UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File No. 0-20966
CATALYTICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2262240
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
430 FERGUSON DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
(415) 960-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
The number of outstanding shares of the Registrant's Common Stock, $.001 par
value, was 19,324,922 as of July 31, 1996.
CATALYTICA, INC.
FORM 10-Q
TABLE OF CONTENTS
JUNE 30, 1996
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations
For the three months ended June 30, 1996 and June 30, 1995 2
Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1996 and June 30, 1995 3
Notes to Condensed Consolidated Financial Statements 4-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6-15
PART II. OTHER INFORMATION 16
SIGNATURES 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1996 1995
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,427 $ 5,021
Short-term investments 7,534 15,881
Accounts receivable, net 3,458 3,557
Notes receivable from employees 346 72
Inventory:
Raw materials 976 498
Work in process 500 178
Finished goods 506 178
-------- --------
1,982 854
Prepaid expenses and other current 545 371
assets -------- --------
Total current assets 34,292 25,756
Property and equipment:
Equipment 8,360 7,950
Leasehold improvements 6,626 6,059
-------- --------
14,986 14,009
Less accumulated depreciation and (9,007) (8,626)
amortization -------- --------
5,979 5,383
Notes receivable from employees 50 100
-------- --------
$ 40,321 $ 31,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,047 $ 1,339
Accrued payroll and related expenses 1,303 1,392
Deferred revenue 1,954 167
Other accrued liabilities 942 590
Notes Payable 1,376 1,995
Current portion of long-term debt 671 2,171
-------- --------
Total current liabilities 7,293 7,654
Long-term debt 1,367 1,556
Non-current deferred revenue 5,600 ---
Minority interest 8,000 ---
Stockholders' equity:
Common stock 19 19
Additional paid-in capital 65,290 65,101
Deferred compensation (63) (86)
Accumulated deficit (47,185) (43,005)
-------- --------
Total stockholders' equity 18,061 22,029
-------- --------
$ 40,321 $ 31,239
======== ========
See accompanying notes.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Product sales $ 2,685 $ 1,669 $ 4,702 $ 3,022
Research revenues 1,424 1,241 2,747 2,423
------- ------- ------- -------
4,109 2,910 7,449 5,445
Costs and expenses:
Cost of sales 2,433 1,765 4,443 3,160
Research and development 2,971 2,529 5,542 4,994
Selling, general and administrative 1,215 1,144 2,461 2,439
------- ------- ------- -------
Total costs and expenses 6,619 5,438 12,446 10,593
------- ------- ------- -------
Operating loss (2,510) (2,528) (4,997) (5,148)
Gain on Sale of Assets 505 --- 505 ---
Interest income 294 135 539 295
Interest expense (99) (65) (227) (123)
------- ------- ------- -------
Net loss $(1,810) $(2,458) $(4,180) $(4,976)
======= ======= ======= =======
Net loss per share $ (0.09) $ (0.16) $(0.22) $(0.33)
======= ======= ======= =======
Shares used in computing net loss per share 19,250 15,101 19,223 15,087
======= ======= ======= =======
See accompanying notes.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYTICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
Six months ended
June 30,
------------------
1996 1995
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,180) $(4,976)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activity:
Depreciation and amortization 412 743
Changes in:
Accounts receivable 99 132
Inventory (1,128) 27
Prepaid expenses and other current assets (174) 430
Accounts payable (292) (259)
Accrued payroll and related expenses (89) (128)
Deferred revenue 7,387 9
Royalties payable to related party --- ---
Other accrued liabilities 352 (182)
-------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,387 (4,204)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (15,520) (3,954)
Maturities of investments 24,000 8,000
Acquisition of property and equipment (1,118) (1,005)
-------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,362 3,041
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts on (issuance of) notes (224) 3
receivable from employees
Additions to debt obligations 1,111 240
Payments on debt obligations (3,419) (192)
Minority investment 8,000 ---
Sale of common stock 189 101
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,657 152
-------- -------
Net increase (decrease) in cash and cash equivalents 15,406 (1,011)
Cash and cash equivalents at beginning of period 5,021 3,638
-------- -------
Cash and cash equivalents at end of period $ 20,427 $ 2,627
======== =======
See accompanying notes.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six-month period ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Catalytica, Inc. annual report on Form 10-
K for the year ended December 31, 1995.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options and warrants
are excluded in the computation as their effect is antidilutive.
3. FINANCIAL INSTRUMENTS
For the purposes of the consolidated cash flows, all investments with
maturities of three months or less at the date of purchase held as
available-for-sale are considered to be cash and cash equivalents;
instruments with maturities of three months or less at the date of purchase
which are held-to-maturity ($1,997,000 at June 30, 1996) and investments
with maturities greater than three months which are available-for-sale
($5,537,000 at June 30, 1996) are considered to be short-term investments;
investments with maturities greater than one year are considered to be long-
term investments and are available-for-sale (none outstanding at June 30,
1996). All investments at June 30, 1996 were carried at amortized cost,
which 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.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
4
date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
5. PFIZER MINORITY INTEREST
On May 8, 1996, Pfizer Inc. ("Pfizer") entered into a Collaborative Research
and License Agreement and a Stock Purchase Agreement with Catalytica Fine
Chemicals, Inc. ("CFC"), a subsidiary of Catalytica, Inc. whereby Pfizer
purchased 150,000 shares of Series B Preferred stock of CFC for $15,000,000.
In consideration of receipt of $7,000,000 of the $15,000,000 paid, CFC is
obligated to perform specified agreed upon research for a five year period.
Accordingly, Catalytica has recognized Pfizer's minority interest in CFC at
$8 million and has recorded deferred revenue of $7 million to be recognized
as research is performed.
6. SALE OF ADVANCED SENSOR DEVICES, INC. NET ASSETS
On June 28, 1996 Catalytica completed the sale of substantially all the
business of its wholly owned subsidiary Advanced Sensor Devices, Inc. (ASD)
to Monitor Labs, Inc. ASD produces continuous emission monitors (CEMs) based
on proprietary catalytic sensors. The terms for selling substantially all of
ASD's assets included an initial payment of approximately $1.1 million at
the closing, an additional amount payable ($0.5 million) which is contingent
on obtaining final certification for the CEM product before the end of 1996,
and a royalty stream based on future revenues. Catalytica realized a $0.5
million net gain over book value on the sale of ASD's assets to Monitor
Labs, Inc. This gain reflects only the payments received thus far by
Catalytica. Any future payments and related gains are at this time
uncertain, and therefore the gains, if any, will be recorded in the period
of actual receipt of any future payments.
5
PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
- --------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of
certain factors set forth under "Risk Factors" and elsewhere in this report.
Catalytica is developing advanced products and manufacturing processes which
use the Company's proprietary chemical catalysis technologies. These products
and processes can yield economic and environmental benefits, including lower
manufacturing costs and reduced hazardous byproducts than those associated
with traditional manufacturing processes. The Company has developed
significant expertise in catalysis, an essential step in the production of
many industrial products. Approximately 96% of the Company's fiscal 1995
product sales were derived from sales of fine chemicals products and its
research and development revenues were derived from the Company's other lines
of business, including natural gas combustion systems. In December 1993, the
Company acquired a manufacturing facility from Sandoz to obtain fine
chemicals manufacturing capacity. As part of the acquisition, Sandoz entered
into a five-year contract for the manufacture of a fine chemical
intermediate. Under the terms of the agreement, Sandoz transferred certain
equipment and technology relating to the manufacture of the particular
intermediate, and agreed to purchase all of its requirements of such
intermediate from the Company, subject to certain volume limitations. These
requirements represent approximately $3.0 million of revenue per year.
However, the timing of receipt of revenues under this contract varies,
depending on the timing of receipt of orders and shipment of products. During
the year ended December 31, 1995 and the six months ended June 30, 1996, 49%
and 21% respectively of the Company's fine chemical product revenues were
derived from sales to Sandoz. The Company has no contractual volume
commitments from Sandoz beyond May 31, 1998, and there can be no assurance
the Sandoz contract will be renewed. The Company plans to eventually replace
the Sandoz contractual products with higher margin product sales to new
customers. The agreement may be terminated by either party upon 30 days prior
written notice for failure to perform a material provision of the agreement,
if such failure is not cured within 60 days after receipt of the notice.
The Company's business has not been profitable to date, and as of June 30,
1996, the Company had an accumulated deficit of $47.2 million. The Company
anticipates incurring additional losses for at least the next 12 to 18
months. The Company expects that losses will fluctuate from quarter to
quarter, as a result of differences in the amount and timing of expenses
incurred and the revenues received. In particular, the Company's operating
results are affected by the size and timing of orders and shipment schedules
of its fine chemicals products, as well as the amount and timing of payments
and expenses under the Company's
6
research and development contracts. Through 1993, substantially all of the
Company's revenues were derived from research and development contracts. Most
of the Company's research and development contracts are subject to periodic
review with the funding partner, which may result in modifications, including
a reduction or termination of funding. The Company's research and development
revenues declined in 1994 and 1995 as certain research projects were
terminated. There can be no assurance the Company will continue to receive
research and development funding, and the Company expects that in the future
it will increasingly rely on product sales for its revenues. In 1994, the
Company began deriving revenues from the sale of fine chemicals products. To
achieve profitable operations, Catalytica must increase significantly its
commercial sales of fine chemicals and successfully develope, manufacture,
introduce, and market or license its combustion systems. There can be no
assurance that the Company will be able to achieve profitability on a
sustained basis, or at all.
On May 8, 1996, Catalytica Fine Chemicals, Inc., announced that Pfizer Inc.
had signed an agreement to infuse $15 million in Catalytica Fine Chemicals.
These funds give Pfizer a 15 percent interest in Catalytica Fine Chemicals
Inc. and a five-year R&D commitment by Catalytica Fine Chemicals to develope
new processes and technology for the manufacture of Pfizer products. Prior to
this investment, Catalytica Fine Chemicals was a wholly-owned subsidiary of
Catalytica, Inc.
During the past four years, Catalytica Fine Chemicals and Pfizer have
collaborated on the development of proprietary processes for key intermediate
products for several of Pfizer's promising new pharmaceuticals. The Pfizer
drugs are at varying stages of approval by the Food and Drug administration,
ranging from Phase II clinical trials through the New Drug Application stage.
Catalytica Fine Chemicals has manufactured intermediates for some Pfizer
drugs and plans to become a supplier of intermediates to Pfizer for other
pharmaceutical products.
On June 28, 1996 Catalytica completed the sale of substantially all the
business of Advanced Sensor Devices, Inc. (ASD) to Monitor Labs, Inc. ASD
produces continuous emission monitors (CEMs) based on proprietary catalytic
sensors. The terms for selling substantially all of ASD's assets included an
initial payment of approximately $1.1 million at the closing, an additional
amount payable ($0.5 million) which is contingent on obtaining final
certification for the CEM product before the end of 1996, and a royalty
stream based on future revenues.
RESULTS OF OPERATIONS
- ---------------------
Net revenues for the three and six months ended June 30, 1996 increased by
41% and 37% respectively, compared to the same periods in 1995 largely due to
an increase in product sales coupled with higher research revenues. Product
sales during the second quarter and first half of 1996 were up 61% and 56%
respectively when compared to the same periods of 1995 primarily due to the
shipment of fine chemical products to new and existing customers. The
increase in research revenues reflects increased activity and funding of the
Company's work on nanoscale materials used in catalysts. This work, which is
being conducted through a joint venture with Microfluidics International
Corp., is being funded
7
by a $2 million grant awarded in 1994 by the U.S. Department of Commerce's
National Institute of Standards and Technology and by funding from potential
customers of this technology.
Cost of goods sold increased 38% for the second quarter of 1996 and increased
41% for the first six months of 1996 compared to the same periods in 1995.
The increase in cost of goods sold for both the three and six month periods'
reflects increased physical volume of product sales coupled with higher than
normal costs associated with production start-up of several new fine chemical
products. Margins were also adversely impacted with lower margins on the fine
chemical products being manufactured for Sandoz under a five-year agreement
negotiated in connection with the purchase of the Company's Bay View facility
plus start-up manufacturing costs associated with the recent introduction of
the new CEMcat(TM) continuous emissions monitor produced by the Company's
subsidiary Advanced Sensor Devices. Margins on the fine chemical products are
subject to fluctuations from quarter to quarter due to various factors
including the mix of products being manufactured, manufacturing efficiencies
achieved on production runs, the length of down-time associated with setting
up new productions runs, and numerous other variables present in the chemical
manufacturing environment.
Research and development expenses increased 17% and 11% for the three and six
months ended June 30, 1996 when compared to the same periods in 1995. The
increase in research and development expenses largely reflect increased
funding of the Company's combustion systems technology and work on nanoscale
materials used in catalysts, coupled with a ramp up of research efforts
supporting the research commitment to Pfizer Inc. Research and development
expenses may fluctuate from quarter to quarter.
Selling, general and administrative expenses increased 6% for the second
quarter of 1996 and increased 1% for the first six months of 1996 compared to
the same periods in 1995 primarily due to incremental sales and marketing
efforts of the Company's subsidiary, Catalytica Fine Chemicals.
The $0.5 million gain on sale of assets represents the net realized gain over
book value on the sale of ASD's assets to Monitor Labs, Inc. (See Overview
above). This gain reflects only the payments received thus far by Catalytica.
Any future payments and related gains are at this time uncertain, and
therefore the gains, if any, will be recorded in the period of actual receipt
of any future payments.
Net interest income increased 118% for the second quarter of 1996 and
increased 83% for the first six months of 1996 compared to the same periods
in 1995 due to higher balances of cash and short-term investments associated
with the Company's $14.7 million recent public offering (November 3, 1995)
and $15 million cash infusion by Pfizer (May 8, 1996). This increased
interest income was partially offset by increased interest expense on a line
of credit and other short-term working capital financing at the Catalytica
Fine Chemicals Bay View manufacturing facility.
8
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total cash and cash equivalents plus short-term investments increased to
$28.0 million compared to $20.9 million at December 31, 1995. This increase
is primarily due to the $15.0 million cash payment by Pfizer for it's equity
investment in Fine Chemicals and prepaid research and development, coupled
with the $1.1 million payment received for the sale of ASD's assets. This
increase was partially offset by the loss for the quarter coupled with the
payments on several working capital lines of credit agreements associated
with the Catalytica Fine Chemicals Bay View manufacturing facility.
In 1994 and 1995, the Company obtained various lines of credit to fund
capital purchases and future working capital needs of its Fine Chemicals
subsidiary. Two of these credit facilities, a working capital line of credit
agreement with $1.4 million outstanding on June 30, 1996 and a promissory
note of $1.5 million used to refinance a subsidiary's outstanding
subordinated debt, expired on July 1, 1996. The $1.5 million promissory note
was repaid in June, and the line of credit balance was repaid on July 1,
1996. In early August, a new working capital line of credit was approved. It
provides a $3.5 million line of credit based on accounts receivable and
expires on June 30, 1997.
The Company's operations to date have required substantial amounts of cash.
The Company anticipates that existing capital resources, product revenues,
and research and development revenues will enable the Company to maintain
current and planned operations for at least the next 18 months. The Company's
future capital requirements will depend on many factors, including rate of
commercialization of the Company's catalytic combustion systems and the need
to expand manufacturing capacity for both its fine chemicals and combustion
systems business. Although there can be no assurance the Company will obtain
orders sufficient to fill the capacity by such time, the Company's
manufacturing facility for pharmaceutical intermediates is expected to reach
capacity in 1997. The Company intends to augment its current pharmaceutical
intermediates manufacturing capacity by acquiring or constructing additional
plant capacity. However, to date, the Company has made plans only to modestly
expand its fine chemicals production capacity through expansion of its Bay
View plant. Adequate funds for future operations, whether from the financial
markets or from collaborative or other arrangements, may not be available
when needed or on terms acceptable to the Company and, if available or
acceptable to the Company, may result in significant dilution to existing
stockholders. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate some or all of its research and
product development programs.
RISK FACTORS
History of Operating Losses and Uncertainty of Future Results
- -------------------------------------------------------------
The Company's business has not been profitable to date, and as of June 30,
1996, the Company had an accumulated deficit of $47.2 million. The Company
anticipates incurring additional losses for at least the next 12 to 18
months. The Company expects that losses will fluctuate from quarter to
quarter as a result of differences in the amount and timing of expenses
incurred and revenues received. In particular, the Company's operating
results are
9
affected by the size and timing of receipt of orders for and shipments of its
fine chemicals products, as well as the amount and timing of payments and
expenses under the Company's research and development contracts. Through
1993, substantially all of the Company's revenues were derived from research
and development contracts. Most of the Company's research and development
contracts are subject to periodic review by the funding partner, which may
result in modifications, including reduction or termination of funding. The
Company's research and development revenues declined in 1995 and 1994 as
certain research projects were terminated. There can be no assurance the
Company will continue to receive research and development funding, and the
Company expects that it will increasingly rely on product sales for its
revenues.
In 1994, the Company began deriving revenues from the sale of fine chemicals
products. Through December 31, 1995, a significant portion of the Company's
product revenues has been derived from sales to Sandoz Agro, Inc. ("Sandoz")
under a five-year contract pursuant to which Sandoz committed to buy certain
minimum volumes for the first four years and eight months. The Company has no
contractual volume commitment from Sandoz beyond May 31, 1998. There can be
no assurance the Sandoz contract will be renewed or replaced with new
business. The Sandoz agreement may be terminated by either party upon 30 days
prior written notice for failure to perform a material provision of the
agreement, if such failure is not cured within 60 days after receipt of
notice. The Company expects that it will need to manufacture new products to
increase revenue. Typically, new products have lower gross margins during the
initial manufacturing phase, which could have an adverse effect on the
Company's results of operations. To achieve profitable operations, Catalytica
must significantly increase its commercial sales of fine chemicals and
successfully develope, manufacture, introduce and market or license its
combustion systems. There can be no assurance that the Company will be able
to achieve profitability on a sustained basis, or at all.
Commercialization; Shift from Research and Development
- ------------------------------------------------------
The Company's success will depend on its ability to complete the transition
from emphasizing research and development to full commercialization and sale
of its products. The Company began manufacturing, marketing and selling
pharmaceutical intermediates in 1994. Success of the Company's fine chemicals
business is dependent upon development and commercialization of appropriate
catalytic processes for new customers and new fine chemicals products. There
can be no assurance the Company will be able to develope and commercialize
such processes. In addition, sales of certain of the Company's fine chemicals
intermediates are dependent upon the customer obtaining clearance from the
United States Food and Drug Administration ("FDA") for marketing of the
customer's end-product. Failure of the Company's customers to obtain the
necessary FDA clearance would have an adverse affect on sales of certain fine
chemicals products.
The Company is still conducting research and development on its combustion
systems. Prior to commercialization of its combustion systems, the Company's
products will be required to undergo rigorous testing by turbine
manufacturers. Ultimate sales of the Company's combustion system products
will depend upon the acceptance and users of the Company's technology by a
limited number of turbine manufacturers and the Company's
10
ability to enter into commercial relationships with these manufacturers. The
Company's subsidiary, Catalytica Combustion Systems, Inc., is currently working
with leading turbine manufacturers, including: General Electric in large
turbines, Allison Engine Co., a subsidiary of Rolls Royce, and Solar Turbines
Inc., a subsidiary of Caterpillar, Inc., in medium size turbines, and Affiliated
Group of Companies (AGC), which uses small Kawasaki Heavy Industries turbines
for mobile cogeneration applications. Neither the Company or its subsidiaries
have formal long-term agreements in place with many of these companies. The
Company's ability to complete research and development and introduce commercial
systems for these markets could be adversely affected if one or more of these
companies terminated its relationship with the Company. If such terminations
occurred, there is no assurance as to whether the Company could enter into a
similar relationship with another manufacturer. The Company currently has
limited manufacturing and marketing capability for its combustion products. The
Company's existing facilities are inadequate for commercial production of the
combustion products under development, and to the extent that the Company
chooses to produce commercial quantities of its products, the Company will be
required to develope or acquire manufacturing capability. In order to market any
of its combustion system products, the Company will be required to develope
marketing capability, either on its own or in conjunction with others. There can
be no assurance that the Company will be able to manufacture its products
successfully or develope an effective marketing and sales organization. In
addition, the Company's combustion systems and processes are expected to be sold
as components of large systems such as natural gas turbines for electric power
plants. Accordingly, the rate of adoption of the Company's systems and processes
may depend in part on economic conditions which affect capital investment
decisions, as well as the regulatory environment. There can be no assurance that
the Company's products will be economically attractive when compared to
competitive products.
Future Capital Requirements and Uncertainty of Additional Funding
- -----------------------------------------------------------------
See Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.
Influence of Environmental Regulations on Rate of Commercialization
- -------------------------------------------------------------------
The rate at which the Company's catalytic combustion systems are adopted by
industrial companies will be heavily influenced by the enactment and
enforcement of environmental regulations at the federal, state and local
levels. Current federal law governing air pollution generally does not
mandate the specific means for controlling emissions, but instead, creates
ambient air quality standards for individual geographic regions to attain
through individualized planning on a regional basis in light of the general
level of air pollution in the region. Federal law requires state and local
authorities to determine specific strategies for reducing emissions or
specific pollutants. Among other strategies, state and local authorities in
all areas which do not meet ambient air quality standards must adopt
performance standards for all major new and modified sources of air
pollution. The more polluted the air in a particular region has become, the
more stringent such controls must be. The Company's revenues will depend, in
part, on the standards, permit requirements and programs these state and
local authorities promulgate for reducing emissions (including
11
emissions of NOx) addressed by the Company's combustion and monitoring
products systems. Demand for the Company's systems and processes will be
affected by how quickly the standards are implemented and the level of
reductions required. Certain industries or companies may successfully delay
the implementation of existing or new regulations or purchase or acquire
emissions credits from other sources, which could delay or eliminate their
need to purchase the Company's systems and processes. Moreover, new
environmental regulations may impose different requirements which may not be
met by the systems and processes being developed by Catalytica or which may
require costly modifications of the Company's products. The United States
Congress is continually reviewing existing environmental regulations. There
can be no certainty as to whether Congress will amend or modify existing
regulations in a manner that could have an adverse effect on demand for the
Company's combustion system products.
Effect of FDA Regulations on Fine Chemicals Manufacturing
- ---------------------------------------------------------
Many of the fine chemicals products the Company manufactures, or will
manufacture in the future, and the final drug products in which they are used
are subject to regulation for safety and efficacy by the FDA and foreign
regulatory authorities before such products can be commercially marketed. The
process of obtaining regulatory clearances for marketing is uncertain, costly
and time consuming. The Company cannot predict how long the necessary
regulatory approvals will take or if its customers will ever obtain such
approval for their products. To the extent the Company's customers do not
obtain the necessary regulatory approvals for marketing new products, the
Company's fine chemicals product sales will be adversely affected.
In the future, the Company intends to manufacture bulk actives. To do so, the
Company would be required to comply with the FDA's current Good Manufacturing
Practices ("cGMP") regulations, and certain of the Company's customers may
also require the Company to adhere to cGMP regulations, even if not required
by the FDA. To comply with cGMP regulations, a manufacturer must continue to
expend time, money and effort in production, recordkeeping and quality
control to ensure that the product meets applicable specifications and other
requirements. The FDA periodically inspects drug manufacturing facilities to
ensure compliance with applicable cGMP requirements. Failure to comply
subjects the manufacturer to possible FDA action, such as suspension of
manufacturing. The FDA also may require the submission of any lot of the
product for inspection and may restrict the release of any lot that does not
comply with FDA regulations, or may otherwise order the suspension of
manufacture, recall or seizure. Failure of the Company's customers to obtain
and to maintain FDA clearance for marketing of the products manufactured by
the Company, or failure of the Company to comply with cGMP regulations as
required by the FDA or the Company's customers, would have a material adverse
effect on the Company's results of operations.
Competition and Technological Change
- ------------------------------------
There are numerous competitors in a variety of industries in the United
States, Europe and Japan which have commercialized and are working on
technologies that could be competitive with those under development by the
Company, including both catalytic and
12
other technological approaches. Some of these competitive products are in
more advanced stages of development and testing. The Company's competitors
may develope technologies and systems and processes that are more effective
than those being developed by the Company or that would render the Company's
technology and systems and processes less competitive or obsolete. In the
fine chemicals market, the Company faces its primary competition from
pharmaceutical companies that produce their own fine chemicals and from other
fine chemicals manufacturers such as Lonza AG and DSM Fine Chemicals. In the
combustion systems market, the Company faces its primary competition from
large gas turbine power generation manufacturers, such as General Electric
Co. ("General Electric"), Allison Engine Company ("Allison") and Solar
Turbines Incorporated ("Solar"), each of which is developing competing
systems for their own turbines. Many of the Company's competitors in the
combustion systems market are also potential customers of the Company, and
the Company expects to at least partially rely on these potential customers
to help commercialize its products. Most of these competitors have greater
research and development capabilities, financial resources, managerial
resources, marketing experience and manufacturing experience than the
Company. If these companies are successful in developing such products, the
Company's ability to sell its systems and processes would be materially
adversely affected. Further, since many of the Company's competitors are
existing or potential customers, the Company's ability to gain market share
may be limited.
Patents and Intellectual Property
- ---------------------------------
The Company has an active program of pursuing patents for its inventions in
the United States and in markets throughout the world relevant to its
business areas. The Company has 54 United Stated patents and 15 pending
United States patent applications.
The Company's success will depend on the ability to continue to obtain
patents, protect trade secrets and operate without infringing on the
proprietary rights of others in the United States and other countries. There
can be no assurance that the Company's patent applications will result in the
issuance of any patent, that any of the Company's existing patents or any
patents that may be issued in the future will provide significant proprietary
protection, that any such patents will be sufficiently broad to protect the
Company's technology, or that any such patents will not be challenged,
circumvented or invalidated. There can also be no assurance that the patents
of others will not have an adverse effect on the Company. Others may
independently develope similar systems or processes or design around patents
issued to the Company. In addition, the Company may be required to obtain
licenses to patents or other proprietary rights. The Company cannot assure
that any licenses required under any such patents or proprietary rights would
be made available on terms acceptable to the Company, if at all. If
Catalytica requires and does not obtain such licenses, it could encounter
delays in system or process introductions while it attempts to design around
such patents, or it could find that the development, manufacture, sale or
licensing of systems or processes requiring such licenses could be
foreclosed. The Company could incur substantial costs in defending itself or
its licensees in litigation brought by others or prosecuting infringement
claims against third parties. The Company could incur substantial costs in
interference proceedings declared by the United States Patent and Trademark
Office in connection with one or more of the Company's or third parties'
patents or patent applications, and those proceedings could also result in an
adverse
13
decision as to the priority of the Company's inventions. The Company also
protects its proprietary technology and processes in part by confidentiality
agreements with its collaborative partners, employees and consultants. There
can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known or be independently discovered
by competitors.
Dependence on Key Personnel
- ---------------------------
The Company's success is dependent on the retention of principal members of
its management and scientific staff and on the ability to continue to
attract, motivate and retain additional key personnel. Competition for such
key personnel is intense, and the loss of the services of key personnel or
the failure to recruit necessary additional personnel could have a material
adverse effect upon the Company's operations and on its research and
development efforts. The Company does not have non-competition agreements
with any of its key employees. The Company's anticipated expansion into areas
and activities requiring additional expertise, such as manufacturing,
marketing and distribution, are expected to place increased demands on the
Company's resources. These activities are expected to require the addition of
new personnel with expertise in these areas and the development of additional
expertise by existing personnel. The failure to acquire such personnel or to
develope such expertise could materially adversely affect prospects for the
Company's success.
Hazardous Materials and Environmental Matters
- ---------------------------------------------
The Company's research and development activities and fine chemicals
manufacturing involve the use of many hazardous chemicals. The Company is
subject to extensive federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
associated waste products. The Company believes that its properties and
operations comply in all material respects with applicable environmental
laws; however, the risk of environmental liabilities cannot be completely
eliminated. Public awareness of environmental issues has increased the impact
of such laws on the conduct of manufacturing operations and ownership of
property. Any failure by the Company to comply with present or future
environmental laws could result in cessation of portions or all of the
Company's operations, impositions of fines, restrictions on the Company's
ability to carry on or expand its operations, significant expenditures by the
Company to comply with environmental laws and regulations, and/or liabilities
in excess of the resources of the Company. The Company does not have
environmental impairment liability insurance. In 1992, the Company completed
a renovation of its research and development facilities at a cost of
approximately $2.3 million to comply with environmental laws and regulations.
There can be no assurance, however, that the Company will not be required to
make additional renovations or improvements to comply with environmental laws
and regulations in the future. The Company's operations, business or assets
could be materially adversely affected in the event such environmental laws
or regulations require the Company to modify current facilities substantially
or otherwise limit the Company's ability to conduct or expand its operations.
14
The Company leases the land on which its fine chemicals facility is located
from Rhone Poulenc, Inc., ("Rhone Poulenc"). The past activities of Rhone
Poulenc's predecessor caused significant soil and groundwater contamination
of the facility and a down gradient area located along the San Francisco Bay.
Consequently, the site is subject to a clean up and abatement order issued by
the Bay Area Regional Water Quality Control Board ("RWQCB") which currently
requires stabilization, containment and monitoring of the arsenic and
volatile organic contamination at the site and surrounding areas. The ground
lease between Rhone Poulenc and the Company includes an indemnity by Rhone
Poulenc against any costs and liabilities that the Company might incur to
fulfill the RWQCB order and to otherwise address the contamination that is
the subject of the order. The Company also has obtained an indemnification
from Sandoz (the immediately preceding owner/operator of the facility)
against any costs and liability the Company may incur with respect to any
contamination caused by Sandoz' operations. However, there can be no
assurance that the Company will not be held responsible with respect to the
existing contamination or named in an action brought by a governmental agency
or a third party because of such contamination. If the Company is held
responsible and it has contributed to the contamination, it will be liable
for any damage to third parties, and will be required to indemnify Rhone
Poulenc and Sandoz for any additional clean up costs or liability they may
incur, with respect to the contamination caused by the Company. The
determination of the existence and additional cost of any such incremental
contamination contribution by the Company could involve costly and time-
consuming negotiations and litigation. Further, any such incremental
contamination by the Company or the unenforceability of either of the
indemnity agreements described above could materially adversely affect the
Company's business and results of operations.
15
PART II - OTHER INFORMATION
On June 6, 1996, at the annual stockholder's meeting, a quorum of
stockholders of the Company approved the following proposals: (1) the re-
election of the Board of Directors; (2) amendment to the Company's 1992 Stock
Option Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 1,200,000 shares; (3) amendment to the Company's 1992
Employee Stock Purchase Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 300,000 shares; (4) adoption of the
Company's 1995 Director Stock Option Plan and the reservation of 100,000
shares of Common Stock for issuance thereunder; and (5) ratification of the
appointment of Ernst & Young LLP to serve as the Company's independent
auditors for the ensuing year.
Proposal 1. Election of Directors
- ----------
Director For Against Abstain
-------- -- ------- --------
James A. Cusumano 15,158,715 596,900
Utz Felcht 15,157,915 597,700
Richard Fleming 15,158,415 597,200
Ricardo B. Levy 15,158,715 596,900
Yoshindo Tomoi 13,738,156 2,017,459
Proposal 2. Amendment to the Company's 1992 Stock Option Plan to increase the
- ----------
number of shares of Common Stock reserved for issuance thereunder by
1,200,000 shares
For Against Abstain
--- ------- -------
9,257,963 3,969,642 161,777
Proposal 3. Amendment to the Company's 1992 Employee Stock Purchase Plan to
- ----------
increase the number of shares of Common Stock reserved for issuance
thereunder by 300,000 shares
For Against Abstain
--- ------- -------
11,502,229 1,825,001 156,277
Proposal 4. Adoption of the Company's 1995 Director Stock Option Plan and
- ----------
the reservation of 100,000 shares of Common Stock for issuance thereunder
For Against Abstain
--- ------- -------
11,198,022 2,198,399 174,409
Proposal 5. Ratification of Appointment of Independent Auditors
- ----------
For Against Abstain
--- ------- -------
15,741,040 3,300 11,275
16
ITEM 6
Exhibits
27.1 Financial Data Schedule.
All information required by other items in Part II is omitted because the items
are inapplicable, the answer is negative or substantially the same information
has been previously reported by the registrant.
CATALYTICA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1996 CATALYTICA, INC.
---------------
(Registrant)
By: /s/ Lawrence W. Briscoe
-----------------------
Lawrence W. Briscoe
Vice President and Chief
Financial Officer
Signing on behalf of the
registrant and as principal
financial officer
17