UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
FORM
10-K
(Mark
One)
x
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Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the fiscal year ended December 31, 1999
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or
¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from
to
.
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Commission File
No. 0-20966
CATALYTICA,
INC.
(Exact name of
Registrant as specified in its charter)
| Delaware |
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94-2262240 |
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| (State or other
jurisdiction of |
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(IRS
Employer |
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| incorporation or
organization) |
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Identification
Number |
) |
430 Ferguson
Drive
Mountain View,
California 94043
(Address of
principal executive offices)
(650)
960-3000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock,
$.001 par value
(Title of
Class)
Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x
No ¨
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant
’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ¨
As of February 25, 2000, there
were outstanding 32,956,691 shares of the registrant’s Common Stock,
par value $.001, which is the only class of common stock of the registrant
registered under Section 12(g) of the Securities Act of 1933. As of that
date, the aggregate market value of the shares of Common Stock held by
nonaffiliates of the registrant (based on the closing price for the Common
Stock on The Nasdaq National Market on February 25, 2000) was
$420,197,810. For purposes of this disclosure, shares of Common Stock held
by each officer and director of the Registrant and by each person who owns
5% or more of the outstanding voting stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. The
Company also has outstanding 13,270,000 shares of Class A Common Stock and
11,730,000 shares of Class B Common Stock which are convertible into an
equal number of shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The information called for by Part
III is incorporated by reference to the definitive Proxy Statement for the
Annual Meeting of Stockholders of the Company which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31,
1999.
CATALYTICA,
INC.
Annual Report on
Form 10-K
Table of
Contents
December 31,
1999
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Page
No.
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| PART
I |
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| Item
1. |
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Business |
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2 |
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| Item
2. |
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Properties |
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22 |
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| Item
3. |
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Legal
Proceedings |
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23 |
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| Item
4. |
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Submission of
Matters to a Vote of Security Holders |
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23 |
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| PART
II |
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| Item
5. |
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Market for
the Registrant’s Common Stock and Related Stockholder
Matters |
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24 |
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| Item
6. |
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Selected
Consolidated Financial Data |
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25 |
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| Item
7. |
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Management’s Discussion and Analysis of Financial
Condition and Results of
Operations |
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26 |
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| Item
7A. |
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Quantitative and Qualitative Disclosures About Market
Risk |
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42 |
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| Item
8. |
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Consolidated Financial Statements and Supplementary
Data |
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43 |
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| Item
9. |
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Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure |
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43 |
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| PART
III |
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| Item
10. |
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Directors and Executive Officers of the
Registrant |
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44 |
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| Item
11. |
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Executive Compensation |
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44 |
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| Item
12. |
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Security Ownership of Certain Beneficial Owners and
Management |
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44 |
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| Item
13. |
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Certain
Relationships and Related Transactions |
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44 |
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| PART
IV |
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| Item
14. |
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Exhibits, Financial Statement Schedules and Reports on
Form 8-K |
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45 |
ITEM
1. Business
Overview
Catalytica, Inc. (“Catalytica” or “the
Company”) finds new pathways to improve processes for
chemical change. For the pharmaceutical industry, Catalytica
applies its innovative and patented catalytic technologies and
other scientific processes to improve the steps for making a
pharmaceutical molecule and also finds better and more efficient
ways to produce products in commercial scale quantities. For the
power industry, Catalytica’s unique application of a
chemical catalyst and proprietary technology enables gas
turbines to produce essentially pollution free
power.
Catalytica
’s core expertise is in the discovery and effective
application of catalysts—substances that change the rate of
chemical reactions but are themselves unchanged at the end of
the process. Catalysts enable faster reactions, improve the
yield of a process, eliminate steps or make reactions cleaner by
eliminating the use of toxic materials. Catalytica has broadened
its proprietary technology base and has identified key markets
for its products and services. Catalytica operates through three
subsidiaries: Catalytica Pharmaceuticals, Catalytica Combustion
Systems, and Catalytica Advanced Technologies:
|
·
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Catalytica Pharmaceuticals, Inc. (“Catalytica
Pharmaceuticals”) and Wyckoff, Inc. (“Wyckoff
”), a division of Catalytica Pharmaceuticals, provide
drug development and manufacturing services to the
pharmaceutical and biotechnology industries. In 1999,
Catalytica derived approximately 99% of its consolidated
revenues from Catalytica Pharmaceuticals’
operations.
|
|
·
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Catalytica Combustion Systems, Inc. (“Combustion
Systems”) discovered and is developing Xonon Cool
Combustion for pollution prevention in gas turbine power
generation and mechanical drive applications. The current
focus is on developing and marketing Xonon for gas turbine
applications, thus eliminating the necessity for costly
post-combustion emissions cleanup. The Company believes that
Xonon Cool Combustion is the only currently available product
that avoids the formation of nitrogen oxide (NOx) in gas
turbine operations by reducing combustion temperatures while
achieving uncompromised gas turbine performance. Xonon Cool
Combustion has demonstrated NOx emissions of less than 2.5
parts per million (ppm) while dramatically reducing carbon
monoxide and unburned hydrocarbons. Xonon’s average
expected life is approximately 8,000 operating hours, which
corresponds to approximately one year of full-time
operation.
|
|
·
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Catalytica Advanced Technologies, Inc. (“Advanced
Technologies”) acts as the incubator for new businesses
for Catalytica. It explores business opportunities by
conducting research and development activities in areas that
utilize Catalytica’s proprietary
technologies.
|
Catalytica Pharmaceuticals
Catalytica
Pharmaceuticals offers scientific innovations, proprietary
technologies, and development and manufacturing expertise in the
formulation and production of drugs for the pharmaceutical
industry. Through its comprehensive and broad range of services,
Catalytica Pharmaceuticals seeks to capitalize on the dynamic
changes in the pharmaceutical industry that it believes will
continue to expand demand for its services. These changes
include:
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·
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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
$230 million in 1987 to $500 million in 1999. This increase
has prompted pharmaceutical companies to seek ways to contain
costs and increase productivity throughout all phases of the
drug development process.
|
|
·
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Greater Focus on Time to Market.
Pharmaceutical companies gain competitive
advantage by being the first to market with a new drug. As a
result, pharmaceutical companies have increased their focus on
reducing the “time to market” for a drug. Several
pharmaceutical companies have announced their
|
|
|
intention 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, and to focus their energy on their core competency of
drug discovery, drug companies are outsourcing some of their
development and 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.
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·
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Greater Price Pressure.
As pharmaceutical drugs come off patent, lower priced
alternatives become available. In 1998, these drug sales
accounted for nearly $30 billion, or 10%, of the $300 billion
dollar pharmaceutical drug market and are expected to grow
approximately 10% annually over the next five years. The
increase in sales of lower-priced 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 lower-priced alternatives. As a
result, pharmaceutical companies are increasing their sales
and marketing budgets to compete with lower-cost alternatives,
thus increasing costs and reducing their margins. In addition,
the effort by managed health care companies and public
programs, such as Medicare and Medicaid, to control healthcare
costs has also put additional price pressure on pharmaceutical
companies. These price pressures have caused pharmaceutical
companies to scrutinize their manufacturing operations to
better use resources and reduce manufacturing
costs.
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|
·
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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
increased costs of drug manufacturing.
|
For
pharmaceutical companies, these factors have made the
outsourcing of drug development, clinical research,
manufacturing and packaging more attractive.
|
Catalytica Pharmaceuticals’
Strategy
|
Catalytica
Pharmaceuticals offers scientific innovations, proprietary
technologies, and development and manufacturing expertise in the
production of drugs for the pharmaceutical industry. It seeks to
provide fully integrated services that are high-quality,
cost-effective, reliable and responsive to customer needs. Its
services span the spectrum of the pharmaceutical drug and
manufacturing process development, from the time the new
chemical entity is discovered by pharmaceutical or biotechnology
companies to the production of the final commercial supply of
the drug product. By providing such a wide 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. These services include:
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·
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chemical process development
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·
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custom
chemical manufacturing
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·
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dosage
formulation development
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·
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clinical trial products manufacturing and
packaging
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·
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full
scale commercial production of sterile and non-sterile form
drug products; and
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·
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packaging of final drug products
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Catalytica
Pharmaceuticals, formerly Catalytica Fine Chemicals, has
provided services that include 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
utilized in the manufacture of active pharmaceutical ingredient
in drugs.
In July
1997, Catalytica Pharmaceuticals acquired a large, highly
sophisticated drug development, manufacturing and packaging
facility in Greenville, North Carolina from Glaxo Wellcome (
“Greenville Facility”). The Greenville Facility
enables Catalytica Pharmaceuticals to offer a fully integrated
drug development, manufacturing, and packaging service to
pharmaceutical and biotechnology companies.
In
September 1999, Catalytica acquired Wyckoff Chemical Company,
which is now known as Wyckoff, Inc. and operates as a division
of Catalytica Pharmaceuticals, to expand its chemical process
development and pilot plant scale-up capabilities and increase
its chemical manufacturing capacity.
Catalytica
Pharmaceuticals currently operates a full service operation that
enables the pharmaceutical industry to obtain complete drug
development and manufacturing services, from chemical process
and dosage form development to clinical trial sample production
and full commercial production of drugs, as well as regulatory
services for the submission of NDAs and other required
regulatory submissions. Its customers include some of the
leading pharmaceutical and biotechnology companies, such
as:
| Abbott
Laboratories |
|
Merck
and Company |
| Allergan, Inc. |
|
Monarch
Pharmaceuticals, Inc. |
| Amgen,
Inc. |
|
Mylan
Laboratories Inc. |
| AstraZeneca PLC |
|
Parke-Davis |
| Aventis
S A |
|
Pfizer,
Inc. |
| Bayer
AG |
|
Pharmacia & Upjohn, Inc. |
| Bristol-Myers Squibb |
|
Schering-Plough |
| CV
Therapeutics, Inc. |
|
Shire
Pharmaceuticals Group plc |
| Eli
Lilly |
|
Triangle Pharmaceuticals Inc. |
| Glaxo
Wellcome plc |
|
Vertex
Pharmaceuticals, Inc. |
| Medeva
PLC |
|
Warner-Lambert Company |
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 specific drugs, it often takes at
least 12 to 24 months from the date that a supply agreement is
signed to manufacture final dosage products and bulk actives
covered by an agreement. Several of Catalytica Pharmaceuticals
’ new supply agreements are currently in various phases of
the development and validation process.
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
Aventis, CV Therapeutics, Eli Lilly, Triangle Pharmaceuticals,
and Vertex.
|
Operations and Manufacturing
|
Catalytica
Pharmaceuticals’ operations are conducted at its facilities
in Greenville, North Carolina, South Haven, Michigan, and East
Palo Alto and Mountain View, California. The facilities operate
under cGMP, and supply FDA-approved products to their customers.
Catalytica Pharmaceuticals offers a full spectrum of services
that provide for the best manufacturing methods for a drug
candidate, which include the following:
|
Chemical Process Research &
Development
|
Catalytica
Pharmaceuticals’ process research and development services
offer innovative problem solving to find alternate synthetic
pathways to the manufacture of drug candidates, including
scientific exploration and application of proprietary
technologies for the determination of economical, efficient, and
safe ways to make the new chemical entity. They focus on
streamlined, highly cost-effective processes, substitution of
noxious reagents, and the use of more environmentally acceptable
chemistries. Catalytica Pharmaceuticals’ strong access to
proprietary technologies in the chemical process research &
development area, primarily based on catalytic methods, enables
the establishment of relationships with its customers early in
the product development cycle and facilitate process
improvement. At December 1999, over 45 scientists, 22 of which
are Ph.D’s, work in this area.
Catalytica
Pharmaceuticals provides 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. The reactors used in pilot scale production range in size
from 5 to 200 gallons each. In December 1999, Catalytica
Pharmaceuticals announced plans to expand its chemical pilot
plant scale-up facilities to accommodate growing customer demand
in this area. Construction for this expansion is scheduled to
begin in 2000.
Catalytica
Pharmaceuticals manufactures the key intermediates along the
pathway to the active pharmaceutical ingredients as well as the
active pharmaceutical ingredient. The chemical manufacturing
operation has over 100,000 gallons of multipurpose chemical
reactor capacity. These reactors range in size from 300 to 4,000
gallons each, providing for a wide range of scale including the
manufacturing of large commercial volumes of products.
Catalytica Pharmaceuticals’ chemical manufacturing
operation 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 Catalytica Pharmaceuticals’ 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 in Greenville currently are operating at near full
capacity, with the majority of production capacity committed to
production of products for Glaxo Wellcome, however, some
capacity has been committed to other customers. Catalytica
Pharmaceuticals has additional available capacity at its South
Haven and Bay View sites and is currently expanding its
operations in South Haven by an additional 14,000 reactor
gallons.
|
Dosage Formulation Development
|
Catalytica
Pharmaceuticals applies its proprietary technologies to assist
its customers with scientific evaluation and determination of
the formulation of essential ingredients to create a dosage form
that allows the drug to be absorbed or administered effectively
and remain potent throughout its shelf life. Catalytica
Pharmaceuticals applies formulation technologies and
capabilities to the development of a complete spectrum of dosage
forms from initial formulation development, through clinical
trial materials and scale-up, to validated formulae ready for
commercial manufacture. Services provided include
pre-formulation and formulation development studies in the areas
of tablets, capsules, ointments, liquids, creams, sterile
solutions and lyophilized products. A full range of analytical
capabilities is available to support all dosage form development
and stability.
A knowledgeable Regulatory Affairs Department is available to
provide complete regulatory-ready submissions for US and foreign
filings. The pharmaceutical research and development division of
Catalytica Pharmaceuticals employs over 150 scientists and
engineers, over 50 of which are Ph.D’s, who currently work
in the dosage formulation development area on over 50 active
projects.
|
Clinical Trial Products Manufacturing and
Packaging
|
Catalytica
Pharmaceuticals manufactures products and placeboes for clinical
trials for its pharmaceutical customers. In December 1999,
Catalytica Pharmaceuticals announced that it is expanding its
service capabilities to include clinical trial material
packaging and labeling. Catalytica Pharmaceuticals expects
facility modifications and validation for the clinical trial
packaging business to be completed by April 2000.
|
Full-scale commercial production of sterile and
non-sterile dosage form drug products
|
Catalytica
Pharmaceuticals offers both sterile and non-sterile manufacture
of final dosage form drug products, including tablets, capsules,
freeze dried products, eye and ear formulations, topical
ointments, liquids, or creams.
The
sterile production facilities produce primarily intravenous and
intramuscular drugs that are administered to the patient through
injection. The state of the art facilities are designed to
prevent microbial contamination through computerized control
systems and advanced barrier technology. The sterile facilities
are also designed to control entry and focus activities due to
the exacting nature of this business. Over 2,000 square feet of
freeze-drying capacity enables preservation of sensitive
therapeutic agents including biological drugs. Implementation of
product transfers in this area typically require long lead times
to obtain regulatory approvals, sometimes as long as 18 to 24
months after signing a 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 for new competitors.
There is currently manufacturing capacity available at the
sterile production facilities.
The
non-sterile 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. There is currently
manufacturing capacity available at the non-sterile
pharmaceutical facility.
|
Packaging of Finished Drug Products
|
Catalytica
Pharmaceuticals offers packaging of final products in a variety
of configurations. Once the final dosage form of a drug has been
prepared, such as tablets, capsules, creams, ointments, and
liquids, these products are packaged for distribution. The
commercial production facilities are capable of packaging in
hospital unit dose packs, single use packages, samples, blister
packages, plastic or glass bottles, vials, 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.
|
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 then produces
the products, provided 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 based on current
market conditions.
Under the
original supply agreement, Catalytica Pharmaceuticals’
production for Glaxo Wellcome is scheduled to decrease over
time. Catalytica Pharmaceuticals estimates aggregate payments
(including reimbursements for the cost of materials) by Glaxo
Wellcome under the original supply agreement to be approximately
$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.
Since
entering into the original supply agreement, Catalytica
Pharmaceuticals has agreed to produce additional products for
Glaxo Wellcome. These agreements have been documented as
amendments to the original supply agreement. In June 1998 and in
November 1999, Catalytica Pharmaceuticals agreed to increase the
chemical capacity available for the manufacture of Glaxo
Wellcome products. The June 1998 amendment provided for minimum
payments by Glaxo Wellcome in 1998 and 1999 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
November 1999, Catalytica Pharmaceuticals and Glaxo Wellcome
signed another amendment to the original supply agreement for
increased production levels of certain additional products in
Catalytica’s chemical manufacturing facility. As part of
the agreement, Glaxo Wellcome is also enabling the purchase of
capital equipment to modify Catalytica’s chemical
manufacturing facility in Greenville to add flexibility to its
existing capacity.
In the
first quarter of 1999, Catalytica Pharmaceuticals also 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. 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.
Catalytica
Pharmaceuticals and Glaxo Wellcome are working with the EPA and
the North Carolina Department of Environment 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
currently does not 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 the 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
Pharmaceuticals may incur unreimbursed costs or suffer
interference with its operations as a result of the
investigation and remediation activities. Catalytica
Pharmaceuticals’ future development and expansion of the
Greenville Facility also may be slowed or prevented by the
investigation and remediation activities.
Catalytica
Pharmaceuticals’ ongoing operations at the Greenville
Facility could cause additional contamination. Determining the
existence and extent of additional contamination contributed by
Catalytica Pharmaceuticals, 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.
On August
15, 1999, a bromine chemical release due to a ruptured flexible
coupling on a bulk storage tank occurred at the Greenville
Facility. The release was contained within a concrete dike
surrounding the tank. Catalytica’s onsite emergency
hazardous material response team responded immediately to
contain the airborne releases preventing additional exposure.
During the response, a voluntary evacuation was conducted of
nearby neighborhoods. Clean-up operations took place
immediately. An investigation into the cause of the accident and
associated regulatory requirements was conducted by the North
Carolina Division of Occupational Safety and Health (OSHA). On
February 14, 2000, OSHA issued its official findings which
included citations and administrative penalties. OSHA and
Catalytica have entered into a settlement agreement whereby
Catalytica has agreed to address the OSHA observations within
stipulated time schedules. The settlement included an agreement
by Catalytica to provide funds to Pitt County Emergency Services
in the amount of $93,100 to be used towards emergency planning
and training projects within Pitt County, North Carolina, and to
pay OSHA $372,400.
Catalytica
Pharmaceuticals’ 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, Rhône Poulenc. Although Catalytica
has contractual rights of indemnity from Rhône Poulenc and
from Novartis, the prior owner/operator of the facility,
Catalytica could be named in an action brought by a governmental
agency or by a third party because of the
contamination.
The
Wyckoff manufacturing site is listed under Michigan’s Act
307 as a site with soil or groundwater contamination. An
environmental assessment, conducted by Catalytica as part of the
acquisition process, estimated the environmental liability for
this site to be approximately $850,000–$1,700,000. A
significant portion of the soil contamination that exists at the
facility is on property acquired by Wyckoff from 1995-1997. The
City of South Haven Brownfield Redevelopment Authority has
approved a Brownfield Plan that incorporates the Wyckoff
facility. Under this plan, environmental assessment and
remediation costs for pre-existing contamination is reimbursable
up to 100% by the The City of South Haven Brownfield
Redevelopment Authority. Approximately 65% of the environmental
liability costs are identified to remediate soil contamination
under this Plan.
|
Catalytica Pharmaceuticals’ Intellectual
Property
|
Catalytica
Pharmaceuticals has an extensive intellectual property base and
expertise in catalytic science and engineering, and in product
development and formulation. Catalytica Pharmaceuticals’
staff draws on its many years of experience of catalytic process
development in the petroleum and petrochemical industry, where
high
yields and efficient manufacturing represent important competitive
factors. Catalytica Pharmaceuticals’ technical staff
includes organic and analytical chemists, and chemical
engineers, many of whom hold Ph.D.’s. These scientists have
a broad background in the discovery, development and scale-up of
novel catalysts and catalytic processes that are relevant to
developing efficient manufacturing processes of pharmaceutical
intermediates and bulk actives and in the formulation and
manufacturing of pharmaceutical dosage forms.
In
addition, Catalytica Pharmaceuticals has an active program to
identify technologies from external sources that are likely to
provide commercial value. In this regard, Catalytica
Pharmaceuticals has been granted an exclusive license to
practice asymmetric hydrogenation technology developed by
Professor Zhang at Penn State University for applications in
pharmaceutical and animal health industries. Additionally,
Catalytica Pharmaceuticals has been granted a license to use a
method for the asymmetric epoxidation of trans-olefins developed
by Professor Shi at Colorado State University. These two
methodologies provide a novel means to establish chiral sites in
drug molecules.
Catalytica
Pharmaceuticals 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, including sterile
products.
Catalytica
believes that several factors are widely recognized as being
important to compete in the pharmaceutical development and
manufacturing services industry, including:
|
·
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reliability and timeliness of meeting customer
orders
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|
·
|
compliance with environmental and FDA
regulations
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|
·
|
technical ability and capacity to produce a range of
quantities from small batches to large commercial
quantities
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price
of services and products
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Catalytica
Pharmaceuticals’ primary competition is from pharmaceutical
companies that produce their own drugs and other contract drug
manufacturers, including Bayer, DSM, Lonza AG, Cambrex, Chirex,
Oread and Patheon, which provide either drug development,
manufacturing, and/or packaging services to the pharmaceutical
industry. 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 Pharmaceuticals.
|
Catalytica Pharmaceuticals’ Executive Officers and
Directors
|
As part of
Catalytica Pharmaceuticals’ strategy to create focused
business units, we have assembled a management group that
includes dedicated senior executives and independent directors
who provide relevant industry expertise. The directors and
executive officers of Catalytica Pharmaceuticals
are:
Name
|
|
Age
|
|
Position with Catalytica
Pharmaceuticals
|
| Gabriel
R. Cipau |
|
58 |
|
President, Chief Executive Officer and
Director |
| Lawrence W. Briscoe |
|
55 |
|
Chief
Financial Officer and Director |
| James
A. Cusumano |
|
57 |
|
Chairman of the Board |
| Barry
M. Bloom |
|
71 |
|
Director |
| Richard
Fleming |
|
75 |
|
Director |
| Thomas
L. Gutshall |
|
61 |
|
Director |
| Ricardo
B. Levy |
|
54 |
|
Director |
| Ernest
Mario |
|
61 |
|
Director |
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, 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 boards of directors,
including Cubist Pharmaceuticals, Inc., Neurogen Corp., Microbia
Inc., 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 also served in executive level
positions with Syntex Corp. from 1981 to 1994, most recently as
executive vice president from June 1989 to August 1994. He
previously served with Mallinckrodt Inc., most recently 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.”
Combustion Systems, Inc.
Combustion
Systems is developing and marketing Xonon Cool Combustion, the
only product that avoids the formation of nitrogen oxide (NOx)
by reducing combustion temperatures while achieving uncompromised
turbine performance. Xonon Cool Combustion has demonstrated NOx
emissions of less than 2.5 parts per million (ppm) and has
dramatically reduced formation of carbon monoxide and unburned
hydrocarbons. Xonon’s average expected life is
approximately 8,000 operating hours, or one year of full-time
operation.
Because
Xonon avoids the use of post-combustion cleanup technologies
which can be costly and in most cases use toxic chemicals to
clean up the pollution, Catalytica believes that Xonon is the
most cost-effective NOx emissions system for ultra-low emissions
for power producing gas turbines and for mechanical drive
applications. Combustion Systems is working with original
equipment manufacturers (OEMs) of gas turbines to incorporate
Xonon Cool Combustion into their products. The Company intends
to develop and sell Xonon through these and other OEMs and
generate additional revenue through the sale of replacement
Xonon modules.
With the
advent of privatization and 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, environmental regulations require that power be
generated in compliance with emissions standards. As a result,
competitive generating companies are seeking ways to reduce
environmental risk and the costs of environmental
compliance.
Gas
turbines have emerged as the solution of choice for power
generation due primarily to their high efficiency, relatively
low capital and installation costs, and reduced emissions
levels. According to Diesel & Gas Turbine Worldwide (October
1999), worldwide sales of gas turbines have increased from 544
units during the year ending May 1989 to 875 units during the
year ending May 1999. The total power generation capacity for
these new orders has increased from an output equivalent of 15
gigawatts in 1989 to over 64 gigawatts in 1999. This latter
figure is equivalent to approximately 1.2 times the total
installed power generation capacity for the state of California,
or the capacity required to meet the peak electrical needs of
12.8 million households. PowerData, a market information
service, has forecasted total worldwide gas turbine sales from
1998 to 2007 at an average of approximately 1,100 turbines per
year.
Despite
improvements over other systems, gas turbine air pollution
emissions remain a concern. Gas turbines without pollution
prevention or cleanup processes generate nitrogen oxide
emissions, a major contributor of air pollution, of 100 to 200
ppm. To meet desired emissions levels, gas turbine manufacturers
have developed improved combustion systems. However, measures to
reduce emissions in conventional combustion systems have in some
cases contributed to premature component failure, reducing gas
turbine reliability. Moreover, even current state-of-the art gas
turbine combustion systems cannot achieve desired ultra low
emissions levels. Thus in many cases burdensome exhaust cleanup
systems are required.
Although
gas turbine exhaust cleanup systems have become commonplace,
they add significant additional capital and operating costs,
reduce overall generating project performance and efficiency,
and in many cases create potential health risks through
secondary emissions and the transportation and storage of
hazardous reagents. Moreover, these exhaust cleanup systems
cannot be used in all gas turbine applications.
Gas
turbine suppliers, such as ABB, General Electric Power Systems,
Kawasaki, Pratt & Whitney Canada, Rolls-Royce (through its
subsidiary Allison Engine Company), Seimens-Westinghouse, and
Solar Turbines offer products for the following
markets:
|
Wholesale Power Generation Sector
|
The
wholesale power generation market consists mainly of public
utilities and wholesale generating companies that operate
generating facilities that provide power supplies for utilities
or for resale in wholesale markets. Gas turbines used in these
facilities are generally large, ranging from 60 to greater than
180 megawatts (MW), to exploit economies of scale. These systems
offer commodity energy suppliers greater value through low
capital and operating costs, high reliability, and high
efficiency through combined-cycle configurations (a
gas turbine combined with exhaust heat recovery steam generators
and steam turbines). The current method for ensuring the lowest
levels of emissions for these systems requires the use of a
post-combustion exhaust cleanup system. This method cleans up
the pollution after it is formed and results in additional
costs, reduced efficiency, and can add concerns related to
hazardous reagents and secondary emissions associated with
exhaust cleanup systems.
Gas
turbines installed in simple cycle (gas turbine alone) provide
electric capacity to support energy needs during peak demand
periods or supply shortages. These systems can be sited and
constructed quickly and enable operational flexibility.
Traditionally, cost-minimizing utilities have operated these
“peaking” units sparingly, for emergency service.
However, in restructured power markets, with hourly price
variation and market prices for reliability services, peaking
turbines are increasingly valued by profit-maximizing wholesale
generators who can site them quickly in supply-short markets and
operate them opportunistically during periods of high prices.
The high-temperature exhaust of these units is not suited for
conventional exhaust cleanup systems and therefore the ability
to fully utilize these systems is presently hampered by their
inability to achieve ultra low emissions.
The
wholesale market sector has recently demonstrated very high
growth with turbine manufacturers experiencing significant sales
increases and backlogs. According to Diesel & Gas Turbine
Worldwide (October 1999), worldwide orders of gas turbines
greater than 60 MW more than doubled from 1998 to 1999, from 160
units for the year ending May 1998 to 384 units for the year
ending May 1999.
|
Industrial Applications Sector
|
The
industrial applications market is comprised of small and
medium-size gas turbines generally ranging from 15 to 60 MW. The
principal users of these turbines are energy intensive
industrial facilities that rely on gas turbines for power
generation, combined heat and power production (cogeneration),
and as mechanical drives for compressors on gas and liquids
pipelines. Gas turbines in mechanical drive applications for
pipeline compression have high-temperature exhaust that is not
suited for exhaust cleanup systems, and thus cannot achieve
ultra low emissions with conventional combustion. This restricts
their use in areas where air quality is of great concern. The
alternative, electric motor drives, are generally far more
costly to operate.
|
Distributed Generation Sector
|
New
markets for energy services along with advances in smaller-scale
generation technologies have made power generation “at the
point of use” economical for a variety of applications from
light industries to households. This new “at the point of
use” or distributed generation power production can offer
valuable benefits relative to services from wholesale generated
power producers. As part of an energy solution such as combined
heat and power, it can offer cleaner power, improved reliability
or power quality, “peak shaving,” or the avoidance of
the costs of transmission and delivery of utility power.
Catalytica believes distributed generation power production at
transmission and distribution substations may emerge as an
important contributor to power grid reliability.
Distributed generation is provided by generation
technologies typically ranging from less than 1 MW to 15 MW,
including small gas turbines, fuel cells, photovoltaic systems,
and reciprocating engines. The most successful distributed
generation technologies will be those that are clean, reliable,
and cost-effective. The ability to site these projects where
they provide the most value is essential. Fuel cells and
photovoltaic systems offer ultra low emissions power, but
present technology is costly. Reciprocating engines and small
gas turbines are cost-effective in many applications today, but
emissions are a recognized barrier to their use.
In
applications where the economics support distributed generation,
small gas turbines and reciprocating engines have a distinct
cost advantage compared to fuel cells and photovoltaic systems.
However, the cost of compliance with environmental regulations
and the risk associated with securing permits have been
persistent barriers to implementation of distributed generation
projects since by their nature they are located in populated
areas, where environmental performance is critical. Moreover,
traditional exhaust cleanup technologies can be
prohibitive due not only to their cost, but also to the
impracticality of the use and storage of toxic reagents in
places where people congregate, such as schools, apartment
buildings, shopping centers, or hospitals. In addition, these
smaller projects are far less able to risk the failure to secure
permits or delays arising in the permitting process.
The
distributed generation market is poised for dramatic growth.
According to Power Engineering (February 1999), it is predicted
to reach a 20%-40% share of total power generation capacity
additions over the next ten years. Worldwide sales of gas
turbines between 1 and 15 MW were 347 for the year ending May
1999 according to Diesel & Gas Turbine World (October
1999).
Combustion
Systems’ Xonon Cool Combustion technology uses catalytic
combustion to sustain the combustion process without the high
temperature flame zone of conventional combustion. Through the
use of Xonon, the temperature at which the combustion process
operates is low enough to avoid the formation of nitrogen
oxides, while achieving identical combustion efficiency and
performance as the conventional combustion process. When
incorporated into the combustor of gas turbines, Xonon achieves
ultra-low emissions by avoiding the formation of NOx and through
complete burnout of CO and hydrocarbons, without adversely
affecting turbine performance. Xonon is the only operating
technology that enables gas turbines to achieve ultra low
emissions through avoidance of pollution formation rather than
cleanup through the use of burdensome post-combustion exhaust
cleanup systems.
In
December 1997, AGC, a builder of small co-generation plants,
successfully ran Xonon on one of its 1.5 MW Kawasaki engines for
1,200 hours, at varying power output levels. AGC’s results
documented less than three ppm of nitrogen oxides throughout the
1,200 hour run.
In October
1998, Combustion Systems and Silicon Valley Power commissioned a
Kawasaki gas turbine equipped with the Xonon system to produce
power for the public electric power grid. After a series of
tests, this unit began continuous operation under commercial
conditions in mid-1999. As of December 31, 1999, the
Xonon-equipped unit at Silicon Valley Power had operated for six
months, with Xonon satisfying EPA criteria for an emissions
technology that is “achieved in practice.” The unit
had accumulated over 4,000 hours of operation during this time
while exhibiting low dynamic pressure oscillation (combustor
vibration) and affirming the durability of the combustor
components. The Xonon-equipped unit was the only gas turbine
ever to demonstrate emissions performance that would satisfy the
California Air Resources Board (CARB) and the South Coast Air
Quality Management District (SCAQMD) guidelines for new gas
turbines without the use of an exhaust gas cleanup system. These
guidelines are the country’s most stringent for air quality
management.
Combustion
Systems has continued to build on the basic technological
concepts underlying Xonon, beginning with sustained catalytic
combustion and continuing through successful operation of Xonon
catalysts under conditions representing a broad range of gas
turbines available today. Combustion Systems is continuing to
expand on this base, with efforts underway to further extend
catalyst life, gain additional experience with operational
transients, and develop component design approaches for engines
with different operating conditions and combustor
configurations. Combustion Systems believes this accumulated
experience is of considerable value to gas turbine
manufacturers, facilitating low-risk adaptation of Xonon to
other gas turbine models in collaboration with Combustion
Systems. Combustion Systems also believes this accumulated
experience, along with its intellectual property base, places
Combustion Systems at a considerable advantage relative to other
potential developers of catalytic combustion.
|
Combustion Systems’ Strategy
|
Combustion
Systems is commercializing Xonon Cool Combustion for gas
turbines. When incorporated into the combustion system of a gas
turbine, Xonon achieves NOx emissions of less than 2.5 ppm. The
Xonon combustion system for gas turbines also achieves
essentially full burnout of carbon monoxide, an invisible gas
that is a health hazard, as well as near-complete combustion of
available hydrocarbons, for ultra low emissions combustion
performance. In addition, the Xonon combustion system for gas
turbines has low combustor vibration (“noise”), or
dynamic pressure oscillation, and improved temperature
uniformity.
Combustion
Systems believes Xonon for gas turbines will make ultra low
emissions operation of gas turbines more cost effective and
available for more applications. Xonon is the only combustion
system demonstrated to meet the CARB’s gas turbine
emissions guidelines without using an exhaust cleanup system.
Gas turbine exhaust cleanup systems are costly to install and
operate, most use hazardous chemicals, and they cannot be used
in all gas turbine applications.
Combustion
Systems manufactures the proprietary Xonon catalytic combustion
module, which forms the heart of the Xonon Cool Combustion
system for gas turbines. The Xonon combustion system for gas
turbines has been developed by Combustion Systems and is being
adapted for individual gas turbines in collaboration with
original equipment gas turbine manufacturers (OEMs). The Xonon
module is designed to be replaced during regularly scheduled
maintenance outages (approximately every 8,000 operating hours)
through the operating life of the gas turbine and recycled.
Combustion Systems intends to develop and sell Xonon Cool
Combustion through OEMs and generate additional revenue through
the sale of replacement Xonon modules.
Combustion
Systems has entered into agreements with General Electric and
Solar Turbines for the adaptation of Xonon to gas turbines in
their product lines and is discussing similar agreements with
Kawasaki, Rolls-Royce Allison and other OEMs as well as the
extension of a previously-announced agreement with Pratt &
Whitney Canada. Combustion Systems expects to continue to work
these OEMs in an effort to expand the commercial availability of
Xonon-equipped gas turbines and to enter into commercialization
agreements with other gas turbine manufacturers who seek to
differentiate their products through ultra low emissions Xonon
combustion technology.
In
December 1999, Catalytica announced the first order for
Xonon-equipped GE 7FA gas turbines for Enron’s proposed
power facility in Southern California. In addition, Combustion
Systems expects to continue to work with General Electric to
expand the commercial availability of Xonon-equipped gas
turbines and to enter into commercialization agreements with
other gas turbine manufacturers.
The
Company believes that Xonon has wide applicability and offers
distinct advantages in all markets within the power generation
and mechanical drive industries. In the large combined-cycle
generating facilities that compete in commodity power markets,
Xonon is designed to benefit gas turbine operation through cost
and performance advantages relative to projects using gas
turbines with post emissions cleanup systems. Xonon would enable
these units to achieve ultra low emissions levels now achievable
only by combined-cycle units with exhaust gas cleanup. Xonon
would also eliminate higher emissions as an issue for peaking
turbines and would facilitate the siting of these units in urban
areas where their capacity is most valuable, but where air
quality is a primary concern. Xonon-equipped units would be free
of emissions-driven operating restrictions, and thus could be
operated in response to market conditions yielding more value
for their owners.
Combustion
Systems also believes the Xonon combustion system for gas
turbines is an enabling technology for distributed generation
applications. Small combustion turbines equipped with Xonon
provide a highly cost-effective, ultra low emissions solution
for distributed generation applications. Further, with Xonon,
the cost and operational burdens associated with exhaust cleanup
systems are avoided.
Catalytica
plans to manufacture commercial quantities of Xonon modules at
its facility in Mountain View, California, on a footprint of
approximately 4000 square feet. The Company believes that this
manufacturing
capacity will require only modest capital expenditures over the
next several years for considerable expansion of its
capabilities to supply Xonon.
During
1999, Combustion Systems earned ISO 9001 Registration for the
production of its current products. ISO 9001 is the most
comprehensive standard in the ISO 9000 series and covers design,
manufacture, installation, and servicing systems. Catalytica
believes that this provides continued evidence of the Company
’s ability to deliver a high-quality product that will meet
the requirements and expectations of gas turbine manufacturers
offering Xonon to their customers.
The Xonon
™ Cool Combustion system has operated on a continuous basis
for six months, accumulating over 4,000 hours of essentially
pollution-free power for Silicon Valley Power. Such operations
satisfy federal Environmental Protection Agency (EPA) guidelines
for an emissions control technology that is “achieved in
practice.” Based on the performance of Xonon during its six
months of operations, Catalytica believes that Xonon is the only
combustion system demonstrated to meet the country’s most
stringent guidelines for air pollution emissions levels for gas
turbines without requiring an exhaust cleanup system. As a
control technology that is achieved in practice, Xonon will be
evaluated in regulatory proceedings that determine whether
proposed new gas turbine projects employ Best Available Control
Technology (BACT).
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. Generally, the more
polluted the air in a particular region becomes, the more
stringent the emissions restrictions.
Under the
Clean Air Act, the EPA establishes ambient air quality
standards. Areas that 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 by taking
existing equipment out of service. If it is not feasible to make
offsetting reductions at the facility, then the user must obtain
emissions 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.
The EPA
upholds 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. Incorporating
Xonon into the world’s supply of gas turbines would reduce
emissions of smog producing NOx by hundreds of thousands of tons
per year. Replacing just 28% of the existing coal fired power
generation with Xonon-equipped gas turbines would be sufficient
to meet the U.S. obligation for the reduction of global warming
gasses as stipulated by the Kyoto Accord. Moreover, it would
reduce NOx emissions by two to three million tons per
year.
|
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 Combustion Systems for $30.0 million. Enron Ventures
also received a three-year option to purchase an additional 4.9%
equity interest in Combustion Systems for $14.4 million.
Pursuant to the terms of the investment, Thomas E. White, the
Vice-Chairman of Enron Energy Services, was appointed to the
board of directors of Combustion Systems. In December 1999,
Enron specified Xonon as its preferred emissions control system
with GE 7FA turbines that have been ordered for the proposed
Pastoria Energy Facility which is currently under regulatory
review by the California Energy Commission (CEC). The Pastoria
Energy Facility, a project proposed by affiliates of Enron North
America, a subsidiary of Enron Corp., is a 750 megawatt (MW)
natural gas fired power generation project located on Tejon
Ranch property south of Bakersfield, California. If the project
is approved by the CEC, it is expected to begin construction in
2001 and enter commercial operations by the summer of
2003.
Combustion
Systems also has entered into several collaborative
relationships with leading industry participants to produce and
sell the Xonon system in specific manufacturers’ turbines.
Currently, Combustion Systems has entered into the following
collaborative relationships:
|
·
|
In
November 1998, 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 gas
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. As a result of Enron’s specification
of Xonon in their GE 7FA turbine orders for the Pastoria
Energy Facility, Catalytica and GE have accelerated their
application of Xonon to these turbines for timely
incorporation for this project.
|
|
·
|
Combustion Systems also is working with Solar Turbines
and is in discussions with Kawasaki, Pratt & Whitney
Canada, and Rolls-Royce Allison 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
October 1996, 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. To date, the
parties have contributed an aggregate of $24.2 million to the
joint venture, of which Woodward contributed $15.0 million and
Catalytica contributed $9.2 million.
|
In January
1995, Combustion Systems entered into a cross-license agreement
with Tanaka Kikinzoku Kogyo K.K., a Japanese precious metals
company. The agreement provides that 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.
|
Combustion Systems’ Intellectual
Property
|
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 Combustion Systems’ catalytic
combustion technology. 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.
Combustion
Systems expects to compete with providers of “lean pre-mix
” systems, including Allison, General Electric and Solar,
and with manufacturers of emissions cleanup 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 Combustion Systems. 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 Combustion
Systems’ technologies, Combustion Systems’ competitive
position and sales prospects would be materially adversely
affected.
Technologies such as wet controls and “lean pre-mix
” systems reduce the formation of pollution in the
combustor of gas turbines and are provided by turbine
manufacturers such as Allison, General Electric and Solar, while
selective catalytic reduction (SCR) systems are used for
post-combustion pollution cleanup.
|
Wet
Controls and Lean Pre-mix
|
The
natural gas turbine combustor typically operates at a peak flame
temperature of about 3,270 degrees Fahrenheit, creating NOx
emissions of 75 to 200 ppm. By reducing the combustor operating
temperature through “wet controls” and “lean
pre-mix,” gas turbine manufacturers are able to achieve
emissions levels in the range of 9-40 ppm.
|
·
|
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. NOx
emissions levels can be reduced to about 40 ppm with water and
about 25 ppm with steam injection. However, the use of water
and steam requires that purified water be available at the
site location. Capital and operating costs can increase if
pure water is not available and water cleanup is required.
Additionally, corrosion induced by water impurities can cause
serious turbine damage. These problems, as well as the
relatively high levels of nitrogen oxide still produced, have
limited the use of wet controls as a NOx emissions control
technology.
|
|
·
|
Lean
pre-mix is a combustion process in which natural gas and
air are pre-mixed before entering the combustor to reduce the
amount of fuel in the mix. Turbine manufacturers utilizing
this approach have achieved emissions levels of approximately
15 to 25ppm and may achieve emissions levels of approximately
9 to 15 ppm 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
ppm, due to combustor “noise” or vibrations, which
may adversely affect reliability.
|
|
Selective Catalytic Reduction
|
The most
common post combustion cleanup process is selective catalytic
reduction, which reduces NOx emissions by approximately 80%. For
example, a turbine with NOx emissions at 25 ppm can be reduced
by 80%,
to about five ppm, 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, and
the system results in secondary emissions of ammonia. Further,
selective catalytic reduction systems cannot be used in all gas
turbine applications. Selective catalytic reduction systems are
designed for use in gas turbine applications such as combined
cycle or cogeneration projects that also employ exhaust heat
recovery systems since lower heat exhaust temperatures are
required for selective catalytic reduction to be effective. Gas
turbines with conventional combustion systems installed in
simple-cycle or mechanical drive applications cannot employ
selective catalytic reduction since installation of a heat
recovery system in these systems is impractical,
cost-prohibitive, and in some cases technically unfeasible.
These combustion systems are thus unable to achieve the lower
exhaust temperatures required for the use of a selective
catalytic reduction unit.
|
Combustion Systems’ Management and
Directors
|
As part of
Combustion Systems’ strategy to create focused business
units, Combustion Systems has assembled a management group that
includes dedicated senior executives and independent directors
who provide relevant industry experience. The directors and
executive officers of Combustion Systems are:
Name
|
|
Age
|
|
Position with Catalytica Combustion
Systems
|
| 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 |
|
62 |
|
Director |
| Ricardo
B. Levy |
|
54 |
|
Director |
| John A.
Urquhart |
|
71 |
|
Director |
| Thomas
E. White |
|
56 |
|
Director |
Dennis
A. Orwig joined Combustion Systems in April 1996 as
executive vice president, and was named president and director
of Combustion Systems in June 1996. Before 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 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
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 Combustion Systems in
January 1998. Mr. White was named chairman and chief executive
officer of Enron Power Corp., a wholly-owned subsidiary of Enron
in 1991 and assumed the title of vice chairman at Enron
Operations Corp. in 1993 and Enron Energy Services in 1998. Mr.
White joined Enron 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 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 the identification and development of 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 Süd-Chemie
Group, a German chemical company, for the custom manufacturing,
process development and marketing of organometallic catalysts
for the plastics industry. The joint venture, Süd-Chemie
Catalytica, initially 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. The Süd-Chemie Group contributed the initial
capital to the venture and is 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 August 1999, S
üd-Chemie Catalytica formed a venture with AlliedSignal
Inc. (subsequently merged with Honeywell) for the joint
development and manufacturing of boron co-catalysts used in a
wide range of polymer applications. This alliance combines the
expertise of Honeywell’s FluoroSolutions
SM
business
with Süd-Chemie Catalytica’s expertise in the
manufacturing, development, and marketing of organometallic
catalysts.
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 began to explore
opportunities to provide catalytic-based high throughput
discovery and development services to the materials and process
industries. Through its proprietary and patented technologies,
Catalytica Advanced Technologies’ aim is to enable
scaleable, reliable and rapid synthesis and screening of
catalysts to find economic improvements for large chemical
processes.
Catalytica, Inc.
As of
December 31, 1999, Catalytica and its subsidiaries had
approximately 1,680 employees. Catalytica is not subject to any
collective bargaining agreements and believes that it maintains
good relations with its employees.
|
Catalytica, Inc. Executive Management and
Directors
|
The
directors and executive officers of the Company are:
Name
|
|
Age
|
|
Position
|
| Ricardo
B. Levy |
|
54 |
|
President, Chief Executive Officer and
Director |
| 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 |
| Jacqueline Cossmon |
|
44 |
|
Vice
President, Investor Relations |
| James
A. Cusumano |
|
57 |
|
Chairman of the Board |
| Richard
Fleming |
|
75 |
|
Director |
| Alan E.
Goldberg |
|
45 |
|
Director |
| Howard
I. Hoffen |
|
36 |
|
Director |
| Ernest
Mario |
|
61 |
|
Director |
| John A.
Urquhart |
|
71 |
|
Director |
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.
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.
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.
Jacqueline Cossmon joined Catalytica in late 1998
as vice president of investor relations, having spent over 18
years in the healthcare industry, with a focus in the last nine
years on investor and public relations. She has headed the
investor relation’s efforts for Applied Biosystems and
Applied Immune Sciences. Prior to that, Cossmon held various
management positions including national sales manager and
national accounts manager
for biochemical and bioseparation products at Applied Biosystems.
She holds an MBA with an emphasis in finance from Santa Clara
University and is an active member of the National Investor
Relations Institute.
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 and served in this capacity through 1999. 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.
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
multi-industry 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 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, 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. 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 is
chairman and chief executive officer of ALZA. Before joining
ALZA in August 1993, 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
SonoSite, 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
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, Hubbell Incorporated, TECO Energy,
Inc., Weir Group PLC and Tampa Electric Co. He previously served
as the senior vice president / executive 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.
Item
2. PROPERTIES
Catalytica
’s headquarters and research and development facilities,
based in Mountain View, California, occupy four buildings
covering approximately 85,000 square feet. The Company’s
lease expires on December 31, 2003, with a five-year option for
renewal. The Company’s research and development facility is
adequate for the Company’s needs for the foreseeable
future.
Catalytica
’s Pharmaceuticals’ manufacturing facilities are
located in Greenville, North Carolina, South Haven, Michigan,
and East Palo Alto, California. The pharmaceutical manufacturing
facility located in Greenville, North Carolina, (
“Greenville Facility”) was purchased from Glaxo
Wellcome on July 31, 1997. The site comprises 584 acres of land,
approximately 165 of which are occupied by 49 buildings totaling
1.8 million square feet of space. The site is used to
manufacture chemical intermediates and bulk drug products and
formulate and package those drugs into final dosage forms for
shipment both domestically and internationally. A key strategic
advantage of this facility is the ability to integrate the
production and packaging in individual dosage form of the final
pharmaceutical product starting from relatively basic raw
materials.
There is
contamination in the soil and groundwater of the pharmaceutical
manufacturing facility Catalytica Pharmaceuticals purchased from
Glaxo Wellcome in 1997. Glaxo Wellcome has been working with the
EPA and the North Carolina Department of Environment and Natural
Resources to investigate, identify and remediate contamination
in the soil and groundwater at the Greenville Facility. This
investigation has identified 17 different areas of the
Greenville Facility where contamination has or may have
occurred. Of these 17 areas, at least six have been identified
by the North Carolina Department of Environment and Natural
Resources as requiring further investigation and remediation.
Contaminants found in the soil and groundwater at the facility
include solvents, petroleum hydrocarbons and pesticides. As the
new owner of the facility, Catalytica Pharmaceuticals is legally
liable for such contamination. Glaxo Wellcome, however, has
agreed to be primarily liable for and to perform, at its cost,
the remediation that is required by law to cure the
contamination of the soil and groundwater that existed at the
Greenville Facility on the date the Greenville Facility was
acquired by Catalytica Pharmaceuticals. The Company does not
know the cost or the extent of remediation that is required at
the Greenville Facility to cure the contamination.
In an
effort to facilitate the remediation, the Company entered into
an agreement with Glaxo Wellcome that requires it to provide
Glaxo Wellcome with access to the Greenville Facility and
certain facility services as required for the remediation. Glaxo
Wellcome has agreed to reimburse the Company for the costs of
such access. The Company, however, cannot assure you that its
costs will be reimbursed by Glaxo Wellcome or that it will not
suffer any interference with ongoing operations because of Glaxo
Wellcome’s remediation activities or the existence of
contamination at the Greenville Facility. In addition, the
Company’s future development of the facility may be limited
by the existence of contamination or Glaxo Wellcome’s
remediation activities.
Catalytica
Pharmaceuticals’ ongoing operations at the Greenville
Facility may also 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.
Furthermore, any such contamination caused by Catalytica
Pharmaceuticals could materially adversely affect the business,
results of operations and financial condition of Catalytica
Pharmaceuticals, and consolidated results of operations and
financial condition.
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 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 reduced the liability
accordingly.
In
September 1999, Catalytica acquired Wyckoff Chemical Company,
which is now known as Wyckoff, Inc., and operates as a division
of Catalytica Pharmaceuticals, Inc. Wyckoff’s facility is
located on 40 acres of
land in South Haven, Michigan with available acreage for
additional expansions. There is approximately 105,000 square
feet of office, manufacturing, and R&D facilities at the
South Haven site. As of December 31, 1999, there were
approximately 174 employees at this facility, most of whom were
existing employees hired in connection with the
acquisition.
The
facility in East Palo Alto, California is on approximately five
acres. The Company owns the buildings, but leases the land at
the site from Rhône Poulenc Inc. The initial lease term is
15 years and expires on November 30, 2008, after which the
Company has options to extend for two five year periods, and one
four-year option to extend the lease term after expiration of
the first two option periods. See Item 7. Risk Factors,
“Soil and groundwater contamination exists at our
facilities, and the contamination may result in large
expenditures of cash and other resources.”
Item 3.
LEGAL PROCEEDINGS
On August
15, 1999, Catalytica’s Greenville Facility experienced a
chemical release as a result of a broken pipeline. Shortly
thereafter, Catalytica, the North Carolina Occupational Health
and Safety Agency and the North Carolina Air Quality Division
initiated an investigation of this incident. On February 14,
2000, OSHA issued its official findings, which included
citations and administrative penalties. OSHA and Catalytica have
entered into a settlement agreement whereby Catalytica has
agreed to address the OSHA observations within stipulated time
schedules. The settlement included an agreement by Catalytica to
provide funds to Pitt County Emergency Services in the amount of
$93,100, and to pay OSHA $372,400.
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. In February 1999, Catalytica received a letter
from the City of Glendale alleging contractual damages and
requesting monetary restitution in order to settle this matter.
The parties are currently discussing alternatives to resolve the
contractual issues related to the project, however, this matter
may result in litigation. While it is not possible to predict
with certainty the outcome of this matter, and while the Company
does not believe an adverse result would have a material effect
on the Company’s consolidated financial position, it could
be material to the results of operations for a fiscal
year.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
There were
no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of the fiscal year covered by
this report.
Item
5. MARKET FOR THE REGISTRANT’S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common
Stock
Catalytica
’s Common Stock is traded in the Nasdaq National Market
under the symbol “CTAL.” The following table shows the
range of high and low closing prices of Catalytica’s Common
Stock as reported by the Nasdaq National Market by quarter and
the dividends paid per share of Wyckoff common stock for each
quarterly period in 1999 and 1998. Such prices represent
interdealer prices and do not include retail mark-ups or
mark-downs or commissions and may not represent actual
transactions.
|
|
|
1999
|
|
1998
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Common
stock price per
share: |
|
High |
|
$
18 |
1
/16
|
|
$
14 |
|
|
$17 |
11
/16
|
|
$14 |
7
/8
|
|
$
13 |
15
/32
|
|
$
19 |
5
/8
|
|
$
20 |
13
/16
|
|
$
18 |
7
/8
|
|
Low |
|
11 |
|
|
10 |
7
/8
|
|
11 |
5
/8
|
|
10 |
1
/4
|
|
10 |
3
/4
|
|
12 |
13
/16
|
|
10 |
3
/16
|
|
13 |
3
/4
|
Dividends per share of
Wyckoff common
stock(1) |
|
$0.30 |
|
|
$0.30 |
|
|
$
— |
|
|
$
— |
|
|
$0.30 |
|
|
$0.30 |
|
|
$0.30 |
|
|
$0.30 |
|
(1)
|
The
Wyckoff acquisition was accounted for as a pooling of
interests, prior to the pooling of interests, Wyckoff paid
dividends quarterly of $0.30 per share.
|
At
February 29, 2000, there were approximately 789 holders of
record of the Company’s Common Stock.
The market
price of the Common Stock has been and is likely to be highly
volatile. Factors such as the results of research and
development and pilot scale testing by Catalytica and its
collaborative partners, the effectiveness and commercial
viability of products of Catalytica or its competitors, changes
in environmental regulations, announcements of technological
innovations or new products by the Company or its competitors,
fluctuations in the Company’s operating results, including
changes in the rate of growth and profitability of its
Pharmaceuticals business, and changes in recommendations by
financial analysts could have a significant impact on the future
price of the Common Stock. In addition, stock markets have
experienced extreme price volatility in recent years. This
volatility has had a substantial effect on the market prices of
securities issued by many companies for reasons that may be
unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect
the market price of the Common Stock.
During
1999, the Company acquired Wyckoff Chemical Company, Inc.
Although Catalytica has never declared or paid cash dividends on
its capital stock, Wyckoff paid dividends to its common
shareholders at $0.30 per quarter. The Company currently intends
to retain its earnings to finance the operation and expansion of
its business and therefore does not expect to pay any cash
dividends in the foreseeable future.
Item
6. SELECTED CONSOLIDATED FINANCIAL
DATA
The
following table presents selected financial data of Catalytica.
This historical data should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto
in Item 8 and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item
7.
|
|
|
Year
Ended December 31,
|
|
|
|
1999
|
|
1998(2)
|
|
1997(2)
|
|
1996(2)
|
|
1995(2)
|
|
|
|
(In
thousands, except per share amounts) |
| Revenues: |
| Product
sales |
|
$398,098 |
|
$390,175 |
|
$205,776 |
|
|
$38,854 |
|
|
$35,348 |
|
| Research and development |
|
25,600 |
|
16,284 |
|
6,599 |
|
|
6,501 |
|
|
4,766 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
423,698 |
|
406,459 |
|
212,375 |
|
|
45,355 |
|
|
40,114 |
|
| Net
income (loss) before common stock redemption |
|
27,131 |
|
22,817 |
|
3,180 |
|
|
(2,490 |
) |
|
(7,837 |
) |
| Premium
paid on common stock redemption |
|
—
|
|
—
|
|
(3,750 |
) |
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income
(loss) attributable to common shareholders |
|
$
27,131 |
|
$
22,817 |
|
$
(570 |
) |
|
$(2,490 |
) |
|
$(7,837 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic
earnings (loss) per share(1) |
|
$
0.47 |
|
$
0.40 |
|
$
(0.02 |
) |
|
$
(0.11 |
) |
|
$
(0.40 |
) |
| Diluted
earnings (loss) per share(1) |
|
$
0.39 |
|
$
0.34 |
|
$
(0.02 |
) |
|
$
(0.11 |
) |
|
$
(0.40 |
) |
| Cash
dividends paid to Wyckoff shareholders |
|
$
0.60 |
|
$
1.20 |
|
$
1.20 |
|
|
$
1.20 |
|
|
$
1.20 |
|
| Cash,
cash equivalents, and short-term investments |
|
$
40,346 |
|
$
46,462 |
|
$
47,372 |
|
|
$24,787 |
|
|
$21,346 |
|
| Total
assets |
|
428,508 |
|
382,469 |
|
362,445 |
|
|
72,977 |
|
|
59,455 |
|
| Long-term debt |
|
51,000 |
|
73,461 |
|
82,178 |
|
|
10,002 |
|
|
9,373 |
|
| Class A
and B common stock |
|
97,079 |
|
97,079 |
|
97,079 |
|
|
—
|
|
|
—
|
|
| Stockholders’ equity |
|
128,748 |
|
95,944 |
|
71,194 |
|
|
34,016 |
|
|
36,401 |
|
(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 Class B Common Stock with
proceeds received from the exercise of warrants issued to
stockholders as a dividend.
|
(1)
|
Restated for the effects of the pooling of interests of
Wyckoff in 1999. See Note 10 to Catalytica’s Consolidated
Financial Statements.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Exchange Act, which involve risks and uncertainties including
but not limited to those statements containing the words
“believes”, “anticipates”, “estimates
”, “expects”, and words of similar import,
regarding the Company’s strategy, financial performance and
revenue sources. The Company’s actual results could differ
materially from the results anticipated in these forward-looking
statements as a result of certain factors including those set
forth under “Risk Factors” and elsewhere in this
report. The Company undertakes no obligation to update publicly
any forward looking statements to reflect new information,
events or circumstances after the date of this release or to
reflect the incurrence of unanticipated events. See
“Forward Looking Statements May Prove Inaccurate
”.
Overview
Catalytica, Inc. (“Catalytica” or “the
Company”) finds new pathways to improve processes for
chemical change. For the pharmaceutical industry, Catalytica
applies its innovative and patented catalytic technologies and
proprietary chemistries to improve the steps for making a
pharmaceutical molecule and also finds better and more efficient
ways to produce products in commercial scale quantities. For the
power industry, Catalytica’s application of a chemical
catalyst and proprietary technology enables gas turbines to
produce essentially pollution free power.
Catalytica
’s core expertise is in the discovery and effective
application of catalysts—substances that change the rate of
chemical reactions but are themselves unchanged at the end of
the process. Catalysts enable faster reactions, improve the
yield of a process, eliminate steps or make reactions cleaner by
eliminating the use of toxic materials. Catalytica has broadened
its proprietary technology base and has identified key markets
for its products and services. Catalytica operates through three
subsidiaries: Catalytica Pharmaceuticals, Catalytica Combustion
Systems, and Catalytica Advanced Technologies.
On
September 20, 1999, the Company acquired Wyckoff, which
develops, manufactures and markets a broad range of active
pharmaceutical and advanced fine chemical ingredients. At the
completion of the acquisition, Wyckoff became a wholly owned
subsidiary of the Company. Wyckoff sells its products and custom
synthesis services principally to pharmaceutical companies that
sell branded or generic pharmaceutical products.
The
acquisition was accounted for as a pooling of interests. The
consolidated financial statements for the three years ended
December 31, 1997, 1998, and 1999 reflect the Company’s
financial position and the results of operations as if Wyckoff
was a wholly-owned subsidiary of the Company since
inception.
On January
14, 1998, Enron Ventures Corporation, a wholly-owned subsidiary
of Enron Corporation, purchased a 15% minority interest in
Combustion Systems for $30.0 million. Catalytica owns the 85%
balance of the outstanding equity of Combustion Systems. In
addition, Enron also received a three-year option to purchase an
additional 4.9% of Combustion Systems for $14.4 million. Enron
’s investment is reflected as minority
interest.
In March
2000, the Company announced that it intends to conduct an
initial public offering of Combustion Systems to infuse
additional capital into the subsidiary, and to offer better
recognition of value for Combustion Systems and Catalytica
shareholders.
Results of Operations
Catalytica
operates primarily in the pharmaceuticals and combustion systems
industries. Catalytica has determined its operating segments
based upon how the business is managed and operated. Catalytica
Pharmaceuticals and Combustion Systems have their own sales,
research and development, and operations
departments.
|
|
|
For
the year ended December 31,
|
|
Annual % Change
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999/1998
|
|
1998/1997
|
|
|
|
(dollars in thousands) |
| Revenues: |
|
|
| Product
sales |
|
$398,098 |
|
$390,175 |
|
$205,776 |
|
2 |
% |
|
90 |
% |
| Research and development contracts |
|
25,600 |
|
16,284 |
|
6,599 |
|
57 |
% |
|
147 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
$423,698 |
|
$406,459 |
|
$212,375 |
|
4 |
% |
|
91 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: Revenue increased
4% from 1998 to 1999 due to an increase in both product sales
and research revenues. Product sales increased 2% during this
period, despite a two-week closure of the Greenville Facility in
September 1999, as a result of Hurricane Floyd. During 1999,
product sales attributable to Glaxo Wellcome declined in
accordance with scheduled volume reductions under the terms of
the original Glaxo Wellcome Supply Agreement. This decline was
partially offset by new business negotiated with Glaxo Wellcome.
The decline in product sales attributable to Glaxo Wellcome was
also offset by expansion of sales to Warner Lambert and other
new and existing customers.
During
1999, 67% of Catalytica’s revenues were derived from sales
to Glaxo Wellcome, of which 38% were derived from sales to Glaxo
Wellcome under the original Supply Agreement. As part of the
original Supply Agreement and related amendments to the original
Supply Agreement, Glaxo Wellcome has guaranteed that revenues
paid to Catalytica will meet a specified minimum level of
revenue in each year of the agreement. Product shipments to
Glaxo Wellcome have exceeded the levels associated with the
aggregate annual minimum payments provided for in the original
Supply Agreement and related amendments. Therefore, Glaxo
Wellcome has made no shortfall payments to
Catalytica.
The
significant increase in revenue of 91% 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 Greenville Facility from Glaxo Wellcome. This
purchase, including the related Supply Agreement and subsequent
amendments, enabled Catalytica to substantially increase its
product revenues beginning in August 1997. During 1998, 79% of
revenues were derived from sales to Glaxo Wellcome, of which 72%
were derived from sales to Glaxo Wellcome under the original
Supply Agreement. During the same period in 1997, 74% of
Catalytica’s revenues were derived from sales to Glaxo
Wellcome, all of which were derived from sales to Glaxo Wellcome
under the original Supply Agreement.
Research and development revenue:
Research and development (“R&D”) contract
revenue increased 57% from 1998 to 1999, due to an increase in
new R&D contracts with customers by Catalytica
Pharmaceuticals. This increase in Catalytica Pharmaceuticals
’ R&D revenue was partially offset by a decrease in
external research funding received by Combustion Systems during
1999. The increase in R&D revenue was also partially offset
by a decrease in Advanced Technologies’ R&D revenue as
it decreased its emphasis on contract research and focused its
efforts on development of new technologies through joint
ventures. Catalytica’s R&D revenues are expected to
increase further in 2000, as Catalytica continues to expand its R
&D efforts and signs additional contracts with new and
existing customers, especially in the pharmaceutical
business.
To more
clearly reflect its R&D activities, Catalytica reclassified
from product sales to research revenues approximately $8.6
million for the year ended December 31, 1998. After this
reclassification, R&D contract revenue increased 147% from
1997 to 1998, which largely 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 Advanced Technologies and Combustion
Systems.
|
|
|
For
the year ended December 31,
|
|
Annual % Change
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999/1998
|
|
1998/1997
|
|
|
|
(dollars in thousands) |
| Costs and Expenses: |
|
|
| Costs
of goods sold |
|
$312,533 |
|
$316,820 |
|
$176,546 |
|
(1 |
)% |
|
79 |
% |
| Research and development |
|
42,573 |
|
32,366 |
|
11,007 |
|
32 |
% |
|
194 |
% |
| Selling, general and administrative |
|
28,602 |
|
21,029 |
|
11,306 |
|
36 |
% |
|
86 |
% |
| Interest expense |
|
8,363 |
|
9,569 |
|
6,006 |
|
(13 |
)% |
|
59 |
% |
| Loss on
joint ventures |
|
1,132 |
|
3,827 |
|
4,355 |
|
(70 |
)% |
|
(12 |
)% |
| Provision for income taxes |
|
6,445 |
|
2,925 |
|
1,425 |
|
120 |
% |
|
105 |
% |
Cost of
goods sold: Cost of sales
decreased 1% from 1998 to 1999, which corresponds to a 2%
increase in product sales. This improvement in the gross margin
due to improved manufacturing efficiencies in the first two
quarters of 1999, was largely offset by the impact of Hurricane
Floyd in the third quarter of 1999. Cost of goods sold was
unfavorably impacted by $4.75 million during the third quarter
of 1999. This reflects fixed operational costs that could not be
offset by production of products during the temporary closure of
Catalytica’s Greenville Facility as a result of the
hurricane. The Company believes some of the damages and
interruption caused by the hurricane are covered by insurance.
Discussions with the insurance carriers are in process and any
loss recovery will be recorded in the period it is agreed to by
the insurance carriers. However, due to increased manufacturing
production and continued manufacturing efficiencies in the
fourth quarter of 1999, overall 1999 gross margin as compared to
1998 showed a slight improvement. 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 achieved on production
runs, the length of down-time associated with setting up new
production runs, and numerous other factors present in the
pharmaceutical manufacturing environment.
The 79%
increase in cost of sales in 1998 reflects a full year of
product sales attributable to operating 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 compared with 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 are
reimbursed by Glaxo Wellcome. Therefore, any change in material
mix can significantly impact gross margins.
Research and development:
Research and development expenses increased 32% from
1998 to 1999. This increase in R&D expenses corresponds to
an increase in R&D income attributable to increased staffing
and associated 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
customers for its R&D services. The increase in R&D
expenditures was also impacted by a shift in R&D spending
from the GENXON joint venture back to Combustion Systems.
Beginning in the second half of 1996 through the end of the
second quarter of 1999, a significant portion of Combustion
Systems’ research activity was financed through and
allocated to the GENXON joint venture. Once the prototype
development of the Kawasaki KHI development program in June 1999
was completed, Catalytica assumed primary funding of additional
system testing. In addition, $1.2 million of costs incurred to
accelerate the development of Xonon technology also contributed
to the increase in R&D expense. Lastly, the increase in R
&D expenses was partially offset by lower R&D expenses
in Advanced Technologies due to a shift in emphasis from
contract research to development of new technologies through
joint ventures. Catalytica’s overall R&D expenses are
expected to continue to grow in the future.
Approximately 16% of Catalytica’s R&D expenses for
1999, were utilized to develop Catalytica’s combustion
systems technology, while 78% was spent on Catalytica’s
pharmaceuticals technologies, and 6% was spent on other
technologies. The comparable division of R&D expenditures
among Catalytica’s businesses for 1998 was 15% for
combustion systems technology, 72% for pharmaceuticals
technologies, and 13% for various other
technologies.
To more
clearly reflect its R&D activities in the pharmaceutical
business, 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 194% in 1998 over 1997,
largely because of R&D activities associated with a full
year of Pharmaceutical operations. To a lesser degree, some
increase in R&D activity was associated with Combustion
Systems.
Of
Catalytica’s R&D expenses for 1997, 19% were utilized
to develop Catalytica’s combustion systems technology, 47%
was spent on Catalytica’s pharmaceuticals technologies, and
34% was spent on various other technologies, most of which were
performed at the specific request of, and funded by, third
parties.
Selling, general and administrative:
Selling, general and administrative expenses
increased 36% from 1998 to 1999, because of $1.5 million of
acquisition costs associated with the Wyckoff merger, as well as
expenditures for sales and marketing personnel for the
Greenville Facility. Selling, general and administrative
expenses for Combustion Systems also increased as it continued
to focus on market commercialization of the Xonon technology.
Selling, general and administrative expenses are expected to
level out somewhat in the future as the sales and marketing
staff at the Greenville Facility has reached the desired
level.
Selling,
general and administrative expenses increased 86% for the year
ended 1998 compared with 1997 largely due to selling, general
and administrative costs incurred by a full year of operations
at the Greenville Facility. In addition, selling, general and
administrative expenses have increased as Catalytica has
expanded its sales and marketing personnel to obtain new
customers for production of its products at the Greenville
Facility and to develop the market for its combustion systems
products. Selling, general and administrative expenses also
increased during 1998 due to management incentive accruals
related to Catalytica’s performance.
|
|
|
For
the year ended
December 31,
|
|
Annual % Change
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999/1998
|
|
1998/1997
|
|
|
|
(dollars in thousands) |
|
|
| Interest Income |
|
$3,081 |
|
$2,894 |
|
$1,450 |
|
6 |
% |
|
100 |
% |
Interest income: Interest
income increased 6% from 1998 to 1999 primarily due to
moderately higher market interest rates in 1999. The reduction
in cash and short term investments at December 31, 1999, when
compared with December 31, 1998, is largely attributable to
$13.7 million of payments to reduce debt outstanding under the
Chase credit agreement throughout 1999 and re-payment of $16.1
million of borrowings by Wyckoff in November 1999. Interest
income is expected to be moderately lower in 2000, reflecting
lower average cash balances related to Combustion Systems, as it
continues to invest its funds in research and development
activities.
Interest
income increased 100% from 1997 to 1998 due to increased cash
balances related to the Enron cash investment in 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.
Interest expense: Interest
expense decreased 13% from 1998 to 1999, which was attributable
to a reduction of approximately $25.0 million of debt during
1999. Catalytica made payments to reduce borrowings outstanding
under the Chase Credit Facility of $13.7 million, which was
partially offset by approximately $5 million of additional
borrowing by Wyckoff during the first three quarters of 1999. On
November 1, 1999, Catalytica repaid all of Wyckoff’s
current and long-term debt of $16.1 million. As a result of
Catalytica’s decrease in current and long-term debt in
1999, interest expense is expected to continue to decrease
somewhat during 2000.
Net
interest expense increased 59% for the year ended 1998 versus
1997 due to a full year of interest payments on debt associated
with the July 31, 1997, acquisition of the Greenville Facility,
as well as some increased borrowing by Wyckoff during 1998. In
the second quarter of 1998, the Credit Agreement was amended to
increase the revolving facility from $75 million to $100
million. In addition, the term facility was reduced from its
original balance of $125 million to $75 million.
Loss on
joint ventures: Combustion
Systems formed a joint venture with Woodward Governor to exploit
the market for improving emissions performance of out of
warranty turbines. Combustion Systems recognized its 50%
share of GENXON losses of $ 1.1 million in 1999, $3.8 million in
1998 and $4.4 million in 1997. Losses on the joint venture are
recognized in the results of operations. As Combustion Systems
shifts its attention from the retrofit market to the new turbine
market, its investment in the GENXON joint venture declined
significantly during 1999. The reduction in GENXON losses during
1999 also reflects a shift from development activities related
to the retrofit of Xonon to less costly activities related to
durability testing of Xonon. It is also partially due to an
increase in research revenue related to a California Energy
Commission grant. In the third quarter of 1999, GENXON completed
its prototype development of the Kawasaki combustor unit, and
funding of the durability testing was shifted to Combustion
Systems. The reduced level of Catalytica’s investment in
GENXON is expected to continue throughout 2000. Although
Catalytica expects to make further reduced capital contributions
during 2000 which will result in the allocation of additional
losses to Catalytica, neither joint venture partner is
contractually required to make further capital infusions.
Catalytica anticipates GENXON will continue to generate losses
during 2000, and accordingly, Catalytica will record its share
of these losses to the extent of its capital
contribution.
Income
Taxes: The Company recorded a
provision for income taxes of $6.4 million in 1999 at an
effective tax rate of 19%. The 1999 effective tax rate differed
from the federal statutory tax rate primarily due to the
utilization of tax net operating loss carryforwards and the
elimination of the valuation allowance for deferred tax assets.
The Company recorded a provision for income taxes of $2.9
million in 1998 and $1.4 million in 1997 at effective tax rates
of 11% and 31%, respectively. The 1998 and 1997 effective tax
rates differed from the federal statutory tax rate primarily due
to the utilization of tax net operating loss carryforwards and
state income tax expense. The Company’s effective tax rate
is expected to approximate the federal statutory tax rate in
2000.
Recently Issued Accounting Standards
In June
1998, the FASB issued Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” or SFAS No. 133. SFAS No. 133
establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value. SFAS
No. 133, as recently amended, is effective for the fiscal year
ending December 31, 2001. Catalytica does not believe that
adopting SFAS No. 133 will have a material effect on the
financial position or results of operations.
Year
2000 Computer Systems Compliance
Many
computer systems, software, and electronic products require
valid dates to work acceptably but are coded to accept only
two-digit entries in the date code field. These systems needed
to be changed to distinguish 21st century dates from 20th
century dates. As a result, some computer systems, software, and
other equipment, such as telephones, office equipment and
manufacturing equipment needed to be upgraded, repaired or
replaced. To date we have not experienced any material problems
with the year 2000 in our products or internal
systems.
As of
December 31, 1999, Catalytica had spent $7.3 million on costs
associated with the Year 2000 effort, of which $4.0 million has
been reimbursed by Glaxo Wellcome. On going costs, if any, are
not expected to have a material effect on future results of
operations or financial condition.
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”. See “Forward Looking Statements May Prove
Inaccurate”.
Catalytica
expects continued profitability in 2000. The extent of
profitability will depend on the operating results of Catalytica
Pharmaceuticals, including the ability to control operating
expenses and the level of revenues obtained from existing and
new business. Beyond 2000, profitability will largely be
dependent upon Catalytica’s ability to continue to obtain
new supply agreements from new and/or existing customers to
maintain volumes commensurate with the fixed costs of its
manufacturing facilities. (See Note 2 of Notes to Consolidated
Financial Statements.) To a lesser degree, profitability may
also be dependent upon successfully developing Catalytica’s
catalytic combustion processes.
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, a third amendment signed in the first
quarter of 1999, and a fourth amendment signed in the fourth
quarter of 1999, will result in step-downs in the level of
anticipated business beginning in 2001. 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 2000. Revenues from non-Glaxo
customers are expected to increase in 2000. However, although
depending on the timing and amount of new business, in 2000 the
Company may not be able to continue its revenue growth when
compared to 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 original acquisition of the
Greenville Facility and the recent acquisition of Wyckoff.
Profitability after 2000 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 packaging
and sterile production facilities in Greenville. Because of the
long lead times required to establish necessary regulatory
approvals to manufacture at these facilities, Catalytica
Pharmaceuticals anticipates some time may pass before revenues
from new business in these facilities develop. Catalytica
Pharmaceuticals’ inability to fill the available capacity
or to reduce costs to levels 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 and new contracts have provided for
approximately $116.0 million in additional revenue through
December 31, 1999, and may provide for approximately $103.0
million in revenue in 2000. A majority of this additional
revenue has been guaranteed by Glaxo Wellcome. However, a
portion 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
and that Glaxo Wellcome will pay to Catalytica Pharmaceuticals
any difference between the specified minimum level and the
amount due for shipment of products anticipated under the
original Supply Agreement. To date, product shipments to Glaxo
Wellcome have exceeded the levels associated with the aggregate
annual minimum payments provided for in the original Supply
Agreement and related amendments. Therefore, Glaxo Wellcome has
made no shortfall payments to Catalytica. The minimum guaranteed
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.
|
|
|
August 1 –
December 31,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
Total
|
| Minimum guaranteed revenues: |
|
|
| Supply
agreement and amendments |
|
$
77.0 |
|
$173.4 |
|
$120.6 |
|
$
99.2 |
|
$
22.6 |
|
$492.8 |
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 business to offset the impact of
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.
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 or customers. Catalytica, through
Combustion Systems, 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 primarily when funded by collaborative partners or
customers.
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 and timing of receipt of orders for and shipments of
its pharmaceutical products, and to a lesser extent the amount
and timing of payments and expenses under Catalytica’s R
&D contracts. Continued profitable operations, during and
after 2000, will depend on Catalytica’s continued success
and timing in obtaining new customers, including possible new
agreements with Glaxo Wellcome and other new and/or existing
customers. 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
|
|
|
For
the year ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(dollars in thousands) |
| Cash,
cash equivalents, short term investments |
|
$
40,346 |
|
|
$
46,462 |
|
| Working
capital |
|
118,497 |
|
|
116,269 |
|
| Cash
provided by (used in) |
|
Operating activities |
|
61,762 |
|
|
52,993 |
|
|
Investing activities |
|
(47,198 |
) |
|
(33,014 |
) |
|
Financing activities |
|
(20,957 |
) |
|
(14,164 |
) |
| |
|
|
|
|
|
|
| Net
increase in cash and cash equivalents |
|
(6,393 |
) |
|
5,815 |
|
| Current
Ratio |
|
2.37 |
|
|
2.65 |
|
Total
cash, cash equivalents and short-term investments decreased in
1999 as compared to 1998. Although Catalytica continues to
generate cash through normal operating activities, it continues
to invest in property and equipment and made $13.7 million of
payments to reduce outstanding borrowings under the Chase credit
agreement and repaid all of Wyckoff’s current and long-term
debt of $16.1 million during 1999. Catalytica expects to invest
approximately $50.0 million in 2000 for capital expenditures,
primarily at Catalytica Pharmaceuticals. Because of its cash and
short term investments of $40.3 million, its available line of
credit of $100.0 million as of December 31, 1999, and the
anticipated cash flow from operations in 2000, Catalytica
believes that it has adequate funds to meet its working capital
needs and debt repayment obligations for the near and longer
term.
Catalytica
also has debt facilities with a group of commercial banks. The
debt facilities consist of a senior secured term loan facility
(the “term facility”) in an aggregate principal amount
of $75 million and a senior secured revolving facility (the
“revolving facility”) in an aggregate principal amount
of $100 million. The term facility will mature on December 31,
2002, and amortizes in quarterly installments commencing on
December 31, 1999, in aggregate annual amounts of (i) $10
million in the fourth quarter of 1999, (ii) $15 million in the
year 2000, (iii) $20 million in the year 2001, and (iv) $30
million in the year 2002. The revolving facility matures on
December 31, 2002. In June 1999 Catalytica made an early payment
of $10 million on the first installment of the term facility due
in the fourth quarter of 1999. In addition, Catalytica made an
early payment of $3.75 million in September 1999 on the
quarterly installment of the term facility due in the first
quarter of 2000. As of December 31, 1999, nothing was
outstanding under the revolving facility and $61.25 million was
outstanding under the term facility. As of December 31, 1999,
Catalytica was in compliance with various covenants and other
restrictions contained in its agreement and believes that it
will remain in compliance.
In the
second quarter of 1998, Catalytica entered into a $50 million
interest rate swap, 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 5.90% for 4
years on $50 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 such financial
instruments for purposes other than risk management.
Risk
Factors
|
Our
quarterly operating results may fluctuate and we may be unable
to maintain profitability
|
Catalytica
’s operating results have fluctuated significantly in the
past and we expect that results will continue to vary from
quarter to quarter. In particular, our quarterly results may
fluctuate and our profitability may suffer 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
|
|
·
|
operating efficiencies in manufacturing
operations
|
|
·
|
seasonality in demand for our products
|
|
·
|
general
business conditions in our markets, particularly in the
pharmaceutical sector
|
|
·
|
major
events such as Hurricane Floyd, which required closure of the
Greenville Facility for two weeks
|
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. During 1999, Glaxo Wellcome
accounted for approximately 67% of Catalytica’s total
revenues, of which 38% related to business under the original
Supply Agreement and 29% related to new business Catalytica has
negotiated with Glaxo Wellcome since its acquisition of the
Greenville Facility. During 1998, 79% of revenues were derived
from sales to Glaxo Wellcome, of which 72% were derived from
sales to Glaxo Wellcome under the original Supply Agreement.
Catalytica’s top five customers collectively accounted for
approximately 82% of its revenues for the twelve months ended
December 31, 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.
|
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 they 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 their 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.
|
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 as well as international regulatory requirements.
Additionally, some of our customers
require us to adhere to certain additional manufacturing standards
specific to their companies. Compliance with cGMP regulations as
well as other company-specific specifications requires us to
expend time, money and effort to maintain precise records and
quality assurance. Failure to maintain satisfactory cGMP
compliance could have a significant adverse effect on our
ability to continue to manufacture and sell our products and, in
the most serious cases, could result in the seizure or recall of
products, injunction and/or civil fines, and such action could
be taken with little or no notice.
Our
facilities are subject to routine inspection by the FDA and
other international regulatory authorities for compliance with
cGMP requirements and other applicable regulations. As such, the
Greenville Facility has had a total of four regulatory
inspections in 1999. Three of the inspections resulted in a
satisfactory assessment by the regulatory agency. One of the
inspections, of our chemical manufacturing facility, which took
place during the week of June 28, 1999, resulted in the issuance
by the FDA of an FDA Form 483 followed by a letter, which
detailed specific areas where the FDA inspectors observed that
we were not in full compliance with certain regulatory
requirements. Corrective actions addressing all identified
observations were initiated immediately, and a re-inspection
conducted by the FDA within one month of the Company’s
receipt of the letter resulted in concurrence by the FDA that
all issues had been addressed to their satisfaction.
|
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.
For
example, in 1999, Catalytica’s Greenville Facility
experienced a chemical release as a result of a broken pipeline.
Shortly thereafter, Catalytica, the North Carolina Occupational
Health and Safety Agency and the North Carolina Air Quality
Division investigated this incident. The investigation was
resolved in February 2000. See Item 3. Legal
Proceedings.
|
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.
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, Rhône Poulenc, Inc. Although
Catalytica has contractual rights of indemnity from Rhône
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 Rhône 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. We are legally liable under federal and state law for
the remediation of these areas of contamination. In addition,
risks of 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 our 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 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 Facility are not fully
utilized. To utilize its manufacturing resources fully,
Catalytica must continue to 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 continue to 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, intermediates, and pharmaceutical products in
finished dosage form. The clinical 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.
|
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
December 31, 1999, Morgan Stanley Dean Witter Capital Partners
and its affiliates held approximately 29% of Catalytica’s
voting stock and 43% 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.
|
Integrating two companies is a difficult task and
the expected benefits of the Wyckoff acquisition may not
occur
|
On
September 20, 1999, Catalytica, pursuant to the Agreement and
Plan of Reorganization dated July 14, 1999, completed the
acquisition of Wyckoff. At the completion of the acquisition,
Wyckoff became a wholly owned subsidiary of Catalytica. This
acquisition 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 has been and will continue to
be a complex, time consuming and expensive process, which has
resulted in disruptions to the operations of the business and
may result in further such disruptions. Before the acquisition,
Catalytica and Wyckoff operated independently, each with its own
business, business culture, customers, employees and systems.
Following the acquisition, the combined company must use common
information communication systems, operating procedures,
financial controls and human resource practices, including
benefit, training and professional development programs. We may
experience difficulties, costs and delays involved in
integrating Catalytica and Wyckoff, as a result of many factors,
including:
|
·
|
distractions to management from the business of the
combined company
|
|
·
|
incompatibility of business cultures
|
|
·
|
perceived and potential adverse change in customer
service standards, business focus or service offerings
available to customers
|
|
·
|
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 our
business.
|
We
depend on retaining and integrating key personnel after the
Acquisition of Wyckoff
|
Wyckoff
’s contribution to the combined company’s success
depends upon the continued service of Wyckoff’s key
management and technical personnel. In November of 1999,
Catalytica signed a new employment agreement with James B.
Friederichsen, the former president and chief operating officer
of Wyckoff and current executive vice president of Chemical
Manufacturing Operations at Catalytica Pharmaceuticals. This
agreement does not require that Mr. Friederichsen continue his
employment with Catalytica or 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 acquisition. 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 continue to retain Wyckoff’s key
personnel after the acquisition. The loss of services of any of
the key members of Wyckoff’s management team could harm our
business.
|
If
the Acquisition of Wyckoff does not qualify as a pooling of
interests, Catalytica’s reported earnings could be lower
in future periods
|
Catalytica
expects the acquisition of Wyckoff to be accounted for as a
pooling of interest transaction. To qualify the acquisition 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 acquisition depends, in part, upon circumstances and events
occurring after completion of the acquisition. 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 acquisition. The failure
of the acquisition to qualify for pooling of interests
accounting treatment for any reason could materially reduce
Catalytica’s future reported earnings.
|
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 change. We have numerous
competitors in the United States, Europe and Asia, many of whom
have greater research and development capabilities, financial
resources, managerial resources, marketing experience and
manufacturing experience. Our primary competition comes from
pharmaceutical companies that manufacture their own products and
from other chemical manufacturers such as Lonza AG, Bayer,
Chirex, Cambrex, Great Lakes, Dow and DSM Fine Chemicals. 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.
A small
portion of our business experiences substantial competition in
connection with the manufacture and sale of pharmaceutical
products for which patent protection has expired (
“off-patent” 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. If we are unable to develop manufacturing
processes soon after products are off-patent, or if other
manufacturers develop alternative manufacturing processes, we
would be required to compete with multiple manufacturers and
would experience additional pricing pressures in its sale of
products to the generic market.
In the
combustion systems market, our 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 our competitors in the
combustion systems market are also potential customers. We
depend on our customers to help commercialize our products, and
would suffer loss of sales and revenues if these customers
withdraw their support or decide to pursue alternate
technologies. Our ability to gain market share may be limited
because many of our 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. We have approximately 40 patents and at least 21
pending patent applications in the United States and
approximately 145 patents and patent applications abroad. 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.
|
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.
|
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
|
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 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, 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
Combustion Systems, then Catalytica may not be able to complete
the development and introduction of the Xonon system for that
part of the market.
|
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
|
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.
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. In February 1999, Catalytica received a letter
from the City of Glendale alleging contractual damages and
requesting monetary restitution in order to settle this matter.
The parties are currently discussing alternatives to resolve the
contractual issues related to the project, however, this matter
may result in litigation. While it is not possible to predict
with certainty the outcome of this matter, and while the Company
does not believe an adverse result would have a material effect
on the Company’s consolidated financial position, it could
be material to the results of operations for a fiscal
year.
|
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.
|
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.
Forward-looking Statements May Prove
Inaccurate
The
statements contained in this annual report that are not
historical facts are “forward-looking statements”
within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements
involve risks and uncertainties and can be identified by the use
of forward-looking terminology such as “estimates,”
“projects,” “anticipates,” “plans,
” “future,” “may,” “will,”
“should,” “predicts,” “potential,”
“continue,” “expects,” “intends,”
“believes” and similar expressions. Examples of these
forward-looking statements include:
|
·
|
our
expectations regarding the amounts of future sales revenues
from Glaxo Wellcome and other pharmaceutical
customers
|
|
·
|
our
estimates of future operating results and our ability to
remain profitable
|
|
·
|
statements regarding the development of our business
and products, including our ability to develop new
pharmaceutical business and commercialize our XONON
product
|
|
·
|
our
ability to develop technologies for efficient manufacturing
processes and solve environmental problems
|
|
·
|
our
expectations regarding our R&D efforts, including our
expectations regarding future R&D reserves
|
|
·
|
opportunities for the use and commercialization of our
technologies
|
|
·
|
the
amounts of any future expenditures which may be necessary to
comply with environmental, health and safety regulations and
to remediate environmental contamination
|
|
·
|
our
expectations regarding our future investment in
GENXON
|
|
·
|
Year
2000 compliance, including expected costs and timing of
ongoing Year 2000 compliance efforts and expectations
regarding the potential effects of non-compliance
|
|
·
|
our
ability to account for our acquisition of Wyckoff Chemical
Company as a pooling of interests
|
|
·
|
our
anticipated capital expenditures and future financial
condition
|
|
·
|
other
statements contained in this annual report regarding matters
that are not historical facts
|
These and
other forward-looking statements in this annual report are only
estimates or predictions. While we believe that the expectations
reflected in the forward-looking statements are reasonable, we
can give you no assurance that future results will be achieved.
Forward-looking statements are subject to known and unknown
risks, uncertainties and other factors that may cause our actual
operating results, levels of activity, financial performance,
achievements and prospects to be materially different from those
expressed or implied by the forward-looking statements. These
risks, uncertainties and other factors include, among others,
those identified in the “Risk Factors” section and
elsewhere in this annual report. We disclaim any obligation to
update information contained in any forward-looking
statement.
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
Company is exposed to financial market risks, including changes
in interest rates. In the second quarter of 1998, following the
restructuring of the Chase credit agreement, Catalytica entered
into a $50.0 million interest rate swap, 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. 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. 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 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.
With the
interest rate swap, 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, 1999, the receive rate on the swap hedging debt was
5.3%. 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. Given the above agreement, approximately
22% of Catalytica’s outstanding debt is variable. A
hypothetical increase of 100 basis points in interest rates
would not result in a material exposure to the
Company.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The Company
’s Consolidated Financial Statements and Schedules, the
report of the independent auditors, and the section entitled
“Quarterly Financial Data (Unaudited)” appear on pages
62 through 97 of this Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART
III
Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
Executive Officers and Directors
Certain
information with respect to persons who are executive officers
of the Registrant is set forth under the caption “Executive
Officers” in Part I of this report. The section entitled
“Election of Directors” appearing in the Registrant
’s proxy statement for the annual meeting of stockholders
sets forth certain information with respect to the directors of
the Registrant and is incorporated herein by
reference.
Item
11. EXECUTIVE
COMPENSATION
The
section entitled “Executive Compensation” appearing in
the Registrant’s proxy statement for the annual meeting of
stockholders sets forth certain information with respect to the
compensation of management of the Registrant and is incorporated
herein by reference.
Item
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
section entitled “Election of Directors” appearing in
the Registrant’s Proxy Statement for the annual meeting of
stockholders sets forth certain information with respect to the
ownership of the Registrant’s Common Stock and is
incorporated herein by reference.
Item
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The
section entitled “Transactions with Management”
appearing in the Registrant’s Proxy Statement for the
annual meeting of stockholders sets forth certain information
with respect to certain business relationships and transactions
between the Registrant and its directors and officers and is
incorporated herein by reference.
Item
14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES & REPORTS ON FORM 8-K
A. (1) Financial
Statements:
PART
IV
Item
14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES & REPORTS ON FORM 8-K
A. (1) Financial
Statements:
The
following financial statements of the Registrant are filed as
part of this Report
|
|
|
Page
|
| Report
of Ernst & Young LLP, Independent Auditors |
|
62 |
Consolidated Statements of Operations for the three
years ended December 31, 1999, 1998,
and 1997 |
|
63 |
| Consolidated Balance Sheets at December 31, 1999, and
December 31, 1998 |
|
64 |
Consolidated Statements of Cash Flows for the three
years ended December 31, 1999, 1998,
and 1997 |
|
66 |
Consolidated Statement of Stockholders’ Equity for
the three years ended December 31, 1999,
1998, and 1997 |
|
68 |
| Notes
to Consolidated Financial Statements |
|
69 |
| Quarterly Financial Data (Unaudited) |
|
97 |
|
|
| (2)
Financial Statement Schedules: |
|
|
| Valuation and Qualifying Accounts |
|
98 |
(3)
Exhibits
Exhibit
No.
|
|
Notes
|
|
Description
|
| 2.1 |
|
(13 |
) |
|
Agreement and Plan of Reorganization by and among the
Registrant, Pilot Acquisition
Corporation and Wyckoff Chemical Company, Inc., dated as of July
14, 1999. |
|
|
| 2.2 |
|
(13 |
) |
|
Form
Voting Agreement between the Registrant and certain
shareholders of Wyckoff |
|
|
| 2.3 |
|
(13 |
) |
|
Escrow
and Indemnification Agreement between the Registrant, Wyckoff
and certain
other signatories |
|
|
| 2.4 |
|
(13 |
) |
|
Special
Purpose Escrow and Indemnification Agreement between the
Registrant, Wyckoff
and certain signatories |
|
|
| 3.1 |
|
(6 |
) |
|
Corrected Fourth Amended and Restated Certificate of
Incorporation. |
|
|
| 3.2 |
|
(1 |
) |
|
Bylaws
of Registrant. |
|
|
| 4.1 |
|
(1 |
) |
|
Agreement of Shareholders Amending Registration Rights
and Right of First Refusal. |
|
|
| 4.2 |
|
(1 |
) |
|
Amended
and Restated Registration Rights Agreement dated September 27,
1988. |
|
|
| 4.3 |
|
(1 |
) |
|
Amendment No. 1 to Amended and Restated Registration
Rights Agreement. |
|
|
| 4.4 |
|
(1 |
) |
|
Form of
Amended and Restated Rights Agreement. |
|
|
| 4.5 |
|
(1 |
) |
|
Specimen of Common Stock Certificate. |
|
|
| 4.6 |
|
(4 |
) |
|
Preferred Shares Rights Agreement dated as of October
23, 1996, between Catalytica, Inc.
and Chase Mellon Shareholder Services, L.L.P., including the
form of Rights Certificate,
the Certificate of Designation and the Summary of Rights
attached thereto as Exhibits A,
B and C, respectively. |
|
|
| 4.7 |
|
(5 |
) |
|
Amendment No. 1, dated as of June 28, 1997, to
Preferred Shares Rights Agreement between
Catalytica, Inc. and Chase Mellon Shareholder Services,
L.L.C. |
|
|
| 4.8 |
|
(6 |
) |
|
Stock
Purchase Warrant for 2,000,000 Shares of the Company’s
Common Stock dated
July 31, 1997. |
Exhibit
No.
|
|
Notes
|
|
Description
|
| 10.1 |
|
(1 |
) |
|
1983
Incentive Stock Option Plan, as amended, with forms of
agreements thereunder. |
|
|
| 10.2 |
|
(11 |
) |
|
1992
Stock Option Plan, as amended. |
|
|
| 10.3 |
|
(11 |
) |
|
1992
Employee Stock Purchase Plan, as amended. |
|
|
| 10.4 |
|
(1 |
)** |
|
Agreement, dated as of July 18, 1988, between the
Company and Tanaka Kikinzoku
Kogyo K.K. |
|
|
| 10.5 |
|
(1 |
) |
|
Form of
Indemnification Agreement. |
|
|
| 10.6 |
|
(2 |
)** |
|
Ground
Lease Agreement, dated November 30, 1993, between the Company
and
Rhône-Poulenc Inc. |
|
|
| 10.7 |
|
(2 |
) |
|
Lease
Agreement, dated January 1, 1993, between the Company and Jack
Dymond
Associates. |
|
|
| 10.8 |
|
(2 |
)** |
|
Agreement, dated January 31, 1995, between the Company
and Tanaka Kikinzoku
Kogyo K.K. |
|
|
| 10.9 |
|
(10 |
) |
|
Catalytica Pharmaceuticals, Inc. 1995 Stock Plan, with
forms of agreements thereunder. |
|
|
| 10.10 |
|
(3 |
) |
|
Catalytica Advanced Technologies, Inc. 1995 Stock Plan,
with forms of agreements
thereunder. |
|
|
| 10.11 |
|
(10 |
) |
|
Catalytica Combustion Systems, Inc. 1995 Stock Plan,
with forms of agreements thereunder. |
|
|
| 10.12 |
|
(3 |
) |
|
Catalytica, Inc. 1995 Director Stock Option Plan, with
forms of agreements thereunder. |
|
|
| 10.13 |
|
(8 |
) |
|
Limited
Liability Operating Agreement of GENXON Power Systems, LLC,
dated
October 21, 1996. |
|
|
| 10.14 |
|
(12 |
) |
|
Amendment No. 1, dated December 4, 1997, to the
Operating Agreement of GENXON
Power Systems, L.L.C. |
|
|
| 10.15 |
|
(6 |
)** |
|
Asset
Purchase Agreement among Glaxo Wellcome Inc. and Catalytica
Pharmaceuticals, Inc.
and Catalytica, Inc., dated June 25, 1997. |
|
|
| 10.16 |
|
(7 |
)** |
|
Supply
Agreement between Glaxo Wellcome Inc. and Catalytica
Pharmaceuticals, Inc., dated
July 31, 1997. |
|
|
| 10.17 |
|
(6 |
) |
|
Investment Agreement dated as of June 25, 1997, among
Morgan Stanley Capital
Partners III, L.P., Morgan Stanley Capital Investors, L.P., MSCP
III 892 Investors, L.P.
and Catalytica, Inc. |
|
|
| 10.18 |
|
(6 |
) |
|
$200,000,000 Credit Agreement dated July 31, 1997, by
and among Catalytica, Inc.,
Catalytica Pharmaceuticals, Inc. and The Chase Manhattan
Bank. |
|
|
| 10.19 |
|
(12 |
) |
|
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. |
|
|
| 10.20 |
|
(6 |
) |
|
Pledge
Agreement |
|
|
| 10.21 |
|
(6 |
) |
|
Security Agreement |
|
|
| 10.22 |
|
(9 |
)* |
|
Amendment No. 1 to Supply Agreement between Glaxo
Wellcome, Inc. and Catalytica
Pharmaceuticals, Inc. dated May 28, 1998. |
|
|
| 10.23 |
|
(9 |
) |
|
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. |
|
|
| 10.24 |
|
(14 |
) |
|
Form of
Change of Control Agreement entered into between the Company
and certain of its
executive officers. |
|
|
| 21.1 |
|
(1 |
) |
|
Subsidiaries of Registrant |
Exhibit
No.
|
|
Notes
|
|
Description
|
| 23.1 |
|
|
|
Consent
of Ernst & Young LLP, Independent Auditors |
|
|
| 24.1 |
|
|
|
Power
of Attorney (See page 100) |
|
|
| 27.1 |
|
|
|
Financial Data Schedule |
|
(1)
|
Incorporated by reference to the exhibits filed with
the Company’s Registration Statement on Form S-1
(Registration Statement No. 33-55696).
|
|
(2)
|
Incorporated by reference to the exhibits filed with
the Company’s Form 10-K for the fiscal year ended
December 31, 1994.
|
|
(3)
|
Incorporated by reference to the exhibits filed with
the Company’s Annual Report on Form 10-K for the year
ended December 31, 1995.
|
|
(4)
|
Incorporated by reference to the exhibits filed with
the Company’s Registration Statement on Form 8-A as filed
with the Commission on November 29, 1996.
|
|
(5)
|
Incorporated by reference to the exhibits filed with
the Company’s Registration Statement on Form 8-A/A as
filed with the Commission on July 29, 1997.
|
|
(6)
|
Incorporated by reference to the exhibits filed with
the Company’s Form 10-Q for the quarter ended June 30,
1997.
|
|
(7)
|
Incorporated by reference to exhibits filed with the
Company’s Form 10-Q/A for the quarter ended June 30,
1997.
|
|
(8)
|
Incorporated by reference to the exhibits filed with
the Company’s Form 10-K for the year ended December 31,
1996.
|
|
(9)
|
Incorporated by reference to exhibits filed with the
Company’s Form 10-Q for the quarter ended June 30,
1998.
|
| (10)
|
Incorporated by reference to exhibits filed with the
Company’s Form 10-Q for the quarter ended September 30,
1998.
|
| (11)
|
Incorporated by reference to exhibits filed with the
Company’s Registration Statement on Form S-8 (file No.
333-57809) as filed with the commission on June 26,
1998.
|
| (12)
|
Incorporated by reference to exhibits filed with the
Company’s Form 10-K for the year ended December 31,
1997.
|
| (13)
|
Incorporated by reference to the exhibits filed with
the Company’s Registration Statement on Form S-4/A
(Registration Statement No. 333-84615).
|
| (14)
|
Incorporated by reference to exhibits filed with the
Company’s Form 10-K for the year ended December 31,
1998.
|
|
**
|
Confidential treatment has been granted for portions of
these agreements.
|
B. Reports on Form
8-K
Catalytica, Inc. filed a current report on Form 8-K dated
October 1, 1999, reporting Catalytica, Inc.’s acquisition
of Wyckoff Chemical Company, Inc. Such report includes (i) the
financial statements of Wyckoff Chemical Company, Inc. and (ii)
pro forma financial information reflecting the purchase
combinations of Catalytica, Inc. and Wyckoff Chemical Company,
Inc.
Catalytica, Inc. filed a current report on Form 8-K dated
November 17, 1999, in order to satisfy requirements under the
Wyckoff Merger Agreement. As required in the Wyckoff Merger
Agreement, such report included the combined results for the one
month and ten months ended October 31, 1999, of
Catalytica.
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, 1999 and 1998, and the
related consolidated statements of operations, stockholders
’ equity, and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a).
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 auditing standards
generally accepted in the United States. 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, 1999 and
1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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.
San Jose,
California
January
29, 2000
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
|
|
For
the year ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Revenues: |
|
|
|
|
|
|
|
|
|
|
Product
sales |
|
$398,098 |
|
|
$390,175 |
|
|
$205,776 |
|
|
Research
and development contracts |
|
25,600 |
|
|
16,284 |
|
|
6,599 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
423,698 |
|
|
406,459 |
|
|
212,375 |
|
| Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
Cost of
goods sales |
|
312,533 |
|
|
316,820 |
|
|
176,546 |
|
|
Research
and development |
|
42,573 |
|
|
32,366 |
|
|
11,007 |
|
|
Selling,
general and administrative |
|
28,602 |
|
|
21,029 |
|
|
11,306 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses |
|
383,708 |
|
|
370,215 |
|
|
198,859 |
|
| |
|
|
|
|
|
|
|
|
|
| Operating income |
|
39,990 |
|
|
36,244 |
|
|
13,516 |
|
|
|
| Interest income |
|
3,081 |
|
|
2,894 |
|
|
1,450 |
|
| Interest expense |
|
(8,363 |
) |
|
(9,569 |
) |
|
(6,006 |
) |
| Loss on
joint ventures |
|
(1,132 |
) |
|
(3,827 |
) |
|
(4,355 |
) |
| |
|
|
|
|
|
|
|
|
|
| Income
before income taxes |
|
33,576 |
|
|
25,742 |
|
|
4,605 |
|
| Provision for income taxes |
|
(6,445 |
) |
|
(2,925 |
) |
|
(1,425 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
income |
|
27,131 |
|
|
22,817 |
|
|
3,180 |
|
| Less
premium paid on redemption of Class B common stock |
|
—
|
|
|
—
|
|
|
(3,750 |
) |
| |
|
|
|
|
|
|
|
|
|
| Income
(loss) attributable to common shareholders |
|
$
27,131 |
|
|
$
22,817 |
|
|
$
(570 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
income (loss) attributable to common shareholders per
share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$
0.47 |
|
|
$
0.40 |
|
|
$
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$
0.39 |
|
|
$
0.34 |
|
|
$
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
Number
of shares used in computing net income (loss) attributable to
common shareholders per
share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
57,554 |
|
|
57,139 |
|
|
37,278 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
63,789 |
|
|
63,434 |
|
|
37,278 |
|
| |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
CATALYTICA, INC.
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|
|
December 31,
|
|
|
|
1999
|
|
1998
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current
assets: |
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$
34,876 |
|
|
$
41,269 |
|
|
Short-term
investments |
|
5,470 |
|
|
5,193 |
|
|
Accounts receivable,
net of allowance for doubtful accounts of $3,176 in 1999 and
$1,700 in 1998 |
|
41,985 |
|
|
38,610 |
|
|
Accounts receivable
from joint ventures, net of allowance for doubtful accounts of
$87 in 1998 |
|
177 |
|
|
1,120 |
|
|
Notes receivable
from employees, net of allowance for doubtful notes of $25 in
1999 and 1998 |
|
158 |
|
|
282 |
|
|
Inventory: |
|
|
|
|
|
|
|
Raw materials |
|
64,836 |
|
|
40,711 |
|
|
Work in process |
|
27,938 |
|
|
43,119 |
|
|
Finished goods |
|
12,745 |
|
|
12,473 |
|
| |
|
|
|
|
|
|
|
|
|
105,519 |
|
|
96,303 |
|
|
Deferred
taxes |
|
12,951 |
|
|
2,275 |
|
|
Prepaid expenses and
other assets |
|
4,060 |
|
|
1,873 |
|
| |
|
|
|
|
|
|
|
Total current assets |
|
205,196 |
|
|
186,925 |
|
| Property, plant and equipment: |
|
|
|
|
|
|
|
Land |
|
6,533 |
|
|
6,510 |
|
|
Buildings and
leasehold improvements |
|
82,273 |
|
|
73,605 |
|
|
Equipment |
|
194,097 |
|
|
159,336 |
|
| |
|
|
|
|
|
|
|
|
|
282,903 |
|
|
239,451 |
|
|
Less accumulated
depreciation and amortization |
|
(61,772 |
) |
|
(47,084 |
) |
| |
|
|
|
|
|
|
|
|
|
221,131 |
|
|
192,367 |
|
|
Notes receivable
from employees |
|
978 |
|
|
708 |
|
| Other
assets |
|
1,203 |
|
|
2,469 |
|
| |
|
|
|
|
|
|
|
|
|
$428,508 |
|
|
$382,469 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current
liabilities: |
|
|
|
|
|
|
|
Accounts
payable |
|
$
38,508 |
|
|
$
21,749 |
|
|
Accrued payroll and
related expenses |
|
18,126 |
|
|
16,800 |
|
|
Other accrued
liabilities |
|
9,184 |
|
|
8,222 |
|
|
Income taxes
payable |
|
1,162 |
|
|
3,906 |
|
|
Deferred
revenue |
|
6,771 |
|
|
4,479 |
|
|
Current portion of
long-term debt |
|
12,948 |
|
|
15,500 |
|
| |
|
|
|
|
|
|
|
Total current liabilities |
|
86,699 |
|
|
70,656 |
|
| Long-term Liabilities: |
|
Debt |
|
51,000 |
|
|
73,461 |
|
|
Deferred
revenue |
|
6,992 |
|
|
2,181 |
|
|
Deferred
taxes |
|
16,031 |
|
|
1,766 |
|
|
Other |
|
959 |
|
|
382 |
|
|
|
|
Minority
interest |
|
41,000 |
|
|
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 in 1999 and 1998 |
|
51,452 |
|
|
51,452 |
|
|
Class B
—17,000,000 shares authorized, 11,730,000 issued and
outstanding in 1999 and 1998 |
|
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, 32,890,407 shares of common stock issued
and outstanding in 1999; (32,435,901 shares in 1998).
See Class A and B common stock above |
|
33 |
|
|
32 |
|
|
Additional paid-in
capital |
|
112,021 |
|
|
106,304 |
|
|
Deferred
compensation |
|
(156 |
) |
|
(281 |
) |
|
Accumulated earnings
(deficit) |
|
16,850 |
|
|
(10,111 |
) |
| |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
128,748 |
|
|
95,944 |
|
| |
|
|
|
|
|
|
|
|
|
$428,508 |
|
|
$382,469 |
|
| |
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
CATALYTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
Year
ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Cash
flows from operating activities: |
|
Net
income |
|
$
27,131 |
|
|
$
22,817 |
|
|
$
3,180 |
|
|
Adjustments to
reconcile net income to net cash provided by operating
activity: |
|
Depreciation |
|
17,291 |
|
|
14,453 |
|
|
8,465 |
|
|
Amortization |
|
1,041 |
|
|
857 |
|
|
561 |
|
|
Deferred income taxes |
|
4,869 |
|
|
(2,701 |
) |
|
42 |
|
|
Losses in joint
ventures |
|
1,132 |
|
|
3,827 |
|
|
4,355 |
|
|
Provision for losses in accounts
receivable |
|
1,389 |
|
|
1,212 |
|
|
500 |
|
|
Changes in: |
|
Accounts receivable |
|
(4,764 |
) |
|
(21,564 |
) |
|
(10,018 |
) |
|
Accounts receivable from joint
venture |
|
943 |
|
|
(153 |
) |
|
(102 |
) |
|
Inventory |
|
(9,216 |
) |
|
24,249 |
|
|
5,883 |
|
|
Prepaid expenses, and other current
assets |
|
(2,037 |
) |
|
(1,259 |
) |
|
1,387 |
|
|
Accounts payable |
|
16,759 |
|
|
(3,385 |
) |
|
21,015 |
|
|
Accrued payroll and related
expenses |
|
1,326 |
|
|
10,687 |
|
|
4,157 |
|
|
Deferred revenue |
|
7,103 |
|
|
1,201 |
|
|
(1,514 |
) |
|
Income taxes payable |
|
(2,744 |
) |
|
3,070 |
|
|
768 |
|
|
Other accrued
liabilities |
|
1,539 |
|
|
(318 |
) |
|
1,202 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
cash provided by operating activities |
|
61,762 |
|
|
52,993 |
|
|
39,881 |
|
| Cash
flows from investing activities: |
|
Purchases of
investments |
|
$(26,635 |
) |
|
$(37,202 |
) |
|
$
(25,099 |
) |
|
Maturities of
investments |
|
26,624 |
|
|
44,431 |
|
|
21,532 |
|
|
Investment in joint
ventures |
|
(1,132 |
) |
|
(3,827 |
) |
|
(1,027 |
) |
|
Acquisition of
property and equipment, net |
|
(46,055 |
) |
|
(36,416 |
) |
|
(9,123 |
) |
|
Acquisition of Glaxo
Wellcome inventory and property, plant and
equipment |
|
—
|
|
|
—
|
|
|
(248,022 |
) |
| Net
cash used in investing activities |
|
(47,198 |
) |
|
(33,014 |
) |
|
(261,739 |
) |
| |
|
|
|
|
|
|
|
|
|
| Cash
flows from financing activities: |
|
Net receipts on
(issuance of) notes receivable from employees |
|
$
(212 |
) |
|
$
(583 |
) |
|
$
(92 |
) |
|
Borrowings |
|
— |
|
|
6,309 |
|
|
138,296 |
|
|
Payments on debt
obligations |
|
(25,013 |
) |
|
(51,698 |
) |
|
(21,840 |
) |
|
Dividends
paid |
|
(170 |
) |
|
(342 |
) |
|
(342 |
) |
|
Effect of pooling of
interest restatement |
|
—
|
|
|
(1,440 |
) |
|
—
|
|
|
Minority
investment |
|
—
|
|
|
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 |
|
|
Repurchase of
Wyckoff treasury stock |
|
—
|
|
|
—
|
|
|
(202 |
) |
|
Issuance of common
stock |
|
4,438 |
|
|
3,590 |
|
|
3,365 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
cash (used in) provided by financing activities |
|
$(20,957 |
) |
|
$(14,164 |
) |
|
$
240,806 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents |
|
(6,393 |
) |
|
5,815 |
|
|
18,948 |
|
|
Cash and cash
equivalents at beginning of year |
|
41,269 |
|
|
35,454 |
|
|
16,506 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of year |
|
$
34,876 |
|
|
$
41,269 |
|
|
$
35,454 |
|
| |
|
|
|
|
|
|
|
|
|
|
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 |
|
| |
|
|
|
|
|
|
|
|
|
| Tax
benefit from employee stock transactions |
|
$
1,280 |
|
|
$
— |
|
|
$
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow
information: |
| |
|
Income taxes
paid |
|
$
4,673 |
|
|
$
1,830 |
|
|
$
849 |
|
| |
|
|
|
|
|
|
|
|
|
|
Interest
paid |
|
$
5,792 |
|
|
$
8,121 |
|
|
$
5,248 |
|
| |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
CATALYTICA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY
(In
thousands, except share amounts)
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Accumulated
Earnings
(Deficit)
|
|
Total
Stockholders’
Equity
|
|
|
|
Shares
|
|
Amount
|
| Balance
at December 31, 1996 |
|
23,426,888 |
|
$23 |
|
$
68,018 |
|
|
$
(41 |
) |
|
$(33,984 |
) |
|
$
34,016 |
|
| Sale
and issuance of common stock |
|
1,413,506 |
|
2 |
|
3,963 |
|
|
—
|
|
|
—
|
|
|
3,965 |
|
Repurchase of Wyckoff common
stock |
|
—
|
|
— |
|
(202 |
) |
|
—
|
|
|
—
|
|
|
(202 |
) |
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 |
|
| Wyckoff
dividends paid |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
(342 |
) |
|
(342 |
) |
| Net
income |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
3,180 |
|
|
3,180 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1997 |
|
31,971,543 |
|
32 |
|
102,714 |
|
|
(406 |
) |
|
(31,146 |
) |
|
71,194 |
|
Effect
of pooling of interest
restatement |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
(1,440 |
) |
|
(1,440 |
) |
| Sale
and issuance of common stock |
|
464,358 |
|
— |
|
3,300 |
|
|
—
|
|
|
—
|
|
|
3,300 |
|
Issuance of stock options to
consultants |
|
—
|
|
— |
|
290 |
|
|
—
|
|
|
—
|
|
|
290 |
|
Amortization of deferred
compensation |
|
—
|
|
— |
|
—
|
|
|
125 |
|
|
—
|
|
|
125 |
|
| Dividends paid |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
(342 |
) |
|
(342 |
) |
| Net
income |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
22,817 |
|
|
22,817 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1998 |
|
32,435,901 |
|
32 |
|
106,304 |
|
|
(281 |
) |
|
(10,111 |
) |
|
95,944 |
|
| Sale
and issuance of common stock |
|
454,506 |
|
1 |
|
4,035 |
|
|
—
|
|
|
—
|
|
|
4,036 |
|
Issuance of stock options to
consultants |
|
—
|
|
— |
|
402 |
|
|
—
|
|
|
—
|
|
|
402 |
|
Amortization of deferred
compensation |
|
—
|
|
— |
|
—
|
|
|
125 |
|
|
—
|
|
|
125 |
|
Tax
benefit from employee stock
transactions |
|
—
|
|
— |
|
1,280 |
|
|
—
|
|
|
—
|
|
|
1,280 |
|
| Dividends paid |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
(170 |
) |
|
(170 |
) |
| Net
income |
|
—
|
|
— |
|
—
|
|
|
—
|
|
|
27,131 |
|
|
27,131 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1999 |
|
32,890,407 |
|
$33 |
|
$112,021 |
|
|
$(156 |
) |
|
$
16,850 |
|
|
$128,748 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Description of Business and Significant
Accounting Policies
Description of Business
Catalytica, Inc. (“Catalytica” or “the
Company”) finds new pathways to improve processes for
chemical change. For the pharmaceutical industry, Catalytica
applies its innovative and patented catalytic technologies and
other scientific processes to improve the steps for making a
pharmaceutical molecule and also finds better and more efficient
ways to produce products in commercial scale quantities. For the
power industry, Catalytica’s unique application of a
chemical catalyst and proprietary technology enables gas
turbines to produce essentially pollution free
power.
Catalytica
’s core expertise is in the discovery and effective
application of catalysts—substances that change the rate of
chemical reactions but are themselves unchanged at the end of
the process. Catalysts enable faster reactions, improve the
yield of a process, eliminate steps or make reactions cleaner by
eliminating the use of toxic materials. Catalytica has broadened
its proprietary technology base and has identified key markets
for its products and services. Catalytica operates through three
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.
On
September 20, 1999, the Company acquired Wyckoff Chemical
Company, Inc. (“Wyckoff”). At the completion of the
merger, Wyckoff became a wholly owned subsidiary of the Company.
The Wyckoff merger was accounted for as a pooling of interests
for financial reporting purposes in accordance with generally
accepted accounting principles. Catalytica exchanged 4,029,813
shares of its common stock and reserved 32,962 shares for
Wyckoff options assumed by the Company. Merger related expenses
of $1.5 million were recorded in 1999. There were no
transactions between Wyckoff and Catalytica prior to the
combination and no significant adjustments were necessary to
conform Wyckoff’s accounting policies.
Since the
fiscal years of Catalytica and Wyckoff were different, the
consolidated financial statements for each year presented
include the following:
Catalytica
|
|
Wyckoff
|
| Fiscal
year ended December 31, 1999 |
|
Twelve
months ended December 31, 1999 |
| Fiscal
year ended December 31, 1998 |
|
Twelve
months ended December 31, 1998 |
| Fiscal
year ended December 31, 1997 |
|
Fiscal
year ended June 30, 1998 |
Reclassification Certain new
product drug formulation revenues and costs at Catalytica
Pharmaceuticals (which were not significant) were classified as
product revenues and costs, respectively in 1998. In 1999 these
amounts have become more significant and are included in
research and development revenue and costs, respectively.
Related 1998 amounts have been reclassified to improve the
comparability of these line items. Accordingly, Catalytica
reclassified approximately $8.0 million from cost of sales to R
&D costs, and 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
Estimate 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.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Cash
and Cash Equivalents Cash and cash
equivalents consist of cash on deposit with banks and money
market instruments. Certain restrictions have been placed on the
use of the Company’s cash and investments. Of the $34.9
million in cash and cash equivalents at December 31, 1999, $10.6
million may only be used for Combustion Systems’
operations, and the remaining $24.3 million may be used for
Catalytica Pharmaceuticals. These same restrictions apply to any
short or long term investments. The $5.5 million in short term
investments may only be used in Combustion Systems.
Investments The Company
considers all investments with maturities of three months or
less at the date of purchase to be cash and cash equivalents
(none at December 31, 1999); investments with maturities of
three months or less at the date of purchase which are
held-to-maturity ($5.5 million at December 31, 1999) and
investments with maturities greater than three months which are
available-for-sale (none at December 31, 1999) 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, 1999). The carrying
value of all investments at December 31, 1999, approximated fair
market value. The classification of investments is made at the
time of purchase with classification for held-to-maturity made
when the Company has the positive intent and ability to hold the
investments to maturity.
As of
December 31, 1999, the average portfolio duration is
approximately 1.13 months.
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:
|
|
|
Year
ended
December 31,
|
Customer
|
|
1999
|
|
1998
|
|
1997
|
| Glaxo
Wellcome |
|
67 |
% |
|
79 |
% |
|
74 |
% |
As of
December 31, 1999 and December 31, 1998, a receivable in the
amount of $22.5 million and $16.0 million, respectively, was
outstanding from Glaxo Wellcome.
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.
Property, Plant, and Equipment
These assets 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 to 40 years).
Long-Lived Assets In
accordance with Financial Accounting Standards (“FAS”)
No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,” the
Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
such assets may not be fully recoverable. To date, no such
impairment has been indicated. If this review
indicates the carrying value of these assets will not be
recoverable, as measured based on estimated undiscounted cash
flows over their remaining life, the carrying amount would be
adjusted to fair value. The cash flow estimates that will be
used will contain management’s best estimates, using
appropriate and customary assumptions and projections at the
time.
Revenues
All product revenues are recognized
upon shipment, and provisions are made at that time for product
returns, if required. Certain research revenues are earned as
contractual services are performed, principally based on
reimbursement of total costs and expenses incurred. In return,
collaborative partners receive certain rights in the
commercialization of the resulting technology. Research and
development contracts are subject to periodic review by the
funding partner, which may result in modifications, including
reduction or termination of funding. No amounts recognized as
research and development revenue are refundable. Unbilled
revenues related to work performed under collaborative
arrangements were approximately $1.6 million at December 31,
1999 ($0.9 million at December 31, 1998) and are included in
accounts receivable on the accompanying balance sheet. Most
amounts unbilled at December 31, 1999, were billed in January,
2000.
Deferred Revenue Deferred
revenue represents negotiated advances from customers which will
be earned in future periods, generally over a period of 1 to 5
years.
Research and Development All
costs for research and development activities are expensed as
incurred. Such costs include proprietary research and
development expenses associated with revenues from research and
development agreements. Approximately 16% of the Company’s
1999 research and development expenses were spent to develop the
Company’s combustion systems technology, approximately 78%
were spent on pharmaceuticals technology, and approximately 6%
were spent on other technologies, much of which was performed at
the specific request of, and funded by, third
parties.
Advertising Advertising
costs are expensed as incurred. Advertising costs were $856,000,
$648,000 and $206,000 for the years ended December 31, 1999,
1998 and 1997 respectively.
Income
Taxes The Company accounts for income
taxes under the asset and liability method in accordance with
FAS No. 109, “Accounting for Income Taxes.” Under the
asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and
are measured using the currently enacted tax rates and
laws.
Earnings (Loss) per Share
Earnings (loss) per share is presented in accordance
with FAS No. 128, “Earnings Per Share” (“EPS
”). 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 year ended December 31, 1997, the
inclusion of common stock equivalents and the reduction of
Catalytica Pharmaceuticals income due to holders of subsidiary
stock options is antidilutive, therefore loss per share is
computed based on the weighted average number of common shares
outstanding excluding common stock equivalents. Weighted average
shares outstanding includes Class A and B common shares, as
class A and B shares are convertible into the equivalent number
of shares of common stock.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
A
reconciliation of the numerators and denominators for the Basic
and Diluted EPS calculations follows:
The
following table sets forth the computation of basic and diluted
earnings attributable to common shareholders per share (in
thousands, except per share amounts:
|
|
|
Year
ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Numerator: |
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share: Net
income |
|
$27,131 |
|
|
$22,817 |
|
|
$
3,180 |
|
|
Premium
paid on common stock redemption (*) |
|
—
|
|
|
—
|
|
|
(3,750 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to common stockholders |
|
27,131 |
|
|
22,817 |
|
|
(570 |
) |
Less:
Reduction of Catalytica Pharmaceuticals income attributable to
holders of subsidiary stock
options |
|
(2,100 |
) |
|
(1,380 |
) |
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per
share |
|
$25,031 |
|
|
$21,437 |
|
|
$
(570 |
) |
| |
|
|
|
|
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per
share |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares |
|
57,554 |
|
|
57,139 |
|
|
37,278 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Catalytica, Inc. employee stock options |
|
823 |
|
|
1,015 |
|
|
—
|
|
|
Catalytica Pharmaceuticals Convertible Preferred
Stock |
|
1,775 |
|
|
1,683 |
|
|
—
|
|
|
Catalytica Pharmaceuticals Convertible Junior Preferred
Stock |
|
599 |
|
|
568 |
|
|
—
|
|
|
Catalytica Combustion Systems, Inc. Convertible
Preferred Stock |
|
2,838 |
|
|
2,651 |
|
|
—
|
|
|
Catalytica, Inc. warrants issued to Glaxo Wellcome,
Inc. |
|
200 |
|
|
378 |
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Dilutive
potential common shares |
|
6,235 |
|
|
6,295 |
|
|
—
|
|
|
Denominator for diluted earnings (loss) per
share |
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted-average shares and assumed conversions |
|
63,789 |
|
|
63,434 |
|
|
37,278 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share |
|
$
0.47 |
|
|
$
0.40 |
|
|
$
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share |
|
$
0.39 |
|
|
$
0.34 |
|
|
$
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
*
|
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.
|
For the
year ended December 31, 1997, potentially dilutive securities of
2,649,000 were outstanding and not included in the diluted
earnings per share computation because they are
antidilutive.
Stock-Based Compensation The
Company has elected to account for stock-based compensation to
employees in accordance with APB Opinion 25, Accounting for
Stock Issued to Employees providing only pro forma
disclosures required by Statement 123 Accounting for
Stock-Based Compensation.
Comprehensive Income
Effective January 1, 1998, the Company adopted FAS No.
130, “Reporting Comprehensive Income.” The
Company has no components of other comprehensive
income.
Segment
Disclosures Beginning in fiscal 1998,
the Company adopted FAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information.
”
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The
Company operates primarily in the pharmaceuticals and combustion
systems businesses. The Company has determined the reportable
operating segments based upon how the businesses are managed and
operated. Catalytica Pharmaceuticals and Combustion Systems
operate as independent businesses with their own sales, research
and development, and operations departments. Each manufactures
and distributes distinct products with different production
processes. As such, the following table discloses their
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. Sales to countries outside of the United
States is less than 10% of total revenues for all periods
presented.
|
|
|
Year
ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(In
thousands) |
| Revenues Pharmaceuticals |
|
$420,645 |
|
|
$400,180 |
|
|
$207,236 |
|
|
Combustion |
|
1,552 |
|
|
2,707 |
|
|
1,950 |
|
|
Corporate and other |
|
1,501 |
|
|
3,572 |
|
|
3,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
$423,698 |
|
|
$406,459 |
|
|
$212,375 |
|
| |
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
|
|
|
|
|
|
|
|
Pharmaceuticals |
|
$
51,028 |
|
|
$
40,707 |
|
|
$
13,778 |
|
|
Combustion |
|
(9,618 |
) |
|
(3,014 |
) |
|
(478 |
) |
|
Corporate and other |
|
(1,420 |
) |
|
(1,449 |
) |
|
216 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
operating income |
|
$
39,990 |
|
|
$
36,244 |
|
|
$
13,516 |
|
| |
|
|
|
|
|
|
|
|
|
| Identifiable assets |
|
|
|
|
|
|
|
|
|
|
Pharmaceuticals |
|
$389,130 |
|
|
$335,929 |
|
|
$339,137 |
|
|
Combustion |
|
19,335 |
|
|
27,402 |
|
|
2,011 |
|
|
Corporate and other |
|
20,043 |
|
|
19,138 |
|
|
21,297 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$428,508 |
|
|
$382,469 |
|
|
$362,445 |
|
| |
|
|
|
|
|
|
|
|
|
Impact
of Recently Issued Accounting Standards
In June 1998, the FASB issued FAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities”. FAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument
be recorded on the balance sheet as either an asset or liability
measured at its fair value. FAS No. 133, is effective for the
fiscal year ending on or about December 31, 2001. The Company
does not believe that adopting this statement will have a
material effect on the financial position or results of
operations.
Note 2.
Catalytica Pharmaceuticals,
Inc.
In
connection with the Company’s purchase of a pharmaceuticals
manufacturing facility in Greenville, North Carolina from Glaxo
Wellcome, the Company issued 250,000 shares of Junior Preferred
Stock of Catalytica Pharmaceuticals.
The Junior
Preferred Stock has the following rights: (a) a non-cumulative
dividend preference and a liquidation preference, both junior to
the outstanding 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 shall be entitled to the number
of votes equal to the number of shares of Common Stock into
which such shares 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, this 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 $3.0 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. Subsequently, this agreement has been
amended from time to time.
The
Company believes the pricing and terms in the original Supply
Agreement, and subsequent amendments with Glaxo Wellcome,
represent fair market terms and conditions based on arms-length
negotiations. 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 have provided for
approximately $120 million in revenue through December 31,
1999.
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.
Product shipments to Glaxo Wellcome have exceeded the levels
associated with the aggregate annual minimum payments provided
for in the original Supply Agreement and related amendments.
Therefore, Glaxo Wellcome has made no shortfall payments to the
Company. 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 under the original Supply
Agreement and subsequent amendments total $492.8
million.
In May
1996, Pfizer Inc. (“Pfizer”) entered into a
Collaborative Research and License Agreement and a Stock
Purchase Agreement with Catalytica Pharmaceuticals, Inc. that
included the purchase of 150,000 shares of Series B Preferred
Stock by Pfizer. The holders of the Series B Preferred Stock
shall be entitled to receive non-cumulative dividends at a rate
of $6.00 per share, per annum, when and if declared by the Board
of Directors. In consideration of the $15 million paid,
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. In 1999 and 1998, $1.5 million and $1.4
million, respectively, of research was performed and recognized
as revenue. The deferred revenue balance pertaining to Pfizer
was $2.1 and $3.6 million at December 31, 1999, and 1998,
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’s Common Stock. After the three year
anniversary of the agreement, Pfizer shall have the right to
require the Company to exchange all of the outstanding shares of
Series B Preferred Stock for that number of shares of Common
Stock based upon a determined exchange rate. The exchange rate
is based upon the fair value of the Preferred Stock and the
market value of Catalytica’s Common Stock at the time of
conversion. In the event of insolvency of the Catalytica
Pharmaceuticals, Pfizer may convert $4.2 million of Series B
Preferred Shares into 700,000 shares of Catalytica’s Common
Stock.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
3. Combustion Systems
In January
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, GENXON™ 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, 1999, Combustion Systems contributed
$0.8 million in cash, and Woodward contributed $0.8 million,
bringing the total combined investment in the joint venture to
$24.2 million as of December 31, 1999. 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. The Company recorded losses on the joint
venture of $1.1 million, $3.8 million, and $4.4 million, for the
years ended December 31, 1999, December 31, 1998, and December
31, 1997, respectively. As of December 31, 1999, $49,000 of
accounts receivable was outstanding from GENXON. In the third
quarter of 1999, GENXON completed its prototype development of
the Kawasaki combustor unit, and funding of the durability
testing was shifted back to Combustion Systems. The reduced
level of the Company’s investment in GENXON is expected to
continue throughout 2000.
Note 4.
Advanced Technologies
Joint
Venture (“Süd-Chemie Catalytica”)
On November 1, 1998, Advanced Technologies entered
into an operating agreement with United Catalysts, Inc. (
“United Catalysts”), a division of Süd-Chemie
Group, to form Single-Site Catalysts, L.L.C., a Delaware limited
liability company, which was subsequently named Süd-Chemie
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
Agreement and $5 million in capital to be
paid in varying installments over the next several years. S
üd-Chemie Catalytica incurred a loss in 1999 and 1998 and
the Company anticipates that the joint venture will continue to
generate losses during 2000. Although no losses were recorded by
the Company in 1999 related to Süd-Chemie Catalytica, it
had recorded its share of losses to the extent of its capital
contribution of $150,000 in 1998. The operating agreement does
not require any further capital contributions by Advanced
Technologies beyond its initial $150,000 contribution.
Therefore, no further losses will be recorded by the Company
unless it decides to invest additional capital beyond the
initial $5 million commitment by its joint venture
partner.
Note 5.
Environmental
Regulations
In
November 1993, the Company entered into a ground lease with Rh
ône 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, Rhône 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 Rhône
Poulenc, Inc., the Company has received an indemnity for the
contamination that is the subject of the RWQCB’s
order.
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. No additional abatement was performed in 1999. The
Company had a reserve totaling $5.8 million and $6.4 million at
December 31, 1999, and 1998, respectively, 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 Greenville Facility to the
Company, 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. 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.
Note 6.
Employee Benefit Plans
Pension
Plan The Company has a nonqualified
pension plan for employees meeting certain requirements, based
on a defined percentage of the employees’ compensation.
Pension expense in any year presented is not
significant.
Retirement Savings Plan The
Company has a defined contribution pension plan which provides
an employer match, and a qualified contributory savings plan as
allowed under 401(k) in the Internal Revenue Code. The plan
permits participant contributions which are matched with Company
contributions according to a specified formula. Additionally,
the plan requires a minimum contribution from the Company
independent of any employee contributions. The Company made
contributions of $3.7 million in 1999, $3.0 million in 1998, and
$1.5 million in 1997.
Note 7.
Debt
The
Company maintains a debt facility pursuant to which Catalytica
Pharmaceuticals may borrow an aggregate of up to $175 million
(the “debt facilities”). The debt facilities
originally consisted of a senior secured term loan facility in
an aggregate principal amount of $125 million and a senior
secured revolving facility in an
aggregate principal amount of $75 million. In June, 1998, this
debt facility was amended to increase the revolving debt portion
from $75 million to $100 million, and the term loan was reduced
from its original balance of $125 million to $75 million. In
August 1999, the debt facilities were further amended to
accommodate the acquisition of Wyckoff. Up to $20 million of the
revolving facility is available for the issuance of letters of
credit. The term loan, which originally matured December 31,
2001, now matures December 31, 2002, and will be amortized in
quarterly installments commencing on December 31, 1999. The
related interest rate is a variable interest rate tied to LIBOR.
This interest rate was 6.875% as of December 31, 1999. As of
December 31, 1999, nothing was outstanding under the revolving
portion and $61.25 million was outstanding under the term
loan.
In
addition to the restrictions above, the 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, 1999, the Company and Catalytica Pharmaceuticals, Inc. were
in compliance with the covenants. The revolving loan, 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.
Interest Rate Swap In
the second quarter of 1998, Catalytica entered into a $50.0
million interest rate swap to reduce its exposure to
fluctuations in short-term interest rates. This interest rate
swap 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 interest rate swap as a hedge, and accrues the
interest rate differential as an adjustment to interest expense
on a monthly basis. 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. Catalytica does not hold or
transact in such financial instruments for purposes other than
risk management.
For the
year ended December 31, 1999, the receive rate on the swap
hedging debt was 5.3%. 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 $320,000 as of December 31,
1999.
Wyckoff
Long-Term Debt There were no long
term borrowings relating to Wyckoff at December 31, 1999. On
December 31, 1998, related long-term borrowing totaled
approximately $11.2 million, with borrowing rates ranging from
5.55% to 7.75%.
In October
1998, Wyckoff entered into a $9.0 million interest rate swap
transaction to reduce its 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. Wyckoff accounted for this interest
rate swap as a hedge, and accrued the interest rate differential
as interest expense on a monthly basis. On November 1, 1999,
concurrent with the repayment of Wyckoff’s debt agreements,
the Company closed out this interest rate swap agreement and
recognized a $178,000 gain.
The fair
value of Catalytica’s debt is based on pricing models or
securities with similar terms, and approximates carrying
value.
At
December 31, 1999, future minimum principal payments on debt
were as follows (in thousands):
| 2000 |
|
12,948 |
| 2001 |
|
21,000 |
| 2002 |
|
30,000 |
| |
|
|
|
|
|
$63,948 |
| |
|
|
| |
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
8. Income Taxes
The
Company accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting for
Income Taxes”. Under the asset and liability method,
deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are
recognized and measured based upon the likelihood of realization
of the related tax benefit in the future.
The
provision (benefit) for income taxes consists of the following
(in thousands):
|
|
|
1999
|
|
1998
|
|
1997
|
| Current: |
|
Federal
|
|
$1,514 |
|
|
$
3,736 |
|
|
$
899 |
|
|
State |
|
1,342 |
|
|
1,665 |
|
|
484 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
2,856 |
|
|
5,401 |
|
|
1,383 |
|
| Deferred: |
|
Federal
|
|
4,081 |
|
|
(2,397 |
) |
|
189 |
|
|
State |
|
(492 |
) |
|
(79 |
) |
|
(147 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
(2,476 |
) |
|
42 |
|
| |
|
|
|
|
|
|
|
|
|
| Total
Provision |
|
$6,445 |
|
|
$
2,925 |
|
|
$1,425 |
|
| |
|
|
|
|
|
|
|
|
|
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):
|
|
|
1999
|
|
1998
|
|
1997
|
| Income
(loss) before provision for income taxes |
|
$33,576 |
|
|
$25,742 |
|
|
$4,605 |
|
| |
|
|
|
|
|
|
|
|
|
| Federal
statutory rate (35% for 1999 & 1998, 34% for
1997) |
|
$11,751 |
|
|
$
9,041 |
|
|
$1,565 |
|
| State
taxes, net of federal benefit |
|
553 |
|
|
1,268 |
|
|
330 |
|
| Benefit
of net operating losses |
|
(4,118 |
) |
|
(7,461 |
) |
|
(198 |
) |
| Change
in valuation allowance |
|
(3,180 |
) |
|
—
|
|
|
—
|
|
| Other |
|
1,439 |
|
|
77 |
|
|
(272 |
) |
| |
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
$
6,445 |
|
|
$
2,925 |
|
|
$1,425 |
|
| |
|
|
|
|
|
|
|
|
|
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
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):
|
|
|
1999
|
|
1998
|
| Deferred tax assets: |
|
Inventory reserves |
|
$
5,165 |
|
|
$
3,756 |
|
|
Accruals
|
|
2,585 |
|
|
1,186 |
|
|
Other,
net |
|
958 |
|
|
409 |
|
|
Credit
carryforwards |
|
1,541 |
|
|
—
|
|
|
Capitalized R&D costs |
|
181 |
|
|
114 |
|
|
Net
operating loss carryforwards |
|
2,521 |
|
|
6,639 |
|
| |
|
|
|
|
|
|
| Total
deferred tax assets |
|
$
12,951 |
|
|
$12,104 |
|
| Valuation allowance |
|
—
|
|
|
(9,829 |
) |
| |
|
|
|
|
|
|
| Net
deferred tax assets |
|
$
12,951 |
|
|
$
2,275 |
|
| Deferred tax liabilities: |
|
Depreciation |
|
(16,031 |
) |
|
(1,766 |
) |
| |
|
|
|
|
|
|
| Total
deferred tax liabilities |
|
(16,031 |
) |
|
(1,766 |
) |
| |
|
|
|
|
|
|
| Net
deferred tax assets (liabilities) |
|
$
(3,080 |
) |
|
$
509 |
|
| |
|
|
|
|
|
|
As of
December 31, 1999, the Company had net operating loss
carryforwards for federal tax purposes of approximately $7.2
million. The federal net operating loss carryforwards will
expire at various dates beginning in year 2007, if not utilized.
The Company also has state tax credit carryforwards of
approximately $2.0 million that will expire at various dates
beginning in year 2003, if not utilized. The valuation allowance
decreased by $9.8 million and $7.9 million in 1999 and 1998,
respectively, and increased by $0.6 million during
1997.
Note 9.
Leases, Commitments, and
Contingencies
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 15 years ground lease. 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.
The
aggregate minimum annual commitments under all operating leases
as of December 31, 1999, are as follows (in
thousands):
| Fiscal Year |
|
|
| 2000 |
|
2,102 |
| 2001 |
|
1,938 |
| 2002 |
|
1,446 |
| 2003 |
|
1,363 |
| 2004 |
|
340 |
| and
thereafter |
|
2,070 |
| |
|
|
|
|
|
$
9,259 |
| |
|
|
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Rent
expense, consisting of building and equipment rent, was $2.6
million, $2.6 million, and $1.4 million for each of the three
years ended December 31, 1999, 1998, and 1997,
respectively.
In
December of 1999, Enron North America announced that Catalytica
’s Xonon combustion system had been specified as the
preferred emissions control system with GE 7FA turbines that
have been ordered for the proposed Pastoria Energy Facility. The
Pastoria Energy Facility, a project proposed by affiliates of
Enron North America, is a 750 megawatt natural gas fired power
generation project located on Tejon Ranch property south of
Bakersfield, Calif. This project is presently under regulatory
review by the California Energy Commission and is expected to
begin construction in 2001 and enter commercial operations by
the summer of 2003. In conjunction with this project, Combustion
Systems and Enron North America signed an agreement whereby
Combustion Systems will advance $9.9 million to accelerate
development of the Xonon-equipped GE gas turbines. Catalytica
expects to recover its advance in late 2000 either in cash or
may recover this amount through the future sale of
Xonon-equipped gas turbines. In December 1999, Combustion
Systems recorded a provision of $1.2 million related to these
advances. Catalytica will advance an additional $8.7 million
under this agreement in 2000.
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.
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 certain research collaboration
arrangements whereby potential future royalty payments may be
required. Such payments would generally be due once specified
milestones such as commencement of commercial sales of products
incorporating the funded technology are achieved. Related
royalty payments for certain technologies would range from 1.5%
to 5.0% of product sales during the period covered by the
royalty agreement.
|
Contingent Purchase Price
|
In
connection with the acquisition of the Greenville Facility, the
Company agreed to pay contingent consideration of 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. This
additional contingent consideration, if any, will be allocated
to acquired long-lived assets and amortized over the remaining
lives of these assets.
Note
10. Capital Stock
On
September 20, 1999, the Company acquired Wyckoff. At the
completion of the merger, Wyckoff became a wholly owned
subsidiary of the Company. Under the terms of the acquisition,
the Company exchanged 4,029,813 shares of its common stock for
all of the Wyckoff outstanding common stock. Additionally, the
Company converted options to purchase approximately 32,962 shares
of Wyckoff common stock into approximately 466,674 options to
purchase shares of the Company’s common stock. The Wyckoff
merger was accounted for as a pooling of interests for financial
reporting purposes in accordance with generally accepted
accounting principles.
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 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, 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
Morgan Stanley Dean Witter Capital Partners (“MSCP”)
(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,
1999, MSCP beneficially owns approximately 29% of the voting
control and 43% of the total outstanding voting and non-voting
stock.
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,
1999.
At any
time after July 1, 1998, MSCP 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), MSCP 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,
1999, MSCP 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, MSCP
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 MSCP 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 (i) upon any transfer by MSCP,
including any distribution to its partners or affiliated
entities, or
(ii) if less than 10% of the shares of Class A Common Stock
initially issued are outstanding. The conversion price initially
shall be $4.00 per share and shall be subject to adjustment in
certain cases as described below.
The
liquidation preference of the Class A Common Stock ranks senior
to all other common stock and preferred stock at any time
outstanding of the Company unless agreed to by MSCP. The
liquidation preference of the Class A Common Stock will be equal
to the greater of (i) $4.00 per share plus any accrued and
unpaid dividends, (the “Liquidation Preference”). No
dividends have been declared or paid; and (ii) the amount that
holders thereof would have received in such liquidation had the
Class A Common Stock been converted to Common Stock in
accordance with its terms.
The Class
B Common Stock has the same powers, preferences and rights
described above as the Class A Common Stock, except that the
Class B Common Stock is convertible into Class A Common Stock,
has no voting rights (except as required by Delaware law) and
has no right to vote for the election of directors.
The shares
of Class B Common Stock will, upon any transfer of such shares
by MSCP, be automatically converted into a like number of shares
of Common Stock, subject to adjustment upon certain events with
respect to the Common Stock. The shares of Class B Common Stock
are convertible at the option of MSCP into Common Stock or Class
A Common Stock so long as such conversion results in MSCP
holding 40% or less of the Company’s outstanding voting
securities.
|
Common Stock Reserved for Future
Issuance
|
Shares of
common stock of the Company reserved for future issuance at
December 31, 1999 are as follows:
|
|
|
1999
|
| Employee Stock Purchase Plan |
|
2,469,000 |
| Stock
Options |
|
5,044,000 |
| Pharmaceuticals Series B Preferred Stock (*)—held
by Pfizer |
|
1,800,000 |
| Pharmaceuticals Junior Preferred Stock (*)—held by
Glaxo Wellcome |
|
600,000 |
| Combustion Systems Series B Preferred Stock (*)
—held by Enron |
|
2,800,000 |
| Warrants
—held by Glaxo Wellcome |
|
2,000,000 |
| Class A
and B Common Stock—held by MSCP |
|
25,000,000 |
| |
|
|
|
|
|
39,713,000 |
| |
|
|
(*)
|
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
Company has 5,000,000 shares of Preferred Stock authorized, all
of which are unissued and undesignated. The Board of Directors
of the Company has the authority, without further vote or action
by the stockholders, to issue these undesignated shares of
Preferred Stock in one or more series and to fix the rights,
qualifications, preferences, privileges, limitations, and
restrictions of each such series, including dividend rights,
terms or redemption, redemption prices, liquidation preferences,
and the number of shares constituting any series or the
designation of such series.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
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 shareholder. 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 shareholders, 6,922,996 shares were
exercised, and warrants for 24,279 shares expired on October 31,
1997.
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 MSCP 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.
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.
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
|
Pro forma
information regarding net income and earnings per share is
required by FAS 123 which also requires that the information be
determined as if the Company has accounted for its employee
stock awards and those of its subsidiaries granted subsequent to
December 31, 1994, under the fair value method of this
Statement. Additionally, options granted under the Wyckoff
Chemical, Inc. Plan have been assumed under the Catalytica,
Inc. Stock Option Plan at the rate of one Wyckoff option to
14.157928 options of Catalytica. The fair value for Catalytica
options and Wyckoff converted options was estimated at the date
of grant using a Black-Scholes multiple option pricing model
with the following weighted average assumptions:
|
|
|
Risk
Free
Interest Rate
|
|
Dividend Yield
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
| Catalytica, Inc. Stock Option Plans |
|
5.27 |
|
5.26 |
|
6.14 |
|
.04 |
|
.13 |
|
.08 |
| Catalytica, Inc. Stock Purchase Plan |
|
5.25 |
|
5.19 |
|
6.15 |
|
—
|
|
—
|
|
—
|
| Catalytica Advanced Technologies, Inc. |
|
—
|
|
5.55 |
|
5.95 |
|
—
|
|
—
|
|
—
|
| Catalytica Combustion Systems, Inc. |
|
5.01 |
|
5.48 |
|
6.01 |
|
—
|
|
—
|
|
—
|
| Catalytica Pharmaceuticals, Inc. |
|
5.71 |
|
5.25 |
|
6.05 |
|
—
|
|
—
|
|
—
|
|
|
|
|
Volatility Factor
|
|
Weighted
Average
Expected Life
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
| Catalytica, Inc. Stock Option Plans |
|
.8018 |
|
.7905 |
|
.8659 |
|
5.5 |
|
5.0 |
|
3.7 |
| Catalytica, Inc. Stock Purchase Plan |
|
.8238 |
|
.8602 |
|
.9089 |
|
1.5 |
|
1.3 |
|
1.2 |
| Catalytica Advanced Technologies, Inc. |
|
—
|
|
.8602 |
|
.9089 |
|
—
|
|
7.0 |
|
7.0 |
| Catalytica Combustion Systems, Inc. |
|
.8238 |
|
.8602 |
|
.9089 |
|
2.6 |
|
5.0 |
|
5.0 |
| Catalytica Pharmaceuticals, Inc. |
|
.8238 |
|
.8602 |
|
.9089 |
|
3.8 |
|
5.0 |
|
3.5 |
|
|
|
Compensation Expense
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Catalytica, Inc. Stock Option Plans |
|
$
7,663 |
|
$
4,984 |
|
$2,096 |
| Catalytica Stock Purchase Plan |
|
964 |
|
2,405 |
|
1,439 |
| Catalytica Advanced Technologies |
|
4 |
|
10 |
|
12 |
| Catalytica Combustion Systems |
|
826 |
|
547 |
|
85 |
| Catalytica Pharmaceuticals |
|
3,387 |
|
3,511 |
|
1,000 |
| |
|
|
|
|
|
|
|
|
|
$12,844 |
|
$11,457 |
|
$4,632 |
| |
|
|
|
|
|
|
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:
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
thousands, except per share data) |
| Income/(loss) attributable to common
shareholders |
|
$
27,131 |
|
|
$
22,817 |
|
|
$
(570 |
) |
| Compensation expense |
|
$(12,844 |
) |
|
$(11,457 |
) |
|
$(4,632 |
) |
| Pro
forma net income/(loss) |
|
$
14,287 |
|
|
$
11,360 |
|
|
$(5,202 |
) |
| Pro
forma income/(loss) per share—basic |
|
$
0.25 |
|
|
$
0.20 |
|
|
$
(0.14 |
) |
| Pro
forma income/(loss) per share—diluted |
|
$
0.19 |
|
|
$
0.16 |
|
|
$
(0.14 |
) |
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Compensation expense for the above reported years resulting from
the stock option plan has been adjusted to reflect the impact of
the Wyckoff acquisition in 1999.
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.
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.
1993
Wyckoff Stock Option Plan In 1993,
Wyckoff Chemical Company, Inc. adopted the 1993 Stock Option
Plan under which 35,000 shares of Wyckoff had been reserved for
future issuance. Upon completion of the acquisition of Wyckoff
by Catalytica, the options were converted to Catalytica options
at a conversion rate of 14.157928 representing a total of
495,527 options reserved for issuance. Upon merging the plan
into the Catalytica Stock Option Plan, 15,521 shares reserved
but unissued under the plan were cancelled. A committee
appointed by the Board of Directors administered the 1993 Stock
Option Plan. Under the Plan, the committee granted incentive
stock options and non-qualified stock options. Incentive stock
were granted at an exercise price of not less than 100% of the
fair market value of Common Stock on the date of grant. Options
generally become exercisable over a 3 year period at a rate of
33
1
/3% as
follows:
1
/3on and
after six months following the date of grant,
1
/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. The options expire after
10 years from 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, 1999, 436,800 shares had been exercised. 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.
CATALYTICA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
1983
Catalytica Restricted Stock Purchase Plan
The Company has a 1983 restricted stock purchase plan
pursuant to which 200,000 shares were reserved for future
issuance to employees. Under the 1983 Employee Restricted Stock
Purchase Plan, employees purchased 179,357 common shares at fair
value, as determined by the Board of Directors. The 1983
Restricted Stock Purchase Plan expired, in accordance with its
terms, on May 16, 1993. All shares reserved but unissued under
that plan were canceled. No shares were subject to
repurchase.
In
September, 1995, the Company implemented a stock exchange
program whereby certain option holders could exchange higher
priced options for a reduced number of new options at the
current fair market value. Options canceled and regranted are
reflected in the table below.
The
following table summarizes stock option plan activity for the
1995 Director Stock Option Plan, the 1992 Stock Option Plan, the
1993 Wyckoff Stock Option Plan, the 1985 Catalytica
Non-Qualified Plan, the 1983 Incentive Stock Option Plan, and
the 1983 Restricted Stock Purchase Plan:
| |
|
Shares
Available
for Grant
|
|
Outstanding Options
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Exercise Price
|
| Balance
at December 31, 1996 |
|
1,238,418 |
|
|
2,005,425 |
|
|
$
3.10 |
|
$
6,219,921 |
|
|
Authorized |
|
1,200,000 |
|
|
—
|
|
|
—
|
|
—
|
|
|
Granted |
|
(1,283,827 |
) |
|
1,283,827 |
|
|
$10.25 |
|
13,152,656 |
|
|
Granted
Below Fair Value |
|
(100,000 |
) |
|
100,000 |
|
|
$
5.00 |
|
500,000 |
|
|
Exercised |
|
—
|
|
|
(1,061,438 |
) |
|
$
1.83 |
|
(1,983,477 |
) |
|
Canceled |
|
29,044 |
|
|
(29,044 |
) |
|
$
7.40 |
|
(214,797 |
) |
|
Expired |
|
(3,200 |
) |
|
—
|
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1997 |
|
1,080,435 |
|
|
2,298,770 |
|
|
$
7.69 |
|
$17,674,303 |
|
|
Authorized |
|
2,000,000 |
|
|
—
|
|
|
—
|
|
—
|
|
|
Granted
at Fair Value |
|
(621,115 |
) |
|
621,115 |
|
|
$12.15 |
|
7,548,336 |
|
|
Exercised |
|
—
|
|
|
(115,904 |
) |
|
$
4.32 |
|
(500,245 |
) |
|
Canceled |
|
96,917 |
|
|
(96,917 |
) |
|
$10.42 |
|
(1,010,284 |
) |
|
Expired |
|
(750 |
) |
|
—
|
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1998 |
|
2,555,487 |
|
|
2,707,064 |
|
|
$
8.76 |
|
$23,712,110 |
|
|
Granted
at Fair Value |
|
(1,062,421 |
) |
|
1,062,421 |
|
|
$14.32 |
|
15,211,594 |
|
|
Exercised |
|
—
|
|
|
(202,622 |
) |
|
$
6.13 |
|
(1,242,307 |
) |
|
Canceled |
|
147,680 |
|
|
(147,680 |
) |
|
$10.57 |
|
(1,561,410 |
) |
|
Expired |
|
(15,917 |
) |
|
—
|
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1999 |
|
1,624,829 |
|
|
3,419,183 |
|
|
$10.56 |
|
$36,119,987 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair value of options granted at fair value
during 1999 is $10.30 as calculated in accordance with FAS
123.
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, 1999 is as
follows:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
|
Number
Outstanding
December 31,
1999
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
as of
December 31,
1999
|
|
Weighted
Average
Exercise
Price
|
| $1.80
–$3.88 |
|
343,284 |
|
6.02 |
|
$
3.57 |
|
215,958 |
|
$
3.54 |
| $3.94
–$5.79 |
|
437,263 |
|
4.53 |
|
$
5.55 |
|
400,730 |
|
$
5.60 |
| $5.93
–$9.25 |
|
154,890 |
|
7.41 |
|
$
6.73 |
|
137,543 |
|
$
6.53 |
| $10.50
–$10.50 |
|
826,975 |
|
7.65 |
|
$10.50 |
|
373,199 |
|
$10.50 |
| $10.56
–$12.19 |
|
413,320 |
|
8.73 |
|
$11.57 |
|
164,159 |
|
$11.56 |
| $12.50
–$14.00 |
|
285,572 |
|
8.58 |
|
$13.21 |
|
91,623 |
|
$13.06 |
| $14.25
–$14.25 |
|
677,616 |
|
9.16 |
|
$14.25 |
|
126,451 |
|
$14.25 |
| $14.75
–$16.38 |
|
244,658 |
|
9.54 |
|
$15.91 |
|
15,470 |
|
$15.19 |
| $17.98
–$17.98 |
|
1,445 |
|
8.92 |
|
$17.98 |
|
429 |
|
$17.98 |
| $18.00
–$18.00 |
|
34,160 |
|
9.00 |
|
$18.00 |
|
16,608 |
|
$18.00 |
| |
|
|
|
|
|
|
|
|
|
|
| $1.80
–$18.00 |
|
3,419,183 |
|
7.73 |
|
$10.56 |
|
1,542,170 |
|
$
8.60 |
| |
|
|
|
|
|
|
|
|
|
|
|
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,
2,469,494 are available for issuance at December 31, 1999. For
the year ended December 31, 1999 employees purchased 263,946 for
$2,766,520. For the year ended December 31, 1998, employees
purchased 348,687 shares for $2,866,943. For the year ended
December 31, 1997, employees purchased 201,390 shares for
$1,365,200. The weighted average fair value of those purchase
rights granted in 1999 was $7.14.
|
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.
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:
|
|
|
Shares
Available
for Grant
|
|
Outstanding Options
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Exercise
Price
|
| 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 |
|
28,000 |
|
|
921,624 |
|
|
$0.10 |
|
$92,162 |
|
|
Canceled |
|
417 |
|
|
(417 |
) |
|
$0.10 |
|
(42 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1999 |
|
28,417 |
|
|
921,207 |
|
|
$0.10 |
|
$92,120 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
There were
no options granted during 1999.
At
December 31, 1999, options outstanding had a weighted average
remaining contractual life of 6.08 years and options to purchase
approximately 847,011 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.
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:
|
|
|
Shares
Available
for Grant
|
|
Outstanding Options
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Exercise
Price
|
| 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 |
|
(90,220 |
) |
|
90,220 |
|
|
$21.17 |
|
1,910,352 |
|
|
Canceled |
|
17,474 |
|
|
(17,474 |
) |
|
$
3.44 |
|
(60,095 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1999 |
|
90,082 |
|
|
1,072,043 |
|
|
$
3.92 |
|
$4,198,811 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair value of options granted during 1999 was
$10.68 as calculated in accordance with FAS 123.
A summary
of Catalytica Combustion Systems’ stock option activity for
the year ended December 31, 1999 is as follows:
Range of
Exercise Prices
|
|
Options Outstanding
|
|
Options Exercisable
|
| |
Number
Outstanding
December 31,
1999
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
As of
December 31,
1999
|
|
Weighted
Average
Exercise
Price
|
| $0.40
–$0.40 |
|
679,837 |
|
6.00 |
|
$
0.40 |
|
645,810 |
|
$
0.40 |
| $2.50
–$2.50 |
|
132,292 |
|
7.75 |
|
$
2.50 |
|
74,761 |
|
$
2.50 |
| $5.60
–$5.60 |
|
64,900 |
|
8.12 |
|
$
5.60 |
|
36,739 |
|
$
5.60 |
| $12.00
–$12.00 |
|
79,244 |
|
8.30 |
|
$12.00 |
|
41,267 |
|
$12.00 |
| $14.50
–$14.50 |
|
23,050 |
|
8.93 |
|
$14.50 |
|
6,972 |
|
$14.50 |
| $15.75
–$15.75 |
|
6,000 |
|
9.50 |
|
$15.75 |
|
2,500 |
|
$15.75 |
| $16.00
–$16.00 |
|
3,000 |
|
8.61 |
|
$16.00 |
|
1,042 |
|
$16.00 |
| $20.50
–$20.50 |
|
3,000 |
|
9.80 |
|
$20.50 |
|
125 |
|
$20.50 |
| $21.60
–$21.60 |
|
80,720 |
|
9.18 |
|
$21.60 |
|
14,981 |
|
$21.60 |
| |
|
|
|
|
|
|
|
|
|
|
| $0.40
–$21.60 |
|
1,072,043 |
|
6.86 |
|
$
3.92 |
|
824,197 |
|
$
1.98 |
| |
|
|
|
|
|
|
|
|
|
|
|
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 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:
|
|
|
Available
for Grant
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Exercise Price
|
| 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 |
|
(11,000 |
) |
|
11,000 |
|
|
$24.65 |
|
271,150 |
|
|
Exercised |
|
—
|
|
|
(37,054 |
) |
|
$
1.85 |
|
(68,718 |
) |
|
Canceled |
|
41,258 |
|
|
(41,258 |
) |
|
$
7.25 |
|
(298,979 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 1999 |
|
558,691 |
|
|
2,351,280 |
|
|
$
7.04 |
|
$16,544,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair value of options granted during 1999 was
$15.26 as calculated in accordance with FAS 123.
A summary
of Catalytica Pharmaceuticals’ stock option activity and
related information for the year ended December 31, 1999 is as
follows:
Range of
Exercise Prices
|
|
Options Outstanding
|
|
Options Exercisable
|
| |
Number
Outstanding
December 31,
1999
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
As of
December 31,
1999
|
|
Weighted
Average
Exercise
Price
|
| $0.40
–$0.40 |
|
347,638 |
|
5.47 |
|
$
0.40 |
|
347,638 |
|
$
0.40 |
| $0.70
–$0.70 |
|
105,271 |
|
6.54 |
|
$
0.70 |
|
95,529 |
|
$
0.70 |
| $1.50
–$1.50 |
|
194,000 |
|
7.34 |
|
$
1.50 |
|
136,368 |
|
$
1.50 |
| $5.50
–$5.50 |
|
1,224,792 |
|
7.64 |
|
$
5.50 |
|
719,292 |
|
$
5.50 |
| $12.00
–$12.00 |
|
18,500 |
|
8.25 |
|
$12.00 |
|
8,573 |
|
$12.00 |
| $16.50
–$16.50 |
|
114,299 |
|
8.33 |
|
$16.50 |
|
64,932 |
|
$16.50 |
| $20.00
–$20.00 |
|
230,781 |
|
8.63 |
|
$20.00 |
|
77,021 |
|
$20.00 |
| $22.00
–$22.00 |
|
105,000 |
|
8.59 |
|
$22.00 |
|
38,438 |
|
$22.00 |
| $24.65
–$24.65 |
|
11,000 |
|
9.43 |
|
$24.65 |
|
4,021 |
|
$24.65 |
| |
|
|
|
|
|
|
|
|
|
|
| $0.40
–$24.65 |
|
2,351,281 |
|
7.43 |
|
$
7.04 |
|
1,491,812 |
|
$
5.38 |
| |
|
|
|
|
|
|
|
|
|
|
CATALYTICA, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In
thousands, except per share amounts)
| |
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
| Product
sales |
|
$90,611 |
|
$
98,476 |
|
$113,105 |
|
$100,435 |
|
$92,031 |
|
$91,099 |
|
$102,351 |
|
$100,165 |
Research and development
revenues |
|
5,313 |
|
1,860 |
|
5,001 |
|
3,840 |
|
6,434 |
|
3,813 |
|
8,852 |
|
6,771 |
|
Total
revenues |
|
95,924 |
|
100,336 |
|
118,106 |
|
104,275 |
|
98,465 |
|
94,912 |
|
111,203 |
|
106,936 |
|
Total
expenses |
|
86,510 |
|
91,189 |
|
103,795 |
|
95,096 |
|
95,575 |
|
86,634 |
|
97,828 |
|
97,296 |
|
Operating
income |
|
9,414 |
|
9,148 |
|
14,311 |
|
9,178 |
|
2,890 |
|
8,278 |
|
13,375 |
|
9,640 |
Net income
attributable to
common shareholders |
|
$
6,372 |
|
$
5,082 |
|
$
9,526 |
|
$
5,792 |
|
$
1,438 |
|
$
5,460 |
|
$
9,795 |
|
$
6,483 |
|
Basic earnings
per share |
|
$
0.11 |
|
$
0.09 |
|
$
0.17 |
|
$
0.10 |
|
$
0.02 |
|
$
0.10 |
|
$
0.17 |
|
$
0.11 |
|
Diluted
earnings per share |
|
$
0.09 |
|
$
0.08 |
|
$
0.14 |
|
$
0.08 |
|
$
0.02 |
|
$
0.08 |
|
$
0.14 |
|
$
0.10 |
CATALYTICA, INC.
Valuation and Qualifying Accounts
(In
thousands)
|
|
|
Balance at
Beginning of
Period
|
|
Additions
Charged to
Bad Debt
Reserves
|
|
Deductions
From Bad
Debt
Reserves
|
|
Balance at
End of
Period
|
| Allowance for Doubtful Accounts: |
|
|
| 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 |
| Fiscal
year ended December 31, 1999 |
|
$1,812,000 |
|
$1,389,000 |
|
—
|
|
$3,201,000 |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
President and Chief Executive Officer
|
Dated:
March 29, 2000
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ricardo B. Levy, his
attorney-in-fact, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his
substitute, may do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the date
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
| /s/
RICARDO
B. LEVY
|
|
|
|
|
Ricardo B. Levy |
|
President, Chief Executive Officer
(Principal Executive Officer),
and Director |
|
March
29, 2000 |
|
|
|
| /s/
JAMES
A. CUSUMANO
|
|
|
|
|
James A. Cusumano |
|
Chairman of the Board |
|
March
29, 2000 |
|
|
|
| /s/
LAWRENCE
W. BRISCOE
|
|
|
|
|
Lawrence W. Briscoe |
|
Vice
President, Finance and
Administration, and Chief Financial
Officer (Principal Accounting and
Financial Officer) |
|
March
29, 2000 |
|
|
|
| /s/
RICHARD
FLEMING
|
|
|
|
|
Richard Fleming |
|
Director |
|
March
29, 2000 |
|
|
|
| /s/
ALAN
GOLDBERG
|
|
|
|
|
Alan Goldberg |
|
Director |
|
March
29, 2000 |
|
|
|
| /s/
HOWARD
HOFFEN
|
|
|
|
|
Howard Hoffen |
|
Director |
|
March
29, 2000 |
Signature
|
|
Title
|
|
Date
|
|
|
| /s/
ERNEST
MARIO
|
|
|
|
|
Ernest Mario |
|
Director |
|
March
29, 2000 |
|
|
|
| /s/
JOHN
A. URQUHART
|
|
|
|
|
John A.
Urquhart |
|
Director |
|
March
29, 2000 |
