<PAGE>
As filed with the Securities and Exchange Commission on February 28, 1996
Registration No. 333-00951
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 2833 91-1206026
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
73-4460 QUEEN KAAHUMANU HWY., SUITE 102
KAILUA-KONA, HI 96740
(808) 326-1353
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
GERALD R. CYSEWSKI, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CYANOTECH CORPORATION
73-4460 QUEEN KAAHUMANU HWY., SUITE 102
KAILUA-KONA, HI 96740
(808) 326-1353
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRADFORD J. SHAFER, ESQ. AUGUST J. MORETTI, ESQ.
THOMAS J. LIMA, ESQ. RICHARD FRIEDMAN, ESQ.
TAMARA L. THOMPSON, ESQ. ALI N. GHIASSI, ESQ.
BROBECK, PHLEGER & HARRISON LLP HELLER EHRMAN WHITE & MCAULIFFE
ONE MARKET, SPEAR STREET TOWER 525 UNIVERSITY AVENUE
SAN FRANCISCO, CA 94105 PALO ALTO, CA 94301
(415) 442-0900 (415) 324-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
CYANOTECH CORPORATION
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS ON FORM SB-2
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Outside Front Cover Page; Front of Registration
Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages; Available
Information
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors; Inside Front Cover
Page
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings.................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Stockholders
12. Description of Securities............................ Prospectus Summary; Capitalization; Description of
Capital Stock
13. Interest of Named Experts and Counsel................ Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
15. Organization Within Last Five Years.................. Not Applicable
16. Description of Business.............................. Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related
Transactions........................................ Certain Transactions; Principal Stockholders
20. Market for Common Equity and Related Stockholder
Matters............................................. Outside Front Cover Page; Prospectus Summary; Price
Range of Common Stock and Dividend Policy;
Description of Capital Stock; Shares Eligible for
Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Consolidated Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1996
1,500,000 SHARES
[COMPANY LOGO]
------------------------
CYANOTECH CORPORATION
COMMON STOCK
All 1,500,000 shares of Common Stock offered hereby are being sold by
Cyanotech Corporation ("Cyanotech" or the "Company"). The Company's Common Stock
is currently traded on the Nasdaq National Market under the symbol "CYAN." On
February 27, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $8 5/8 per share. See "Price Range of Common Stock
and Dividend Policy."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ---------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------
Total (3)........................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Does not include a non-accountable expense allowance payable by the Company
to the Representative of the Underwriters. See "Underwriting" for
indemnification arrangements with the several Underwriters.
(2) Before deducting expenses payable by the Company estimated at $495,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 225,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Van Kasper & Company, San Francisco, California on or about
, 1996.
Van Kasper & Company
MARCH , 1996
<PAGE>
CYANOTECH DEVELOPS AND COMMERCIALIZES NATURAL
PRODUCTS FROM MICROALGAE, A LARGELY UNEXPLORED AND UNEXPLOITED
RENEWABLE NATURAL RESOURCE
SPIRULINA is a naturally occurring multi-cellular microscopic plant that
grows extremely fast, producing a new crop approximately every week. The Company
has developed and produces a unique strain of this microalgae, SPIRULINA
PACIFICA, which is a vegetable-based, highly absorbable source of natural beta
carotene, mixed carotenoids and other phytonutrients, B vitamins, gamma
linolenic acid, protein and essential amino acids. SPIRULINA PACIFICA is sold
world-wide to the health and natural foods market.
[Photograph of Spirulina cells]
ASTAXANTHIN is a red pigment used primarily in the aquaculture industry to
impart pink color to the flesh of pen-raised fish and shrimp. The Company is
currently conducting pilot production work and feeding trials on natural
astaxanthin derived from the Haematococcuss microalgae, and is discussing a
strategic alliance with a major aquaculture feed formulator.
[Photograph of haematococcuss cells containing astaxanthin]
MOSQUITOCIDE PRODUCTS are currently under development by Cyanotech. The
toxin gene from Bacillus Thuringinsis var, israelensis (Bti) has been
genetically engineered into Synechococcus, a blue green algae which is a food
for mosquito larvae. The Company believes that when applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control. Development of a commercial production
system for this product is scheduled to start by mid-1996.
[Photograph of Syneochoccus cells]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
Cyanotech has developed and implemented proprietary production and
harvesting technologies, systems and processes permitting year-round production
of SPIRULINA PACIFICA.
1. GROWING PONDS
SPIRULINA PACIFICA is cultured in shallow, open ponds adjacent to the
Pacific Ocean. Paddlewheels agitate the water, permitting even exposure of the
algae to the sun. A combination of fresh water and nutrient-rich deep ocean
water, drawn from a depth of 2,000 feet, is used to fill the ponds.
[Photograph of Spirulina growing ponds]
2. SEPARATION SCREENS
SPIRULINA PACIFICA is pumped from the culture ponds through underground
pipes to a process building where it is screened for particulate matter and then
separated by stainless steel screens from the culture medium. In this system,
100% of the growing media is continuously recycled to culture ponds to become
the nutrient base for the next crop.
[Photograph of stainless steel screens used in processing the Company's
Spirulina products]
3. VACUUM WASHING SYSTEM
Prior to drying, SPIRULINA PACIFICA is washed three times with fresh water
and vacuum filtered.
[Photograph of vacuum washing system used in processing the Company's
Spirulina products.]
4. OCEAN CHILL DRYING (U.S. PATENT 15,276,977)
Cyanotech has developed and patented a drying system for powder microalgae
products called OCEAN CHILL DRYING. The drying process takes approximately three
seconds and results in a dark green powder with a consistency similar to flour.
[Drawing depicting the Company's Ocean Chill Drying process]
5. FINISHED PRODUCT
Bulk SPIRULINA PACIFICA powder, tablets and flakes are packaged in foil
laminate heat-sealed bags with an oxygen absorbing pack sealed in each bag. This
packaging ensures product freshness and extends the shelf life of bulk SPIRULINA
PACIFICA.
[Photograph of finished powder packaging]
6. COLD COMPRESSION TABLETING
SPIRULINA PACIFICA tablets are produced by Cyanotech by blending SPIRULINA
PACIFICA powder with a minimum amount of excipients and tableting in a cold
compression tablet making machine.
[Photograph of cold compression tablet-making machine]
7. QUALITY ASSURANCE TESTING
A sample from each lot of SPIRULINA PACIFICA is subjected to quality
assurance testing including bulk density, moisture, particulate matter, color
and taste and subjected to a prescribed set of microbiological tests for food
products.
[Photograph of Quality Assurance Testing Process]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED AND UNLESS THE CONTEXT INDICATES OTHERWISE, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND (II) CONVERSION OF THE COMPANY'S 1,250,000 SHARES OF SERIES A PREFERRED
STOCK INTO 250,000 SHARES OF COMMON STOCK, EFFECTIVE AS OF THE CLOSING OF THIS
OFFERING. SEE "UNDERWRITING."
THE COMPANY
Cyanotech develops and commercializes natural products from microalgae. The
Company is currently producing microalgae products for the nutritional
supplement and immunological diagnostics markets and is also developing
microalgae-based products for the aquaculture feed/pigments, biopesticide and
food coloring markets. Microalgae are a diverse group of over 30,000 species of
microscopic plants which have a wide range of physiological and biochemical
characteristics and naturally contain high levels of nutrients. Microalgae
represent a largely unexplored and unexploited renewable natural resource, which
grow much faster than land-based plants. Under favorable growing conditions,
certain microalgae produce a new crop every week. Cyanotech has designed,
developed and implemented proprietary production and harvesting technologies,
systems and processes which eliminate many of the stability and contamination
problems frequently encountered in the production of microalgae. The Company's
technologies, systems, processes and favorable growing location permit
year-round harvesting of its microalgal products in a cost-effective manner. The
Company believes that these accomplishments have not been equaled by any other
company, university or research institute.
Cyanotech's principal revenues are derived from sales of microalgae-based
"Spirulina" products for the vitamin and supplement market, which for the United
States alone is estimated at $3.7 billion. SPIRULINA PACIFICA is a unique strain
of Spirulina developed by Cyanotech which provides a vegetable-based, highly
absorbable source of natural beta carotene, mixed carotenoids and other
phytonutrients, B vitamins, gamma linolenic acid ("GLA"), protein and essential
amino acids. The Company believes its Hawaiian SPIRULINA PACIFICA has achieved
high brand identity among both wholesale and retail customers, and that the
Company's products have better taste, more consistent color and greater
concentrations of natural beta carotene than competing Spirulina products. Since
1993, the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has tripled its Spirulina production capacity since 1993 and continues
to increase capacity. Cyanotech currently markets its products in the United
States and twelve other countries through a combination of retail, wholesale,
and private label channels, and plans to market new products either directly or
through strategic alliances where appropriate.
Cyanotech maintains an environmentally responsible philosophy in the
development and production of its products, using natural production methods and
resources which employ extensive recycling of raw materials and nutrients. The
Company believes that these recycling methods result in substantially lower
operating costs. The Company's production system operates without the use of
pesticides and herbicides, and does not create erosion, fertilizer runoff or
water pollution. The Company believes that it is the only producer of microalgae
to receive organic certification.
The Company is incorporated in Nevada. Its principal executive offices are
located at 73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, Hawaii 96740,
and its telephone number is (808) 326-1353. Unless otherwise indicated, all
references in this Prospectus to the "Company" and "Cyanotech" refer to
Cyanotech Corporation, a Nevada corporation, and its wholly-owned subsidiary,
Nutrex, Inc.
------------------------
SPIRULINA PACIFICA-TM-, OCEAN-CHILL DRYING-TM-, HAWAIIAN ENERGIZER-TM- and
NUTREX-TM- are trademarks of the Company. SPIRULINA PACIFICA is a registered
trademark of the Company in Japan. The SPIRULINA PACIFICA logo is a registered
trademark of the Company in the United States. This Prospectus also includes
trademarks of entities other than the Company.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,500,000 shares
Common Stock to be outstanding after the
offering.................................... 15,232,460 shares (1)
Use of proceeds.............................. Construction of additional Spirulina culture
ponds, a natural astaxanthin production
facility and culture ponds, a
laboratory/warehouse and a cogeneration
facility, and for working capital and general
corporate purposes
Nasdaq symbol................................ CYAN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
CONSOLIDATED STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C>
Net sales............................................... $ 2,697 $ 4,150 $ 2,921 $ 5,972
Gross profit............................................ 1,202 1,875 1,339 3,188
Income from operations.................................. 220 718 534 1,781
Net income.............................................. 204 769 503 1,729
Net income per common share............................. $ 0.02 $ 0.05 $ 0.04 $ 0.12
Weighted average number of common shares and common
share equivalents...................................... 13,330 13,589 13,907 14,452
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
DECEMBER
JUNE 30, SEPTEMBER 30, 31,
1995 1995 1995
----------- ------------- -----------
Net sales.................................................. $ 1,568 $ 2,056 $ 2,348
<S> <C> <C> <C>
Gross profit............................................... 778 1,112 1,298
Income from operations..................................... 418 621 742
Net income................................................. 413 605 711
Net income per common share................................ 0.03 0.04 0.05
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------
AS
ACTUAL ADJUSTED (2)
--------- -------------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C>
Working capital........................................................ $ 1,004 $ 12,509
Equipment and leasehold improvements, net.............................. 7,204 7,204
Total assets........................................................... 9,649 21,154
Stockholders' equity................................................... 7,371 18,876
</TABLE>
- ------------------------
(1) Includes 3,674,885 shares of Common Stock which are issuable upon conversion
of the Company's Series C Preferred Stock. Excludes as of December 31, 1995
(i) 997,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants, (ii) 400,000 shares of Common Stock reserved for
issuance under the Company's 1995 Stock Option Plan, of which options to
purchase 101,000 shares are outstanding, (iii) 213,475 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding options
under the Company's 1985 Incentive Stock Option Plan, (iv) 89,000 shares of
Common Stock reserved for issuance under the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan, of which options to purchase
9,000 shares of Common Stock are outstanding, and (v) 102,000 shares of
Common Stock issuable upon exercise of other non-qualified options to
purchase Common Stock. See "Capitalization," "Management -- Stock Option
Plan," "Certain Transactions" and "Description of Capital Stock."
(2) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price per share
of $8 5/8, the last reported sale price of the Common Stock on the Nasdaq
National Market on February 27, 1996, and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON
STOCK OFFERED HEREBY.
PRODUCT CONCENTRATION
Since 1992 substantially all of the Company's net sales have been
attributable to its SPIRULINA PACIFICA products. Sales of SPIRULINA PACIFICA
products accounted for approximately 97% of the Company's net sales in each of
the years ended March 31, 1994 and 1995 and the nine months ended December 31,
1995. The Company believes that SPIRULINA PACIFICA products will continue to
constitute a substantial portion of net sales. The Company plans to increase
production of Spirulina products substantially in 1996 by using a portion of the
net proceeds from this offering to construct more Spirulina ponds and related
Spirulina processing facilities. There can be no assurance that the market for
Spirulina products in general, or the Company's SPIRULINA PACIFICA products in
particular, will support the increased output anticipated from the Company's
planned expansion. Any decrease in the overall level of sales of, or the prices
for, the Company's SPIRULINA PACIFICA products, whether as a result of
competition, change in consumer demand, increased worldwide supply of Spirulina
or any other factors, would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's Spirulina
products are rich in natural beta carotene. Two large scale studies released in
January 1996 on synthetic beta carotene indicated that certain health benefits
previously associated with beta carotene generally do not exist in synthetic
beta carotene. Although synthetic beta carotene has different properties from
natural beta carotene, consumers' perception of beta carotene generally may be
adversely affected by these and other studies. If consumer perceptions of the
negative effects of synthetic beta carotene are extended to the Company's
products which contain natural beta carotene, the Company's business, financial
condition and results of operation could be materially adversely affected. See
"Management's Discussions and Analysis of Financial Condition and Results of
Operations."
CUSTOMER CONCENTRATION AND RISKS ASSOCIATED WITH CHANGES IN PRODUCT MIX
Approximately 32.3% and 49.9% of the Company's net sales in the year ended
March 31, 1995 and the nine months ended December 31, 1995, respectively, were
derived from sales to the Company's top three customers during those periods.
The Company's largest customer, a Hong Kong-based natural products marketing and
distribution company, accounted for approximately 3.0% and 31.4% of Cyanotech's
net sales in the year ended March 31, 1995 and the nine months ended December
31, 1995, respectively. The Hong Kong-based company is a multilevel marketing
organization which purchases the Company's packaged consumer products and sells
them under a private label. The Company understands that the government of
China, where the Hong Kong-based company distributes the vast majority of the
products it purchases from the Company, is considering regulating multilevel
marketing organizations. Any such regulation could result in reduced orders for
the Company's products being placed by the Hong Kong-based company, which could
in turn have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's second largest customer, a
Canadian Spirulina marketing and distribution company, accounted for
approximately 16.8% and 11.0% of Cyanotech's net sales in the year ended March
31, 1995 and the nine months ended December 31, 1995, respectively. The
Company's third largest customer, a Dutch-based Spirulina marketing and
distribution company, accounted for approximately 12.5% and 7.5% of Cyanotech's
net sales in the year ended March 31, 1995 and the nine months ended December
31, 1995, respectively. The loss of, or significant adverse change in, the
relationship between the Company and its largest customer or any other major
customer would have a material adverse effect on the Company's business,
financial condition and results of operations. The loss of, or reduction in
orders from, any significant customer, losses arising from customer disputes
regarding shipments, fees, product condition or related matters, or the
Company's inability to collect accounts receivable from any major customer could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Customers."
A majority of the Company's net sales are derived from the Company's bulk
SPIRULINA PACIFICA products, which have lower associated gross profit (measured
in dollars) but higher associated gross margin (measured
5
<PAGE>
as a percentage of net sales) than the Company's packaged consumer products.
Accordingly, an increase in the percentage of net sales attributable to bulk
products would increase the Company's gross margin. Conversely, an increase in
the percentage of the Company's net sales attributable to the Company's packaged
consumer products would decrease its gross margin but likely increase gross
profit. The Company expects that its product mix will vary from period to
period, and a decrease in orders from a customer such as the Company's largest
current customer which purchases only packaged consumer products could require
the Company to reallocate greater portions of its production capacity to its
lower gross profit bulk products. In such event, the Company expects that its
gross margin would be favorably impacted but that its earnings would be
adversely affected.
The Company currently estimates that net sales for the three months ending
March 31, 1996 will be comparable to or lower than net sales for the three
months ended December 31, 1995, principally due to (i) lower orders from the
Company's largest customer and, to a lesser extent, (ii) less sunlight, lower
temperatures and more rainfall related to normal seasonality during the first
eight weeks of the quarter. The decrease in sales is expected to result in lower
net income in the three months ending March 31, 1996 compared to the three
months ended December 31, 1995. Although there can be no assurance in this
regard, based on discussions with the Company's largest customer, the Company
anticipates that sales to its largest customer should continue to represent a
significant portion of the Company's total net sales in the three months ending
March 31, 1996 and the year ending March 31, 1997. See "-- History of Losses;
Fluctuations in Operating Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT DEVELOPMENT
Other than its Spirulina and phycobiliprotein products, the Company
currently has no products available for commercial sale. The Company believes
that its future success is substantially dependent on the expansion of the
worldwide Spirulina market and the Company's ability to successfully develop and
commercialize new products and penetrate new markets. For example, the Company
is currently conducting pilot production work on natural astaxanthin, a red
pigment principally used in the aquaculture industry to impart pink color to the
flesh of pen-raised fish and shrimp. Natural astaxanthin is a new product for
the Company and many production issues must be resolved prior to commercial
production. The Company's future product plans also include a genetically
engineered mosquitocide and natural food colorings. There can be no assurance
that the Company can successfully develop these or any other additional
products, that any such products will be capable of being produced in commercial
quantities at reasonable cost, or that any such products will achieve market
acceptance. The Company has little experience marketing its products directly
and is generally dependent on the marketing skills and efforts of third parties.
There can be no assurances as to whether the marketing efforts of such third
parties will be successful or whether such third parties will eventually compete
with the Company or assist the Company's competitors. Many other companies have
significantly greater marketing and product development experience and resources
to devote to marketing and product development than the Company. The Company has
entered into, and expects to enter into additional, selected strategic alliances
with third parties for product development and marketing. There can be no
assurances regarding the performance of such third parties, or the overall
success, if any, of such strategic alliances. The inability of the Company to
successfully develop or commercialize these or any additional products would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products Under Development."
CONCENTRATION OF PRODUCTION CAPACITY; RELIANCE ON CLIMATE CONDITIONS
All of the Company's production capacity is located at its Kailua-Kona,
Hawaii facility, on property leased from the State of Hawaii and which is
situated on a 200-year-old lava flow adjacent to a dormant volcano. The Company
maintains minimal finished goods inventory. In the event that production at or
transportation from such facility were interrupted by fire, volcanic eruption,
earthquake, tidal wave, hurricane, or other natural disaster, work stoppage,
termination or suspension of the Company's facility lease by the State of Hawaii
for public use or similar purposes, other regulatory actions or any other cause,
the
6
<PAGE>
Company would be unable to continue to produce its products at such facility.
Such an interruption would materially and adversely affect the Company's
business, financial condition and results of operations. See "Business --
Manufacturing" and "-- Properties."
Due to the importance of sunlight and a consistent warm temperature for
microalgae growth, the Company's production is significantly affected by weather
patterns and seasonal weather changes. For example, the Company estimates that
its ponds are up to approximately 20% less productive between the months of
November and February due to fewer daylight hours and lower temperatures than
during other months of the year. Any unseasonably cool or cloudy weather would
adversely impact the Company's production and could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of Gerald R. Cysewski, its President and Chief Executive Officer, and
other members of the Company's executive management and the loss of any of such
key executives could have a material adverse effect on the Company's business,
financial condition or results of operations. Furthermore, the Company's future
performance depends on its ability to identify, recruit and retain key
management personnel. The competition for such personnel is intense, and there
can be no assurance the Company will be successful in such efforts. The Company
is also dependent on its ability to continue to attract, retain and motivate
production, distribution, sales and other personnel, of which there can be no
assurance. The failure to attract and retain such personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."
RISKS ASSOCIATED WITH MANAGING EXPANDING OPERATIONS
Since 1992 the Company has experienced substantial growth in its revenues
and operations, and has undergone substantial changes in its business that have
placed significant demands on the Company's management, working capital and
financial and management control systems. The Company's current expansion plans
also may place a significant strain on the Company's management, working capital
and financial and management control systems. Failure to upgrade the Company's
operating, management and financial control systems or difficulties encountered
during such upgrades could adversely affect the Company's business, financial
condition and results of operations. Although the Company believes that its
systems and controls are adequate to address its current needs, there can be no
assurance that such systems will be adequate to address future expansion of the
Company's business. The Company's results of operations will be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses resulting from any expansion and there can be no assurance
that any expansion will be profitable or that it will not adversely affect the
Company's results of operations. In addition, the success of any future
expansion plans will depend in part upon the Company's ability to continue to
improve and expand its management and financial control systems, to attract,
retain and motivate key personnel, and to raise additional required capital.
There can be no assurance that the Company will be successful in these regards.
COMPETITION
The Company's SPIRULINA PACIFICA products compete with a variety of
vitamins, dietary supplements, other algal products and similar nutritional
products available to consumers. The nutritional products market is highly
competitive. It includes international, national, regional and local producers
and distributors, many of whom have greater resources than the Company, and many
of whom offer a greater variety of products. The Company believes that its
direct competition in the Spirulina market currently is from Dainippon Ink and
Chemical's Earthrise Farms facility in California. To a lesser extent, the
Company competes with numerous smaller farms in China, India, Thailand, Brazil
and South Africa. The Company's packaged consumer products marketed under its
Nutrex brand also compete with products marketed by health food manufacturing
customers of the Company who purchase bulk Spirulina from the Company and
7
<PAGE>
package it for retail sales. A large Spirulina production facility located in
Mexico, which has been closed since 1993, may reopen. Should this facility
resume production in substantial quantities, the Company will encounter
increased competition.
In addition to other Spirulina based products, SPIRULINA PACIFICA competes
in certain markets with other "green superfoods," such as Chlorella (a green
microalgae with sales primarily in Japan), APHAMIZOMENON (a blue-green algae
harvested from an eutrophic lake in Oregon with sales primarily through
multilevel marketing) and cereal grasses such as barley, wheat and kamut. In
addition, major food and beverage companies may become more active in the
nutritional products business, either directly or through the acquisition of
smaller companies. A decision by another company to focus on the Company's
existing or target markets or a substantial increase in the overall supply of
Spirulina could have a material adverse effect on the Company's business,
financial condition and results of operations. While the Company believes that
it competes favorably on factors such as quality, brand name recognition and
loyalty, the Company's SPIRULINA PACIFICA products have typically been sold at
prices higher than other Spirulina products. There can be no assurance that the
Company will not experience competitive pressure, particularly with respect to
pricing, that could adversely affect its business, financial condition and
results of operations.
The products being developed by Cyanotech will compete with both synthetic
and natural products on the basis of price and quality. The Company's future
competitors may include major chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of Cyanotech. Cyanotech believes that its proprietary
technology combined with the metabolic diversity and high productivity of
microalgae will allow the Company to compete in large market areas against large
companies, although there can be no assurance in this regard.
The Company's natural astaxanthin product, if successfully developed, will
compete directly against synthetic astaxanthin produced and marketed worldwide
by Hoffman LaRoche. The Company believes that there are no other significant
producers of astaxanthin. Although the Company is unaware of any studies
indicating that natural astaxanthin has any benefits not otherwise provided by
synthetic astaxanthin, it believes there is consumer demand for a natural
astaxanthin product. See "Business -- Competition."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Although the Company regards its proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to its success and
relies on a combination of trade secret, contract, patent, copyright and
trademark law to establish and protect its rights in its products and
technology, there can be no assurance that the Company will be able to protect
its technology adequately or that competitors will not be able to develop
similar technology independently. In addition, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as the laws of the United States. Cyanotech has had one United States
patent issued to it. Litigation in the United States or abroad may be necessary
to enforce the Company's patent or other intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation, even if successful, could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's business,
results of operations and financial condition. Additionally, although currently
there are no pending claims or lawsuits that have been brought against the
Company, if any such claims are asserted against the Company, the Company may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance however, that a license would be available on terms
acceptable or favorable to the Company, if at all.
While the disclosure and use of Cyanotech's know-how and trade secrets are
generally controlled under agreements with the parties involved, there can be no
assurance that all confidentiality agreements will be honored, that others will
not independently develop equivalent technology, that disputes will not arise
concerning the ownership of intellectual property, or that dissemination of the
Company's trade secrets will not occur. The Company anticipates that it may in
the future apply for additional patents on certain aspects of its technology. No
assurance can be given that its patent applications will issue as patents or
that any patent now or to be issued will provide the Company with preferred
positions with respect to the covered technology. Additionally, there can be no
assurance that any patent issued to the Company will not be
8
<PAGE>
challenged, invalidated or circumvented or that the rights granted thereunder
will provide adequate protection to the Company's products. Furthermore, there
can be no assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company. See "Business -- Patents,
Licenses and Trademarks."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and is likely to continue to be, highly
volatile. The market price of the Common Stock has fluctuated substantially in
recent periods, rising from $1 1/8 on March 24, 1995, to a high of $14 7/8 at
November 27, 1995, to $8 5/8 at February 27, 1996. Future announcements
concerning the Company or its competitors, quarterly variations in operating
results, introduction of new products or changes in product pricing policies by
the Company or its competitors, changes in market demand for Spirulina,
acquisition or loss of significant customers, weather patterns and other acts of
nature that may affect or be perceived to affect the Company's production
capability, or changes in earnings estimates by analysts, among other factors,
could cause the market price of the Common Stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years. This volatility has had a substantial effect on the market prices
of securities of many smaller public companies for reasons frequently unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Common Stock. There
can be no assurance that the market price of the Common Stock will not decline
below the public offering price. See "Price Range of Common Stock and Dividend
Policy."
RISK OF PRODUCT LIABILITY
Use of the Company's products and potential products in human consumption
may expose the Company to liability claims from the use of such products,
although the Company has not been subject to any such claims to date. Although
the Company conducts regular quality assurance tests, there can be no assurance
that the Company's products will not suffer contamination at the Company's
facilities or in the distribution channel, which could in turn cause injury to
consumers. Although the Company does not have any reason to believe that natural
beta carotene increases health risks, one large scale study released in January
1996 indicated that among smokers and persons who worked with asbestos, users of
synthetic beta carotene suffered a higher incidence of death from lung cancer
and heart disease. The Company maintains product liability insurance in limited
amounts for products involving human consumption. However, there can be no
assurance that the Company's insurance will be adequate or will remain available
to cover any liabilities arising from use of the Company's current or future
products. A contamination problem, product liability claim or recall of products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability and
Legal Proceedings."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In the years ended March 31, 1994 and 1995 and the nine months ended
December 31, 1995, international sales accounted for approximately 32%, 42% and
56%, respectively, of the Company's net sales. The Company expects that
international sales will continue to represent a significant portion of its net
sales. The Company's business, financial condition and results of operations may
be materially adversely affected by any difficulties associated with managing
accounts receivable from international customers, tariff regulations, imposition
of governmental controls, political and economic instability or other trade
restrictions. Although the Company's international sales are currently
denominated in United States dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in the affected country, leading to a reduction in sales in that
country. Additionally, the Company's largest customer resells the Company's
products principally in mainland China, and thus the Company is exposed to
political, legal, economic and other risks and uncertainties associated with
doing business in China. See "-- Customer Concentration and Risks Associated
with Changes in Product Mix," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Marketing and Sales" and
"-- Distribution."
9
<PAGE>
HISTORY OF LOSSES; FLUCTUATIONS IN OPERATING RESULTS
The Company was formed in 1983 and did not become profitable on an annual
basis until fiscal 1992. As of December 31, 1995, the Company's accumulated
deficit was $5.4 million. There can be no assurance that the Company will be
consistently profitable on either a quarterly or an annual basis. The Company
has experienced quarterly fluctuations in operating results and anticipates that
these fluctuations may continue in future periods. Future operating results may
fluctuate as a result of changes in sales levels to the Company's largest
customers, new product introductions, weather patterns, the mix between sales of
bulk products and packaged consumer products, start-up costs associated with new
facilities, expansion into new markets, sales promotions, competition, increased
energy costs, the announcement or introduction of new products by the Company's
competitors, changes in the Company's customer mix, and overall trends in the
market for Spirulina products. While a significant portion of the Company's
expense levels are relatively fixed, and the timing of increases in expense
levels is based in large part on the Company's forecasts of future sales, if net
sales are below expectations in any given period, the adverse impact on results
of operations may be magnified by the Company's inability to adjust spending
quickly enough to compensate for the sales shortfall. The Company may also
choose to reduce prices or increase spending in response to market conditions,
which may have a material adverse effect on the Company's results of operations.
The Company currently estimates that net sales for the three months ending
March 31, 1996, will be comparable to or lower than net sales for the three
months ended December 31, 1995, principally due to (i) lower orders from the
Company's largest customer, a Hong Kong-based multilevel marketing organization
that purchases the Company's packaged consumer products and sells them under a
private label and, to a lesser extent, (ii) less sunlight, lower temperatures
and more rainfall related to normal seasonality during the first eight weeks of
the quarter. The decrease in sales of packaged consumer products is expected to
result in lower net income in the three months ending March 31, 1996 compared to
the three months ended December 31, 1995. Although there can be no assurance in
this regard, based on discussions with the Company's largest customer, the
Company anticipates that sales to its largest customer should continue to
represent a significant portion of the Company's total net sales in the three
months ending March 31, 1996 and the year ending March 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
POTENTIAL DIFFICULTY IN OBTAINING FDA AND OTHER GOVERNMENT APPROVALS
The Company's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). Each line of
products that is or may be marketed by the Company, its licensees or its
collaborators can present unique regulatory problems and risks, depending on the
product type, uses and method of manufacture. The FDA regulates, to varying
degrees and in different ways, dietary supplements, other food products, and
diagnostic medical device and pharmaceutical products, including their
manufacture, testing, exportation, labeling, and, in some cases, advertising.
Generally, prescription pharmaceuticals and certain types of diagnostic
products, as medical devices, are regulated more rigorously than foods, such as
dietary supplements. The EPA rigorously regulates pesticides, among other types
of products.
The Company is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. The Company works with foreign
distributors in its compliance with foreign laws, regulations and policies.
There can be no assurance that any changes with respect to federal, state and
foreign laws, regulations and policies, and, particularly with respect to the
FDA and EPA or other such regulatory bodies, with possible retroactive effect,
will not have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that any of the
Company's potential products will satisfy applicable regulatory requirements.
See "Business -- Government Regulation."
10
<PAGE>
CONTROL BY OFFICERS AND DIRECTORS
The Company's officers and directors and their affiliates will, in the
aggregate, control approximately 39.8% of the voting power of the capital stock
of the Company upon completion of this offering. As a result, in certain
circumstances, these stockholders acting together may be able to determine
matters requiring approval of the stockholders of the Company, including the
election of the Company's directors, or they may delay, defer or prevent a
change in control of the Company. In addition, Eva R. Reichl, a director of the
Company, has the contractual right to nominate one person for election as a
director. See "Certain Transactions," "Principal Stockholders" and "Description
of Capital Stock."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock, 734,977 of which are currently outstanding and
designated as Series C Preferred Stock, and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock. The consent of holders of a majority of the outstanding shares
of Series C Preferred Stock is required to change the powers, preferences or
rights of such shares, sell all or substantially all of the Company's assets or
merge the Company. Such rights could have the effect of delaying, deferring or
preventing a change in control of the Company. While the Company has no present
intention to issue additional shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with the possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company and entrenching existing
management. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company is also subject to the anti-takeover provisions of Sections
78.411 through 78.444 of the Nevada Revised Statutes, which restrict certain
"combinations" with "interested stockholders" unless certain conditions are met.
By delaying and deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Company's Common Stock. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following the offering could have an adverse impact on the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding approximately 15.2 million shares of Common Stock, assuming the
conversion of all the outstanding shares of Preferred Stock into Common Stock,
no exercise of the Underwriters' over-allotment option and no exercise of
options or warrants to purchase the Company's Common Stock. Of these shares, all
of the Common Stock being sold hereby and approximately 5.5 million shares held
by existing stockholders will be freely tradeable (unless such shares are held
by an "affiliate" of the Company as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. The remaining 8.3
million shares were issued and sold by the Company in private transactions
("Restricted Shares") and are eligible for public sale only if registered under
the Securities Act or sold in accordance with Rule 144 thereunder. Approximately
1.1 million of the Restricted Shares are currently eligible for sale in the
public market pursuant to Rule 144(k) (of which approximately 870,000 shares are
subject to the agreements not to sell described below). Approximately 7.2
million additional Restricted Shares will be eligible for sale in reliance on
Rule 144 (of which approximately 6.6 million are subject to the agreements not
to sell described below). The directors, executive officers and stockholders of
the Company who hold in the aggregate approximately 7.5 million shares have
agreed, subject to certain limited exceptions, not to offer, sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock owned by them for the 120-day period after the closing of
this offering without the prior written consent of Van Kasper & Company. In
addition, the Company has agreed that for a period of 120 days after the date of
this Prospectus, it will not, without the prior written consent of Van Kasper &
Company, issue, offer, sell, grant options to purchase or otherwise dispose of
any equity security or securities convertible into or exchangeable for equity
securities except for (i) shares of the Common Stock offered hereby, (ii) shares
of Common Stock issued pursuant to the exercise of outstanding options and
warrants, (iii) shares of Common Stock issued pursuant to the
11
<PAGE>
conversion of Preferred Stock and (iv) options granted to its associates,
officers, directors and consultants so long as none of such options become
exercisable during said 120-day period. The Company has reserved 400,000 shares
of Common Stock for issuance under the 1995 Stock Option Plan, options to
purchase 101,000 shares of which have been granted. The Company also has
outstanding options to purchase 213,475 shares, which options were granted under
the 1985 Incentive Stock Option Plan. In addition, the Company has options
outstanding to purchase 9,000 shares under the 1994 Non-Employee Directors Stock
Option and Stock Grant Plan and other non-qualified options outstanding to
purchase 102,000 shares of Common Stock. The Company has filed registration
statements under the Securities Act covering an aggregate of 800,000 shares of
Common Stock issuable under the Company's 1995 Stock Option Plan and 1985
Incentive Stock Option Plan. Shares issued upon the exercise of stock options or
previously issued on exercise, generally will be available for sale in the open
market subject to Rule 144 volume limitations applicable to affiliates and the
lock-up agreements with Van Kasper & Company described above. No predictions can
be made as to the effect, if any, that market sales of Common Stock or the
availability of Common Stock for sale will have on the market price prevailing
from time to time. Sale of a substantial number of shares of Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock. See "Shares Eligible for Future Sale."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be approximately $11.5 million at an
assumed offering price of $8 5/8 per share, the last reported sale price of the
Common Stock on the Nasdaq National Market on February 27, 1996. Since 1993, the
Company has been capacity-constrained, with demand for its bulk SPIRULINA
PACIFICA products exceeding the Company's production capabilities. Accordingly,
the Company has not been able to accept any major new customers since March
1995. The Company intends to use approximately $4 million of the net proceeds of
the offering to construct additional culture ponds and related processing
facilities in order to increase the production of SPIRULINA PACIFICA products. A
portion of the net proceeds are expected to be used as follows: (i) construction
of a facility and culture ponds for the production of natural astaxanthin, (ii)
construction of a laboratory/warehouse, and (iii) construction of a cogeneration
facility. The remainder of the net proceeds will be used for working capital and
general corporate purposes.
Pending such uses, the Company intends to invest the net proceeds from this
offering in short-term interest-bearing securities, including government
obligations and money market instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Until February 27, 1996, the Company's Common Stock was quoted on The Nasdaq
SmallCap Market. On such date, the Company's Common Stock began trading on the
Nasdaq National Market. The following table sets forth the high and low bid
quotation per share of the Company's Common Stock on The Nasdaq SmallCap Market
and the Nasdaq National Market, as the case may be, for the periods indicated.
Quotations from The Nasdaq SmallCap Market are from the Nasdaq Monthly
Statistical Summary Report, and reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year ended March 31, 1994
First Quarter......................................................... 1 7/8 1 3/16
Second Quarter........................................................ 1 3/8 1 1/8
Third Quarter......................................................... 1 9/16 1
Fourth Quarter........................................................ 1 1/2 1
Year ended March 31, 1995
First Quarter......................................................... 1 1/8 13/16
Second Quarter........................................................ 1 5/8 15/16
Third Quarter......................................................... 1 1/2 1 1/4
Fourth Quarter........................................................ 1 3/8 1 1/16
Year ending March 31, 1996
First Quarter......................................................... 1 3/8 1 1/16
Second Quarter........................................................ 3 3/8 1 1/8
Third Quarter......................................................... 14 7/8 5 1/8
Fourth Quarter (through February 27, 1996)............................ 11 3/8 6 1/4
</TABLE>
As of December 31, 1995, there were approximately 1,445 holders of record of
the Company's Common Stock. On February 27, 1996, the last reported sale price
of the Common Stock on the Nasdaq National Market was $8 5/8 per share.
The Company has never declared or paid cash dividends on its Common Stock.
Holders of Series C Preferred Stock are entitled to cumulative annual dividends
at the rate of $.40 per share if and when declared by the Board of Directors.
The Company may not pay dividends on the Common Stock until it has paid
accumulated dividends on the Series C Preferred Stock. Cumulative dividends in
arrears on the Series C Preferred Stock as of December 31, 1995 amounted to $1.9
million ($2.563 per share). The Company currently intends to retain all of its
earnings for use in its business and does not anticipate paying any cash
dividends on its Series C Preferred Stock or Common Stock in the foreseeable
future. See "Description of Capital Stock."
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
December 31, 1995, (ii) the pro forma capitalization of the Company as of
December 31, 1995, assuming full conversion of all outstanding shares of Series
A Preferred Stock into shares of Common Stock, and (iii) the pro forma
capitalization of the Company as of December 31, 1995, as adjusted to reflect
the sale by the Company of 1,500,000 shares of Common Stock pursuant to this
offering and the receipt and application by the Company of the estimated net
proceeds therefrom, assuming a public offering price of $8 5/8 per share (the
last reported sale price of the Common Stock on the Nasdaq National Market on
February 27, 1996) and after deducting the estimated underwriting discount and
estimated offering expenses. The capitalization information set forth in the
table below is qualified by the more detailed consolidated financial statements
and notes thereto included elsewhere in this Prospectus and should be read in
conjunction with such consolidated financial statements and notes.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term liabilities, net of current portion.................................. $ 908 $ 908 $ 908
--------- ----------- -----------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized
Series A, 12% cumulative; 1,250,000 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and pro forma as adjusted;
liquidation value $0.40 per share plus unpaid accumulated dividends......... 1 -- --
Series C, 8% cumulative, convertible; 734,977 shares issued and outstanding,
actual, pro forma and pro forma as adjusted; liquidation value $5.00 per
share plus unpaid accumulated dividends..................................... 1 1 1
Common Stock, $0.005 par value, 18,000,000 shares authorized; 9,807,575 shares
issued and outstanding, actual; 10,057,575 shares issued and outstanding, pro
forma; 11,557,575 shares issued and outstanding, pro forma as adjusted (1).... 49 50 58
Additional paid-in capital..................................................... 12,720 12,720 24,217
Accumulated deficit............................................................ (5,400) (5,400) (5,400)
--------- ----------- -----------
Total stockholders' equity................................................... 7,371 7,371 18,876
--------- ----------- -----------
Total capitalization....................................................... $ 8,279 $ 8,279 $ 19,784
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
(1) Excludes 3,674,885 shares of Common Stock which are issuable upon conversion
of the Company's Series C Preferred Stock. Also excludes as of December 31,
1995 (i) 997,000 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants, (ii) 400,000 shares of Common Stock reserved for
issuance under the Company's 1995 Stock Option Plan, of which options to
purchase 101,000 shares are outstanding, (iii) 213,475 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding options
under the Company's 1985 Incentive Stock Option Plan, (iv) 89,000 shares of
Common Stock reserved for issuance under the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan, of which options to purchase
9,000 shares of Common Stock are outstanding, and (v) 102,000 shares of
Common Stock issuable upon exercise of other non-qualified options to
purchase Common Stock. See "Management -- Stock Option Plan," "Certain
Transactions" and "Description of Capital Stock."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The consolidated statement of
income data for the years ended March 31, 1994 and 1995 and the consolidated
balance sheet data at March 31, 1994 and 1995 have been derived from the
Company's consolidated financial statements, which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The following
selected consolidated financial and operating data are qualified by the more
detailed consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus and should be read in conjunction with
such consolidated financial statements and notes and the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statement of
income data for the nine-month periods ended December 31, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1995 are derived from unaudited
consolidated financial statements which, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements and
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operations for
such periods. The results of operations for the nine months ended December 31,
1995 are not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA
Net sales............................................................. $ 2,697 $ 4,150 $ 2,921 $ 5,972
Cost of sales....................................................... 1,495 2,275 1,582 2,784
--------- --------- --------- ---------
Gross profit.......................................................... 1,202 1,875 1,339 3,188
--------- --------- --------- ---------
Operating expenses:
Research and development............................................ 59 171 93 243
General and administrative.......................................... 604 685 504 862
Sales and marketing................................................. 319 301 208 302
--------- --------- --------- ---------
Total operating expenses.......................................... 982 1,157 805 1,407
--------- --------- --------- ---------
Income from operations............................................ 220 718 534 1,781
--------- --------- --------- ---------
Other income (expense):
Interest income..................................................... 13 17 12 19
Interest expense.................................................... (16) (27) (19) (63)
Other income, net................................................... 22 98 13 --
Proportionate share of loss of joint venture........................ (35) (37) (37) --
--------- --------- --------- ---------
Total other income (expense)...................................... (16) 51 (31) (44)
--------- --------- --------- ---------
Net income before income taxes.................................... 204 769 503 1,737
Provision for income taxes........................................ -- -- -- 8
--------- --------- --------- ---------
Net income........................................................ $ 204 $ 769 $ 503 $ 1,729
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share....................................... $ 0.02 $ 0.05 $ 0.04 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and common share
equivalents.......................................................... 13,330 13,589 13,907 14,452
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................................. $ 870 $ 600 $ 1,004
Equipment and leasehold improvements, net....................................... 3,365 4,635 7,204
Total assets.................................................................... 5,132 6,212 9,649
Stockholders' equity............................................................ 4,160 5,104 7,371
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Substantially all of the Company's resources are currently dedicated to the
production of SPIRULINA PACIFICA, a nutritional microalgae. The Company sells
SPIRULINA PACIFICA to health food manufacturers, health food distributors and
retail consumers on a worldwide basis. Through the application of its Integrated
Culture Biology Management ("ICBM") technology, the Company maintains continuous
algae cultures and produces a new crop from each of its 45 algal culture ponds
(aggregating approximately 28 acres) approximately every week on average. For
the year ended March 31, 1994, with an average of 17 culture ponds in operation
(aggregating approximately 10 acres), the Company had net sales of $2,697,000
and net income of $204,000. For the year ended March 31, 1995, with an average
of 25 culture ponds in operation (aggregating approximately 15 acres), the
Company had net sales of $4,150,000 and net income of $769,000.
Since 1993 the Company has been capacity-constrained, with demand for its
bulk SPIRULINA PACIFICA products exceeding the Company's production
capabilities. Historically, a majority of the Company's net sales have been
derived from the Company's bulk SPIRULINA PACIFICA products, which have lower
associated gross profit (measured in dollars) but higher associated gross margin
(measured as a percentage of net sales) than the Company's packaged consumer
products. Accordingly, an increase in the percentage of net sales attributable
to bulk products would increase the Company's gross margin. Conversely, an
increase in the percentage of the Company's net sales attributable to the
Company's packaged consumer products would decrease its gross margin but likely
increase gross profit. The Company expects that its product mix will vary from
period to period, and a decrease in orders from a customer such as the Company's
largest current customer which purchases only packaged consumer products could
require the Company to reallocate greater portions of its production capacity to
its lower gross profit bulk products. In such event, the Company expects that
its gross margin would be favorably impacted but that its earnings would be
adversely affected. See "Risk Factors -- Product Concentration."
The Company currently estimates that net sales for the three months ending
March 31, 1996 will be comparable to or lower than net sales for the three
months ended December 31, 1995, principally due to (i) lower orders from the
Company's largest customer, a Hong Kong-based multilevel marketing organization
that purchases the Company's packaged consumer products and sells them under a
private label and, to a lesser extent, (ii) less sunlight, lower temperatures
and more rainfall related to normal seasonality during the first eight weeks of
the quarter. The decrease in sales of packaged consumer products is expected to
result in lower net income in the three months ending March 31, 1996 compared to
the three months ended December 31, 1995. Although there can be no assurance in
this regard, based on discussions with the Company's largest customer, the
Company anticipates that sales to its largest customer should continue to
represent a significant portion of the Company's total net sales in the three
months ending March 31, 1996 and the year ending March 31, 1997. See "Risk
Factors -- Customer Concentration and Risks Associated with Changes in Product
Mix."
The Company is currently producing SPIRULINA PACIFICA at full capacity and,
with a portion of the net proceeds of this offering, is planning to
significantly increase the rate of production by late 1996. There can be no
assurance that the favorable supply/demand characteristics of the market for
SPIRULINA PACIFICA will continue. In order to meet the increasing demand for the
Company's Spirulina products, the Company completed construction of six
additional 36,000 square foot algal culture ponds during December 1995, bringing
the total number of ponds to 45. The Company is currently constructing six
additional such ponds and installing the associated equipment. This work is
expected to be completed by late February 1996 and full production attained by
early March 1996. The Company intends to undertake a substantial pond expansion
project that is currently scheduled to be completed in late 1996 with a portion
of the net proceeds from this offering.
Using a portion of the net proceeds of this offering, the Company plans to
begin construction of a natural astaxanthin production facility in mid-1996.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C>
Cost of sales....................................... 55.4 54.8 54.2 46.6
--------- --------- --------- ---------
Gross profit.......................................... 44.6 45.2 45.8 53.4
--------- --------- --------- ---------
Operating expenses:
Research and development............................ 2.2 4.1 3.2 4.1
General and administrative.......................... 22.4 16.5 17.2 14.4
Sales and marketing................................. 11.8 7.3 7.1 5.1
--------- --------- --------- ---------
Total operating expenses.......................... 36.4 27.9 27.5 23.6
--------- --------- --------- ---------
Income from operations............................ 8.2 17.3 18.3 29.8
--------- --------- --------- ---------
Other income (expense):
Interest income..................................... 0.4 0.4 0.4 0.3
Interest expense.................................... (0.5) (0.7) (0.6) (1.0)
Other income, net................................... 0.8 2.4 0.4 --
Proportionate share of loss of joint venture........ (1.3) (0.9) (1.3) --
--------- --------- --------- ---------
Total other income (expense)...................... (0.6) 1.2 (1.1) (0.7)
--------- --------- --------- ---------
Net income before income taxes.................... 7.6 18.5 17.2 29.1
Income taxes...................................... -- -- -- (0.1)
--------- --------- --------- ---------
Net income........................................ 7.6% 18.5% 17.2% 29.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
NET SALES
Net sales for the nine months ended December 31, 1995 increased 104.5% to
$5,972,000 from $2,921,000 for the comparable period in 1994. The increase is
attributable to increased prices, increased sales of bulk Spirulina powder and
tablets and increased sales of packaged consumer products. The increased
production is a result of the Spirulina production expansions that were
completed in October 1994 and May 1995. Due to the Company's capacity
constraints, it has not been able to accept any major new customers since March
1995. However, approximately $1,752,000 of the period to period increase
resulted from increased sales to the Company's largest customer, a Hong
Kong-based natural products marketing and distribution company which purchases
packaged consumer products for private label resale. See "Risk Factors --
Customer Concentration and Risks Associated with Changes in Product Mix."
International sales represented 56% and 39% of total net sales for the nine
months ended December 31, 1995 and 1994, respectively. The increase is
attributable principally to the Company's increasing emphasis on developing
international markets and higher sales of packaged consumer products into Asian
retail markets.
GROSS PROFIT
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. The Company's gross profit increased
138.1% to $3,188,000 for the nine months ended December 31, 1995 from $1,339,000
in the comparable period of 1994. The Company's gross margin was 53.4% for the
nine months ended
17
<PAGE>
December 31, 1995 compared to 45.8% for the comparable period of 1994. The
increase in gross margin was primarily attributable to higher prices and higher
production levels resulting in the absorption of fixed manufacturing overhead
costs over a significantly increased sales volume during the period.
OPERATING EXPENSES
Operating expenses were $1,407,000 for the nine months ended December 31,
1995, an increase of 74.8% from $805,000 in the comparable period of the prior
year, and represented 23.6% of net sales compared to 27.5% of net sales for the
nine months ended December 31, 1994. The improvement as a percentage of net
sales was due to increased sales for the nine months ended December 31, 1995.
RESEARCH AND DEVELOPMENT. Research and development expense increased to
$243,000, or 4.1% of net sales, for the nine months ended December 31, 1995,
from $93,000 or 3.2% of net sales, for the nine months ended December 31, 1994.
The increase from the prior period was primarily the result of the research work
done on natural beta carotene products for the joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") and on natural astaxanthin. Research
and development costs are expected to increase further during the remainder of
the year ending March 31, 1996, and increase substantially during future years
as the Company continues work on the development of natural astaxanthin,
genetically engineered mosquitocide and other algae products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $862,000, or 14.4% of net sales, for the nine months ended December 31, 1995,
from $504,000, or 17.2% of net sales, for the comparable period of the prior
year. This increase in absolute dollars was due to the payment of associate
incentive bonuses indexed to the Company's profitability during the nine months
ended December 31, 1995, higher insurance costs and compensation expense
associated with grants of Common Stock to non-employee directors.
SALES AND MARKETING. Sales and marketing expenses increased to $302,000 or
5.1% of net sales, for the nine months ended December 31, 1995, from $208,000,
or 7.1% of net sales, for the comparable period of the prior year. The increase
was primarily due to higher payroll and travel expenditures. The Company
anticipates that sales and marketing expenses will increase during the remainder
of the year ending March 31, 1996 and in future years as the Company increases
its marketing efforts both domestically and internationally.
PROPORTIONATE SHARE OF LOSS FROM JOINT VENTURE
Proportionate share of loss from joint venture represents the Company's 50%
ownership interest in a joint venture with Acquasearch, Inc. for the development
of astaxanthin. The loss in the nine months ended December 31, 1994 represents
services and facilities and equipment use that was contributed to the joint
venture by the Company. The joint venture was terminated in November 1994 by
mutual consent and the Company has no further obligation under the joint venture
arrangement.
INCOME TAXES
The tax provision of $7,500 for the nine months ended December 31, 1995
represents estimated alternative minimum taxes payable. The Company made no
provision for income taxes for the nine months ended December 31, 1994 due to
the utilization of tax net operating loss carry forwards. As of March 31, 1995,
tax net operating loss and tax credit carryforwards amounted to $6.8 million and
$140,000, respectively. Subject to certain limitations and differences between
federal and state tax laws, the Company expects to apply these carryforwards to
taxable income and/or income taxes in the year ending March 31, 1996 and in
future years until such carryforwards are fully utilized or expire unutilized.
18
<PAGE>
YEARS ENDED MARCH 31, 1995 AND 1994
NET SALES
Net sales for the year ended March 31, 1995 were $4,150,000, a 54% increase
over net sales of $2,697,000 for the year ended March 31, 1994. The increase in
net sales during the year ended March 31, 1995 was due primarily to price
increases and significantly higher production and sales of bulk Spirulina powder
and tablets. The increased production was the result of Spirulina production
expansions that were completed in March and October of 1994.
International sales represented 42% and 32% of total net sales for the years
ended March 31, 1995 and 1994, respectively. This increase reflects the
Company's increasing emphasis on developing international markets.
GROSS PROFIT
Gross profit increased 56.0% to $1,875,000 for the year ended March 31, 1995
from $1,202,000 for the year ended March 31, 1994. The slight increase in gross
margin to 45.2% for the year ended March 31, 1995 from 44.6% for the year ended
March 31, 1994 was due primarily to higher prices and higher production levels.
OPERATING EXPENSES
Operating expenses were $1,157,000 for the year ended March 31, 1995, an
increase of 17.8% from $982,000 in the prior year. These expenses represented
27.9% and 36.4% of net sales for the years ended March 31, 1995 and 1994,
respectively.
RESEARCH AND DEVELOPMENT. Expenditures for research and development during
the year ended March 31, 1995 increased by 189.8% to $171,000 from the limited
activity of the prior year primarily as a result of the research work being done
for the joint venture partnership with Hauser.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
13.4% to $685,000 during the year ended March 31, 1995 primarily due to higher
insurance and payroll expenditures.
SALES AND MARKETING. Sales and marketing expenses decreased 5.6% to
$301,000 during the year ended March 31, 1995 from 1994 due to lower advertising
and promotion expenditures associated with the Nutrex product line.
Inflation during the years ended March 31, 1994 and 1995 and the nine months
ended December 31, 1995 did not have a material impact on the Company's
operations.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the four quarters in the year ended March 31, 1995 and the first three
quarters in the year ending March 31, 1996. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited consolidated financial statements contained herein and includes all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth therein. The operating results for any quarter
are not necessarily indicative of results for any future period.
19
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1994 1994 1995 1995 1995
----------- --------------- --------------- ----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 930 $ 1,043 $ 948 $ 1,229 $ 1,568 $ 2,056
Cost of sales.................... 516 525 539 695 790 944
----- ------ ----- ----------- ----------- ------
Gross profit..................... 414 518 409 534 778 1,112
----- ------ ----- ----------- ----------- ------
Operating expenses:
Research and development......... 24 30 39 78 69 89
General and administrative....... 156 181 168 180 206 315
Sales and marketing.............. 65 69 75 92 85 87
----- ------ ----- ----------- ----------- ------
Total operating expenses....... 245 280 282 350 360 491
----- ------ ----- ----------- ----------- ------
Income from operations......... 169 238 127 184 418 621
----- ------ ----- ----------- ----------- ------
Other income (expense):
Interest income.................. 4 4 4 5 6 4
Interest expense................. (8) (7) (4) (8) (10) (21)
Other income, net................ 9 1 3 85 (1) 1
Proportionate share of loss of
joint venture................... (13) (24) -- -- -- --
----- ------ ----- ----------- ----------- ------
Total other income (expense)... (8) (26) 3 82 (5) (16)
----- ------ ----- ----------- ----------- ------
Net income before income
taxes......................... 161 212 130 266 413 605
Provision for income taxes..... -- -- -- -- -- --
----- ------ ----- ----------- ----------- ------
Net income..................... $ 161 $ 212 $ 130 $ 266 $ 413 $ 605
----- ------ ----- ----------- ----------- ------
----- ------ ----- ----------- ----------- ------
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 2,348
Cost of sales.................... 1,050
------
Gross profit..................... 1,298
------
Operating expenses:
Research and development......... 85
General and administrative....... 341
Sales and marketing.............. 130
------
Total operating expenses....... 556
------
Income from operations......... 742
------
Other income (expense):
Interest income.................. 9
Interest expense................. (32)
Other income, net................ --
Proportionate share of loss of
joint venture................... --
------
Total other income (expense)... (23)
------
Net income before income
taxes......................... 719
Provision for income taxes..... 8
------
Net income..................... $ 711
------
------
</TABLE>
The following table sets forth certain consolidated statement of income data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1994 1994 1995 1995 1995
----------- --------------- --------------- ----------- ----------- ---------------
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C> <C> <C>
Cost of sales................ 55.5 50.3 56.9 56.6 50.4 45.9
----- ----- ----- ----- ----- -----
Gross profit................. 44.5 49.7 43.1 43.4 49.6 54.1
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development..... 2.5 2.9 4.1 6.3 4.4 4.4
General and administrative... 16.8 17.4 17.7 14.6 13.1 15.3
Sales and marketing.......... 7.0 6.6 7.9 7.5 5.4 4.2
----- ----- ----- ----- ----- -----
Total operating expenses... 26.3 26.9 29.7 28.4 22.9 23.9
----- ----- ----- ----- ----- -----
Income from operations..... 18.2 22.8 13.4 15.0 26.7 30.2
----- ----- ----- ----- ----- -----
Other income (expense):
Interest income.............. 0.4 0.4 0.4 0.4 0.4 0.3
Interest expense............. (0.9) (0.7) (0.4) (0.6) (0.6) (1.0)
Other income, net............ 1.0 0.1 0.3 6.9 (0.1) --
Proportionate share of loss
of joint venture............ (1.4) (2.3) -- -- -- --
----- ----- ----- ----- ----- -----
Total other income
(expense)................. (0.9) (2.5) 0.3 6.6 (0.4) (0.8)
----- ----- ----- ----- ----- -----
Net income before income
taxes..................... 17.3 20.3 13.7 21.6 26.3 29.4
Provision for income
taxes..................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net income................. 17.3% 20.3% 13.7% 21.6% 26.3% 29.4%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
DECEMBER 31,
1995
---------------
Net sales...................... 100.0%
<S> <C>
Cost of sales................ 44.7
-----
Gross profit................. 55.3
-----
Operating expenses:
Research and development..... 3.6
General and administrative... 14.5
Sales and marketing.......... 5.6
-----
Total operating expenses... 23.7
-----
Income from operations..... 31.6
-----
Other income (expense):
Interest income.............. 0.4
Interest expense............. (1.4)
Other income, net............ --
Proportionate share of loss
of joint venture............ --
-----
Total other income
(expense)................. (1.0)
-----
Net income before income
taxes..................... 30.6
Provision for income
taxes..................... 0.3
-----
Net income................. 30.3%
-----
-----
</TABLE>
20
<PAGE>
Although the Company has been profitable in each of the last seven quarters,
there can be no assurance that such profitability will continue or that levels
of net sales, income from operations and net income will not vary significantly
among quarterly periods. The Company has experienced quarterly fluctuations in
operating results and anticipates that these fluctuations may continue in future
periods. Due to the importance of sunlight and temperature for microalgae
growth, the Company's production is significantly affected by weather patterns
and seasonal weather changes. The Company estimates that its ponds are up to
approximately 20% less productive between the months of November and February
due to less sunlight and lower temperatures. The decline in net sales in the
quarter ended December 31, 1994 from the quarter ended September 30, 1994
resulted from this seasonality combined with the fact that there was no increase
in the number of producing ponds between those two periods.
The Company currently estimates that net sales for the three months ending
March 31, 1996 will be comparable to or lower than net sales for the three
months ended December 31, 1995, principally due to (i) lower orders from the
Company's largest customer, a Hong Kong-based multilevel marketing organization
that purchases the Company's packaged consumer products and sells them under a
private label and, to a lesser extent, (ii) less sunlight, lower temperatures
and more rainfall related to normal seasonality during the first eight weeks of
the quarter. The decrease in sales of packaged consumer products is expected to
result in lower net income in the three months ending March 31, 1996 compared to
the three months ended December 31, 1995. Although there can be no assurance in
this regard, based on discussions with the Company's largest customer, the
Company anticipates that sales to its largest customer should continue to
represent a significant portion of the Company's total net sales in the three
months ending March 31, 1996 and the year ending March 31, 1997.
Future operating results may fluctuate as a result of changes in sales
levels to the Company's largest customers, new product introductions, weather
patterns, the mix between sales of bulk products and packaged consumer products,
start-up costs associated with new facilities, expansion into new markets, sales
promotions, competition, increased energy costs, the announcement or
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the market for Spirulina products.
See "Risk Factors -- History of Losses; Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has met its operating and capital
requirements from cash flow from operating activities, additional borrowings and
proceeds from the exercise of warrants and stock options. The Company's cash and
cash equivalent balance increased by $280,000 during the nine months ended
December 31, 1995. The increase was primarily due to increased profit levels,
borrowings from two customers and proceeds from the exercise of warrants and
stock options. Major uses of cash during the nine months ended December 31, 1995
included $643,000 in additional accounts receivable to support the higher sales
level and $2,622,000 in additional investment in culture ponds and equipment to
increase Spirulina production capacity. Largely as a result of the increases in
cash and accounts receivable, working capital increased $404,000 during the nine
months ended December 31, 1995. The Company presently estimates that its
existing capital resources, the net proceeds from this offering and interest
thereon, together with its facility and equipment financing and expected cash
flow from operations, will be sufficient to fund its current and planned
operations and capital expenditures. The Company currently has no bank credit
lines.
As of December 31, 1995, the Company had construction commitments totalling
$1,120,000, which the Company intends to fund from cash reserves and cash flow
from operations. In addition, the Company intends to use approximately $7.5
million of the net proceeds from this offering for the construction of (i)
additional culture ponds and related processing facilities, (ii) a facility and
culture ponds for the production of natural astaxanthin, (iii) a
laboratory/warehouse, and (iv) a cogeneration facility. See "Use of Proceeds."
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
21
<PAGE>
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset. Generally, SFAS No. 121
requires that long-lived assets and certain intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
provisions of SFAS No. 121 must be adopted by the Company no later than April 1,
1996. The Company has not determined when it will adopt the provisions of SFAS
No. 121 but does not expect adoption to have a material effect on the Company's
consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a new,
fair value based method of measuring stock-based compensation, but does not
require an entity to adopt the new method for preparing its basic financial
statements. For entities not adopting the new method for preparing basic
financial statements, SFAS No. 123 requires disclosure in the footnotes of pro
forma net earnings and earnings per share information as if the fair value based
method had been adopted. Adoption of SFAS No. 123 is required no later than the
Company's year ending March 31, 1997. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 31, 1995. The Company will comply with the disclosure requirements of
SFAS No. 123 in its financial statements for its year ending March 31, 1997.
22
<PAGE>
BUSINESS
OVERVIEW
Cyanotech develops and commercializes natural products from microalgae. The
Company is currently producing microalgae products for the nutritional
supplement and immunological diagnostics markets and is also developing
microalgae-based products for the aquaculture feed/pigments, biopesticide and
food coloring markets. Microalgae are a diverse group of over 30,000 species of
microscopic plants which have a wide range of physiological and biochemical
characteristics and naturally contain high levels of nutrients. Microalgae
represent a largely unexplored and unexploited renewable natural resource, which
grow much faster than land-based plants. Under favorable growing conditions,
certain microalgae produce a new crop every week. Cyanotech has designed,
developed and implemented proprietary production and harvesting technologies,
systems and processes which eliminate many of the stability and contamination
problems frequently encountered in the production of microalgae. The Company
believes its technologies, systems, processes and favorable growing location
permit year-round harvesting of its microalgal products in a cost effective
manner. The Company believes that these accomplishments have not been equaled by
any other company, university or research institute.
Cyanotech's principal revenues are derived from sales of microalgae-based
"Spirulina" products for the vitamin and supplement market, which for the United
States alone is estimated at $3.7 billion. SPIRULINA PACIFICA is a unique strain
of Spirulina developed by Cyanotech which provides a vegetable-based, highly
absorbable source of natural beta carotene, mixed carotenoids and other
phytonutrients, B vitamins, gamma linolenic acid ("GLA"), protein and essential
amino acids. The Company believes its Hawaiian SPIRULINA PACIFICA has achieved
high brand identity among both wholesale and retail customers, and that the
Company's products have better taste, more consistent color and greater
concentrations of natural beta carotene than competing Spirulina products. Since
1993, the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has tripled its Spirulina production capacity since 1993 and continues
to increase capacity. Cyanotech currently markets its products in the United
States and twelve other countries through a combination of retail, wholesale,
and private label channels, and plans to market new products either directly or
through strategic alliances where appropriate.
Cyanotech maintains an environmentally responsible philosophy in the
development and production of its products, using natural production methods and
resources which employ extensive recycling of raw materials and nutrients. The
Company believes that these recycling methods result in substantially lower
operating costs. The Company's production system operates without the use of
pesticides and herbicides, and does not create erosion, fertilizer runoff or
water pollution. The Company believes that it is the only producer of microalgae
to receive organic certification.
INDUSTRY BACKGROUND
Microalgae are a diverse group of microscopic plants that have a wide range
of physiological and biochemical characteristics and naturally contain, among
other things, high levels of proteins, amino acids, vitamins, pigments and
enzymes. Microalgae grow extremely fast, making it possible to harvest a new
crop every week utilizing optimal culture and processing technologies. The raw
materials required for microalgae growth are abundant and include sunlight,
carbon dioxide and agricultural fertilizers.
Research on potential uses of microalgae began in the early 1900s and
intensified after World War II. One of the first comprehensive reviews on
applications of microalgae and methods to grow microalgae was in ALGAL CULTURE
FROM LABORATORY TO PILOT PLANT, published by the Carnegie Institute in 1953.
Most early work centered on microalgae as a food and this theme was carried into
recent work by NASA, which continues to examine microalgae as a source of food
as well as a means to remove carbon dioxide and generate oxygen in outer space.
Current industry and university research is directed at identifying unique
compounds produced by microalgae for the fine chemical and pharmaceutical
markets.
23
<PAGE>
Over 30,000 species of microalgae are known to exist and represent a largely
unexplored and unexploited renewable natural resource. Microalgae has the
following properties that make commercial production attractive: (1) microalgae
grow much faster than land grown plants; (2) microalgae have a uniform cell
structure with no bark, stems, branches or leaves, which permits easier
extraction of products and higher utilization of the microalgae cells; (3)
cellular uniformity also makes it practical to manipulate and control growing
conditions in order to optimize a particular cell characteristic; (4) microalgae
contain a wide array of vitamins and other important nutrients; and (5)
microalgae contain natural pigments and are a potential source of medical
products.
Commercial applications for these microscopic plants include nutritional
products, diagnostic products, aquaculture feed/pigments, natural food colorings
and research grade chemicals. The Company believes that microalgae could
potentially be used for other commercial applications, including genetically
engineered products for the biopesticide and pharmaceutical industries. The most
significant microalgae products produced today are algae utilized as food
supplements. These include forms of Spirulina, Chlorella, lake grown blue green
algae and natural beta carotene from DUNALIELLA SALINA. These microalgae food
supplements contain, in varying degrees, highly absorbable sources of
phytonutrients including mixed carotenoids, B vitamins, GLA, protein and
essential amino acids. Published scientific animal studies suggest that
increased levels of some of these natural compounds in the diet may reduce the
risk of many types of cancer and strengthen the immune system. The Company
believes that demand for these microalgae products has increased as the benefits
of plant-based nutrients, commonly known as "green superfoods," are beginning to
receive promotion in retail markets outside the health food community.
While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems have been designed and tested and failed over
the last 20 years. Because microalgae produced for food supplements is typically
cultivated and harvested outdoors, production is affected significantly by
climate, weather conditions and the chemical composition of the culture media.
Without consistent sunlight, warm temperature, low rainfall and proper chemical
balance, microalgae will not grow as quickly, resulting in longer harvesting
cycles, decreased pond utilization and increased cost. Furthermore, microalgal
growth requires a nutrient rich environment. The high nutrient levels in the
ponds promote the growth of unwanted organisms, or "weeds," if the chemical
composition of the ponds changes from its required balance. Once contamination
occurs, a pond must be emptied, cleaned and restarted, a process that further
decreases pond utilization and increases production costs.
Microalgae producers also face relatively high harvesting and processing
costs, particularly with respect to the energy costs required to dry the
microalgae prior to packaging and the labor required throughout the harvesting
and processing cycles. Once harvested, microalgal cells contain from 85% to 95%
water. The high water content is due to internal water in the cells that cannot
be removed by mechanical means. The Company estimates that the cost of
conventional heat-based microalgae drying processes represents approximately 30%
of total production cost. Most drying systems also damage or destroy oxygen
sensitive nutrients in the finished microalgae products.
THE CYANOTECH SOLUTION
Cyanotech has designed, developed and implemented proprietary production and
harvesting technologies, systems and processes which reduce many of the
stability and contamination problems frequently encountered in the production of
microalgae. This proprietary production system is known as Integrated Culture
Biology Management ("ICBM"). Through the application of this technology,
Cyanotech's ponds are in production year-round without any significant loss in
productivity due to contamination. The Company believes that such an
accomplishment remains unique to Cyanotech. Certain aspects of the ICBM
technology are also applicable to producing other microalgae products which the
Company currently has under development. The Company believes that its ICBM
technology combined with the climate conditions at its production facility in
Hawaii make it a cost-effective producer of premium Spirulina products.
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In addition to the advantages of its ICBM technology, Cyanotech has
developed a patented system for the recovery of carbon dioxide from its drying
system exhaust gas, called OCEAN-CHILL DRYING. Since microalgae are essentially
microscopic "plants," they require sunlight, water, carbon dioxide and nutrients
for optimal growth. By recovering carbon dioxide that would otherwise be
released into the atmosphere, the Company is able to divert the recovered carbon
dioxide back to the algae cultures to nourish the growing algae. The Company
believes that this process provides it with a significant cost advantage over
other microalgae producers who must purchase carbon dioxide. OCEAN-CHILL DRYING
also dries microalgal products in a low oxygen environment which protects oxygen
sensitive nutrients. In addition, Cyanotech has developed an automated Spirulina
processing system, which enables a single operator to harvest and produce dried
Spirulina powder.
Another major advantage for the Company is the location of its production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. The Company believes that the combination of consistent warm
temperature, abundant sunlight, and low rainfall at this facility makes this a
favorable location for economically cultivating microalgae on a large scale. The
Company believes that in contrast to its facility, other microalgae production
facilities located in areas lacking these characteristics stop producing
microalgae for up to four months a year because of unfavorable climate or
weather conditions.
At the HOST Park, the Company has access to cold, clean, deep sea water that
is pumped up from a depth of 2,000 feet. This sea water is used both as a source
of nutrients for microalgae culture and as a cooling agent in the OCEAN-CHILL
DRYING process. Additionally, Cyanotech's facility has access to a complete
industrial infrastructure and is located 30 miles from a deep water port and
adjacent to an airport. The Company believes that the combination of its ICBM
technology, favorable growing location, year-round production capability,
OCEAN-CHILL DRYING process and automated processing system can be successfully
applied to the large-scale cultivation of other species of microalgae that may
be identified for commercial applications. The Company is currently conducting
pilot production work on natural astaxanthin, a red pigment used primarily in
the aquaculture industry to impart pink color to the flesh of pen-raised fish
and shrimp. Among the Company's other microalgae products under development are
a genetically engineered mosquitocide and natural food colorings.
CYANOTECH'S STRATEGY
The Company's objective is to be the leading developer and producer of
microalgal products in its existing and future markets. The Company seeks to
achieve this objective through the following strategies:
- INCREASE THE COMPANY'S SPIRULINA MARKET SHARE. The Company intends to
increase its world market share for Spirulina by expanding channels of
distribution, expanding geographically and locating new potential markets
for Spirulina. The Company plans to expand domestic sales and marketing
efforts for its Nutrex products and private label packaged products, and
to explore mass marketing opportunities for Spirulina based products. The
Company's products are sold in twelve foreign countries and the Company is
investigating ways to expand the global presence of its products,
including through the addition of foreign distributors. The Company is
investigating potential additonal uses for Spirulina. To this end, the
Company intends to fund limited clinical trials on the effects of
Spirulina on arthritis and the immune system, and to fund studies for the
use of Spirulina as a premium animal feed.
- PROMOTE BRAND UNIQUENESS AND PACKAGED PRODUCTS. Cyanotech is the only
Hawaiian producer of Spirulina and has developed a unique strain of
Spirulina marketed as "SPIRULINA PACIFICA." Manufacturers who market
Cyanotech's brand generally identify and promote Hawaiian Spirulina as a
superior product. The private label customers also promote the brand
uniqueness of Hawaiian Spirulina, which the Company believes provides
competitive differentiation in the marketplace. The Company plans to
increase marketing emphasis on packaged products, which generally have
higher associated gross profit per pound than bulk products. The Company
believes that it is the only producer of microalgae to receive organic
certification.
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- INCREASE BREADTH OF PRODUCT OFFERINGS. The Company is developing and plans
to develop other products from microalgae, utilizing, in part, its current
production technologies. These products include aquaculture feed/pigments
and biopesticides. The Company is currently conducting pilot production
work on natural astaxanthin, a red pigment used primarily in the
aquaculture industry to impart pink color to the flesh of pen-raised fish
and shrimp. Among the Company's other products under development are a
genetically engineered mosquitocide and natural food colorings.
- ESTABLISH STRATEGIC ALLIANCES. The Company intends to market new and
existing products through strategic alliances where appropriate. The
Company believes that these alliances will allow it to focus on its core
business as a microalgal producer and to gain access to broader markets.
For example, the Company is currently discussing a strategic alliance for
its proposed natural astaxanthin product with a major aquaculture feed
formulator.
- CONTINUE IMPROVEMENT UPON PRODUCTION METHODOLOGIES. Cyanotech intends to
continue to improve upon its ICBM proprietary production system and
OCEAN-CHILL DRYING system and apply certain of those technologies in the
development of additional microalgae-based products for the aquaculture
feed/pigments, biopesticide, food coloring and nutrition markets, as well
as other potential commercial uses.
- PROMOTE ENVIRONMENTAL RESPONSIBILITY. Cyanotech has a strong commitment to
the environment. The Company's production system recovers carbon dioxide
from its drying system exhaust gas, recycles 100% of the growing media,
operates without the use of pesticides or herbicides, and does not create
erosion, fertilizer runoff or water pollution. The Company believes that
these recycling methods result in significantly lower operating costs.
TECHNOLOGY
Cyanotech has developed the following proprietary technology for the
efficient, stable and cost-effective production of microalgal products:
- INTEGRATED CULTURE BIOLOGY MANAGEMENT. Most notable among the Company's
technology is the proprietary ICBM microalgae production method which
integrates culture pond chemistry and harvesting and processing methods
designed to maintain optimal microalgae growing conditions. The Company
believes that ICBM has eliminated many of the stability and contamination
problems frequently encountered in the large scale production of
microalgae. Currently, the Company's Spirulina microalgae is produced
using ICBM in a system in which 100% of the growing media is continuously
recycled to culture ponds to become the nutrient base for the next crop.
Culture ponds generally are harvested approximately once each week.
Spirulina production with ICBM has proven to be an extremely stable
operating environment, permitting the Company to grow and harvest
Spirulina year-round without any significant problems of contamination by
unwanted algae and associated loss of productivity. The Company believes
that such an accomplishment has not been equaled by any other company,
university or research institute.
- OCEAN-CHILL DRYING. Cyanotech has also developed and patented a drying
system for powder microalgal products. Called OCEAN-CHILL DRYING, this
unique system utilizes cold sea water brought from a depth of 2,000 feet
in a closed-cycle modified spray-drying system that cools and removes
moisture from the air exiting the dryer. This dryer air is then recycled,
permitting the Company to control and reduce oxygen levels within the
dryer, minimize product oxidation and increase carbon dioxide levels to
concentrations that make recovery feasible. The recovered carbon dioxide
is then fed to the algae culture ponds as a nutrient source. This system
substantially eliminates carbon dioxide exhaust emissions, provides a
higher quality product, and significantly reduces production costs by
recovering carbon dioxide that would otherwise have to be purchased.
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PRODUCTS AND PRODUCT CANDIDATES
The following table summarizes the market applications and current status of
the Company's current products and products under development.
<TABLE>
<CAPTION>
MARKET APPLICATION STATUS
<S> <C> <C>
CURRENT PRODUCTS:
SPIRULINA PACIFICA Powder Health and nutrition Domestic and international
wholesale and retail sales
SPIRULINA PACIFICA Tablets Health and nutrition Domestic and international
wholesale and retail sales
SPIRULINA PACIFICA Flakes Health and nutrition Domestic retail sales
HAWAIIAN ENERGIZER Sports Health and nutrition Domestic retail sales
Drink Powder
HAWAIIAN ENERGIZER Tablets Health and nutrition Domestic retail sales
Phycobiliproteins Immunological
diagnostics Domestic and international sales
PRODUCTS UNDER DEVELOPMENT:
Natural Astaxanthin Aquaculture pigment Pilot production in process
Genetically Engineered Pesticide Production system development work
Mosquitocide expected to start mid-1996
Natural Food Colorings Food manufacturers Pilot production in process
</TABLE>
PRODUCTS
SPIRULINA
Cyanotech's principal product is a nutritional microalgae marketed as
SPIRULINA PACIFICA, a unique strain of Spirulina developed by Cyanotech and sold
worldwide to the health and natural foods market. SPIRULINA PACIFICA is a
vegetable microalgae that is a highly absorbable source of natural beta
carotene, mixed carotenoids and other phytonutrients, B vitamins, GLA, protein
and essential amino acids. The Company believes SPIRULINA PACIFICA has greater
concentrations of natural beta carotene, better taste and more consistent color
than competing Spirulina products. The Company believes that it is the only
Spirulina producer to have its products and processes certified organic.
Spirulina is a naturally occurring microscopic plant which grows wild
throughout the world in alkaline environments such as soda lakes. It has been
used for thousands of years as a food. Today, Spirulina is used by the health
conscious consumer for a variety of immediate and long term effects. Based on
customer testimonials, the Company believes that the primary immediate benefits
Spirulina provides are increased energy and, in people who have arthritis or
injuries, decreased joint pain. Spirulina is a good source of natural
phytonutrients, including carotenoids and phycocyanin, among others. Published
scientific animal studies suggest that increased levels of some of these natural
compounds in the diet may reduce the risk of many types of cancer and strengthen
the immune system.
The Company produces SPIRULINA PACIFICA in three forms: powder, flake and
tablets. Powder is used as an ingredient in health food drinks while flakes are
used as a seasoning on salads and pasta. Tablets are consumed daily as a food
supplement. The retail price of the Company's Spirulina packaged consumer
products is approximately $17.00 for a one-month supply.
The Company also produces and markets two products under the HAWAIIAN
ENERGIZER name. HAWAIIAN ENERGIZER sports drink contains complex carbohydrates
and vegetarian protein in combination with SPIRULINA PACIFICA, Bee Pollen and
Siberian Ginseng. HAWAIIAN ENERGIZER tablets contain SPIRULINA PACIFICA, Bee
Pollen and Siberian Ginseng.
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PHYCOBILIPROTEINS
Cyanotech also produces phycobiliproteins which are sold to the medical and
biotechnology research industry. Phycobiliproteins are highly fluorescent
pigments purified from microalgae. Their spectral properties make them useful as
tags or markers in many kinds of biological assays, such as flow cytometry,
fluorescence immunoassays and fluorescence microscopy.
The Company produces a line of four phycobiliprotein products with various
spectral properties. R-phycoerythrin (RPE) is a red pigment used primarily in
flow cytometry. Allo-phycocyanin (APC) is a blue pigment also used in flow
cytometry, but typically in combination with RPE to form a fluorescent tandem
phycobiliprotein conjugate which improves sensitivity. Cross-linked
allo-phycocyanin (XL-APC) is a stabilized form of APC which can be used in very
diluted solution without problems of degradation. C-phycocyanin (CPC) is also a
blue pigment and, although not used extensively in cytometry, has potential
applications in food and cosmetics coloring. The Company's phycobiliproteins
currently range in price from $5,000 to $33,000 per gram. Sales of
phycobiliproteins accounted for less than 3% of the Company's net sales for the
nine months ended December 31, 1995. The Company anticipates that sales of
phycobiliproteins will not be material in future periods.
PRODUCTS UNDER DEVELOPMENT
Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. The Company does not
conduct basic scientific research to identify new microalgal products or develop
new microalgal products through genetic engineering. Rather, the Company
investigates specific microalgae identified in scientific literature for
potentially marketable products. When necessary, the Company will license
specific organisms and/or basic science technology for pilot-studies.
Three products are under active development by Cyanotech: natural
astaxanthin, genetically engineered mosquitocide and natural food colorings.
NATURAL ASTAXANTHIN
Astaxanthin is a red pigment used primarily in the aquaculture industry to
impart pink color to the flesh of pen-raised fish and shrimp. For example,
without astaxanthin in their diet, the flesh of pen-raised salmon is white and
has a limited market. The astaxanthin market currently is dominated by Hoffman
LaRoche, which produces synthetic astaxanthin from petrochemicals. The Company
believes that Hoffman LaRoche currently sells synthetic astaxanthin to the
aquaculture industry at approximately $1,140 per pure pound.
The Company is currently discussing a strategic alliance for its natural
astaxanthin with a major aquaculture feed formulator. The Company has also been
working with this feed formulator to schedule feeding tests at a major salmon
production facility. Presently, feeding schedules call for Cyanotech to deliver
limited amounts of natural astaxanthin product beginning in March 1996.
Using a portion of the net proceeds of this offering, the Company plans to
begin construction of a natural astaxanthin production facility by mid-1996.
Natural astaxanthin is a new product for the Company and many production issues
must be resolved prior to commercial production. There can be no assurance that
the Company will resolve production issues or that the Company will successfully
complete its pilot production scale studies of natural astaxanthin. See "Risk
Factors -- Risks Associated with Expansion into Additional Markets and Product
Development" and "-- Competition."
GENETICALLY ENGINEERED MOSQUITOCIDE
A genetically engineered mosquitocide was developed at the University of
Memphis by a team under the direction of Professor Edward Stevens, Jr., who
successfully cloned the toxin gene from BACILLUS THURINGINSIS VAR, ISRAELENSIS
(Bti) into the blue-green algae SYNECHOCOCCUS. The bacterial toxin of Bti is
very specific to mosquitoes and black flies, while the blue-green algae is a
food for mosquito larvae. The Company believes that when applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control.
In June 1995, Cyanotech signed an exclusive worldwide license agreement with
the University of Memphis to manufacture and sell the genetically engineered
mosquitocide. Development of a commercial
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production system is scheduled to start by mid-1996. In addition to being a
nuisance, mosquitoes are carriers for viral encephalitis in the United States,
and major carriers for a number of diseases throughout the world including
malaria, yellow fever, dengue fever and filariasis. The Company is currently
investigating the possible application of this technology to other
biopesticides.
NATURAL FOOD COLORINGS
Natural beta carotene, a fat soluble pigment found in many plants, can be
used as a yellow/orange coloring agent for margarine, cake mixes, soft drinks
and other products. The Company believes that there are no other natural
yellow/orange food colorings available today.
In August 1994, Cyanotech and Hauser formed a joint venture partnership,
BetaPharm International, to develop, produce and sell products derived from
DUNALIELLA SALINA (natural beta carotene). Pilot scale studies are underway to
determine the economic and technical feasibility of producing certain products
derived from natural beta carotene. If the results of the project warrant and
market conditions dictate, the joint venture will proceed to obtain funding to
commercialize the product. The parties must agree on all commercialization
funding decisions. If commercialization (i.e., obtaining production plant
funding) cannot be reached by December 31, 1996, the joint venture will dissolve
and licenses granted by the parties under the joint venture will terminate.
OTHER POTENTIAL PRODUCTS
Many potential commercial substances have been identified in microalgae
including amino acids, vitamins, fatty acids, pigments, enzymes, anti-bacterial
agents and anti-viral agents. Cyanotech believes that it has, and is further
developing, technology which will allow the Company to produce a variety of
products from microalgae. Of particular interest to the Company is the
production of natural colorants for use in foods and cosmetics and an expanded
line of biopesticides through genetic manipulation of microalgae. Cyanotech
believes that a large market may exist for these products, and that while
government approval for such products is likely to be required, Cyanotech
believes approval may be obtained in a shorter time period and with less expense
than for pharmaceutical products. The Company believes that as new potential
products are either identified in microalgae or genetically engineered into
microalgae, it will be in a unique position to employ its proprietary and
commercially proven technology for the cost effective production of these
potential products.
MANUFACTURING
SPIRULINA
Cyanotech began culturing SPIRULINA PACIFICA in 1985 at its present facility
at the HOST Park. SPIRULINA PACIFICA is cultured in shallow, open ponds adjacent
to the Pacific Ocean. Paddlewheels agitate the water, permitting even exposure
of the algae to the sun. A combination of fresh water and nutrient-rich deep
ocean water, drawn from a depth of 2,000 feet, is used to fill the Spirulina
ponds. Ninety-six trace elements are supplied by deep ocean water. The other
major components required for growing Spirulina are food-grade baking soda
(sodium bicarbonate) and carbon dioxide.
SPIRULINA PACIFICA is pumped from the culture ponds through underground
pipes to a process building where it is screened for particulate matter and then
separated by stainless steel screens from the culture medium. It is then washed
three times with fresh water and vacuum filtered. SPIRULINA PACIFICA intended
for use in powder and tablets is dried by a patented OCEAN-CHILL DRYING process.
The Company uses deep ocean water in its OCEAN-CHILL DRYING process. The Company
obtains the cold water from the HOST Park at a cost substantially less than the
cost of generating the same cooling effect by refrigeration. The drying process
takes approximately three seconds and results in a dark green powder with a
consistency similar to flour. SPIRULINA PACIFICA prepared in flake form is dried
in a more conventional proprietary process. Bulk SPIRULINA PACIFICA powder,
tablets and flakes are packaged in foil laminate heat-sealed bags with an oxygen
absorbing pack sealed in each bag. This packaging ensures product freshness and
extends the shelf life of bulk SPIRULINA PACIFICA.
Carbon dioxide is recovered as a result of the OCEAN-CHILL DRYING process
and fed back to the culture ponds as a nutrient. By use of ICBM, all culture
media from the harvest are recycled to culture ponds and
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<PAGE>
additional nutrients are added to support the next growth phase. Active culture
remaining in the ponds after harvest serves to inoculate the next batch. The
algae reproduces rapidly, and, on average, approximately one week is required
before the culture pond is again harvested. Spirulina production with ICBM has
proven to be an extremely stable operating environment, permitting the Company
to grow and harvest Spirulina without any significant problems of contamination
by unwanted algae and associated loss of productivity. The Company believes that
its Spirulina competitors continue to experience problems of culture
contamination by unwanted algae, requiring that culture ponds be emptied,
cleaned and restarted. The Company is presently pursuing certification under the
international quality management system ISO 9000.
Spirulina powder is difficult to tablet and most tablet manufacturers
overcome this difficulty by either adding high amounts (from 10% to 30%) of
excipients to "glue" the tablet together or by using a heat granulation process
that destroys nutrients. SPIRULINA PACIFICA tablets are produced by the Company
by blending SPIRULINA PACIFICA powder with a minimum amount of excipients
(maximum of 2%) and tableting in a cold press compression tablet-making machine.
SPIRULINA PACIFICA flakes are produced by blending SPIRULINA PACIFICA powder
with food-grade lecithin and drying this in a proprietary drying system. The
Company's packaged consumer products are bottled and labeled by two
subcontractors in California, both of which are certified cGMP manufacturers and
undergo regular governmental inspections.
A sample from each lot of SPIRULINA PACIFICA is subjected to quality
assurance testing. Quality assurance testing includes bulk density, moisture,
particulate matter, color and taste. In addition, each lot of SPIRULINA PACIFICA
is subjected to a prescribed set of microbiological tests for food products,
including total aerobic bacteria, coliform bacteria and E. coli. SPIRULINA
PACIFICA powder is certified free of pesticides and herbicides, and certified
Kosher.
Since 1993 Cyanotech has tripled its production capacity of Spirulina to its
present annual production capacity of 350 metric tons per year. In June 1995,
the Company more than doubled its drying capacity.
NATURAL ASTAXANTHIN
Cyanotech is conducting pilot production work to develop a commercial
production system for natural astaxanthin. HAEMATOCOCCUS, the microalgae which
produces astaxanthin, grows in neutral conditions and is susceptible to
contamination by unwanted algae. Cyanotech is developing a proprietary system
which it believes will solve this problem. The Company employs a closed culture
system during the initial stage of algal growth, after which the algae is
transferred to open ponds for astaxanthin production. An additional advantage of
the Company's pilot system is the ability to control the temperature of algal
cultures by the use of cold seawater. Natural astaxanthin is a new product for
the Company and many production issues must be resolved prior to commercial
production. There can be no assurance that the Company will resolve production
issues or that the Company will successfully complete its pilot production scale
studies of natural astaxanthin. See "Risk Factors -- Risks Associated with
Expansion into Additional Markets and Product Development" and "-- Competition."
30
<PAGE>
MARKETING AND SALES
The Company believes that its present bulk customers could consume a
significant portion of the increased production of Spirulina from the facilities
expansion funded by a portion of the net proceeds of this offering. However, it
is the Company's strategy to first emphasize sales of higher priced packaged
consumer products through its own Nutrex brand and private label customers,
since sales of packaged consumer products carry higher associated gross profit
than sales of bulk products. Cyanotech intends to form strategic alliances with
established mass market sales and distribution companies to sell Spirulina
products into mass markets. The Company also intends to take certain efforts
targeted at expanding the bulk market for Spirulina and to continue to
differentiate its products based on quality, taste and color consistency.
- PRODUCT IDENTITY AND BRAND UNIQUENESS. Cyanotech is the only Hawaiian
producer of Spirulina and has developed a unique strain of Spirulina
marketed as "SPIRULINA PACIFICA." Manufacturers who market Cyanotech's
brand generally identify and promote Hawaiian Spirulina as a superior
product. The private label customers also promote the brand uniqueness of
Hawaiian Spirulina, which the Company believes provides competitive
differentiation in the marketplace.
- EXPAND SALES OF CONSUMER PACKAGED PRODUCTS.
PRIVATE LABEL CONSUMER PACKAGED PRODUCTS. The Company has achieved
significant sales of private label products in certain Pacific Rim
countries. Cyanotech plans to capitalize upon its unique Hawaiian brand to
increase the number of both domestic and international private label
customers.
NUTREX BRAND PRODUCTS. The Company believes that a substantial opportunity
exists to increase domestic sales of its Nutrex brand products. Nutrex
packaged consumer products and certain of the Company's private label
products currently are the only organic certified microalgal products,
which the Company believes is important to health and natural food
consumers. The Company is launching a new label and an intensified retail
marketing program. The initial thrust of this program will be to focus
resources on high volume, large natural food store chains such as Whole
Foods, Mrs. Gooches, Alfalfas, Wild Oats, Bread and Circus, and Puget
Consumers Cooperatives. The Company intends to hire domestic sales
personnel and increase spending on Nutrex marketing activities.
- DEVELOP STRATEGIC ALLIANCES. The Company is seeking strategic alliances
with sales and distribution companies that have proven track records in
mass market sales and distribution outside the health food industry. The
objective is to generate sales of consumer packaged products in chain drug
stores and discount stores. Cyanotech anticipates coordinating this
program with media advertising.
- EXPAND BULK SALES. The Company intends to focus marketing efforts on its
existing bulk customers in order to increase bulk sales. Cyanotech
develops product literature and marketing materials for bulk customers,
sponsors cooperative advertising, participates in trade shows and provides
speakers for product forums and press interviews. The Company plans to
sponsor feed studies on the benefits of incorporating SPIRULINA PACIFICA
in feed formulations for poultry, pets and fish in an effort to expand the
bulk market for Spirulina products.
- DIFFERENTIATE PRODUCTS ON QUALITY ADVANTAGES. Cyanotech believes it has
established a quality advantage for its SPIRULINA PACIFICA in the health
food and nutrition industry. The Company plans on maintaining its premium
status through (i) continued education of customers about the Company's
product quality and (ii) consistent improvement of product quality through
improved processing and handling of finished goods.
DISTRIBUTION
The majority of Cyanotech's bulk Spirulina sales are to companies with their
own Spirulina product lines. Many of these companies identify and promote
Cyanotech's Hawaiian Spirulina in their products. In the United States, the
Company sells directly to manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network and via mail order. Orders for packaged consumer products
are taken at the store level by one of 34 regional broker representatives and
shipped through one of 22 distributors. In the foreign markets the Company has
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appointed exclusive sales distributors for both bulk Spirulina and packaged
consumer products. The Company now has exclusive sales distributors for the
following regions: (i) Japan, Korea, Taiwan and Singapore; (ii) Canada; (iii)
the Benelux Countries; (iv) Australia; (v) Hong Kong and China; and (vi) France.
CUSTOMERS
Cyanotech markets and sells its Spirulina products to health food
manufacturers, private label customers, retail distributors, natural products
distributors and direct to certain natural food stores. The Company's customers
range in size from large enterprises with over $500 million in annual sales to
small neighborhood retail stores. Several of the Company's major customers are
businesses that were established exclusively to market and sell Spirulina
products. The Company cooperates closely with these customers to develop product
labeling and advertising designed to educate the consumer about the health
benefits of using a "green superfood" such as Spirulina and, more specifically,
SPIRULINA PACIFICA products. Net sales to the Company's three largest customers
increased from approximately 32.3% of net sales in the year ended March 31, 1995
to approximately 49.9% of net sales in the nine months ended December 31, 1995.
Since 1993 the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has not been able to accept any major new customers since March 1995.
HEALTH FOOD MANUFACTURERS. Health food manufacturers use the Company's
products as the key ingredient in Spirulina products, or as an ingredient in
health food formulations, which they manufacture for sale. These customers
purchase bulk powder or bulk tablets and package the products under their brand
label for sale to the health and natural food markets. In some instances, these
customers produce products under private-labeling arrangements with third
parties. Many of the products produced by these customers are often marketed and
sold in direct competition with the Nutrex line of retail consumer products.
However, the Company differentiates its products from those of its bulk
customers by reserving the certified organic line of products for sale
exclusively under the Nutrex label and certain private labels.
PRIVATE LABEL CUSTOMERS. The Company currently provides private label
retail consumer products to two international customers. Using Spirulina tablets
produced by the Company, the products are packaged by one of the Company's two
bottling subcontractors in Southern California, using product labels supplied by
the customer. Products for these customers are manufactured only upon receipt of
an order; finished product inventories are not maintained by the Company.
RETAIL DISTRIBUTORS. According to WHOLE FOODS RETAILER magazine, in the
domestic health and natural food industry, retail distributors account for
approximately 57% of all products sold to health and natural food retailers.
Retail distributors act as product wholesalers to independent and chain
retailers. The majority of domestic Nutrex sales in the nine months ended
December 31, 1995 were to 22 distributors. Pricing and promotional strategies
with respect to retail distributors are coordinated by the Company's master
broker, an independent consultant retained by the Company on a month-to-month
basis.
NATURAL PRODUCTS DISTRIBUTORS. In the nine months ended December 31, 1995,
the Company sold to three U.S. customers engaged in the business of distributing
natural raw materials to health and natural food manufacturers. These
distributors provide their customers with standardized quality control,
warehousing and distribution services, and charge a mark-up on the products for
providing these services. These distributors may differentiate the products they
sell, but they generally treat the products as commodities, with price being the
major determining factor in their purchasing decision.
NATURAL FOOD STORES. Less than 5% of the Company's sales in the nine months
ended December 31, 1995, were direct sales to independent or chain natural food
retail stores. The Company believes that most natural food retail stores prefer
to purchase products from retail distributors.
COMPETITION
SPIRULINA
The Company's SPIRULINA PACIFICA products compete with a variety of
vitamins, dietary supplements, other algal products and similar nutritional
products available to consumers. The nutritional products
32
<PAGE>
market is highly competitive. It includes international, national, regional and
local producers and distributors, many of whom have greater resources than the
Company, and many of whom offer a greater variety of products. The Company
believes that its direct competition in the Spirulina market currently is from
Dainippon Ink and Chemical's Earthrise Farms facility in California and numerous
smaller farms in China, India, Thailand, Brazil and South Africa, but that the
Company is the only producer of certified organic microalgal consumer products.
The Company's packaged consumer products marketed under its Nutrex brand also
compete with products marketed by health food manufacturing customers of the
Company who purchase bulk Spirulina from the Company and package it for retail
sales. A large Spirulina production facility in Mexico, which has been closed
since 1993, may reopen. Should this facility resume production in substantial
quantities, the Company would encounter increased competition.
In addition to other Spirulina based products, SPIRULINA PACIFICA competes
in certain markets with other "green superfoods," such as Chlorella (a green
microalgae with sales primarily in Japan), APHAMIZOMENON (a blue-green algae
harvested from an eutrophic lake in Oregon with sales primarily through
multilevel marketing) and cereal grasses such as barley, wheat and kamut. In
addition, major food and beverage companies may become more active in the
nutritional products business, either directly or through the acquisition of
smaller companies. A decision by another company to focus on the Company's
existing markets or target markets or a substantial increase in the overall
supply of Spirulina could have a material adverse effect on the Company's
business, financial condition and results of operations. While the Company
believes that it competes favorably on factors such as quality, brand name
recognition and loyalty, the Company's SPIRULINA PACIFICA products have
typically been sold at prices higher than most other Spirulina products. There
can be no assurance that the Company will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect its business,
financial condition and results of operations. See "Risk Factors -- Competition"
and "-- Customer Concentration and Risks Associated with Changes in Product
Mix."
PHYCOBILIPROTEINS
There are four major competitors which manufacture phycobiliprotein products
for sale, including Molecular Probes, Inc., Quantify Inc., Martek Biosciences
Corporation and Prozyme Inc. Cyanotech competes with these companies on the
basis of price and quality. In addition, one large potential user of
phycobiliproteins, Coulter, Inc., manufactures phycobiliproteins for its
internal use. New synthetic fluores-
cent compounds have been developed by a third party which are superior to
phycobiliproteins in some applications. The advantage of the synthetic compounds
is their lower molecular weight and, in some cases, their lower cost. While the
Company's phycobiliprotein products may not be able to compete effectively
against synthetic compounds in some applications, Cyanotech's phycobiliproteins
have gained a reputation for high quality at a competitive price.
PRODUCTS UNDER DEVELOPMENT
The products being developed by Cyanotech will compete with both synthetic
and natural products on the basis of price and quality. The Company's future
competitors may include major chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of Cyanotech. Cyanotech believes that its proprietary
technology combined with the metabolic diversity and high productivity of
microalgae will allow the Company to compete in large market areas against large
companies, although there can be no assurance in this regard.
The Company's natural astaxanthin product, if successfully developed, will
compete directly against synthetic astaxanthin produced and marketed worldwide
by Hoffman LaRoche. The Company believes that there are no other significant
producers of astaxanthin. Although the Company is unaware of any studies
indicating that natural astaxanthin has any benefits not otherwise provided by
synthetic astaxanthin, it believes there is consumer demand for a natural
astaxanthin product.
Cyanotech's proposed mosquitocide product may, if successfully developed,
compete with chemical pesticides as well as other biopesticides. Three companies
currently manufacture a mosquito biopesticide
33
<PAGE>
based on the bacterial Bti toxin: Abbot Laboratories, Novo and Sandoz. There can
be no assurance that Cyanotech's proposed product, if successfully developed,
can or would compete favorably with the other Bti products currently available.
The Company's natural food coloring, if successfully developed, will compete
directly with synthetic food colorings as well as natural food colorings
produced by other companies.
GOVERNMENT REGULATION
The Company's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). Each line of
products that is or may be marketed by the Company, its licensees or its
collaborators can present unique regulatory problems and risks, depending on the
product type, uses and method of manufacture. The FDA regulates, to varying
degrees and in different ways, dietary supplements, other food products, and
diagnostic medical device and pharmaceutical products, including their
manufacture, testing, exportation, labeling, and, in some cases, advertising.
Generally, prescription pharmaceuticals and certain types of diagnostic
products, as medical devices, are regulated more rigorously than foods, such as
dietary supplements. The EPA rigorously regulates pesticides, among other types
of products.
The Company is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. The Company works with foreign
distributors in its compliance with foreign laws, regulations and policies.
There can be no assurance that any changes with respect to federal, state and
foreign laws, regulations and policies, and, particularly with respect to the
FDA and EPA or other such regulatory bodies, with possible retroactive effect,
will not have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that any of the
Company's potential products will satisfy applicable regulatory requirements.
See "Risk Factors -- Potential Difficulty in Obtaining FDA and Other Government
Approvals."
The Federal Dietary Supplement Health and Education Act ("DSHEA") regulates
the use and marketing of dietary supplements, including vitamin products. The
DSHEA covers only dietary supplements and contains a number of provisions that
differentiate dietary supplements from other foods. The DSHEA also sets forth
standards for adulteration of dietary supplements or ingredients thereof and
establishes current food Good Manufacturing Practices ("cGMP") requirements for
dietary supplements. It also provides detailed requirements for the labeling of
dietary supplements, including nutrition and ingredient labeling. The Company
currently believes that its SPIRULINA PACIFICA, marketed as a dietary
supplement, is exempt from FDA regulation as a food additive.
The Company's Spirulina manufacturing processes and the Company's contract
bottlers are required to adhere to cGMP as prescribed by the FDA. The Company
believes that it is currently in compliance with all applicable cGMP and other
food regulations. Such regulations specify component and product testing
standards, quality assurance requirements, and records and other documentation
controls. Compliance with relevant cGMP requirements can be onerous and time
consuming, and there can be no assurance that the Company can continue to meet
relevant FDA manufacturing requirements for existing products or meet such
requirements for any future products. Ongoing compliance with food cGMP and
other applicable regulatory requirements are monitored through periodic
inspections by state and federal agencies, including the FDA, the Hawaii
Department of Health and comparable agencies in other countries. The Company's
processing facility is also inspected annually for organic certification by
Quality Assurance International and for Kosher certification by the Kosher
Overseers Association. The use of Spirulina as a food additive for seasoning on
salads or pasta or for such other food uses has not been cleared by the FDA. The
Company currently markets the product for these food uses on the basis of its
belief that its use in these food applications is generally recognized as safe
and therefore is not subject to FDA premarket clearances as a
34
<PAGE>
food additive. A determination that the Company is in violation of the FDA's
food cGMP and other food regulations, including food additive requirements,
could lead to the imposition of civil penalties, including fines, product
recalls or product seizures, and potentially criminal sanctions.
As IN VITRO diagnostic medical device components, phycobiliprotein products
do not currently require premarket clearances by the FDA. However, as a
component of a medical device, they can nonetheless still be subject to other
various medical device requirements, including cGMP requirements.
All new color additives require premarket clearances from the FDA.
Therefore, the Company's potential natural food color products will require FDA
clearances, unless they meet the requirements of current color additive
regulations. The Company's proposed natural astaxanthin product will need FDA
clearance for use as a color additive in the United States. The Company believes
that no regulatory approval is required for use of astaxanthin as a colorant in
foods in major markets outside the United States. The process of obtaining
clearances for a new color additive is expensive and time consuming. Extensive
information is required on the toxicity of the additive, including
carcinogenicity studies and other animal testing. No assurances can be given
that any of the Company's proposed products intended for use in coloring foods
will be cleared by the FDA as color additives on a timely basis, if at all.
FIFRA requires the registration of most pesticides, including the Company's
proposed genetically engineered mosquitocide. The EPA also regulates under FIFRA
the experimental testing of pesticides, facility inspections, records and
exports of pesticides. The registration of a new pesticide must usually contain
different types of supporting data, including product chemistry, environmental
fate, toxicology, and fish and wildlife studies. Although biochemical and
microbial pesticides are sometimes treated differently from conventional
chemical pesticides because of their unique modes of action, low volumes, target
species specificity or natural occurrence, there can be no assurance that EPA
registration of the Company's mosquitocide can be obtained on a timely basis, if
at all.
PATENTS, LICENSES AND TRADEMARKS
Although the Company regards its proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to its success and
relies on a combination of trade secret, contract, patent, copyright and
trademark law to establish and protect its rights in its products and
technology, there can be no assurance that the Company will be able to protect
its technology adequately or that competitors will not be able to develop
similar technology independently. In addition, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as the laws of the United States. Cyanotech has had one United States
patent issued to it. Litigation in the United States or abroad may be necessary
to enforce the Company's patent or other intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation, even if successful, could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's business,
results of operations and financial condition. Additionally, although currently
there are no pending claims or lawsuits that have been brought against the
Company, if any such claims are asserted against the Company, the Company may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license would be available on terms
acceptable or favorable to the Company, if at all.
While the disclosure and use of Cyanotech's know-how and trade secrets are
generally controlled under agreements with the parties involved, there can be no
assurance that all confidentiality agreements will be honored, that others will
not independently develop equivalent technology, that disputes will not arise
concerning the ownership of intellectual property, or that dissemination of the
Company's trade secrets will not occur. The Company anticipates that it may in
the future apply for additional patents on certain aspects of its technology. No
assurance can be given that its patent applications will issue as patents or
that any patent now or to be issued will provide the Company with preferred
positions with respect to the covered technology. Additionally, there can be no
assurance that any patent issued to the Company will not be
35
<PAGE>
challenged, invalidated or circumvented or that the rights granted thereunder
will provide adequate protection to the Company's products. Furthermore, there
can be no assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company. See "Risk Factors -- Dependence
on Proprietary Technology."
ASSOCIATES
The Company employed 53 associates as of December 31, 1995, of which 49 are
full-time. Approximately 20 associates are involved in the harvesting and
production process, five are involved in research and product development, and
the remainder are involved in sales, administration and support. Management
believes that its relations with its associates are good. The Company has not
experienced difficulty in attracting personnel. None of the Company's associates
are represented by a labor union.
Effective April 1, 1995, the Company implemented a profit sharing plan for
all associates not covered under a separate management incentive plan. Under the
profit sharing plan, 5% of pre-tax profits are allocated based on gross wages to
non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax basis,
the remainder is deposited in each associate's 401(k) account on a pre-tax basis
with a six year vesting schedule, based on years of service with the Company.
PROPERTIES
The Company is located in Kailua-Kona, Hawaii, at the HOST Park. The
facility in Kailua-Kona consists of approximately 77 leased acres containing
production ponds, a processing facility, a laboratory, administrative offices
and additional space for production ponds. All products are produced at this
facility. The property is leased from the State of Hawaii under a 30-year
commercial lease expiring in 2025. Cyanotech has made a request to obtain an
option to lease an additional 160 acres at the HOST Park, which request has been
approved, subject to preparation of final documentation. The Company believes
that there is sufficient available land at the HOST Park to meet its currently
planned needs. The Company has no production facilities or offices outside the
State of Hawaii.
PRODUCT LIABILITY AND LEGAL PROCEEDINGS
Cyanotech is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
product liability, employee-related issues and disputes with vendors or
customers. Due to the nature of the Company's products, the Company may be
subject to product liability claims involving personal injuries allegedly
related to the Company's products. The Company carries product liability
insurance in limited amounts for products involving human consumption. In the
opinion of management, broader product liability insurance coverage is
prohibitively expensive at this time. Nevertheless, any future claims are
subject to the uncertainties related to litigation and the ultimate outcome of
any such proceedings or claims cannot be predicted. There can be no assurance
that the Company's insurance is adequate or will remain available to cover any
such claims. In addition, the Company may experience product recalls, although
no such recalls have been required to date. See "Risk Factors -- Risk of Product
Liability."
36
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of Cyanotech and their respective ages
and positions with Cyanotech are set forth in the following table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
Gerald R. Cysewski, Ph.D. ................ 46 Chairman of the Board, President and Chief
Executive Officer
<S> <C> <C>
Ronald P. Scott........................... 41 Executive Vice President - Finance and
Administration, Secretary, Treasurer and
Director
Glenn Jensen.............................. 37 Vice President - Operations
Kelly J. Moorhead......................... 40 Vice President - Sales and Marketing and
President, Nutrex, Inc.
Julian C. Baker........................... 29 Director
Eva R. Reichl............................. 77 Director
John T. Ushijima.......................... 71 Director
Paul C. Yuen, Ph.D. ...................... 67 Director
</TABLE>
DR. CYSEWSKI co-founded the Company in 1983 and has served as a director of
the Company and as its Scientific Director since that time. Since March 1990,
Dr. Cysewski has served as President and Chief Executive Officer of the Company
and in October 1990 was also appointed to the position of Chairman of the Board.
From 1988 to November 1990, he served as Vice Chairman of the Company. From 1980
to 1982 Dr. Cysewski was group leader of microalgae research and development at
Battelle Northwest, a major contract research and development firm. From 1976 to
1980 Dr. Cysewski was an assistant professor in the Department of Chemical and
Nuclear Engineering at the University of California, Santa Barbara, where he
received a two-year grant from the National Science Foundation to develop a
culture system for blue-green algae. Dr. Cysewski received his doctorate in
Chemical Engineering from the University of California at Berkeley.
MR. SCOTT was appointed to the Board of Directors of the Company (the
"Board") in November 1995, has served as Executive Vice President - Finance and
Administration since August 1995, and has served as Secretary and Treasurer
since November 1990 and June 1990, respectively. From December 1990 until August
1995 Mr. Scott served as Vice President - Finance and Administration. From
September 1990 to December 1990, Mr. Scott served as Controller. From 1989 to
1990, he was Assistant Controller for PRIAM Corporation, a manufacturer of
Winchester disk drives. From 1980 to 1989, he served in various accounting
management positions with Measurex Corporation, a manufacturer of industrial
process control systems. Mr. Scott holds a B.S. degree in Finance and Management
from California University, San Jose, and an M.B.A. degree from the University
of Santa Clara.
MR. JENSEN has served as Vice President - Operations since May 1993. He
joined the Company in 1984 as Process Manager and was promoted to Production
Manager in 1991, in which position he served until his promotion to Vice
President - Operations. Prior to joining Cyanotech, Mr. Jensen worked for three
years as a plant engineer at a Spirulina production facility, Cal-Alga near
Fresno, California, which ceased to do business in 1983. Mr. Jensen holds a B.S.
degree in Health Science from California State University, Fresno.
MR. MOORHEAD has served as Vice President - Sales and Marketing and
President of Nutrex, Inc. since December 1991. From August 1987 to December
1991, he served as Vice President - Production. Mr. Moorhead joined the Company
as Production Biologist in December 1984. Prior to joining Cyanotech, Mr.
Moorhead worked at the Oceanic Institute in Honolulu, Hawaii where he conducted
research on production of Spirulina from agricultural wastes. Mr. Moorhead holds
a B.S. degree in Aquatic Biology from the University of California, Santa
Barbara.
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<PAGE>
MR. BAKER has served as a director of the Company since November 1995. Mr.
Baker is a portfolio manager for Laurence A. Tisch and Preston R. Tisch and for
members of their family. Prior to his employment by the Tisch family, Mr. Baker
was a member of The Clipper Group and its predecessors, CS First Boston Merchant
Bank and First Boston Venture Capital. Mr. Baker is a graduate of Harvard
University. Laurence A. Tisch and Preston R. Tisch are Co-Chairmen and Co-Chief
Executive Officers of Loews Corporation and own approximately 32% of the
outstanding shares of that corporation. Loews Corporation owns approximately 84%
of the outstanding shares of CNA Financial Corporation. CNA Financial
Corporation, through a wholly-owned subsidiary, is a significant stockholder of
Cyanotech. See "Principal Stockholders."
MS. REICHL has served as a director of the Company since August 1993. She is
a private investor who has been involved in a variety of real estate and
fruit-growing operations in the states of Florida and Washington during the past
ten years.
MR. USHIJIMA has served as a director of the Company since 1984. He has been
a Partner in the law firm of Ushijima & Ushijima, Hilo, Hawaii, for over ten
years. Mr. Ushijima is also a former Hawaii State Senator and currently serves
as a member of the Board of Regents for the University of Hawaii.
DR. YUEN has served as a director of the Company since August 1993. Dr. Yuen
currently serves as Dean, College of Engineering, for the University of Hawaii
at Manoa. From July 1992 to March 1993, Dr. Yuen was Acting President of the
University of Hawaii. From 1989 to 1992, Dr. Yuen was Interim Senior Vice
President for Academic Affairs, University of Hawaii at Manoa. Dr. Yuen holds
M.S. and Ph.D. degrees in Electrical Engineering from the Illinois Institute of
Technology.
The Company's directors are elected at the annual stockholders' meeting and
serve until their respective successors are elected or until death, resignation
or removal. Officers are appointed by, and serve at the discretion of, the
Board. There are no family relationships among any directors or executive
officers of the Company.
BOARD COMMITTEES
The Board has an Audit Committee and a Compensation and Stock Option
Committee. The Board does not have a standing nominating committee. The present
Audit Committee consists of Dr. Yuen, Mr. Ushijima and Ms. Reichl. The present
Compensation and Stock Option Committee consists of Dr. Yuen, Mr. Ushijima and
Ms. Reichl.
DIRECTOR COMPENSATION
Each non-employee director is entitled to receive $500 per Board meeting
attended and is reimbursed for all out-of-pocket costs incurred in connection
with attendance at such meetings. In addition, each non-employee director (other
than Mr. Baker) has received, pursuant to the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan (the "Non-Employee Directors Plan"),
options to purchase 3,000 shares of the Company's Common Stock. At the 1996
Annual Meeting of Stockholders, Mr. Baker and any other new non-employee
director (in each case if continuing as a director) who has not received such a
grant will receive a 10-year option to purchase 3,000 shares. Each non-employee
director who has received such an option grant, at each subsequent annual
meeting of stockholders, received or will receive under the Non-Employee
Directors Plan an automatic grant of 2,000 shares of fully paid and
non-assessable shares of Common Stock that are non-transferable for six months
following the date of such grant. During the fiscal year ended March 31, 1995,
each of the director nominees other than Mr. Cysewski was granted under the
Non-Employee Directors Plan options to purchase 3,000 shares of Common Stock
expiring in 2004 at $1.0625 per share, representing the fair market value of the
shares on the date of grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company believes that its status as a Nevada corporation as well as
certain provisions of its Restated Articles of Incorporation and Bylaws will be
useful to attract and retain qualified persons as directors and officers. The
Company's Restated Articles of Incorporation limit the liability of directors to
the fullest extent permitted by Nevada law. This provision is intended to allow
the Company's directors the benefit of Nevada Corporation Law which provides
that directors of Nevada corporations may be relieved of
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monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of unlawful distributions. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Nevada
law.
The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, associate or other agent.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the years ended March 31, 1995 (fiscal
1995), March 31, 1994 (fiscal 1994) and December 31, 1992 (fiscal 1992),
respectively, to the Company's Chief Executive Officer (the "Named Executive
Officer"). No executive officer earned over $100,000. No executive officer who
would have otherwise been includable in this table on the basis of salary and
bonus earned for fiscal 1995 has resigned or terminated employment.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------
-------------------- SECURITIES
SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) OPTIONS/SARS(#)
- ------------------------------------------------- ----------- --------- --------- -------------------
Gerald R. Cysewski 1995 $ 86,809 $ 10,000 11,000
<S> <C> <C> <C> <C>
Chairman of the Board, 1994(1) 71,941 -- 11,000
President and Chief Executive Officer 1992 69,000 -- --
</TABLE>
- ------------------------
(1) The Company changed its fiscal year end from December 31 to March 31,
effective March 31, 1994.
STOCK OPTION GRANTS TO NAMED EXECUTIVE OFFICER
The following table contains information concerning the grant of stock
options made by the Company during the year ended March 31, 1995 to the Named
Executive Officer.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/ SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
- ----------------------------------------------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Gerald R. Cysewski (1)..................................... 11,000 11.1% $0.9375 6/30/99
</TABLE>
- ------------------------
(1) The options become exercisable in four equal and cumulative annual
installments over the optionee's period of service with the Company,
beginning one year after the June 30, 1994 grant date.
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Executive
Officer and certain other officers concerning the exercise of options during the
year ended March 31, 1995 and unexercised options held as of March 31, 1995. No
stock appreciation rights were exercised during the year ended March 31, 1995 or
outstanding as of March 31, 1995.
39
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ SARS
NUMBER OF OPTIONS/SARS AT MARCH 31,
SHARES VALUE 1995 AT MARCH 31, 1995 ($)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald R. Cysewski (1)....................... 0 0 5,500 16,500 0 $ 2,750
Ronald P. Scott (1).......................... 0 0 23,000 24,000 7,184 7,434
Glenn Jensen (1)............................. 0 0 28,000 24,000 8,434 7,434
Kelly J. Moorhead (1)........................ 0 0 34,000 25,000 10,308 8,058
</TABLE>
- ------------------------
(1) Since March 31, 1995, the Company has granted to Dr. Cysewski and Messrs.
Jensen, Moorhead and Scott, options to purchase 14,500, 12,000, 13,000 and
14,500 shares of Common Stock, respectively. The options become exercisable
in four equal and cumulative annual installments over the optionee's period
of service with the Company, beginning one year after the August 10, 1995
grant date.
STOCK OPTION PLAN
The Board adopted, and the stockholders approved, the 1995 Stock Option Plan
(the "Plan") in August 1995. The Plan is the successor plan to the Company's
1985 Incentive Stock Option Plan (the "Prior Plan"). The Plan contains a
discretionary grant program (the "Discretionary Grant Program"), under which
associates and consultants may be granted options to purchase shares of the
Company's Common Stock, and a discounted option grant program (the "Discounted
Grant Program"), under which associates may elect to have a portion of their
base salary reduced each year in return for options to purchase shares of Common
Stock at a discount from current fair market value. Options granted under the
Discretionary Grant Program may be either incentive stock options ("ISOs")
designed to meet the requirements of Section 422 of the Internal Revenue Code or
non-qualified options ("NQOs") which are not intended to satisfy such
requirements. All grants under the Discounted Grant Program are NQOs.
The Discretionary Grant Program and the Discounted Grant Program are
administered by a committee (the "Committee") of two or more non-employee Board
members appointed by the Board, presently the Compensation and Stock Option
Committee. Under the Plan, 400,000 shares of the Company's Common Stock are
reserved for issuance over the ten-year term of the Plan. Associates of the
Company or its subsidiaries (including officers) and consultants are eligible to
participate in the Plan. As of December 31, 1995, approximately 35 associates
were eligible to participate in the Plan.
The Committee may authorize loans or installment payments in order to assist
optionees in financing the exercise of outstanding options under the
Discretionary Grant Program or Discounted Grant Program on terms to be
determined by the Committee. Any such financing may be subject to forgiveness in
whole or in part, at the discretion of the Committee, over the optionee's period
of service with the Company. As of December 31, 1995, no loans or installment
payments had been authorized.
There are currently outstanding options to purchase 101,000 and 213,475
shares of Common Stock under the Plan and the Prior Plan, respectively, with a
weighted average exercise price per share of $2.32.
401(K) PLAN
The Company sponsors a 401(k) Plan (the "401(k) Plan") under which eligible
associates may contribute, on a pre-tax basis, up to 15% of the associate's
total annual income from the Company, subject to certain Internal Revenue Code
limitations. Associates may contribute 50% of their profit-sharing bonus to the
401(k) Plan. All contributions are allocated to the associate's individual
account and are subject to a six-year vesting schedule based on years of service
with the Company. All full-time associates who have attained age 18 are eligible
to participate in the 401(k) Plan. See "Business -- Associates."
40
<PAGE>
CERTAIN TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
STOCKHOLDERS AGREEMENT. In connection with the purchase by Eva R. Reichl in
1993 of 1,800,000 shares of the Company's Common Stock, certain holders of
Common Stock, including Gerald R. Cysewski (the "Holders"), the Company and Ms.
Reichl entered into a Stockholders Agreement dated as of May 17, 1993 (the
"Stockholders Agreement"). Under the Stockholders Agreement, the parties agreed
that without approval of a majority of the Holders' and Ms. Reichl's shares, the
Company would not propose, and the Holders and Ms. Reichl would not vote for,
any resolution, Bylaw change or other proposal that would increase the Company's
Board of Directors to more than six members. In addition, the Company is
obligated under the Stockholders Agreement to notify Ms. Reichl of any Board
elections so that she may nominate one person for election as a director. At any
Board election, the Holders and Ms. Reichl have agreed to vote their shares to
elect such nominee. The Stockholders Agreement terminates when Ms. Reichl sells,
transfers or disposes of any of the 1,800,000 shares acquired, other than by
will, the laws of descent, or to any entity controlled by Ms. Reichl.
OTHER TRANSACTIONS
SHARE CONVERSION AGREEMENT. In February 1996, the Company entered into a
Preferred Stock Conversion and Registration Rights Agreement with Firemen's
Insurance Company of Newark, New Jersey (an indirect wholly-owned subsidiary of
CNA Financial Corporation) ("Firemen's Insurance"), a principal stockholder of
the Company (the "Conversion Agreement"), for the conversion of the Company's
Series A Preferred Stock into Common Stock effective upon the closing of this
offering. Firemen's Insurance holds 1,250,000 shares of the Company's Series A
Preferred Stock (the "Series A Shares"), constituting all the Series A Shares
currently issued and outstanding, which shares were convertible into 250,000
shares of Common Stock until February 28, 1995. Pursuant to the Conversion
Agreement, Firemen's Insurance has agreed to convert the Series A Shares into
250,000 shares of Common Stock, which conversion ratio was determined in
accordance with an independent valuation. Firemen's Insurance has agreed,
subject to certain limited exceptions, not to offer, sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock, or any securities
convertible into or exercisable for, or any rights to purchase or acquire,
Common Stock owned by them through the date 120 days after the date of the
closing of this offering. In addition, the Company has granted to Firemen's
Insurance certain "piggy-back" registration rights with respect to the shares of
Common Stock issuable upon conversion of the Series A Shares and the shares of
Common Stock issuable upon conversion of the Company's Series C Preferred Stock
held by Firemen's Insurance. See "Shares Eligible for Future Sale --
Registration Rights."
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1995 and as adjusted
to reflect the sale of shares of Common Stock offered hereby by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of the Common Stock of the Company, (ii) the Named Executive Officer,
(iii) each director and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING(1)
SHARES ------------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Gerald R. Cysewski, Ph.D. (2)............................................ 473,308(3) 3.4% 3.1%
Ronald P. Scott (2)...................................................... 34,750(4) * *
Julian C. Baker (2)...................................................... --(5) -- --
Eva R. Reichl (2)........................................................ 1,805,000 13.1 11.8
John T. Ushijima (2)..................................................... 283,600(6) 2.1 1.9
Paul C. Yuen (2)......................................................... 13,100(7) * *
B. Michael Pisani........................................................ 855,573(8) 6.0 5.4
44 Lake Road
Short Hills, NJ 07078
CNA Financial Corporation................................................ 3,408,641(9) 24.8 22.4
CNA Plaza
Chicago, IL 60685
American Cyanamid Company................................................ 699,730(10) 5.1 4.6
(a wholly-owned subsidiary of American Home Products Corporation)
5 Giralda Farms
Madison, NJ 07940
All directors and executive officers as a group (8 persons)(5)(11)....... 2,670,658 19.3 17.4
</TABLE>
- --------------------------
* Less than 1.0%.
(1) Reflects the pro forma capitalization of the Company at December 31, 1995,
assuming for all percentages presented full conversion of all outstanding
shares of Series A Preferred Stock and Series C Preferred Stock into shares
of Common Stock (13,732,460 issued and outstanding before the offering;
15,232,460 issued and outstanding after the offering). See "Capitalization."
For each person, also assumes as outstanding options and warrants
exercisable by such person within 60 days of December 31, 1995.
(2) Address is c/o Cyanotech Corporation, 73-4460 Queen Kaahumanu Hwy., Suite
102, Kailua-Kona, HI 96740.
(3) Includes options exercisable within 60 days of December 31, 1995 for 11,000
shares of Common Stock.
(4) Includes options exercisable within 60 days of December 31, 1995 for 22,250
shares of Common Stock.
(5) Does not include 250,000 shares held by Firemen's Insurance Company of
Newark, NJ ("Firemen's Insurance"), 183,486 shares held by National-Ben
Franklin Company of Illinois ("National-Ben Franklin") and 2,975,155 shares
of Common Stock issuable upon conversion of 595,031 shares of Series C
Preferred Stock held by Firemen's Insurance. Mr. Baker is the director
nominee (relating to the Series A Preferred Stock which is being converted
to Common Stock as of the closing of this offering) of CNA Financial
Corporation, the parent company of Firemen's Insurance and National-Ben
Franklin, and disclaims beneficial ownership of such shares.
(6) Includes options exercisable within 60 days of December 31, 1995 for 3,000
shares of Common Stock.
(7) Includes options exercisable within 60 days of December 31, 1995 for 3,000
shares of Common Stock.
(8) Includes warrants exercisable within 60 days of December 31, 1995 for
561,816 shares of Common Stock.
(9) Represents 250,000 shares held by Firemen's Insurance, 183,486 shares held
by National-Ben Franklin and 2,975,155 shares of Common Stock issuable upon
conversion of 595,031 shares of Series C Preferred Stock held by Firemen's
Insurance. National-Ben Franklin and Firemen's Insurance are indirect
wholly-owned subsidiaries of CNA Financial Corporation. Firemen's Insurance
holds approximately 81.0% of the Series C Preferred Stock.
(10) Represents 699,730 shares of Common Stock issuable upon conversion of
139,946 shares of Series C Preferred Stock. American Cyanamid Company holds
approximately 19.0% of the Series C Preferred Stock.
(11) Includes 85,250 shares issuable under options and warrants to purchase
shares of Common Stock exercisable within 60 days of December 31, 1995 to:
Gerald R. Cysewski (11,000 shares); Ronald P. Scott (22,250); John T.
Ushijima (3,000 shares); Paul C. Yuen (3,000 shares); and 46,000 shares
issuable to other executive officers.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 18,000,000 shares of
Common Stock, $0.005 par value per share, of which 9,807,575 shares of Common
Stock were issued and outstanding as of December 31, 1995 (10,057,575 shares
issued and outstanding, assuming full conversion of the Series A
Preferred Stock effective on the closing of this offering), and 5,000,000 shares
of Preferred Stock, $0.001 par value per share, 734,977 shares of which are
designated as Series C Preferred Stock, and are currently issued and
outstanding.
COMMON STOCK
Subject to the rights of holders of Preferred Stock, the holders of
outstanding shares of Common Stock are entitled to share ratably in dividends
declared out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time lawfully determine. Each
holder of Common Stock is entitled to one vote for each share held. Cumulative
voting in elections of directors and all other matters brought before
stockholders meetings, whether they be annual or special, is not permitted. The
Common Stock is not entitled to conversion or preemptive rights and is not
subject to redemption or assessment. Subject to the rights of holders of any
outstanding Preferred Stock, upon liquidation, dissolution or winding up of the
Company, any assets legally available for distribution to stockholders as such
are to be distributed ratably among the holders of the Common Stock at that time
outstanding. The Common Stock presently outstanding is, and the Common Stock
issued in this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Articles of Incorporation, as the Board determines. The
rights, preferences, limitations and restrictions of different series of
Preferred Stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The Board may authorize the issuance of
Preferred Stock which ranks senior to the Common Stock with respect to the
payment of dividends and the distribution of assets on liquidation. In addition,
the Board is authorized to fix the limitations and restrictions, if any, upon
the payment of dividends on Common Stock to be effective while any shares of
Preferred Stock are outstanding. The Board, without stockholder approval, can
issue Preferred Stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company.
The Company's 8% Cumulative, Convertible Preferred Shares -- Series C (the
"Series C Shares") are convertible at the option of the holders thereof into
Common Stock at the rate of five shares of Common Stock for one share of
Preferred Stock through February 23, 2000, after which date the conversion
feature is no longer applicable. Holders of 21,030 Series C Shares elected to
convert such shares into 105,150 shares of Common Stock during the year ended
March 31, 1995. Series C Shares have voting rights equal to the number of shares
of Common Stock into which they are convertible and have a preference in
liquidation over all other series of preferred stock of five dollars per share
plus any accumulated but unpaid dividends. Holders of Series C Shares are
entitled to cumulative annual dividends at the rate of $.40 per share if and
when declared by the Board; cumulative dividends in arrears as of December 31,
1995 amounted to $1.9 million ($2.563 per share). Upon conversion of Series C
Shares, cumulative dividends in arrears on converted shares are no longer
payable. Each share of Series C Preferred Stock entitles holders to voting power
equal to the voting power of the number of shares of Common Stock into which the
shares of Series C Preferred Stock may be converted. Holders of Series C
Preferred Stock are entitled to vote on all matters on which holders of shares
of Common Stock are entitled to vote. The consent of holders of a majority of
the outstanding Series C Shares is required to change the powers, preferences or
rights of the Series C Shares, sell all or substantially all of the Company's
assets or merge the Company. The Series C Shares were originally issued with a
redemption feature. Terms of the Series C Shares were modified in February 1991
to eliminate the redemption feature.
The Company has no present intention to issue any additional shares of
Preferred Stock.
43
<PAGE>
WARRANTS
As of December 31, 1995, the Company had warrants outstanding to acquire
997,000 shares of the Company's Common Stock. The warrants were issued in
consideration for loans to the Company, in consideration for and in recognition
of services performed, and to certain individuals who guaranteed notes payable
by the Company. Warrants granted for loans, services and guarantees were granted
with exercise prices not lower than the fair market value of the Company's
Common Stock on the date of grant. These outstanding warrants are exercisable at
prices ranging from $.40 to $1.00 per share, with a weighted average price per
share of $.458, and expire on various dates from 1996 to 1999.
NEVADA ANTI-TAKEOVER LAWS AND CERTAIN CHARTER PROVISIONS
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations having at least 200
stockholders, prohibits an "interested stockholder" from entering into a
"combination" with the corporation, unless certain conditions are met. A
"combination" includes (a) any merger with an "interested stockholder," or any
other corporation which is or after the merger would be, an affiliate or
associate of the interested stockholder, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets, in one transaction or
a series of transactions, to an "interested stockholder," having (i) an
aggregate market value equal to 5% or more of the aggregate market value of the
corporation's assets, (ii) an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation, or (iii)
representing 10% or more of the earning power or net income of the corporation,
(c) any issuance or transfer of shares of the corporation or its subsidiaries,
to the "interested stockholder," having an aggregate market value equal to 5% or
more of the aggregate market value of all the outstanding shares of the
corporation, (d) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would have the effect of in increasing the
proportionate share of outstanding shares of the corporation owned by the
"interested stockholder," or (f) the receipt of benefits, except proportionately
as a stockholder, of any loans, advances or other financial benefits by an
"interested stockholder." An "interested stockholder" is a person who (i)
directly or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of the
corporation which at any time within three years before the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares, unless
the combination or the interested stockholder's acquisition of shares was
approved by the board of directors before the interested stockholder acquired
the shares. If this approval was not obtained, then after the three-year period
expires, the combination may be consummated if all the requirements in the
Articles of Incorporation are met and either (a) (i) the board of directors of
the corporation approves, prior to such person becoming an "interested
stockholder," the combination or the purchase of shares by the "interested
stockholder" or (ii) the combination is approved by the affirmative vote of
holders of a majority of voting power not beneficially owned by the "interested
stockholder" at a meeting called no earlier than three years after the date the
"interested stockholder" became such or (b) the aggregate amount of cash and the
market value of consideration other than cash to be received by holders of
common shares and holders of any other class or series of shares meets the
minimum requirements set forth in Sections 78.411 through 78.443, inclusive, and
prior to the consummation of the combination, except in limited circumstances,
the "interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Section78.378-78.379, prohibits an acquiror, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. The Company does not intend to "do business" in Nevada
within the meaning of the Control Share Acquisition Statute. Therefore, it is
unlikely that the Control Share Acquisition Statute will apply to the Company.
The statute specifies three thresholds: at least one-fifth but less than
one-third, at least one-third but less than a majority, and a majority or more,
of all the outstanding voting power. Once an acquiror crosses one of the above
thresholds, shares which it acquired in the transaction
44
<PAGE>
taking it over the threshold or within ninety days become "Control Shares" which
are deprived of the right to vote until a majority of the disinterested
stockholders restore that right. A special stockholders' meeting may be called
at the request of the acquiror to consider the voting rights of the acquiror's
shares no more than 50 days (unless the acquiror agrees to a later date) after
the delivery by the acquiror to the corporation of an information statement
which sets forth the range of voting power that the acquiror has acquired or
proposes to acquire and certain other information concerning the acquiror and
the proposed control share acquisition. If no such request for a stockholders'
meeting is made, consideration of the voting rights of the acquiror's shares
must be taken at the next special or annual stockholders' meeting. If the
stockholders fail to restore voting rights to the acquiror or if the acquiror
fails to timely deliver an information statement to the corporation, then the
corporation may, if so provided in its articles of incorporation or bylaws, call
certain of the acquiror's shares for redemption. The Company's Restated Articles
of Incorporation and Bylaws do not currently permit it to call an acquiror's
shares for redemption under these circumstances. The Control Share Acquisition
Statute also provides that the stockholders who do not vote in favor of
restoring voting rights to the Control Shares may demand payment for the "fair
value" of their shares (which is generally equal to the highest price paid in
the transaction subjecting the stockholder to the statute).
The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "Preferred Stock," may
have the effect of delaying or deterring a change in the control or management
of the Company. See "Risk Factors -- Effect of Anti-Takeover Provisions."
LISTING
The Company's Common Stock is currently quoted on the Nasdaq National Market
under the symbol "CYAN."
TRANSFER AGENT AND REGISTRAR
First Interstate Bank of Washington, N.A. is the registrar and transfer
agent of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of this offering, the Company will have outstanding
approximately 15.2 million shares of Common Stock, assuming the conversion of
all the outstanding shares of Preferred Stock into Common Stock, no exercise of
the Underwriters' over-allotment option and no exercise of options or warrants
to purchase the Company's Common Stock. Of these shares, all of the Common Stock
being sold hereby and approximately 5.5 million shares held by existing
stockholders will be freely tradeable (unless such shares are held by an
"affiliate" of the Company as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. The remaining 8.3
million shares were issued and sold by the Company in private transactions
("Restricted Shares") and are eligible for public sale only if registered under
the Securities Act or sold in accordance with Rule 144 thereunder. Approximately
1.1 million of the Restricted Shares are currently eligible for sale in the
public market pursuant to Rule 144(k) (of which approximately 870,000 shares are
subject to the agreements not to sell described below). Approximately 7.2
million additional Restricted Shares will be eligible for sale in reliance on
Rule 144 (of which approximately 6.6 million are subject to the agreements not
to sell described below). The directors, executive officers and stockholders of
the Company who hold in the aggregate approximately 7.5 million shares have
agreed, subject to certain limited exceptions, not to offer, sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock owned by them for the 120-day period after the closing of
this offering without the prior written consent of Van Kasper & Company. In
addition, the Company has agreed that for a period of 120 days after the date of
this Prospectus, it will not, without the prior written consent of Van Kasper &
Company, issue, offer, sell, grant options to purchase or otherwise dispose of
any equity securities or securities convertible into or exchangeable for equity
securities except for (i) shares of Common Stock offered hereby, (ii) shares of
Common Stock issued pursuant to the exercise of outstanding options and
warrants, (iii) shares of Common Stock issued pursuant to the conversion of
Preferred Stock and (iv) options granted to its associates, officers, directors
and consultants so long as none of such options become exercisable during said
120-day period. Van Kasper & Company may, in its sole discretion and at any time
45
<PAGE>
without notice, release all or any portion of the securities subject to the
lock-up agreements. No predictions can be made as to the effect, if any, that
market sales of Common Stock or the availability of Common Stock for sale will
have on the market price prevailing from time to time. Sale of a substantial
number of shares of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. See "Risk Factors
- -- Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, any holder of Restricted
Shares, including an affiliate of the Company, as to which at least two years
have elapsed since the later of the date of their acquisition from the Company
or an affiliate, would be entitled within any three-month period to sell a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 115,000 shares immediately
after the completion of this offering assuming no exercise of the Underwriters'
over-allotment option and assuming no conversion of the Series C Preferred
Stock) or (ii) the average weekly trading volume of the Common Stock in the
over-the-counter market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission. Sales pursuant to
Rule 144 are also subject to certain other requirements relating to manner of
sale, notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale, and who, together with any previous holder who is not an
affiliate of the Company, has beneficially owned Restricted Shares for at least
three years, would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described above. The foregoing summary is not intended
to be a complete description of Rule 144.
The Company has reserved 400,000 shares of Common Stock for issuance under
the 1995 Stock Option Plan, options to purchase 101,000 shares of which have
been granted. The Company also has outstanding options to purchase 213,475
shares, which options were granted under the 1985 Incentive Stock Option Plan.
In addition, the Company has options outstanding to purchase 9,000 shares under
the 1994 Non-Employee Directors Stock Option and Stock Grant Plan and other
non-qualified options outstanding to purchase 102,000 shares of Common Stock.
The Company has filed registration statements under the Securities Act covering
an aggregate of 800,000 shares of Common Stock under the Company's 1995 Stock
Option Plan and 1985 Incentive Stock Option Plan. Shares issued upon the
exercise of stock options or previously issued on exercise, generally will be
available for sale in the open market subject to Rule 144 volume limitations
applicable to affiliates and the lock-up agreements with Van Kasper & Company
described above.
REGISTRATION RIGHTS
In connection with a Joint Venture Agreement consummated August 31, 1994,
between Hauser Chemical Research, Inc. ("Hauser") and the Company, Hauser
purchased 96,969 shares of the Company's Common Stock and the Company granted
certain demand and "piggy-back" registration rights to Hauser covering the
96,969 shares of Common Stock pursuant to a Registration Rights Agreement dated
as of August 31, 1994. Under the agreement, Hauser may, subject to certain
limitations, require the Company to register shares of such Common Stock under
the Securities Act to enable it to sell such shares to the public. In addition,
whenever the Company proposes to register any of its securities under the
Securities Act (other than registrations in connection with stock option plans
and certain other registrations), Hauser may require the Company, subject to
certain limitations, to include all or any portion of such shares of Common
Stock in the registration. The Company generally is required to bear all costs
incurred in connection with the "piggy-back" registrations other than
underwriting discounts and commissions payable with respect to the Common Stock
and fees of counsel to the holders of the Common Stock, and Hauser is generally
required to bear all costs incurred in connection with the demand registrations.
Hauser has agreed, subject to certain limited exceptions, not to offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock owned by them through the date 120 days after the date of
the closing of this offering.
The Company has granted to Firemen's Insurance and American Cyanamid certain
"piggy-back" registration rights with respect to the shares of Common Stock
issuable upon conversion of the Series A Shares and the Series C Shares,
amounting to 3,924,885 shares of Common Stock on an as-converted basis. Whenever
the Company proposes to register any of its securities under the Securities Act
in connection with the public offering of such securities solely for cash (other
than registrations in connection with stock option plans and certain other
registrations), Firemen's Insurance and American Cyanamid may require the
46
<PAGE>
Company, subject to certain limitations, to include all or any portion of the
Common Stock acquired pursuant to the conversion of Series A Shares and Series C
Shares in such registration. The Company has agreed to register for sale in any
future offering until February 3, 2005 a minimum of the greater of (i) American
Cyanamid's or Firemen's Insurance (as the case may be) pro rata portion of not
less than 40% of the total number of securities to be registered in any offering
with respect to all security holders with piggy-back registration rights and
(ii) 110,000 of American Cyanamid's shares or 507,000 of Firemen's Insurance's
shares (as the case may be). American Cyanamid and Firemen's Insurance also have
certain rights to withdraw their election to sell in any such offering prior to
the effectiveness of the registration statement related thereto. The Company
generally is required to bear all costs incurred in connection with all such
registrations other than underwriting discounts and commissions payable with
respect to the Common Stock and fees of counsel to the holders of the Common
Stock. In connection with and in consideration of the granting of such
registration rights, Firemen's Insurance and American Cyanamid have agreed,
subject to certain limited exceptions, not to offer, sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock, or any securities
convertible into or exercisable for, or any rights to purchase or acquire,
Common Stock owned by them through the date 120 days after the date of the
closing of this offering. See "Certain Transactions -- Other Transactions."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representative, Van Kasper & Company
(the "Representative"), have severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.........................................................
----------
Total........................................................................ 1,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the underwriters will
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Underwriters propose to offer the Common Stock directly to the public at
the offering price set forth on the cover page of this Prospectus and to certain
selected dealers at this price less a concession not in excess of $ per
share. The Underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers.
The Company has granted an option to the Underwriters, exercisable by the
Representative within 30 days after the date of this Prospectus, to purchase up
to 225,000 additional shares of Common Stock at the initial offering price, less
underwriting discounts and commissions. The Representative may exercise the
over-allotment option solely for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby. To the
extent that the over-allotment option is exercised, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of the
additional shares as the number of shares to be purchased and offered by that
Underwriter in the above table bears to the total.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Representative
has informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
Certain stockholders, representing in the aggregate 7,460,748 shares of
Common Stock (assuming conversion of the Company's Series C Preferred Stock) and
the holders of options to purchase 85,250 shares of Common Stock have agreed
pursuant to such lock-up agreements, subject to certain limited exceptions, not
to offer, sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or exercisable for, or any
rights to purchase or acquire, Common Stock owned by them for the 120-day period
after the closing of this offering without the prior written consent of the
Representative. The Representative may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, the Company has agreed that for a period of 120
days after the date of this Prospectus, it will not, without the prior written
consent of the Representative, issue, offer, sell, grant options to purchase or
otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for (i) shares of Common Stock offered
hereby, (ii) shares of Common Stock issued pursuant to the exercise of
outstanding options and warrants, (iii) shares of Common Stock issued pursuant
to the conversion of Preferred Stock and (iv) options granted to its
48
<PAGE>
associates, officers, directors and consultants so long as none of such options
become exercisable during said 120-day period. Sales of such shares in the
future could adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."
The Company has agreed to pay the Representative a non-accountable expense
allowance of 1.0% of the total proceeds of the offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Woodburn and Wedge, Reno,
Nevada. Certain legal matters in connection with this offering will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, San Francisco,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Heller Ehrman White & McAuliffe, Palo Alto,
California.
EXPERTS
The consolidated financial statements of Cyanotech Corporation and its
subsidiary as of March 31, 1995 and March 31, 1994, and for each of the years in
the two-year period ended March 31, 1995, have been included herein and in the
Registration Statement in reliance on the report of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Cyanotech is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Company has filed a registration statement on Form SB-2 (herein, together with
all amendments and exhibits referred to as the "Registration Statement") with
the Commission under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information, exhibits and schedules set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement, exhibits and schedules thereto. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete and, in each instance, if such contract
or document is filed as an exhibit to the Registration Statement, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, and each such statement being qualified in all respects
by such reference to such exhibit. Copies of such materials may be inspected,
without charge, at the offices of the Commission, or obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center
(13th Floor), New York, New York 10019. The Company's Common Stock is quoted on
the Nasdaq National Market. Reports, proxy statements and other information
concerning the Company may also be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
49
<PAGE>
CYANOTECH CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets at March 31, 1994 and 1995 and at December 31, 1995 (unaudited)................ F-3
Consolidated Statements of Income for the Years Ended March 31, 1994 and 1995 and for the Nine Months Ended
December 31, 1994 and 1995 (unaudited).................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and the Nine
Months Ended December 31, 1995 (unaudited)................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Nine Months
Ended December 31, 1994 and 1995 (unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Cyanotech Corporation:
We have audited the accompanying consolidated balance sheets of Cyanotech
Corporation and subsidiary as of March 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cyanotech
Corporation and subsidiary as of March 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Honolulu, Hawaii
May 3, 1995
F-2
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 AND 1995 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS (NOTE 4)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 866 $ 496 $ 776
Accounts receivable........................................................... 462 648 1,291
Inventories (note 2).......................................................... 398 375 275
Prepaid expenses.............................................................. 7 5 32
--------- --------- ------
Total current assets........................................................ 1,733 1,524 2,374
Equipment and leasehold improvements, net (note 3).............................. 3,365 4,635 7,204
Other assets.................................................................... 34 53 71
--------- --------- ------
Total assets................................................................ $ 5,132 $ 6,212 $ 9,649
--------- --------- ------
--------- --------- ------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt (note 4)................................. $ 13 $ 7 $ 175
Current maturities of capital lease obligations (note 5)...................... 26 58 123
Accounts payable.............................................................. 566 629 700
Accrued expenses and other (note 7)........................................... 258 230 372
--------- --------- ------
Total current liabilities................................................... 863 924 1,370
Long-term debt, excluding current maturities (note 4)........................... 7 -- 550
Obligations under capital lease, excluding current maturities (note 5).......... 102 184 358
--------- --------- ------
TOTAL LIABILITIES........................................................... 972 1,108 2,278
--------- --------- ------
STOCKHOLDERS' EQUITY:
Preferred stock (note 8)...................................................... 2 2 2
Common stock of $.005 par value; authorized 18,000,000 shares; outstanding
8,736,506 shares at March 31, 1994, 9,051,325 shares at March 31, 1995 and
9,807,575 shares at December 31, 1995........................................ 44 45 49
Additional paid-in capital.................................................... 12,042 12,216 12,720
Accumulated deficit........................................................... (7,898) (7,129) (5,400)
--------- --------- ------
4,190 5,134 7,371
Less -- treasury stock, 30,000 common shares at cost.......................... 30 30 --
--------- --------- ------
Total stockholders' equity.................................................. 4,160 5,104 7,371
--------- --------- ------
Commitments and contingencies (notes 5, 8 and 12)
Total liabilities and stockholders' equity.................................. $ 5,132 $ 6,212 $ 9,649
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1994 AND 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
NET SALES (note 10)............................................... $ 2,697 $ 4,150 $ 2,921 $ 5,972
COST OF SALES..................................................... 1,495 2,275 1,582 2,784
--------- --------- ----------- -----------
GROSS PROFIT.................................................. 1,202 1,875 1,339 3,188
--------- --------- ----------- -----------
OPERATING EXPENSES:
Research and development........................................ 59 171 93 243
General and administrative...................................... 604 685 504 862
Sales and marketing............................................. 319 301 208 302
--------- --------- ----------- -----------
Total operating expenses...................................... 982 1,157 805 1,407
--------- --------- ----------- -----------
Income from operations........................................ 220 718 534 1,781
--------- --------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income................................................. 13 17 12 19
Interest expense................................................ (16) (27) (19) (63)
Other income, net............................................... 22 98 13 --
Proportionate share of loss of joint venture (note 6)........... (35) (37) (37) --
--------- --------- ----------- -----------
Total other income (expense).................................. (16) 51 (31) (44)
--------- --------- ----------- -----------
Net income before income taxes................................ 204 769 503 1,737
Provision for income taxes........................................ -- -- -- (8)
--------- --------- ----------- -----------
NET INCOME........................................................ $ 204 $ 769 $ 503 $ 1,729
--------- --------- ----------- -----------
--------- --------- ----------- -----------
NET INCOME PER COMMON SHARE....................................... $ 0.02 $ 0.05 $ 0.04 $ 0.12
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of common shares and common share
equivalents...................................................... 13,330 13,589 13,907 14,452
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1994 AND 1995
AND NINE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
(NOTE 8) COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED TREASURY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT STOCK
--------- --------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1993........ 2,118,507 $ 2 6,260,197 $ 31 $ 9,665 $ (8,102) $ (30)
Common stock issued for cash, net
of costs of $24.................. -- -- 2,350,000 12 2,314 -- --
Exercise of warrants for cash..... -- -- 83,000 1 37 -- --
Exercise of stock options for
cash............................. -- -- 3,300 -- 2 -- --
Common stock issued in
satisfaction of debt............. -- -- 40,000 -- 24 -- --
Other............................. -- -- 9 -- -- -- --
Net income........................ -- -- -- -- -- 204 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT MARCH 31, 1994........ 2,118,507 2 8,736,506 44 12,042 (7,898) (30)
Common stock issued for cash, net
of costs of $6................... -- -- 146,969 1 144 -- --
Exercise of warrants for cash..... -- -- 38,400 -- 24 -- --
Exercise of stock options for
cash............................. -- -- 4,300 -- 3 -- --
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock... (21,030) -- 105,150 -- -- -- --
Conversion of 100,000 shares of
Series E preferred stock to
20,000 shares of common stock.... (100,000) -- 20,000 -- -- -- --
Issuance of common stock warrants
for services..................... -- -- -- -- 3 -- --
Net income........................ -- -- -- -- -- 769 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT MARCH 31, 1995........ 1,997,477 2 9,051,325 45 12,216 (7,129) (30)
Exercise of warrants for cash..... -- -- 695,200 4 420 -- --
Exercise of stock options for
cash............................. 80,550 74
Issuance of stock grants to non-
employee directors............... -- -- 8,000 -- 40 -- --
Exchange of 12,500 shares of
Series B preferred stock for
2,500 shares of common stock..... (12,500) -- 2,500 -- -- -- --
Retire 30,000 shares of treasury
stock............................ -- -- (30,000) -- (30) -- 30
Net income........................ -- -- -- -- -- 1,729 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT DECEMBER 31, 1995
(unaudited)...................... 1,984,977 $ 2 9,807,575 $ 49 $ 12,720 $ (5,400) $ --
--------- --------- --------- --------- ----------- ------------- -----
--------- --------- --------- --------- ----------- ------------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES AT MARCH 31, 1993........ $ 1,566
Common stock issued for cash, net
of costs of $24.................. 2,326
Exercise of warrants for cash..... 38
Exercise of stock options for
cash............................. 2
Common stock issued in
satisfaction of debt............. 24
Other............................. --
Net income........................ 204
------
BALANCES AT MARCH 31, 1994........ 4,160
Common stock issued for cash, net
of costs of $6................... 145
Exercise of warrants for cash..... 24
Exercise of stock options for
cash............................. 3
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock... --
Conversion of 100,000 shares of
Series E preferred stock to
20,000 shares of common stock.... --
Issuance of common stock warrants
for services..................... 3
Net income........................ 769
------
BALANCES AT MARCH 31, 1995........ 5,104
Exercise of warrants for cash..... 424
Exercise of stock options for
cash............................. 74
Issuance of stock grants to non-
employee directors............... 40
Exchange of 12,500 shares of
Series B preferred stock for
2,500 shares of common stock..... --
Retire 30,000 shares of treasury
stock............................ --
Net income........................ 1,729
------
BALANCES AT DECEMBER 31, 1995
(unaudited)...................... $ 7,371
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1994 AND 1995
AND NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 204 $ 769 $ 503 $ 1,729
Adjustments to reconcile net income to net cash provided by
operating activities:
Proportionate share of loss of joint venture.................. 35 37 37 --
Depreciation and amortization................................. 253 338 234 356
Net (increase) decrease in:
Accounts receivable......................................... (77) (186) (5) (643)
Inventories................................................. (159) 23 (43) 100
Prepaid expenses and other assets........................... 33 (17) (40) (45)
Net increase (decrease) in:
Accounts payable............................................ 283 63 (152) 71
Accrued expenses and other.................................. 63 (28) 45 142
--------- --------- ----------- -----------
Net cash provided by operating activities................. 635 999 579 1,710
--------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements.............. (1,770) (1,442) (982) (2,622)
Investment in joint venture..................................... (35) (37) (37) --
--------- --------- ----------- -----------
Net cash used in investing activities..................... (1,805) (1,479) (1,019) (2,622)
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...................... 2,366 175 174 538
Proceeds from issuance of long-term debt........................ -- -- -- 750
Principal payments on capital lease obligations................. (10) (52) (38) (64)
Principal payments on long-term debt............................ (532) (13) (10) (32)
--------- --------- ----------- -----------
Net cash provided by financing activities................. 1,824 110 126 1,192
--------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...... 654 (370) (314) 280
Cash and cash equivalents at beginning of period.................. 212 866 866 496
--------- --------- ----------- -----------
Cash and cash equivalents at end of period........................ $ 866 $ 496 $ 552 $ 776
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................ $ 18 $ 26 $ 20 $ 25
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Non-cash investing and financing activities:
Equipment leased under capital lease obligation............... $ 133 $ 166 $ 167 $ 303
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Common stock issued in satisfaction of debt................... $ 24 $ -- $ -- $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(INFORMATION AS OF DECEMBER 31, 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 IS UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Description of Business
Cyanotech Corporation is engaged in the identification and wholesale
commercialization of high-value chemicals, nutritional additives and related
products derived from blue-green (cyanobacteria) and other algae. Cyanotech
Corporation is dependent, to an extent, upon the health food and medical
diagnostic industry sectors.
(b) Principles of Consolidation
The Company consolidates enterprises in which it has a controlling financial
interest. The accompanying consolidated financial statements include the
accounts of Cyanotech Corporation and its wholly-owned subsidiary, Nutrex, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt investments purchased with original maturities
of three months or less to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market.
(e) Equipment and Leasehold Improvements
Owned equipment and leasehold improvements are stated at cost. Equipment
under capital lease is stated at the lower of the present value of minimum lease
payments or fair value of the equipment at the inception of the lease.
Depreciation and amortization are provided using the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
---------------
<S> <C>
Equipment.................................................................... 3 to 10 years
Leasehold improvements....................................................... lease term
Furniture and fixtures....................................................... 7 years
Equipment under capital lease................................................ lease term
</TABLE>
Amortization of equipment under capital lease is included in depreciation
and amortization expense in the accompanying consolidated financial statements.
(f) Investments in Joint Ventures
Investments in joint ventures and other investments for which the Company
has the ability to exercise significant influence over the operating and
financing policies of the enterprise are accounted for under the equity method.
(g) Net Income Per Common Share
Net income per common share is computed based on net income after preferred
stock dividend requirements and the weighted average number of common shares
outstanding during the year, adjusted to
F-7
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
reflect the assumed exercise of outstanding stock options and warrants and the
conversion of preferred stock to the extent such items have a dilutive effect on
the computation. Fully diluted net income per common share is not materially
different from primary net income per common share.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
(i) Accounting Changes -- Future Implementation
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows derived from an asset
is less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell.
The provisions of SFAS No. 121 must be adopted by the Company no later than
April 1, 1996. The Company has not determined when it will adopt the provisions
of SFAS No. 121 but does not expect adoption to have a material effect on the
Company's consolidated financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a new,
fair value based method of measuring stock-based compensation, but does not
require an entity to adopt the new method for preparing its basic financial
statements. For entities not adopting the new method for preparing basic
financial statements, SFAS No. 123 requires disclosure in the footnotes of pro
forma net earnings and earnings per share information as if the fair value based
method had been adopted. Adoption of SFAS No. 123 is required no later than the
Company's year ending March 31, 1997. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 31, 1995. The Company will comply with the disclosure requirements of
SFAS No. 123 in its financial statements for its year ending March 31, 1997.
(2) INVENTORIES
Inventories consists of the following as of March 31, 1994 and 1995 and
December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ---------------
<S> <C> <C> <C>
Raw materials................................................... $ 15 $ 29 $ 67
Work in process................................................. 105 105 105
Finished goods.................................................. 192 171 33
Supplies........................................................ 86 70 70
--------- --------- -----
$ 398 $ 375 $ 275
--------- --------- -----
--------- --------- -----
</TABLE>
F-8
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements consists of the following as of March
31, 1994 and 1995 and December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ------------
<S> <C> <C> <C>
Equipment................................................. $ 2,221 $ 2,622 $ 2,995
Leasehold improvements.................................... 2,638 3,648 6,028
Furniture and fixtures.................................... 28 31 36
Equipment under capital lease (note 5).................... 133 299 602
--------- --------- ------------
5,020 6,600 9,661
Less accumulated depreciation and amortization............ (2,201) (2,539) (2,895)
Construction in-progress.................................. 546 574 438
--------- --------- ------------
Equipment and leasehold improvements, net............. $ 3,365 $ 4,635 $ 7,204
--------- --------- ------------
--------- --------- ------------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1994 and 1995 and
December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31,
------------ DECEMBER 31,
1994 1995 1995
----- ----- ------------
<S> <C> <C> <C>
Note payable at 5% to the State of Hawaii, Department of Agriculture, in annual installments of $14,
including interest; final payment due September 1995............................................... $ 20 $ 7 $--
Notes payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted quarterly; principal
payments of $37.5 due quarterly.................................................................... -- -- 725
Less current maturities of long-term debt........................................................... (13) (7) (175)
----- ----- -----
Long-term debt, excluding current maturities.................................................... $ 7 $-- $ 550
----- ----- -----
----- ----- -----
</TABLE>
Note payable to the State of Hawaii, Department of Agriculture was secured
by substantially all of the Company's assets.
On April 1, 1995, the Company executed a $250 note, payable in principal
installments of $12.5 each quarter, plus interest, with principal and interest
payments satisfied by delivering to the lender an equivalent market value amount
of salable product or cash (at the lender's option). The note payable bears
interest at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted
quarterly, and is secured by certain assets of the Company.
On July 11, 1995, the Company executed a $500 note payable in principal
installments of $25 each quarter, plus interest, with principal and interest
payments satisfied by delivering to the lender an equivalent market value amount
of salable product or cash (at the lender's option). The note payable bears
interest at LIBOR plus 2%, adjusted quarterly, and is secured by certain assets
of the Company. The quarterly principal payment due October 1, 1995 was paid in
January 1996.
(5) LEASES
The Company leases certain of its equipment and a building under capital
leases expiring between 1998 and 2000 and leases facilities, equipment and land
under operating leases expiring between 1996 and 2013. At March 31, 1995, the
net book value of equipment under the capital leases amounted to $266.
F-9
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of March 31, 1995 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -----------
<S> <C> <C>
Year ended March 31:
1996.............................................................. $ 75 $ 87
1997.............................................................. 75 77
1998.............................................................. 68 74
1999.............................................................. 58 72
2000.............................................................. 3 72
Thereafter, through 2013.......................................... -- 941
----- -----------
279 $ 1,323
-----------
-----------
Less amount representing interest at 8.1%........................... 37
-----
Present value of minimum capital lease obligations.............. 242
Less current maturities of capital lease obligations................ 58
-----
Obligations under capital lease, excluding current maturities... $ 184
-----
-----
</TABLE>
Total rent expense under operating leases amounted to $49 and $48 for the
years ended March 31, 1994 and 1995, respectively, and $33 and $71 for the nine
months ended December 31, 1994 and 1995, respectively.
As of March 31, 1995, the Company has received a commitment for an equipment
leasing credit facility totalling $350.
(6) INVESTMENT IN JOINT VENTURES
In March 1993, the Company formed a joint venture corporation, OceanColor,
Inc., with an unrelated entity, Aquasearch, Inc., to develop commercial systems
for producing a natural red pigment from micro-
algae, called astaxanthin, for use as a natural feed ingredient by the
aquaculture industry. On November 18, 1994, the joint venture agreement was
terminated by mutual consent. Under the terms of the joint venture agreement,
the Company owned a 50% interest in OceanColor, Inc., and was committed to
contribute, subject to certain conditions, services and facilities and equipment
use and technology valued at $423. As of the termination date, $63 of services
and facilities and equipment use had been contributed and the Company has no
further obligation under the joint venture arrangement. The joint venture's
financial statements are not significant to the Company's consolidated financial
statements. The Company plans to continue, on its own, development of commercial
systems for the production of astaxanthin.
On August 31, 1994, the Company formed a joint venture partnership with
Hauser Chemical Research, Inc. (Hauser) to develop, produce, and market natural
beta carotene. Under the terms of the partnership agreement, Hauser has a 60%
interest and the Company has a 40% interest in the joint venture. Development
work was expected to be completed in 1995 with the total cost to the Company for
its share of development costs not expected to exceed $300 (as of March 31, 1995
and December 31, 1995, approximately $125 and $174, respectively, had been
incurred). Funding for the construction of the commercial production facility
would be arranged by the joint venture partnership.
F-10
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) ACCRUED EXPENSES AND OTHER
Accrued expenses and other consists of the following as of March 31, 1994
and 1995 and December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ---------------
<S> <C> <C> <C>
Accrued payroll and related benefits............................ $ 64 $ 126 $ 269
Accrued directors' fees......................................... 40 35 30
Deposits........................................................ 58 26 --
Other accrued liabilities....................................... 96 43 73
--------- --------- -----
$ 258 $ 230 $ 372
--------- --------- -----
--------- --------- -----
</TABLE>
(8) PREFERRED STOCK
Series A and B preferred stock are nonvoting (except for the right of Series
A preferred stockholders to elect one director, as described below) and were
convertible into common stock at the rate of five shares of preferred stock for
one share of common stock through February 28, 1995 for Series A preferred stock
and February 28, 1993 for Series B preferred stock. Holders of Series A
preferred stock are entitled to 12% cumulative annual dividends at the rate of
$.048 per share; cumulative dividends in arrears as of March 31, 1995 and
December 31, 1995 amount to $595 ($.476 per share) and $640 ($.512 per share),
respectively, for Series A. Series A preferred stockholders have a prior claim
in liquidation of $.40 per share plus all declared but unpaid dividends. On
December 27, 1995, the Company exchanged 2,500 shares of restricted common stock
for the remaining 12,500 shares of Series B perferred stock.
Series A preferred stockholders also have certain preemptive rights,
anti-dilution privileges and the right to elect one member of the board of
directors. The consent of Series A preferred stockholders is also required to
alter their present rights, issue additional shares of preferred stock, sell the
Company, or sell or assign the Company's proprietary technical information.
Series C convertible preferred stock is convertible into common stock at the
rate of one share of preferred stock for five shares of common stock through
February 23, 2000, after which date the conversion feature is no longer
applicable. Holders of 21,030 shares of Series C preferred stock elected to
convert such shares into 105,150 shares of common stock during the year ended
March 31, 1995. Series C preferred stock has voting rights equal to the number
of shares of common stock into which it is convertible and has a preference in
liquidation over all other series of preferred stock of $5 per share plus any
accumulated but unpaid dividends. Holders of Series C preferred stock are
entitled to 8% cumulative annual dividends at the rate of $.40 per share;
cumulative dividends in arrears as of March 31, 1995 and December 31, 1995
amount to $1,663 ($2.263 per share) and $1,884 ($2.563 per share), respectively.
Upon conversion of Series C preferred stock, cumulative dividends in arrears on
converted shares are no longer payable. The amount of cumulative dividends
foregone due to conversion during the year ended March 31, 1995 and the nine
months ended December 31, 1995 amounted to $36 and nil, respectively. The
consent of Series C preferred stockholders is required to change their present
rights or sell all or substantially all of the Company's assets.
The Series C convertible preferred stock was originally issued with a
redemption feature. Terms of the Series C preferred stock were modified in
February 1991 to eliminate such redemption feature.
Series E convertible preferred stock was convertible at the holder's option
into common stock at the rate of five shares of preferred stock for one share of
common or for such number of common shares as have a market value of $.75,
through September 26, 1994. Series E convertible preferred stock was converted
by the holder into 20,000 shares of common stock on September 21, 1994. Upon
conversion of Series E preferred stock, cumulative dividends in arrears on
converted shares were no longer payable. The amount of cumulative dividends
foregone due to conversion during the year ended March 31, 1995 was $38.
F-11
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) PREFERRED STOCK (CONTINUED)
Preferred stock as of March 31, 1994 and 1995 and December 31, 1995, consist
of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------- DECEMBER 31,
1994 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Preferred stock, authorized 5,000,000 shares;
$.001 par value, issued and outstanding:
Series A, 12% cumulative; 1,250,000 shares;
liquidation value $.40 per share plus
unpaid accumulated dividends........................ $ 1 $ 1 $ 1
Series B, 12% cumulative, 12,500 shares on
March 31, 1994 and 1995; nil shares on
December 31, 1995; liquidation value $.40 per share
plus unpaid accumulated dividends................... * * --
Series C, 8% cumulative, convertible; 756,007 shares
as of March 31, 1994 and 734,977 shares as of March
31, 1995 and December 31, 1995: liquidation value
$5.00 per share plus unpaid accumulated dividends... 1 1 1
Series E, 12% cumulative, convertible; converted to
common shares in September 1994..................... * -- --
---- ---- -----
$ 2 $ 2 $ 2
---- ---- -----
---- ---- -----
</TABLE>
- ------------------------
*Amount is less than $.5
(9) STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
At the Annual Meeting held on August 9, 1995, the stockholders of the
Company approved the Company's 1995 Stock Option Plan (Plan), reserving a total
of 400,000 shares of common stock for issuance under the Plan. The Plan provides
for the issuance of both incentive and nonqualified stock options. Options are
to be granted at or above the fair market value of the Company's common stock at
the date of grant and generally become exercisable over a five-year period.
The Company also has a Non-Employee Director Stock Option and Stock Grant
Plan, which was approved by stockholders in 1994. Under the Plan, non-employee
directors are granted a ten-year option to purchase 3,000 shares of the
Company's common stock at its fair market value on the date of grant. In
addition, on the date of each Annual Meeting of Stockholders in each year that
this plan is in effect, each non-employee director continuing in office will be
automatically granted, without payment, 2,000 shares of common stock that is
non-transferable for six months following the date of grant. Grants of 8,000
shares of common stock were made under this plan in August 1995.
In 1985, the Company adopted an Incentive Stock Option Plan (qualified stock
option plan) and authorized 200,000 shares of common stock to be set aside for
grants to officers and key employees of the Company. In 1993, the stockholders
approved an amendment to the Incentive Stock Option Plan which increased the
number of shares reserved for issuance under this plan from 200,000 to 400,000.
Options are granted with exercise prices not lower than the fair market value of
the Company's common stock at the date of grant. Options generally become
excercisable in four equal annual installments, commencing one year from the
date of grant and expire, if not exercised, five years from the date of grant,
unless stipulated
F-12
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK OPTIONS AND WARRANTS (CONTINUED)
otherwise by the Compensation and Stock Option Committee of the board of
directors. The Incentive Stock Option Plan terminated on March 18, 1995. Options
granted prior to the plan termination date are not affected.
The Company has also issued nonqualified stock options to nonemployees and
directors in exchange for services provided to the Company. Nonqualified stock
options are granted with exercise prices not lower than the fair market value of
the Company's common stock on the date of grant, are immediately exercisable and
expire two to ten years from the date of grant.
A summary of transactions relating to options during the years ended March
31, 1994 and 1995, and nine months ended December 31, 1995 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------
QUALIFIED NONQUALIFIED
SHARES UNDER ---------------------------- ----------------------------
OPTION NUMBERS OF NUMBER OF
AVAILABLE SHARES UNDER PRICE PER SHARES UNDER PRICE PER
FOR GRANT OPTION SHARE OPTION SHARE
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1993............. 47,400 152,600 $ .56 to .94 18,000 $ .50 to 5.25
Additional shares reserved............. 200,000 -- -- -- --
Options granted........................ (82,000) 82,000 1.50 -- --
Options exercised...................... -- (3,300) .56 to .94 -- --
Options cancelled...................... 10,300 (10,300) .56 to 1.50 (16,000) 3.30 to 5.25
------------ ------------ -------------- ------------ --------------
Balances at March 31, 1994............. 175,700 221,000 .56 to 1.50 2,000 .50
Options granted........................ (98,900) 98,900 .94 115,000 1.06 to 2.00
Options exercised...................... -- (4,300) .56 to .94 -- --
Options canceled....................... 20,900 (20,900) .56 to 1.50 (3,000) 1.06
------------ ------------ -------------- ------------ --------------
Balances at March 31, 1995............. 97,700 294,700 .56 to 1.50 114,000 .50 to 2.00
Additional shares reserved............. 400,000 -- -- -- --
Options granted........................ (101,000) 101,000 5.13 -- --
Options exercised...................... (77,550) .56 to 1.50 (3,000) 1.06
Options cancelled...................... 3,675 (3,675) .56 to 1.50 -- --
Expiration of 1985 Plan................ (101,375) -- -- -- --
------------ ------------ -------------- ------------ --------------
Balances at December 31, 1995.......... 299,000 314,475 $ .56 to 5.13 111,000 $ .50 to 2.00
------------ ------------ -------------- ------------ --------------
------------ ------------ -------------- ------------ --------------
</TABLE>
At March 31, 1995 and December 31, 1995, options to purchase 408,700 and
425,475 shares of common stock, respectively, were exercisable at average prices
of $1.23 and $2.21 per share, respectively.
WARRANTS
The Company has warrants outstanding to acquire 1,653,800 and 997,000 shares
of the Company's common stock as of March 31, 1995 and December 31, 1995,
respectively. The warrants were issued in consideration for loans to the
Company, in consideration for and in recognition of services performed and to
certain individuals who guaranteed notes payable by the Company. Warrants
granted for loans, services and guarantees were granted with exercise prices not
lower than the fair market value of the Company's common stock on the date of
grant. The warrants are exercisable at prices ranging from $.40 to $1.00 per
share and expire on various dates from 1996 to 1999.
F-13
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers for the years ended March 31, 1994 and 1995, and
the nine months ended December 31, 1994 and 1995, are summarized as follows
(percent of product sales):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
------------------------ ----------------------------------
1994 1995 1994 1995
----- ----- ---------------- ----------------
<S> <C> <C> <C> <C>
Customer A.......................................... *% *% *% 31%
Customer B.......................................... 16% 17% 13% 11%
Customer C.......................................... *% 13% 12% *%
Customer D.......................................... 10% *% *% *%
-- -- -- --
26% 30% 25% 42%
-- -- -- --
-- -- -- --
</TABLE>
- ------------------------
*Less than 10% of product sales.
Product sales revenue by geographic area for the years ended March 31, 1994
and 1995, and the nine months ended December 31, 1994 and 1995, are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
United States................................... $ 1,828 $ 2,412 $ 1,781 $ 2,620
Canada.......................................... 497 696 378 654
Europe.......................................... 202 621 424 558
Asia/Pacific.................................... 170 421 338 2,150
--------- --------- ----------- -----------
$ 2,697 $ 4,150 $ 2,921 $ 5,972
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
(11) INCOME TAXES
The provision for income taxes for the years ended March 31, 1994 and 1995
and nine months ended December 31, 1994 is nil due to the utilization of net
operating losses. The provision for income taxes for the nine months ended
December 31, 1995 represents estimated alternative minimum taxes payable.
The tax effects of temporary differences related to various assets and
liabilities that give rise to deferred tax assets and deferred tax liabilities
as of March 31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 2,949 $ 2,585
Tax credit carryforwards............................................... 149 141
Other.................................................................. 62 72
--------- ---------
3,160 2,798
Less valuation allowance................................................. (3,051) (2,751)
--------- ---------
Net deferred tax assets.............................................. $ 109 $ 47
--------- ---------
--------- ---------
Deferred tax liability -- equipment and leasehold improvements........... $ 109 $ 47
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets as of March 31, 1994 and
1995 was $3,051 and $2,751, respectively. The valuation allowance decreased by
$71 and $300 during the years ended March 31, 1994 and 1995, respectively.
F-14
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES (CONTINUED)
At March 31, 1995, the Company has tax net operating tax loss carryforwards
available to offset future federal and state taxable income and tax credit
carryforwards available to offset future federal income taxes as follows:
<TABLE>
<CAPTION>
INVESTMENT RESEARCH AND
NET OPERATING TAX EXPERIMENTATION
LOSSES CREDITS TAX CREDITS
------------- ---------- ---------------
<S> <C> <C> <C>
Expires March 31,
1998...................................................... $-- -- 3
1999...................................................... -- -- 14
2000...................................................... -- 14 15
2001...................................................... 852 -- 22
2002...................................................... 1,800 -- 15
2003...................................................... 1,405 52
2004...................................................... 1,825 -- 5
2005...................................................... 155 -- --
2006...................................................... 763 -- --
2007...................................................... 1 -- --
2008...................................................... -- -- --
2009...................................................... 1 -- --
------ --- ---
$6,802 14 126
------ --- ---
------ --- ---
</TABLE>
Investment tax credits will be recorded as a reduction of the provision for
federal income taxes in the year realized.
(12) COMMITMENTS AND CONTINGENCIES
At March 31, 1995 and December 31, 1995, the Company has commitments for
capital expenditures totaling $506 and $1,120, respectively.
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-15
<PAGE>
[Aerial photograph of Cyanotech's production facility located
at the Hawaii Ocean Science and Technology Park on the Kona coast of
Hawaii.]
Cyanotech's production facility located at the Hawaii Ocean Science and
Technology Park on the Kona coast of Hawaii
[Photograph of selected bottles containing the Company's Spirulina
products.]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 13
Capitalization................................. 14
Selected Consolidated Financial Data........... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business....................................... 23
Management..................................... 37
Certain Transactions........................... 41
Principal Stockholders......................... 42
Description of Capital Stock................... 43
Shares Eligible for Future Sale................ 45
Underwriting................................... 48
Legal Matters.................................. 49
Experts........................................ 49
Available Information.......................... 49
Index to Consolidated Financial Statements..... F-1
</TABLE>
1,500,000 SHARES
[COMPANY LOGO]
CYANOTECH CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
Van Kasper & Company
MARCH , 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Private Corporation Law ("NPCL") provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to (x) any action or suit by or in the right
of the corporation against expenses, including amounts paid in settlement and
attorneys' fees, actually and reasonably incurred, in connection with the
defense or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction to be liable to the corporation or for amounts paid in
settlement to the corporation and (y) any other action or suit or proceeding
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred, if he or she acted in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, reasonable cause to believe his or her conduct was unlawful: To the
extent that a director, officer, employee or agent has been "successful on the
merits or otherwise" the corporation must indemnify such person. The articles of
incorporation or bylaws may provide that the expenses of officers and directors
incurred in defending any such action must be paid as incurred and in advance of
the final disposition of such action. The NPCL also permits the Registrant to
purchase and maintain insurance on behalf of the Registrant's directors and
officers against any liability arising out of their status as such, whether or
not Registrant would have the power to indemnify him against such liability.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act.
The Company's Bylaws provide that the Company shall, to the fullest extent
permitted by applicable law, indemnify any director or officer of the Company in
connection with certain actions, suits or proceedings, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred. The Company is also required to pay any
expenses incurred by a director or officer in defending such an action, in
advance of the final disposition of such action. The Company's Bylaws further
provide that, by resolution of the Board of Directors, such benefits may be
extended to employees, agents or other representatives of the Company.
The NPCL provides that a corporation's articles of incorporation may contain
a provision which eliminates or limits the personal liability of a director or
officer to the corporation or its stockholders for damages for breach of
fiduciary duty as a director or officer, provided that such a provision must not
eliminate or limit the liability of a director or officer for: (a) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (b) the payment of illegal distributions. The Company's Restated
Articles of Incorporation include a provision eliminating the personal liability
of directors for breach of fiduciary duty except that such provision will not
eliminate or limit any liability which may not be so eliminated or limited under
applicable law.
Reference is made to Section 7 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying the Company's officers and directors against
certain liabilities.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee, the NASD fee and the Nasdaq
National Market fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Registration fee.............................................................. $ 4,164
NASD fee...................................................................... 1,708
Nasdaq National Market fee.................................................... 17,500
Non-accountable expense allowance............................................. 148,781
Printing and engraving........................................................ 75,000
Legal fees and expenses....................................................... 175,000
Accounting fees and expenses.................................................. 35,000
Director and officer insurance................................................ 22,000
Blue sky fees and expenses.................................................... 10,000
Transfer agent fees........................................................... 5,000
Miscellaneous................................................................. 847
----------
Total....................................................................... $ 495,000
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1993, the Registrant has issued and sold the following
unregistered securities in reliance on the exemption provided by Section 4(2) of
the Securities Act:
(a) On January 15, 1993, the Company issued to Mr. Eugene Nester 25,000
shares of its Common Stock pursuant to the exercise of a warrant at an exercise
price of $0.40 per share.
(b) On February 26, 1993, an aggregate of 20,000 shares of the Company's
Common Stock were issued upon conversion of 100,000 shares of the Company's
Series B Preferred Stock. Each of Mr. Robert Lesson, Jr., Mr. John L. Kidde and
Mr. Wilson Kidde received 2,500 shares of the Company's Common Stock. Mr. Ashton
Hawkins received 12,500 shares.
(c) On May 11, 1993, the Company issued to Mr. James Austin 40,000 shares of
its Common Stock in payment for services at a price of $0.60 per share.
(d) Pursuant to a Subscription Agreement dated as of May 15, 1993, the
Company sold 1,800,000 shares of its Common Stock to Ms. Eva Reichl at $1.00 per
share for an aggregate purchase price of $1,800,000, 560,000 of which were
purchased on May 15, 1993, 640,000 of which were purchased on June 14, 1993, and
600,000 of which were purchased on August 30, 1993.
(e) On June 10, 1993, the Company issued to Mr. Eugene Nester 35,000 shares
of its Common Stock pursuant to the exercise of warrants for 35,000 shares at an
exercise price of $0.40 per share.
(f) The Company issued to a group of four investors 550,000 shares of its
Common Stock under subscription agreements between January 10, 1994 and January
12, 1994 at a price of $1.00 per share.
(g) On March 2, 1994, the Company issued to Mr. Eugene Nester 48,000 shares
of its Common Stock pursuant to the exercise of warrants at an exercise price of
$0.50 per share.
(h) On May 26, 1994, the Company issued to Mr. George Kay 21,570 shares of
its Common Stock in connection with the conversion of 4,314 shares of the
Company's Series C Preferred Stock into Common Stock.
(i) On June 15, 1994, the Company issued to Gilbert Glass 83,580 shares of
its Common Stock in connection with the conversion of 16,716 shares of the
Company's Series C Preferred Stock into Common Stock.
(j) Since August 10, 1994, the Company has granted non-qualified options to
purchase an aggregate of 15,000 shares of its Common Stock to certain directors
pursuant to its 1994 Non-Employee Directors Stock Option and Stock Grant Plan at
a weighted average exercise price of $1.125.
II-2
<PAGE>
(k) On August 31, 1994, the Company sold to Hauser Chemical Research, Inc.
96,969 shares of the Company's Common Stock for an aggregate purchase price of
$100,000 cash.
(l) On September 19, 1994, the Company granted to a customer options to
purchase 100,000 shares of Common Stock at an exercise price of $2.00 per share.
(m) On September 21, 1994, the Company issued 20,000 shares of its Common
Stock to Cosmo Oil Co. Ltd. in connection with the conversion of 100,000 shares
of the Company's Series E Preferred Stock into its Common Stock.
(n) On September 30, 1994, the Company issued a warrant to purchase 25,000
shares of Common Stock at an exercise price of $1.00 per share to Canterbury
Associates in exchange for certain services to be rendered pursuant to an
agreement between the Company and Canterbury Associates dated January 26, 1994.
The agreement was terminated on January 5, 1995.
(o) On October 5, 1994, the Company issued to a customer 50,000 shares of
its Common Stock at $1.00 per share.
(p) On December 16, 1994, the Company issued to Mr. John Ushijima 38,400
shares of its Common Stock pursuant to the exercise of warrants at an exercise
price of $0.625 per share.
(q) On April 12, 1995, the Company issued to Mr. Eugene Nester 38,400 shares
of its Common Stock pursuant to the exercise of warrants at an exercise price of
$0.625 per share.
(r) On May 11, 1995, the Company issued 199,757 shares of its Common Stock
to Mr. B. Michael Pisani pursuant to the exercise of warrants at an exercise
price of $0.625 per share.
(s) On May 12, 1995, the Company issued to Mr. William Bensinger 76,800
shares of its Common Stock pursuant to the exercise of warrants on May 12, 1995
at an exercise price of $0.625.
(t) On May 12, 1995, the Company issued to Mr. John Ushijima 19,200 shares
of its Common Stock pursuant to the exercise of warrants on May 12, 1995 at an
exercise price of $0.625 per share.
(u) On May 15, 1995, the Company issued to Mr. Robert Long 30,643 shares of
its Common Stock pursuant to the exercise of warrants on May 11, 1995 at an
exercise price of $0.625 per share.
(v) On August 9, 1995, the Company granted 8,000 shares of fully paid and
non-assessable Common Stock to certain of its non-employee directors pursuant to
its 1994 Non-Employee Directors Stock Option and Stock Grant Plan.
(w) On August 23, 1995, the Company issued to Mr. Robert Long 2,000 shares
of its Common Stock pursuant to the exercise of warrants at an exercise price of
$1.00 per share.
(x) On August 23, 1995, the Company issued to Mr. B. Michael Pisani 74,000
shares of its Common Stock pursuant to the exercise of warrants at an exercise
price of $1.00 per share.
(y) On October 18, 1995, the Company issued 3,000 shares of the Company's
Common Stock to Ms. Eva Reichl pursuant to the exercise of options under the
1994 Non-Employee Directors Stock Option and Stock Grant Plan at an exercise
price of $1.0625 per share.
(z) On December 4, 1995, the Company issued to Mr. James Austin 38,400
shares of the Company's Common Stock pursuant to the exercise of a warrant at an
exercise price of $0.625 per share.
(aa) On December 8, 1995, the Company issued to Mr. John Ushijima 120,000
and 96,000 shares of the Company's Common Stock pursuant to the exercise of a
warrant at exercise prices of $0.40 and $0.50, respectively, per share.
(bb) On December 29, 1995, the Company issued to Mr. BJ Howard 2,500 shares
of its Common Stock in exchange for 12,500 shares of the Company's Series B
Preferred Stock.
(cc) On January 5, 1996, the Company issued to Mr. B. Michael Pisani 100,000
shares of its Common Stock pursuant to the exercise of warrants at an exercise
price of $0.40 per share.
(dd) On January 22, 1996, the Company issued to Mr. William Bensinger 96,000
shares of its Common Stock pursuant to the exercise of warrants at an exercise
price of $0.50 per share.
II-3
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
4.1** Specimen Common Stock Certificate.
4.2 Terms of the Series C Preferred Stock as Revised 1991. (Incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, file no. 0-14602.)
5.1** Opinion of Woodburn and Wedge.
10.1 1985 Incentive Stock Option Plan dated March 18, 1985, as amended. (Incorporated by reference to
Exhibit 4(d) to the Company's Registration Statement on Form S-8 filed on December 3, 1992, file no.
33-55310.)
10.4 Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no. 0-14602.)
10.5 1994 Non-Employee Directors Stock Option and Stock Grant Plan. (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no.
0-14602.)
10.6 Supply and Exclusive Marketing Agreement between the Company and Nutrition Gandalf dated July 8, 1994.
Confidential portions of this exhibit have been omitted and filed separately with the Commission.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995, file no. 0-14602.)
10.7 Joint Venture Agreement dated as of August 31, 1994 between Hauser Chemical Research, Inc. and the
Company. Confidential portions of this exhibit have been omitted and filed separately with the
Commission. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994, file no. 0-14602.)
10.8 Letter and Registration Rights Agreement dated August 31, 1994 between Hauser Chemical Research, Inc.
and the Company. (Incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994, file no. 0-14602.)
10.9 Facilities Rental Agreement dated November 1, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.10 Facilities Rental Agreement dated December 2, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.11 Term Loan Agreement dated April 1, 1995 between Spirulina International B.V. and the Company.
(Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995, file no. 0-14602.)
10.12 License Agreement by and between The University of Memphis and the Company dated June 19, 1995.
(Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995, file no. 0-14602.)
10.13 Term Loan Agreement dated July 11, 1995 between Satoshi Sakurada and the Company. (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995, file no. 0-14602.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.14 1995 Stock Option Plan for Cyanotech Corporation dated August 9, 1995, as amended. (Incorporated by
reference to Exhibit 4(c) to the Company's Registration Statement on Form S-8 filed on October 27,
1995, file no. 33-63789.)
<S> <C>
10.15 Sub-Lease Agreement between the Company and the Natural Energy Laboratory of Hawaii Authority dated
December 29, 1995. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
10.16* Preferred Stock Conversion and Registration Rights Agreement by and between the Company and Firemen's
Insurance Company of Newark, New Jersey, dated as of February 20, 1996.
10.17* Registration Rights Agreement by and between the Company and American Cynamid Company dated as of
February 20, 1996.
10.18 Management Incentive Plan dated May 18, 1995. Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
11.1** Statement re: Computation of Earnings Per Share.
21.1** Subsidiaries of the Company.
23.1** Consent of KPMG Peat Marwick LLP.
23.2** Consent of Woodburn and Wedge (included in Exhibit 5.1).
24.1** Power of Attorney.
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the NPCL, the Restated Articles of Incorporation or the
Bylaws of Registrant, Underwriting Agreement, or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Kailua-Kona, State of Hawaii on February 27, 1996.
CYANOTECH CORPORATION
By /s/ GERALD R. CYSEWSKI, PH.D.
------------------------------------
Gerald R. Cysewski, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, THE AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------- --------------------
<C> <S> <C>
/s/ GERALD R. CYSEWSKI, PH.D. Chairman of the Board, President February 27, 1996
------------------------------------------- and Chief Executive Officer
Gerald R. Cysewski, Ph.D.
* Executive Vice President -- Finance February 27, 1996
------------------------------------------- and Administration, Chief
Ronald P. Scott Financial Officer, Secretary,
Treasurer and Director
* Director February 27, 1996
-------------------------------------------
Julian C. Baker
* Director February 27, 1996
-------------------------------------------
Eva R. Reichl
* Director February 27, 1996
-------------------------------------------
John T. Ushijima
* Director February 27, 1996
-------------------------------------------
Paul C. Yuen, Ph.D.
*By /s/ GERALD R. CYSEWSKI
---------------------------------------
Gerald R. Cysewski, Ph.D.
Attorney in Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
4.1** Specimen Common Stock Certificate.
4.2 Terms of the Series C Preferred Stock as Revised 1991. (Incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, file no. 0-14602.)
5.1** Opinion of Woodburn and Wedge.
10.1 1985 Incentive Stock Option Plan dated March 18, 1985, as amended. (Incorporated by reference to
Exhibit 4(d) to the Company's Registration Statement on Form S-8 filed on December 3, 1992, file no.
33-55310.)
10.4 Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no. 0-14602.)
10.5 1994 Non-Employee Directors Stock Option and Stock Grant Plan. (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no.
0-14602.)
10.6 Supply and Exclusive Marketing Agreement between the Company and Nutrition Gandalf dated July 8, 1994.
Confidential portions of this exhibit have been omitted and filed separately with the Commission.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995, file no. 0-14602.)
10.7 Joint Venture Agreement dated as of August 31, 1994 between Hauser Chemical Research, Inc. and the
Company. Confidential portions of this exhibit have been omitted and filed separately with the
Commission. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994, file no. 0-14602.)
10.8 Letter and Registration Rights Agreement dated August 31, 1994 between Hauser Chemical Research, Inc.
and the Company. (Incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994, file no. 0-14602.)
10.9 Facilities Rental Agreement dated November 1, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.10 Facilities Rental Agreement dated December 2, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.11 Term Loan Agreement dated April 1, 1995 between Spirulina International B.V. and the Company.
(Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995, file no. 0-14602.)
10.12 License Agreement by and between The University of Memphis and the Company dated June 19, 1995.
(Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995, file no. 0-14602.)
10.13 Term Loan Agreement dated July 11, 1995 between Kenny Corporation and the Company. (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995, file no. 0-14602.)
10.14 1995 Stock Option Plan for Cyanotech Corporation dated August 9, 1995, as amended. (Incorporated by
reference to Exhibit 4(c) to the Company's Registration Statement on Form S-8 filed on October 27,
1995, file no. 33-63789.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.15 Sub-Lease Agreement between the Company and Natural Energy Laboratory of Hawaii Authority dated
December 29, 1995. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
<S> <C>
10.16* Preferred Stock Conversion and Registration Rights Agreement by and between the Company and Firemen's
Insurance Company of Newark, New Jersey, dated as of February 20, 1996.
10.17* Registration Rights Agreement by and between the Company and American Cynamid Company dated as of
February 20, 1996.
10.18 Management Incentive Plan dated May 18, 1995. Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
11.1** Statement re: Computation of Earnings Per Share.
21.1** Subsidiaries of the Company.
23.1** Consent of KPMG Peat Marwick LLP.
23.2** Consent of Woodburn and Wedge (included in Exhibit 5.1).
24.1** Power of Attorney.
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
<PAGE>
CYANOTECH CORPORATION
(a Nevada Corporation)
1,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
, 1996
-------------
VAN KASPER & COMPANY
As Representative of the several
Underwriters named in Schedule I,
11661 San Vincente Boulevard, Suite 709
Los Angeles, California 90049
Ladies and Gentlemen:
Cyanotech Corporation, a Nevada corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") 1,500,000 shares (the "Firm Stock") of the Company's Common
Stock, $0.005 par value (the "Common Stock"). In addition, the Company also
proposes to grant to the Underwriters an option to purchase up to an additional
225,000 shares of the Common Stock on the terms and for the purposes set forth
in Section 2(b) (the "Option Stock"). The Firm Stock and any Option Stock
purchased pursuant to this Agreement are referred to below as the "Stock." Van
Kasper & Company is acting as representative of the several Underwriters and in
that capacity is referred to in this Agreement as the "Representative."
The Company hereby confirms its agreement with the several Underwriters as
set forth below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and agrees with each Underwriter as follows:
(a) A Registration Statement (Registration No. 333-00951) on Form
SB-2 under the Securities Act of 1933, as amended (the "Securities Act"),
including such amendments to such registration statement as may have been
required to the date of this Agreement, relating to the Stock has been
prepared by the Company under and in conformity with the provisions of the
Securities Act, the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the Commission
to be effective under the Securities Act, either (A) if the Company relies on
Rule 434 under the Securities Act, a Term Sheet (defined below) relating to
the Stock, that identifies the Preliminary Prospectus (defined below) that it
supplements and contains such information as is required or permitted by Rules
<PAGE>
434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not
rely on Rule 434 under the Securities Act, a prospectus in the form most
recently included in an amendment to such registration Statement (or, if no such
amendment has been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A of the Rules and Regulations or
permitted by Rule 424(b) of the Rules and Regulations, and in the case of either
(i)(A) or (i)(B) of this sentence, as has been provided to and approved by the
Representative, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Securities Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and approved
by the Representative prior to the execution of this Agreement. As used in
this Agreement, the term "Registration Statement" means such registration
statement, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations and included in the Prospectus (defined below); the term
"Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Securities Act,
the Term Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Securities Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the
Securities Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Securities Act; or
(C) if the Company does not rely on Rule 434 under the
Securities Act and if no prospectus is required to be filed pursuant to Rule
424(b) under the Securities Act, the prospectus included in the Registration
Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for "use in connection with the offering of the Stock" differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such
revised prospectus from and after the time it is first provided to the
Underwriters for such use.
-2-
<PAGE>
The term "Term Sheet" as used in this Agreement means any term sheet that
satisfies the requirements of Rule 434 under the Securities Act. Any reference
in this Agreement to the "date" of a prospectus that includes a Term Sheet means
the date of such Term Sheet.
(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the issue of any Preliminary Prospectus or
the Prospectus has been issued and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no order suspending the sale of the Stock in any jurisdiction has
been issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with.
(c) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be contained therein and complied in
all material respects with the requirements of the Securities Act and the Rules
and Regulations, and (ii) did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment thereto
was or is declared effective, it (i) contained or will contain all statements
required to be contained therein and complied or will comply in all material
respects with the requirements of the Securities Act, and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and at all times subsequent thereto up to and
including the Closing Date (defined below) and any date on which Option Stock is
to be purchased, the Prospectus, as amended or supplemented at any such time,
(i) contained or will contain all statements required to be contained therein
and complied or will comply in all material respects with the requirements of
the Securities Act, the Rules and Regulations, and (ii) did not or will not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (c) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any
-3-
<PAGE>
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representative specifically for use
therein.
(d) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has full power (corporate and
other) and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and as
currently being conducted and proposed to be conducted by it and is duly
qualified as a foreign corporation and in good standing in all jurisdictions in
which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, condition (financial or otherwise), results of operations
or, to the best of the Company's knowledge, prospects of the Company and its
subsidiaries taken as a whole). Each of the Company and each of its
subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
federal, state, local, foreign and other governmental or regulatory authorities
that are material to the conduct of its business, all of which are valid and in
full force and effect. Except as may be disclosed in the Registration
Statement, the Company owns all of the outstanding capital stock of each of its
subsidiaries, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest of any type, kind or nature. None of
the subsidiaries of the Company (excluding the subsidiaries listed on Exhibit
21.1 to the Registration Statement) is a "significant subsidiary" as such
term is defined in Rule 405 under the Securities Act. As used in this
Agreement, the word "subsidiary" means any corporation, partnership, limited
liability company or other entity of which the Company directly or indirectly
owns 50% or more of the equity or that the Company directly or indirectly
controls. The Company does not have any subsidiaries that are not
corporations.
(e) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there has not been any
material loss or interference with the business of the Company or any of its
subsidiaries from fire, explosion, flood, volcano, tidal wave, earthquake or
other calamity, whether or not covered by insurance, or from any court or
governmental action, order or decree, or any changes in the capital stock or
long-term debt of the Company or any of its subsidiaries, or any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or any material adverse change, or a development known
to the
-4-
<PAGE>
Company that might cause or result in a material adverse change, in or affecting
the business, properties, condition (financial or otherwise), results of
operation or, to the best of the Company's knowledge, the prospects of the
Company and its subsidiaries taken as a whole, whether or not arising from
transactions in the ordinary course of business, in each case other than as may
be set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and
since such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(f) There is no agreement, contract, license, lease or other document
required to be described in the Registration Statement or the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus) or
to be filed as an exhibit to the Registration Statement which is not described
or filed as required. All contracts described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), if any,
are in full force and effect on the date hereof, and neither the Company nor any
of its subsidiaries nor, to the best knowledge of the Company, any other party
thereto is in material breach of or default under any such contract.
(g) The authorized and outstanding capital stock of the Company is
set forth in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and the description of the Common Stock therein
conforms with and accurately describes the rights set forth in the instruments
defining the same. The shares of the Stock have been duly and validly
authorized and, when issued and delivered against payment therefore as provided
herein, will be duly and validly issued, fully paid and non-assessable, and the
issuance of the Stock is not subject to any preemptive or similar rights.
(h) All of the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all applicable federal and state securities
laws and were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities. All of the issued shares
of each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned by the Company, free and
clear of all liens or encumbrances. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted or exercised thereunder, set forth in the Prospectus (or,
if the Prospectus is not in
-5-
<PAGE>
existence, the most recent Preliminary Prospectus), accurately and fairly
present the information required to be shown with respect to such plans,
arrangements, options and rights. Other than this Agreement and the options to
purchase the Common Stock described in the Prospectus, there are no options,
warrants or other rights outstanding to subscribe for or purchase any shares of
the Company's capital stock. There are no preemptive rights applicable to any
shares of capital stock of the Company.
(i) This Agreement has been duly authorized, executed and delivered
by, and constitutes the valid and binding obligation of, the Company,
enforceable against it in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable federal or state
securities laws, public policy or general equitable principles. The filing of
the Registration Statement does not give rise to any rights, other than those
which have been waived, for or relating to the registration of any capital stock
of the Company.
(j) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
completion of the transactions contemplated by this Agreement result in a
material violation of or constitute a breach of or a default (including without
limitation with the giving of notice, the passage of time or otherwise) under,
the certificate or articles of incorporation, bylaws or other governing
documents of the Company or any of its subsidiaries or any obligation,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture, mortgage, deed of trust,
loan agreement, lease, license, joint venture or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which any of
its or their properties may be bound or affected. The Company has not incurred
any liability, direct or indirect, for any finders' or similar fees payable on
behalf of the Company or the Underwriters in connection with the transactions
contemplated by this Agreement. The performance by the Company of its
obligations under this Agreement will not violate any law, ordinance, rule or
regulation, or any order, writ, injunction, judgment or decree of any
governmental agency or body or of any court having jurisdiction over the
Company, its subsidiaries or any of their respective properties, or result in
the creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or any of its subsidiaries. Except for permits
and similar authorizations required under the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or under other securities
or Blue Sky laws of certain jurisdictions, the clearance of this offering with
the NASD and for such permits and authorizations that have been obtained, no
consent, approval, authorization or order of any court,
-6-
<PAGE>
governmental agency or body, financial institution or any other person is
required in connection with the completion of the transactions contemplated by
this Agreement.
(k) The Company and each of its subsidiaries owns, or has valid
rights to use, all items of real and personal property which are material to the
business of the Company and its subsidiaries taken as a whole and free and clear
of all liens, encumbrances and claims that might materially interfere with the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole.
(l) Each of the Company and each of its subsidiaries owns or
possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights described or referred to in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) as owned by or used by any of them, or which are
necessary for the conduct of their business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus); and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, tradenames or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would reasonably be expected to have a material
adverse effect on the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and its subsidiaries taken as
a whole.
(m) There is no litigation or governmental proceeding to which the
Company or any of its subsidiaries is a party or to which any property of the
Company or any of its subsidiaries is subject which is pending or, to the best
knowledge of the Company, is threatened or contemplated against the Company or
any of its subsidiaries which, if subject to an unfavorable decision, ruling or
finding, would reasonably be expected to have a material adverse effect on the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole, that might
prevent consummation of the transactions contemplated by this Agreement or that
are required to be disclosed in the Registration Statement or Prospectus (or, if
the Prospectus is not in existence, in the most recent Preliminary Prospectus)
and are not so disclosed.
(n) Neither the Company nor any of its subsidiaries is in violation
of, and neither the Company nor any of its
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subsidiaries has received any notice or claim from any governmental agency or
third party that any of them is in violation of, any law, order, ordinance, rule
or regulation, or any order, writ, injunction, judgment or decree of any agency
or body or of any court, to which it or its properties (whether owned or leased)
may be subject, which violation would reasonably be expected to have a material
effect on the business, properties, condition (financial or otherwise), results
of operations or prospects of the Company and its subsidiaries taken as a whole.
(o) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Stock. No bid or purchase by the Company and, to the best
knowledge of the Company, no bid or purchase that could be attributed to the
Company (as a result of bids or purchases by an "affiliated purchaser" within
the meaning of Rule 10b-6 under the Exchange Act) for or of the Stock, the
Common Stock, any securities of the same class or series as the Common Stock or
any securities convertible into or exchangeable for or that represent any right
to acquire the Common Stock is now pending or in progress or will have commenced
at any time prior to the completion of the distribution of the Stock.
(p) KPMG Peat Marwick LLP, whose reports appear in the Registration
Statement and the Prospectus, are, and during the periods covered by their
reports in the Registration Statement were, independent accountants as required
by the Securities Act and the Rules and Regulations. The financial statements
and schedules included in the Registration Statement, each Preliminary
Prospectus and the Prospectus present fairly (or, if the Prospectus has not been
filed with the Commission, as to the Prospectus, will present fairly) the
financial condition, results of operations, cash flow and changes in
stockholders' equity and the financial statements and schedules included in the
Registration Statement present fairly the information required to be stated
therein. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods presented. The unaudited quarterly financial
data included in the Registration Statement and the Prospectus
present fairly (or, if the Prospectus has not been filed with the Commission, as
to the Prospectus, will present fairly) the information shown therein and have
been prepared on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to
be included in the Registration Statement.
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(q) The books, records and accounts of the Company and each of its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and each of its
subsidiaries. The systems of internal accounting controls maintained by the
Company and each of its subsidiaries are sufficient to provide reasonable
assurances that: (i) transactions are executed in accordance with management's
general or specific authorization; and (ii) transactions are recorded as
necessary (x) to permit preparation of financial statements in conformity with
generally accepted accounting principles and (y) to maintain accountability for
assets.
(r) The Company will not, and the Company has delivered to the
Representative the written agreement of each of its officers and directors and
all persons who own more than 1% of the outstanding shares of Common Stock
(collectively, "Material Holders") to the effect that each of the Material
Holders will not, in each case for a period of 120 days following the date of
this Agreement, in each case without the prior written consent of the
Representative, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock or options or convertible securities
exercisable or exchangeable for, or convertible into, Common Stock; provided
however, that the Company may issue Common Stock upon the exercise of stock
options and may grant options to purchase Common Stock under its plans described
in the Registration Statement so long as none of such options become
exercisable during a period of 120 days following the date of this Agreement.
(s) No labor disturbance by the employees of the Company or any of
its subsidiaries exists, is imminent or, to the best knowledge of the Company,
is contemplated or threatened; and the Company is not aware of an existing,
imminent or threatened labor disturbance by the employees of any principal
suppliers, contract manufacturing organizations, manufacturers, authorized
dealers or distributors that would reasonably be expected to result in any
material adverse change in the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company and its
subsidiaries taken as a whole. No collective bargaining agreement exists with
any of the Company's or any of the Company's subsidiaries' employees and, to the
best knowledge of the Company, no such agreement is imminent.
(t) Each of the Company and each of its subsidiaries has filed all
federal, state, local and foreign tax returns that are required to be filed or
has requested extension thereof and has paid all taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges to the extent
that the same have become due and payable, except for such as are being
contested in good faith. No tax assessment or deficiency has been made or
proposed against the Company or any of its
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subsidiaries nor has the Company or any of its subsidiaries received any notice
of any proposed tax assessment or deficiency in either case that has not been
paid in full or is not being by the Company in good faith.
(u) Except as set forth in the Prospectus (or if the Prospectus is
not in existence, the most recent Preliminary Prospectus) there are no
outstanding loans, advances or guaranties of indebtedness by the Company to or
for the benefit of any of (i) its "affiliates," as such term is deemed in the
Rules and Regulations, (ii) any of the officers or directors of any of its
subsidiaries or (iii) any of the members of the families of any of them.
(v) Neither the Company nor any of its subsidiaries has, directly or
indirectly, at any time: (i) made any contributions to any candidate for
political office in violation of law; (ii) made any payment to any local, state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties; or (iii) violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended.
(w) The Company has not distributed and will not distribute prior to
the Closing Date or on or prior to any date on which the Option Stock is to be
purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Stock other than the Prospectus,
the Registration Statement and any other material which may be permitted by the
Securities Act and the Rules and Regulations.
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(x) The Stock has been approved for inclusion for listing on the
Nasdaq National Market, subject only to official notice of issuance.
(y) The Company is not now, and intends to conduct its affairs in the
future in such a manner so that it will not become, an investment company within
the meaning of the Investment Company Act of 1940, as amended.
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(z) The Company satisfies the requirements for filing a registration
statement on Form SB-2.
2. PURCHASE, SALE AND DELIVERY OF THE STOCK.
(a) On the basis of the representations, warranties, covenants and
agreements of the Company contained in this Agreement and subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
several Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $______ per share
of Stock ("Purchase Price") the respective number of shares of Firm Stock set
forth opposite the name of such Underwriter on Schedule I to this Agreement
(subject to adjustment as provided in Section 8 of this Agreement).
(b) On the basis of the several (and not joint) representations,
warranties, covenants and agreements of the Underwriters contained in this
Agreement and subject to the terms and conditions set forth in this Agreement,
the Company grants an option to the several Underwriters to purchase from the
Company, severally and jointly, all or any portion of the Option Stock at the
Purchase Price. This option may be exercised only to cover over-allotments in
the sale of the Firm Stock by the Underwriters and may be exercised in whole or
in part at any time (but not more than once) on or before the 30th day after the
date of the Prospectus upon written, telecopied or telegraphic notice by the
Representative to the Company setting forth the aggregate principal amount of
Option Stock as to which the several Underwriters are exercising the option and
the settlement date. The Option Stock shall be purchased severally, and not
jointly,
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by each Underwriter, if purchased at all, in the same proportion that the number
of shares of Firm Stock set forth opposite the name of the Underwriter in
Schedule I to this Agreement bears to the total number of shares of Firm Stock
to be purchased by the Underwriters under Section 2(a) above, subject to such
adjustments as the Representative in its absolute discretion shall make to
eliminate any fractional Stock. Delivery of Option Stock, and payment therefor,
shall be made as provided in Section 2(c) and Section 2(d) below.
(c) Delivery of the Firm Stock and the Option Stock (if the option
granted by the Company in Section 2(b) above has been exercised not later than
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date), and payment therefor, shall be made at the office of Van Kasper &
Company, 600 California Street, San Francisco, California at 7:00 a.m., San
Francisco time, on the third business day after the date of this Agreement, or
at such time on such other day, not later than seven full business days after
such third business day, as shall be agreed upon in writing by the Company and
the Representative, or as provided in Section 8 of this Agreement. The date and
hour of delivery and payment for the Firm Stock are referred to in this
Agreement as the "Closing Date." As used in this Agreement, "business day"
means a day on which the Nasdaq Stock Market is operating and on which banks in
New York and California are open for business and not permitted by law or
executive order to be closed. Certificates for the Stock shall be in such
denominations and registered in such names as the Representative may request in
writing at least two business days before the Closing Date.
(d) If the option granted by the Company in Section 2(b) above is
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of the Option Stock and payment therefor
shall be made at the office of Van Kasper & Company, 600 California Street, San
Francisco, California at 7:00 a.m., San Francisco time, on the date specified by
the Representative (which shall be three or four or fewer business days after
the exercise of the option, but not in excess of the period specified in the
Rules and Regulations).
(e) Payment of the purchase price for the Stock by the several
Underwriters shall be made by certified or official bank check or checks drawn
in next-day funds, payable to the order of the Company. Such payment shall be
made upon delivery of Stock to the Representative for the respective accounts of
the several Underwriters. The Stock to be delivered to the Representative shall
be registered in such name or names and shall be in such denominations as the
Representative may request at least two business days before the Closing Date,
in the case of Firm Stock, and at least one business prior to the purchase of
the Option
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Stock, in the case of the Option Stock. The Representative, individually and
not on behalf of the Underwriters, may (but shall not be obligated to) make
payment to the Company for Stock to be purchased by any Underwriter whose check
shall not have been received by the Representative on the Closing Date or any
later date on which Option Stock is purchased for the account of such
Underwriter. Any such payment shall not relieve such Underwriter from any of
its obligations hereunder.
(f) The several Underwriters propose to offer the Stock for sale to
the public as soon as the Representative deems it advisable to do so. The Firm
Stock is to be initially offered to the public at the public offering price set
forth (or to be set forth) in the Prospectus. The Representative may from time
to time thereafter change the public offering price and other selling terms.
(g) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), the legend
respecting stabilization set forth on the inside front cover page and the
statements set forth under the caption "Underwriting" in any Preliminary
Prospectus, in the Registration Statement and in the final form of Prospectus
filed pursuant to Rule 424(b) constitute the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement.
3. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment (including post-effective amendments) of
the Registration Statement or any supplement to the Prospectus without (i)
advising the Representative of and, a reasonable time prior to the proposed
filing of such amendment or supplement, furnishing the Representative with
copies thereof and (ii) obtaining the prior consent of the Representative to
such filing. The Company will prepare and file with the Commission, promptly
upon the request of the Representative, any amendment to the Registration
Statement or supplement to the Prospectus that may be necessary or advisable in
the reasonable opinion of the
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Representative in connection with the distribution of the Stock by the
Underwriters and use its best efforts to cause the same to become effective as
promptly as possible.
(b) The Company will promptly advise the Representative (i) when the
Registration Statement becomes effective, (ii) when any post-effective amendment
thereof becomes effective, (iii) of any request by the Commission for any
amendment of or supplement to the Registration Statement or the Prospectus or
for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification of
the Stock for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will make every reasonable effort to
prevent the issuance of any such stop order or suspension and, if issued, to
obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
the Representative and its counsel a signed copy of the Registration Statement
as originally filed and of each amendment thereto filed prior to the time the
Registration Statement becomes effective and, promptly upon the filing thereof,
a signed copy of each post-effective amendment, if any, to the Registration
Statement (together with, in each case, all exhibits thereto unless previously
furnished to the Representative) and will also deliver to the Representative,
for distribution to the several Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to the Representative and send to the several Underwriters, at such
office or offices as the Representative may designate, as many copies of the
Prospectus as the Representative may reasonably request and (iii) thereafter
from time to time during the period in which a prospectus is required by law to
be delivered by an Underwriter or a dealer, likewise to send to the Underwriters
as many additional copies of the Prospectus and as many copies of any supplement
to the Prospectus and of any amended Prospectus, filed by the Company with the
Commission, as the Representative may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading in light of the circumstances
then existing or so that the Prospectus will
not omit to state a material fact necessary in light of the circumstances
then existing to be stated therein, in
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each case at the time the Prospectus is delivered to a purchaser of the Stock,
or if it shall be necessary to amend or to supplement the Prospectus to comply
with the Securities Act or the Rules and Regulations, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein in light of the
circumstances then existing not misleading and so that it then will
otherwise comply with the Securities Act and the Rules and Regulations. If,
after the public offering of the Stock by the Underwriters and during such
period, the Underwriters propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, the
Representative will advise the Company in writing of the proposed variation
and if, in the opinion either of counsel for the Company or counsel for the
Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the Stock
may be sold by the Underwriters to use the Prospectus, as from time to time
so amended or supplemented, in connection with the sale of the Stock in
accordance with the applicable provisions of the Securities Act and the Rules
and Regulations for such period.
(e) The Company will cooperate with the Representative and its
counsel in the qualification or registration of the Stock for offer and sale
under the securities or blue sky laws of such jurisdictions as the
Representative may designate and, if applicable, in connection with exemptions
from such qualification or registration and, during the period in which a
Prospectus is required by law to be delivered by an Underwriter or a dealer, in
keeping such qualifications, registrations and exemptions in effect; provided,
however, that the Company shall not be obligated to file any general consent to
service of process or to qualify to do business as a foreign corporation in any
jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports and other documents as are or
may be required to continue such qualifications, registrations and exemptions in
effect for so long a period as the Representative may reasonably request for the
distribution of the Stock.
(f) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to the Representative and to each
Underwriter who may so request in writing copies of (i) all periodic and special
reports furnished by it to shareholders of the Company, (ii) all information,
documents and reports filed by it with the Commission, any securities exchange
on which any securities of the Company are then listed, Nasdaq or its National
Market System or the National
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Association of Securities Dealers, Inc., (iii) all press releases and material
news items or articles in respect of the Company or its affairs released or
prepared by the Company (other than promotional and marketing materials
disseminated solely to customers and potential customers of the Company in the
ordinary course of business) and (iv) any additional information concerning the
Company which the Representative may reasonably request.
(g) As soon as practicable, but not later than the 45th day following
the end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Representative an earnings statement or statements in
accordance with Section 11(a) of the Securities Act and Rule 158 of the Rules
and Regulations.
(h) The Company intends to apply the net proceeds from the offering
of the Stock in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(i) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(j) The Company will, and at all times for a period of at least
five years after the date of this Agreement, make every reasonable effort to
cause the Common Stock (including the Stock) to be listed on the Nasdaq
National Market, and the Company will comply with all registration, filing,
reporting and other requirements of the Exchange Act and the Nasdaq National
Market which may from time to time be applicable to the Company.
(k) The Company will make every best effort to maintain insurance of
the types and in the amounts which it deems adequate for its business consistent
with insurance coverage maintained by companies of similar size and engaged in
similar businesses, including, but not limited to, product liability insurance
and general liability insurance covering all real and personal property owned or
leased by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against.
(l) The Company will issue no press release prior to the Closing
Date with respect to the offering without providing the Representative a
reasonable opportunity to review it.
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4. FEES AND EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with: the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus, any drafts of each of them and any amendments
or supplements to any of them; the duplication or, if applicable, printing
(including all drafts thereof) of this Agreement, the Agreement Among
Underwriters, any Selected Dealer Agreements, the Preliminary Blue Sky Survey
and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and the
Power of Attorney and the duplication and printing (including of drafts thereof)
of any other underwriting documents and material (including but not limited to
marketing memoranda and other marketing material) in connection with the
offering, purchase, sale and deliver of the Stock; the issuance and delivery of
the Stock under this Agreement to the several Underwriters, including all
expenses, taxes and duties on the purchase and sale of the Stock and stock
exchange brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Stock (x) incident to the sale and delivery of the
Stock by the Company to the Underwriters and (y) incident to the sale and
delivery of the Stock by the Underwriters to the initial purchasers thereof; the
cost of printing the certificates for the Stock; the Transfer Agents' and
Registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent public accountants and any
other experts named in the Prospectus; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectus and the Prospectus, the agreements and other
documents and instruments referred to above and any amendments or supplements to
any of the foregoing; the NASD filing fees; the cost of qualifying or
registering the Stock (or obtaining exemptions from qualification or
registration) under the laws of such jurisdictions as the Representative may
designate (including filing fees and fees and costs/disbursements of
Underwriters' counsel in connection with such NASD filings and state securities
or Blue Sky qualifications, registrations and exemptions and in preparing the
preliminary and any final Blue Sky Memorandum); all fees and expenses in
connection with listing of the Stock on the Nasdaq National Market; all
Company marketing expenses; and all other expenses incurred by the Company in
connection with the performance of its obligations hereunder. In addition,
the Company will pay the Representatives on the Closing Date and, if
applicable, on the date on which Option Stock is purchased a non-accountable
expense allowance of one percent (1%) of the gross proceeds (prior to
deducting underwriting discounts and commissions) of the offering of the
Stock. Except as provided in
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this Section 4(a), Section 4(d) and Section 7, the Underwriters shall pay all of
their own expenses, including the fees of and disbursements to their counsel.
(ii) In addition to its obligations under Section 7(a) of this
Agreement, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any loss, claim, damage or liability described in Section 7(a) of
this Agreement, it will reimburse or advance to or for the benefit of the
Underwriters, and each of them, on a quarterly basis for all legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse or advance for the benefit of the Underwriters
for such expenses or the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that any
portion, or all, of any such interim reimbursement payments or advances are so
held to have been improper, the Underwriters receiving the same shall promptly
return such amounts to the Company together with interest, compounded daily, at
the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by Bank of America, NT&SA, San
Francisco, California (the "Prime Rate"), but not in excess of the maximum rate
permitted by applicable law. Any such interim reimbursement payments or
advances that are not made to or for the Underwriters within 30 days of a
request for reimbursement or for an advance shall bear interest at the Prime
Rate, compounded daily, but not in excess of the maximum rate permitted by
applicable law, from the date of such request until the date paid.
(b) In addition to their obligations under Section 7(b) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Firm Stock as set forth on Schedule I hereto, agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 7(b) of this Agreement, they will reimburse or
advance to or for the benefit of the Company on a quarterly basis for all legal
and other expenses incurred by the Company in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety or
enforceability of the Underwriters' obligation to reimburse or advance for the
benefit of the Company for such expenses and the possibility that such payments
or advances might later be held to have been improper by a court of competent
jurisdiction. To the extent that any portion, or all, of any such interim
reimbursement payments or
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advances are so held to have been improper, the Company shall promptly return
such amounts to the Underwriters together with interest, compounded daily, at
the Prime Rate, but not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances that are not made to
the Company within 30 days of a request for reimbursement or for an advance
shall bear interest at the Prime Rate, compounded daily, but not in excess of
the maximum rate permitted by applicable law, from the date of such request
until the date paid.
(c) Any controversy arising out of the operation of the interim
reimbursement and advance arrangements set forth in Sections 4(a)(ii) and 4(b)
above, including the amounts of any requested reimbursement payments or advance,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the indemnifying parties, shall be settled by arbitration
conducted under the provisions of the Code of Arbitration Procedure of the
National Association of Securities Dealers, Inc. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. If the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to the demand or notice is
authorized to do so. Any such arbitration will be limited to the interpretation
and obligations of the parties under the interim reimbursement and advance
provisions contained in Sections 4(a)(ii) and 4(b) above and will not resolve
the ultimate propriety or enforceability of the obligation to indemnify for or
contribute to expenses that is created by the provisions of Section 7 of this
Agreement.
(d) If the sale of the Stock provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 5 of this Agreement is not satisfied, or because of any termination
pursuant to Section 9(b) of this Agreement, or because of any refusal, inability
or failure on the part of the Company to perform any covenant or agreement set
forth in this Agreement or to comply with any provision of this Agreement other
than by reason of a default by any of the Underwriters, the Company agrees to
reimburse the several Underwriters upon demand for all reasonable out-of-pocket
accountable expenses actually incurred (including fees and disbursements of
counsel) that shall have been incurred by any or all of them in connection with
investigating, preparing to market or marketing the Stock or otherwise in
connection with this Agreement.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase and pay for the Stock shall be subject, in the sole
discretion of the Representative,
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to the accuracy as of the date of execution of this Agreement, the Closing Date
and the date and time at which the Option Stock is to be purchased, as the case
may be, of the representations and warranties of the Company set forth in this
Agreement, to the accuracy of the statements of the Company and its officers
made in any certificate delivered pursuant to this Agreement, to the performance
by the Company of all of its obligations to be performed under this Agreement at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, to the satisfaction of all conditions to be
satisfied or performed by the Company at or prior to that date and to the
following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective and the Company shall
have provided evidence satisfactory to the Representative of such filing and
effectiveness) not later than 5:00 p.m., New York time, on the date of this
Agreement or at such later date and time as the Representative may approve in
writing and, at the Closing Date or, with respect to the Option Stock, the date
on which such Option Stock is to be purchased, no stop order suspending the
effectiveness of the Registration Statement or any qualification, registration
or exemption from qualification or registration for the sale of the Stock in any
jurisdiction shall have been issued and no proceedings for that purpose shall
have been instituted or threatened; and any request for additional information
on the part of the Commission shall have been complied with to the reasonable
satisfaction of the Representative and its counsel.
(b) The Representative shall have received from Heller Ehrman White &
McAuliffe, counsel for the Underwriters, an opinion, on and dated as of the
Closing Date or, if applicable, the date on which Option Stock is to be
purchased, with respect to the issuance and sale of the Stock and such other
related matters as the Representative may reasonably require, and the Company
shall have furnished such counsel with all documents which they may request for
the purpose of enabling them to pass upon such matters.
(c) The Representative shall have received on the Closing Date or, if
applicable, the later date on which Option Stock is purchased the opinions of
Brobeck, Phleger & Harrison and of Woodbury & Wedge, counsel for the Company,
addressed to the Underwriters and dated the Closing Date or such later date,
with reproduced copies or signed counterparts thereof for each of the
Underwriters, covering the matters set forth in Annex A and Annex B,
respectively, to this Agreement and in form and substance satisfactory to the
Representative.
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(d) The Representative shall be satisfied that there has not been any
material change in the market for securities in general or in political,
financial or economic conditions as to render it impracticable in the
Representative's judgment to make a public offering of the Stock.
(e) The Representative shall have received on the Closing Date and on
any later date on which Option Stock is purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the President
and the Chief Financial Officer of the Company stating that:
(i) the representations and warranties of the Company set forth
in Section 1 of this Agreement are true and correct with the same force and
effect as if expressly made at and as of the Closing Date or such later date,
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or such later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and to the best of such officer's
knowledge no proceedings for that purpose have been instituted or are pending or
are threatened under the Securities Act;
(iii) the Stock has been approved for listing on the Nasdaq
National Market, subject only to notice of issuance, and the outstanding shares
of the Common Stock of the Company are listed on the Nasdaq National Market; and
(iv) all outstanding Series A Preferred Stock of the Company
shall automatically convert into Common Stock of the Company upon the Closing as
described in the Prospectus; and
(v) (A) each of the respective signers of such certificate have
carefully examined the Registration Statement in the form in which it originally
became effective and the Prospectus and any supplements or amendments to any of
them and, as of the Effective Date, in his opinion and to the best of his
knowledge after making necessary investigations the statements made in the
Registration Statement and the Prospectus were true and correct in all material
respects and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, (B) since the effective
date of the Registration Statement, no event has occurred that should have been
set forth in an amendment to the Registration Statement or a supplement or
amendment to the Prospectus that has not been set forth in such an amendment or
supplement, (C) since the respective dates as of which information is given in
the Registration Statement in the form in
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which it originally became effective and the Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the business, properties, condition (financial or
otherwise), results of operations or to the best of the Company's knowledge
prospects of the Company and its subsidiaries taken as a whole and, since such
dates, neither the Company nor any of its subsidiaries has entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
(D) there are not any pending or known threatened legal proceedings to which the
Company or any of its subsidiaries is a party or of which property of the
Company or any of its subsidiaries is the subject which are material and which
are not disclosed in the Registration Statement and the Prospectus and (E) there
are not any license agreements, contracts, leases or other documents that are
required to be filed as exhibits to the Registration Statement that have not
been filed as required.
(f) The Representative shall have received from KPMG Peat Marwick LLP
a letter or letters, addressed to the Underwriters and dated the Closing Date
and any later date on which Option Stock is purchased, confirming that they are
independent accountants with respect to the Company within the meaning of the
Securities Act and the applicable Rules and Regulations thereunder and, based
upon the procedures described in their letter delivered to the Representative
concurrently with the execution of this Agreement (the "Original Letter"), but
carried out to a date not more than five business days prior to the Closing Date
or such later date on which Option Stock is purchased, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date,, as the case may
be, and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect any
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. Such letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business,
properties or condition (financial or otherwise), results of operations or
prospects of the Company or any of its subsidiaries which, in the
Representative's sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus. In addition, the Representative shall have
received from KPMG Peat Marwick LLP, on or prior to the Closing Date, a letter
addressed to the Company and made available to the Representative for the use of
the Underwriters stating that their review of the Company's system of internal
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's
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consolidated financial statements as of March 31, 1995 or in delivering their
Original Letter, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) Prior to the Closing Date, the Stock shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance and the outstanding shares of the Common Stock of the Company shall be
listed on the Nasdaq National Market.
(h) On or prior to the Closing Date, the Representative shall have
received from all Material Holders executed agreements covering the matters
described in Section 1(r) of this Agreement.
(i) The Representative shall have received from the State of Hawaii
as of the Closing Date an estoppel certificate relating to the real property
leased by the Company in form and substance reasonably acceptable to the
Representative.
(j) On the Closing Date all outstanding shares of Series A Preferred
Stock of the Company shall have converted into Common Stock as described in the
Prospectus.
(k) The Company shall have furnished to the Representative such
further certificates and documents as the Representative shall reasonably
request (including certificates of officers of the Company) as to the accuracy
of the representations and warranties of the Company set forth in this
Agreement, the performance by the Company of its obligations under this
Agreement and such other matters as the Representative may have then requested.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are satisfactory to the Representative. The Company will
furnish the Representative with such number of conformed copies of such
opinions, certificates, letters and documents as the Representative shall
reasonably request.
If any of the conditions specified in this Section 5 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
time being of the essence, or if any of the opinions and certificates mentioned
above or elsewhere in this Agreement shall not be in all material respects
satisfactory in form and substance to the Representative and its counsel, this
Agreement and all obligations of the Underwriters hereunder may be canceled by
the Representative at or at any time prior to, the Closing Date or, with respect
to the Option Stock, prior to the date which the Option Stock is to be
purchased, as
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the case may be. Notice of such cancellation shall be given to the Company
in writing or by telephone, telecopy or telegraph confirmed in writing. Any
such termination shall be without liability of the Company to the Underwriters
(except as provided in Section 4 or Section 7 of this Agreement) and without
liability of the Underwriters to the Company (except as provided in Section 4 or
7 of this Agreement).
6. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligations of the
Company to sell and deliver the Stock required to be delivered as and when
specified in this Agreement shall be subject to the condition that, at the
Closing Date or, with respect to the Option Stock, the date and time at which
the Option Stock is to be purchased, no stop order suspending the effectiveness
of the Registration Statement shall be in effect and no proceedings therefor
shall be pending or threatened by the Commission.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereto) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or action in respect thereof)
related to negligence on the part of any Underwriter, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise provided below, settlement expenses and
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Company in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof) or any post-effective amendment
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if
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the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or (iv) any untrue statement or alleged untrue statement of
a material fact contained in any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify or register the Stock under the securities or Blue Sky laws thereof or
to obtain an exception from such qualification or registration or filed with the
Commission, any securities association or the Nasdaq National Market, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that (1) the indemnity agreements of the Company contained in
this Section 7(a) shall not apply to such losses, claims, damages, liabilities
or expenses if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter through the Representative specifically for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto and (2) the indemnity agreement
contained in this Section 7(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the Stock that
is the subject thereof (or to the benefit of any person controlling such
Underwriter) if the Company can demonstrate that at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) or, for this purpose, if applicable, a
copy of the then most recent Preliminary Prospectus was not sent or delivered to
such person and the untrue statement or omission of a material fact contained in
such Preliminary Prospectus or, if applicable, prior Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented) or,
if applicable, the then most recent Preliminary Prospectus, unless the failure
is the result of noncompliance by the Company with Section 3 of this Agreement.
The indemnity agreements of the Company contained in this Section 7(a) and the
representations and warranties of the Company contained in Section 1 of this
Agreement shall remain operative and in full force and effect regardless of any
investigation made by or behalf of any indemnified party and shall survive the
delivery of and payment for the Stock. This indemnity agreement shall be in
addition to any liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of its
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officers who signs the Registration Statement, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or other federal
or state statute, law or regulation or at common law or otherwise and to
reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, settlement expenses and reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding that may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any breach of any covenant or
agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof) or any
post-effective amendment thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, but in each case
under clauses (i), (ii) and (iii) above, as the case may be, only if such
statement or omission was made in reliance upon and in connection with
information furnished in writing to the Company by or on behalf of such
indemnifying Underwriter specifically for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The Company acknowledges and agrees that the matters
described in Section 2(g) of this Agreement constitute the only information
furnished in writing by or on behalf of any of the several Underwriters for
inclusion in the Registration Statement or the Prospectus or in any Preliminary
Prospectus. The several indemnity agreement of each Underwriter contained in
this Section 7(b) shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock. This indemnity agreement
shall be in addition to any liabilities which each Underwriter may otherwise
have.
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<PAGE>
(c) Each person or entity indemnified under the provisions of
Sections 7(a) and 7(b) above agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
Sections, it will, if a claim in respect thereunder is to be made against the
indemnifying party or parties under this Section 7, promptly give written notice
(the "Notice") of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
Sections 7(a) or 7(b) above shall be available to any person who fails to so
give the Notice if the party to whom such Notice was not given was unaware of
the action, suit, investigation, inquiry or proceeding to which the Notice would
have related, but only to the extent such party was materially prejudiced by the
failure to receive the Notice, and the omission to so notify such indemnifying
party or parties shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of Sections 7(a) and 7(b). Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense of
such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying, party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses or
rights available to such indemnified party or parties different from or in
addition to those available to the indemnifying party or parties, then separate
counsel for and selected by the indemnified party or parties shall be entitled,
at the expense of the indemnifying parties, to conduct the defense of the
indemnified parties to the extent determined by counsel to the indemnified
parties to be necessary to protect the interests of the indemnified party or
parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel selected by such indemnified party or parties
participate in, but not conduct, the defense. If, within a reasonable time
after receipt of the Notice, an indemnifying party gives a Notice of
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Defense and, unless separate counsel is to be chosen by the indemnified party or
parties as provided above, the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under Sections 7(a) through
7(c) for any legal or other expenses subsequently incurred by the indemnified
party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear and pay the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the "provided,
however" clause in the preceding sentence and (B) the indemnifying party or
parties shall bear and pay such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding. In no event
shall any indemnifying party be liable with respect to any amounts paid in
settlement of any claim or action unless the indemnifying party shall have
approved the terms of such settlement, such approval not to be unreasonably
withheld.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 7(a) or 7(b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each indemnifying
party in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same respective
proportion as the total proceeds from the offering of the Stock, net of the
underwriting discounts, received by the Company and the total underwriting
discount retained by the Underwriters bear to the aggregate public offering
price of the Stock. Relative fault shall be
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determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were to be determined by pro rata
allocation which does not take into account the equitable considerations
referred to in the first sentence of the first paragraph of this Section 7(d)
and to the considerations referred to in the third sentence of the first
paragraph of this Section 7(d). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities, or actions in respect
thereof, referred to in the first sentence of the first paragraph of this
Section 7(d) shall be deemed to include any legal or other expenses incurred by
such indemnified party in connection with investigating, preparing to defend or
defending against any action or claim which is the subject of this Section 7(d).
Notwithstanding the provisions of this Section 7(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by that Underwriter. For purposes of this
Section 7(d), each person who controls an Underwriter within the meaning of the
Securities Act shall have the same rights to contribution as such Underwriter,
and each person who controls the Company within the meaning of the Securities
Act, each officer of the Company who signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company; provided, however, in each case that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute in
this Section 7(d) are several in proportion to their respective underwriting
obligations and not joint.
Each party or other entity entitled to contribution agrees that upon
the service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Section 7(c) above).
(e) No indemnifying party will, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened
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claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not such indemnified party or
any person who controls such indemnified party within the meaning of Section 15
of the Securities Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional release
of each such indemnified party and each such controlling person from all
liability arising out of such claim, action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section
7 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections 4(a)(ii),
4(b) and 4(c) and this Section 7 of this Agreement fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Securities Act and the Rules and
Regulations. The parties are advised that federal or state policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section 7 of this
Agreement and, to the extent permitted by law, the parties hereto hereby
expressly waive and relinquish any right or ability to assert such public policy
as a defense to a claim under Sections 4(a)(ii), 4(b) or 4(c) or this Section 7
of this Agreement and further agree not to attempt to assert any such defense.
8. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of the
Underwriters fails or refuses (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 5 or Section 9
of this Agreement) to purchase and pay for the number of shares of Firm Stock
agreed to be purchased by such Underwriter or Underwriters, the Representative
shall immediately give notice thereof to the Company and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by the
Company of such notice to purchase, or procure one or more other Underwriters to
purchase, in such proportions as may be agreed upon among the Representative and
such purchasing Underwriter or Underwriters and upon the terms set forth herein,
all or any part of the Firm Stock that such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail to
make such arrangements with respect to all such Stock, the number of shares of
Firm Stock that each non- defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares of Stock that the defaulting Underwriter or
Underwriters agreed to
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purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the Stock that the defaulting Underwriter or Underwriters
agreed to purchase if the aggregate amount of such Stock exceeds 10% of the
aggregate amount of Firm Stock that all Underwriters agreed to purchase under
this Agreement. If the total number of shares of Firm Stock that the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the first 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
reasonably satisfactory to the Representative for purchase of such Stock on the
terms set forth in this Agreement. In any such case, either the Representative
or the Company shall have the right to postpone the Closing Date determined as
provided in Section 2(c) of this Agreement for not more than seven business days
after the date originally fixed as the Closing Date pursuant to Section 2(c) in
order that any necessary changes in the Registration Statement, the Prospectus
or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company shall make
arrangements within the time periods set forth above for the purchase of all the
Firm Stock that the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company to any non-defaulting
Underwriter (except as provided in Section 4 or Section 7 of this Agreement) and
without any liability on the part of any nondefaulting Underwriters to the
Company (except to the extent provided in Section 4 or 7 of this Agreement).
Nothing in this Section 8, and no action taken hereunder, shall relieve any
defaulting Underwriter from liability, if any, to the Company or any
nondefaulting Underwriter for damages occasioned by its default under this
Agreement. The term "Underwriter" in this Agreement shall include any persons
substituted for an Underwriter under this Section 8.
9. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as the Representative and the Company shall
agree upon the public offering price and the purchase price of the Stock. If
the public offering price and other terms and the purchase price of the Stock
shall not have been determined prior to 5:00 p.m., New York time, on the fifth
full business day after the Registration Statement has become effective, this
Agreement shall thereupon terminate without liability on the part of the Company
or the Underwriters (except as provided in Section
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4 or Section 7 of this Agreement). By giving notice as set forth in Section 12
of this Agreement before the time this Agreement becomes effective, the
Representative, as Representative of the several Underwriters, may prevent this
Agreement from becoming effective without liability of any party to the other
party, except that the Company shall remain obligated to pay costs and expenses
to the extent provided in Section 4 and Section 7 of this Agreement. If the
Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
the Representative and the Company.
(b) This Agreement may be terminated by the Representative by giving
written notice to the Company at any time on or prior to the Closing Date or,
with respect to the purchase of the Option Stock, on or prior to any later date
on which the Option Stock is to be purchased, as the case may be, if prior to
such time any of the following has occurred: (i) after the respective dates as
of which information is given in the Registration Statement and the Prospectus,
any material adverse change or development involving a prospective material
adverse change in or affecting materially the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
its subsidiaries taken as a whole, which would, in the Representative's sole
judgment, make the offering or the delivery of the Stock impracticable or
inadvisable; or (ii) if trading in securities of the Company has been suspended
by the Commission or if trading generally on the New York Stock Exchange,
American Stock Exchange or over-the-counter market has been suspended or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of such exchanges, by the NASD or by
the Commission; or (iii) if there shall have been the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, court,
legislative body, agency or other governmental authority which in the
Representative's sole judgment materially affects or may materially affect the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole; (iv) if there
shall have been the declaration of a banking moratorium by federal, New York or
California authorities; (v) existing international monetary conditions shall
have undergone a material change which, in the Representative's sole judgment,
makes the offering or delivery of the Stock impracticable or inadvisable; or
(vi) if there has occurred any material change in the financial markets in the
United States or internationally or any outbreak of hostilities or escalation of
existing hostilities or other crisis, the effect of which in the
Representative's sole judgment make the offering or delivery of the Stock
impracticable or inadvisable. If this Agreement shall be terminated pursuant to
this Section 9, there
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<PAGE>
shall be no liability of the Company to the Underwriters (except pursuant to
Section 4 and Section 7 of this Agreement) and no liability of the Underwriters
to the Company (except pursuant to Sections 4a and 7 of this Agreement).
10. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Underwriters, shall be mailed, telecopied or telegraphed or delivered to Van
Kasper & Company, 11661 San Vincente Boulevard, Suite 709, Los Angeles,
California 90049, Attention: Bruce P. Emmeluth (telecopier: (310) 820-5032); and
if to the Company, shall be mailed, telecopied, telegraphed or delivered to it
at its office at 73-4460 Queen Kaahumanu Hwy., Suite 102, Keahole Point, Kailua
- - Kona, Hawaii 96740 (telecopier: (808) 395-1353) Attention: Gerald R. Cysewski.
All notices given by telecopy or telegraph shall be promptly confirmed by
letter.
11. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 4 and Section 7 of this Agreement, the
several parties (in addition to the Company and the several Underwriters)
indemnified under the provisions of Section 4 and Section 7. Nothing in this
Agreement is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable remedy or claim under or in respect of this
Agreement or any provision contained herein. The term "successors and assigns"
as herein used shall not include any purchaser, as such, of any of the Stock
from the several Underwriters.
12. GENERAL. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Sections
2(r), 3(f), 3(g), 3(h), 3(i) and 3(j) of this Agreement shall be of no further
force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF CALIFORNIA.
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<PAGE>
13. AUTHORITY OF THE REPRESENTATIVE. In connection with this Agreement,
the Representative will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by the Representative, as representative
of the several Underwriters, will be binding on all of the Underwriters.
If the foregoing correctly sets forth your understanding, please so
indicate by signing in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among the Company and the several
Underwriters.
Very truly yours,
CYANOTECH CORPORATION
By: Gerald R. Cysewski, Ph.D.
Its: President and Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
VAN KASPER & COMPANY
By:
--------------------------
Bruce P. Emmeluth
Managing Director
On its behalf and on behalf of
each of the several Underwriters
named in Schedule I hereto
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<PAGE>
SCHEDULE I
UNDERWRITERS
Shares of Firm Stock
Underwriters to be Purchased
- ----------------------------------- -----------------------------------
Van Kasper & Company
---------
Total
---------
---------
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<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Brobeck, Phleger & Harrison
(i) The shares of capital stock of the Company and its subsidiaries
that have been issued in the previous three years have not been issued in
violation of any applicable federal securities laws, provided that in
rendering their opinion as to applicable federal securities laws, such
counsel may assume, unless counsel has knowledge of facts that may render
such assumption unreasonable, that any purchasers had, to the extent relevant
and represented by such purchasers in writing, any required investment intent,
(ii) The execution, delivery and performance of this Agreement and the
issuance and sale of the Stock do not (A) conflict with, violate, result in a
breach of or constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under any agreement (including,
without limitation, an agreement with respect to registration rights) to which
the Company is a party or by which it or any of its properties or assets is
bound and which is filed as an exhibit to, or incorporated by reference in,
the Registration Statement or (B) result in violation of any material federal
or California law, rule or regulation or, to the best knowledge of such
counsel, any writ, judgment, order, injunction or decree of any government,
governmental body, agency or court or any arbitration tribunal having
jurisdiction over the Company or any of its properties,
(iii) The Underwriting Agreement has been duly authorized by all necessary
corporate action on the part of the Company, and has been duly executed and
delivered by the Company,
<PAGE>
(iv) Except for the order of the Commission making the Registration
Statement effective and similar authorizations required under the securities or
"Blue Sky" laws of certain jurisdictions (as to which such counsel need express
no opinion), no consent, approval, authorization or other order of any federal
or California governmental body or, to the knowledge of such counsel, other
person is required in connection with the authorization, issuance, sale and
delivery of the Stock and the execution, delivery and performance by the Company
of the Underwriting Agreement;
(v) The Registration Statement has become effective under the Securities
Act and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Securities Act;
(vi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements, financial data and
supporting schedules included therein, as to which such counsel need express no
opinion), as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Securities Act and
the applicable Rules and Regulations. The Company satisfies the requirements
for filing a registration statement on Form SB-2;
(vii) The description in the Registration Statement and the Prospectus of
the Company's contracts is accurate in all material respects and fairly presents
in all material respects the information required to be presented by the
Securities Act and the Rules and Regulations;
(viii) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit
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<PAGE>
to the Registration Statement that are not described or referred to therein and
filed as required;
(ix) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries of a character which are required to be disclosed in the
Registration Statement or the Prospectus by the Securities Act or the applicable
Rules and Regulations, other than those described therein;
(x) To the best knowledge of such counsel, neither the Company nor any of
its subsidiaries are presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or, without limitation,
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which any of their properties are bound and that is filed
as an exhibit to, or incorporated by reference in, the Registration Statement
and that, individually or in the aggregate, is material to the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company and its subsidiaries taken as a whole; and
(xi) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to any
securities of the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, the independent public accountants of the Company, the Representative
and counsel to the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although they have not independently verified the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, the
Registration Statement (except as to financial statement, financial data and
supporting schedules contained therein, as to which such counsel need express no
opinion) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on which the
Option Stock is to be purchased, as the case may be, the Prospectus contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
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<PAGE>
ANNEX B
Matters to be Covered in the Opinion of
Nevada Counsel
(i) Each of the Company and each of its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(ii) Each of the Company and each of its subsidiaries has the corporate
power to own, lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) Each of the Company and each of its subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions in which the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure so to
qualify would not have a material adverse effect on the business, properties,
condition (financial or otherwise), results of operations or prospects of the
Company and its subsidiaries taken as a whole;
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; all outstanding shares of Series A Preferred Stock of the
Company shall automatically convert into shares of Common Stock as of the
Closing as described in the Prospectus; the issued and outstanding shares of
capital stock of the Company and its subsidiaries have been duly and validly
authorized and issued, are fully paid and nonassessable and have not been issued
in violation of any preemptive right or other rights to subscribe for or
purchase securities; and the Company directly or indirectly owns all of the
issued and outstanding equity securities of each of its subsidiaries and there
are no outstanding options, warrants or other rights to acquire any equity
securities of any such subsidiary;
(v) The Company has corporate power and authority to enter into the
Agreement and to issue, sell and deliver the Stock to the Underwriters;
(vi) The execution, delivery and performance of the Agreement and the
issuance and sale of the Stock do not (A) conflict with, violate, result in a
breach of or constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under the Articles of Incorporation
or By-laws of the Company or (B) result in violation of any material federal or
Nevada law, rule or regulation or, to the
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<PAGE>
best knowledge of such counsel, any writ, judgment, order, injunction or decree
of any government, governmental body, agency or court or any arbitration
tribunal having jurisdiction over the Company or any of its properties,
(vii) The Stock is duly authorized and, when issued and delivered against
payment in full therefor, will be validly issued, fully paid, non-assessable,
and free of preemptive rights;
(viii) The Underwriting Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company;
(ix) Except for the order of the Commission making the Registration
Statement effective and similar authorizations required under the securities or
"Blue Sky" laws of certain jurisdictions (as to which such counsel need express
no opinion), no consent, approval, authorization or other order of any federal
or Nevada governmental body or, to the knowledge of such counsel, other person
is required in connection with the authorization, issuance, sale and delivery of
the Stock and the execution, delivery and performance by the Company of the
Underwriting Agreement;
(x) The terms and provisions of the capital stock of the Company conform
in all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the information in the Prospectus
under the caption "Description of Capital Stock," to the extent it constitutes
matters of law or legal conclusions, has been reviewed by such counsel and is
correct and the form of certificate for the Stock complies with Nevada law; and
(xi) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company is accurate in all material respects.
-41-
<PAGE>
Exhibit 10.16
CYANOTECH CORPORATION
PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT
THIS PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made as of February 20, 1996, by and between Cyanotech
Corporation, a Nevada corporation (the "Company"), and Firemen's Insurance
Company of Newark, New Jersey, a New Jersey insurance company ("Firemen's
Insurance"). National-Ben Franklin Co. of Illinois, an Illinois corporation
("National-Ben"), has executed this Agreement for purposes of Article IV
hereof only.
WHEREAS, Firemen's Insurance holds 1,250,000 shares (the "Series A Shares")
of the Company's 12% Cumulative, Convertible Preferred Shares -- Series A, par
value $.001 per share, constituting all the shares of such series of the Company
currently issued and outstanding;
WHEREAS, Firemen's Insurance purchased the Series A Shares pursuant to
the Venture Capital Unit Purchase Agreement dated as of April 18, 1985 between
The Continental Corporation (the successor in interest to Firemen's Insurance)
and the Company (the "Series A Agreement");
WHEREAS, Firemen's Insurance holds 595,031 shares (the "Series C Shares")
of the Company's 8% Cumulative, Convertible Preferred Shares -- Series C, par
value $.001 per share;
WHEREAS, the 1,250,000 outstanding Series A Shares were convertible by
their terms into 250,000 shares of the Company's common stock, par value $.005
per share (all shares of the Company's common stock referred to herein as the
"Common Stock"), until February 28, 1995;
WHEREAS, the Company is contemplating an underwritten public offering of
its Common Stock (the "Contemplated Public Offering"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), which Contemplated
Public Offering is expected to occur in late March or early April 1996;
WHEREAS, the underwriters of the Contemplated Public Offering have advised
the Company that for marketing reasons, among other factors, the success of the
Contemplated Public Offering is partially dependent, among other factors, upon
agreement of Fireman's Insurance to convert the outstanding Series A Shares into
Common Stock of the Company;
1.
<PAGE>
WHEREAS, Firemen's Insurance will benefit from the success of the
Contemplated Public Offering;
WHEREAS, Firemen's Insurance desires to convert, and the Company desires
Firemen's Insurance to convert, the Series A Shares into shares of Common Stock,
on the terms and subject to the terms set forth herein; and
WHEREAS, to further induce Firemen's Insurance to convert the Series A
Shares and the Series C Shares, the Company has agreed to grant certain "piggy-
back" registration rights to Firemen's Insurance with respect to its resale of
the shares of Common Stock issuable on conversion of the Series A Shares and the
Series C Shares.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I
CONVERSION OF SERIES A SHARES
1.1 CONVERSION OF SERIES A SHARES. Subject to the terms and
conditions of this Agreement, Firemen's Insurance shall convert the Series A
Shares into 250,000 shares of Common Stock (subject to appropriate adjustments
for stock splits, stock dividends, combinations, other recapitalizations and
similar events), which conversion ratio has been determined in accordance with
the independent valuation attached hereto as EXHIBIT A and the Company shall
issue to Firemen's Insurance 250,000 shares of Common Stock in respect thereof
(subject to appropriate adjustments for stock splits, stock dividends,
combinations, other recapitalizations and similar events). The aggregate
250,000 shares of Common Stock to be issued to Firemen's Insurance shall
herein be referred to as the "Common Shares."
1.2 TERMINATION OF RIGHTS UNDER OTHER AGREEMENTS. All rights of
Firemen's Insurance to cause the Company to register the resale of any of the
Company's securities existing prior to the date hereof under the Securities Act
or any state securities laws shall terminate as of the date hereof. All rights
of Firemen's Insurance under the Series A Agreement, and any other agreement to
which the Company and Firemen's Insurance is a party relating to the Series A
Shares and the Common Stock issuable upon conversion thereof shall terminate as
of the date hereof. All rights of Firemen's Insurance incident to ownership of
Series A Shares, including, without limitation, the ability of the holders of
the Series A Shares to elect one director of the Company, shall terminate as of
the Closing (as defined below).
1.3 CLOSING. The conversion of the Series A Shares and the issuance
of the Common Shares in respect thereof shall take place at such time and place
as the closing of the Contemplated Public Offering (which time and place are
designated as the "Closing"). At the Closing, Firemen's Insurance shall deliver
to the Company the certificates representing the Series A Shares and the Company
shall deliver to Firemen's Insurance certificates representing the Common Shares
as set forth in Section 1.1 hereof. This Agreement shall terminate in its
entirety and be of no further force and effect, and any
2.
<PAGE>
rights terminated pursuant to Section 1.2 shall be reinstated, if the Closing
does not occur by September 30, 1996, or such later date as all parties hereto
shall agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FIREMEN'S INSURANCE
Firemen's Insurance hereby represents and warrants to the Company
that:
2.1 TITLE TO STOCK. Firemen's Insurance has good and valid title to
the Series A Shares held by it, free and clear of any lien, pledge, security
interest, or other encumbrance with full right and power to convert such shares
as set forth herein.
2.2 AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation, enforceable in accordance with its terms, subject to
bankruptcy and other laws of general application affecting the rights and
remedies of creditors, and rules of law governing specific performance,
injunctive relief, or other equitable remedies.
2.3 RESTRICTED SECURITIES. Firemen's Insurance understands that the
Common Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they were initially acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations, such securities may be resold without registration under
the Securities Act, only in certain limited circumstances. In this connection,
Firemen's Insurance represents that it is familiar with Securities and Exchange
Commission ("SEC") Rule 144 as presently in effect and it understands the resale
limitations imposed thereby and by the Securities Act. Firemen's Insurance
understands that it may be deemed an "affiliate" of the Company as that term is
defined in Rule 144.
2.4 DISCLOSURE OF INFORMATION. Firemen's Insurance believes that it
has received all the information that it considers necessary or appropriate for
deciding whether to enter into the transactions contemplated by this Agreement
and to acquire the Common Shares. Firemen's Insurance has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the Common Shares. The Company has not made any representations
to Firemen's Insurance regarding the Company, its business, prospects, financial
condition, or any other matter.
2.5 LEGENDS. It is understood that the certificates evidencing the
Common Shares, when reissued in the name of Firemen's Insurance, may bear the
following legend, or a legend substantially similar to such legend:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act
3.
<PAGE>
or an opinion of counsel satisfactory to the company that such registration is
not required or unless sold pursuant to Rule 144 of such Act."
ARTICLE III
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
3.1 DEFINITIONS. For purposes of this Article III:
(a) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (1) the Common
Shares issued to Firemen's Insurance pursuant to this Agreement, (2) the shares
of Common Stock of the Company issuable or issued upon conversion of the
Series C Shares, and (3) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right, or other security which
is issued as) a dividend or other distribution with respect to, or in exchange
for or in replacement of, such Common Shares or such Common Stock, excluding in
all cases, however, any Registrable Securities sold by a person in a transaction
in which his/her rights under this Article III are not assigned;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 3.10 hereof; and
(e) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any comparable or successor form under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
3.2 COMPANY REGISTRATION. If (but without any obligation to do so
under this Agreement), at any time after the closing of the Contemplated Public
Offering, the Company proposes to register any of its stock or other securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan,
4.
<PAGE>
or a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, give each Holder written notice of such registration at least 20 days
prior to the proposed date to file any registration statement. Upon the written
request of each Holder given within twenty (20) days after mailing of such
notice by the Company in accordance with Section 4.5, the Company shall, subject
to the provisions of Section 3.6, cause to be registered under the Securities
Act all of the Registrable Securities that each such Holder has requested to be
registered.
3.3 OBLIGATIONS OF THE COMPANY. Whenever required under this
Article III to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective and to remain effective
for a period of not less than 90 days or such shorter period which will
terminate when all Registrable Securities covered by such registration statement
have been sold..
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and other applicable laws and regulations with
respect to the disposition of all securities covered by such registration
statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus including all supplements
thereto, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, PROVIDED that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) Use its reasonable best efforts to list for quotation on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) such Registrable Securities.
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the
5.
<PAGE>
managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement. In addition, all shares registered shall be distributed
substantially in accordance with the plan of distribution as set forth in the
registration statement.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and notice of any stop order issued or threatened by the SEC and to
take all reasonable actions to prevent the entry of such stop order or to remove
it if it is entered.
(h) If any Registrable Securities are offered for sale, on the
date that the Registrable Securities are delivered to the underwriters, if any,
and if such Registrable Securities are not being sold through underwriters, then
on the date the registration statement becomes effective, the Company shall
furnish the Holder with (A) a signed opinion, dated as of the date of such
delivery, of the legal counsel of the Company addressed to the underwriters, if
any, and if such Registrable Securities are not being sold through underwriters,
then to the Holder covering such matters as are customarily addressed in
opinions rendered to underwriters on such transactions, and (B) a letter, dated
as of the date of such delivery, of the Company's independent public accountants
addressed to the underwriters, and if such Registrable Securities are not being
sold through underwriters, then to the Holder and, if such accountants refuse to
deliver such letter to the Holder, then to the Company (x) stating that they are
independent certified public accountants within the meaning of the Securities
Act and that, in the opinion of such accountants, the financial statements and
other financial data of the Company included in the registration statement or
the prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and (y) covering such other financial matters (including information as to
the period ending not more than five (5) business days prior to the date of such
letter) with respect to the registration in respect of which such letter is
being given as the Holder may reasonably request and as would be customary in
such a transaction.
3.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Article III with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required by law or otherwise to effect the registration of such
Holder's Registrable Securities.
3.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay
all expenses incurred in connection with any registration, filing, or
qualification of
6.
<PAGE>
Registrable Securities with respect to the registrations pursuant to Section 3.2
for each Holder (which right may be assigned as provided in Section 3.10),
including (without limitation) all registration, filing, and qualification fees,
printer's and accounting fees relating thereto, and fees and disbursements of
counsel for the Company, but excluding the fees and disbursements of legal
counsel for the selling Holders if separate legal counsel is employed and
underwriting discounts and commissions relating to Registrable Securities.
3.6 (a) UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 3.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then subject to the
terms set forth below only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters reasonably believe
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters believe will not jeopardize the
success of the offering (the securities so included to be apportioned pro-rata
among the selling stockholders according to the total amount of securities
entitled to be included therein owned by each selling stockholder or in such
other proportions as shall mutually be agreed to by such selling stockholders);
PROVIDED, HOWEVER, that the amount of Registrable Securities and other
securities excluded from the offering may not be reduced to less than forty
percent (40%) of such offering; and further PROVIDED, HOWEVER that Firemen's
Insurance will be entitled to include in each public offering, if it shall so
elect, no fewer than 507,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events). For purposes of the parenthetical in the
preceding sentence concerning apportionment, for any selling stockholder which
is a Holder of Registrable Securities and which is a partnership or corporation,
the partners, retired partners and stockholders of such Holder, or the estates
and family members of any such partners and retired partners and any trusts for
the benefit of any of the foregoing persons shall be deemed to be a single
"selling stockholder," and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
(b) WITHDRAWAL RIGHTS. Each Holder shall be permitted to
withdraw up to 507,000 shares (subject to appropriate adjustment for stock
splits, stock dividends, combinations, other recapitalizations and similar
events) of such Holder's Registrable Securities included in a registration at
any time prior to the effective date of such registration. In addition, to the
extent the number of Registrable Securities being sold by the Holder is greater
than 507,000 shares (subject to appropriate adjustment for stock splits, stock
dividends, combinations, other recapitalizations and similar events) the Holder
can
7.
<PAGE>
withdraw any such portion above 507,000 shares if, on the date of such
withdrawal, the last reported sale price of the Company's Common Stock on Nasdaq
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) was less than 85% of the proposed maximum
offering price per share listed on the "Calculation of Registration Fee" section
on the cover of the registration statement filed with respect to the Registrable
Securities.
3.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article III. This Section 3.7 shall
not affect any remedies at law available to the Holder for breaches of Section
3.6(a) by the Company.
3.8 INDEMNIFICATION AND CONTRIBUTION. In the event any Registrable
Securities are included in a registration statement under this Article III:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act or the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions, or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act or
the 1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter, or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER,
that the indemnity agreement contained in this subsection 3.8(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter, or
controlling person.
8.
<PAGE>
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 3.8(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 3.8(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld.
(c) Promptly after receipt by an indemnified party under this
Section 3.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 3.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain separate counsel in each
jurisdiction where separate representation would be appropriate in the judgment
of the indemnified party, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party to the extent of such prejudice of any liability
to the indemnified party under this Section 3.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 3.8.
(d) No indemnifying party, in the defense of any claim arising
out of a Violation shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from
9.
<PAGE>
all liability in respect to such claim or litigation and, in the event the terms
of such judgment or settlement include any term other than the payment by the
indemnifying party of money damages, the indemnifying party shall not so consent
or enter into such a settlement without the consent of each indemnified party
(which will not be unreasonably withheld) whether or not the terms thereof
include such a release.
(e) CONTRIBUTION. If for any reason the indemnity provided for
in this Section 3.8 is unavailable to, or is insufficient to hold harmless, an
indemnified party, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and the indemnified party on the other, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, or provides a lesser sum to
the indemnified party than the amount hereinafter calculated, in such proportion
as is appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other but
also the relative fault of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties; and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 3.8(d), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.8(e) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
(f) The obligations of the Company and Holders under this
Section 3.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Article III, and otherwise.
3.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to
10.
<PAGE>
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees and covenants to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act;
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Securities Act and the 1934 Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company with the
SEC or any securities exchange, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration or
pursuant to such form; and
(d) provide the Holder with prompt notice of any failure by the
Company to comply with the requirements of Rule 144.
3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Article III may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds (i) at
least 1% of the Registrable Securities then outstanding (subject to appropriate
adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events), or (ii) all of the shares of Registrable
Securities initially issued to such Holder, PROVIDED that, within a reasonable
time after such transfer, the Company is furnished with written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned; and PROVIDED, FURTHER,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and/or not otherwise eligible
for sale under Rule 144(k) of the Securities Act or similar exemption. For the
purposes of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants, and siblings of such partners or
spouses who acquire Registrable Securities by gift, will, or intestate
succession) shall be aggregated together and with the partnership; PROVIDED that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices, or taking any action under this
Article III.
11.
<PAGE>
3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Article III may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities and the Company.
3.12 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled
to exercise any right provided for in this Article III after February 3, 2005.
ARTICLE IV
MISCELLANEOUS
4.1 MARKET STAND-OFF. Firemen's Insurance and National-Ben hereby
covenant that they will not, except for the conversion of the Series A Shares
contemplated by this Agreement, without the prior written consent of Van Kasper
& Company (or such other investment bank that serves as the lead managing
underwriter in the Company's Contemplated Public Offering, which person is
referred to herein as the "Lead Managing Underwriter"), offer, sell, or
otherwise dispose of, directly or indirectly, any shares of the Company's Common
Stock, or any securities convertible into or exercisable or exchangeable for, or
any rights to purchase or acquire, Common Stock owned by it (otherwise than as a
bona fide gift or gifts, provided the donee or donees thereof agree in writing
to be bound by the terms of this Section 4.1) for the period beginning on the
date hereof and ending on the date one hundred and twenty (120) days after the
date of the closing of the Contemplated Public Offering. If requested by the
Lead Managing Underwriter, Firemen's Insurance and National-Ben each agree to
execute an agreement similar to that set forth in this Section 4.1 addressed to
the Lead Managing Underwriter. The Company shall be expressly entitled to
enforce the provisions of this Section 4.1 on behalf of the Lead Managing
Underwriter. This Section 4.1 shall be effective only upon the execution of a
similar provision by American Cyanamid Company.
4.2 SURVIVAL OF WARRANTIES. The warranties, representations, and
covenants of Firemen's Insurance, National-Ben and the Company contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of Firemen's Insurance or the Company.
4.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their
12.
<PAGE>
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
4.4 EXPENSES. Except as otherwise provided in Article III hereof,
irrespective of whether the Closing is effected, each party shall pay its own
costs and expenses that such party incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement.
4.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
days after deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or by facsimile
confirmed by such certified or registered mail or at such other address as such
party may designate by ten (10) days' advance written notice to the other
parties.
4.6 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Nevada.
4.7 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.8 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This writing, together
with any exhibits annexed hereto, constitutes the entire Agreement of the
parties with respect to the subject matter hereof and shall supersede all prior
understandings and writings with respect thereto. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of all the parties hereto.
4.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.
<PAGE>
4.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Cyanotech Corporation
By: /s/ GERALD R. CYSEWSKI
______________________________________
Name: Gerald R. Cysewski
Title: President & CEO
Address: 73-4460 Queen Kaahumanu Hwy.,
Suite 102
Kailua-Kona, HI 96740
Firemen's Insurance Company of Newark, New Jersey
By: /s/ RICHARD W. DUBBERKE
______________________________________
Name: Richard W. Dubberke
Title: Vice President
Address: CNA Plaza
Chicago, IL 60685
FOR PURPOSES OF ARTICLE IV ONLY:
National-Ben Franklin Co. of Illinois
By: /s/ RICHARD W. DUBBERKE
______________________________________
Name: Richard W. Dubberke
Title: Vice President
Address: CNA Plaza
Chicago, IL 60685
14.
<PAGE>
EXHIBIT A
TO
CYANOTECH CORPORATION
PREFERRED STOCK CONVERSION AGREEMENT
<PAGE>
[ALAN R HOEFER LETTERHEAD]
January 30, 1996
The Board of Directors
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy., Suite 102
Kailua-Kona, HI 96740
Re: Fairness Opinion re Exchange of 12% Cumulative Preferred Stock - Series A
of Cyanotech Corporation
Dear Board Members:
In response to your request of January 15, 1996, I have examined the
advisability of a voluntary, negotiated exchange of the Common Stock of
Cyanotech Corporation (Cyanotech) or (the Company) for the 1,250,000 outstanding
shares of the 12% Cumulative Preferred Stock - Series A (Series A Preferred) or
(Series A) and I have considered an appropriate exchange rate. I have
considered each question based upon the benefit and fairness, from a financial
standpoint, to the holders of the Common Stock of Cyanotech.
In recognition of your need to promptly commence negotiations, should I have
found such negotiations advisable, I have previously submitted to you on January
17, 1996, a written summary of my preliminary opinion endorsing such action.
The opinion letter herewith provided to you confirms and replaces the summary
findings and contains supporting information that we have discussed and that you
will wish to include in the record.
QUALIFICATIONS OF THE ADVISOR
A summary of my background and experience relevant to this assignment is
attached as Exhibit A.
NO CONFLICT OF INTEREST
I have no direct or indirect financial interest in the Series A Preferred Stock
nor in any other security of Cyanotech. I have had no past business or
financial relationship with the holder of the Series A Preferred Stock, nor have
I any such present or expected future relationship. I have been referred to you
for this assignment by your corporate counsel, Messrs. Goodsill, Anderson, Quinn
& Stifel, with whom I have had past professional contact, but with whom I have
no financial links.
DATABASE
For my analysis, I have reviewed the following documents: (1) the Cyanotech
annual report and SEC Form 10-KSB for the fiscal year ended 3/31/95; (2) the
Cyanotech SEC Forms 10-QSB for the fiscal
<PAGE>
quarters ended 6/30/95 and 9/30/95; (3) the shareholders' Proxy Statement dated
6/26/95; (4) a financial summary of the Cyanotech FYs 1996-2000 business plan,
as prepared 11/15/95; (5) Draft, preliminary SEC Forms SB-2 dated 12/28/95 and
1/12/96, as prepared for the prospective public sale of up to 1,380,000 shares
of Cyanotech Common Stock; (6) the Restated Articles of Incorporation of
Cyanotech Corporation, as filed with the Secretary of State of the State of
Nevada on 4/23/91; and (7) news releases pertaining to Cyanotech issued during
the course of FY 1996, including the news release of 1/24/96 regarding FY 1996
third quarter and nine months' sales and earnings.
In addition, I discussed certain legal matters pertaining to the Series A
Preferred with the Company's counsel, Brobeck, Phleger & Harrison LLP, and I
tracked the daily trading prices, volumes, and other market attributes of the
Cyanotech Common Stock during the course of this assignment.
Without independent verification, I have relied upon the essential accuracy of
financial information contained in the foregoing documents, except that I viewed
the financial business plan from FY 1997 onward more as a set of goals than as a
forecast, in common with the plans of most small businesses pursuing a course of
rapid growth.
SERIES A PREFERRED STOCK
The Series A Preferred Stock is described in the attached Exhibit B.
ANALYSIS AND CONCLUSIONS
The following is a summary of the benefits to the holders of the Common Stock to
be obtained from an exchange of Common Stock for all of the outstanding shares
of the Series A Preferred Stock:
(1) Elimination of the $500,000 liquidation preference, a factor potentially of
value to the common shareholders in event of the sale or liquidation of
Cyanotech;
(2) Elimination of the $655,000 cumulative preferred dividend arrearage (as of
3/31/96), a cash payout requirement preceding payment of dividends to the
holders of the Common Stock and any prospective repurchase of Common Stock;
(3) Elimination of the after-tax $60,000 per annum perpetual future cumulative
dividend requirement, increasing earnings attributable to the Common Stock
by a like annual amount and prospectively increasing near term earnings per
share.
(4) Elimination of the perpetual right of the Series A stockholders to elect
one director, which right can, by operation of certain other provisions
applicable to the Series A stock, carry over to any successor corporation;
(5) Elimination of "Consent" requirements, which give holders of the Series A
the ability to impede, delay or block (a) the sale or merger of Cyanotech,
or (b) the entrance by the Company into certain joint ventures, whether or
not any such action would be in the interest of the holders of the Common
Stock.
The costs of the contemplated exchange to Cyanotech and to the holders of the
Common Stock are the following:
(1) Exchange of Common Stock valued at approximately $2,500,000, based upon an
assumed current market price of $10.00 per share (1/30/96 price range:
$10.25-$8.25; last sale: $8.25; closing bid and ask: $8.375 @ $8.75;
trading volume: 107,400 shares; previous day last sale: $10.25.) and an
exchange rate of 1 share of Common Stock for 5 shares of Series A
Preferred.
(2) A potential long term small percentage dilution in the earnings per share
attributable to the Common Stock. (The current breakeven point on dilution
is $0.24 per share, compared with the proforma earnings per share for FY
1996 of $0.18 contained in the Company's business plan.)
<PAGE>
The potential dilution of earnings per share is not a material factor as (a) the
number of common shares to be exchanged will not exceed 1.58% of the total
outstanding prior to the exchange, and (b) there are no assurances with respect
to future earnings of Cyanotech.
The significant cost is therefore the market value of the Common Stock
exchanged. This cost can be compared with the benefits obtained. Benefits can
be partially quantified. Subject to variations in the beholders' perception of
values, with such variations based in part upon reasonably different points of
view as to the timing of the realization of the benefits, discount rates applied
and other considerations, the nominal value to Cyanotech and its Common
Stockholders of eliminating the Series A Preferred may be as follows:
<TABLE>
<CAPTION>
<S> <C>
Elimination of the Series A liquidation preference $500,000
Elimination of the dividend arrearage 655,000
Elimination of the $60,000 per annum Series A dividend,
discounted to present value @ 12% for 25 years 470,580
Total Nominal Value $1,625,580
Difference between Total Nominal Value of Quantifiable
Benefits and the current market value of the Common Stock
to be exchanged ($874,420)
</TABLE>
In my opinion, of far greater value to the Common Stockholders than the
quantifiable benefits, are the benefits summarized above as items (4) and (5).
The perpetual right of representation through the election of one director by
the Series A Preferred, which may, as a class, have substantially different
interests and objectives than the holders of the Common Stock, is a right
disproportionate to the small economic stake of the Series A class, (as compared
with an assumed $2,500,000 exchange value of the Series A, the Common Stock
represents a proforma market value of approximately $158,750,000.) Through
operation of certain other provisions of the Series A, this right carries over
to any successor to Cyanotech. In the event of a prospective merger or sale of
Cyanotech, the right, with its carryover attribute, could be an impediment to a
transaction otherwise in the interest of the Common Stockholders, or it could be
a deal breaker. Value can be justifiably relinquished by the Common
Stockholders to the Series A holders today, in order to forestall prospectively
far greater cost in the future.
"Consent" requirements, as a whole, also potentially separate the interests of
the Series A and Common Stock, with unknown and unknowable prospective future
cost to the Common. The ramifications of these provisions are complex and need
not be dealt with in depth in this letter. For an example, reference is made to
Exhibit B, CONSENT OF HOLDERS REQUIRED, item (v). This restriction (a) gives
the Series A holders effective veto power over the sale or merger of Cyanotech
to, with or into any other entity, (b) may provide similar power over the sale
of any division or subsidiary of Cyanotech, owned now or in the future, and (c)
would preclude most conceivable joint ventures without Series A consent.
Other than by a transaction such as is contemplated and which is the subject of
this opinion, or by such other transaction voluntarily acceptable to the holders
of the Series A, Cyanotech has no method by which it can eliminate the non-
redeemable, "perpetual" Series A Preferred Stock.
<PAGE>
In the final analysis, as the prospective future perils to the economic
interests of the holders of the Common Stock, represented by potentially
conflicting rights of the holders of the Series A Preferred Stock, while real
and severe, are nonetheless not quantifiable, the benefit and fairness of the
exchange to the holders of the Common Stock is a matter of business judgment.
In my opinion, based upon the information at hand, an exchange of Common stock
for all of the 1,250,000 Series A Preferred Stock is advisable. In my opinion
also, a negotiated exchange rate of up to and including one share of Common
Stock for each five shares of Series A Preferred Stock is appropriate. In my
opinion, the exchange, as advised herein, is both fair and beneficial, from a
financial point of view, to the holders of the Common Stock of Cyanotech
Corporation.
Sincerely,
/s/ Alan R Hoefer
Alan R Hoefer
<PAGE>
EXHIBIT A
Summary: Background and Experience
Education
B.S. University of California at Davis 1955
M.B.A. Harvard Business School 1962
Occupation
Independent investment banker. Investment banking since 1962. Served as
partner or officer of Dean Witter, Smith Barney, Halsey Stuart, and Bache Halsey
Stuart Shields. Founded and managed Hoefer & Arnett, Inc. and two other
specialty broker/dealers engaged in investment banking, research and
institutional brokerage. Presently semi-retired, providing occasional advice
and counsel on matters pertaining to corporate finance, securities and business
strategies.
Transactions
As the sole or primary investment banking professional, participated and advised
in more than one hundred corporate financings, mergers, acquisitions, and sales.
Participated with others in the largest equity financing, the largest tax-exempt
industrial revenue bond financing, and the second largest Chapter XI corporate
reorganization in history at the times of such transactions. Dealt with
virtually all categories of corporate securities, including common and preferred
stocks, convertible securities, secured and unsecured debt and securities
ranging from the highest investment ratings to securities in default.
Fiduciary Responsibility
Served as a director of five public and four closely held corporations (two
currently). Served as a trustee of three non-profit organizations (one
currently).
<PAGE>
CYANOTEK CORPORATION
EXHIBIT B
SERIES A PREFERRED STOCK
Of the 5,000,000 shares of stock authorized to be issued as special or preferred
shares, 1,250,000 shares are Series A Shares. On February 28, 1995, the right
of holders of the Series A Shares to exchange such shares for the Common Stock
of Cyanotek Corporation expired. On that same date, such holder's preemptive
rights also expired. Certain other rights, voting power, preferences,
restrictions and qualifications of the Series A Shares, as defined in the
Restated Articles of Incorporation of Cyanotek Corporation, are as follows:
VOTING POWER. The holders of Series A Shares are entitled to one vote to be
case at stockholder meetings in the election of the one member of the board of
directors that is elected by the holders of the Series A Shares. Holders of
Series A Shares are also entitled to cumulative voting.
DIVIDENDS. The holders of Series A Shares are entitled to an annual dividend
when and as declared by the Company's board of directors if there is surplus or
net profits legally available for dividends and payable quarterly on the first
business day of April, July, October and January of each year. When and if
declared, dividends are at the rate of 12% of the initial issue price of $0.40
per share (that is, $0.048 per share per annum or $0.012 per share per quarter)
and are cumulative. Dividends may be paid to the Series A Shares only when, if
and on the same basis as dividends are paid to the holders of 12% Cumulative,
Convertible Preferred Shares-Series B Shares. Dividends may not be paid in any
year to holders of Common Stock until after the Company shall have paid or
provided for the payment of dividends on all of the Series A Shares including
any amounts that may have been accumulated but undeclared and unpaid for each
year from the date of issuance to and including the year in question.
RIGHTS IN DISSOLUTION AND DISTRIBUTIONS OF ASSETS. Upon liquidation,
dissolution, or winding up of the Company, holders of the Series A Shares are
entitled to receive prior to any distribution to the holders of the Common Stock
a liquidation preference of $0.40 per share plus all dividends declared on such
shares but unpaid less any distribution of assets before any amount shall be
paid in liquidation, dissolution or winding up to the holders of Common Stock.
The Series A Shares are not entitled to any further payment as dividends in
liquidation or otherwise. In the event assets as opposed to cash are
distributed to stockholders, the Series A Shares shall be entitled to receive
prior to any distribution to holders of Common Stock, a liquidation preference
in assets equal to $0.40 per share in distributions of assets and in
liquidation, dissolution or winding up of the Company.
CONSENT OF HOLDERS REQUIRED. So long as the Series A Shares are outstanding,
the Company may not without the prior written consent of the holders of a
majority of the Series A Shares do any of the following: (i) issue or propose
to issue any other shares of the Series A Shares, (ii) sell all or substantially
all of the assets of the corporation or consolidate or merge the Company with
any other corporation (an Acquisition Transaction) unless any securities
exchange for the Series A Shares shall be cumulative, convertible preferred
stock the terms of which are identical in all material respects to the Series A
Shares of the Company; (iii) alter or change the powers, preferences or rights
given the Series A Shares; (iv) enter into any transaction in which the holders
of the Series A Shares would be required to accept cash in exchange for their
shares; or (v) enter into any transaction in which the Company's trade secrets
or proprietary technical information or know how is assigned, sold or made
available to any other entity; however, the Company is not prevented from
entering into contracts to provide research and development to other entities,
on an arms length basis, in the ordinary course of business.
<PAGE>
CYANOTEK CORPORATION
EXHIBIT C
Common Stock
For the purpose of this analysis, the following tabulation of issued and
proforma outstanding Common Stock has been used:
Common Stock outstanding as of 12/31/95 9,807,575 shares
Conversion of Series C Preferred Stock (Proforma) 3,674,885
In-the-money Warrants (Unexercised) 997,000
Proposed New Common Stock Issuance and Sale
including "Green Shoe" 1,380,000
Current Total Proforma Common Shares 15,859,460
Proposed Series A Exchange 250,000
Adjusted Total Proforma Common Shares 16,109,460
<PAGE>
CYANOTECH CORPORATION
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
February 20, 1996, by and between Cyanotech Corporation, a Nevada corporation
(the "Company"), and American Cyanamid Company, a Maine corporation and wholly-
owned subsidiary of American Home Products Corporation ("American Cyanamid").
WHEREAS, American Cyanamid holds 139,946 shares (the "Series C Shares") of
the Company's 8% Cumulative, Convertible Preferred Shares -- Series C, par value
$.001 per share;
WHEREAS, the 139,946 Series C Shares are currently convertible by their
terms into 699,730 shares of the Company's common stock, par value $.005 per
share ("Common Stock");
WHEREAS, the Company is contemplating an underwritten public offering (the
"Contemplated Public Offering") of its common stock (all shares of the Company's
common stock referred to herein as the "Common Stock"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), which Contemplated
Public Offering is expected to occur in late March or early April 1996;
WHEREAS, in connection with the Contemplated Public Offering, American
Cyanamid has agreed to the market stand-off provisions contained herein; and
WHEREAS, the Company has agreed to grant certain "piggy-back" registration
rights to American Cyanamid with respect to its resale of the shares of Common
Stock issuable on conversion of the Series C Shares.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
1.1 DEFINITIONS. For purposes of this Article I:
(a) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in
1.
<PAGE>
compliance with the Securities Act of 1933, as amended (the "Securities
Act"), and the declaration or ordering of effectiveness of such registration
statement or document;
(b) The term "Registrable Securities" means (1) the shares of
Common Stock of the Company issuable or issued upon conversion of the Series C
Shares and (2) any Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right, or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, such shares of Common Stock, excluding in all cases, however,
any Registrable Securities sold by a person in a transaction in which his/her
rights under this Article I are not assigned;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.10 hereof; and
(e) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any comparable or successor form under the
Securities Act subsequently adopted by the Securities and Exchange Commission
("SEC") which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
1.2 COMPANY REGISTRATION. If (but without any obligation to do so
under this Agreement), at any time after the closing of the Contemplated Public
Offering, the Company proposes to register any of its stock or other securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, or a registration on
any form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable Securities), the Company shall, at such time, give each Holder
written notice of such registration at least 20 days prior to the proposed date
to file any registration statement. Upon the written request of each Holder
given within twenty (20) days after mailing of such notice by the Company in
accordance with Section 2.5, the Company shall, subject to the provisions of
Section 1.6, cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered.
1.3 OBLIGATIONS OF THE COMPANY. Whenever required under this
Article I to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
2.
<PAGE>
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective and to remain effective
for a period of not less than 90 days or such shorter period which will
terminate when all Registrable Securities covered by such registration statement
have been sold.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and other applicable laws and regulations with
respect to the disposition of all securities covered by such registration
statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus including all supplements
thereto, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, PROVIDED that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) Use its reasonable best efforts to list for quotation on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) such Registrable Securities.
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement. In addition, all shares registered shall
be distributed substantially in accordance with the plan of distribution as set
forth in the registration statement.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and notice of any stop order issued or threatened by the SEC and to
take all reasonable actions to prevent the entry of such stop order or to remove
it if it is entered.
3.
<PAGE>
(h) If any Registrable Securities are offered for sale, on the
date that the Registrable Securities are delivered to the underwriters, if any,
and if such Registrable Securities are not being sold through underwriters, then
on the date the registration statement becomes effective, the Company shall
furnish the Holder with (A) a signed opinion, dated as of the date of such
delivery, of the legal counsel of the Company addressed to the underwriters, if
any, and if such Registrable Securities are not being sold through underwriters,
then to the Holder covering such matters as are customarily addressed in
opinions rendered to underwriters on such transactions, and (B) a letter, dated
as of the date of such delivery, of the Company's independent public accountants
addressed to the underwriters, and if such Registrable Securities are not being
sold through underwriters, then to the Holder and, if such accountants refuse to
deliver such letter to the Holder, then to the Company (x) stating that they are
independent certified public accountants within the meaning of the Securities
Act and that, in the opinion of such accountants, the financial statements and
other financial data of the Company included in the registration statement or
the prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and (y) covering such other financial matters (including information as to
the period ending not more than five (5) business days prior to the date of such
letter) with respect to the registration in respect of which such letter is
being given as the Holder may reasonably request and as would be customary in
such a transaction.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Article I with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required by law or otherwise to effect the registration of such
Holder's Registrable Securities.
1.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay
all expenses incurred in connection with any registration, filing, or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.2 for each Holder (which right may be assigned as provided
in Section 1.10), including (without limitation) all registration, filing, and
qualification fees, printer's and accounting fees relating thereto, and fees and
disbursements of counsel for the Company, but excluding the fees and
disbursements of legal counsel for the selling Holders if separate legal counsel
is employed and underwriting discounts and commissions relating to Registrable
Securities.
1.6 (a) UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then subject to the
terms set forth below only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount
4.
<PAGE>
of securities, including Registrable Securities, requested by stockholders to
be included in such offering exceeds the amount of securities sold other than
by the Company that the underwriters reasonably believe compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable
Securities, which the underwriters believe will not jeopardize the success of
the offering (the securities so included to be apportioned pro-rata among the
selling stockholders according to the total amount of securities entitled to
be included therein owned by each selling stockholder or in such other
proportions as shall mutually be agreed to by such selling stockholders);
PROVIDED, HOWEVER, that the amount of Registrable Securities and other
securities excluded from the offering may not be reduced to less than forty
percent (40%) of such offering; and further PROVIDED, HOWEVER that American
Cyanamid will be entitled to include in each public offering, if it shall so
elect, no fewer than 110,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events). For purposes of the parenthetical in
the preceding sentence concerning apportionment, for any selling stockholder
which is a Holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and stockholders of such Holder,
or the estates and family members of any such partners and retired partners
and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder," and any pro-rata reduction with
respect to such "selling stockholder" shall be based upon the aggregate
amount of shares carrying registration rights owned by all entities and
individuals included in such "selling stockholder," as defined in this
sentence.
(b) WITHDRAWAL RIGHTS. Each Holder shall be permitted to
withdraw up to 110,000 shares (subject to appropriate adjustment for stock
splits, stock dividends, combinations, other recapitalizations and similar
events) of such Holder's Registrable Securities included in a registration at
any time prior to the effective date of such registration. In addition, to the
extent the number of Registrable Securities being sold by the Holder is greater
than 110,000 shares (subject to appropriate adjustment for stock splits, stock
dividends, combinations, other recapitalizations and similar events) the Holder
can withdraw any such portion above 110,000 shares if, on the date of such
withdrawal, the last reported sale price of the Company's Common Stock on Nasdaq
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) was less than 85% of the proposed maximum
offering price per share listed on the "Calculation of Registration Fee" section
on the cover of the registration statement filed with respect to the Registrable
Securities.
1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article I. This Section 1.7 shall not
affect any remedies at law available to the Holder for breaches of Section
1.6(a) by the Company.
5.
<PAGE>
1.8 INDEMNIFICATION AND CONTRIBUTION. In the event any Registrable
Securities are included in a registration statement under this Article I:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act or the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions, or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act or
the 1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter, or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER,
that the indemnity agreement contained in this subsection 1.8(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter, or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.8(b), in
connection with investigating or defending any such loss, claim, damage,
liability,
6.
<PAGE>
or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 1.8(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain separate counsel in each
jurisdiction where separate representation would be appropriate in the judgment
of the indemnified party, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party to the extent of such prejudice of any liability
to the indemnified party under this Section 1.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 1.8.
(d) No indemnifying party, in the defense of any claim arising
out of a Violation shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or litigation and, in the event the terms of such judgment or settlement
include any term other than the payment by the indemnifying party of money
damages, the indemnifying party shall not so consent or enter into such a
settlement without the consent of each indemnified party (which will not be
unreasonably withheld) whether or not the terms thereof include such a release.
(e) CONTRIBUTION. If for any reason the indemnity provided for
in this Section 1.8 is unavailable to, or is insufficient to hold harmless, an
indemnified party, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and the indemnified party on the other, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, or provides a lesser sum to
the indemnified party than the amount hereinafter calculated, in such proportion
as is
7.
<PAGE>
appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other but
also the relative fault of the indemnifying party and the indemnified party
as well as any other relevant equitable considerations. The relative fault
of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties; and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Section 1.8(d), any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 1.8(e) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
(f) The obligations of the Company and Holders under this
Section 1.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Article I, and otherwise.
1.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees and
covenants to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act;
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Securities Act and the 1934 Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the
8.
<PAGE>
Company with the SEC or any securities exchange, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule
or regulation of the SEC which permits the selling of any such securities
without registration or pursuant to such form; and
(d) provide the Holder with prompt notice of any failure by the
Company to comply with the requirements of Rule 144.
1.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Article I may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds (i) at
least 1% of the Registrable Securities then outstanding (subject to appropriate
adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events), or (ii) all of the shares of Registrable
Securities initially issued to such Holder, PROVIDED that, within a reasonable
time after such transfer, the Company is furnished with written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned; and PROVIDED, FURTHER,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and/or not otherwise eligible
for sale under Rule 144(k) of the Securities Act or similar exemption. For the
purposes of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants, and siblings of such partners or
spouses who acquire Registrable Securities by gift, will, or intestate
succession) shall be aggregated together and with the partnership; PROVIDED that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices, or taking any action under this
Article I.
1.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Article I may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities and the Company.
1.12 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled
to exercise any right provided for in this Article I after February 3, 2005.
9.
<PAGE>
ARTICLE II
MISCELLANEOUS
2.1 MARKET STAND-OFF. American Cyanamid hereby covenants that it
will not, without the prior written consent of Van Kasper & Company (or such
other investment bank that serves as the lead managing underwriter in the
Company's Contemplated Public Offering, which person is referred to herein as
the "Lead Managing Underwriter"), offer, sell, or otherwise dispose of, directly
or indirectly, any shares of the Company's Common Stock, or any securities
convertible into or exercisable or exchangeable for, or any rights to purchase
or acquire, Common Stock owned by it (otherwise than as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by the
terms of this Section 2.1) for the period beginning on the date hereof and
ending on the date one hundred and twenty (120) days after the date of the
closing of the Contemplated Public Offering. If requested by the Lead Managing
Underwriter, American Cyanamid agrees to execute an agreement similar to that
set forth in this Section 2.1 addressed to the Lead Managing Underwriter. The
Company shall be expressly entitled to enforce the provisions of this
Section 2.1 on behalf of the Lead Managing Underwriter. This Section 2.1 shall
be effective only upon the execution of a similar provision by Firemen's
Insurance Company of Newark, NJ.
2.2 SURVIVAL OF WARRANTIES. The warranties, representations, and
covenants of American Cyanamid and the Company contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of American Cyanamid or the Company.
2.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
2.4 EXPENSES. Except as otherwise provided in Article I hereof,
irrespective of whether the Closing is effected, each party shall pay its own
costs and expenses that such party incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement.
2.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
days after deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or
10.
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by facsimile confirmed by such certified or registered mail or at such other
address as such party may designate by ten (10) days' advance written notice
to the other parties.
2.6 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New Jersey.
2.7 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.8 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This writing, together
with any exhibits annexed hereto, constitutes the entire Agreement of the
parties with respect to the subject matter hereof and shall supersede all prior
understandings and writings with respect thereto. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of all the parties hereto.
2.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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2.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Cyanotech Corporation
By: /s/ GERALD R. CYSEWSKI
-----------------------------------------
Name: Gerald R. Cysewski
Title: President & CEO
Address: 73-4460 Queen Kaahumanu Hwy.,
Suite 102
Kailua-Kona, HI 96740
Phone: (808) 326-1353
Fax: (808) 329-3597
American Cyanamid Company
By: /s/ JOHN R. CONSIDINE
-----------------------------------------
Name: John R. Considine
Title: Vice President
Address: Five Giralda Farms
Madison, New Jersey 07940
Attn.: Senior Vice President and
General Counsel
Phone: (201) 660-5000
Fax: (201) 660-7155
12.
