be
designated Class B Common Stock, par value $0.001 per share.
With the closing of the acquisition of the Greenville Facility as described
in Note 2, the Company closed a sale of 13,270,000 shares of its Class A Common
Stock and 16,730,000 shares of its Class B Common Stock to MSDWCP
(collectively, the "Stock Sale"), at a price of $4.00 per share, for an
aggregate of $120 million. As a result of the Stock Sale and subsequent stock
repurchase, as of December 31, 1998, MSDWCP beneficially own approximately 32%
of the voting control, and securities convertible into 40% of the voting
control of the Company, and 47% of the outstanding capital stock of the
Company.
Per the terms of the Acquisition, the Company had the option to redeem up to
5,000,000 shares of the Class B Common Stock at a price equal to $4.75 per
share during the period from closing through November 30, 1997, and $5.00 per
share during the period from December 1, 1997 through May 31, 1998, upon which
the redemption right expired. The optional redemption right provided the
Company with the flexibility to reduce the amount of equity issued to complete
the Acquisition if during the period between the closing of the Acquisition and
May 31, 1998, the Company's financial performance during such period enabled
the Company to obtain capital on terms that reduced the equity dilution from
the Stock Sale. As further described in "Warrant Dividend" below, on November
30, 1997, the Company exercised its right of redemption for 5,000,000 shares of
the Class B Common Stock at $4.75 per share reflecting a call premium of $0.75
per share. As such, 11,730,000 shares of Class B Common Stock remained
outstanding as of December 31, 1998.
At any time after July 1, 1998, MSDWCP has the right to request the Company
to effect a registration of shares of Common Stock issuable upon conversion of
the Class A Common Stock and Class B Common Stock held by it with an aggregate
offering price of at least $15 million. In addition, in the event the Company
proposes to register any of its securities for its own account or the account
of any of its stockholders (other than certain registrations relating solely to
a stock option or other similar employee benefit plan), MSDWCP will have the
right to have the Common Stock issuable upon conversion of the Class A and B
Common Stock included in such registration. At December 31, 1998, MSDWCP has
not effected a registration of shares of either Class A Common Stock or Class B
Common Stock.
At any time after July 1, 2005, the holders of the Class A Common Stock will
have the right to require the Company, upon six months written notice, to
repurchase during any annual period commencing July 1 and ending June 30 up to
one-third of the initial outstanding shares of Class A Common Stock and Class B
Common Stock for an amount in cash equal to the Liquidation Preference,
initially established at $4.00 per share subject to certain adjustments. In
addition, upon a change of control, MSDWCP shall have the right to cause the
Company to purchase all of the shares of Class A Common Stock and Class B
Common Stock initially acquired by MSDWCP at the Liquidation Preference.
Each share of Class A Common Stock may be converted at the option of the
holder into shares of Common Stock at the effective conversion price. Each
share of Class A Common Stock shall automatically convert into Common Stock (a)
upon any transfer by MSDWCP, including any distribution to its partners or
affiliated entities, or (b) if less than 10% of the shares of Class A Common
Stock initially issued are outstanding. The conversion price initially shall be
$4.00 per share and shall be subject to adjustment in certain cases as
described below.
The liquidation preference of the Class A Common Stock ranks senior to all
other common stock and preferred stock at any time outstanding of the Company
unless agreed to by MSDWCP. The liquidation preference of the Class A Common
Stock will be equal to the greater of (a) $4.00 per share plus any accrued and
unpaid dividends, (the "Liquidation Preference") and (b) the amount that
holders thereof would have
F-40
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
received in such liquidation had the Class A Common Stock been converted to
Common Stock in accordance with its terms.
The Class B Common Stock has the same powers, preferences and rights
described above as the Class A Common Stock, except that the Class B Common
Stock is convertible into Class A Common Stock, has no voting rights (except as
required by Delaware law) and has no right to vote for the election of
directors.
The shares of Class B Common Stock will, upon any transfer of such shares by
MSDWCP, be automatically converted into a like number of shares of Common
Stock, subject to adjustment upon certain events with respect to the Common
Stock. The shares of Class B Common Stock are convertible at the option of
MSDWCP into Common Stock or Class A Common Stock so long as such conversion
results in MSDWCP holding 40% or less of the Company's outstanding voting
securities.
Common Stock Reserved for Future Issuance
Shares of Common Stock of the Company reserved for future issuance at
December 31, 1998 are as follow:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Employee Stock Purchase Plan.................................... 2,733,000
Stock Options................................................... 4,771,000
Pharmaceuticals Series B Preferred Stock (*)--held by Pfizer.... 1,700,000
Pharmaceuticals Junior Preferred Stock (*)--held by Glaxo
Wellcome....................................................... 600,000
Combustion Systems Series B Preferred Stock (*)--held by Enron.. 2,700,000
Warrants--held by Glaxo Wellcome................................ 2,000,000
Class A and B Common Stock--held by MSDWCP...................... 25,000,000
----------
39,504,000
==========
</TABLE>
- --------
(*) Under terms of Shareholder Agreements with Pfizer, Glaxo Wellcome, and
Enron, stock held by these companies in Catalytica Pharmaceuticals and
Combustion Systems is convertible into Catalytica common stock if certain
terms and conditions are met. The minority interests held by Pfizer, Glaxo
Wellcome, and Enron are reflected as $8 million, $3 million, and $30
million, respectively, ($41 million in total) as of December 31, 1998.
Preferred Stock
The Company has 5,000,000 shares of Preferred Stock authorized, all of which
are unissued. Catalytica has reserved 100,000 shares of Series A participating
preferred stock for potential issuance pursuant to the exercise rights under
the Catalytica Stockholders' Rights Plan. The Board of Directors of the Company
has the authority, without further vote or action by the stockholders, to issue
these undesignated shares of Preferred Stock in one or more series and to fix
the rights, qualifications, preferences, privileges, limitations, and
restrictions of each such series, including dividend rights, terms or
redemption, redemption prices, liquidation preferences, and the number of
shares constituting any series or the designation of such series.
Warrant Dividend
The Company distributed, at no cost, to each holder of Common Stock of
record as of August 22, 1997, one warrant for each three shares of Common Stock
held by the stockholder. The warrants entitled each holder to purchase Common
Stock at $4.00 per share. The total number of warrants issued was 6,947,275. Of
the warrants issued to stockholders, 6,922,996 shares were exercised, and
warrants for 24,279 shares expired on October 31, 1997.
F-41
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The exercise of 6,922,996 warrants generated gross proceeds of $27.7
million. The Company used $23.75 million of the proceeds to repurchase an
aggregate of 5,000,000 shares of its Class B Common Stock issued to MSDWCP on
July 31, 1997. The repurchase price was $4.75 per share, as such repurchase was
consummated prior to November 30, 1997. The premium paid in connection with the
repurchase is reflected in the Company's earnings per share calculation for the
period ended December 31, 1997, as a reduction of earnings available to common
shareholders. Accordingly, the Company's earnings per share for the year ending
December 31, 1997, were reduced by $0.10 due to this repurchase.
Warrants
In connection with the Acquisition of the Greenville Facility, the Company
issued warrants to Glaxo Wellcome to purchase 2,000,000 shares of the Company's
Common Stock at an exercise price of $12.00 per share. The warrants expire on
July 31, 2003. The value of the warrants was recorded in additional paid-in
capital as of December 31, 1997.
The Company issued a warrant to purchase 320,000 shares of Common Stock at a
price per share equal to $4.80 per share in connection with its financing in
November, 1995. As of December 31, 1998, 320,000 of the outstanding warrants
were exercised for 208,274 shares of common stock as per the terms of a cash-
less exercise agreement.
Catalytica Deferred Compensation
The Company granted to an officer options to purchase 100,000 shares of
Common Stock at an exercise price of $5.00 per share in 1997, for which the
Company recorded deferred compensation amounting to $0.5 million. The deferred
compensation is being amortized to expense ratably over the vesting period of
the option, four years.
Stockholders Rights Plan
On October 28, 1996, the Board of Directors adopted a Stockholders Rights
Plan providing a dividend of rights (which cannot be exercised until certain
events occur) to purchase shares of preferred stock of the Company. Each
shareholder of record receives one right for each share of common stock then
owned. This plan was adopted to ensure that all stockholders of the Company
receive fair value for their common stock in the event of any proposed takeover
of the Company and to guard against coercive tactics to gain control of the
Company without offering fair value to the Company's stockholders.
Stock Option and Stock Purchase Plans
The Company has elected to follow Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), requires the use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's stock options generally equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 which also requires that the information be determined as
if the Company has accounted for its employee stock awards and
F-42
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
those of its subsidiaries granted subsequent to December 31, 1994, under the
fair value method of this Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes multiple option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Weighted
Risk Free Dividend Volatility Average
Interest Rate Yield Factor Expected Life
-------------- -------- ----------------- --------------
1998 1997 1996 1996-98 1998 1997 1996 1998 1997 1996
---- ---- ---- -------- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Catalytica, Inc. Stock
Option Plans........... 5.19 6.15 6.42 0.0 .8602 .9089 .8852 5.1 3.6 3.5
Catalytica, Inc. Stock
Purchase Plan.......... 5.19 6.15 6.42 0.0 .8602 .9089 .8852 1.3 1.2 1.7
Catalytica Advanced
Technologies, Inc...... 5.55 5.95 6.67 0.0 .8602 .9089 .8852 7.0 7.0 7.0
Catalytica Combustion
Systems, Inc........... 5.48 6.01 6.57 0.0 .8602 .9089 .8852 5.0 5.0 5.0
Catalytica
Pharmaceuticals, Inc... 5.25 6.05 6.39 0.0 .8602 .9089 .8852 5.0 3.5 3.5
</TABLE>
<TABLE>
<CAPTION>
Compensation
Expense
-------------------
1998 1997 1996
------- ------ ----
(in thousands)
<S> <C> <C> <C>
Catalytica, Inc. Stock Option Plans..................... $ 4,621 $1,990 $470
Catalytica Stock Purchase Plan.......................... 2,405 1,439 74
Catalytica Advanced Technologies........................ 10 12 25
Catalytica Combustion Systems........................... 547 85 66
Catalytica Pharmaceuticals.............................. 3,511 1,000 44
------- ------ ----
$11,094 $4,526 $679
======= ====== ====
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Income/(Loss) attributable to common
shareholders................................. $ 20,763 $(3,440) $(5,192)
Compensation expense.......................... $(11,094) $(4,526) $ (679)
Pro forma net income/(loss)................... $ 9,669 $(7,966) $(5,871)
Pro forma income/(loss) per share--basic...... $ 0.18 $ (0.24) $ (0.30)
Pro forma income/(loss) per share--diluted.... $ 0.14 $ (0.24) $ (0.30)
</TABLE>
Compensation expense resulting from the stock option and purchase plans
increased in fiscal 1998 significantly over prior years due to the full impact
of initial and annual option grants for employees at the Greenville Facility
and their participation in the employee stock purchase plan. 1997 only reflects
participation on both plans, Option Plans and Purchase Plan, by employees at
the Greenville Facility after the acquisition date of July 31, 1997.
F-43
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since compensation expense is recognized over the vesting period of the
related options, which are generally four years, and because pro forma
disclosure is only required commencing with 1995, the initial impact on pro
forma income may not be representative of compensation expense in future years.
Catalytica Inc.
1995 Catalytica Director Stock Option Plan. In 1995, the Company adopted the
1995 Director Option Plan under which 200,000 shares have been reserved for
future issuance. Under the 1995 Director Option Plan, the Board of Directors is
authorized to grant nonqualified stock options to Outside Directors to provide
incentive to continue service on the Board. The nonqualified stock options may
be granted at a price of not less than 100% of the fair market value of Common
Stock on the date of grant. Options generally become exercisable ratably over
three years from the date of grant and expire no later than ten years from the
date of grant.
1992 Catalytica Stock Option Plan. In 1992, the Company adopted the 1992
Stock Option Plan under which 5,050,000 shares have been reserved for future
issuance. Under the 1992 Stock Option Plan, the Board of Directors is
authorized to grant incentive stock options, or nonqualified stock options to
eligible employees and consultants, although incentive stock options may be
granted only to employees. Incentive stock options may be granted at an
exercise price of not less than 100% of the fair market value of Common Stock
on the date of grant while nonqualified stock options may be granted at a price
not less than 50% of the value of the Common Stock. Options generally become
exercisable ratably over five years and, effective 1998, 4 years from the date
of grant and expire no later than ten years from the date of grant.
1985 Catalytica Non-Qualified Stock Option Plan. Since 1985, the Company has
granted to certain directors, officers, and consultants 438,800 nonqualified
stock options at an average price of $0.54 per share. As of December 31, 1998,
436,400 shares had been exercised, and 400 were exercisable. Of the amounts
disclosed, 400,000 options were granted in 1985 to an officer of the Company
who is now a director. All options were granted at the fair market value at the
date of grant.
1983 Catalytica Incentive Stock Option Plan. The Company established an
incentive stock option plan in 1983 pursuant to which 1,240,000 shares were
reserved for future issuance to employees. The plan provided for full-time
employees to be granted options to purchase common shares at fair value, as
determined by the Board of Directors. The 1983 Incentive Stock Option Plan
expired, in accordance with its terms, on May 16, 1993. While all future awards
will be made under the 1992 Stock Option Plan, awards made under the 1983
Incentive Stock Option Plan will continue to be administered in accordance with
that plan. All shares reserved but unissued under that plan were canceled.
1983 Catalytica Restricted Stock Purchase Plan. The Company has a 1983
restricted stock purchase plan pursuant to which 200,000 shares were reserved
for future issuance to employees. Under the 1983 Employee Restricted Stock
Purchase Plan, employees purchased 179,357 common shares at fair value, as
determined by the Board of Directors. The 1983 Restricted Stock Purchase Plan
expired, in accordance with its terms, on May 16, 1993. All shares reserved but
unissued under that plan were canceled. No shares were subject to repurchase.
F-44
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September, 1995, the Company implemented a stock exchange program whereby
certain option holders could exchange higher priced options for a reduced
number of new options at the current fair market value. Options canceled and
regranted are reflected in the table below.
The following table summarizes stock option plan activity for the 1995
Director Stock Option Plan, the 1992 Stock Option Plan, the 1985 Catalytica
Non-Qualified Plan, the 1983 Incentive Stock Option Plan, and the 1983
Restricted Stock Purchase Plan:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------
Shares Weighted
Available Number of Average Aggregate
for Grant Shares Exercise Price Exercise Price
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995.................... 177,024 1,502,065 $ 2.20 $ 3,305,943
Authorized............. 1,200,000 -- -- --
Granted................ (308,700) 308,700 $ 3.89 1,201,756
Exercised.............. -- (124,095) $ 1.56 (194,102)
Canceled............... 37,017 (37,017) $ 3.63 (134,310)
Expired................ (4,200) -- -- --
---------- ---------- -----------
Balance at December 31,
1996.................... 1,101,141 1,649,653 $ 2.53 $ 4,179,287
Authorized............. 1,200,000 -- -- --
Granted at Fair Value.. (1,218,420) 1,218,420 $10.48 12,764,792
Granted Below Fair
Value................. (100,000) 100,000 $ 5.00 500,000
Exercised.............. -- (1,060,660) $ 1.87 (1,979,072)
Canceled............... 29,044 (29,044) $ 7.40 (214,797)
Expired................ (3,200) -- -- --
---------- ---------- -----------
Balance at December 31,
1997.................... 1,008,565 1,878,369 $ 8.12 $15,250,210
Authorized............. 2,000,000 -- -- --
Granted at Fair Value.. (570,785) 570,785 $12.70 7,246,356
Exercised.............. -- (115,550) $ 4.31 (498,294)
Canceled............... 91,609 (91,609) $10.68 (978,986)
Expired................ (750) -- -- --
---------- ---------- -----------
Balance at December 31,
1998.................... 2,528,639 2,241,995 $ 9.38 $21,019,286
Granted at Fair Value
(unaudited)........... (760,505) 760,505 $14.27 10,849,003
Exercised (unaudited).. -- (70,447) $ 5.13 (361,226)
Canceled (unaudited)... 51,516 (51,516) $11.43 (588,636)
---------- ---------- -----------
Balance at June 30,
1999 (unaudited)...... 1,819,650 2,880,537 $10.73 $30,918,427
========== ========== ===========
</TABLE>
The weighted average fair value of options granted at fair value during 1998
is $8.90 as calculated in accordance with FASB 123.
F-45
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock option activity and related information for
the year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Number Weighted Number Weighted
Outstanding Weighted Average Average Exercisable Average
Range of December 31, Remaining Exercise As of Exercise
Exercise Prices 1998 Contractual Life Price December 31, 1998 Price
- --------------- ------------ ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$1.80--
$3.50....... 199,783 6.32 $ 3.16 75,983 $ 3.02
$3.88--
$3.88....... 226,410 7.51 $ 3.88 84,283 $ 3.88
$3.94--
$9.25....... 207,179 7.66 $ 6.01 99,387 $ 5.98
$10.50--
$10.50...... 909,233 8.65 $10.50 237,018 $10.50
$10.63--
$12.00...... 242,527 9.71 $11.24 59,614 $11.44
$12.19--
$12.81...... 366,386 9.46 $12.52 32,420 $12.81
$13.88--
$16.25...... 65,820 9.11 $14.56 13,283 $14.31
$16.38--
$16.38...... 750 9.86 $16.38 750 $16.38
$17.98--
$17.98...... 1,630 9.92 $17.98 0 $ 0.00
$18.00--
$18.00...... 22,277 10.00 $18.00 0 $ 0.00
--------- -------
$1.80--
$18.00...... 2,241,995 8.51 $ 9.38 602,738 $ 8.19
========= =======
</TABLE>
1992 Catalytica Employee Stock Purchase Plan
In 1992, the Company adopted the 1992 Employee Stock Purchase Plan ("ESPP")
under which 3,500,000 shares have been reserved for future issuance. Under the
1992 Employee Stock Purchase Plan, employees of the Company are given an
opportunity to purchase Common Stock of the Company through accumulated payroll
deductions. Shares are purchased under the ESPP at 85% of the fair market value
at certain specified dates. Of the 3,500,000 shares authorized to be issued
under this plan, 2,733,440 are available for issuance at December 31, 1998. For
the year ended December 31, 1998, employees purchased 348,687 shares for
$2.9 million. For the year ended December 31, 1997, employees purchased 201,390
shares for $1.4 million. For the year ended December 31, 1996, employees
purchased 82,757 shares for $0.2 million. The weighted average fair value of
those purchase rights granted in 1998 was $5.66.
Catalytica Advanced Technologies, Inc.
1995 Catalytica Advanced Technologies Stock Option Plan. In 1995, the
Company adopted the 1995 Catalytica Advanced Technologies Stock Option Plan
under which 949,624 shares have been reserved for future issuance. Under the
1995 Catalytica Advanced Technologies Stock Option Plan, the Catalytica
Advanced Technologies Board of Directors is authorized to grant incentive stock
options, or nonqualified stock options to eligible employees and consultants,
although incentive stock options may be granted only to employees. The
incentive stock options generally vest ratably over four years from the date of
grant and expire no later than ten years from the date of grant. Nonqualified
stock options offered to directors vest ratably over three years from the date
of grant and expire no later than ten years from the date of grant. These
options become exercisable upon an initial public offering of the subsidiary's
stock, acquisition of more than 50% of the subsidiary's outstanding securities
by a third party, or upon reaching the date January 1, 2004.
F-46
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option plan activity for the 1995
Catalytica Advanced Technologies Stock Option Plan:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------
Shares Weighted Aggregate
Available Number of Average Exercise
for Grant Shares Exercise Price Price
--------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... 43,500 756,500 $0.10 $75,650
Authorized.................... 100,000 -- -- --
Granted....................... (80,000) 80,000 $0.10 8,000
Canceled...................... 8,000 (8,000) $0.10 (800)
-------- ------- -------
Balance at December 31, 1996.... 71,500 828,500 $0.10 82,850
Authorized.................... 19,624 -- -- --
Granted....................... (172,000) 172,000 $0.10 17,200
Canceled...................... 80,876 (80,876) $0.10 (8,088)
-------- ------- -------
Balance at December 31, 1997.... -- 919,624 $0.10 91,962
Authorized.................... 30,000 -- -- --
Granted....................... (17,000) 17,000 $0.10 1,700
Canceled...................... 15,000 (15,000) $0.10 (1,500)
-------- ------- -------
Balance at December 31, 1998 and
June 30, 1999 (unaudited)...... 28,000 921,624 $0.10 $92,162
======== ======= =======
</TABLE>
The weighted average fair value of options granted during 1998 was $0.08 as
calculated in accordance with FASB 123.
At December 31, 1998, options outstanding had a weighted average remaining
contractual life of 7.08 years and options to purchase approximately 772,328
shares of Catalytica Advanced Technologies common stock were vested with a
weighted average exercise price of $0.10/share.
Catalytica Combustion Systems, Inc.
1995 Catalytica Combustion Systems Stock Option Plan. In 1995, The Company
adopted the 1995 Catalytica Combustion Systems Stock Option Plan under which
1,162,125 shares have been reserved for future issuance. Under the 1995
Catalytica Combustion Systems Stock Option Plan, the Catalytica Combustion
Systems Board of Directors is authorized to grant incentive stock options, or
nonqualified stock options to eligible employees and consultants, although
incentive stock options may be granted only to employees. The incentive stock
options generally vest ratably over four years from the date of grant and
expire no later than ten years from the date of grant. Nonqualified stock
options offered to directors vest ratably over three years from the date of
grant and expire no later than ten years from the date of grant. These options
become exercisable upon an initial public offering of the subsidiary's stock,
acquisition of more than 50% of the subsidiary's outstanding securities by a
third party, or upon reaching the date January 1, 2004. Effective August 4,
1998, all new option grants become exercisable ratably over four years and
expire no later than ten years from the date of grant.
F-47
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option plan activity for the 1995
Catalytica Combustion Systems Stock Option Plan:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------
Shares Weighted Aggregate
Available Number of Average Exercise
for Grant Shares Exercise Price Price
--------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,
1995........................ 251,900 498,100 $ 0.40 $ 199,240
Granted.................... (242,900) 242,900 $ 0.40 97,160
Canceled................... 72,292 (72,292) $ 0.40 (28,917)
-------- --------- ----------
Balance at December 31,
1996........................ 81,292 668,708 $ 0.40 267,483
Authorized................. 112,125 -- -- --
Granted.................... (170,500) 170,500 $ 2.04 348,550
Canceled................... 4,750 (4,750) $ 0.40 (1,900)
-------- --------- ----------
Balance at December 31,
1997........................ 27,667 834,458 $ 0.74 614,133
Authorized................. 300,000 -- -- --
Granted.................... (187,950) 187,950 $ 9.69 1,821,665
Canceled................... 23,111 (23,111) $ 3.77 (87,244)
-------- --------- ----------
Balance at December 31,
1998........................ 162,828 999,297 $ 2.35 2,348,554
Granted (unaudited)........ (81,220) 81,220 $21.60 1,754,352
Canceled (unaudited)....... 15,470 (15,470) $ 2.68 (41,422)
-------- --------- ----------
Balance at June 30, 1999
(unaudited)................. 97,078 1,065,047 $ 3.81 $4,061,484
======== ========= ==========
</TABLE>
The weighted average fair value of options granted during 1998 was $6.60 as
calculated in accordance with FASB 123.
A summary of Catalytica Combustion Systems' stock option activity for the
year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Number Weighted Number Weighted
Outstanding Weighted Average Average Exercisable Average
Range of December Remaining Exercise As of Exercise
Exercise Prices 31, 1998 Contractual Life Price December 31, 1998 Price
- --------------- ----------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.40--$0.40.. 692,847 7.02 $ 0.40 578,000 $ 0.40
$2.50--$2.50.. 133,500 8.75 $ 2.50 41,720 $ 2.50
$5.60--$5.60.. 64,900 9.12 $ 5.60 21,198 $ 5.60
$12.00--
$12.00....... 80,000 9.30 $12.00 16,602 $12.00
$14.50--
$14.50....... 23,050 9.93 $14.50 125 $14.50
$16.00--
$16.00....... 5,000 9.63 $16.00 0 $ 0.00
------- -------
$0.40--
$16.00....... 999,297 7.65 $ 2.35 657,645 $ 1.00
======= =======
</TABLE>
Catalytica Pharmaceuticals, Inc.
1995 Pharmaceuticals Stock Option Plan. In 1995, The Company adopted the
1995 Pharmaceuticals Stock Option Plan under which 2,947,025 shares have been
reserved for future issuance. Under the 1995 Pharmaceuticals Stock Option Plan,
the Catalytica Pharmaceuticals Board of Directors is authorized to grant
incentive stock options, or nonqualified stock options to eligible employees
and consultants, although incentive stock options may be granted only to
employees. The incentive stock options generally vest ratably over four
F-48
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
years from the date of grant and expire no later than ten years from the date
of grant. Nonqualified stock options offered to directors vest ratably over
three years from the date of grant and expire no later than ten years from the
date of grant. These options become exercisable upon an initial public offering
of the subsidiary's stock, acquisition of more than 50% of the subsidiary's
outstanding securities by a third party, or upon reaching the date January 1,
2004. Effective August 4, 1998, all new option grants become exercisable
ratably over four years and expire no later than ten years from the date of
grant.
The following table summarizes stock option plan activity for the 1995
Catalytica Pharmaceuticals Stock Option Plan:
<TABLE>
<CAPTION>
Weighted Aggregate
Available for Number of Average Exercise
Grant Shares Exercise Price Price
------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31,
1995.................... 900 377,100 $ 0.40 $ 150,840
Authorized............. 100,000 -- -- --
Granted................ (121,900) 121,900 $ 0.66 80,830
Canceled............... 23,000 (23,000) $ 0.40 (9,200)
---------- --------- -----------
Balance at December 31,
1996.................... 2,000 476,000 $ 0.47 222,470
Authorized............. 1,469,025 -- -- --
Granted................ (1,503,400) 1,503,400 $ 4.93 7,411,580
Canceled............... 32,375 (32,375) $ 5.13 (166,213)
---------- --------- -----------
Balance at December 31,
1997.................... -- 1,947,025 $ 3.84 7,467,837
Authorized............. 1,000,000 -- -- --
Granted................ (492,255) 492,255 $19.06 9,384,793
Canceled............... 20,688 (20,688) $10.21 (211,281)
---------- --------- -----------
Balance at December 31,
1998.................... 528,433 2,418,592 $ 6.88 16,641,349
Granted (unaudited).... (68,500) 68,500 $20.20 1,383,950
Exercised (unaudited).. -- (18,054) $ 1.32 (23,918)
Canceled (unaudited)... 102,862 (102,862) $15.37 (1,581,448)
---------- --------- -----------
Balance at June 30, 1999
(unaudited)............. 562,795 2,366,176 $ 6.94 $16,419,933
========== ========= ===========
</TABLE>
The weighted average fair value of options granted during 1998 was $13.09 as
calculated in accordance with FASB 123.
A summary of Catalytica Pharmaceuticals' stock option activity and related
information for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Number Weighted Number Weighted
Outstanding Weighted Average Average Exercisable Average
Range of December Remaining Exercise As of Exercise
Exercise Prices 31, 1998 Contractual Life Price December 31, 1998 Price
- --------------- ----------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.40--$0.40.. 367,600 6.48 $ 0.40 356,650 $ 0.40
$0.70--$0.70.. 110,425 7.54 $ 0.70 74,844 $ 0.70
$1.50--$1.50.. 209,000 8.34 $ 1.50 105,286 $ 1.50
$5.50--$5.50.. 1,254,312 8.64 $ 5.50 415,334 $ 5.50
$12.00-
$12.00....... 18,500 9.25 $12.00 3,948 $12.00
$16.50--
$16.50....... 114,945 9.32 $16.50 32,973 $16.50
$20.00--
$20.00....... 238,810 9.63 $20.00 250 $20.00
$22.00--
$22.00....... 105,000 9.59 $22.00 11,250 $22.00
--------- ---------
$0.40--$5.50.. 2,418,592 8.41 $ 6.88 1,000,535 $ 3.48
========= =========
</TABLE>
F-49
<PAGE>
CATALYTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Quarterly Financial Data (Unaudited)
The following table summarizes the Company's quarterly results of operations
for the six months ended June 30, 1999 and the years ended December 31, 1999
and 1998.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------ ------------------------ --------------- ----------------
1999 1998 1997 1999 1998 1997 1998 1997 1998 1997 (1)
------- ------- -------- -------- ------- ------- ------- ------- ------- --------
(2) (2)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales........... $82,751 $90,280 $ 3,059 $ 99,418 $93,766 $ 6,262 $86,072 $66,699 $97,330 $ 98,327
Research and development
revenues .............. 5,313 1,854 1,726 5,001 2,311 1,500 2,115 1,606 1,428 1,767
Total revenues......... 88,064 92,134 4,785 104,419 96,077 7,762 88,187 68,305 98,758 100,094
Total expenses......... 79,184 84,375 6,263 93,351 87,784 9,254 79,792 64,832 90,270 91,601
Gross profit........... 8,880 7,759 (1,478) 11,068 8,293 (1,492) 8,395 3,473 8,488 8,493
Income (loss) before
common stock
redemption............ 6,164 4,251 (2,325) 7,283 5,033 (1,828) 5,644 743 5,835 3,720
Net income (loss)
attributable to common
shareholders.......... $ 6,164 $ 4,251 $ (2,325) $ 7,283 $ 5,033 $(1,828) $ 5,644 $ 743 $ 5,835 $ (30)
Basic earnings (loss)
per share (1)......... $ 0.12 $ 0.08 $ (0.12) $ 0.14 $ 0.09 $ (0.09) $ 0.10 $ 0.02 $ 0.11 $ 0.00
Diluted earnings (loss)
per share (1)......... $ 0.10 $ 0.07 $ (0.12) $ 0.11 $ 0.08 $ (0.09) $ 0.09 $ 0.02 $ 0.09 $ 0.00
</TABLE>
- --------
(1) Net income (loss) per share in 1997 reflects a reduction in net income of
$3.75 million relating to the premium paid for the repurchase of
five million shares of Series B common stock with proceeds received from
the exercise of warrants issued to shareholders as a dividend.
(2) See Note 2.
F-50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Members
Genxon Power Systems, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' capital and of cash flows present fairly in all
material respects, the financial position of Genxon Power Systems L.L.C. at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the year ended September 30, 1998 and for the period from October 21,
1996 (date of inception) to September 30, 1997. These financials are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations in both
fiscal years 1998 and 1997, which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers
LLP
San Jose, California
October 26, 1998
F-51
<PAGE>
GENXON POWER SYSTEM, L.L.C.
(a Delaware limited liability company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 594,573 $ 54,366
Accounts receivable................................... 204,233
Inventory............................................. 278,292 233,977
Prepaid expenses...................................... 358,482
---------- -----------
Total current assets................................ 1,077,098 646,825
---------- -----------
Property and equipment, net............................. 897,876 557,362
Note receivable from employee........................... 120,000
---------- -----------
Total assets........................................ $2,094,974 $ 1,204,187
========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Payable to Woodward Governor Company.................. $ 9,060 $ 89,483
Payable to Catalytica Combustion Systems, Inc......... 320,589 315,580
Accounts payable...................................... 199,480 1,852,014
Accrued liabilities................................... 257,093 433,261
---------- -----------
Total current liabilities........................... 786,222 2,690,338
Commitments and contingencies (Note 3)..................
Members' capital........................................ 1,308,752 (1,486,151)
---------- -----------
Total liabilities and members' capital.............. $2,094,974 $ 1,204,187
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year Ended inception)
September 30, to September
1998 30, 1997
------------- ------------
<S> <C> <C>
Revenues:
Research contract................................. $ 204,233 $ 268,000
----------- ------------
Operating expenses:
Research and development.......................... 8,137,903 8,656,442
Selling, general and administrative expenses...... 1,709,337 2,147,797
----------- ------------
9,847,240 10,804,239
----------- ------------
Loss from operations............................ (9,643,007) (10,536,239)
Other income, net................................... 27,910 50,088
----------- ------------
Net loss........................................ $(9,615,097) $(10,486,151)
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
Catalytica
Woodward Combustion
Governor Systems,
Company Inc. Total
----------- ----------- ------------
<S> <C> <C> <C>
Capital contributions.................. $ 7,100,000 $ 1,900,000 $ 9,000,000
Net loss........................... (8,243,076) (2,243,075) (10,486,151)
----------- ----------- ------------
Members' capital, September 30, 1997... (1,143,076) (343,075) (1,486,151)
Capital contributions................ 6,605,000 5,805,000 12,410,000
Net loss........................... (4,807,548) (4,807,549) (9,615,097)
----------- ----------- ------------
Members' capital, September 30, 1998... $ 654,376 $ 654,376 $ 1,308,752
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 21,
1996 (date
of
Year ended Inception)
September to September
30, 1998 30, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (9,615,097) $(10,486,151)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense............................ 74,447 --
Changes in assets and liabilities:
Accounts receivable............................. (204,233) --
Inventory....................................... (44,315) (233,977)
Prepaid expenses................................ 358,482 (358,482)
Note receivable from employee................. (120,000) --
Payable to members............................ (75,414) 405,063
Accounts payable.............................. (1,652,534) 1,852,014
Accrued liabilities........................... (176,168) 433,261
------------ ------------
Net cash used in operating activities....... (11,454,832) (8,388,272)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment........... (414,991) (557,362)
------------ ------------
Cash flows from financing activities:
Members' capital contributions.................. 12,410,000 9,000,000
------------ ------------
Net increase in cash and cash equivalents......... 540,207 54,366
Cash and cash equivalents, beginning of period.... 54,366 --
------------ ------------
Cash and cash equivalents, end of period.......... $ 594,573 $ 54,366
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business of the Company:
GENXON Power Systems, L.L.C. (the Company), a Delaware limited liability
company, was formed on October 21, 1996 to develop and sell products and
services to a wide range of users of out-of-warranty gas turbines which require
reductions in emissions, overhaul or upgrade. Except as provided for in the
Limited Liability Operating Agreement, the existence of the Company will be
perpetual.
Investor members in GENXON Power Systems, L.L.C. received a percentage
interest in the Company based on the amount of cash and the agreed-upon fair
value of certain technology licenses contributed to the Company. There were two
initial investor members, each receiving a 50 percent interest in the Company.
Their initial capital commitments were as follows:
<TABLE>
<CAPTION>
Cash Technology
Commitment Licenses Total
---------- ---------- -----------
<S> <C> <C> <C>
Catalytica Combustion Systems, Inc.
(Catalytica)............................... $2,000,000 $8,000,000 $10,000,000
Woodward Governor Company (Woodward)........ $8,000,000 $2,000,000 $10,000,000
</TABLE>
At September 30, 1998, each member had contributed its agreed-upon
technology licenses and cash in the total amount of $21.4 million. Additional
future cash contributions will be at the discretion of each of the members, but
will generally be in proportion to their respective percentage interests in the
Company and will be governed by the terms of the Operating Agreement. For
financial statement purposes only, the fair value of the technology licenses
has not been recorded.
The Operating Agreement generally provides that profits and losses in any
fiscal year, or other applicable period, shall be allocated to each member in
proportion to their respective percentage interest. In the event that a
member's cumulative capital account, including the fair value of the technology
licenses contributed, is reduced to zero, losses will be reallocated to members
having positive capital account balances until all members' capital accounts
have been reduced to zero. Thereafter, losses will again be allocated to the
members based on their respective percentage interests. Such "reallocated"
losses shall first be restored by an allocation of profits before any
additional profits are allocated to the members. Under the terms of the
Operating Agreement, the Company is required to make cash distributions to each
member in the amount of the estimated tax liability for the net taxable income
and gains allocated to such member during the fiscal year. Any additional
distributions of cash or property will be at the discretion of the Board of
Managers as provided for in the Operating Agreement. At September 30, 1998,
cumulative capital account balances determined in accordance with the Operating
Agreement are as follows:
<TABLE>
<CAPTION>
Catalytica Woodward Total
------------ ------------ ------------
<S> <C> <C> <C>
Cash contributed..................... $ 7,705,000 $ 13,705,000 $ 21,410,000
Technology licenses contributed...... 8,000,000 2,000,000 10,000,000
Allocation of cumulative net loss.... (10,050,624) (10,050,624) (20,101,248)
------------ ------------ ------------
Capital account balances............. $ 5,654,376 $ 5,654,376 $ 11,308,752
============ ============ ============
</TABLE>
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The Company's financial statements have been prepared on a basis of
accounting assuming that it is a going concern, which contemplates realization
of assets and satisfaction of liabilities in the normal course of business. The
Company has reported a net loss of $9.6 million for the year ended September
30, 1998 and a
F-56
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
cumulative loss of $20.1 million for the period from October 21, 1996 (date of
inception) through September 30, 1998. Management plans to obtain additional
capital contributions from its members or other additional investors to meet
its current and ongoing obligations. Continued existence of the Company is
dependent on the Company's ability to ensure the availability of adequate
funding and the establishment of profitable operations. The financial
statements do not include adjustments that might result from the outcome of
this uncertainty.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less at the date of purchase to be
cash equivalents. Substantially all of the Company's excess cash is invested in
money market accounts with a major investment company.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and other accrued
liabilities approximate fair value due to their short maturities.
Inventory:
Inventory, consisting of purchased and manufactured parts to be used in the
overhaul and upgrade of gas turbine engines, is stated at the lower of cost or
estimated selling price.
Property and Equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, generally 3 to 10
years. Gains and losses from the disposal of property and equipment will be
taken into income in the year of disposition. At September 30, 1998, property
and equipment consists of tooling costs incurred in the construction of the
Company's manufacturing equipment.
Income Taxes:
The financial statements include no provision for income taxes since the
Company's income and losses are reported in the members' separate tax returns.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for its fiscal year 1999, with
reclassification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in members' capital
except those resulting from investments or contributions by members. The
Company is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's results
of operations.
F-57
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise. The new standard becomes effective for the Company's fiscal year
1999, and requires that comparative information from earlier years be restated
to conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
3. Commitments and Contingencies:
The Company entered into an exclusive agreement with Agilis Group, Inc.
(Agilis) to provide assistance and advice in the development and design of the
combustor and combustor related hardware for the Company's proprietary
catalytic combustion technology. Under the terms of the agreement, Agilis has
responsibility as to the details, methods, and means of performing its
services. Subject to the Company's approval and on its behalf, Agilis may enter
into purchase commitments and contracts with outside vendors to provide
materials and services to complete the projects. At September 30, 1998, the
Company has approximately $0.7 million in open purchase commitments through
Agilis. The agreement will expire on the later of the completion of all
services described in the agreement or December 31, 1999, unless extended in
writing and agreed to by both parties.
The Company has entered into a technical services agreement with the City of
Glendale, California to retrofit an FT4 gas turbine engine which was provided
by the City. Under the terms of the agreement, the retrofit will include adding
the Company's proprietary XONON combustion system and a digital control system
for a total turnkey price of $0.7 million, and must be completed by December
1998. In the event that the Company is unable to complete the agreed upon
retrofit on time or damages the engine in the process, the agreement requires
the Company to return the engine to its original state or replace it with a
similar engine, for which the Company has recorded a reserve of $134,000. The
Company and the City of Glendale are in discussions regarding the ultimate
utilization of XONON technology on either existing or new gas turbines under
this agreement.
4. Related Party Transactions:
The Company has entered into a services agreement with Catalytica and
Woodward to provide the Company with management support, technical services
support and administrative services. Costs under these services agreements for
the year ended September 30, 1998 and for the period from October 21, 1996
(date of inception) to September 30, 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Catalytica:
Research and development............................... $3,182,559 $3,450,077
General and administrative............................. $ 816,163 $1,355,308
Woodward:
Research and development............................... $ 552,690 $ 513,487
General and administrative............................. $ 118,550 $ 65,192
</TABLE>
The Company has also entered into supply agreements with both Catalytica and
Woodward to supply combustion system products and control system products to be
used by the Company in its business of retrofitting installed and operating gas
turbine engines.
F-58
<PAGE>
CATALYTICA, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to From Bad Balance at
Beginning Bad Debt Debt End of
of Period Reserves Reserves Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal year ended December 31,
1996............................. $ 100,000 $ -- $ -- $ 100,000
Fiscal year ended December 31,
1997............................. $ 100,000 $ 500,000 $ -- $ 600,000
Fiscal year ended December 31,
1998............................. $ 600,000 $1,212,000 $ -- $1,812,000
Six months ended June 30, 1999
(unaudited)...................... $1,812,000 $ 19,000 $ -- $1,831,000
</TABLE>
F-59
<PAGE>
Wyckoff Chemical Company, Inc. and Subsidiaries
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance Charged Deductions Balance
at to Bad From Bad at End
Beginning Debt Debt of
of Period Reserves Reserves Period
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal year ended June 30, 1997......... $45,000 $ 12,000 $(45,000) $12,000
Fiscal year ended June 30, 1998......... $12,000 $ 10,000 $ -- $22,000
Fiscal year ended June 30, 1999......... $22,000 $ 12,000 $ -- $34,000
</TABLE>
F-60
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CATALYTICA, INC.,
PILOT ACQUISITION CORPORATION,
AND
WYCKOFF CHEMICAL COMPANY, INC.
Dated as of July 14, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER...................................................... 1
1.1 The Merger.......................................................... 1
1.2 Effective Time...................................................... 1
1.3 Effect of the Merger................................................ 1
1.4 Articles of Incorporation; Bylaws................................... 2
1.5 Directors and Officers.............................................. 2
1.6 Effect of Merger on the Capital Stock of the Constituent
Corporations........................................................... 2
1.7 Surrender of Certificates........................................... 4
1.8 No Further Ownership Rights in Company Common Stock................. 6
1.9 Lost, Stolen or Destroyed Certificates.............................. 6
1.10 Tax and Accounting Consequences.................................... 6
1.11 Taking of Necessary Action; Further Action......................... 6
1.12 Adjustment to Acquisition Consideration............................ 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 7
2.1 Organization of the Company......................................... 7
2.2 Subsidiaries........................................................ 7
2.3 Company Capital Structure........................................... 7
2.4 Authority; No Dissenters' Rights.................................... 8
2.5 No Conflict......................................................... 8
2.6 Consents............................................................ 8
2.7 Company Financial Statements and Projections........................ 9
2.8 No Undisclosed Liabilities.......................................... 10
2.9 No Changes.......................................................... 10
2.10 Tax Matters........................................................ 11
2.11 Restrictions on Business Activities................................ 13
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition
of Equipment........................................................... 13
2.13 Intellectual Property.............................................. 15
2.14 Agreements, Contracts and Commitments.............................. 17
2.15 Interested Party Transactions...................................... 18
2.16 Governmental Authorization......................................... 18
2.17 Litigation......................................................... 19
2.18 Accounts Receivable; Inventory..................................... 19
2.19 Minute Books....................................................... 20
2.20 Environmental Matters.............................................. 20
2.21 Brokers' and Finders' Fees; Third Party Expenses................... 21
2.22 Employee Benefit Plans and Compensation............................ 22
2.23 Insurance.......................................................... 24
2.24 Compliance with Laws............................................... 24
2.25 Warranties; Indemnities............................................ 24
2.26 Statements; Proxy Statement/Prospectus............................. 24
2.27 Orders and Commitments............................................. 25
2.28 Materials and Parts................................................ 25
2.29 Bank Accounts...................................................... 25
2.30 Representations Complete........................................... 25
2.31 No Other Representations or Warranties............................. 25
2.32 Knowledge.......................................................... 25
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB............... 25
3.1 Organization, Standing and Power..................................... 25
3.2 Authority............................................................ 26
3.3 No Conflict.......................................................... 26
3.4 Capital Structure.................................................... 26
3.5 SEC Documents; Parent Financial Statements........................... 27
3.6 No Material Adverse Change........................................... 27
3.7 Brokers' and Finders' Fees........................................... 27
3.8 Nasdaq Listing....................................................... 27
3.9 Litigation........................................................... 27
3.10 Information Supplied................................................ 27
3.11 Capitalization and Interim Operations of Sub........................ 28
3.12 Consents............................................................ 28
3.13 Certain Post-Merger Operations...................................... 28
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................. 28
4.1 Conduct of Business of the Company................................... 28
4.2 No Solicitation...................................................... 30
ARTICLE V ADDITIONAL AGREEMENTS............................................ 31
5.1 Registration Statement............................................... 31
5.2 Access to Information................................................ 31
5.3 Confidentiality...................................................... 32
5.4 Expenses............................................................. 32
5.5 Public Disclosure.................................................... 32
5.6 Consents............................................................. 33
5.7 FIRPTA Compliance.................................................... 33
5.8 Reasonable Efforts................................................... 33
5.9 Notification of Certain Matters...................................... 33
5.10 Additional Documents and Further Assurances......................... 33
5.11 Employee Plans; Employees........................................... 33
5.12 Shareholder Approval................................................ 34
5.13 Pooling Accounting.................................................. 34
5.14 Affiliate Agreements................................................ 34
5.15 Nasdaq Listing...................................................... 34
5.16 Regulatory Filings.................................................. 35
5.17 Form S-8............................................................ 35
5.18 Company's Auditors.................................................. 35
5.19 Maintenance of Insurance............................................ 35
5.20 Underwriting of Parent Common Stock................................. 35
5.21 Inspection of Real Property......................................... 35
5.22 Publication of Results.............................................. 35
5.23 Parent Intentions With Respect to Future Operations................. 36
5.24 Indemnification..................................................... 36
ARTICLE VI CONDITIONS TO THE MERGER........................................ 36
6.1 Conditions to Obligations of Each Party to Effect the Merger......... 36
6.2 Conditions to Obligations of Company................................. 37
6.3 Conditions to the Obligations of Parent and Sub...................... 38
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
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Page
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<S> <C>
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER.............................. 39
7.1 Termination.......................................................... 39
7.2 Effect of Termination................................................ 39
7.3 Termination Fee...................................................... 39
7.4 Amendment............................................................ 40
7.5 Extension; Waiver.................................................... 40
ARTICLE VIII GENERAL PROVISIONS............................................ 40
8.1 Notices.............................................................. 40
8.2 Interpretation....................................................... 41
8.3 Counterparts......................................................... 41
8.4 Entire Agreement; Assignment......................................... 41
8.5 Severability......................................................... 41
8.6 Governing Law........................................................ 42
8.7 Rules of Construction................................................ 42
</TABLE>
<TABLE>
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Exhibit Description
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<C> <S>
Exhibit A Certificate of Merger
Exhibit B Escrow and Indemnification Agreement
Exhibit B-1 Special Purpose Escrow and Indemnification Agreement
Exhibit C Form of Parent Affiliate Agreement
Exhibit D Form of Company Affiliate
Exhibit E Form of Voting Agreement
Exhibit F Form of Legal Opinion of Counsel to Parent
Exhibit G Form of Legal Opinion of Counsel to the Company
Exhibit H Form of Estoppel Certificate
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 14, 1999 among Catalytica, Inc., a Delaware corporation
("Parent"), Pilot Acquisition Corporation, a Michigan corporation and wholly-
owned subsidiary of Parent ("Sub"), and Wyckoff Chemical Company, Inc., a
Michigan corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe it
is in the best interests of each company and their respective shareholders that
Parent acquire the Company through the statutory merger of Sub with and into
the Company (the "Merger") and, in furtherance thereof, have approved the
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding securities of the Company shall be converted into the right to
receive shares of Parent Common Stock as set forth herein. Parent will assume
all outstanding stock options of the Company.
C. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions.
D. The Company, on the one hand, and Parent and Sub, on the other hand,
desire to make certain representations, warranties, covenants and other
agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Michigan Business Corporation Act ("Michigan Law"
or "MBCA"), the Sub shall be merged with and into the Company, the separate
corporate existence of the Sub shall cease and the Company shall continue as
the surviving corporation and as a wholly-owned subsidiary of Parent. The
surviving corporation after the Merger is hereinafter referred to as the
"Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to
Section 7.1, the closing of the Merger (the "Closing") will become effective at
the time of filing the articles of merger with the Michigan Corporation,
Securities and Land Development Bureau in the form attached hereto as Exhibit A
(the "Merger Certificate"), and will take place as promptly as practicable, but
no later than five (5) business days following satisfaction or waiver of the
conditions set forth in Article VI, at the offices of Warner Norcross & Judd
LLP, 900 Old Kent Building, 111 Lyon Street, N.W., Grand Rapids, Michigan,
unless another place or time is agreed to in writing by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date." The time of acceptance by the Michigan Corporation, Securities
and Land Development Bureau of the Merger Certificate is herein referred to as
the "Effective Time."
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Michigan Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the
Company and Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
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1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time, at
the Effective Time, the Articles of Incorporation of Sub shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Articles of Incorporation; provided, however, that
Section I of the Articles of Incorporation of the Surviving Corporation shall
be amended to read as follows: "The name of the corporation is Wyckoff, Inc."
(b) The Bylaws of Sub, as in effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation until thereafter amended as
provided by law and such Bylaws.
1.5 Directors and Officers. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation immediately
after the Effective Time, each to hold the office of director of the Surviving
Corporation in accordance with the provisions of Michigan Law and the Articles
of Incorporation and Bylaws of the Surviving Corporation until their successors
are duly qualified and elected. The officers of the Sub immediately prior to
the Effective Time shall be the officers of the Surviving Corporation
immediately after the Effective Time, each to hold office in accordance with
the provisions of the Bylaws of the Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
(a) Certain Definitions. For all purposes of this Agreement, the following
terms shall have the following meanings:
"Acquisition Consideration" shall mean 4,496,487 shares of Parent Common
Stock, as appropriately adjusted to reflect the effect of any stock split,
stock dividend, reorganization, recapitalization or the like with respect
to the Parent Common Stock occurring after the date hereof and prior to the
Effective Time (a "Recapitalization of Parent Common Stock"); provided, the
Acquisition Consideration shall be subject to adjustment as provided in
Section 1.12 herein.
"Adjustment to Acquisition Consideration" shall mean the number of
shares of Parent Common Stock to be deducted from the Acquisition
Consideration as provided in Section 1.12 herein.
"Company Common Stock" shall mean shares of Common Stock of the Company.
"Company Options" shall mean each option and other right to acquire
Company Common Stock outstanding immediately prior to the Effective Time.
"Escrow Amount" shall mean the number of shares of Parent Common Stock
equal to five percent (5%) of the Acquisition Consideration.
"Exchange Ratio" shall be the amount resulting from the quotient of (i)
the Acquisition Consideration less the Adjustment to Acquisition
Consideration, if applicable, divided by (ii) the sum of the (A) total
issued and outstanding number of shares of Company Common Stock outstanding
immediately prior to the Closing Date, as adjusted to reflect appropriately
the effect of any stock split, reverse stock split, stock dividend,
reorganization, recapitalization, reclassification or other like change
with respect to the Company Common Stock occurring or having a record date
on or after the date hereof and prior to the Effective Time and (B) total
number of shares of Common Stock issuable upon exercise of Company Options.
"Parent Common Stock" shall mean shares of the Common Stock of Parent.
"Parent Rights" shall mean rights issued pursuant to the Parent Rights
Agreement.
"Parent Rights Agreement" shall mean the Preferred Shares Rights
Agreement dated as of October 23, 1996 between Chase Mellon Shareholder
Services, L.L.P. and Parent, as amended by Amendment No. 1, dated as of
June 28, 1997.
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"Shareholder" shall mean each holder of Company Common Stock immediately
prior to the Effective Time.
"Special Purpose Escrow Amount" shall mean the number of shares of
Parent Common Stock equal to $600,000.
"Total Outstanding Shares" shall be 317,647 shares of Company Common
Stock (which is equal to the aggregate number of shares of Company Common
Stock outstanding immediately prior to the Effective Time plus the
aggregate number of shares of Company Common Stock issuable, with or
without the passage of time or satisfaction of other conditions, upon
exercise or conversion of all Company Options outstanding immediately prior
to the Effective Time).
"Trading Price" shall be equal to the median closing sales price of the
Parent Common Stock as reported on the Nasdaq National Market during the
twenty (20) consecutive trading days ending on the date immediately
preceding the date hereof.
(b) Maximum Shares to be Issued; Effect on Capital Stock.
(i) The maximum number of shares of Parent Common Stock to be issued
(including Parent Common Stock to be reserved for issuance upon exercise of
Company Options) in exchange for the acquisition by Parent of all
outstanding Company Common Stock and all Company Options shall
be 4,496,487, less the Adjustment to the Acquisition Consideration, if
applicable. No adjustment shall be made to the number of shares of Parent
Common Stock issued or issuable in respect of the Merger as a result of any
cash proceeds received by the Company from the date hereof to the Closing
Date pursuant to the exercise of Company Options.
(ii) Subject to the terms and conditions of this Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part
of the Parent, the Company or any other holder of any shares of the
Company, each share of the Company Common Stock issued and outstanding
immediately prior to the Effective Time will be canceled and extinguished
and be converted automatically into the right to receive, upon surrender of
the certificate representing such share of Company Common Stock in the
manner provided in Section 1.7(c), that number of shares of Parent Common
Stock equal to the Exchange Ratio.
(iii) Each share of Parent Common Stock to be issued in the Merger will
have attached to it the number of Parent Rights issuable pursuant to the
Parent Rights Agreement then represented by each share of Parent Common
Stock at the Effective Time, provided that the Parent Rights are not then
separately transferable.
(c) Company Options to Purchase Company Common Stock.
(i) At the Effective Time, each Company Option then outstanding, whether
or not immediately exercisable, will be assumed by Parent. Each Company
Option so assumed by Parent under this Agreement will continue to have, and
be subject to, the same terms and conditions governing such Company Option
immediately prior to the Effective Time (including, without limitation, any
vesting schedule or repurchase rights), except that (i) each Company Option
will be exercisable (or will become exercisable in accordance with its
terms) for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable
upon exercise of such Company Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole
number of shares of Parent Common Stock, and (ii) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Option will be equal to the quotient determined by dividing
the exercise price per share of Company Common Stock at which such Company
Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. After the Effective
Time, Parent will issue to each holder of an outstanding Company Option a
notice describing the foregoing assumption of such Company Option by
Parent. Notwithstanding the provisions of clauses (i) and (ii) of the first
sentence of this Section 1.6(c)(i),
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each Option which is an "incentive stock option" shall be adjusted as
required by Section 424 of the Internal Revenue Code, and the regulations
promulgated thereunder, so as not to constitute a modification, extension
or renewal of such Option, within the meaning of Section 424(h) of the
Internal Revenue Code.
(ii) Prior to the Effective Time, the Company shall take all action
necessary to effect the transactions anticipated by this Section 1.6(c)
under all Company Option agreements and any other plan, agreement or
arrangement of the Company.
(d) Capital Stock of Sub. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation. Each stock certificate of Sub evidencing
ownership of any such shares shall continue to evidence ownership of such
shares of capital stock of the Surviving Corporation.
(e) Withholding Taxes. Any number of shares of Parent Common Stock issuable
pursuant to Section 1.6(b) and any cash payable pursuant to Section 1.7(g)
shall be subject to the amount of any state and federal withholding taxes
incurred (and not previously paid by or on behalf of such Shareholder or the
Company) in connection with the acquisition of the Company's Common Stock, upon
the exercise of Company Options and any Company Common Stock that had its
vesting accelerated, if any, by such Shareholder. The Shareholder shall make
appropriate arrangements with the Company for payment of any such amounts.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Stock or Company Common Stock), reorganization, recapitalization or
other like change with respect to Parent Common Stock or Company Common Stock,
as applicable, occurring after the date hereof and prior to the Effective Time.
1.7 Surrender of Certificates.
(a) Exchange Agent. The corporate secretary of Parent or an institution
selected by Parent and reasonably satisfactory to the Company shall serve as
exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, the aggregate number of shares of Parent Common Stock
issuable pursuant to Section 1.6 in exchange for outstanding shares of Company
Common Stock; provided that, on behalf of the holders of Company Common Stock,
Parent shall deposit into escrow accounts that number of shares of Parent
Common Stock equal to the Escrow Amount out of the aggregate number of shares
of Parent Common Stock otherwise issuable pursuant to Section 1.6. The escrows
will be established pursuant to an Escrow and Indemnification Agreement among
Parent, Sub, the Company and U.S. Bank Trust, N.A., as Escrow Agent (the
"Escrow Agent"), in the form of Exhibit B hereto (the "Escrow Agreement") and a
Special Purpose Escrow and Indemnification Agreement among Parent, Sub, the
Company and the Escrow Agent in the form of Exhibit B-1 hereto (the "Special
Purpose Escrow Agreement") subject to such changes as may be required by the
Escrow Agent. For purposes of this Agreement, the Escrow Agreement and the
Special Purpose Escrow Agreement shall be referred to collectively as the
"Escrow Agreements." Of the Escrow Amount, an amount equal to the Special
Purpose Escrow Amount shall be deposited into the Special Purpose Escrow
Agreement and an amount equal to the Escrow Amount less the Special Purpose
Escrow Amount shall be deposited into the Escrow Agreement. The portion of the
Escrow Amount and the Special Purpose Escrow Amount contributed on behalf of
each holder of Company Common Stock shall be in proportion to the aggregate
number of shares of Parent Common Stock which such holder would otherwise be
entitled to receive under Section 1.6 by virtue of ownership of outstanding
shares of Company Common Stock.
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Company Common Stock whose shares were
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converted into the right to receive shares of Parent Common Stock pursuant to
Section 1.6 (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock (less the number of shares of Parent Common
Stock, if any, to be deposited in the respective Escrow Fund (each as defined
separately in the Escrow Agreements) on such holder's behalf pursuant to the
Escrow Agreements), plus cash in lieu of fractional shares in accordance with
Section 1.7(g), to which such holder is entitled pursuant to Section 1.6, and
the Certificate so surrendered shall forthwith be canceled. As soon as
practicable after the Effective Time, and subject to and in accordance with the
provisions of the Escrow Agreements, Parent shall cause to be distributed to
the Escrow Agent a certificate or certificates representing that number of
shares of Parent Common Stock equal to the Escrow Amount and the Special
Purpose Escrow Amount which shall be registered in the name of the Escrow
Agent. Such shares shall be beneficially owned by the holders on whose behalf
such shares were deposited in the respective Escrow Fund and shall be available
to compensate Parent as provided in the Escrow Agreements. Until so
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of full shares of Parent
Common Stock into which such shares of Company Common Stock shall have been so
converted and the right to receive an amount in cash in lieu of the issuance of
any fractional shares in accordance with Section 1.7(g).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the reasonable satisfaction of
Parent or any agent designated by it that such tax has been paid or is not
payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to a holder of shares of Parent Common Stock or Company Common
Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(g) Fractional Shares. No fraction of a share of Parent Common Stock will be
issued, but in lieu thereof, each holder of shares of Company Common Stock who
would otherwise be entitled to a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock to be received
by such holder) shall be entitled to receive from Parent an amount of cash
(rounded to the nearest whole cent) equal to the product of (i) such fraction,
multiplied by (ii) the Trading Price.
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1.8 No Further Ownership Rights in Company Common Stock. All amounts paid in
respect of the surrender for exchange of shares of Company Common Stock in
accordance with the terms hereof, shall be deemed to be full satisfaction of
all rights pertaining to such shares of Company Common Stock, and there shall
be no further registration of transfers on the records of the Surviving
Corporation of shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Company
Stock Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any certificates
evidencing shares of Company Common Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock and other amounts, if any,
as may be required pursuant to Section 1.7(d); provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificates to deliver a
bond in such sum as it may reasonably direct against any claim that may be made
against Parent or the Exchange Agent with respect to the certificates alleged
to have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) qualify for accounting treatment as a pooling of interests.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, Parent and Sub, the officers and directors of
the Surviving Corporation and Parent are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful
and necessary action.
1.12 Adjustment to Acquisition Consideration. As soon as practicably
available, the Company shall deliver to Parent an audited balance sheet of the
Company dated as of June 30, 1999 (the "June Balance Sheet"). The June Balance
Sheet will be prepared consistent with generally accepted accounting principles
("GAAP") on a basis consistent with that employed in preparing balance sheets
forming a part of the Company's audited financial statements for prior periods
so as to present fairly the assets and liabilities of the Company as of June
30, 1999. In the event of a Material Adverse Effect in the June Balance Sheet
(as defined herein), the Acquisition Consideration shall be reduced by the
Adjustment to the Acquisition Consideration (as defined herein). A "Material
Adverse Effect in the June Balance Sheet" shall be deemed to exist in the
event, and to the extent, that the difference (the "Total Difference") between
(i) the amount of the actual long-term bank debt as of June 30, 1999 on the
June Balance Sheet minus $11,420,000, less (ii) the amount of actual working
capital as reflected in the June Balance Sheet (which shall be reduced by the
amount of proceeds received from the exercise of Company Options) minus
$9,120,000 is greater than $2,000,000. For purposes of such calculation, the
term "working capital" shall mean the excess of short-term assets over short-
term liabilities, including the current portion of the bank debt. An
"Adjustment to the Acquisition Consideration" shall be calculated in the event
of a Material Adverse Effect in the June Balance Sheet and shall be equal to
the number of shares of Parent Common Stock resulting from the quotient of (A)
the Total Difference, divided by (B) Trading Price. For purposes of calculating
the Total Difference and determining whether a Material Adverse Effect in the
June Balance Sheet exists, the parties agree that the amount of $11,420,000
shall be adjusted by subtracting $1,750,000 and adding the amount actually
spent by the Company subsequent to March 31, 1999 and prior to June 30, 1999
for capital equipment with the written consent of Parent.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub, subject to such
exceptions as are specifically disclosed in the Disclosure Letter (the Company
shall use its reasonable best efforts to reference the appropriate section and
paragraph numbers) supplied by the Company to Parent (the "Disclosure Letter"),
that on the date hereof and as of the Effective Time as though made at the
Effective Time as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Michigan. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified could have a Material Adverse Effect.
For all purposes of this Agreement, the term "Material Adverse Effect" means
any change, event or effect that is materially adverse to the business, assets
(including intangible assets), condition (financial or otherwise) or results of
operations of the Company. The Company has delivered a true and correct copy of
its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Section 2.1 of the Disclosure Letter lists the current directors and officers
of the Company. The operations now being conducted by the Company have not been
conducted under any other name.
2.2 Subsidiaries. Except for Wyckoff Chemical Foreign Sales Corporation
("Subsidiary"), the Company does not have, and has never had, any subsidiaries
or affiliated companies and does not otherwise own, and has not otherwise
owned, any shares in the capital of or any interest in, or control, directly or
indirectly, any corporation, partnership, association, joint venture or other
business entity. Section 2.2 of the Disclosure Letter sets forth the
capitalization of Subsidiary, the record and beneficial owners of all the
outstanding capital stock of Subsidiary, the directors and officers of
Subsidiary, and each jurisdiction where Subsidiary is qualified to do business.
The Company has provided Parent complete and correct copies of Subsidiary's
Articles of Incorporation and Bylaws. There are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
either the Company or Subsidiary is a party or by which it is bound obligating
Subsidiary to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of capital stock
of Subsidiary or obligating Subsidiary to grant, extend, accelerate the vesting
of, change the price of, otherwise amend or enter into any such option,
warrant, call, right, commitment or agreement. As a result of the Merger,
Surviving Corporation will be the record and beneficial owner of all
outstanding capital stock of Subsidiary and rights to acquire capital stock of
the Subsidiary.
2.3 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 5,000,000 shares
of Company Common Stock, of which 283,929 shares are issued and outstanding as
of the date hereof. The Company Common Stock is held by the persons, with the
domicile addresses and in the amounts set forth in Section 2.3(a) of the
Disclosure Letter. All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and not subject to
preemptive rights created by statute, the Articles of Incorporation or Bylaws
of the Company or any agreement to which the Company is a party or by which it
is bound and have been issued in compliance with federal and state securities
laws. There are no declared or accrued unpaid dividends with respect to any
shares of the Company's Common Stock. The Company has no other capital stock
authorized, issued or outstanding.
(b) Except for the Company's 1993 Stock Option Plan (the "Stock Option
Plan"), the Company has not adopted or maintained any stock option plan or
other plan providing for equity compensation to any person. The Company has
reserved 35,000 shares of Company Common Stock for issuance to employees,
directors and consultants pursuant to the Stock Option Plan, and 33,718 shares
are subject to outstanding unexercised options as of the date hereof. Section
2.3(b) of the Disclosure Letter sets forth for each outstanding Company Option,
the name and the domicile address of the record holder, the number of shares of
Company Common Stock
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subject to such Company Option, the exercise price and the extent such Company
Option has vested to the date hereof. Section 2.3(b) of the Disclosure Letter
also sets forth the name of the holder of any Company Common Stock subject to
vesting, the number of shares of Company Common Stock subject to vesting and
the vesting schedule for such Company Common Stock, including the extent vested
to date. There will be, immediately prior to the Closing Date, no Company
warrants outstanding for the purchase of Company capital stock. There are no
other options, warrants, calls, rights, commitments or agreements of any
character, written or oral, to which the Company is a party or by which it is
bound obligating the Company to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. There are
no voting trusts, proxies, or other agreements or understandings with respect
to the voting stock of the Company. As a result of the Merger, Parent will be
the record and sole beneficial owner of all outstanding Company capital stock
and all rights to acquire or receive any Company capital stock, whether or not
such Company capital stock is outstanding.
2.4 Authority; No Dissenters' Rights.
(a) The Company has all requisite power and authority to enter into this
Agreement and any Related Agreements (as hereinafter defined) to which it is a
party and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and any Related Agreements to which it
is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Company, and no further action is required on the part of the Company to
authorize the Agreement, any Related Agreements to which it is a party and the
transactions contemplated hereby and thereby, subject only to the approval of
this Agreement by the Shareholders. This Agreement and the Merger have been
approved by a majority of the Board of Directors of the Company. This Agreement
and any Related Agreements to which the Company is a party have been duly
executed and delivered by the Company and, assuming the due authorization,
execution, delivery and performance by the other parties hereto and thereto,
constitute the valid and binding obligation of the Company, enforceable in
accordance with their respective terms, except as such enforceability may be
limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and to
rules of law governing specific performance, injunctive relief or other
equitable remedies. The "Related Agreements" shall mean all such ancillary
agreements required by this Agreement to be executed and delivered in
connection with the transactions contemplated hereby, including Exhibits A, B,
B-1, C, D and E.
(b) The Shareholders do not have dissenters' or appraisal rights under the
MBCA in connection with the transactions contemplated by this Agreement.
2.5 No Conflict. The execution and delivery of this Agreement and any
Related Agreements to which the Company is a party do not, and, the
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the Articles
of Incorporation and Bylaws of the Company, each as amended, (ii) any
agreement, contract, covenant, instrument, lease, franchise, license or
commitment to which either the Company or its Subsidiary is a party or by which
either of them is bound or to which any of their respective properties or
assets are subject or (iii) any judgment, permit, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets, except where such a Conflict could not reasonably be expected to (A)
have a Material Adverse Effect on the Company or (B) require the Company to
make a payment in excess of $5,000 individually or $50,000 in the aggregate.
2.6 Consents. Section 2.6 of the Disclosure Letter accurately lists (i) each
consent, waiver, approval or authorization of any third party, including a
party to any Contract (as defined in Section 2.14 hereof) (so as not to trigger
any Conflict), and (ii) each registration, declaration or filing with, any
court, administrative agency or
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commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") and
each Environmental Permit (as defined under Section 2.20) and each consent or
clearance under any Environmental Law (as defined under Section 2.20) which is
required by or with respect to the Company in connection with the execution and
delivery of this Agreement and any Related Agreements or the consummation of
the transactions contemplated hereby and thereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state or federal securities laws
thereby, (ii) the filing of the Merger Certificate with the Michigan
Corporation, Securities and Land Development Bureau; (iii) filings of
appropriate documents with the relevant authorities of states other than
Michigan in which the Company is authorized to do business, (iv) such filings,
consents, approvals, orders, registrations and declarations as may be required
under the laws of any foreign country in which the Company or its Subsidiary
conducts any business or owns any assets, (v) filings under the Hart-Scott-
Rodino Antitrust Improvements Act (the "HSR Act"), and (vi) such other
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not
(A) require a payment by Parent or the Company of greater than $5,000
individually or $50,000 in the aggregate, (B) have a Material Adverse Effect on
the Company, (C) impair in any material respect the ability of the Company to
perform its obligations under this Agreement or (D) prevent or significantly
delay the consummation of the transactions contemplated by this Agreement.
2.7 Company Financial Statements and Projections.
(a) Attached to Section 2.7 of the Disclosure Letter is the Company's
audited consolidated balance sheet as of June 30, 1998 and the related audited
consolidated statements of income and cash flow for the twelve-month periods
ended June 30, 1998 and June 30, 1997 and any notes thereto (the "Year-End
Financials") and the Company's unaudited balance sheets as of May 31, 1999, and
the related unaudited statements of income and cash flow for the eleven months
then ended (the "Interim Financials"). The Year-End Financials and the Interim
Financials are correct in all material respects, present fairly in all material
respects the consolidated financial condition and consolidated operating
results of the Company and the Subsidiary as of the dates and during the
periods indicated therein, and have been prepared in accordance with GAAP
applied on a basis consistent throughout the periods indicated and consistent
with each other, subject in the case of the Interim Financials, to normal year-
end adjustments (the effect of which will not have a Material Adverse Effect on
the Company) and the absence of notes (that, if presented, would not differ
materially from those included in the Year-End Financials). The Company's
unaudited Balance Sheet as of May 31, 1999 and any notes thereto shall be
hereinafter referred to as the "Current Balance Sheet" and the Company's
audited Balance Sheet as of June 30, 1998 and any notes thereto shall
hereinafter be referred to as the "Year-End Balance Sheet."
(b) The Company has provided financial projections to Parent with regard to
the Company's anticipated future financial condition and results of operations.
Such projections have been prepared in good faith and are based on assumptions
which the Company believes are reasonable at the time of the execution of this
Agreement.
(c) The Company shall amend the Disclosure Letter as soon as practicable to
attach the Company's audited consolidated balance sheet as of June 30, 1999,
and audited consolidated statements of income and cash flow for the twelve-
month period ended June 30, 1999 and June 30, 1998 and any notes thereto (the
"1999 Audited Financial Statements"). The 1999 Audited Financial Statements
shall be correct in all material respects and be prepared in accordance with
GAAP applied on a basis consistent throughout the periods indicated and
consistent with each other and shall present fairly in all material respects
the consolidated financial condition and consolidated operating results of the
Company and the Subsidiary as of the dates and during the periods indicated
therein. The June 30, 1999 audited balance sheet shall be hereinafter referred
to as the "June 30, 1999 Balance Sheet."
(d) The Company shall amend the Disclosure Letter as soon as practicable
(and in any event within fifteen (15) days after the end of each month
beginning with July 1999 up until the Effective Date) to attach the Company's
unaudited balance sheet as of the end of such immediately preceding month and
the related
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unaudited statements of income and cash flow for the period from July 1, 1999
to such month then ended (the "Monthly Financials"). The updated Monthly
Financials shall be correct in all material respects, present fairly in all
material respects the consolidated financial condition and consolidated
operating results of the Company and the Subsidiary as of the dates and during
the periods indicated therein and be prepared in accordance with GAAP applied
on a basis consistent throughout the periods indicated and consistent with each
other and with the 1999 Audited Financial Statements, subject to normal year-
end adjustments (the effect of which will not have a Material Adverse Effect on
the Company) and the absence of notes (that, if presented, would not differ
materially from these included in the 1999 Audited Financial Statements).
2.8 No Undisclosed Liabilities. Neither the Company nor the Subsidiary has
any liability, indebtedness, obligation, expense, claim, deficiency, guaranty
or endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with GAAP), which individually or in the aggregate (i)
has not been reflected or reserved against in the Current Balance Sheet, (ii)
has not arisen in the ordinary course of business consistent with past
practices, or (iii) has not been reflected or reserved against in the June 30,
1999 Balance Sheet.
2.9 No Changes. Since March 31, 1999, except as set forth in the Disclosure
Letter, there has not been, occurred or arisen any:
(a) amendments or changes to the Articles of Incorporation or Bylaws of the
Company;
(b) capital expenditure or commitment by the Company, exceeding $25,000
individually or $50,000 in the aggregate;
(c) destruction of, damage to or loss of any assets, business or customer of
the Company or any Subsidiary (whether or not covered by insurance) that has or
reasonably could be expected to have a Material Adverse Effect on the Company;
(d) claim of wrongful discharge or other unlawful labor practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company or Subsidiary
(other than changes that have been required by GAAP and are described in the
Company's financial statements);
(f) revaluation by the Company or Subsidiary of any of its assets, including
without limitation writing down the value of inventory or writing off notes or
Accounts Receivable (as defined in Section 2.18), other than in the ordinary
course of business;
(g) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company or Subsidiary or
any direct or indirect redemption, purchase or other acquisition by the Company
or Subsidiary of its capital stock;
(h) increase in the salary or other compensation payable or to become
payable by the Company or Subsidiary to any of its officers, directors,
employees or advisors, except regularly scheduled increases in compensation to
employees in the ordinary course of business, or the declaration, payment or
commitment or obligation of any kind for the payment, by the Company or
Subsidiary of a bonus or other additional salary or compensation to any such
person, except bonuses or other additional salary or compensation earned by
employees in the ordinary course of business under plans in existence as of the
date of this Agreement;
(i) any termination or material extension, amendment or modification of the
terms of any Contract (as defined in Section 2.14);
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company or Subsidiary or any creation of any security
interest in such assets or properties, except in the ordinary course of
business;
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(k) loan by the Company or Subsidiary to any person or entity, incurring by
the Company or Subsidiary of any indebtedness, guaranteeing by the Company or
Subsidiary of any indebtedness, issuance or sale of any debt securities of the
Company or Subsidiary or guaranteeing of any debt securities of others, except
for advances to employees for travel and business expenses in the ordinary
course of business, consistent with past practice or items not in excess of
$5,000 individually or $50,000 in the aggregate;
(l) waiver or release of any right or claim of the Company or Subsidiary
having a value or potential value in excess of $25,000;
(m) the commencement or notice or, to the Company's knowledge, threat of any
lawsuit, proceeding or investigation against the Company or the Subsidiary;
(n) notice of any claim or, to the Company's knowledge, potential claim of
ownership by any person other than the Company of the Company Intellectual
Property (as defined in Section 2.13) or of infringement by the Company of any
other person's Intellectual Property (as defined in Section 2.13);
(o) issuance or sale, or contract to issue or sell, by the Company or
Subsidiary of any shares of its capital stock or securities exchangeable,
convertible or exercisable therefor, or any securities, warrants, options or
rights to purchase any of the foregoing other than issuances of securities to
the Company's employees pursuant to the exercise of any Company Options;
(p) (i) selling or entering into any license agreement with respect to the
Company's Intellectual Property with any third party or (ii) buying or entering
into any license agreement with respect to the intellectual property of any
third party;
(q) any event or condition of any character that has had a Material Adverse
Effect on the Company or Subsidiary;
(r) transaction by the Company or Subsidiary except in the ordinary course
of business as conducted on that date and consistent with past practices; or
(s) negotiation or agreement by the Company or Subsidiary or, to the
Company's knowledge, any officer or employee thereof to do any of the things
described in the preceding clauses (a) through (r) (other than negotiations
with Parent and its representatives regarding the transactions contemplated by
this Agreement).
2.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes", means (i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes and assessments for public improvements, together with all interest,
penalties and additions imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type described in clause (i) as
a result of being a member of an affiliated, consolidated, combined or unitary
group for any period; and (iii) any liability for the payment of any amounts of
the type described in clause (i) or (ii) as a result of any express or implied
obligation to indemnify any other person or as a result of any obligations
under any agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) As of the Effective Time, each of the Company and Subsidiary will
have prepared and timely filed all required federal, state, local and
foreign returns, estimates, information statements and reports ("Returns")
relating to any and all Taxes concerning or attributable to the Company or
its operations and such Returns are true and correct in all material
respects and have been completed in accordance with applicable law.
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(ii) As of the Effective Time, each of the Company and Subsidiary (A)
will have paid or made preparations for payment of all Taxes it is required
to pay and will have withheld with respect to its employees all federal and
state income taxes, FICA, FUTA and other Taxes required to be withheld, and
(B) will have accrued on the Current Balance Sheet and the June 30, 1999
Balance Sheet all unpaid Taxes attributable to the periods covered by the
Current Balance Sheet and the June 30, 1999 Balance Sheet and will not have
incurred any liability for Taxes for the period prior to the Effective Time
other than in the ordinary course of business.
(iii) Neither the Company nor Subsidiary is delinquent in the payment of
any Tax nor is there any material Tax deficiency outstanding, assessed or
proposed against the Company or Subsidiary, nor has the Company or
Subsidiary executed any currently effective waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax.
(iv) No audit or other examination of any Return of the Company or
Subsidiary is presently in progress, nor has the Company or Subsidiary been
notified of any request for such an audit or other examination.
(v) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns for the Company and Subsidiary filed for all periods for the past
three years.
(vi) There are (and immediately following the Effective Time there will
be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort
(collectively, "Liens") on the assets of the Company or Subsidiary relating
to or attributable to Taxes other than Liens for Taxes not yet due and
payable.
(vii) The Company has no knowledge of any basis for the assertion of any
claim relating or attributable to Taxes which, if adversely determined,
would result in any Lien on the assets of the Company or Subsidiary.
(viii) None of the Company's or Subsidiary's assets are treated as "tax-
exempt use property", within the meaning of Section 168(h) of the Internal
Revenue Code (the "Code").
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions
of this Agreement, covering any employee or former employee of the Company
or Subsidiary that, individually or collectively, could give rise to the
payment of any amount that would not be deductible as an expense under
applicable law.
(x) Neither the Company nor Subsidiary has filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(4) of the
Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company or Subsidiary.
(xi) Neither the Company nor Subsidiary is a party to any tax sharing,
indemnification or allocation agreement nor does the Company or Subsidiary
owe any amount under any such agreement, other than this Agreement.
(xii) The Company's tax basis in its assets for purposes of determining
its future amortization, depreciation and other federal income tax
deductions is accurately reflected on the Company's tax books and records.
(xiii) Neither the Company nor Subsidiary is and neither has been at any
time, a "United States Real Property Holding Corporation" within the
meaning of Section 897(c)(2) of the Code.
(c) Executive Compensation Tax. There is no contract, agreement, plan or
arrangement to which the Company or Subsidiary is a party as of the date of
this Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of Company, individually or
collectively, which could give rise to the payment of any amount that would not
be deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
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2.11 Restrictions on Business Activities. There is no judgment, injunction,
order or decree to which the Company or Subsidiary is a party or otherwise
binding upon the Company or Subsidiary which has or may have the effect of
prohibiting or impairing any material business practice of the Company or
Subsidiary, any material acquisition of property (tangible or intangible) by
the Company or Subsidiary or the conduct of business by the Company or
Subsidiary as presently conducted or as currently proposed to be conducted.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
(a) Section 2.12(a) of the Disclosure Letter sets forth a list of all real
property currently leased by the Company and Subsidiary (the "Leased
Properties"), the name of the lessor, the date of the lease and each amendment
thereto and, with respect to any current lease, the aggregate annual rental
and/or other fees payable under any such lease. All such current leases are in
full force and effect, are valid and effective against the Company in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event of default (or event which with notice or
lapse of time, or both, would constitute a default) by the Company or, to the
Company's knowledge, by the other party thereto. The Company has provided
Parent with complete copies of each such lease; no term or condition of any
such lease has been modified, amended or waived except as shown in such copies;
each such lease constitutes the entire agreement of the landlord and the tenant
thereunder; and there are no other agreements whatsoever relating to the
Company's use or occupancy of any of the premises described in such leases.
Neither the Company nor Subsidiary has transferred or assigned any interest in
any such lease, nor has the Company or Subsidiary subleased or otherwise
granted rights of use or occupancy of any of the premises described therein to
any other person or entity.
(b) Section 2.12(b) of the Disclosure Letter sets forth a list of all real
property currently owned by the Company or Subsidiary (collectively the "Owned
Properties"). The Company and Subsidiary own good and marketable fee simple
title to the Owned Properties, subject to easements, restrictions, encumbrances
and interests of record which are set forth in the Disclosure Letter.
(c) There are no pending or, to the Company's or Subsidiary's knowledge,
threatened special assessments or improvements of any public or quasi-public
body either planned, in process, or completed which may give rise to any
special assessment against any of the Owned Properties or any portion thereof.
(d) To the Company's knowledge there are not any laws, ordinances or
restrictions, or any change contemplated therein, or any judicial or
administrative action, or any action by adjacent landowners, or natural or
artificial conditions upon any of the Owned Properties which could, in the
aggregate, have a material and adverse effect upon any of the Owned Properties.
Neither the Company nor Subsidiary has received any notice from any third party
of any defects or inadequacies in any of the Owned Properties or Leased
Properties or any part thereof which could materially and adversely affect the
insurability of such Owned Properties or Leased Properties or the premiums for
the insurance thereof. No notice has been received by the Company or the
Subsidiary from any insurance company which has issued a policy with respect to
any material portion of any Owned Properties or Leased Properties or by any
board of fire underwriters (or other body exercising similar functions)
requesting the performance of any repairs, alterations or other work with which
compliance has not been made.
(e) To the Company's knowledge, there are no parties in possession of any
portion of any Owned Properties, whether as tenants, tenants at sufferance,
trespassers or otherwise, except the Company or Subsidiary other than those
tenants listed on Section 2.12(e) of the Disclosure Letter. For each party
identified on Section 2.12(e) of the Disclosure Letter, the Company has set
forth the name of the party, the date of the occupancy agreement entered into
with such party and any amendment thereto, and the expiration date of such
agreement.
(f) All improvements existing on the land on which the Owned Properties are
located (including the buildings and all drives, parking lots, landscaping,
curbs, sidewalks, sewers and other utilities) have been in all material
respects constructed and installed in accordance with plans and specifications
approved by all Governmental Entities having jurisdiction. All such
improvements (including all parking areas) are private and have not been
dedicated to any public authority.
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(g) No law, ordinance, regulation or restriction is, or as of the Closing
Date will be violated by the continued occupancy, maintenance, operation or use
of the Owned Properties or the Leased Properties in their present manner. No
improvements on or use of the Owned Properties violate any restrictive
covenants or easements affecting the Owned Properties. To the Company's or
Subsidiary's knowledge, there is no law, ordinance, order, regulation or
requirement now in existence or under active consideration by any government
body which could require the owner of any of the Owned Properties or the tenant
of any of the Leased Properties to make any expenditure in excess of $10,000 to
modify or improve such Owned Property or Leased Property to bring it into
compliance therewith.
(h) There are currently in existence no service, operating or management
agreements or arrangements with respect to any Owned Property, except as
described on Section 2.12(h) of the Disclosure Letter.
(i) There are presently in existence water, sewer, gas and electrical lines
and surface drainage systems serving each Owned Property which have been
licensed, permitted, completed, installed and paid for in all material respects
and which are sufficient as licensed and permitted to service the operations of
each of the Owned Properties as used in the business as currently conducted. As
of the Closing Date, except to the extent of ongoing normal maintenance
consistent with past practice, there will be no structural, electrical,
mechanical, plumbing, roof, paving or other defects in the Owned Properties,
the roofs shall be free of leaks and in sound structural condition, and the
operating systems for each Owned Property will be in good working order.
(j) There is no pending or, to the Company's or Subsidiary's knowledge,
threatened condemnation or similar proceeding affecting in any material respect
any of the Owned Properties or Leased Properties or any portion thereof, and
neither the Company nor Subsidiary has knowledge that any such action is
currently contemplated. There are no legal actions, suits or other legal or
administrative proceedings pending or, to the Company's or the Subsidiary's
knowledge, threatened against the Company, Subsidiary or third parties
affecting any of the Owned Properties or the Leased Properties.
(k) With respect to every mortgage, deed of trust or other instrument now
encumbering any of the Owned Properties, (i) no default, event of default, or
event which with the giving of notice or passage of time or both could
constitute a default or event of default exist thereunder by the Company or the
Subsidiary or under any instrument evidencing, securing or otherwise relating
to the indebtedness secured thereby, and neither the Company nor Subsidiary has
been given notice by any holder of any such instrument of such a default, event
of default or other event, and (ii) the Company's or Subsidiary's sale of the
Owned Properties and prepayment of any indebtedness evidenced or secured
thereby is not prohibited by the holder of any such instrument.
(l) Each of the Company and Subsidiary has good and valid title to, or, in
the case of leased properties and assets, valid leasehold interests in, all of
their respective tangible properties and assets, real, personal and mixed, used
or held for use in its business, free and clear of any Liens, leases, rights,
restrictions or options, except (i) as reflected in the Current Balance Sheet;
(ii) as since sold or otherwise disposed of in the ordinary course of business;
and (iii) subject to easements, restrictions, encumbrances and interests of
record which are set forth in the Disclosure Letter, except for Liens for Taxes
not yet due and payable.
(m) Section 2.12(m) of the Disclosure Letter lists all items of equipment
(the "Equipment") with an individual depreciated book value in excess of
$10,000 owned or leased by the Company. All equipment used by the Company in
the operation of its business is (i) adequate for the conduct of the business
of the Company as currently conducted and (ii) in good operating condition,
subject to normal wear and tear.
(n) The Company has sole and exclusive ownership, free and clear of any
Liens, subject to easements, restrictions, encumbrances and interests of record
which are set forth in the Disclosure Letter, of all customer files and other
customer information relating to the Company's current customers (the "Customer
Information"). To the Company's knowledge, no person other than the Company
possesses any claims or rights with respect to use of the Customer Information.
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2.13 Intellectual Property
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all industrial and
intellectual property rights, including, but not limited to all of the
following and all rights in, arising out of, or associated therewith: (i)
all United States and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, proprietary processes or formulae, franchises, licenses, know
how, technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iii) all copyrights, copyrights
registrations and applications therefor and all other rights corresponding
thereto throughout the world; (iv) all mask works, mask work registrations
and applications therefor; (v) all industrial designs and any registrations
and applications therefor throughout the world; (vi) all trade names,
logos, common law trademarks and service marks; trademark and service mark
registrations and applications therefor and all goodwill associated
therewith throughout the world; (vii) all databases and data collections
and all rights therein throughout the world; (viii) all computer software
including all source code, object code, algorithms, display screens,
layouts, firmware, development tools, files, records and data, all media on
which any of the foregoing is recorded, all Web addresses, sites and domain
names; (ix) any similar, corresponding or equivalent rights to any of the
foregoing; (x) any and all other industrial or intellectual property; and
(xi) all documentation related to any of the foregoing.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by or exclusively licensed to the Company or Subsidiary.
"Company Registered Intellectual Property" shall mean all Registered
Intellectual Property owned by, or filed in the name of, the Company or
Subsidiary.
"Registered Intellectual Property" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; (iv) any mask work registrations
and applications to register mask works; and (v) any other Company
Intellectual Property that is the subject of an application, certificate,
filing, registration or other document issued by, filed with, or recorded
by, any state, government or other public legal authority.
(b) Section 2.13(b) of the Disclosure Letter lists all Company Registered
Intellectual Property and lists any proceedings or actions before any court,
tribunal (including the United States Patent and Trademark Office (the "PTO")
or equivalent authority anywhere in the world) related to any of the Company
Registered Intellectual Property rights.
(c) Each item of Company Intellectual Property, including all Company
Registered Intellectual Property listed in Section 2.13(b) of the Disclosure
Letter and all Intellectual Property licensed to the Company or Subsidiary, is
free and clear of any Liens granted by the Company. The Company or Subsidiary
(i) is the exclusive owner of all trademarks and trade names reasonably
necessary for the operation of the business of the Company or Subsidiary,
including the sale of any products or technology or the provision of any
services by the Company or Subsidiary as currently conducted and (ii) owns
exclusively, and has good title to, all copyrighted works that are products of
the Company or Subsidiary or other works of authorship that the Company or
Subsidiary otherwise purports to own.
(d) To the extent that any Intellectual Property that is reasonably
necessary for the operation of the Company or Subsidiary as currently conducted
has been developed or created by any person other than the Company or
Subsidiary for which the Company or Subsidiary has, directly or indirectly,
paid, either the Company or Subsidiary has a written agreement with such person
with respect thereto, and the Company or Subsidiary thereby has obtained
ownership of, and is the exclusive owner of, all such Intellectual Property by
operation of law or by valid assignment.
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(e) The Company Intellectual Property constitutes all the Intellectual
Property used in and/or necessary to the conduct of the business of the Company
or Subsidiary as it currently is conducted or is reasonably contemplated to be
conducted, including, without limitation, the design, development, manufacture,
use, import and sale of products, technology and services (including products,
technology or services currently under development).
(f) Other than "shrink-wrap" and similar widely available commercial end-
user licenses, the contracts, licenses and agreements listed in Section 2.13(f)
of the Disclosure Letter include all unexpired contracts, licenses and
agreements to which the Company is a party with respect to any Intellectual
Property.
(g) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including but not
limited to the Company's design, development, use, import, manufacture and sale
of the products, technology or services (including products, technology or
services currently under development) of the Company or Subsidiary does not
infringe or misappropriate the Intellectual Property of any person, violate the
rights of any person (including rights to privacy or publicity), or constitute
unfair competition or trade practices under the laws of any jurisdiction, and
neither the Company nor Subsidiary has received notice from any person claiming
that such operation or any act, product, technology or service (including
products, technology or services currently under development) of the Company
infringes or misappropriates the Intellectual Property of any person or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(h) Each item of Company Registered Intellectual Property is valid and
subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been paid
and all necessary documents and certificates in connection with such Company
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such Company
Registered Intellectual Property. In each case in which the Company has
acquired from any person any Intellectual Property rights that are reasonably
necessary for the operation of the Company or Subsidiary as currently
conducted, the Company has obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
(including the right to seek past and future damages with respect to such
Intellectual Property) to the Company and, in accordance with applicable laws
and regulations, the Company has recorded each such assignment with the
relevant governmental authorities, including the PTO, the U.S. Copyright
Office, or their respective equivalents in any relevant foreign jurisdiction,
as the case may be.
(i) There are no contracts, licenses or agreements between the Company or
Subsidiary and any other person with respect to Company Intellectual Property
under which there is any dispute known to the Company regarding the scope of
such agreement, or performance under such agreement including with respect to
any payments to be made or received by the Company thereunder.
(j) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property.
(k) The Company has taken the steps that are reasonable under the
circumstances to protect the Company's rights in confidential information and
trade secrets of the Company or provided by any other person to the Company.
Without limiting the foregoing, the Company has, and enforces, a policy
requiring each key employee to execute proprietary information, confidentiality
and assignment agreements substantially in the Company's standard forms, and
all current and former (within the past five years) key employees of the
Company and Subsidiary have executed such an agreement.
(l) The execution, delivery and performance of this Agreement, the
consummation of the Merger and the consummation of the other transactions
contemplated hereby will not have a Material Adverse Effect on the rights,
title and interest in and to the Company Intellectual Property.
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(m) Neither the development, manufacture, marketing, license, sale or use of
any product currently licensed or sold by the Company or currently under
development violates or will violate any license or agreement with any third
party or infringes or will infringe any Intellectual Property of any other
party which would have a Material Adverse Effect on the Company. There is no
pending or, to the knowledge of the Company, threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or dispose of
any Company Intellectual Property nor has the Company received any notice
asserting that any Company Intellectual Property or the proposed use, sale,
license or disposition thereof conflicts with the rights of any other party.
(n) No Company Intellectual Property or product, technology or service of
the Company or Subsidiary is subject to any proceeding or outstanding decree,
order, judgment, agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by the Company or Subsidiary or may affect the
validity, use or enforceability of such Company Intellectual Property.
(o) No (i) product, technology, service or publication of the Company or
Subsidiary, (ii) material published or distributed by the Company or Subsidiary
or (iii) conduct or statement of Company or Subsidiary constitutes obscene
material, a defamatory statement or material, false advertising or otherwise
violates any law or regulation.
(p) The Company has undertaken reasonable measures to ensure that its Year
2000 Assets are Year 2000 Compliant. To the Company's knowledge, except as set
forth on Section 2.13(p) of the Disclosure Letter, all Year 2000 Assets are
Year 2000 Compliant. "Year 2000 Assets" means all computer hardware and
software, information technology systems, machinery, equipment, devices and all
other personal property and fixtures that are owned, leased, licensed or used
by the Company in the conduct of its business. "Year 2000 Compliant" means,
with respect to any Year 2000 Asset, that it will at all times before, during
and after January 1, 2000 accurately process and handle date/time data,
including but not limited to performing all leap year calculations and
calculating, comparing and sequencing during the years 1999 and 2000 and all
other years, and will not malfunction, cease to function or provide invalid or
incorrect results or data as a result of date/time data. A Year 2000 Asset will
be considered Year 2000 Compliant if a failure to meet these requirements is
caused only by and occurs only when it is being used in combination with or is
interfacing with any computer hardware and software, information technology
systems, machinery, equipment, devices and all other personal property and
fixtures that is owned, leased, licensed or used by the Company in the conduct
of its business that (a) is not Year 2000 Compliant, and (b) is not owned,
leased, licensed or otherwise used by the Company.
2.14 Agreements, Contracts and Commitments
(a) Except as set forth in the Disclosure Letter, neither the Company nor
Subsidiary is a party to nor is either bound by:
(i) any employment or consulting agreement, contract or commitment with
an employee or individual consultant or salesperson or consulting or sales
agreement, contract or commitment with a firm or other organization,
(ii) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement,
(iii) any fidelity or surety bond or completion bond,
(iv) any lease of personal property having a value individually in
excess of $10,000 or $25,000 in the aggregate,
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or to
compete with any person,
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(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000
individually or $50,000 in the aggregate,
(vii) any agreement, contract or commitment relating to the disposition
or acquisition of assets or any interest in any business enterprise outside
the ordinary course of the Company's business,
(viii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit,
(ix) any purchase order or contract for the purchase of materials
involving in excess of $10,000 individually or $25,000 in the aggregate,
(x) any construction contracts,
(xi) any distribution, joint marketing or development agreement, or
(xii) any other agreement, contract or commitment that involves $25,000
or more or is not cancelable without penalty within thirty (30) days.
The items listed in Section 2.14 of the Disclosure Letter are referred to in
this Agreement individually as a "Contract" and collectively as the
"Contracts."
(b) Each of the Company and Subsidiary is in compliance with and neither has
breached, violated or defaulted under, or received notice that either of them
has breached, violated or defaulted under, any of the terms or conditions of
any Contract where such breach, violation or default could reasonably be
expected to have a Material Adverse Effect on the Company, and the Company has
no knowledge of any event that would constitute such a breach, violation or
default with the lapse of time, giving of notice or both. Each Contract is in
full force and effect against the Company and, to the Company's knowledge,
against the other party thereto and, to the Company's knowledge, is not subject
to any default thereunder by any party obligated to the Company pursuant
thereto. Following the Effective Time, each of the Company and Subsidiary will
be permitted to exercise all of their rights under the Contracts without the
payment of any material additional amounts or consideration other than ongoing
fees, royalties or payments which the Company and Subsidiary would otherwise be
required to pay had the transactions contemplated by this Agreement not
occurred.
2.15 Interested Party Transactions. To the Company's knowledge no officer,
director or, to the Company's knowledge, Shareholder (nor, to the Company's
knowledge, any sibling or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) an interest in any
entity which furnished or sold, or furnishes or sells, services, products or
technology that the Company furnishes or sells, or proposes to furnish or sell,
or (ii) any interest in any entity that purchases from or sells or furnishes to
the Company or Subsidiary any goods or services or (iii) a beneficial interest
in any Contract other than Contracts containing terms that represent arms'
length negotiation; provided, that ownership of no more than one percent (1%)
of the outstanding voting stock of a publicly traded corporation shall not be
deemed an "interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Section 2.16 of the Disclosure Letter lists
each consent, license, permit, grant or other authorization issued to the
Company or Subsidiary by a Governmental Entity (i) pursuant to which the
Company or Subsidiary currently operates or holds any interest in any of their
properties or (ii) which is required for the operation of its business or the
holding of any such interest (herein collectively called "Company
Authorizations"). The Company Authorizations are in full force and effect with
respect to the Company and constitute all Company Authorizations required to
permit the Company or Subsidiary to operate or conduct its business as
currently operated or conducted, or hold any interest in its properties or
assets, except where the failure to obtain any particular Company Authorization
could not reasonably be expected to have a Material Adverse Effect on the
Company.
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2.17 Litigation. There is no action, suit or proceeding of any nature
pending, or, to the Company's knowledge, threatened, against the Company or
Subsidiary, their properties or any of their officers or directors, that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on the Company. To the Company's knowledge, there is no
investigation pending or threatened against the Company or Subsidiary, their
properties or any of their officers or directors by or before any Governmental
Entity. No Governmental Entity has in the past three years challenged or
questioned the legal right of the Company to conduct its operations as
presently conducted.
2.18 Accounts Receivable; Inventory.
(a) Schedule 2.18(a) of the Disclosure Letter contains an accurate and
complete listing and aging of all accounts receivable, notes receivable and
other receivables of the Company as of May 31, 1999. All of the accounts, notes
and other receivables ("Accounts Receivable") that are reflected in the Current
Balance Sheet and to be reflected in the 1999 Audited Financial Statements and
those that are listed on in the Disclosure Letter and those that are created
after May 31, 1999, represent valid obligations of customers of the Company
arising from bona fide transactions entered into in the ordinary course of
business. Except to the extent reserved against in the Current Balance Sheet
and to be reserved against in the 1999 Audited Financial Statements, all of
such Accounts Receivable that are reflected in the Current Balance Sheet and to
be reflected in the 1999 Audited Financial Statements have been collected in
full, or are good and collectible, in the ordinary course of business; and all
of the Accounts Receivable which have been acquired by the Company since the
date of the Current Balance Sheet were acquired in the ordinary course of
business and have been collected in full, or are good and collectible, subject
to an appropriate reserve determined in a manner consistent with past practices
of the Company, in the ordinary course of business. The Company shall provide a
revised Schedule 2.18(a) for each month prior to Closing, including a revised
Schedule 2.18(a) dated as of the last month-end immediately prior to the
Closing Date.
(b) Except as set forth on Section 2.18(b) of the Disclosure Letter, all
Accounts Receivable of the Company are carried at values determined in
accordance with the Company's past practices consistently applied. No person
has any material Lien on any of such Accounts Receivable and no request or
agreement for a material deduction or discount has been made with respect to
any of such Accounts Receivable. The Company shall provide a revised Schedule
2.18(b) for each month prior to Closing, including a revised Schedule 2.18(b)
dated as of the last month-end immediately prior to the Closing Date.
(c) All of the inventories of the Company or Subsidiary reflected on the
Current Balance Sheet and to be reflected in the 1999 Audited Financial
Statements and the Company's books and records on the date hereof were
purchased, acquired or produced in the ordinary course of business and in a
manner consistent with the Company's regular inventory practices and are set
forth on the Company's books and records in accordance with the practices and
principles of the Company consistent with the method of treating said items in
prior periods. None of the inventory of the Company or Subsidiary reflected on
the Current Balance Sheet and to be reflected in the 1999 Audited Financial
Statements or on the Company's books and records as of the date hereof (in
either case net of the reserve therefor) is obsolete, defective or in excess of
the needs of the business of the Company reasonably anticipated for the normal
operation of the business consistent with past practices and outstanding
customer contracts. The presentation of inventory on the Year-End Financials
and Current Balance Sheet and to be reflected in the 1999 Audited Financial
Statements conform to GAAP in all material respects and such inventory is
stated at the lower of cost (determined using the first-in, first-out method)
or net realizable value. Subject to reserves therefor set forth in the Current
Balance Sheet and to be set forth in the 1999 Audited Financial Statements, all
inventories of the Company are of a quality usable and salable in the ordinary
course of business, except for obsolete items. In addition, the Company has
provided in Schedule 2.18(c) a listing of all commitments for inventory,
including, without limitation, all materials or supplies, work in process, and
finished goods for which the Company is or may be or become obligated to any
third party as of May 31, 1999. The Company shall provide a revised Schedule
2.18(c) for each month prior to Closing, including a revised Schedule 2.18(c)
dated as of the last month-end immediately prior to the Closing Date.
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2.19 Minute Books. The minutes of the Company and Subsidiary made available
to counsel for Parent contain a reasonably accurate summary of all meetings of
the Board of Directors (or committees thereof) of the Company and Subsidiary
and their respective Shareholders or actions by written consent for the past
five years.
2.20 Environmental Matters. For purposes of this Agreement, the following
terms shall have the meanings ascribed to them below:
(a) Definitions.
(i) "Hazardous Material" is any material or substance that is prohibited
or regulated by any Environmental Laws or that has been designated by any
Governmental Entity having jurisdiction over the Company or the Subsidiary
to be radioactive, toxic, hazardous or otherwise a danger to health or the
environment.
(ii) "Business Facility" is any property including the land, the
improvements, the groundwater and the surface water thereof, that is or at
any time has been owned, operated, occupied, controlled or leased by the
Company or Subsidiary in connection with the operation of its business.
(iii) "Disposal Site" is a landfill, disposal agent, waste hauler or
recycler of Hazardous Materials.
(iv) "Environmental Laws" are all applicable laws, rules, regulations,
orders, statutes, and codes promulgated by any Governmental Entity having
jurisdiction over the Company or the Subsidiary which prohibit, regulate or
control any Hazardous Material or any Hazardous Material Activity,
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act of 1976, the Federal Water
Pollution Control Act, the Clean Air Act, the Hazardous Materials
Transportation Act, the Occupational Safety and Health Act, the Clean Water
Act, comparable laws, rules, regulations, ordinances, orders, statutes, and
codes of other Governmental Entities having jurisdiction over the Company
or the Subsidiary, the regulations promulgated pursuant to any of the
foregoing, all as amended to date.
(v) "Hazardous Materials Activity" is the transportation, transfer,
recycling, storage, use, treatment, manufacture, removal, remediation,
release, exposure of others to, sale, registration or distribution of any
Hazardous Material or any product containing a Hazardous Material.
(vi) "Environmental Permit" is any approval, permit, license, clearance
or consent required to be obtained from any private person or any
Governmental Entity with respect to a Hazardous Materials Activity which is
or was conducted by the Company.
(b) Except as set forth in the Section 2.20 of the Disclosure Letter:
(i) Condition of Property. As of the Closing, except in compliance with
Environmental Laws in a manner that could not reasonably be expected to
subject the Company or Subsidiary to liability, no Hazardous Materials are
present on any Business Facility currently owned, operated, occupied,
controlled or leased by the Company or Subsidiary or were present on any
other Business Facility at the time it ceased to be owned, operated,
occupied, controlled or leased by the Company or Subsidiary. Except as set
forth in Section 2.20(b)(i) of the Disclosure Letter, there are no
underground storage tanks, asbestos which is friable or likely to become
friable or PCBs present on any Business Facility currently owned, operated,
occupied, controlled or leased by the Company or Subsidiary or as a
consequence of the acts of the Company or Subsidiary or their agents.
(ii) Hazardous Materials Activities. The Company and Subsidiary and any
person acting on behalf of the Company and the Subsidiary have conducted
all Hazardous Material Activities relating to their business in compliance
in all material respects with all applicable Environmental Laws, except for
past instances of noncompliance which the Company has resolved in full. The
Hazardous Materials Activities of the Company and Subsidiary prior to the
Closing have not resulted in the exposure of any person to a Hazardous
Material in a manner which has caused an adverse health effect to any such
person.
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(iii) Permits. Section 2.20(b)(iii) of the Disclosure Letter accurately
describes all of the Environmental Permits currently held by the Company
and Subsidiary relating to their business and the listed Environmental
Permits are all of the Environmental Permits necessary for the continued
conduct of any Hazardous Material Activity of the Company and Subsidiary
relating to their business as such activities are currently being
conducted. All such Environmental Permits are in full force and effect. The
Company and Subsidiary have complied in all material respects with all
covenants and conditions of any Environmental Permit which is or has been
in force during the relevant term of each such Environmental Permit with
respect to its Hazardous Materials Activities except for past instances of
noncompliance which the Company has resolved in full. No circumstances
peculiar to the Company and the Subsidiary exist which could cause any
Environmental Permit to be revoked, modified, or rendered non-renewable
upon payment of the permit fee.
(iv) Environmental Litigation. Except as set forth in Section
2.20(b)(iv) of the Disclosure Letter, no action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or
to the Company's or Subsidiary's knowledge, threatened, concerning or
relating to any Environmental Permit or any Hazardous Materials Activity of
the Company or Subsidiary relating to their business, or any Business
Facility currently or in the past owned, operated, occupied, controlled or
leased by the Company or Subsidiary.
(v) Offsite Hazardous Material Disposal. For the past five years, the
Company and Subsidiary have transferred or released Hazardous Materials
only to those Disposal Sites set forth in Section 2.20(b)(v) of the
Disclosure Letter. No action, proceeding, liability or claim has been
asserted or, to the Company's or Subsidiary's knowledge is, threatened
against the Company or Subsidiary, or to the Company's knowledge, against
any such Disposal Site with respect to any transfer or release of Hazardous
Materials at any time relating to the business of the Company or Subsidiary
to such Disposal Site which could reasonably be expected to subject the
Company or Subsidiary to material liability.
(vi) Capital Expenditures for Hazardous Materials Activities. No capital
expenditure in excess of $500,000 is currently required so that the
Hazardous Materials Activities of the Company or Subsidiary can be
conducted in compliance with Environmental Laws.
(vii) Environmental Liabilities. To the knowledge of the Company and
Subsidiary there is no fact or circumstance, which could result in
liability under any Environmental Law which could reasonably be expected to
result in a Material Adverse Effect on the Company.
(viii) Reports and Records: The Company and Subsidiary have delivered to
Parent or made available for inspection by Parent and its agents,
representatives and employees all records in the Company's and Subsidiary's
possession concerning the Hazardous Materials Activities of the Company and
Subsidiary relating to their business and all environmental audits and
environmental assessments of any Business Facility conducted at the request
of, and in the possession of, the Company or Subsidiary. The Company and
Subsidiary have complied or will comply in all material respects with all
environmental disclosure obligations imposed on the Company or Subsidiary
by Environmental Laws with respect to this transaction.
2.21 Brokers' and Finders' Fees; Third Party Expenses. The Company has not
incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Agreement or any transaction contemplated hereby. Section
2.21 of the Disclosure Letter sets forth the principal terms and conditions of
any agreement, written or oral, with respect to such fees. Section 2.21 of the
Disclosure Letter sets forth the Company's current reasonable estimate of all
Third Party Expenses (as defined in Section 5.4) expected to be incurred by the
Company in connection with the negotiation and effectuation of the terms and
conditions of this Agreement and the transactions contemplated hereby.
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2.22 Employee Benefit Plans and Compensation.
(a) For purposes of this Section 2.22, the following terms shall have the
meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations thereunder;
(ii) "Employee Plan" shall refer to any plan, program, policy, practice,
contract, agreement or other arrangement providing for bonuses, severance,
termination pay, deferred compensation, pensions, profit sharing,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits of any kind, whether formal or informal, written or
otherwise, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed
to, or required to be contributed to, by the Company or any Affiliate for
the benefit of any "Employee" (as defined below), and pursuant to which the
Company or any Affiliate has or may have any material liability, contingent
or otherwise;
(iii) "Employee" shall mean any current, former, or retired employee,
consultant, officer, or director of the Company or any Affiliate; and
(iv) "Employee Agreement" shall refer to each offer letter or
employment, severance, consulting or similar agreement or contract between
the Company or any Affiliate and any Employee.
(b) Schedule. Section 2.22(b) of the Disclosure Letter contains an accurate
and complete list of (i) each Employee of the Company and Subsidiary and each
Employee's current salary and bonus applicable to the current fiscal period and
(ii) each Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Employee Plan or
Employee Agreement. Neither the Company nor Subsidiary has any plan or
commitment, whether legally binding or not, to establish any new Employee Plan
or Employee Agreement, to modify any Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Employee Plan or
Employee Agreement to the requirements of any applicable law, in each case as
previously disclosed to Parent in writing, or as required by this Agreement),
or to enter into any Employee Plan or Employee Agreement, nor does either of
them have any intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent, (i) accurate and complete
copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial
valuations, if any, prepared for each Employee Plan; (iii) the three most
recent annual reports (Series 5500 and all schedules thereto), if any, required
under ERISA or the Code in connection with each Employee Plan or related trust;
(iv) the most recent summary plan description together with the most recent
summary of material modifications, if any, required under ERISA with respect to
each Employee Plan; (v) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Employee
Plan; (vi) if the Employee Plan is funded, the most recent annual and periodic
accounting of Employee Plan assets; (vii) all material agreements and contracts
relating to each Employee Plan, including but not limited to, administrative
service agreements, group annuity contracts and group insurance contracts; and
(viii) all material communications to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would
result in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company has performed all obligations
required to be performed by it under each Employee Plan and each Employee Plan
has been established and maintained in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and regulations,
including ERISA and the Code; (ii) each Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code has either received a favorable determination letter with
respect to each such Plan from the IRS or has remaining a period of time under
applicable Treasury regulations or IRS pronouncements in which to apply for
such a determination letter and
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make any amendments necessary to obtain a favorable determination; (iii) no
"prohibited transaction", within the meaning of Section 4975 of the Code or
Section 406 or 407 of ERISA, has occurred with respect to any Company Employee
Plan; (iv) there are no actions, suits or claims pending, or, to the Company's
knowledge threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (v) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to the Company,
Parent, Sub or any Affiliate (other than ordinary administration expenses
typically incurred in a termination event); (vi) there are no inquiries or
proceedings pending or, to the Knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any Employee Plan; and (vii)
neither the Company nor any Affiliate is subject to any penalty or tax with
respect to any Employee Plan under Section 502(i) of ERISA or Section 4975
through 4980 of the Code.
(e) Pension Plans. Neither the Company nor Subsidiary does now, nor has it
ever, maintained, established, sponsored, participated in, or contributed to,
any Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA,
Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company or Subsidiary
contributed to or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Employee Plan provides, or has any
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any
reason, except as may be required by statute, and the Company has not
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) that such Employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) No COBRA Violation. Neither the Company nor any Affiliate has, prior to
the Effective Time violated any of the health care continuation requirements of
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, the
requirements of the Family Medical Leave Act of 1993, as amended, the
requirements of the Women's Health and Cancer Rights Act, the requirements of
the Newborns' and Mothers' Health Protection Act of 1996, or any similar
provisions of state law applicable to its employees.
(i) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) No International Employee Plans. The Company does not now, nor has it
ever had the obligation to, maintain, establish, sponsor, participate in, or
contribute to any Company Employee Plan that has been adopted or maintained by
the Company or any Affiliate, whether informally or formally, or with respect
to which the Company or any Affiliate will or may have any liability, for the
benefit of Employees who perform services outside the United States.
(k) Employment Matters. Each of the Company and Subsidiary (i) is in
compliance with all material applicable laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours, in each case, with respect to Employees; (ii) has withheld all
amounts required by law or by agreement to be withheld from the wages, salaries
and other payments to Employees or other persons who by virtue of their
activities performed on behalf of the Company may be deemed employees within
the meaning of applicable law; (iii) is not liable for any arrears of wages or
any taxes or any penalty for failure to comply with any of the foregoing; and
(iv) is not liable for any payment to any trust or other fund or to any
governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees or other persons who by virtue of their activities performed on
behalf of the Company or Subsidiary may be deemed employees within the meaning
of applicable law (other than routine payments to be made in the normal course
of business and consistent with past practice).
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(l) Labor. No work stoppage or labor strike against the Company or
Subsidiary is pending, or to the knowledge of the Company, threatened. Neither
the Company nor Subsidiary is involved in or, to the knowledge of the Company,
threatened with any labor dispute, grievance, or litigation relating to labor,
safety or discrimination matters involving any Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints,
which, if adversely determined, would, individually or in the aggregate, result
in material liability to the Company, Parent or Sub. Neither the Company nor
Subsidiary has engaged in any unfair labor practices which could, individually
or in the aggregate, directly or indirectly result in a material liability to
the Company, Parent, Sub or any Affiliate. Neither the Company nor Subsidiary
is presently, nor has either in the past, been a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees and
no collective bargaining agreement is being negotiated by the Company.
(m) No Interference or Conflict. To the knowledge of the Company, no
Shareholder, officer, employee or consultant of the Company is obligated under
any contract or agreement subject to any judgement, decree or order of any
court or administrative agency, that would interfere with such person's efforts
to promote the interests of the Company or that would interfere with the
Company's business. Neither the execution nor delivery of this Agreement, nor
the carrying on of the Company's business as presently conducted or proposed to
be conducted nor any activity of such officers, directors, employees or
consultants in connection with the carrying on of the Company's business as
presently conducted or proposed to be conducted, will, to the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract or agreement under
which any of such officer's, directors, employees or consultants is now bound.
2.23 Insurance. Section 2.23 of the Disclosure Letter lists all insurance
policies and fidelity bonds covering the Company or Subsidiary, including but
not limited to all policies covering assets, business, equipment, properties,
operations, employees, officers and directors. There is no claim by the Company
or Subsidiary pending under any of such policies or bonds as to which coverage
has been, to the knowledge of the Company, questioned, denied or disputed by
the underwriters of such policies or bonds. All premiums due and payable under
all such policies and bonds have been paid, and the Company and Subsidiary are
otherwise in material compliance with the terms of such policies and bonds. The
Company has no knowledge of any threatened termination of, or premium increase
with respect to, any of such policies.
2.24 Compliance with Laws. Each of the Company and Subsidiary has complied
with, is not in violation of, and has not received any notices of violation
with respect to, any material foreign, federal, state or local statute, law or
regulation, except where such violation would not have a Material Adverse
Effect on the Company.
2.25 Warranties; Indemnities. Except for the warranties and indemnities set
forth in Section 2.25 of the Disclosure Letter, the Company has not given any
warranties or indemnities relating to products or technology sold or licensed
or services rendered by the Company in the past five years.
2.26 Statements; Proxy Statement/Prospectus. The information supplied by the
Company specifically for inclusion in the Proxy Statement (as defined in
Section 5.1) to be sent to the Shareholders shall not, on the date the Proxy
Statement is first mailed to the Shareholders and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies or consents for approval of this Agreement which has become false or
misleading. If at any time prior to the Effective Time, any event relating to
the Company or any of its affiliates, officers or directors should be
discovered by the Company which under applicable law should be set forth in an
amendment or a supplement to the Proxy Statement, the Company shall promptly
inform Parent. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by Parent
or Merger Sub which is contained in any of the foregoing documents or
incorporated by reference therein.
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2.27 Orders and Commitments. The Company has no orders or commitments to
provide products or services to any person that to the Company's knowledge will
be unduly burdensome to carry out. Except as disclosed in Section 2.27 of the
Disclosure Letter, all orders for products are included in the Company's
backlog as of the date of this Agreement.
2.28 Materials and Parts. To the Company's knowledge, there is no actual or
threatened shortage of materials or parts from any source that could
potentially have a Material Adverse Effect on the Company.
2.29 Bank Accounts. Section 2.29 of the Disclosure Letter contains a
schedule setting forth and describing (1) all bank accounts currently owned or
maintained by the Company and all authorized signatories with respect thereto;
and (2) all safety deposit boxes currently maintained by the Company and all
employees or agents of the Company having access with respect thereto.
2.30 Representations Complete. None of the representations or warranties
made by the Company in this Agreement (as modified by the Disclosure Letter),
nor any statement made in any Schedule or certificate furnished by the Company
pursuant to this Agreement contains or will contain at the Effective Time, any
untrue statement of a material fact, or omits or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading.
2.31 No Other Representations or Warranties. The Company has not made nor
shall be deemed to have made any representation or warranty other than as
expressly made by the Company in this Article II and, except as expressly
covered by a representation and warranty contained in this Article II, no other
information or documents (financial or otherwise) made available or delivered
to Parent or its counsel, accountants or other advisers shall be deemed to be a
representation or warranty.
2.32 Knowledge. For purposes of this Article II, the phrases "to the
knowledge of the Company (and Subsidiary)" and "to the Company's (and
Subsidiary's) knowledge" and similar phrases shall mean the actual knowledge of
the officers of the Company as of the date of this Agreement obtained in the
course of conducting a reasonably comprehensive investigation concerning the
existence of a fact or matter.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Michigan. Each of Parent and Sub has
the corporate power to own its properties and to carry on its business as now
being conducted and is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the failure to be so
qualified would constitute a Parent Material Adverse Effect. Parent has
delivered a true and correct copy of the Certificate of Incorporation and
Bylaws of Parent and the Articles of Incorporation and Bylaws of Sub, as
amended to date, to counsel for the Company. For all purposes of this
Agreement, the term "Parent Material Adverse Effect" means any change, event or
effect that is materially adverse to the business, assets (including intangible
assets), condition (financial or otherwise), capitalization or results of
operations of Parent and its subsidiaries taken as a whole.
3.2 Authority. Each of Parent and Sub has all requisite corporate power and
authority to enter into this Agreement and any Related Agreements to which it
is a party and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and any Related Agreements to
which they are parties and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub, and no further action is
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required on the part of Parent or Sub to authorize the Agreement, any Related
Agreements to which they are a party and the transactions contemplated hereby
and thereby. This Agreement and any Related Agreements to which Parent and Sub
are parties have been duly executed and delivered by Parent and Sub and
constitute the valid and binding obligations of Parent and Sub, enforceable in
accordance with their terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
3.3 No Conflict. The execution and delivery of this Agreement and any
Related Agreements to which Parent or Sub is a party do not, and the
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a Conflict under (i) any
provision of the Certificate of Incorporation, as amended, and Bylaws of Parent
or Sub, as amended, (ii) any agreement, contract, covenant, instrument, lease,
franchise, license or commitment to which either Parent or Sub is a party or by
which either of them is bound or to which any of their respective properties or
assets are subject; or (iii) any judgment, permit, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or Sub or their properties
or assets, except where such Conflict will not have a Parent Material Adverse
Effect.
3.4 Capital Structure.
(a) The authorized stock of Parent consists of 120,000,000 shares of Common
Stock (including 30,000,000 shares designated as Class A Common Stock and
17,000,000 shares designated as Class B Common Stock), $0.001 par value, of
which 28,462,821 shares of Common Stock, 13,270,000 shares of Class A Common
Stock and 11,730,000 shares of Class B Common Stock were issued and outstanding
as of the quarter ended March 31, 1999, and 5,000,000 shares of Preferred
Stock, $0.001 par value, of which 100,000 shares are designated as Series A
Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock
are reserved for issuance pursuant to preferred stock purchase rights issued
under the Parent Rights Agreement. No shares of Preferred Stock are issued or
outstanding. The authorized capital stock of Sub consists of 60,000 shares of
Common Stock, no par value, 1,000 of which, as of the date hereof, are issued
and outstanding and are held by Parent. All such shares of Parent and Sub have
been duly authorized, and all such issued and outstanding shares have been
validly issued, are fully paid and nonassessable, are not subject to preemptive
rights created by statute, the Certificate of Incorporation or Bylaws of Parent
or Sub or any agreement to which either Parent or Sub are parties or by which
either is bound, and are free of any liens or encumbrances other than any liens
or encumbrances created by or imposed upon the holders thereof.
(b) Parent has 7,454,414 shares of Common Stock reserved for issuance
pursuant to its employee and director stock and option plans, of which options
to purchase 2,902,823 shares of Common Stock were outstanding and 4,551,591
shares of Common Stock are reserved for future grants as of March 31, 1999.
Pursuant to the terms of stockholder agreements between Parent and certain
stockholders of Parent's subsidiaries, certain shares of preferred stock of
Parent's subsidiaries held by these stockholders are exchangeable into Parent
Common Stock if certain terms and conditions are met. Except for (i) the
outstanding options listed above, (ii) the exchangeable rights listed above,
(iii) outstanding warrants to purchase 2,000,000 shares of Parent Common Stock
as of March 31, 1999, and (iv) outstanding Parent Rights, there are no other
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which Parent is a party or by which it is bound obligating
Parent to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of
Parent or obligating Parent to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
(c) The shares of Parent Common Stock to be issued pursuant to the Merger
will be duly authorized, validly issued, fully paid, non-assessable, free of
any liens or encumbrances and not subject to any preemptive rights or rights of
first refusal in excess of 100,000 shares created by statute or the Certificate
of Incorporation or Bylaws of Parent or Sub or any agreement to which Parent or
Sub is a party or is bound.
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3.5 SEC Documents; Parent Financial Statements. Parent has filed all
required reports, forms and other documents with the Securities and Exchange
Commission (the "SEC") since December 31, 1998 (the "SEC Documents"). Parent
has made available to the Company a true and complete copy of all of its SEC
Documents since December 31, 1998. The SEC Documents contain an audited
consolidated balance sheet of Parent as of December 31, 1998 and the related
audited consolidated statements of income and cash flow for the year then ended
and Parent's unaudited consolidated balance sheet as of March 31, 1999 (the
"Parent Balance Sheet") and the related unaudited consolidated statements of
income and cash flow for the three month period then ended (collectively, the
"Parent Financials"). As of their respective dates, (i) the SEC Documents
complied in all material respects with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case
may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such SEC Documents, and (ii) none of the SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Parent included in the SEC Documents
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of Parent
and its consolidated subsidiaries as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments). Since
March 31, 1999, there has been no material change in Parent's accounting
policies, except as described in the notes to the Parent Financials.
3.6 No Material Adverse Change. Since the date of the balance sheet included
in the Parent's most recently filed report on Form 10-Q, Parent has conducted
its business in the ordinary course and there has not occurred: (a) any
material adverse change in the financial condition, liabilities, assets, or
business of Parent and its subsidiaries, taken as a whole; (b) any amendments
or changes in the Certificate of Incorporation or Bylaws of Parent or Sub; (c)
any damage to, destruction or loss of any assets of the Parent, (whether or not
covered by insurance) that constitutes a Parent Material Adverse Effect; or (d)
any sale of a material amount of property of Parent, except in the ordinary
course of business.
3.7 Brokers' and Finders' Fees. The Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.8 Nasdaq Listing. All shares of Parent Common Stock registered under the
Securities Act have been duly listed on the Nasdaq National Market and shares
of Parent Common Stock issued to the Shareholders in connection with the Merger
will be duly listed on the Nasdaq National Market.
3.9 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending or as to which Parent has received any notice of
assertion against Parent or, to Parent's knowledge, threatened, which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay any of
the transactions contemplated by this Agreement.
3.10 Information Supplied. The information supplied by Parent or Sub
specifically for inclusion in the Registration Statement (as defined in Section
5.1) shall not at the time such Registration Statement is filed with the SEC,
at any time such Registration Statement is amended or supplemented, and at the
time such Registration Statement becomes effective under the Securities Act of
1933 (the "Securities Act") contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading or omit to state any
material fact necessary to correct any statement in the Registration Statement
which has become false or misleading. The information supplied by Parent or Sub
specifically for inclusion in the Proxy Statement (as defined in Section 5.1)
to be sent to the Company Shareholders shall not, on the date the Proxy
Statement is first mailed to the Company Shareholders
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and at the time of the meeting of the Company Shareholders held to vote on the
approval and adoption of this Agreement and the transactions contemplated
hereby, and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not false or misleading or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies or consents
for the approval of this Agreement which has become false or misleading.
Notwithstanding the foregoing, Parent makes no representation or warranty with
respect to any information supplied by the Company which is contained in any of
the foregoing documents.
3.11 Capitalization and Interim Operations of Sub. Parent is and will be
immediately before the Effective Time, the record and beneficial owner and
holder of the issued and outstanding shares of the capital stock of Sub, free
and clear of all Liens. Sub was formed solely for the purpose of engaging in
the transactions contemplated by this Agreement and has not engaged in any
business activities or conducted any operations other than in connection with
the transactions contemplated by this Agreement.
3.12 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required
by Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation by Parent and Sub, as the case may be, of any of
the transactions contemplated by this Agreement, except for (i) such consents,
waivers, approvals, orders, authorizations, regulations, declarations and
filings as may be required under applicable state or federal securities laws
thereby; (ii) filings of appropriate documents with the relevant authorities of
states other than Michigan in which Parent or Sub is authorized to do business;
(iii) such filings and consents as may be required under any environmental,
health or safety law or regulation pertaining to any notification, disclosure
or required approval triggered by the Merger or the transactions contemplated
by this Agreement, (iv) such filings, consents, approvals, orders,
registrations and declarations as may be required under the laws of any foreign
country in which the Parent or Sub conducts any business or owns any assets,
(v) filings under the HSR Act, and (vi) such other consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings the
failure of which to be obtained or made would not, individually or in the
aggregate (A) constitute a Parent Material Adverse Effect, (B) impair in any
material respect the ability of Parent to perform its obligations under this
Agreement or (C) prevent or significantly delay the consummation of the
transactions contemplated by this Agreement.
3.13 Certain Post-Merger Operations. Parent has no current plan or intention
to liquidate the Surviving Corporation; to merge the Surviving Corporation with
or into another corporation (other than Parent or a subsidiary of Parent); to
sell or otherwise dispose of any of the stock of the Surviving Corporation or
to cause the Surviving Corporation to sell or otherwise dispose of any of its
assets, except for dispositions made in the ordinary course of business.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on the Company's business
in the ordinary course consistent with past practices, to pay the debts and
Taxes of the Company when due and payable in the ordinary course, pay or
perform other obligations when due and payable in the ordinary course, and, to
the extent consistent with such business, use its commercially reasonable
efforts consistent with past practice and policies to preserve intact the
Company's present business organizations, keep available the services of the
Company's present officers and key employees and preserve the Company's
relationships with customers, suppliers, distributors, licensors, licensees,
and others having business dealings with it, all with the goal of preserving
unimpaired the Company's goodwill and ongoing businesses at the Effective Time.
The Company shall promptly notify Parent of any material event or occurrence or
emergency not in the ordinary
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course of business of the Company and any material event involving the Company
occurring between the date of this Agreement and the Effective Time. Except as
expressly contemplated by this Agreement, or as set forth in Section 4.1 of the
Disclosure Letter, before the Effective Time the Company shall not, without the
prior written consent of Parent:
(a) (i) Sell or enter into any license agreement with respect to the
Company Intellectual Property with any person or entity or (ii) buy or
enter into any license agreement with respect to the Intellectual Property
of any person or entity;
(b) Transfer to any person or entity any rights to the Company
Intellectual Property;
(c) Enter into or amend any Contract pursuant to which any other party
is granted marketing, distribution or similar rights of any type or scope
with respect to any products or technology of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, any of the Contracts set forth or described in
the Disclosure Letter;
(e) Commence or settle any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company;
(g) Issue, grant, redeem, deliver or sell or authorize or propose the
issuance, grant, redemption, delivery or sale of, or purchase or propose
the purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue or
purchase any such shares or other convertible securities, other than
issuance of shares of Company Common Stock pursuant to the exercise of
Company Options.
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or by
purchasing assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof; or acquire or agree to acquire any assets
which are material, individually or in the aggregate, to the Company's
business, except purchases of inventory and supplies in the ordinary course
of business;
(j) Except in the ordinary course of business, sell, lease, license or
otherwise dispose of any of its properties or assets, or modify, amend or
terminate any existing Contract affecting the use, possession or operation
of any such properties or assets; grant or otherwise create or consent to
the creation of any easement, covenant, restriction, assessment or charge
affecting in any material way any of the Owned Properties or Leased
Properties or any material part thereof; convey, assign, sublease, license
or otherwise transfer all or any portion of any of the Owned Properties or
Leased Properties or any interest or rights therein; commit any waste or
nuisance on any such properties; or make any material changes in the
construction or condition of any such properties;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others, other than borrowings under the Company's existing
credit agreements with National City Bank;
(l) Grant any loans to others, other than travel advances to employees
in the ordinary course of business, or purchase debt securities of others
or amend the terms of any outstanding loan agreement;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date hereof and disclosed in
the Disclosure Letter;
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(n) Adopt any employee benefit plan, or enter into any employment
contract, pay or agree to pay any special bonus or special remuneration to
any director or employee, except bonuses or special remunerations that have
been earned by directors or employees pursuant to plans existing on the
date of this Agreement, or increase the salaries or wage rates of its
employees, except regularly scheduled increases in salary or wage rates to
employees in the ordinary course of business;
(o) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy, in an amount in excess of $10,000 (in any
one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge, settlement or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in, or
contemplated by, the Current Balance Sheet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent
to any extension or waiver of the limitation period applicable to any claim
or assessment in respect of Taxes;
(r) Enter into any strategic alliance or joint marketing arrangement or
agreement;
(s) Enter into any agreement or arrangement relating to the design or
development of chemicals;
(t) Enter into any agreement or arrangement relating to the manufacture
of chemicals that would require performance over a period greater than six
months from the date of this Agreement;
(u) Accelerate the vesting schedule of any of the outstanding Company
Options or Company Common Stock, except according to the terms of any
outstanding Company Option;
(v) Hire or terminate employees or encourage employees to resign, except
in the ordinary course of business;
(w) Enter into any commitment or transaction not in the ordinary course
of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(x) Terminate or materially modify or amend any Environmental Permit; or
Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (x) above, or any other action that
would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the date of
termination of this Agreement pursuant to the provisions of Section 7.1
hereof, the Company will not, (nor will the Company permit any of its
officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with any party other than Parent
and its designees: (a) solicit, encourage, initiate or participate in any
negotiations or discussions with respect to, any offer or proposal to acquire
all, substantially all or a significant portion of the Company's business,
properties or technologies or any portion of the Company's capital stock
(whether or not outstanding) whether by merger, purchase of assets, tender
offer or otherwise, except for acquisitions of Company Common Stock by
employees pursuant to the exercise by such employees of Company Options, or
effect any such transaction, (b) disclose any information not customarily
disclosed to any person concerning the Company's business, technologies or
properties or, other than in the ordinary course of business, afford to any
person or entity access to its properties, technologies, books or records, (c)
assist or cooperate with any person to make any proposal to purchase all or
any material part of the Company's capital stock or assets, except for
acquisitions of Company Common Stock by employees pursuant to the exercise by
such employees of Company Options, or (d) enter into any agreement with any
person providing for the acquisition of all or any significant portion of the
Company (whether by way of merger, purchase of assets, tender offer or
otherwise). In addition to the foregoing, if the Company receives, prior to
the Effective Time or
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the termination of this Agreement, any offer, proposal, or request relating to
any of the above or any amendment or modification of such offer, proposal or
request, the Company shall promptly notify Parent thereof, including
information as to the identity of the offeror or the party making any such
offer or proposal and the specific terms of such offer or proposal, as the case
may be, and such other information related thereto as Parent may reasonably
request. The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.2 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties that Parent shall be entitled to seek an injunction or
injunctions to prevent breaches of the provisions of this Section 4.2 and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which Parent may be entitled at law or in equity.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement. As promptly as practicable after the execution
of this Agreement, the Company shall prepare, with the cooperation of Parent, a
proxy statement (the "Proxy Statement"), and Parent will prepare and file a
registration statement on Form S-4 (the "Registration Statement") filed with
the SEC, in which the Proxy Statement will be included as a prospectus. Each of
Parent and the Company shall provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be required or
appropriate for inclusion in the Proxy Statement and the Registration Statement
or in any amendments or supplements thereto, and to cause its counsel and
auditors to cooperate with the other's counsel and auditors in the preparation
of the Proxy Statement and the Registration Statement. Each of the Company and
Parent shall use its respective reasonable best efforts to respond to any
comments of the SEC, and have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing. The
Company will cause the Proxy Statement to be mailed to its Shareholders at the
earliest practicable time after the Registration Statement is declared
effective by the SEC. As promptly as practicable after the date of this
Agreement, the Company and Parent will prepare and file any other filings
required under the Exchange Act, the Securities Act or any other Federal,
foreign or Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). Each of the Company and
Parent will notify the other promptly upon the receipt of any comments from the
SEC or its staff and of any request by the SEC or its staff or any other
government officials for amendments or supplements to the Registration
Statement, the Proxy Statement or any Other Filing or for additional
information and will supply the other with copies of all material
correspondence between such party or any of its representatives, on the one
hand, and the SEC or its staff or any other government officials, on the other
hand, with respect to the Registration Statement, the Proxy Statement, the
Merger or any Other Filing. The Proxy Statement, the Registration Statement,
and the Other Filings will comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement, the Registration Statement, or any Other
Filing, the Company or Parent, as the case may be, will promptly inform the
other of such occurrence and cooperate in filing with the SEC or its staff or
any other government officials, and/or mailing to the Shareholders, such
amendment or supplement.
5.2 Access to Information. The Company shall afford Parent and its
accountants, counsel and other designated representatives, reasonable access
during normal business hours during the period prior to the Effective Time to
(a) the Company's properties, books, contracts, commitments and records, (b)
all other relevant information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law) of the Company as
Parent may reasonably request and (c) all key employees of the Company as
identified by Parent, provided that the investigation shall be conducted in a
manner that does not unreasonably interfere with the Company's normal
operations and employee relationships. The Company agrees to provide to Parent
and its accountants, counsel and other designated representatives copies of
internal financial statements (including all material supporting documentation)
within fifteen (15) days after the end of
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any particular month. Parent shall afford the Company and its accountants,
counsel and other designated representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) Parent's
and Sub's properties, books, contracts, commitments and records, (b) all other
relevant information concerning the business, properties and personnel (subject
to restrictions imposed by applicable law) of Parent and Sub as the Company may
reasonably request and (c) all key employees of Parent and Sub as identified by
the Company, provided that the investigation shall be conducted in a manner
that does not unreasonably interfere with Parent's or Sub's normal operations
and employee relationships. Parent agrees to provide to the Company and its
accountants, counsel and other designated representatives copies of internal
financial statements (including all material supporting documentation) promptly
upon request. No information or knowledge obtained in any investigation
pursuant to this Section 5.2 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger, except as set forth in the
Disclosure Letter.
5.3 Confidentiality. Subject to Section 5.5 hereof, the parties agree that
neither they nor their agents shall disclose to any person who is not a direct
participant in the negotiations or due diligence regarding the proposed
transactions any of the terms or conditions of the proposed transactions. In
addition, each party will maintain in strict confidence (and will cause its
officers, employees, accountants, counsel, financial advisers and other
representatives to maintain in strict confidence) all Confidential Information
(as defined below) obtained from any other party or its agents during the
course of the due diligence and negotiation in accordance with the
Confidentiality Agreement dated February 4, 1999 between the Company and
Parent. "Confidential Information" means nonpublic information concerning the
disclosing party's business, business plans, products or technology, whether
disclosed before or after the date of this Agreement, which is clearly marked
"confidential or "proprietary" and orally disclosed information which is
communicated with indicia of confidentiality and promptly thereafter confirmed
in writing to be confidential. Confidential Information shall not include any
information in writing which is or becomes publicly known or available through
no improper action of the receiving party, is already known by the receiving
party prior to disclosure, is independently developed by the receiving party
without using Confidential Information of the other party, or is obtained by
the receiving party from a third party without breach of a confidentiality
obligation. In the event that the Merger is not consummated, or any time upon
the request of any party, all material furnished by such party or its agents to
any other party or its agents, and all copies or extracts thereof in notes and
analyses prepared therefrom, shall be returned to the disclosing party or
destroyed and certified as destroyed.
5.4 Expenses.
(a) Except as set forth in Section 5.4(b) and the Escrow Agreements whether
or not the Merger is consummated, all fees and expenses incurred in connection
with the Merger including, without limitation, all legal, accounting, financial
advisory, regulatory, consulting and all other fees and expenses of third
parties ("Third Party Expenses") incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses, except that expenses incurred in
connection with printing and mailing the documents distributed to the Company's
Shareholders (including the Proxy Statement) shall be paid by the Company and
expenses incurred in connection with filing the Registration Statement,
including registration and filing fees, fees for the listing of the shares of
Parent Common Stock to be issued pursuant to this Agreement on the Nasdaq
National Market, and fees, costs and expenses associated with compliance with
applicable state securities laws in connection with the Merger shall be paid by
Parent.
(b) In the event that the Merger is consummated, Parent shall pay all Third
Party Expenses incurred by the Company. The Company agrees that Parent shall
have full recourse to either Escrow Fund without regard to the Threshold Amount
for reimbursement of all Third Party Expenses of the Company that exceed
$350,000.
5.5 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such
approval shall not be
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unreasonably withheld, subject, in the case of Parent, to Parent's obligation
to comply with applicable securities laws and the rules and regulations of the
Nasdaq National Market.
5.6 Consents. The Company shall use its commercially reasonable efforts to
obtain the consents, waivers, assignments and approvals under the Contracts as
may be required in connection with the Merger so as to preserve for the
Surviving Corporation all material rights of, and benefits to, the Company
under such Contracts.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Reasonable Efforts. Subject to the terms and conditions provided in this
Agreement, each of the parties hereto shall use commercially reasonable efforts
to take promptly, or cause to be taken, all actions, and to do promptly, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals
and to effect all necessary registrations and filings and to seek to remove any
injunctions or other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by this Agreement
for the purpose of securing to the parties hereto the benefits contemplated by
this Agreement; provided that Parent shall not be required to agree to any
divestiture by Parent or the Company or any of Parent's subsidiaries or
affiliates of shares of capital stock or of any business, assets or property of
Parent or its subsidiaries or affiliates or of the Company, its affiliates, or
the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock.
5.9 Notification of Certain Matters.
(a) Each party shall give prompt written notice to the other party of (i)
the occurrence or non-occurrence of any event, the occurrence or non-occurrence
of which is likely to cause any representation or warranty of such party
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time and (ii) any failure of such party to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that, subject to Section 5.9(b),
the delivery of any notice pursuant to this Section 5.9(a) shall not limit or
otherwise affect any remedies available to the party receiving such notice.
(b) Any disclosure by Company pursuant to Section 5.9(a) (i) will not be
deemed to amend the Disclosure Letter for purposes of determining if closing
conditions have been satisfied under Article VI; and (ii) will not limit or
modify Parent's termination rights under Article VII. However, if the closing
of the Merger occurs, for the purpose of limiting claims against a respective
Escrow Fund by Parent pursuant to the Escrow Agreements, any written disclosure
by the Company pursuant to Section 5.9(a) between the date of this Agreement
and the Effective Time identified as an amendment to the Disclosure Letter
shall thereafter be deemed to amend or supplement the Disclosure Letter and
prevent or cure any misrepresentations, breach of warranty or breach of
covenant by the Company related to such disclosures.
5.10 Additional Documents and Further Assurances. Each party hereto, at the
request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary
or desirable for effecting completely the consummation of this Agreement and
the transactions contemplated hereby.
5.11 Employee Plans; Employees.
(a) list of the Company's Employee Plans is set forth in Section 2.22 of
the Disclosure Letter.
(b) Parent shall cause the Surviving Corporation to take such actions as are
reasonably necessary so that, for a period of not less than one year after the
Effective Time, employees of the Company who continue their
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employment after the Effective Time will be provided employee benefits which in
the aggregate are generally comparable to those provided to such employees as
of the date hereof.
(c) Following the first anniversary of the Effective Time, Parent will
provide employee benefit plans, programs, arrangements and policies for the
benefit of employees of the Company which are generally comparable in the
aggregate to the employee benefit plans, programs, arrangements and policies
for the benefit of other employees of Parent who are similarly situated and
subject to Parent's policies related to geographic differences in compensation.
In connection therewith, all service credited to each employee by the Company
through the Effective Time (and by the Surviving Corporation thereafter) shall
be recognized by Parent for all purposes, including for purposes of
eligibility, vesting and benefit accruals under any employee benefit plan
provided by Parent for the benefit of the employees; provided, however, such
service need not be credited to the extent it would result in a duplication of
benefits, including, without limitation, benefit accrual service under defined
benefit plans.
(d) Parent hereby agrees to cause the Surviving Corporation to honor
(without modification) and assume the employment agreements and individual
benefit arrangements listed on Schedule 5.11.
5.12 Shareholder Approval. As promptly as practicable after the execution of
this Agreement and consistent with Section 5.1 of this Agreement, the Company
shall submit this Agreement and the transactions contemplated hereby to its
Shareholders for approval and adoption as provided by Michigan Law and its
Articles of Incorporation and Bylaws. The Company shall use its reasonable
efforts to solicit and obtain the consent of its Shareholders sufficient to
approve the Merger and this Agreement and to enable the Closing to occur as
promptly as practicable. The materials submitted to the Company's Shareholders
in furtherance of the transactions contemplated by this Agreement shall be
subject to review and approval by Parent and include information regarding the
Company, the terms of the Merger and this Agreement and the recommendation of
the Board of Directors of the Company regarding the Merger and this Agreement.
The Company shall deliver to Parent, concurrently with the execution of this
Agreement, executed Voting Agreements in the form attached hereto as Exhibit E
from the persons and entities listed on Schedule 5.12 hereto.
5.13 Pooling Accounting. Parent and the Company shall each use its
reasonable efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Each of Parent and the
Company shall use its reasonable efforts to cause its respective employees,
directors, shareholders and affiliates not to take any action that would
adversely affect the ability of Parent to account for the business combination
to be effected by the Merger as a pooling of interests. Neither Parent nor the
Company shall take any action, including the acceleration of vesting of any
options, warrants, restricted stock or other rights to acquire shares of the
capital stock of the Company (except as may be required pursuant to the terms
of outstanding Company Options), which reasonably would be expected to (i)
interfere with Parent's ability to account for the Merger as a pooling of
interests or (ii) jeopardize the tax-free nature of the reorganization
hereunder.
5.14 Affiliate Agreements. Schedule 5.12 sets forth those persons who, in
the Company's reasonable judgment, are "affiliates" of the Company within the
meaning of Rule 145 (each such person an "Affiliate") promulgated under the
Securities Act ("Rule 145"). The Company shall provide Parent such information
and documents as Parent shall reasonably request for purposes of reviewing such
list. Each of Parent and the Company has delivered or shall cause to be
delivered to the other, concurrently with the execution of this Agreement, from
each of their respective Affiliates, an executed Affiliate Agreement in the
form attached hereto as Exhibit C or Exhibit D. Parent and the Surviving
Corporation shall be entitled to place appropriate legends on the certificates
evidencing any Parent Common Stock to be received by Affiliates of the Company
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for Parent Common Stock, consistent with the
terms of such Affiliate Agreements.
5.15 Nasdaq Listing. Parent agrees to authorize for listing on the Nasdaq
National Market the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official
notice of issuance.
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5.16 Regulatory Filings. As soon as may be reasonably practicable, the
Company and Parent each shall file with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by
the parties. The Company and Parent each shall promptly (a) supply the other
with any information which may be required in order to effectuate such filings
and (b) supply any additional information which reasonably may be required by
the FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.17 Form S-8. Parent shall file immediately following the Effective Date a
registration statement on Form S-8 to register shares of Parent Common Stock
issuable upon exercise of Company Options assumed by Parent.
5.18 Company's Auditors. The Company will use its commercially reasonable
efforts to cause its management and its independent auditors to facilitate on a
timely basis (i) the preparation of financial statements (including pro forma
financial statements if required) as required by Parent to comply with
applicable SEC regulations, and (ii) the review of any Company audit or review
work papers for up to the past three (3) years, including the examination of
selected interim financial statements and data.
5.19 Maintenance of Insurance. The Company shall maintain in full force and
effect all of the insurance policies listed in Section 2.23 of the Disclosure
Letter and will promptly notify Parent in writing of any material changes in
such coverage.
5.20 Underwriting of Parent Common Stock. Promptly after the Effective Time,
Parent shall survey the holders of Parent Common Stock issued in connection
with the Merger to determine which holders, if any, may elect to immediately
sell their shares of Parent Common Stock. If in the Parent's judgment the
number of shares of Parent Common Stock which are likely to be immediately sold
is sufficiently large to materially adversely affect the price of Parent Common
Stock as quoted on the Nasdaq National Market, Parent will at its own expense
(with the exception of underwriters' discounts and commissions) use reasonable
efforts to arrange an underwritten public offering on behalf of such holders
for the resale of such shares of Parent Common Stock.
5.21 Inspection of Real Property. Parent and/or its designated agents,
contractors and representatives shall have the right to enter upon the Owned
Properties and Leased Properties to make any inspections, evaluations, surveys
or tests which Parent reasonably may deem necessary or appropriate, including,
without limitation, engineering studies, seismic tests, environmental studies
(including, without limitation, surface and subsurface tests, borings and
samplings) and surveys of the Owned Properties and Leased Properties and such
feasibility studies as Parent reasonably deems necessary or appropriate and to
investigate all matters relating to zoning, use and compliance with other
applicable laws regarding the use and occupancy of the Owned Properties and
Leased Properties; provided, that the inspections, evaluations, surveys and
tests shall be conducted in a manner that does not unreasonably interfere with
the Company's normal operations and employee relationship. The Company and
Subsidiary shall cooperate reasonably with Parent in completing such
inspections and evaluations. Parent's exercise of its right to inspect the
Owned Properties and Leased Properties, or Parent's election not to inspect any
Owned Property or Leased Property, shall in no way be interpreted as a waiver
of any of Parent's rights or remedies contained in this Agreement, including,
without limitation, Parent's right to rely on the Company's and Subsidiary's
representations and warranties made herein.
5.22 Publication of Results. Parent shall publish as promptly as practical
but in no event later than 20 days after the end of the first calendar month
after the Effective Time in which there are at least 30 days of post-Merger
combined operations, combined sales and net income figures as contemplated by
and in accordance with the terms of SEC Accounting Series Release No. 135,
provided that if such calendar month is
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the last month in a fiscal quarter such financial statements shall be published
within 30 days of the end of such fiscal quarter.
5.23 Parent Intentions With Respect to Future Operations. Parent hereby
confirms that it currently intends to retain the vast majority of the Company's
employee base and to enhance and expand the Company's manufacturing facilities
and process development capability in South Haven, Michigan, provided that
future operations are subject to prudent business practices, and could change
if the business and economic conditions and customer needs of the Company
change in a significant manner.
5.24 Indemnification.
(a) From and after the Effective Time, the Surviving Corporation will
indemnify, defend and hold harmless (and Parent will not take any action to
cause the Surviving Corporation not to do so) the present and former officers,
directors, employees and agents of the Company and its Subsidiary (the
"Indemnified Parties") against all losses, claims, damages, expenses or
liabilities arising out of actions or omissions or alleged actions or omissions
occurring at or before the Effective Time to the same extent and on the same
terms and conditions (including with respect to advancement of expenses)
provided for in the Company's Articles of Incorporation and Bylaws and
agreements in effect as of the date of this Agreement (to the extent consistent
with applicable law).
(b) After the Effective Time, Parent will provide directors and officers of
the Company with the same coverage and amounts of directors' and officers'
liability insurance as Parent provides from time to time to directors and
officers of Parent's other subsidiaries.
(c) The provisions of this Section 5.24 are intended to be for the benefit
of, and will be enforceable by, each of directors and officers of the Company
and their heirs, legal representatives, successors and assigns.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of the Company and Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law, by the Shareholders of the Company.
(b) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger. All waiting periods under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(c) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
in writing by the SEC; and all requests for additional information on the
part of the SEC shall have been complied with to the reasonable
satisfaction of the parties hereto.
(d) Tax Opinions. Parent and the Company shall each have received
substantially identical written opinions from their counsel, Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, and Warner Norcross &
Judd LLP, respectively, in form and substance reasonably satisfactory to
them, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code. The parties to this Agreement
agree to make reasonable representations as requested by such counsel for
the purpose of rendering such opinions.
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(e) Opinion of Accountants. Each of Parent and Company shall have
received letters from Ernst & Young LLP and BDO Seidman LLP, respectively,
dated as of the Closing Date to the effect that those firms concur with the
Parent management's and the Company management's conclusions, respectively,
as to the appropriateness of pooling of interests accounting for the Merger
under Accounting Principles Board Opinion No. 16, if consummated in
accordance with this Agreement.
(f) Nasdaq Listing. The shares of Parent Common Stock issuable to
Shareholders of the Company pursuant to this Agreement and such other
shares required to be reserved for issuance in connection with the Merger
shall have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(g) Affiliate Agreements. Each of the parties identified by the Company
or Parent as being one of their respective Affiliates shall have delivered
an executed Affiliate Agreement which shall be in full force and effect.
6.2 Conditions to Obligations of Company. The obligations of the Company to
consummate and effect the Merger and the transactions contemplated hereby shall
be subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
the Company:
(a) Representations, Warranties and Covenants. The representations and
warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects
with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) Certificate of the Parent. Company shall have been provided with a
certificate executed on behalf of Parent by the Chief Executive Officer to
the effect that, as of the Effective Time:
(i) all representations and warranties made by Parent and Sub in
this Agreement are true and correct in all material respects on and as
of the Effective Time as though such representations and warranties
were made on and as of such time; and
(ii) all covenants and obligations of this Agreement to be performed
by Parent on or before such date have been so performed in all material
respects.
(d) Legal Opinion. The Company shall have received a legal opinion from
Wilson Sonsini Goodrich & Rosati, Professional Corporation, legal counsel
to Parent, substantially in the form of Exhibit F hereto.
(e) Claims. There shall be no bona fide action, suit, claim or
proceeding of any nature pending, or overtly threatened, against the
Parent, Sub or the Company, their respective properties or any of their
officers or directors, arising out of, or in any way connected with, the
Merger or the other transactions contemplated by the terms of this
Agreement that would materially and adversely affect the consummation of
the transactions contemplated hereby.
(f) No Material Adverse Changes or Effect. Since the date of this
Agreement, there shall not have occurred any material adverse change in the
business, assets (including intangible assets), results of operations,
liabilities (contingent or accrued), or financial condition of Parent since
the date of this Agreement.
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6.3 Conditions to the Obligations of Parent and Sub. The obligations of
Parent and Sub to consummate and effect the Merger and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations and
warranties of the Company in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of the Effective Time
and the Company shall have performed and complied in all material respects
with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) Claims. There shall be no bona fide action, suit, claim or
proceeding of any nature pending, or overtly threatened, against the
Parent, Sub or the Company, their respective properties or any of their
officers or directors, arising out of, or in any way connected with, the
Merger or the other transactions contemplated by the terms of this
Agreement that would materially and adversely affect the consummation of
the transactions contemplated hereby.
(d) Third Party Consents. The consents, waivers, assignments and
approvals listed in Section 2.6 of the Disclosure Letter shall have been
obtained.
(e) Legal Opinion. Parent shall have received a legal opinion from
Warner Norcross & Judd LLP, legal counsel to the Company, substantially in
the form of Exhibit G hereto.
(f) No Material Adverse Changes or Effect. Since the date of this
Agreement, there shall not have occurred any material adverse change in the
business, assets (including intangible assets), results of operations,
liabilities (contingent or accrued), financial condition or prospects of
the Company. For the purpose of this Section 6.3(f), a material adverse
change in prospects will be deemed to occur if there is a material adverse
change in the Company's actual or anticipated sales or profitability as
compared to the Company's financial projections which were provided to
Parent pursuant to Section 2.7(b) prior to the date of this Agreement.
(g) 1999 Audited Financial Statements. Parent shall have received from
the Company when available, but at least five (5) business days prior to
the Closing Date, the 1999 Audited Financial Statements and unaudited
financial statements for the most recent month ended.
(h) Certificate of the Company. Parent shall have been provided with a
certificate executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company in this
Agreement are true and correct in all material respects on and as of
the Effective Time as though such representations and warranties were
made on and as of such time;
(ii) all covenants and obligations of this Agreement to be performed
by the Company on or before such date have been so performed in all
material respects; and
(iii) the provisions set forth in Section 6.3 have been satisfied.
(i) Estoppel Certificates. The Company shall have obtained and delivered
to Parent an estoppel certificate from each lender of any material loan
outstanding with respect to any of the Owned Properties ("Property Loan"),
in the form attached as Exhibit H.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. Except as provided in Section 7.2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not occurred
by January 15, 2000, provided, however, that the right to terminate this
Agreement under this Section 7.1(b)(i) shall not be available to any party
whose action or failure to act has been a principal cause of or resulted in
the failure of the Merger to occur on or before such date and such action
or failure to act constitutes a breach of this Agreement; (ii) there shall
be a final nonappealable injunction, judgment, order or other action of a
federal or state court of competent jurisdiction in effect preventing
consummation of the Merger; or (iii) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity that would make consummation of the
Merger illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity, which would in any material respect:
(i) prohibit Parent's or Sub's ownership or operation of any material
portion of the business of the Company or (ii) compel Parent or the Company
to dispose of or hold separate all or a material portion of the business or
assets of the Company, or Parent, or Catalytica Pharmaceuticals, Inc. and
Bayview taken as a whole, or Catalytica Combustion Systems, Inc. as a
result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
the Company and such breach has not been cured within twenty (20) business
days after written notice to the Company; provided, however, that, no cure
period shall be required for a breach which by its nature cannot be cured;
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
on the part of Parent or Sub and such breach has not been cured within
twenty (20) business days after written notice to Parent; provided,
however, that no cure period shall be required for a breach which by its
nature cannot be cured;
(f) by Parent or Sub if an event having a Material Adverse Effect on the
Company shall have occurred after the date of this Agreement; and
(g) by Parent or Sub if this Agreement shall fail to receive the
requisite vote for approval and adoption by the Company's Shareholders.
Where action is taken to terminate this Agreement pursuant to this
Section 7.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and, except
as set forth in Section 7.3, there shall be no liability or obligation on the
part of Parent, Sub or the Company, or their respective officers, directors or
shareholders, provided that each party shall remain liable for any willful
breaches of this Agreement prior to its termination; provided further that, the
provisions of Sections 5.3 (confidentiality), 5.4 (expenses) and 5.5 (public
disclosure), and Articles VII and VIII of this Agreement shall remain in full
force and effect and survive any termination of this Agreement, and except as
provided in this Section 7.2 and Section 7.3, each party hereby irrevocably
waives and releases any other claim that may arise upon such termination.
7.3 Termination Fee.
(a) The Company shall pay Parent a termination fee of $4,000,000 payable in
cash by wire transfer or cashier's check in the event, and only in the event,
that the Closing does not occur, this Agreement is
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terminated, Parent is not in material breach of its obligations under this
Agreement, and any of the following events has occurred:
(i) the Shareholders of the Company shall have failed to approve the
Merger by a requisite vote required for such approval and prior to December
31, 1999, the Company or any of its officers, directors or affiliates
participates in any negotiations or discussions with respect to any offer
or proposal to acquire all, substantially all or a significant portion of
the Company's business, properties or technologies or more than twenty
percent (20%) of the Company's capital stock (whether or not outstanding)
whether by merger, purchase of assets, tender offer or otherwise
(collectively, a "Change of Control") and thereafter such negotiations or
discussions lead to a Change of Control (which may occur after December 31,
1999);
(ii) a majority of the Board of Directors of the Company shall have
failed to recommend or shall have changed its recommendation concerning the
Merger; or shall have disclosed, in any manner, its intention not to
recommend or to change such recommendation; or
(iii) the Company has breached Section 4.2.
(b) Any payment required under Section 7.3 shall be made by the Company
within ten (10) days after termination of this Agreement; provided, in the case
of a payment owed pursuant to Section 7.3(a)(i), such payment shall be made
immediately upon such Change of Control.
7.4 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of Parent, Sub
and the Company.
7.5 Extension; Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company on the other hand, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by a nationally
recognized commercial messenger or courier service, or mailed by registered or
certified mail (return receipt requested, postage prepaid) or sent via
facsimile (with acknowledgment of complete transmission) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice), provided, however, that notices sent by mail will not be
deemed given until received:
(a) if to Parent or Sub, to:
Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043
Attention: Chief Executive Officer and Chief Financial Officer
Telephone No.: (650) 960-3000
Facsimile No.: (650) 968-8754
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with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Barry E. Taylor, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to
Wyckoff Chemical Company, Inc.
1421 Kalamazoo Street
South Haven, Michigan 49090
Attention: Chief Executive Officer
Telephone No.: (616) 637-8474
Facsimile No.: (616) 637-8410
with a copy to:
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street N.W.
Grand Rapids, Michigan
Attention: Stephen C. Waterbury, Esq.
Telephone No.: (616) 752-2000
Facsimile No.: (616) 752-2500
8.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, and
the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder except to the limited extent provided in Section
5.24; and (c) shall not be assigned (other than by operation of law), except
that Parent and Sub may assign their respective rights and delegate their
respective obligations hereunder to their respective affiliates.
8.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
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8.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof. Each of the parties hereto irrevocably consents to the exclusive
jurisdiction and venue of any federal district court for the District of
Delaware, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of Delaware for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction, venue and such process.
8.7 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be duly executed by their duly authorized
representatives as of the date first above written.
CATALYTICA, INC. WYCKOFF CHEMICAL
COMPANY, INC.
By: ________________________________ By: ________________________________
Name: ______________________________ Name: ______________________________
Title: _____________________________ Title: _____________________________
PILOT ACQUISITION CORPORATION
By: ________________________________
Name: ______________________________
Title: _____________________________
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EXHIBIT A
Certificate of Merger
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EXHIBIT B
Escrow and Indemnification Agreement
AI-45
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EXHIBIT B-1
Special Purpose Escrow and Indemnification Agreement
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EXHIBIT C
Form of Parent Affiliate Agreement
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EXHIBIT D
Form of Company Affiliate
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EXHIBIT E
Form of Voting Agreement
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EXHIBIT F
Form of Legal Opinion of Counsel to Parent
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EXHIBIT G
Form of Legal Opinion of Counsel to the Company
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EXHIBIT H
Form of Estoppel Certificate
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ANNEX II
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is made and entered into as of July
13, 1999, by and among Pilot Corporation, a Delaware corporation ("Parent"),
and the undersigned shareholder and/or option holder (the "Shareholder") of
Black River, Inc., a Michigan corporation (the "Company").
RECITALS
A. The Company, Sub (as defined below) and Parent have entered into an
Agreement and Plan of Reorganization (the "Reorganization Agreement"), which
contemplates that the Company will enter into an Merger Agreement, which will
provide for the merger (the "Merger") of a wholly-owned subsidiary of Parent
("Sub") with and into the Company. Pursuant to the Merger, all of the issued
and outstanding securities of the Company will be converted into the right to
receive shares of Parent Common Stock, as set forth in the Reorganization
Agreement;
B. Shareholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") of such number
of shares of the outstanding capital stock of the Company and shares subject to
outstanding options and warrants as is indicated on the signature page of this
Agreement; and
C. In order to induce Parent to execute the Reorganization Agreement,
Shareholder agrees to vote the Shares (as defined below) and other such shares
of capital stock of the Company over which Shareholder has voting power so as
to facilitate consummation of the Merger. The execution and delivery of this
Agreement and of the attached form of proxy is a material condition to Parent's
willingness to enter into the Reorganization Agreement.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Reorganization Agreement. For purposes of this
Agreement:
1.1 "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been validly terminated
pursuant to Article VIII thereof, or (ii) such date and time as the Merger
shall become effective in accordance with the terms and provisions of the
Reorganization Agreement.
1.2 "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
1.3 "Shares" shall mean: (i) all equity securities of the Company
(including all shares of Company Common Stock and all options, warrants and
other rights to acquire shares of Company Common Stock) owned by
Shareholder as of the date of this Agreement; and (ii) all additional
equity securities of the Company (including all additional shares of
Company Common Stock and all additional options, warrants and other rights
to acquire shares of Company Common Stock) of which Shareholder acquires
ownership during the period from the date of this Agreement through the
Expiration Date.
1.4 A Person shall be deemed to have effected a "Transfer" of a security
if such person directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such security or
any interest in such security; or (ii) enters into an agreement or
commitment providing for the sale of, pledge of, encumbrance of, grant of
an option with respect to, transfer of or disposition of such security or
any interest therein.
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2. Transfer of Shares.
2.1 Transferee of Shares to be Bound by this Agreement. Shareholder
agrees that, during the period from the date of this Agreement through the
Expiration Date, Shareholder shall not cause or permit any Transfer of any
of the Shares to be effected unless such Transfer is in accordance with any
affiliate agreement between Shareholder and Parent contemplated by the
Reorganization Agreement and each Person to which any of such Shares, or
any interest in any of such Shares, is or may be transferred shall have:
(a) executed a counterpart of this Agreement and a proxy in the form
attached hereto as Exhibit A (with such modifications as Parent may
reasonably request); and (b) agreed in writing to hold such Shares (or
interest in such Shares) subject to all of the terms and provisions of this
Agreement.
2.2 Transfer of Voting Rights. Shareholder agrees that, during the
period from the date of this Agreement through the Expiration Date,
Shareholder shall not deposit (or permit the deposit of) any Shares in a
voting trust or grant any proxy or enter into any voting agreement or
similar agreement in contravention of the obligations of Shareholder under
this Agreement with respect to any of the Shares.
3. Conversion of Shares. The Shareholder agrees that, to the extent any of
the Shares consist of shares of Preferred Stock of the Company, Shareholder
shall not exercise any conversion rights in respect of such Shares prior to the
record date fixed by the Board of Directors of the Company for the
determination of shareholders entitled to vote on the Merger.
4. Agreement to Vote Shares. At every meeting of the shareholders of the
Company called, and at every adjournment thereof, and on every action or
approval by written consent of the shareholders of the Company, Shareholder
shall: (i) cause the Shares to be voted in favor of approval of the
Reorganization Agreement and the Merger and in favor of any matter that could
reasonably be expected to facilitate the Merger.
5. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
6. Representations and Warranties of the Shareholder. Shareholder (i) is the
beneficial owner of the shares of Common Stock of the Company, Preferred Stock
of the Company and the options and warrants to purchase shares of Common Stock
of the Company indicated on the final page of this Agreement, free and clear of
any liens, claims, options, rights of first refusal, co-sale rights, charges or
other encumbrances; (ii) does not beneficially own any securities of the
Company other than the shares of Common Stock of the Company, Preferred Stock
of the Company and options and warrants to purchase shares of Common Stock of
the Company indicated on the signature page of this Agreement; and (iii) has
full power and authority to make, enter into and carry out the terms of this
Agreement and the Proxy.
7. Appointment of Securityholder Agent. Shareholder agrees to appoint [ ]
as agent and attorney-in-fact for and on behalf of Shareholder for purposes of
Article VII of the Reorganization Agreement. Shareholder further agrees that
any decision, act, consent or instruction of the Securityholder Agent (as
defined in the Merger Agreement), including, without limitation, any agreement
by the Securityholder Agent for and on behalf of the Shareholders (as defined
in the Reorganization Agreement) to any amendments, modifications and waivers
of any term, condition or other agreement set forth in the Reorganization
Agreement, shall constitute a decision of Shareholder for all purposes of and
under the Reorganization Agreement, and that such decision, act, consent or
instruction shall be final, binding and conclusive upon Shareholder as if made
by Shareholder.
8. Additional Documents. Shareholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent, to carry out the intent of this Agreement.
9. Consent and Waiver. Shareholder (not in his capacity as a director or
officer of the Company) hereby gives any consents or waivers that are
reasonably required for the consummation of the Merger under the terms of any
agreements to which Shareholder is a party or pursuant to any rights
Shareholder may have.
AII-2
<PAGE>
10. Legending of Shares. If so requested by Parent, Shareholder agrees that
the Shares shall bear a legend stating that they are subject to this Agreement
and to an irrevocable proxy. Subject to the terms of Section 2 hereof,
Shareholder agrees that Shareholder will not Transfer the Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares.
11. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
12. Miscellaneous.
12.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
12.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
12.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
12.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Parent upon any
such violation, Parent shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Parent at law or in equity.
12.5 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by a
nationally recognized commercial messenger or courier service, or mailed by
registered or certified mail (return receipt requested, postage prepaid) or
sent via facsimile (with acknowledgment of complete transmission) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice), provided, however, that notices sent by
mail will not be deemed given until received:
If to Parent: Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043-5272
Attention: Lawrence W. Briscoe
Telephone: (650) 960-3000
Facsimile: (650) 968-8754
With a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Barry E. Taylor, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
If to Shareholder: To the address for notice set forth on the signature
page hereof.
AII-3
<PAGE>
12.6 Governing Law. This Agreement shall be governed by the laws of the
State of Michigan, regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws. Shareholder hereby irrevocably
consents to the exclusive jurisdiction and venue of any federal district
court for the Western District of Michigan in connection with any matter
based upon or arising out of this Agreement, agrees that process may be
served upon it in any manner authorized by the laws of the State of
Michigan for such persons and waives and covenants not to assert or plead
any objection which it might otherwise have to such jurisdiction, venue and
process.
12.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
12.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
12.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
AII-4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
PILOT CORPORATION SHAREHOLDER
By: _________________________________ _____________________________________
Signature of Authorized Signatory
Signature
____________________________________ _____________________________________
Print Name and Title
Print Name
_____________________________________
_____________________________________
Print Address
_____________________________________
Telephone
_____________________________________
Facsimile No.
Shares beneficially owned:
shares of Company Common Stock
shares of Company Preferred
Stock
shares of Company Common Stock
issuable upon exercise of
outstanding options or warrants
[SIGNATURE PAGE TO IRREVOCABLE PROXY]
AII-5
<PAGE>
Exhibit A
IRREVOCABLE PROXY
The undersigned shareholder of Black River, Inc., a Michigan corporation
(the "Company"), hereby irrevocably (to the fullest extent permitted by law)
appoints and of Pilot Corporation, a Delaware corporation
("Parent"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to vote
and exercise all voting and related rights (to the full extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of the Company that now are or hereafter may be beneficially owned by the
under-signed, and any and all other shares or securities of the Company issued
or issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned shareholder of the Company as of the date of this
Proxy are listed on the final page of this Proxy. Upon the undersigned's
execution of this Proxy, any and all prior proxies given by the undersigned
with respect to any Shares are hereby revoked and the undersigned agrees not to
grant any subsequent proxies with respect to the Shares until after the
Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among Parent and the undersigned
shareholder (the "Voting Agreement"), and is granted in consideration of Parent
entering into that certain Agreement and Plan of Reorganization (the
"Reorganization Agreement"), among Parent, Pilot Acquisition Corporation, a
Michigan corporation and a wholly-owned subsidiary of Parent ("Sub"), the
Company and certain other parties. The Reorganization Agreement provides for
the merger of Sub into the Company in accordance with its terms (the "Merger").
As used herein, the term "Expiration Date" shall mean the earlier to occur of
(i) such date and time as the Reorganization Agreement shall have been validly
terminated pursuant to Article VIII thereof or (ii) such date and time as the
Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting, consent and similar rights of the under-
signed with respect to the Shares (including, without limitation, the power to
execute and deliver written consents) at every annual, special or adjourned
meeting of shareholders of the Company and in every written consent in lieu of
such meeting in favor of approval of the Merger, the execution and delivery by
the Company of the Reorganization Agreement and the adoption and approval of
the terms thereof and in favor of each of the other actions contemplated by the
Reorganization Agreement and any action required in furtherance hereof and
thereof.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned shareholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
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<PAGE>
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically
upon the Expiration Date.
Dated: , 1999 Signature of Shareholder: ___________
Print Name of Shareholder: __________
Shares beneficially owned: __________
shares of the Company Common
Stock
shares of the Company Preferred
Stock
shares of the Company Common
Stock issuable upon exercise of
outstanding options or warrants
[SIGNATURE PAGE TO IRREVOCABLE PROXY]
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ANNEX III
ESCROW AND INDEMNIFICATION AGREEMENT
This ESCROW AND INDEMNIFICATION AGREEMENT (the "Agreement") is made,
executed and delivered this 14th day of July, 1999, by and among Catalytica,
Inc., a Delaware corporation ("Parent"), Pilot Acquisition Corporation, a
Michigan corporation and wholly-owned subsidiary of Parent ("Sub"),
Wyckoff Chemical Company, Inc., a Michigan corporation (the "Company"), John L.
Urness, as Securityholder Agent for the shareholders of the Company, and U.S.
Bank Trust, N.A., a corporation as Escrow Agent.
RECITALS
WHEREAS, the Company, Sub and Parent have entered into an Agreement and Plan
of Reorganization, dated as of July 14, 1999 (the "Reorganization Agreement"),
which contemplates that the Company, Parent and Sub will enter into a Merger
Agreement and other related agreements (collectively, the "Merger Agreements")
providing for the merger (the "Merger") of Sub with and into the Company;
WHEREAS, pursuant to the terms of the Reorganization Agreement, at the
Effective Time Parent is required to deliver the Escrow Amount (defined below)
to the Escrow Agent, such Escrow Amount to be held and applied by the Escrow
Agent in accordance with the terms of this Agreement;
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings ascribed to such terms in the Reorganization Agreement;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and each intending to be legally bound hereby, the parties hereby agree as
follows:
1. Creation of Escrow Fund
(a) As the sole and exclusive remedy of Parent after the Effective Time for
any breach by the Company of the representations, warranties and covenants
contained in the Reorganization Agreement or in any closing certificate, at the
Effective Time the Company's Shareholders will be deemed to have received and
deposited with the Escrow Agent, without any act of any Shareholder, the number
of shares of Parent Common Stock equal to five percent (5%) of the Acquisition
Consideration less Six Hundred Thousand Dollars ($600,000) less the Adjustment
to Acquisition Consideration, if any, (the "Escrow Amount") (plus any
additional shares as may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time). As soon as
practicable after the Effective Time, the Escrow Amount, without any act of any
Shareholder, will be deposited with the Escrow Agent, such deposit to
constitute an escrow fund (the "Escrow Fund") to be governed by the terms set
forth herein and at Parent's sole cost and expense. The portion of the Escrow
Amount contributed on behalf of each Shareholder of the Company shall be in
proportion to the aggregate number of shares of Parent Common Stock which such
holder would otherwise be entitled under Section 1.6(a) of the Reorganization
Agreement. No portion of the Escrow Amount shall be contributed in respect of
any Company Options.
(b) The Escrow Fund shall be available solely to compensate Parent and its
officers, directors and affiliates (including the Surviving Corporation and its
officers and directors) for any claims, losses, liabilities, damages,
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses, and expenses of investigation and defense (hereinafter individually a
"Loss" and collectively "Losses") incurred by Parent, its officers, directors
or affiliates (including the Surviving Corporation and its officers and
directors) directly or indirectly as a result of any breach of a representation
or warranty of the Company contained in Article II of the Reorganization
Agreement (as modified by the Disclosure Letter subject to the provisions of
Section 12(b)(ii)), or any failure by the Company to perform or comply with any
covenant contained therein;
AIII-1
<PAGE>
provided, however, that the Escrow Fund shall not be available to compensate
Parent, its officers, directors or affiliates (including the Surviving
Corporation and its officers and directors) for any Loss incurred by Parent,
its officers, directors or affiliates related to the intellectual property
matter described in Schedule A to this Agreement. Parent and the Company each
acknowledge that such Losses, if any, would relate to unresolved contingencies
existing at the Effective Time, which if resolved at the Effective Time would
have led to a reduction in the Acquisition Consideration.
2. Escrow Period; Distribution upon Termination of Escrow Periods. Subject
to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
California time, on the Expiration Date (the "Escrow Period"); provided that
the Escrow Period shall not terminate with respect to such amount (or some
portion thereof), that together with the aggregate amount remaining in the
Escrow Fund is necessary in the reasonable judgment of Parent, subject to the
objection of the Securityholder Agent and the subsequent arbitration of the
matter in the manner provided in Section 6 hereof, to satisfy any unsatisfied
claims concerning facts and circumstances existing prior to the termination of
such Escrow Period and which are properly indemnifiable under the
Reorganization Agreement as specified in any Officer's Certificate (defined
below) delivered to the Escrow Agent prior to termination of such Escrow
Period. As soon as all such claims have been resolved, the Escrow Agent shall
deliver to the Shareholders of the Company the remaining portion of the Escrow
Fund not required to satisfy such claims. Deliveries of Escrow Amounts to the
Shareholders of the Company pursuant to this Section 2 shall be made in
proportion to their respective original contributions to the Escrow Fund.
3. Protection of Escrow Fund.
(a) The Escrow Agent shall hold and safeguard the Escrow Fund during the
Escrow Period, shall treat such fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Parent and shall hold and
dispose of the Escrow Fund only in accordance with the terms hereof.
(b) Any shares of Parent Common Stock or other equity securities issued or
distributed by Parent (including shares issued upon a stock split) ("New
Shares") in respect of Parent Common Stock in the Escrow Fund which have not
been released from the Escrow Fund shall be added to the Escrow Fund and become
a part thereof. New Shares issued in respect of shares of Parent Common Stock
which have been released from the Escrow Fund shall not be added to the Escrow
Fund but shall be distributed to the recordholders thereof. Cash dividends on
Parent Common Stock shall not be added to the Escrow Fund but shall be
distributed to the recordholders thereof.
(c) Each Shareholder shall have voting rights with respect to the shares of
Parent Common Stock contributed to the Escrow Fund by such Shareholder (and on
any voting securities added to the Escrow Fund in respect of such shares of
Parent Common Stock).
4. Claims Upon Escrow Fund.
(a) Upon receipt by the Escrow Agent at any time on or before the last day
of the Escrow Period of a certificate signed by any officer of Parent (an
"Officer's Certificate"): (i) stating that Parent or the Surviving Corporation
has paid or properly accrued or reasonably anticipates that it will have to pay
or accrue Losses, and (ii) specifying in reasonable detail the individual items
of Losses included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the nature
of the misrepresentation, breach of warranty or covenant to which such item is
related, the Escrow Agent shall, subject to the provisions of Section 5 hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, shares of
Parent Common Stock held in the Escrow Fund in an amount equal to such Losses.
(b) For the purposes of determining the number of shares of Parent Common
Stock to be delivered to Parent out of the Escrow Fund pursuant to Section 4(a)
hereof, the shares of Parent Common Stock shall be deemed to be valued at the
Trading Price.
AIII-2
<PAGE>
5. Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Securityholder Agent and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 4 hereof unless the Escrow Agent shall have
received written authorization from the Securityholder Agent to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of shares of Parent Common Stock from the Escrow Fund in
accordance with Section 4 hereof, provided that no such payment or delivery may
be made if the Securityholder Agent shall object in a written statement to the
claim made in the Officer's Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the expiration of such thirty (30) day
period.
6. Resolution of Conflicts; Arbitration.
(a) In case the Securityholder Agent shall so object in writing to any claim
or claims made in any Officer's Certificate, the Securityholder Agent and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Securityholder Agent and
Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and
distribute shares of Parent Common Stock from the Escrow Fund in accordance
with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation, either
Parent or the Securityholder Agent may demand arbitration of the matter unless
the amount of the damage or loss is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration; and in either such event the
matter shall be settled by arbitration conducted by three arbitrators. Parent
and the Securityholder Agent shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator, each of which
arbitrators shall be independent and have at least ten (10) years relevant
experience. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing
the parties an opportunity, adequate in the sole judgment of the arbitrators,
to discover relevant information from the opposing parties about the subject
matter of the dispute. The arbitrators shall rule upon motions to compel or
limit discovery and shall have the authority to impose sanctions, including
attorneys fees and costs, to the extent as a court of competent law or equity,
should the arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement, and notwithstanding anything
in Section 5 hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Chicago,
Illinois under the rules then in effect of the Judicial Arbitration and
Mediation Services, Inc. For purposes of this Section 6, in any arbitration
hereunder in which any claim or the amount thereof stated in the Officer's
Certificate is at issue, Parent shall be deemed to be the Non-Prevailing Party
in the event that the arbitrators award Parent less than the sum of one-half
(1/2) of the disputed amount plus any amounts not in dispute; otherwise, the
Shareholders of the Company as represented by the Securityholder Agent shall be
deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration and the expenses, including without
limitation, reasonable attorneys' fees and costs, incurred by the other party
to the arbitration.
7. Securityholder Agent of the Shareholders; Power of Attorney.
(a) In the event that the Merger is approved, effective upon such vote, and
without further act of any Shareholder, the Securityholder Agent shall be
appointed as agent and attorney-in-fact for each Shareholder of the Company,
for and on behalf of Shareholders of the Company, to give and receive notices
and
AIII-3
<PAGE>
communications, to authorize delivery to Parent of shares of Parent Common
Stock from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agent for the accomplishment of
the foregoing. Such agency may be changed by the Shareholders of the Company
from time to time upon not less than thirty (30) days prior written notice to
Parent; provided that the Securityholder Agent may not be removed unless
holders of a two-thirds interest of the Escrow Fund agree to such removal and
to the identity of the substituted agent. Any vacancy in the position of
Securityholder Agent may be filled by approval of the holders of a majority in
interest of the Escrow Fund. No bond shall be required of the Securityholder
Agent, and the Securityholder Agent shall not receive compensation for his or
her services. Notices or communications to or from the Securityholder Agent
shall constitute notice to or from each of the Shareholders of the Company.
(b) In performing any duties under the Agreement, the Securityholder Agent
shall not be liable to any party for damages, losses or expenses, except for
gross negligence or willful misconduct on the part of the Securityholder Agent.
The Securityholder Agent shall not incur any such liability for (i) any act or
failure to act made or omitted in good faith, or (ii) any action taken or
omitted in reliance upon any instrument, including any written statement of
affidavit provided for in this Agreement that the Securityholder Agent shall in
good faith believe to be genuine, nor will the Securityholder Agent be liable
or responsible for forgeries, fraud, impersonations or determining the scope of
any representative authority. In addition, the Securityholder Agent may consult
with legal counsel in connection with Securityholder Agent's duties under this
Agreement and shall be fully protected in any act taken, suffered or permitted
by it in good faith in accordance with the advice of counsel. The
Securityholder Agent is not responsible for determining and verifying the
authority of any person acting or purporting to act on behalf of any party to
this Agreement. The Shareholders of the Company on whose behalf the Escrow
Amount was contributed to the Escrow Fund shall severally indemnify the
Securityholder Agent and hold the Securityholder Agent harmless against any
loss, liability or expense incurred without negligence or bad faith on the part
of the Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties hereunder,
including the reasonable fees and expenses of any legal counsel retained by the
Securityholder Agent.
8. Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
Shareholders for whom a portion of the Escrow Amount otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive
upon each of such Shareholders, and the Escrow Agent and Parent may rely upon
any such decision, act, consent or instruction of the Securityholder Agent as
being the decision, act, consent or instruction of each every such Shareholder
of the Company. The Escrow Agent and Parent are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Securityholder Agent.
9. Third-Party Claims. In the event Parent becomes aware of a third-party
claim which Parent believes may result in a demand against the Escrow Fund,
Parent shall promptly notify the Securityholder Agent of such claim, and the
Securityholder Agent, as representative for the Shareholders of the Company,
shall be entitled, at their expense, to participate in any defense of such
claim. Parent shall have the right in its sole discretion to settle any such
claim; provided, however, that except with the consent of the Securityholder
Agent, no settlement of any such claim with third party claimants shall alone
be determinative of the amount of any claim against the Escrow Fund and the
Securityholder Agent and Shareholders shall not be bound by such settlement. In
the event that the Securityholder Agent has consented to any such settlement
and acknowledged that the claim is a valid claim against the Escrow Fund, the
Securityholder Agent shall have no power or authority to object under any
provision of this Agreement to the amount of any claim by Parent against the
Escrow Fund with respect to such settlement. Each party will make available to
each other and each other's legal counsel and other professional advisers all
of its books and records relating to a third-party claim and each party will
render to the other assistance as may be reasonably required to ensure the
proper and adequate defense of a third-party claim.
AIII-4
<PAGE>
10. Escrow Agent's Duties.
(a) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein, and as set forth in any additional
written escrow instructions which the Escrow Agent may receive after the date
of this Agreement which are signed by an officer of Parent and the
Securityholder Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(b) The Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person, excepting
only orders or process of courts of law, and is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case the
Escrow Agent obeys or complies with any such order, judgment or decree of any
court, the Escrow Agent shall not be liable to any of the parties hereto or to
any other person by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(c) The Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents or papers
deposited or called for hereunder.
(d) The Escrow Agent shall not be liable for the expiration of any rights
under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
(e) In performing any duties under the Agreement, the Escrow Agent shall not
be liable to any party for damages, losses or expenses, except for gross
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (i) any act or failure to act made
or omitted in good faith, or (ii) any action taken or omitted in reliance upon
any instrument, including any written statement of affidavit provided for in
this Agreement that the Escrow Agent shall in good faith believe to be genuine,
nor will the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered or permitted by it in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(f) If any controversy arises between the parties to this Agreement, or with
any other party, concerning the subject matter of this Agreement, its terms or
conditions, the Escrow Agent will not be required to determine the controversy
or to take any action regarding it. The Escrow Agent may hold all documents and
shares of Parent Common Stock and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent may be required, despite what may
be set forth elsewhere in this Agreement. In such event, the Escrow Agent will
not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all documents and shares of Parent Common Stock held in escrow,
except all costs, expenses, charges and reasonable attorney fees incurred by
the Escrow Agent due to the interpleader action and which the parties jointly
and severally agree to pay. Upon initiating such action, the Escrow Agent shall
be fully released and discharged of and from all obligations and liability
imposed by the terms of this Agreement.
(g) The parties and their respective successors and assigns agree jointly
and severally to indemnify and hold Escrow Agent harmless against any and all
losses, claims, damages, liabilities and expenses, including
AIII-5
<PAGE>
reasonable costs of investigation, counsel fees and disbursements that may be
imposed on Escrow Agent or incurred by Escrow Agent in connection with the
performance of its duties under this Agreement, including but not limited to
any litigation arising from this Agreement or involving its subject matter.
(h) The Escrow Agent may resign at any time upon giving at least thirty (30)
days written notice to the parties; provided, however, that no such resignation
shall become effective until the appointment of a successor escrow agent which
shall be accomplished as follows: the parties shall use their best efforts to
mutually agree on a successor escrow agent within thirty (30) days after
receiving such notice. If the parties fail to agree upon a successor escrow
agent within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers and duties of the predecessor escrow agent
as if originally named as escrow agent. The Escrow Agent shall be discharged
from any further duties and liability under this Agreement.
11. Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or if
the Escrow Agent renders any service not provided for in this Agreement, or if
the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes
in, any litigation pertaining to this escrow or its subject matter, the Escrow
Agent shall be reasonably compensated for such extraordinary services and
reimbursed for all costs, attorney's fees and expenses occasioned by such
default, delay, controversy or litigation. Parent promises to pay these sums
upon demand.
12. Limitations on Indemnification. The indemnification of Parent provided
under this Agreement shall be the sole and exclusive remedy of Parent after the
Effective Time for any breach by the Company of the representations, warranties
and covenants contained in the Reorganization Agreement or in any closing
certificate and is limited in certain respects as follows:
(a) The Company's representations and warranties in the Reorganization
Agreement or in any closing certificate delivered pursuant to the
Reorganization Agreement shall survive the Merger and continue until 5:00 p.m.,
California time, on the earlier of the date which is the date of the auditor's
report for the first audit of Parent's and the Company's combined financial
statements after the Closing Date or the date which is six months following the
Closing Date (the "Expiration Date").
(b) (i) The Company shall not be liable to Parent for claims until the
aggregate amount of Losses exceeds One Hundred Fifty Thousand Dollars
($150,000) (the "Threshold Amount"). Upon reaching such amount, the
Company shall be liable to Parent for all Losses, including the
Threshold Amount, up to the Escrow Fund (the "Maximum Amount"). Under no
circumstances shall the Company be liable to Parent for any amount in
excess of the Maximum Amount.
(ii) Notwithstanding the provisions of Section 12(b)(i), this
subsection shall govern any claim seeking reimbursement of Losses
arising out of the legally-required cleanup or remediation of any
single spill event or instance of environmental contamination at the
Company's properties existing or having occurred prior to the Effective
Date, which matter or event is disclosed in Schedule 2.20(b)(i)(1)
through (15) of the Disclosure Letter (a "Listed Environmental Claim").
There shall not be any liability for any Loss arising out of a Listed
Environmental Loss until the aggregate amount of cleanup or remediation
costs associated with that Listed Environmental Claim, excluding all
costs of environmental assessment, investigation and evaluation
associated with the claim, exceeds Two Hundred Fifty Thousand Dollars
($250,000) (the "Environmental Threshold"). Upon reaching such amount,
the full amount of the Loss with respect to remediation costs
associated with that Listed Environmental Claim, including the
Threshold Amount, but excluding all costs of assessment, investigation
and evaluation, shall be available to compensate Parent pursuant to the
AIII-6
<PAGE>
terms of this Agreement. Any other environmental claim shall not be
subject to the Environmental Threshold, but shall be subject to the
provisions of Section 12(b)(i) above. No costs of environmental
assessment, investigation or evaluation associated with a Listed
Environmental Claim shall constitute a "Loss" for purposes of this
Agreement. In no event shall the Company's liability under this
subsection, when added to the Company's liability under all other
provisions of this Agreement, exceed the Maximum Amount.
Notwithstanding any other provision of this Agreement or the Merger
Agreement, there shall be no liability under this Agreement, the Merger
Agreement or otherwise, for any environmental claim or associated
Losses arising out of or in connection with (a) certain soil
contamination near the northwest and southwest corners of the North
Tank Farm, as identified in the Phase II Environmental Site Assessment
report dated June 28, 1999, issued by URS Greiner Woodward Clyde; (b)
any costs voluntarily incurred for environmental remediation of the
Company's properties for which the Company and/or Parent is eligible to
seek partial or total reimbursement under the City of South Haven
Redevelopment Authority Brownfield Plan approved on April 12, 1999 and,
to the extent of any proceeds actually received by the Company and/or
Parent, any future "brownfield redevelopment" or similar program
sponsored or operated by a governmental entity, including without
limitation under Michigan Public Act 381 of 1996; or (c) the
remediation of environmental contamination resulting from historical
leakage from drains within the Company's production building 1 and
building 2.
(c) To the extent Parent is entitled to be indemnified from the Escrow Fund
on any Loss, Parent will first use commercially reasonable efforts to pursue
its rights and causes of action with respect to any insurance, warranty
coverage or third-party claim related to such Loss to the extent it is
commercially reasonable to do so. In the event Parent does not pursue its
rights or causes of action, or commences such pursuit and determines that
continuing such pursuit is not commercially reasonable, Parent shall be
entitled to be indemnified from the Escrow Fund, which indemnification shall
include the costs incurred to pursue such insurance, warranty coverage or
third-party claim and Parent, at the request of the Securityholder Agent, shall
(i) assign to the Securityholder Agent, for the benefit of the Shareholders, to
the fullest extent allowable, its rights and causes of action with respect to
any insurance, warranty coverage or third-party claim related to such Loss; or
(ii) pursue such right or cause of action at the sole expense of the
Shareholders. In the event of an assignment pursuant to (i) above, the
Securityholder Agent shall be entitled to retain for the benefit of the
Shareholders any recoveries made as a result of any such action up the amount
of the Loss paid form the Escrow Fund and any expenses of such recovery. Any
excess in the recoveries over such amount shall be paid to the Company. Parent
shall provide the Securityholder Agent reasonable assistance in prosecuting
such claim, including making its and the Company's books and records relating
to such claim available to the Securityholder Agent and making its and the
Company's employees available for interviews and similar matters, provided the
Shareholders shall pay for any out-of-pocket expenses of the Parent Company or
any employees.
(d) Any Loss shall be reduced by an amount equal to the Tax Benefit (defined
below), if any, attributable to the Loss. For purposes of any Loss relating to
taxes, the Loss shall be reduced by the actual Tax Benefit realized, if any,
attributable to or arising out of the adjustment giving rise to the indemnity
payment. The parties agree to report any Loss as an adjustment to the
Acquisition Consideration for all tax purposes unless required to report such
Loss in a different manner by any applicable taxing authority. To the extent
that Parent is required to report the receipt of any payment for a Loss as
taxable income, the amount of the Loss shall be increased by an amount
sufficient to compensate Parent for any taxes applicable thereto, as well as
all taxes applicable to the receipt of all such amounts (a full tax "gross
up"). For purposes of this Agreement, Tax Benefit shall mean the actual tax
savings realized during the fiscal year in which the Loss is reported for tax
purposes from any reasonably identifiable refund, credit or reduction in
otherwise required tax payments, including any interest payable thereon. To the
extent a Tax Benefit is realized after any recovery or payment pursuant to this
Agreement, there shall be a corresponding adjustment between the parties
without regard to the time limitations imposed under Section 2.
AIII-7
<PAGE>
(e) No "multiple of lost profits" shall be applied in calculating any
indemnity amount. The Company shall have no liability for indemnification with
respect to any Loss that relates to the passing of, or any change in, after the
Closing Date, any law or any accounting policy, principle or practice or any
increase in tax rates in effect on the Closing Date, even if the change or
increase has retroactive effect or requires action at a future date.
(f) Parent agrees that in the event of any breach giving rise to an
indemnity obligation of the Escrow Fund, Parent shall take and shall cause the
Company to take, all commercially reasonable measures to mitigate the
consequences of the related breach.
(g) With respect to any Loss relating to environmental matters in which
Parent or any affiliate (including the Company) is required under applicable
law to initiate or conduct a response action, the Escrow Fund shall only be
responsible to provide indemnification with respect to commercially reasonable
response actions. A Loss arising out of off-site disposal that is resolved
through agreement, settlement or consent among a group of potentially
responsible parties with the appropriate Governmental Authority shall be deemed
reasonable as long as consistent with that affecting other similarly situated
parties. The Securityholder Agent shall be entitled to review any response
action for which a claim for indemnification is to be made under this Agreement
and, upon request, Parent shall, and shall cause its affiliates (including the
Company) to, provide the Securityholder Agent and its agents and
representatives necessary documentation and reasonable access to any affected
real property for purposes of conducting the review.
13. Miscellaneous Provisions.
(a) The Section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(b) All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by a nationally recognized
commercial messenger or courier service, or mailed by registered or certified
mail (return receipt requested, postage prepaid) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice), provided, however, that notices sent by mail will not be deemed given
until received:
(i) if to Parent or Sub, to:
Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043
Attention: Chief Executive Officer and Chief Financial Officer
Telephone No.: (650) 960-3000
Facsimile No.: (650) 968-8754
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Barry E. Taylor, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
AIII-8
<PAGE>
(ii) if to the Company, to:
Wyckoff Chemical Company, Inc.
1421 Kalamazoo Street
South Haven, Michigan 49090
Attention: Chief Executive Officer
Telephone No.: (616) 637-8474
Facsimile No.: (616) 637-8410
with a copy to:
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street N.W.
Grand Rapids, Michigan
Attention: Stephen C. Waterbury, Esq.
Telephone No.: (616) 752-2000
Facsimile No.: (616) 752-2500
(iii) if to the Escrow Agent, to:
U.S. Bank Trust, N.A.
_____________________
_____________________
Attention:
Telephone No.:
Facsimile No.:
(c) This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party, it being understood that all parties need not sign the same
counterpart.
(d) This Agreement shall insure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, personal representatives,
successors and assigns, provided that any assignment of this Agreement or the
rights hereunder by any party hereto without the written consent of the other
parties shall be void. Nothing in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto any rights or
remedies under or by reason of this Agreement.
(e) This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof. Each of the
parties hereto irrevocably consents to the exclusive jurisdiction and venue of
any federal district court for the District of Delaware, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner authorized by
the laws of the State of Delaware for such persons and waives and covenants not
to assert or plead any objection which they might otherwise have to such
jurisdiction, venue and such process.
(f) No consent or waiver, expressed or implied, by any party to or of any
breach or default by another other in the performance by the other of its
obligations hereunder shall be deemed or construed to be a consent or waiver to
or of any other breach or default in the performance by such party of the same
or any obligations of the party. Failure on the part of any party to complain
of any act or failure to act of the other party or to declare the other party
in default, irrespective of how long such failure continues, shall not
constitute a waiver by that party of its rights under this Agreement or
otherwise.
AIII-9
<PAGE>
(g) No modification, waiver or discharge of this Agreement shall bind any
party unless signed by such party or a duly authorized officer of such party.
(h) In the event that any provision of this Agreement or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue
in full force and effect and the application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of such void or unenforceable provision.
[Remainder of Page Intentionally Blank]
AIII-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be duly executed by their duly authorized
representatives as of the date first above written.
CATALYTICA, INC. WYCKOFF CHEMICAL
COMPANY, INC.
By: ________________________________ By: ________________________________
Name: ______________________________ Name: ______________________________
Title: _____________________________ Title: _____________________________
PILOT ACQUISITION CORPORATION
By: ________________________________
Name: ______________________________
Title: _____________________________
SECURITYHOLDER AGENT:
____________________________________
John L. Urness
ESCROW AGENT:
By: ________________________________
Name: ______________________________
Title: _____________________________
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<PAGE>
ANNEX IV
SPECIAL PURPOSE ESCROW AND INDEMNIFICATION AGREEMENT
This ESCROW AND INDEMNIFICATION AGREEMENT (the "Agreement") is made,
executed and delivered this 14th day of July, 1999, by and among Catalytica,
Inc., a Delaware corporation ("Parent"), Pilot Acquisition Corporation, a
Michigan corporation and wholly-owned subsidiary of Parent ("Sub"), Wyckoff
Chemical Company, Inc., a Michigan corporation (the "Company"), John L. Urness,
as Securityholder Agent for the shareholders of the Company, and U.S. Bank
Trust, N.A., a corporation as Escrow Agent.
RECITALS
WHEREAS, the Company, Sub and Parent have entered into an Agreement and Plan
of Reorganization, dated as of July , 1999 (the "Reorganization Agreement"),
which contemplates that the Company, Parent and Sub will enter into a Merger
Agreement and other related agreements (collectively, the "Merger Agreements")
providing for the merger (the "Merger") of Sub with and into the Company;
WHEREAS, pursuant to the terms of the Reorganization Agreement, at the
Effective Time Parent is required to deliver the IP Escrow Amount (defined
below) to the Escrow Agent, such IP Escrow Amount to be held and applied by the
Escrow Agent in accordance with the terms of this Agreement;
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings ascribed to such terms in the Reorganization Agreement;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and each intending to be legally bound hereby, the parties hereby agree as
follows:
1. Creation of IP Escrow Fund
(a) As the sole and exclusive remedy of Parent after the Effective Time for
any Loss incurred by Parent, its officers, directors or affiliates (including
the Surviving Corporation and its officers and directors) related to a specific
intellectual property matter described in Schedule A to this Agreement, at the
Effective Time the Company's Shareholders will be deemed to have received and
deposited with the Escrow Agent, without any act of any Shareholder, the number
of shares of Parent Common Stock equal to $600,000 (the "IP Escrow Amount")
(plus any additional shares as may be issued upon any stock split, stock
dividend or recapitalization effected by Parent after the Effective Time). As
soon as practicable after the Effective Time, the IP Escrow Amount, without any
act of any Shareholder, will be deposited with the Escrow Agent, such deposit
to constitute an escrow fund (the "IP Escrow Fund") to be governed by the terms
set forth herein and at Parent's sole cost and expense. The portion of the IP
Escrow Amount contributed on behalf of each Shareholder of the Company shall be
in proportion to the aggregate number of shares of Parent Common Stock which
such holder would otherwise be entitled under Section 1.6(a) of the
Reorganization Agreement. No portion of the IP Escrow Amount shall be
contributed in respect of any Company Options.
(b) The IP Escrow Fund shall be available solely to compensate Parent, its
officers, directors and affiliates (including the Surviving Corporation and its
officers and directors) for any claims, losses, liabilities, damages,
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses, and expenses of investigation and defense (hereinafter individually a
"Loss" and collectively "Losses") incurred by Parent, its officers, directors
and affiliates (including the Surviving Corporation and its officers and
directors) directly or indirectly related to the specific intellectual property
matter described in Schedule A to this Agreement (the "IP Matter"). Parent and
the Company each acknowledge that such Losses, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the
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<PAGE>
Effective Time would have led to a reduction in the Acquisition Consideration.
The foregoing indemnification shall be available notwithstanding disclosures in
the Disclosure Letter regarding the IP Matter, which disclosures shall not
modify the representations and warranties or limit Parent's right to
indemnification with respect to the IP Matter.
2. Escrow Period; Distribution upon Termination of Escrow Periods. Subject
to the following requirements, the IP Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
California time, on the Expiration Date (the "Escrow Period"); provided that
the Escrow Period shall not terminate with respect to such amount (or some
portion thereof), that together with the aggregate amount remaining in the IP
Escrow Fund is necessary in the reasonable judgment of Parent, subject to the
objection of the Securityholder Agent and the subsequent arbitration of the
matter in the manner provided in Section 6 hereof, to satisfy any unsatisfied
claims pertaining to the IP Matter concerning facts and circumstances existing
prior to the termination of such Escrow Period and which are properly
indemnifiable under the Reorganization Agreement as specified in any Officer's
Certificate (defined below) delivered to the Escrow Agent prior to termination
of such Escrow Period. As soon as all such claims have been resolved, the
Escrow Agent shall deliver to the Shareholders of the Company the remaining
portion of the IP Escrow Fund not required to satisfy such claims. Deliveries
of IP Escrow Amounts to the Shareholders of the Company pursuant to this
Section 2 shall be made in proportion to their respective original
contributions to the IP Escrow Fund.
3. Protection of IP Escrow Fund.
(a) The Escrow Agent shall hold and safeguard the IP Escrow Fund during the
Escrow Period, shall treat such fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Parent and shall hold and
dispose of the IP Escrow Fund only in accordance with the terms hereof.
(b) Any shares of Parent Common Stock or other equity securities issued or
distributed by Parent (including shares issued upon a stock split) ("New
Shares") in respect of Parent Common Stock in the IP Escrow Fund which have not
been released from the IP Escrow Fund shall be added to the IP Escrow Fund and
become a part thereof. New Shares issued in respect of shares of Parent Common
Stock which have been released from the IP Escrow Fund shall not be added to
the IP Escrow Fund but shall be distributed to the recordholders thereof. Cash
dividends on Parent Common Stock shall not be added to the IP Escrow Fund but
shall be distributed to the recordholders thereof.
(c) Each Shareholder shall have voting rights with respect to the shares of
Parent Common Stock contributed to the IP Escrow Fund by such Shareholder (and
on any voting securities added to the IP Escrow Fund in respect of such shares
of Parent Common Stock).
4. Claims Upon IP Escrow Fund.
(a) Upon receipt by the Escrow Agent at any time on or before the last day
of the Escrow Period of a certificate signed by any officer of Parent (an
"Officer's Certificate"): (i) stating that Parent or the Surviving Corporation
has paid or properly accrued or reasonably anticipates that it will have to pay
or accrue Losses, and (ii) specifying in reasonable detail the individual items
of Losses included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the nature
of the Loss to which such item is related, the Escrow Agent shall, subject to
the provisions of Section 5 hereof, deliver to Parent out of the IP Escrow
Fund, as promptly as practicable, shares of Parent Common Stock held in the IP
Escrow Fund in an amount equal to such Losses.
(b) For the purposes of determining the number of shares of Parent Common
Stock to be delivered to Parent out of the IP Escrow Fund pursuant to Section
4(a) hereof, the shares of Parent Common Stock shall be deemed to be valued at
the Trading Price.
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<PAGE>
5. Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Securityholder Agent and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
IP Escrow Amounts pursuant to Section 4 hereof unless the Escrow Agent shall
have received written authorization from the Securityholder Agent to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of shares of Parent Common Stock from the IP Escrow Fund in
accordance with Section 4 hereof, provided that no such payment or delivery may
be made if the Securityholder Agent shall object in a written statement to the
claim made in the Officer's Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the expiration of such thirty (30) day
period.
6. Resolution of Conflicts; Arbitration.
(a) In case the Securityholder Agent shall so object in writing to any claim
or claims made in any Officer's Certificate, the Securityholder Agent and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Securityholder Agent and
Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and
distribute shares of Parent Common Stock from the IP Escrow Fund in accordance
with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation, either
Parent or the Securityholder Agent may demand arbitration of the matter unless
the amount of the damage or loss is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration; and in either such event the
matter shall be settled by arbitration conducted by three arbitrators. Parent
and the Securityholder Agent shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator, each of which
arbitrators shall be independent and have at least ten (10) years relevant
experience. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing
the parties an opportunity, adequate in the sole judgment of the arbitrators,
to discover relevant information from the opposing parties about the subject
matter of the dispute. The arbitrators shall rule upon motions to compel or
limit discovery and shall have the authority to impose sanctions, including
attorneys fees and costs, to the extent as a court of competent law or equity,
should the arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement, and notwithstanding anything
in Section 5 hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the IP Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Chicago,
Illinois under the rules then in effect of the Judicial Arbitration and
Mediation Services, Inc. For purposes of this Section 6, in any arbitration
hereunder in which any claim or the amount thereof stated in the Officer's
Certificate is at issue, Parent shall be deemed to be the Non-Prevailing Party
in the event that the arbitrators award Parent less than the sum of one-half
(1/2) of the disputed amount plus any amounts not in dispute; otherwise, the
Shareholders of the Company as represented by the Securityholder Agent shall be
deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration and the expenses, including without
limitation, reasonable attorneys' fees and costs, incurred by the other party
to the arbitration.
7. Securityholder Agent of the Shareholders; Power of Attorney.
(a) In the event that the Merger is approved, effective upon such vote, and
without further act of any Shareholder, the Securityholder Agent shall be
appointed as agent and attorney-in-fact for each Shareholder of the Company,
for and on behalf of Shareholders of the Company, to give and receive notices
and
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<PAGE>
communications, to authorize delivery to Parent of shares of Parent Common
Stock from the IP Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agent for the accomplishment of
the foregoing. Such agency may be changed by the Shareholders of the Company
from time to time upon not less than thirty (30) days prior written notice to
Parent; provided that the Securityholder Agent may not be removed unless
holders of a two-thirds interest of the IP Escrow Fund agree to such removal
and to the identity of the substituted agent. Any vacancy in the position of
Securityholder Agent may be filled by approval of the holders of a majority in
interest of the IP Escrow Fund. No bond shall be required of the Securityholder
Agent, and the Securityholder Agent shall not receive compensation for his or
her services. Notices or communications to or from the Securityholder Agent
shall constitute notice to or from each of the Shareholders of the Company.
(b) In performing any duties under the Agreement, the Securityholder Agent
shall not be liable to any party for damages, losses or expenses, except for
gross negligence or willful misconduct on the part of the Securityholder Agent.
The Securityholder Agent shall not incur any such liability for (i) any act or
failure to act made or omitted in good faith, or (ii) any action taken or
omitted in reliance upon any instrument, including any written statement of
affidavit provided for in this Agreement that the Securityholder Agent shall in
good faith believe to be genuine, nor will the Securityholder Agent be liable
or responsible for forgeries, fraud, impersonations or determining the scope of
any representative authority. In addition, the Securityholder Agent may consult
with legal counsel in connection with Securityholder Agent's duties under this
Agreement and shall be fully protected in any act taken, suffered or permitted
by it in good faith in accordance with the advice of counsel. The
Securityholder Agent is not responsible for determining and verifying the
authority of any person acting or purporting to act on behalf of any party to
this Agreement. The Shareholders of the Company on whose behalf the IP Escrow
Amount was contributed to the IP Escrow Fund shall severally indemnify the
Securityholder Agent and hold the Securityholder Agent harmless against any
loss, liability or expense incurred without negligence or bad faith on the part
of the Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties hereunder,
including the reasonable fees and expenses of any legal counsel retained by the
Securityholder Agent.
8. Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
Shareholders for whom a portion of the IP Escrow Amount otherwise issuable to
them are deposited in the IP Escrow Fund and shall be final, binding and
conclusive upon each of such Shareholders, and the Escrow Agent and Parent may
rely upon any such decision, act, consent or instruction of the Securityholder
Agent as being the decision, act, consent or instruction of each every such
Shareholder of the Company. The Escrow Agent and Parent are hereby relieved
from any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Securityholder Agent.
9. Third-Party Claims. Parent shall consult with senior management of the
Company with respect to any IP Matter before Parent contacts an interested
third party regarding the IP Matter. After consultation with senior management
of the Company, Parent shall be free to pursue any course of action with
respect to the IP Matter. In the event Parent becomes aware of a third-party
claim which Parent believes may result in a demand against the IP Escrow Fund,
Parent shall promptly notify the Securityholder Agent of such claim, and the
Securityholder Agent, as representative for the Shareholders of the Company,
shall be entitled, at their expense, to participate in any defense of such
claim. Parent shall have the right in its sole discretion to settle any such
claim; provided, however, that except with the consent of the Securityholder
Agent, no settlement of any such claim with third party claimants shall alone
be determinative of the amount of any claim against the IP Escrow Fund and the
Securityholder Agent and Shareholders shall not be bound by such settlement. In
the event that the Securityholder Agent has consented to any such settlement
and acknowledged that the claim is a valid claim against the IP Escrow Fund,
the Securityholder Agent shall have no power or authority to object under any
provision of this Agreement to the amount of any claim by Parent against the IP
Escrow Fund with respect to such settlement. Each party will make available to
each other and each other's legal counsel and other
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<PAGE>
professional advisers all of its books and records relating to a third-party
claim and each party will render to the other assistance as may be reasonably
required to ensure the proper and adequate defense of a third-party claim.
10. Escrow Agent's Duties.
(a) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein, and as set forth in any additional
written escrow instructions which the Escrow Agent may receive after the date
of this Agreement which are signed by an officer of Parent and the
Securityholder Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(b) The Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person, excepting
only orders or process of courts of law, and is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case the
Escrow Agent obeys or complies with any such order, judgment or decree of any
court, the Escrow Agent shall not be liable to any of the parties hereto or to
any other person by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(c) The Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents or papers
deposited or called for hereunder.
(d) The Escrow Agent shall not be liable for the expiration of any rights
under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
(e) In performing any duties under the Agreement, the Escrow Agent shall not
be liable to any party for damages, losses or expenses, except for gross
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (i) any act or failure to act made
or omitted in good faith, or (ii) any action taken or omitted in reliance upon
any instrument, including any written statement of affidavit provided for in
this Agreement that the Escrow Agent shall in good faith believe to be genuine,
nor will the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered or permitted by it in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(f) If any controversy arises between the parties to this Agreement, or with
any other party, concerning the subject matter of this Agreement, its terms or
conditions, the Escrow Agent will not be required to determine the controversy
or to take any action regarding it. The Escrow Agent may hold all documents and
shares of Parent Common Stock and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent may be required, despite what may
be set forth elsewhere in this Agreement. In such event, the Escrow Agent will
not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all documents and shares of Parent Common Stock held in escrow,
except all costs, expenses, charges and reasonable attorney fees incurred by
the Escrow Agent due to the interpleader action and
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<PAGE>
which the parties jointly and severally agree to pay. Upon initiating such
action, the Escrow Agent shall be fully released and discharged of and from all
obligations and liability imposed by the terms of this Agreement.
(g) The parties and their respective successors and assigns agree jointly
and severally to indemnify and hold Escrow Agent harmless against any and all
losses, claims, damages, liabilities and expenses, including reasonable costs
of investigation, counsel fees and disbursements that may be imposed on Escrow
Agent or incurred by Escrow Agent in connection with the performance of its
duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter.
(h) The Escrow Agent may resign at any time upon giving at least thirty (30)
days written notice to the parties; provided, however, that no such resignation
shall become effective until the appointment of a successor escrow agent which
shall be accomplished as follows: the parties shall use their best efforts to
mutually agree on a successor escrow agent within thirty (30) days after
receiving such notice. If the parties fail to agree upon a successor escrow
agent within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers and duties of the predecessor escrow agent
as if originally named as escrow agent. The Escrow Agent shall be discharged
from any further duties and liability under this Agreement.
11. Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or if
the Escrow Agent renders any service not provided for in this Agreement, or if
the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes
in, any litigation pertaining to this escrow or its subject matter, the Escrow
Agent shall be reasonably compensated for such extraordinary services and
reimbursed for all costs, attorney's fees and expenses occasioned by such
default, delay, controversy or litigation. Parent promises to pay these sums
upon demand.
12. Limitations on Indemnification. The indemnification of Parent provided
under this Agreement shall be the sole and exclusive remedy of Parent after the
Effective Time for any Loss incurred by Parent and its officers, directors or
affiliates (including the Surviving Corporation and its officers and directors)
related to the IP Matter before the date of this Agreement and is limited in
certain respects as follows:
(a) The Company's liability for any Loss which is the subject of this
Agreement shall survive the Merger and continue until 5:00 p.m., California
time, on the third anniversary of the date of this Agreement (the
"Expiration Date").
(b) The Company shall be liable to Parent for all Losses up to the IP
Escrow Fund (the "Maximum Amount"). Under no circumstances shall the
Company be liable to Parent under this Agreement for any amount in excess
of the Maximum Amount.
(c) To the extent Parent is entitled to be indemnified from the IP
Escrow Fund on any Loss, Parent will first use commercially reasonable
efforts to pursue its rights and causes of action with respect to any
insurance, warranty coverage or third-party claim related to such Loss to
the extent it is commercially reasonable to do so. In the event Parent does
not pursue its rights or causes of action, or commences such pursuit and
determines that continuing such pursuit is not commercially reasonable,
Parent shall be entitled to be indemnified from the IP Escrow Fund, which
indemnification shall include the costs incurred to pursue such insurance,
warranty coverage or third-party claim and Parent, at the request of the
Securityholder Agent, shall (i) assign to the Securityholder Agent, for the
benefit of the Shareholders, to the fullest extent allowable, its rights
and causes of action with respect to any insurance, warranty coverage or
third-party claim related to such Loss; or (ii) pursue such right or cause
of action at the sole expense of the Shareholders. In the event of an
assignment pursuant to (i) above, the Securityholder Agent shall be
entitled to retain for the benefit of the Shareholders any recoveries made
as a result of any such action up the amount of the Loss paid form the IP
Escrow Fund and any expenses of such recovery. Any
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<PAGE>
excess in the recoveries over such amount shall be paid to the Company.
Parent shall provide the Securityholder Agent reasonable assistance in
prosecuting such claim, including making its and the Company's books and
records relating to such claim available to the Securityholder Agent and
making its and the Company's employees available for interviews and similar
matters, provided the Shareholders shall pay for any out-of-pocket expenses
of the Parent Company or any employees.
(d) Any Loss shall be reduced by an amount equal to the Tax Benefit
(defined below), if any, attributable to the Loss. For purposes of any Loss
relating to taxes, the Loss shall be reduced by the actual Tax Benefit
realized, if any, attributable to or arising out of the adjustment giving
rise to the indemnity payment. The parties agree to report any Loss as an
adjustment to the Acquisition Consideration for all tax purposes unless
required to report such Loss in a different manner by any applicable taxing
authority. To the extent that Parent is required to report the receipt of
any payment for a Loss as taxable income, the amount of the Loss shall be
increased by an amount sufficient to compensate Parent for any taxes
applicable thereto, as well as all taxes applicable to the receipt of all
such amounts (a full tax "gross up"). For purposes of this Agreement, Tax
Benefit shall mean the actual tax savings realized during the fiscal year
in which the Loss is reported for tax purposes from any reasonably
identifiable refund, credit or reduction in otherwise required tax
payments, including any interest payable thereon. To the extent a Tax
Benefit is realized after any recovery or payment pursuant to this
Agreement, there shall be a corresponding adjustment between the parties
without regard to the time limitations imposed under Section 2.
(e) No "multiple of lost profits" shall be applied in calculating any
indemnity amount. The Company shall have no liability for indemnification
with respect to any Loss that relates to the passing of, or any change in,
after the Closing Date, any law or any accounting policy, principle or
practice or any increase in tax rates in effect on the Closing Date, even
if the change or increase has retroactive effect or requires action at a
future date.
(f) Parent agrees that in the event of any breach giving rise to an
indemnity obligation of the IP Escrow Fund, Parent shall take and shall
cause the Company to take, all commercially reasonable measures to mitigate
the consequences of the related breach.
13. Miscellaneous Provisions.
(a) The Section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(b) All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by a nationally recognized
commercial messenger or courier service, or mailed by registered or certified
mail (return receipt requested, postage prepaid) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice), provided, however, that notices sent by mail will not be deemed given
until received:
(i) if to Parent or Sub, to:
Catalytica, Inc.
430 Ferguson Drive
Mountain View, California 94043
Attention: Chief Executive Officer and Chief Financial Officer
Telephone No.: (650) 960-3000
Facsimile No.: (650) 968-8754
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<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Barry E. Taylor, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(ii) if to the Company, to:
Wyckoff Chemical Company, Inc.
1421 Kalamazoo Street
South Haven, Michigan 49090
Attention: Chief Executive Officer
Telephone No.: (616) 637-8474
Facsimile No.: (616) 637-8410
with a copy to:
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street N.W.
Grand Rapids, Michigan
Attention: Stephen C. Waterbury, Esq.
Telephone No.: (616) 752-2000
Facsimile No.: (616) 752-2500
(iii) if to the Escrow Agent, to:
U.S. Bank Trust, N.A.
______________________
______________________
Attention:
Telephone No.:
Facsimile No.:
(c) This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party, it being understood that all parties need not sign the same
counterpart.
(d) This Agreement shall insure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, personal representatives,
successors and assigns, provided that any assignment of this Agreement or the
rights hereunder by any party hereto without the written consent of the other
parties shall be void. Nothing in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto any rights or
remedies under or by reason of this Agreement.
(e) This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof. Each of the
parties hereto irrevocably consents to the exclusive jurisdiction and venue of
any federal district court for the District of Delaware, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner authorized by
the laws of the State of Delaware for such persons and waives and covenants not
to assert or plead any objection which they might otherwise have to such
jurisdiction, venue and such process.
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<PAGE>
(f) No consent or waiver, expressed or implied, by any party to or of any
breach or default by another other in the performance by the other of its
obligations hereunder shall be deemed or construed to be a consent or waiver to
or of any other breach or default in the performance by such party of the same
or any obligations of the party. Failure on the part of any party to complain
of any act or failure to act of the other party or to declare the other party
in default, irrespective of how long such failure continues, shall not
constitute a waiver by that party of its rights under this Agreement or
otherwise.
(g) No modification, waiver or discharge of this Agreement shall bind any
party unless signed by such party or a duly authorized officer of such party.
(h) In the event that any provision of this Agreement or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue
in full force and effect and the application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of such void or unenforceable provision.
[Remainder of Page Intentionally Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be duly executed by their duly authorized
representatives as of the date first above written.
CATALYTICA, INC. WYCKOFF CHEMICAL
COMPANY, INC.
By: _________________________________ By: _________________________________
Name: _______________________________ Name: _______________________________
Title: ______________________________ Title: ______________________________
PILOT ACQUISITION CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
SECURITYHOLDER AGENT:
_____________________________________
John L. Urness
ESCROW AGENT:
By: _________________________________
Name: _______________________________
Title: ______________________________
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Certificate of Incorporation
Article 10 of Catalytica's certificate of incorporation provides that, to
the fullest extent permitted by Delaware law, as the same now exists or may
hereafter be amended, a director shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. Delaware law provides that directors of a corporation will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for liability:
. for any breach of their duty of loyalty to the corporation or its
shareholders,
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law, or
. for any transaction from which the director derived an improper personal
benefit.
Bylaws
Article VI of Catalytica's bylaws provides that Catalytica: (1) will
indemnify any person who was or is a party to any proceeding, whether civil,
criminal, administrative or investigative, arising out of the fact that he was
or is an agent of Catalytica and by reason of the fact that he is or was a
director or officer of the corporation or a predecessor corporation, or is or
was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise, and
(2) may indemnify any person who was or is a party to any proceeding, whether
civil, criminal, administrative or investigative, arising out of the fact that
he was or is an agent of Catalytica, other than an action by or in the right of
the corporation by reason of the fact that he
. is or was an employee or agent of the corporation or a predecessor
corporation, or
. is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
proceeding.
Catalytica's bylaws also permit Catalytica to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the provisions of
Delaware law would permit indemnification. Catalytica currently maintains
liability insurance for its officers and directors.
Catalytica has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in Catalytica's
certificate of incorporation and bylaws. These agreements, among other things,
indemnify Catalytica's directors and officers for certain expenses incurred by
any such person in any action or proceeding, including any action by or in the
right of Catalytica, arising out of such person's services as a director or
officer of Catalytica, any subsidiary of Catalytica or any other company or
enterprise to which the person provides services at the request of Catalytica.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(i) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among the Registrant, Pilot Acquisition Corporation and
Wyckoff Chemical Company, Inc., dated as of July 14, 1999 (included as Annex I to the proxy
statement/prospectus forming a part of this Registration Statement and incorporated herein by
reference).
2.2 Form of Voting Agreement between the Registrant and certain shareholders of Wyckoff (included as
Annex II to the proxy statement/prospectus forming a part of this Registration Statement and
incorporated herein by reference).
2.3 Escrow and Indemnification Agreement between the Registrant, Wyckoff and certain other signatories
(included as Annex III to the proxy statement/prospectus forming a part of this Registration
Statement and incorporated herein by reference).
2.4 Special Purpose Escrow and Indemnification Agreement between the Registrant, Wyckoff and certain
other signatories (included as Annex IV to the proxy statement/prospectus forming a part of this
Registration Statement and incorporated herein by reference).
3.1 Corrected Fourth Amended and Restated Certificate of Incorporation. Incorporated by reference to the
exhibits filed with Catalytica's Form 10-Q for the quarter ended June 30, 1997.
3.2 Bylaws of the Registrant. Incorporated by reference to the exhibits filed with Catalytica's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.1 Agreement of Shareholders Amending Registration Rights and Right of First Refusal. Incorporated by
reference to the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
4.2 Amended and Restated Registration Rights Agreement dated September 27, 1988. Incorporated by
reference to the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
4.3 Amendment No. 1 to Amended and Restated Registration Rights Agreement. Incorporated by reference to
the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration Statement No.
33-55696).
4.4 Form of Amended and Restated Rights Agreement. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.5 Specimen of common stock Certificate. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.6 Preferred Shares Rights Agreement dated as of October 23, 1996, between the Registrant and Chase
Mellon Shareholder Services, L.L.P., including the form of Rights Certificate, the Certificate of
Designation and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
Incorporated by reference to the exhibits filed with Catalytica's Registration Statement on Form 8-A
as filed with the Commission on November 29, 1996.
4.7 Amendment No. 1, dated as of June 28, 1997, to Preferred Shares Rights Agreement between the
Registrant and Chase Mellon Shareholder Services, L.L.C. Incorporated by reference to the exhibits
filed with Catalytica's Registration Statement on Form 8-A/A as filed with the Commission on July
29, 1997.
4.8 Stock Purchase Warrant for 2,000,000 shares of the Registrant's common stock dated July 31, 1997.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-Q for the quarter ended
June 30, 1997.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding validity of securities being
registered.
8.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding certain tax aspects of the merger. **
8.2 Opinion of Warner Norcross & Judd LLP, regarding certain tax aspects of the merger. **
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.1 1983 Incentive Stock Option Plan, as amended, with forms of agreements thereunder. Incorporated by
reference to the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
10.2 1992 Stock Option Plan, as amended. Incorporated by reference to exhibits filed with Catalytica's
Registration Statement on Form S-8 (file No. 333-57809) as filed with the commission on June 26,
1998.
10.3 1992 Employee Stock Purchase Plan, as amended. Incorporated by reference to exhibits filed with
Catalytica's Registration Statement on Form S-8 (file No. 333-57809) as filed with the commission on
June 26, 1998.
10.4 Agreement, dated as of July 18, 1988, between Catalytica and Tanaka Kikinzoku Kogyo K.K.
Incorporated by reference to the exhibits filed with Catalytica's Registration Statement on Form S-1
(Registration Statement No. 33-55696).*
10.5 Development Agreement, dated January 4, 1991 among the Registrant, Petro-Canada Inc. and
Techmocisco, Inc. (a subsidiary of Mitsubishi Oil), as amended. Incorporated by reference to the
exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration Statement No. 33-
55696).*
10.6 Form of Indemnification Agreement. Incorporated by reference to the exhibits filed with Catalytica's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
10.7 Stock Purchase Agreement dated December 10, 1992 between the Registrant and Mitsubishi Oil Co., Ltd.
Incorporated by reference to the exhibits filed with Catalytica's Registration Statement on Form S-1
(Registration Statement No. 33-55696).
10.8 Ground Lease Agreement, dated November 30, 1993, between Catalytica and Rhone-Poulenc Inc.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-K for the fiscal year
ended December 31, 1994.*
10.9 Supply Agreement, dated September 28, 1993, between the Registrant and Novartis Agro, Inc.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-K for the fiscal year
ended December 31, 1994.*
10.10 Lease Agreement, dated January 1, 1993, between the Registrant and Jack Dymond Associates.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-K for the fiscal year
ended December 31, 1994.
10.11 Agreement, dated January 31, 1995, between the Registrant and Tanaka Kikinzoku Kogyo K.K.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-K for the fiscal year
ended December 31, 1994.*
10.12 Catalytica Pharmaceuticals, Inc. 1995 Stock Plan, with forms of agreements thereunder. Incorporated
by reference to exhibits filed with Catalytica's Form 10-Q for the quarter ended September 30, 1998.
10.13 Catalytica Advanced Sensor Devices 1995 Stock Plan, with forms of agreement thereunder. Incorporated
by reference to the exhibits filed with Catalytica's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.14 Catalytica Advanced Technologies, Inc. 1995 Stock Plan, with forms of agreement thereunder.
Incorporated by reference to the exhibits filed with Catalytica's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.15 Catalytica Combustion Systems, Inc. 1995 Stock Plan, with forms of agreements thereunder.
Incorporated by reference to exhibits filed with Catalytica's Form 10-Q for the quarter ended
September 30, 1998.
10.16 Catalytica, Inc. 1995 Director Stock Option Plan, with forms of agreements thereunder. Incorporated
by reference to the exhibits filed with Catalytica's Annual Report on Form 10-K for the year ended
December 31, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.17 Limited Liability Operating Agreement of GENXON Power Systems, LLC, dated October 21, 1996.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-K for the year ended
December 31, 1996.
10.18 Amendment No. 1, dated December 4, 1997, to the Operating Agreement of GENXON Power Systems, L.L.C.
Incorporated by reference to exhibits filed with Catalytica's Form 10-K for the year ended December
31, 1997.
10.19 Asset Purchase Agreement among Glaxo Wellcome Inc. and Catalytica Pharmaceuticals, Inc. and
Catalytica, Inc., dated June 25, 1997. Incorporated by reference to the exhibits filed with
Catalytica's Form 10-Q for the quarter ended June 30, 1997.*
10.20 Supply Agreement between Glaxo Wellcome Inc. and Catalytica Pharmaceuticals, Inc., dated July 31,
1997. Incorporated by reference to exhibits filed with Catalytica's Form 10-Q/A for the quarter
ended June 30, 1997.*
10.21 Investment Agreement dated as of June 25, 1997, among Morgan Stanley Dean Witter Capital Partners
III, L.P., Morgan Stanley Dean Witter Capital Investors, L.P., MSDWCP III 892 Investors, L.P. and
Catalytica, Inc. Incorporated by reference to the exhibits filed with Catalytica's Form 10-Q for the
quarter ended June 30, 1997.
10.22 $200,000,000 Credit Agreement dated July 31, 1997, by and among Catalytica, Inc., Catalytica
Pharmaceuticals, Inc. and The Chase Manhattan Bank. Incorporated by reference to the exhibits filed
with Catalytica's Form 10-Q for the quarter ended June 30, 1997.
10.23 Amendment No. 1 and Consent, dated January 6, 1998, to $200,000,000 Credit Agreement among
Catalytica, Inc., Catalytica Pharmaceuticals, Inc. and The Chase Manhattan Bank. Incorporated by
reference to exhibits filed with Catalytica's Form 10-K for the year ended December 31, 1997.
10.24 Pledge Agreement. Incorporated by reference to the exhibits filed with Catalytica's Form 10-Q for
the quarter ended June 30, 1997.
10.25 Security Agreement. Incorporated by reference to the exhibits filed with Catalytica's Form 10-Q for
the quarter ended June 30, 1997.
10.26 Amendment No. 1 to supply agreement between Glaxo Wellcome, Inc. and Catalytica Pharmaceuticals
dated May 28, 1998. Incorporated by reference to exhibits filed with Catalytica's Form 10-Q for the
quarter ended June 30, 1998.*
10.27 Effectiveness Agreement among Catalytica, Inc., Catalytica Pharmaceuticals, Inc. and The Chase
Manhattan Bank dated June 4, 1998, including Exhibit A, $175,000,000 Amended and Restated Credit
Agreement. Incorporated by reference to exhibits filed with Catalytica's Form 10-Q for the quarter
ended June 30, 1998.
10.28 Form of Change of Control Agreement entered into between Catalytica and certain of its executive
officers. Incorporated by reference to exhibits filed with Catalytica's Form 10-K for the year ended
December 31, 1998.
13 1998 Annual Report to Shareholders (to be deemed filed only to the extent required by the
instructions to exhibits for reports on Form 10-K).
21.1 Subsidiaries of the Registrant. Incorporated by reference to the exhibits filed with Catalytica's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of BDO Seidman LLP, Independent Accountants.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
24.1 Power of Attorney (included on the signature page of this registration statement).
99.1 Form of Proxy for special meeting of shareholders of Wyckoff.
99.2 Notice of Special Meeting of Shareholders of Wyckoff, dated , 1999 (included between the front
page and the cover page of the Proxy Statement/Prospectus of this Form S-4).
</TABLE>
- --------
*Confidential treatment has been granted for portions of these agreements.
**To be filed by amendment.
(ii) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) ((S) 230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of Catalytica's annual report pursuant to section 13(a) or
section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-5
<PAGE>
(6) That every prospectus (a) that is filed pursuant to the paragraph
immediately preceding, or (b) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospective pursuant to Items 4, 10(b), 11, or 13 of
this Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and Catalytica being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Catalytica has
duly caused this registration statement on Form S-4 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Mountain View,
State of California, on the 5th day of August, 1999.
CATALYTICA, INC.
By: /s/ Dr. Ricardo B. Levy
-----------------------------------
Dr. Ricardo B. Levy
President and Chief Executive
Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Dr. Ricardo B.
Levy and Lawrence W. Briscoe, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this registration statement on
Form S-4 (including any post-effective amendments), and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement on Form S-4 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dr. Ricardo B. Levy President, Chief Executive August 5, 1999
____________________________________ Officer and director
Dr. Ricardo B. Levy (Principal Executive Officer)
/s/ Lawrence W. Briscoe Vice President, Finance and August 5, 1999
____________________________________ Administration and Chief
Lawrence W. Briscoe Financial Officer (Principal
Financial and Accounting
Officer)
/s/ James A. Cusamano Chairman of the Board of August 5, 1999
____________________________________ Directors and Chief
James A. Cusamano Strategic Officer
/s/ Richard Fleming Director August 5, 1999
____________________________________
Richard Fleming
Director
____________________________________
Alan Goldberg
/s/ Howard I. Hoffen Director August 5, 1999
____________________________________
Howard I. Hoffen
/s/ Ernest Mario Director August 5, 1999
____________________________________
Ernest Mario
/s/ John A. Urquhart Director August 5, 1999
____________________________________
John A. Urquhart
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among the Registrant, Pilot Acquisition Corporation and
Wyckoff Chemical Company, Inc., dated as of July 14, 1999 (included as Annex I to the proxy
statement/prospectus forming a part of this Registration Statement and incorporated herein by
reference).
2.2 Form of Voting Agreement between the Registrant and certain shareholders of Wyckoff (included as
Annex II to the proxy statement/prospectus forming a part of this Registration Statement and
incorporated herein by reference).
2.3 Escrow and Indemnification Agreement between the Registrant, Wyckoff and certain other signatories
(included as Annex III to the proxy statement/prospectus forming a part of this Registration
Statement and incorporated herein by reference).
2.4 Special Purpose Escrow and Indemnification Agreement between the Registrant, Wyckoff and certain
other signatories (included as Annex IV to the proxy statement/prospectus forming a part of this
Registration Statement and incorporated herein by reference).
3.1 Corrected Fourth Amended and Restated Certificate of Incorporation. Incorporated by reference to the
exhibits filed with Catalytica's Form 10-Q for the quarter ended June 30, 1997.
3.2 Bylaws of the Registrant. Incorporated by reference to the exhibits filed with Catalytica's
Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.1 Agreement of Shareholders Amending Registration Rights and Right of First Refusal. Incorporated by
reference to the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
4.2 Amended and Restated Registration Rights Agreement dated September 27, 1988. Incorporated by
reference to the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
4.3 Amendment No. 1 to Amended and Restated Registration Rights Agreement. Incorporated by reference to
the exhibits filed with Catalytica's Registration Statement on Form S-1 (Registration Statement No.
33-55696).
4.4 Form of Amended and Restated Rights Agreement. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.5 Specimen of common stock Certificate. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration Statement No. 33-55696).
4.6 Preferred Shares Rights Agreement dated as of October 23, 1996, between the Registrant and Chase
Mellon Shareholder Services, L.L.P., including the form of Rights Certificate, the Certificate of
Designation and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
Incorporated by reference to the exhibits filed with Catalytica's Registration Statement on Form 8-A
as filed with the Commission on November 29, 1996.
4.7 Amendment No. 1, dated as of June 28, 1997, to Preferred Shares Rights Agreement between the
Registrant and Chase Mellon Shareholder Services, L.L.C. Incorporated by reference to the exhibits
filed with Catalytica's Registration Statement on Form 8-A/A as filed with the Commission on July
29, 1997.
4.8 Stock Purchase Warrant for 2,000,000 shares of the Registrant's common stock dated July 31, 1997.
Incorporated by reference to the exhibits filed with Catalytica's Form 10-Q for the quarter ended
June 30, 1997.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding validity of securities being
registered.
8.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding certain tax aspects of the merger. **
8.2 Opinion of Warner Norcross & Judd LLP, regarding certain tax aspects of the merger. **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.1 1983 Incentive Stock Option Plan, as amended, with forms of agreements
thereunder. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).
10.2 1992 Stock Option Plan, as amended. Incorporated by reference to
exhibits filed with Catalytica's Registration Statement on Form S-8
(file No. 333-57809) as filed with the commission on June 26, 1998.
10.3 1992 Employee Stock Purchase Plan, as amended. Incorporated by
reference to exhibits filed with Catalytica's Registration Statement
on Form S-8 (file No. 333-57809) as filed with the commission on June
26, 1998.
10.4 Agreement, dated as of July 18, 1988, between Catalytica and Tanaka
Kikinzoku Kogyo K.K. Incorporated by reference to the exhibits filed
with Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).*
10.5 Development Agreement, dated January 4, 1991 among the Registrant,
Petro-Canada Inc. and Techmocisco, Inc. (a subsidiary of Mitsubishi
Oil), as amended. Incorporated by reference to the exhibits filed with
Catalytica's Registration Statement on Form S-1 (Registration
Statement No. 33-55696).*
10.6 Form of Indemnification Agreement. Incorporated by reference to the
exhibits filed with Catalytica's Registration Statement on Form S-1
(Registration Statement No. 33-55696).
10.7 Stock Purchase Agreement dated December 10, 1992 between the
Registrant and Mitsubishi Oil Co., Ltd. Incorporated by reference to
the exhibits filed with Catalytica's Registration Statement on Form S-
1 (Registration Statement No. 33-55696).
10.8 Ground Lease Agreement, dated November 30, 1993, between Catalytica
and Rhone-Poulenc Inc. Incorporated by reference to the exhibits filed
with Catalytica's Form 10-K for the fiscal year ended December 31,
1994.*
10.9 Supply Agreement, dated September 28, 1993, between the Registrant and
Novartis Agro, Inc. Incorporated by reference to the exhibits filed
with Catalytica's Form 10-K for the fiscal year ended December 31,
1994.*
10.10 Lease Agreement, dated January 1, 1993, between the Registrant and
Jack Dymond Associates. Incorporated by reference to the exhibits
filed with Catalytica's Form 10-K for the fiscal year ended December
31, 1994.
10.11 Agreement, dated January 31, 1995, between the Registrant and Tanaka
Kikinzoku Kogyo K.K. Incorporated by reference to the exhibits filed
with Catalytica's Form 10-K for the fiscal year ended December 31,
1994.*
10.12 Catalytica Pharmaceuticals, Inc. 1995 Stock Plan, with forms of
agreements thereunder. Incorporated by reference to exhibits filed
with Catalytica's Form 10-Q for the quarter ended September 30, 1998.
10.13 Catalytica Advanced Sensor Devices 1995 Stock Plan, with forms of
agreement thereunder. Incorporated by reference to the exhibits filed
with Catalytica's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.14 Catalytica Advanced Technologies, Inc. 1995 Stock Plan, with forms of
agreement thereunder. Incorporated by reference to the exhibits filed
with Catalytica's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.15 Catalytica Combustion Systems, Inc. 1995 Stock Plan, with forms of
agreements thereunder. Incorporated by reference to exhibits filed
with Catalytica's Form 10-Q for the quarter ended September 30, 1998.
10.16 Catalytica, Inc. 1995 Director Stock Option Plan, with forms of
agreements thereunder. Incorporated by reference to the exhibits filed
with Catalytica's Annual Report on Form 10-K for the year ended
December 31, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.17 Limited Liability Operating Agreement of GENXON Power Systems, LLC,
dated October 21, 1996. Incorporated by reference to the exhibits
filed with Catalytica's Form 10-K for the year ended December 31,
1996.
10.18 Amendment No. 1, dated December 4, 1997, to the Operating Agreement of
GENXON Power Systems, L.L.C. Incorporated by reference to exhibits
filed with Catalytica's Form 10-K for the year ended December 31,
1997.
10.19 Asset Purchase Agreement among Glaxo Wellcome Inc. and Catalytica
Pharmaceuticals, Inc. and Catalytica, Inc., dated June 25, 1997.
Incorporated by reference to the exhibits filed with Catalytica's Form
10-Q for the quarter ended June 30, 1997.*
10.20 Supply Agreement between Glaxo Wellcome Inc. and Catalytica
Pharmaceuticals, Inc., dated July 31, 1997. Incorporated by reference
to exhibits filed with Catalytica's Form 10-Q/A for the quarter ended
June 30, 1997.*
10.21 Investment Agreement dated as of June 25, 1997, among Morgan Stanley
Dean Witter Capital Partners III, L.P., Morgan Stanley Dean Witter
Capital Investors, L.P., MSDWCP III 892 Investors, L.P. and
Catalytica, Inc. Incorporated by reference to the exhibits filed with
Catalytica's Form 10-Q for the quarter ended June 30, 1997.
10.22 $200,000,000 Credit Agreement dated July 31, 1997, by and among
Catalytica, Inc., Catalytica Pharmaceuticals, Inc. and The Chase
Manhattan Bank. Incorporated by reference to the exhibits filed with
Catalytica's Form 10-Q for the quarter ended June 30, 1997.
10.23 Amendment No. 1 and Consent, dated January 6, 1998, to $200,000,000
Credit Agreement among Catalytica, Inc., Catalytica Pharmaceuticals,
Inc. and The Chase Manhattan Bank. Incorporated by reference to
exhibits filed with Catalytica's Form 10-K for the year ended December
31, 1997.
10.24 Pledge Agreement. Incorporated by reference to the exhibits filed with
Catalytica's Form 10-Q for the quarter ended June 30, 1997.
10.25 Security Agreement. Incorporated by reference to the exhibits filed
with Catalytica's Form 10-Q for the quarter ended June 30, 1997.
10.26 Amendment No. 1 to supply agreement between Glaxo Wellcome, Inc. and
Catalytica Pharmaceuticals dated May 28, 1998. Incorporated by
reference to exhibits filed with Catalytica's Form 10-Q for the
quarter ended June 30, 1998.*
10.27 Effectiveness Agreement among Catalytica, Inc., Catalytica
Pharmaceuticals, Inc. and The Chase Manhattan Bank dated June 4, 1998,
including Exhibit A, $175,000,000 Amended and Restated Credit
Agreement. Incorporated by reference to exhibits filed with
Catalytica's Form 10-Q for the quarter ended June 30, 1998.
10.28 Form of Change of Control Agreement entered into between Catalytica
and certain of its executive officers. Incorporated by reference to
exhibits filed with Catalytica's Form 10-K for the year ended December
31, 1998.
13 1998 Annual Report to Shareholders (to be deemed filed only to the
extent required by the instructions to exhibits for reports on Form
10-K).
21.1 Subsidiaries of the Registrant. Incorporated by reference to the
exhibits filed with Catalytica's Registration Statement on Form S-1
(Registration Statement No. 33-55696).
23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of BDO Seidman LLP, Independent Accountants.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
24.1 Power of Attorney (included on the signature page of this registration
statement).
99.1 Form of Proxy for special meeting of shareholders of Wyckoff.
99.2 Notice of Special Meeting of shareholders of Wyckoff, dated , 1999
(included between the front page and the cover page of the Proxy
Statement/Prospectus of this Form S-4).
</TABLE>
- --------
*Confidential treatment has been granted for portions of these agreements.
**To be filed by amendment.
<PAGE>
Exhibit 5.1
August 5, 1999
Catalytica, Inc.
430 Ferguson Drive
Mountain View, CA 94043
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by you
with the Securities and Exchange Commission on or about August 5, 1999 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 4,496,487 shares of your Common Stock
(the "Shares"). As your counsel in connection with this transaction, we have
examined the proceedings taken and are familiar with the proceedings proposed
to be taken by you in connection with the issuance of the Shares pursuant to
the acquisition transaction set forth and described in the Registration
Statement.
It is our opinion that, when issued in the manner described in the
Registration Statement, the Shares will be legally and validly issued, fully-
paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name whenever appearing in the
Registration Statement and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI,
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 29, 1999 in the Registration Statement (Form S-
4) and related Prospectus of Catalytica, Inc. for the registration of 4,496,487
shares of its common stock.
/s/ Ernst & Young LLP
San Jose, California
August 4, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus and Registration Statement on
Form S-4 of Catalytica, Inc. of our report (which contains an explanatory
paragraph relating to GENXON Power Systems, L.L.C.'s ability to continue as a
going concern as described in Note 2) dated October 26, 1998 relating to the
financial statements of GENXON Power Systems, L.L.C., which appears in such
Prospectus and Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus and Registration Statement.
/s/ PricewaterhouseCoopers LLP
SanJose, CA
August 5, 1999
<PAGE>
Exhibit 23.3
Consent of BDO Seidman, LLP, Independent Accountants
We hereby consent to the use in the prospectus constituting part of this
registration statement on Form S-4 of Catalytica, Inc., of our report dated
July 23, 1999, relating to the consolidated financial statements of Wyckoff
Chemical Company, Inc., which appears in such prospectus. We also consent to
the references to us under the headings "Experts" in such prospectus.
/s/ BDO Seidman, LLP
Kalamazoo, Michigan
August 4, 1999
<PAGE>
EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
WYCKOFF CHEMICAL COMPANY, INC.
SPECIAL MEETING OF SHAREHOLDERS
P R O X Y
The undersigned shareholder of Wyckoff Chemical Company, Inc., a Michigan
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and proxy statement, each dated [ ], 1999, and hereby
appoints Ronald L. Hartgerink and James B. Friederichsen, and each of them,
with full power to each of substitution, as proxies and attorneys-in-fact,
on behalf and in the name of the undersigned, to represent the undersigned
at the Special Meeting of Shareholders of Wyckoff, to be held on [ ],
1999, at , local time, at Baseline Middle School, 7357
Baseline Road, South Haven, Michigan 49090, and at any adjournment thereof,
and to vote all shares of common stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set
forth on the reverse side.
This Proxy will be voted as directed or, if no contrary direction is
indicated, will be voted FOR the proposal to approve the merger and the
Agreement and Plan of Reorganization, dated as of July 14, 1999, by and
among Catalytica, Inc., Pilot Acquisition Corporation and Wyckoff, and to
approve the merger of Pilot Acquisition with and into Wyckoff pursuant to
the Agreement and Plan of Reorganization.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
<PAGE>
Please mark Votes as in this example.
x
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). The board of
directors unanimously recommends a vote FOR the proposal.
FOR AGAINST ABSTAIN
To approve the merger and the
Agreement and Plan of
Reorganization, dated July 14, 1999,
by and among Catalytica, Inc., Pilot
Acquisition Corporation and Wyckoff,
and to approve the merger of Pilot
Acquisition Corporation with and
into Wyckoff pursuant to the
Agreement and Plan of
Reorganization.
and, in their discretion, the proxies
are authorized to vote on such other
business as may properly come before
the meeting or any adjournment
thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE
AT LEFT
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD USING THE ENCLOSED
ENVELOPE. Please sign exactly as name
appears hereon. Where shares are held
by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership by
authorized person.
SIGNATURE
DATE
SIGNATURE
DATE
