<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 1996
Commission File Number 0-14602
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 91-1206026
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding as of January 31, 1997:
Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 12,693,195
Transitional Small Business Disclosure Format: Yes ; No X
--- ---
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets (unaudited)
December 31, 1996 and March 31, 1996. . . . . . . . . . . 3
Consolidated Statements of Income (unaudited)
Three and nine month periods ended
December 31, 1996 and 1995. . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (unaudited)
Nine month periods ended
December 31, 1996 and 1995. . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (unaudited) . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,349 $ 9,409
Accounts receivable 2,469 1,288
Inventories (note 2) 1,202 494
Prepaid expenses 49 120
----------- -----------
Total current assets 11,069 11,311
Equipment and leasehold improvements, net (note 4) 12,790 8,349
Other assets 206 56
----------- -----------
Total assets $ 24,065 $ 19,716
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 150 $ 150
Current maturities of capital lease obligations 130 126
Accounts payable 811 852
Other accrued liabilities (note 5) 352 434
----------- -----------
Total current liabilities 1,443 1,562
Long-term debt, excluding current maturities 400 513
Obligations under capital leases, excluding
current maturities 234 325
----------- -----------
Total liabilities 2,077 2,400
----------- -----------
Stockholders' equity:
Preferred stock (note 6) 1 1
Common Stock - 12,693,195 shares issued and outstanding
on December 31, 1996 and 11,755,650 shares issued
and outstanding on March 31, 1996 63 59
Additional paid-in capital 23,639 21,876
Accumulated deficit (1,715) (4,620)
----------- -----------
Total stockholders' equity 21,988 17,316
----------- -----------
Total liabilities and stockholders' equity $ 24,065 $ 19,716
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $2,782 $2,348 $8,049 $5,972
COST OF PRODUCT SALES 1,051 1,050 3,108 2,784
-------- -------- -------- --------
Gross Profit 1,731 1,298 4,941 3,188
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 121 85 454 243
General and administrative 367 341 1,063 862
Sales and marketing 255 130 669 302
-------- -------- -------- --------
Total operating expenses 743 556 2,186 1,407
-------- -------- -------- --------
Income from operations 988 742 2,755 1,781
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 153 9 377 19
Interest expense (17) (32) (61) (63)
Other income, net 7 - 9 -
-------- -------- -------- --------
Total other income (expense) 143 (23) 325 (44)
-------- -------- -------- --------
Income before income taxes 1,131 719 3,080 1,737
Income taxes 175 8 175 8
-------- -------- -------- --------
NET INCOME $956 $711 $2,905 $1,729
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER COMMON SHARE $0.06 $0.05 $0.18 $0.12
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common
shares outstanding and
common stock equivalents (note 3) 16,662 14,831 16,573 14,702
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,905 $1,729
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 506 356
Common stock issued for services 37 -
Net (increase) decrease in:
Accounts receivable (1,181) (643)
Inventories (708) 100
Prepaid expenses and other assets (79) (45)
Net increase (decrease) in:
Accounts payable (41) 71
Other accrued liabilities (82) 142
---------- ----------
Net cash provided by operating activities 1,357 1,710
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in equipment and leasehold improvements (4,947) (2,622)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,398 -
Net proceeds from exercise of warrants and options 332 538
Proceeds from issuance of long-term debt - 750
Principal payments on capital lease obligations (87) (64)
Principal payments on long-term debt (113) (32)
---------- ----------
Net cash provided by financing activities 1,530 1,192
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,060) 280
Cash and cash equivalents at beginning of period 9,409 496
---------- ----------
Cash and cash equivalents at end of period $7,349 $776
---------- ----------
---------- ----------
Supplemental schedule of noncash investing and
financing activities:
Purchase of equipment under
capital lease obligation - $303
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements and notes should
be read in conjunction with the Company's financial statements contained in
the Company's previously filed report on Form 10-KSB for the year ended
March 31, 1996.
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. While the financial
information furnished for the three and nine month periods ended
December 31, 1996 is unaudited, the statements in this report reflect all
material items which, in the opinion of management, are necessary for a
fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the dates of the
consolidated balance sheets. The operating results for the interim period
presented are not necessarily indicative of the results that may be
expected for the year ending March 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly
from those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market and consist of the following (dollars in thousands):
December 31, March 31,
1996 1996
----------- -----------
Raw materials $ 129 $ 73
Work in process 277 200
Finished goods 658 105
Supplies 138 116
----------- -----------
$ 1,202 $ 494
----------- -----------
----------- -----------
6
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
3. NET INCOME PER COMMON SHARE INFORMATION
Net income per common share for the three and nine month periods ended
December 31, 1996 and 1995 is computed based on net income after preferred
stock dividend requirements and the weighted average number of common
shares outstanding during the period, adjusted to reflect the assumed
exercise of outstanding stock options and warrants and the conversion of
preferred stock to the extent these items have a dilutive effect on the
computation. Primary and fully diluted net income per share herein are the
same.
4. 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 the
minimum lease payments or fair value at the inception of the lease.
Equipment and furniture and fixtures are depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements and equipment under capital lease are amortized using the
straight-line method over the remaining term of the lease. Equipment and
leasehold improvements consist of the following (dollars in thousands):
December 31, March 31,
1996 1996
----------- -----------
Equipment $ 5,269 $ 3,538
Leasehold improvements 10,120 6,815
Furniture and fixtures 64 36
Equipment under capital lease 602 602
----------- -----------
16,055 10,991
Less accumulated depreciation
and amortization (3,544) (3,038)
Construction in-progress 279 396
Equipment and leasehold improvements, net $ 12,790 $ 8,349
----------- -----------
----------- -----------
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities as of December 31, 1996 and March 31, 1996
consist of the following (dollars in thousands):
December 31, March 31,
1996 1996
----------- -----------
Accrued payroll and related benefits $ 263 $ 341
Accrued directors' fees 30 30
Other accrued expenses 59 63
----------- -----------
$ 352 $ 434
----------- -----------
----------- -----------
7
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. PREFERRED STOCK
Preferred stock as of December 31, 1996 and March 31, 1996 consists of the
following (dollars in thousands):
December 31, March 31,
1996 1996
----------- -----------
Preferred stock, authorized 5,000,000
shares; $.001 par value, issued
and outstanding:
Series C, 8% cumulative, convertible;
734,977 shares on December 31 and
March 31, 1996; liquidation value
$5.00 per share plus unpaid
accumulated dividends $ 1 $ 1
----------- -----------
----------- -----------
7. ACCOUNTING CHANGES
LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board
(FASB) 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 (undiscounted and without interest charges) 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 Company adopted the provisions of SFAS No. 121 effective April 1, 1996.
The adoption of SFAS No. 121 did not have a material effect on the
Company's financial condition or results of operations.
STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation, but does not
require an entity to adopt the new method for purposes of preparing its
basic financial statements. For entities not adopting the new method, SFAS
No. 123 requires footnote disclosure of pro forma net income and earnings
per share information as if the fair value based method had been adopted.
The disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
will comply with the disclosure requirements of SFAS No. 123 in its
consolidated financial statements as of and for the year ending March 31,
1997.
8
<PAGE>
CYANOTECH CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS REGARDING
THE FUTURE PERFORMANCE OF THE COMPANY AND FUTURE EVENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
STATEMENTS CONTAINED HEREIN. THIS DOCUMENT, AND THE OTHER DOCUMENTS THAT THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
SUCH AS ITS REPORTS ON FORM 10-KSB, FORM 10-QSB, FORM 8-KSB, AND ITS PROXY
MATERIALS, CONTAIN ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER FROM THE COMPANY'S CURRENT EXPECTATIONS AND THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.
Substantially all of the Company's resources are currently dedicated to the
production of SPIRULINA PACIFICA, a beta carotene-rich 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
sixty-seven algae culture ponds (aggregating approximately sixty acres as of
December 31, 1996) approximately every week, on average.
In early November, 1996, the Company increased its total pond area from
forty acres to sixty acres, resulting in a 50% increase in production capacity.
As a result of increasing competition and downward pricing pressure in certain
market areas from lower cost/quality Asian spirulina producers, the Company was
unable to realize a corresponding increase in net sales of bulk Spirulina powder
and tablets, and ended the third quarter with approximately six weeks of
Spirulina production in inventory. Although there can be no assurance in this
regard, the Company expects to sell this inventory and the additional output
from these new ponds 1) to new customers, 2) in new markets/geographic areas
and, to a lesser extent, 3) to its existing customers. In future periods, the
Company may need to further reduce the selling prices of its SPIRULINA PACIFICA
products in order to maintain and increase its market share. The Company
believes that it will continue to realize further per unit production cost
reductions as a result of economies of scale and production process changes, and
that such production cost reductions may partially or wholly offset any possible
future selling price decreases, although there can be no assurance in this
regard.
The Company is moving forward on its astaxanthin product with construction
having begun in October 1996 on a new 3200-square foot astaxanthin processing
plant. The Company expects to complete the astaxanthin processing plant by the
end of February 1997 and be in full commercial production with six acres of pond
area by the end of March 1997. In addition, the Company is continuing work on a
genetically-engineered mosquitocide. 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.
9
<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:
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of product sales 37.8 44.7 38.6 46.6
------ ------ ------ ------
Gross profit 62.2 55.3 61.4 53.4
------ ------ ------ ------
------ ------ ------ ------
Operating expenses:
Research and development 4.3 3.6 5.7 4.1
General and administrative 13.2 14.5 13.2 14.4
Sales and marketing 9.2 5.6 8.3 5.1
------ ------ ------ ------
Total operating expenses 26.7 23.7 27.2 23.6
------ ------ ------ ------
Income from operations 35.5 31.6 34.2 29.8
------ ------ ------ ------
Other income (expense):
Interest income 5.5 0.4 4.7 0.3
Interest expense (0.4) (1.4) (0.7) (1.0)
------ ------ ------ ------
Total other income (expense) 5.1 (1.0) 4.0 (0.7)
------ ------ ------ ------
Income before income taxes 40.6 30.6 38.2 29.1
------ ------ ------ ------
Income taxes ( 6.2) ( 0.3) (2.1) (0.1)
------ ------ ------ ------
Net income 34.4% 30.3% 36.1% 29.0%
------ ------ ------ ------
------ ------ ------ ------
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
NET SALES
Net sales for the three month period ended December 31, 1996 increased 18%
to $2,782,000 from the $2,348,000 reported for the three month period ended
December 31, 1995. This increase is attributable to significantly higher
production and sales of packaged consumer products, which carry a higher sales
price than bulk Spirulina Pacifica products. The increase in sales of packaged
consumer products was partially offset by lower net sales of bulk Spirulina
powder and tablets. Compared to the prior year third quarter, the Company
shipped greater quantities of bulk Spirulina powder and tablets but, because of
the decreases in the average selling prices, recorded lower net sales of these
products. The increased production is a result of the Spirulina production
expansions that were completed in December of 1995 and February and November of
1996.
10
<PAGE>
International sales represented 71% and 51% of total net sales for the
three month period ended December 31, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 54% and 32% of Cyanotech's net sales in the
third quarter of fiscal 1997 and 1996, 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, primarily in mainland
China. The Company anticipates that sales of Spirulina to this customer will
continue to represent a significant portion of the Company's total net sales
during the current calendar year.
GROSS PROFIT
Gross profit increased 33% to $1,731,000 for the three month period ended
December 31, 1996, from $1,298,000 in the comparable period of fiscal 1996. The
Company's gross margin increased to 62% for the three month period ended
December 31, 1996 compared to 55% for the comparable period of fiscal 1996.
This increase in gross margin from the prior year period is primarily
attributable to increased economies of scale related to the production of
packaged consumer SPIRULINA PACIFICA products.
OPERATING EXPENSES
Operating expenses were $743,000 during the three month period ended
December 31, 1996, an increase of 34% from $556,000 in the comparable period of
fiscal 1996, and represented 27% of net sales compared to 24% of net sales for
the three months ended December 31, 1995. This increase as a percentage of net
sales is attributable to higher expenses in all areas.
RESEARCH AND DEVELOPMENT. Expenditures for research and development
were $121,000 for the three month period ended December 31, 1996, an increase of
42% from $85,000 for the comparable period of fiscal 1996. This increase from
the prior year was primarily the result of the research work being done on the
natural astaxanthin product which has been in pilot production since January of
1996. Research and development costs are expected to increase further during
fiscal 1997 and through fiscal 1998 as the Company continues work on
commercializing the astaxanthin product and the mosquitocidal microalgae
product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $367,000 for the three month period ended December 31, 1996, an increase of
8% from $341,000 for the comparable period of fiscal 1996. This increase from
the prior year was due to higher payroll costs, the payment of associate
incentive bonuses indexed to the Company's profitability during the third
quarter, higher insurance costs, and estimated compensation expense associated
with expected future grants of Common Stock to non-employee directors. However,
general and administrative expenses as a percentage of net sales decreased to
13.2% for the three month period ended December 31, 1996 from 14.5% for the
comparable period of fiscal 1996.
SALES AND MARKETING. Sales and marketing expenses increased to
$255,000 for the three month period ended December 31, 1996, an increase of 96%
from $130,000 for the comparable period of fiscal 1996. This increase from the
prior year was due to higher payroll, travel, advertising and promotion costs
related to increased domestic and international marketing efforts.
11
<PAGE>
NET INCOME
The Company recorded $245,000 more net income for the third quarter of
fiscal 1997 than for the comparable period of fiscal 1996. This increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer SPIRULINA PACIFICA products and increased sales of packaged
consumer products.
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
NET SALES
Net sales for the nine month period ended December 31, 1996 increased 35%
to $8,049,000 from $5,972,000 for the comparable period of fiscal 1996. This
increase is attributable to significantly higher production and sales of bulk
Spirulina powder and tablets and increased sales of packaged consumer products,
which carry a higher sales price than bulk SPIRULINA PACIFICA products. The
increased production is a result of the Spirulina production expansions that
were completed in December of 1995 and February and November of
1996.
International sales represented 63% and 56% of total net sales for the nine
month period ended December 31, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 39% and 23% of Cyanotech's net sales in the
first nine months of fiscal 1997 and 1996, 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, primarily in
mainland China. The Company anticipates that sales of Spirulina to this
customer will continue to represent a significant portion of the Company's total
net sales during the current calendar year.
GROSS PROFIT
Gross profit increased 55% to $4,941,000 for the nine month period ended
December 31, 1996 from $3,188,000 in the comparable period of fiscal 1996. The
Company's gross margin increased to 61% for the nine month period ended December
31, 1996 compared to 53% for the comparable period of fiscal 1996. This
increase in gross margin from the prior year period is attributable to increased
economies of scale related to the production of both bulk and packaged consumer
SPIRULINA PACIFICA products.
OPERATING EXPENSES
Operating expenses were $2,186,000 during the nine month period ended
December 31, 1996, an increase of 55% from $1,407,000 in the comparable period
of fiscal 1996, and represented 27% of net sales for the nine month period ended
December 31, 1996 compared to 24% of net sales for the nine month period ended
December 31, 1995. This increase as a percentage of net sales is attributable
to higher expenses in all areas.
12
<PAGE>
RESEARCH AND DEVELOPMENT. Expenditures for research and development
were $454,000 for the nine month period ended December 31, 1996, an increase of
87% from $243,000 for the comparable period of fiscal 1996. This increase from
the prior year was primarily the result of the research work being done on the
natural astaxanthin product which has been in pilot production since January of
1996. Research and development costs are expected to increase further during
fiscal 1997 and through fiscal 1998 as the Company continues work on
commercializing the astaxanthin product and the mosquitocidal microalgae
product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $1,063,000 for the nine month period ended December 31, 1996, an increase of
23% from $862,000 for the comparable period of fiscal 1996. This increase from
the prior year was due to higher payroll costs, the payment of associate
incentive bonuses indexed to the Company's profitability during the first nine
months of fiscal 1997, higher insurance costs, and estimated compensation
expense associated with expected future grants of Common Stock to non-employee
directors. However, general and administrative expenses as a percentage of net
sales decreased to 13.2% for the nine month period ended December 31, 1996 from
14.4% for the comparable period of fiscal 1996.
SALES AND MARKETING. Sales and marketing expenses increased to
$669,000 for the nine month period ended December 31, 1996, an increase of 122%
from $302,000 for the comparable period of fiscal 1996. This increase from the
prior year was due to higher payroll, travel, advertising and promotion costs
related to increased domestic and international marketing efforts.
NET INCOME
The Company recorded $1,176,000 more net income for the first nine months
of fiscal 1997 than for the comparable period of fiscal 1996. This increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer SPIRULINA PACIFICA products, significantly higher sales of
packaged consumer products and, to a lesser extent, increased production and
sales of bulk Spirulina powder and tablets.
VARIABILITY OF RESULTS
The Company was formed in 1983 and did not become profitable on an annual
basis until fiscal 1992. As of December 31, 1996, the Company's accumulated
deficit was $1.7 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 financial condition
and results of operations.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $119,000 during the first nine
months of fiscal 1997 to $9,630,000 while its cash and cash equivalents balance
decreased by $2,060,000 during the first nine months of fiscal 1997 to
$7,349,000. The major sources of cash other than that provided by operating
activities during the nine month period ended December 31, 1996 were:
$1,398,000 in net proceeds from the sale of 225,000 shares of common stock to
the underwriters and $332,000 from the exercise of common stock warrants and
options. The major uses of cash during the first nine months of fiscal 1997
were: $4,947,000 invested in capital equipment and leasehold improvements
(including process enhancements, a 20-acre capacity expansion project and
construction of an astaxanthin production facility), $1,181,000 in additional
accounts receivable and $708,000 in increased inventory balances. The Company
believes that its existing cash balances, together with cash expected to be
provided by operations, will provide adequate funding for its financial
requirements, during the remainder of fiscal 1997 and throughout fiscal 1998. As
of December 31, 1996, the Company has commitments for capital expenditures
totaling $1,237,000. As of the date of this report, the Company has available a
$1 million bank line of credit secured by a time deposit.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished with this report:
Exhibit 3.1 - Restated Articles of Incorporation
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYANOTECH CORPORATION (Registrant)
February 13, 1997 By: /s/ Gerald R. Cysewski
- ---------------- ------------------------------
(Date) Gerald R. Cysewski
Chairman of the Board,
President and Chief Executive Officer
By: /s/ Ronald P. Scott
------------------------------
Ronald P. Scott
Executive Vice President - Finance &
Administration
(Principal Financial and
Accounting Officer)
16
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EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
CYANOTECH CORPORATION
The undersigned President and Secretary of Cyanotech Corporation restate
the Articles of Incorporation of Cyanotech Corporation as follows:
ARTICLE I
NAME: The name of the corporation is Cyanotech Corporation.
ARTICLE II
REGISTERED OFFICE AND AGENT: The address of the corporation's principal
office in Nevada is One East First Street, Reno, NV 89501. The agent for
service of process at that address will be The Corporation Trust Company of
Nevada.
ARTICLE III
PURPOSE: The purposes for which the corporation is organized are to engage
in any activity or business not in conflict with the laws of the State of Nevada
or of the United States of America, and without limiting the generality of the
foregoing, specifically:
1. To have and to exercise all the powers now or hereafter conferred by
the laws of the State of Nevada upon corporations organized pursuant to the laws
under which the corporation is organized and any and all acts amendatory thereof
and supplemental thereto.
2. To discount and negotiate promissory notes, drafts, bills of exchange,
and other evidence of debts, and to collect for others money due them on notes,
checks, drafts, bills of exchange, commercial paper and other evidence of
indebtedness.
3. To purchase or otherwise acquire, own, hold, lease, sell, exchange,
assign, transfer, mortgage, pledge, or otherwise dispose of, to guaranty, to
invest, trade, and deal in and with personal property of every class and
description.
4. To enter into any kind of contract of agreement, cooperative or profit
sharing plan with its officers or employees that the corporation may deem
advantageous or expedient or otherwise to reward or pay such persons for their
services as the directors
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may deem fit.
5. To purchase, lease, or otherwise acquire, in whole or in part, the
business, the good will, rights, franchises and property of every kind, and to
undertake the whole or any part of the assets or liabilities, or any person,
firm, association, non-profit or profit corporation, or own property necessary
or suitable for its purposes, and to pay the same in cash, in the stocks or
bonds of this company or otherwise, to hold or in any manner dispose of the
whole or any part of the business or property so acquired and to exercise all of
the powers necessary or incidental to the conduct of such business.
6. To lend or borrow money and to negotiate and make loans, either on its
own account or as agent or broker for others.
7. To enter into, make, perform and carry out contracts of every kind and
for any lawful purpose, without limit as to amount, with any person, firm,
association, cooperative, profit or non-profit corporation, municipality, state
or government or any subdivision, district or department thereof.
8. To buy, sell, exchange, negotiate, or otherwise deal in, or
hypothecate securities, stocks, bonds, debentures, mortgages, notes or other
collateral or securities, created or issued by any corporation wherever
organized, including this corporation, within such limits as may be provided by
law, and while owner of any such stocks or other collateral to exercise all
rights, powers and privileges of ownership, including the right to vote the
same; to subscribe for stock in any corporation to be organized, other than to
promote the organization thereof.
9. To purchase or otherwise acquire, own, hold, lease, sell, exchange,
assign, transfer, mortgage, pledge, license or otherwise dispose of any letters,
patents, copyrights, or trademarks of every class and description.
10. To do any and all other such acts, things, business or businesses in
any manner connected with or necessary, incidental, convenient or auxiliary to
do any of these objects hereinbefore enumerated, or calculated, directly or
indirectly, to promote the interest of the corporation; and in carrying on its
purposes, or for the purpose of obtaining or furthering any of its business, to
do any and all acts and things, and to exercise any and all other powers which a
co-partner or natural person could do or exercise, and which now or hereafter
may be authorized by law, and here and in any other part of the world.
11. The several clauses contained in this statement of powers shall be
construed as both purposes and powers, and the statements contained in each of
these clauses shall be in no way limited or restricted, by reference to or
inference from, the terms of any
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other clauses, but shall be regarded as independent purposes and powers; and no
recitations, expression or declaration of specific or special powers or purposes
herein enumerated shall be deemed to be exclusive; but it is hereby expressly
declared that all other lawful powers not inconsistent herewith, are hereby
included.
ARTICLE V
STOCK: GENERAL PROVISIONS.
The Corporation shall have the authority to issue thirty million
(30,000,000) shares of stock. Of these shares, twenty-five million (25,000,000)
shares shall be common stock, par value $.005, having a total par value of
$125,000, and five million (5,000,000) shares shall be special or preferred
stock, par value $.001, having a total par value of $5,000. Each common share
issued pursuant to this paragraph shall be fully paid and nonassessable.
Except as provided herein with respect to the 12% Cumulative, Convertible
Preferred Shares - Series A, no holder of shares of common, special or
preferred stock of the corporation shall be entitled, as such, to any preemptive
or preferential rights to subscribe to any unissued stock or any other
securities which the corporation may now or hereafter be authorized to issue.
The board of directors of the corporation may however, at its discretion, by
resolution determine that any unissued securities of the corporation shall be
offered for subscription solely to the holders of common, special or preferred
stock of the corporation or solely to the holders of any class or classes of
such stock, in such proportions based on stock ownership as said board at its
discretion may determine.
Each share of common stock shall be entitled to one vote at shareholders
meetings, either in person or by proxy, except with respect to the election of
the one member of the board of directors designated as the member to be elected
by holders of 12% Cumulative, Convertible Preferred Shares - Series A. Shares
of common stock shall have no vote in the election of the one director nominated
by holders of 12% Cumulative, Convertible Preferred Shares - Series A. Shares
of 12% Cumulative, Convertible Preferred Shares - Series A shall have no vote
except that each such share shall be entitled to one vote at shareholders
meetings with respect to the election of the one member of the board of
directors designated to be elected by holders of 12% Cumulative, Convertible
Preferred Shares - Series A. Cumulative voting in elections of directors and
all other matters brought before stockholders meetings, whether they be annual
or special, shall not be permitted.
The board of directors is authorized to fix and determine the rights,
conditions, restrictions, preferences, designations, limitations, and other
terms of special or preferred stock by resolution, either in the resolution
that provides for issuance of special or
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preferred stock or in another resolution, including, without limitation, the
following:
Whether the stock to be issued will be one or more series of a class of
stock;
Voting powers or lack thereof;
Whether the stock to be issued will be subject to redemption and the time
or times and price or prices thereof;
Dividends and the conditions, times, and rates thereof, whether payable in
preference to or in relation to dividends payable on any other series or
class or classes of stock and whether cumulative or non-cumulative;
Rights upon dissolution or upon any distribution of the assets of the
corporation;
Whether the stock may be convertible into or exchangeable for shares of any
other class or classes or of any other series of the same or any other
class or classes of stock of the corporation; and
Whether the stock shall have preemptive rights and the terms and conditions
thereof,
together with such other designations, preferences, and relative, participating,
optional or any special rights, qualifications, limitations, or restrictions
thereof as the board of directors may determine.
12% CUMULATIVE, CONVERTIBLE PREFERRED SHARES - SERIES A. Of the five
million shares of stock authorized to be issued as special or preferred shares,
1,250,000 shares are hereby designated as "12% Cumulative, Convertible Preferred
Shares - Series A".
The rights, voting power, preferences, restrictions, and qualifications of
12% Cumulative, Convertible Preferred Shares - Series A are as follows:
A. VOTING POWER. Each share of 12% Cumulative, Convertible Preferred
Shares - Series A shall be entitled to one vote to be cast at stockholder
meetings in the election of the one member of the board of directors that is
elected by holders of 12% Cumulative, Convertible Preferred Shares - Series A.
Cumulative voting shall not be permitted by such holders.
B. DIVIDENDS. The holders of 12% Cumulative, Convertible Preferred
Shares - Series A shall be entitled to an annual dividend when and as declared
by the board of directors if there is surplus or net profits legally available
for dividends and payable
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quarterly on the first business day of April, July, October, and January of each
year. When and if declared, dividends shall be at the rate of 12 per cent of
the initial issue price of 40 cents per share (that is, 4.8 cents per share per
annum or 1.2 cents per share per quarter) and shall be cumulative. Dividends
may be paid to 12% Cumulative, Convertible Preferred Shares - Series A only
when, if, and on the same basis as dividends are paid to 12% Cumulative,
Convertible Preferred Shares - Series B. Dividends may not be paid in any year
to holders of common stock until after the corporation shall have paid or
provided for the payment of dividends on all 12% Cumulative, Convertible
Preferred Shares - Series A 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. Holders of 12% Cumulative, Convertible
Preferred Shares - Series A shall not be entitled to any cash dividend other
than as provided in this paragraph B.
C. CONVERSION. Until February 28, 1995, holders of 12% Cumulative,
Convertible Preferred Shares - Series A may exchange such shares for common
shares at the rate of one share for one share by tendering to the corporation
such shares of 12% Cumulative, Convertible Preferred Shares - Series A. Such
rate of exchange is subject to adjustment as set forth in paragraph H below.
After February 28, 1995, 12% Cumulative, Convertible Preferred Shares - Series A
may not be exchanged for common shares.
D. RIGHTS IN DISSOLUTION AND DISTRIBUTIONS OF ASSETS. Upon liquidation,
dissolution, or winding up of the corporation, holders of 12% Cumulative,
Convertible Preferred Shares - Series A shall be entitled to receive prior to
any distribution to holders of common stock a liquidation preference of 40 cents
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. Holders of 12%
Cumulative, Convertible Preferred Shares - Series A shall not be entitled to any
further payment as dividends in liquidation or otherwise. In the event assets
as opposed to cash are distributed to shareholders, holders of 12% Cumulative,
Convertible Preferred Shares - Series A shall be entitled to receive prior to
any distribution to holders of common stock a liquidation preference in assets
equal to 40 cents per share in distributions of assets and in liquidation,
dissolution or winding up of the corporation.
E. PRE-EMPTIVE RIGHTS. Each holders of 12% Cumulative, Convertible
Preferred Shares - Series A shall have preemptive rights to acquire additional
shares of stock which may be issued by this corporation, as follows:
1. Before any unissued shares (at any time authorized) of this
corporation are offered for sale or otherwise disposed of, the holders of 12%
Cumulative, Convertible Preferred Shares - Series A shall have the first right
to purchase such shares ("preempted shares"). Each such holder shall be
entitled to purchase a percentage of such preempted shares equal to the
percentage he or she owns of all shares then outstanding,
<PAGE>
such percentage to be calculated as if each such holder had fully converted his
or her 12% Cumulative, Convertible Preferred Shares - Series A immediately prior
to such issuance, or such lessor number of the preempted shares as the holder
elects to purchase. Such allocation of shares shall be subject to adjustments
as determined by the board of directors which are necessary to avoid the issue
of fractional shares.
2. The purchase of preempted shares by existing holders of 12%
Cumulative, Convertible Preferred Shares - Series A shall be on terms and
conditions, including purchase price, not less favorable than those under which
it is proposed that such shares be offered for sale or otherwise disposed of to
others.
3. Written notice shall be given shall be given (sic) to each holder
of 12% Cumulative, Convertible Preferred Shares - Series A of a proposal for the
sale or other disposition of the preempted shares, which notice shall set forth
the sale or other disposition. The preemptive rights of any such holders shall
be deemed waived as follows:
a. If the holder at any time agrees in writing to waive his or
her rights as to any specific preempted shares, the waiver
shall be deemed effective as to those shares;
b. If, within 30 days after the written notice is mailed by
certified mailed (sic), postage prepaid, to a holder as
provided in this paragraph E, such holder does not agree in
writing to purchase some or all of the preempted shares he
or she is entitled to purchase, the waiver shall be deemed
effective as to those shares such holder has not agreed to
purchase.
4. If there is a waiver of rights under paragraph E, the corporation
may during the 60 days immediately following such waiver sell the shares to
which such waiver pertains to anyone at a price to the purchaser of not less
than the price set forth in the notice, and otherwise on terms and conditions
not less favorable to the corporation than those set forth in such notice, but
the corporation may pay, or there may be deducted from such price, such
reasonable compensation to underwriters or dealers as may be lawfully paid by
the corporation.
5. If it is proposed to dispose of preempted shares for property
other than cash, including without limitation, dispositions in connection with
mergers or consolidations, acquisitions of assets or outstanding securities of
another corporation, or other reorganizations, the per share price to the
shareholders hereunder shall be the pro rata portion of the fair market value of
such property, as such value is set in good faith by the board of directors.
<PAGE>
6. Notices shall be deemed given hereunder when mailed, postage
prepaid, to either the last known address of a holder of 12% Cumulative,
Convertible Preferred Shares - Series A or the latest address provided by such
holder and shown on the corporation's stock records for such holder.
7. There shall exist no preemptive rights with respect to shares
issued:
a. to satisfy the obligations of the corporation upon exercise of
warrants or options heretofore (April 21, 1985) issued;
b. to satisfy the obligations of the corporation in connection with
present and future employee stock option plans and incentive
stock option plans not to exceed five percent of authorized
shares;
c. to purchasers of shares registered or to be registered pursuant
to section 12 of the Securities Exchange Act of 1934 (15 U.S.
sec. 78 l) provided holder has been given at least 60 days
written notice of such offering and been given the opportunity to
include, at no cost to holder, at least 15 percent of holder's
shares of common stock in such registered offering; or,
d. to satisfy the company's obligations upon the exercise of
warrants or options issued to investment bankers or other parties
not affiliated with the corporation as compensation in connection
with a registered public offering of securities of the
corporation.
8. There shall exist no preemptive rights with respect to shares of
this corporation except as provided in this paragraph E.
9. Preemptive rights for holders of 12% Cumulative, Convertible
Preferred Shares - Series A shall terminate on February 28, 1995.
F. CONSENT OF HOLDERS REQUIRED. So long as any shares of 12% Cumulative,
Convertible Preferred Shares - Series A are outstanding, the corporation shall
not without the prior written consent of the holders of a majority of the 12%
Cumulative, Convertible Preferred Stock - Series A:
1. Issue or propose to issue any other shares of 12% Cumulative,
Convertible Preferred Shares - Series A;
2. Sell all or substantially all of the assets of the corporation or
consolidate or merge the corporation with any other corporation (an "Acquisition
<PAGE>
Transaction") unless any securities exchange for 12% Cumulative, Convertible
Preferred Shares - Series A shall be cumulative, convertible preferred stock the
terms of which are identical in all material respect to the 12% Cumulative
Convertible Preferred Shares - Series A of the corporation;
3. Alter or change the powers, preferences or rights given to the
12% Cumulative, Convertible Preferred Shares - Series A;
4. Enter into any transaction in which the holders of the 12%
Cumulative, Convertible Preferred Shares - Series A would be required to accept
cash in exchange for their shares;
5. Enter into any transaction in which the corporation's trade
secrets or proprietary technical information or know how is assigned, sold or
made available to any other entity, provided this subparagraph (5) shall not be
construed to prevent the corporation from entering into contracts to provide
research and development to other entities, on an arms length basis, in the
ordinary course of business;
G. STOCK FULLY PAID; RESERVATION OF SHARES. All shares of common stock
which may be issued upon the exercise of the right of conversion of 12%
Cumulative, Convertible Preferred Shares - Series A (the "conversion right")
will, upon issuance, be fully paid, nonassessable, and free from all taxes,
liens and charges with respect to issuance. During the period within which the
conversion right may be exercised, the corporation will at all times have
authorized and reserved for the purpose of issue a sufficient number of shares
of common stock to provide for the exercise of the conversion right.
H. ADJUSTMENT OF NUMBER OF SHARES. Upon the happening of certain events,
the number and kind of securities for which 12% Cumulative, Convertible
Preferred Shares - Series A may be exchanged pursuant to paragraph C shall be
subject to adjustment from time to time as follows:
1. RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any
reclassification or change of outstanding common shares issuable upon exercise
of the conversion right (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any consolidation or merger of the corporation
with or into another corporation (other than a merger with another corporation
in which the corporation is the surviving corporation and which does not result
in any reclassification or change--other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination--or outstanding common shares issuable upon exercise
of the conversion right), or in case of any sale or transfer to another
<PAGE>
corporation of the property of the corporation as an entirety or substantially
as an entirety, the corporation, as the case may be, shall, without payment of
any additional consideration therefor, issue new 12% Cumulative, Convertible
Preferred Shares - Series A that provide that the holder of 12% Cumulative
Convertible Preferred Shares - Series A shall have the right to exchange such
shares for such new 12% Cumulative, Convertible Preferred Shares - Series A.
Such new shares shall provide conversion rights and other rights, privileges,
and preferences substantially identical to those provided herein. They shall
also provide that, upon such exercise of the conversion right, the holder may
procure in lieu of each share of common stock theretofore issuable upon
conversion the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change, consolidation, merger,
sale or transfer. Such new 12% Cumulative, Convertible Preferred Shares -
Series A shall provide for adjustments which shall be nearly equivalent as may
be practicable to the adjustments provided for in this paragraph H. The
provisions of this subparagraph (1) shall similarly apply to successive
reclassification, changes, consolidations, mergers, sales and transfers.
2. SUBDIVISION OR COMBINATION OF SHARES. If the corporation, at any
time while the conversion right is effective shall subdivide or combine its
common shares, the number of common shares for which 12% Cumulative, Convertible
Preferred Shares - Series A may be exchanged shall be proportionately increased,
in case of subdivision of shares, as at the effective date of such subdivision,
or if the corporation shall take a record of holders of its common shares for
the purpose of so subdividing as at such record date, whichever is earlier, or
shall be proportionately decreased, in the case of combination of shares, as at
the effective date of such combination or, if the corporation shall take a
record of holders of its common shares for the purpose of so combining, as at
such record date, whichever is earlier.
3. STOCK DIVIDENDS AND DISTRIBUTION. If the corporation, at any
time while the conversion right remains effective, shall pay a dividend payable
in, or make any other distribution of, common shares, there shall be an
adjustment in the number of shares issuable upon exercise of the conversion
right which shall equal the number of shares issued pursuant to such dividend or
distribution as if the holder had exercised his conversion right immediately
prior to the record date used for such dividend or distribution.
4. ISSUANCE OF ADDITIONAL SHARES OF COMMON. If the corporation, at
any time while the Conversion Right remains effective, shall issue any
Additional Shares of Common (otherwise than as provided in the foregoing
subparagraph 3 of this paragraph H), at a price per share less than 40 cents or
without consideration, then the number of shares of Common issuable upon
exercise of the Conversion Right shall be adjusted as follows:
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a. It shall be assumed for purposes of this adjustment that the
Conversion Right is based upon a Conversion Price of 40 cents per
each share of Common (the "Conversion Price") and that each share
of 12% Cumulative, Convertible Preferred Shares - Series A shall
have a value of 40 cents;
b. Upon each such issuance of Additional Shares, the Conversion
Price shall be reduced to that price determined by multiplying
the Conversion Price by a fraction:
(i) The numerator of which shall be the number of shares of
Common outstanding immediately prior to the issuance of such
Additional Shares of Common plus the number of shares of Common
which the aggregate consideration received by the Corporation for
the total number of shares of Common so issued would purchase at
the Conversion Price, and
(ii) the denominator of which shall be the number of Shares of
Common outstanding immediately after the issuance of such
Additional Shares of Common.
The provisions of this subparagraph 4 shall not apply under any of the
circumstances for which an adjustment is provided in subparagraphs 1, 2, or 3 of
this paragraph H. No adjustment of the Conversion Price shall be made under
this subparagraph 4 upon issuance of any Addition (sic) Shares of Common which
are issued pursuant to any Common Stock Equivalent if upon the issuance of any
such Common Stock Equivalent (i) any such adjustment shall previously have been
made pursuant to subparagraph 5 of this paragraph H or (2) (sic) no adjustment
was required pursuant to subparagraph 5 of this paragraph H.
5. ISSUANCE OF COMMON STOCK EQUIVALENTS. In case the corporation
shall, at any time while the conversion right remains in effect, issue any
Common Stock Equivalent and the price per share for which Additional Shares of
Common may be issuable thereafter pursuant to such Common Stock Equivalent shall
be less than 40 cents, or if, after any such issuance, the price per share for
which Additional Shares of Common may be issuable thereafter is amended, and
such price as so amended shall be less than 40 cents at the time of such
amendment; such issuance or amendment shall be adjusted as provided in
subparagraph 4 of this paragraph H on the basis that (a) the maximum number of
Additional shares of Common issuable pursuant to all such Common Stock
Equivalents shall be deemed to have been issued as of the earlier of (1) the
date on which the corporation shall enter into a firm contract for the issuance
of such Common Stock Equivalent, or (2) the date of actual issuance of such
Common Stock Equivalent, and (b)
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the aggregate consideration for such maximum number of Additional Shares of
Common shall be deemed to be the minimum consideration received and receivable
by the corporation for the issuance of such Additional Shares of Common pursuant
to such Common Stock Equivalent. No adjustment shall be made under this
subparagraph 5 upon the issuance of any convertible security which is issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any adjustment shall previously have been made upon the
issuance of such warrants or other rights pursuant to this subparagraph 5.
6. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
PARAGRAPH H. The following provisions shall be applicable to the making of
adjustments pursuant to this paragraph H:
a. COMPUTATION OF CONSIDERATION. In case of the issuance at any
time of any Additional Shares of Common or Common Stock
Equivalents in payment or satisfaction of any dividend upon any
class of stock other than common, the corporation shall be deemed
to have received for such Additional Shares of Common or Common
Stock Equivalents a consideration equal to the amount of such
dividend so paid or satisfied. In any case in which the
consideration to be received or paid shall be other than cash,
the Board shall notify the Holder of 12% Cumulative, Convertible
Preferred Shares - Series A of its determination of the fair
market value of such consideration prior to payment or accepting
receipt thereof. If, within then days after receipt of said
notice, the Holders of 12% Cumulative, Convertible Preferred
Shares - Series A convertible into at least a majority of
Conversion Stock then unissued shall notify the Board in writing
of their objection to such determination, a determination of fair
market value of such consideration shall be made by arbitration
in accordance with the Rules of the American Arbitration
Association by an arbitrator in the City of New York, New York.
b. READJUSTMENT. Upon the expiration of the right to convert,
exchange or exercise any Common Stock Equivalent the issuance of
which effected an adjustment in the number of shares for which
the 12% Cumulative, Convertible Preferred Shares - Series A may
be exchanged, if any such Common Stock Equivalent shall not have
been converted, exercised or exchanged, the number of shares of
common shares deemed to be issued and outstanding by reason of
the fact that they were issuable upon conversion, exchange or
exercise of any such Common Stock Equivalent and thereupon only
the number of Additional Shares of Common actually so issued
shall
<PAGE>
be deemed to have been issued and only the consideration actually
received by the corporation (computed as in clause a of this
subparagraph 6) shall be deemed to have been received by the
corporation.
c. TREASURY SHARES. The number of shares of common at any time
outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the corporation
or any of its subsidiaries.
7. OTHER ACTION AFFECTING COMMON SHARES. In case after the date
hereof the corporation shall take any action affecting its common shares, other
than an action described in any of the foregoing subparagraphs 1 through 6 of
this paragraph H, inclusive, which, in the opinion of the Board, would have a
materially adverse effect upon the rights of the holders of 12% Cumulative,
Convertible Preferred Shares - Series A, the number of common shares for which
such 12% Cumulative, Convertible Preferred Shares - Series A, the number of
common shares for which such 12% Cumulative, Convertible Preferred Shares -
Series A (sic) may be exchanged shall be adjusted in such manner and at such
time as the Board may in good faith determine to be equitable in the
circumstances.
8. ADJUSTMENT OF NUMBER OF SHARES. Upon the happening of any of the
events requiring an adjustment in the Conversion Price listed in this paragraph
H, the number of shares of common for which 12% Cumulative, Convertible
Preferred Shares - Series A may be exchanged hereunder shall be adjusted, to the
nearest one hundredth of a whole share, to the product obtained by multiplying
such number of shares purchasable using the Conversion Price immediately prior
to such adjustment in the Conversion Price by a fraction, the numerator of which
shall be the Conversion Price immediately prior to such adjustment and the
denominator of which shall be the Conversion Price immediately thereafter. If
the corporation shall be in default under its agreement contained in the last
sentence of paragraph G so that applicable law prevents the issuance of shares
adjusted in accordance with this paragraph H, the adjustment of shares provided
in the foregoing sentence shall nonetheless be made and the holder of 12%
Cumulative, Convertible Preferred Shares - Series A shall be entitled to
exchange 12% Cumulative, Convertible Preferred Shares - Series A for such
greater number of shares for which the right of conversion may then be
exercised. Such exercise shall not constitute a waiver of any claim arising
against the corporation by reason of its default under the agreement contained
in the last sentence of paragraph G.
9. NOTICE OF ADJUSTMENTS. Whenever adjustment shall be made
pursuant to paragraph H, the corporation shall make a certificate signed by its
President or a Vice President and by its Treasurer, Assistant Treasurer,
Secretary or Assistant
<PAGE>
Secretary setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board made any
determination hereunder), and the number of common shares for which 12%
Cumulative, Convertible Preferred Shares - Series A may be exchanged after
giving effect to such adjustment, and shall cause copies of such certificate to
be mailed (by first class mail postage prepaid) to the holder of 12% Cumulative,
Convertible Preferred Shares - Series A promptly after each adjustment.
10. FRACTIONAL SHARES. No fractional shares of common will be issued
in connection with any exchange, but in lieu of such fractional shares, the
corporation shall make a cash payment therefor equal in amount to the product of
the applicable fraction multiplied by the share value then determined by the
board.
11. DEFINITIONS. For the purposes of paragraph H, the following
terms have the following meanings:
"ADDITIONAL SHARES OF COMMON" shall mean all shares of Common issued
by the corporation after the date hereof except
(a) 250,000 shares of Common Stock issuable upon exercise of the
conversion right of 12% Cumulative, Convertible Preferred Shares - Series
B;
(b) 125,000 shares of Common Stock issuable upon exercise of warrants
issued together with 12% Cumulative, Convertible Preferred Shares - Series
B as part of a unit offering; and
(c) 1,555,000 shares of Common Stock issuable to satisfy the obligations
of the corporation in connection with (i) present and future employee stock
option plans and incentive stock options plans and (ii) warrants heretofore
(April 21, 1985) issued.
"COMMON" AND "COMMON STOCK" shall mean the corporation's common stock,
par value $.001 per share, and any stock into which such common stock may
hereafter be changed.
"COMMON STOCK EQUIVALENT" shall mean any Convertible Security or
warrant, option or other right to subscribe for or purchase any Additional
Shares of Common or any Convertible Security.
"CONVERSION RIGHT" shall mean the right set forth in paragraph C.
<PAGE>
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares
of Stock or other securities which are or may be at any time convertible
into or exchangeable for Additional Shares of Common. The term
"Convertible Security" shall mean one of the Convertible Securities.
"STOCK" shall include any and all shares, interests or other
equivalents (however designated) of or participation in corporate stock.
"SUBSIDIARY" shall mean any corporation at least 50% of whose
outstanding Voting Stock shall at the time be owned directly or indirectly
by the corporation or by one or more Subsidiaries or by the corporation and
one or more Subsidiaries.
"VOTING STOCK" as applied to the Stock of any corporation, shall mean
Stock of any class or classes (however designated) having ordinary voting
power for the election of a majority of the members of the Board of
Directors (or other governing body) of such corporation, other than Stock
having such power only by reason of the happening of a contingency.
12% CUMULATIVE, CONVERTIBLE PREFERRED SHARES - SERIES B, of the
5,000,000 shares of stock authorized by amendment of the Articles of
Incorporation to be issued as special or preferred shares, 625,000 shares are
hereby designated as "12% Cumulative, Convertible Preferred Shares - Series B".
The rights, voting power, preferences, restrictions, and qualifications of
12% Cumulative, Convertible Preferred Shares - Series B are as follows:
A. NO VOTING POWER. 12% Cumulative, Convertible Preferred Shares -
Series B do not entitle the holder to vote at shareholders' meetings or
otherwise give the holder any voting power. The consent of holders of 12%
Cumulative, Convertible Preferred Shares - Series B is not required for
corporate actions.
B. DIVIDENDS. The holders of 12% Cumulative, Convertible Preferred
Shares - Series B shall be entitled to dividends when and as declared by the
board of directors in its absolute discretion and payable on such dates as fixed
by the board in its absolute discretion. When and if declared, dividends shall
be at the rate of 12 per cent of the initial issue price of 40 cents per share
(that is, 4.8 cents per share) per annum and shall be cumulative. Dividends may
be paid to 12% Cumulative, Convertible Preferred Shares - Series B only when,
if, and on the same basis as dividends are paid to 12% Cumulative, Convertible
Preferred Shares - Series A. Dividends may be paid in any year to holders of
common stock only after the corporation shall have paid or provided for the
payment of dividends on all 12% Cumulative, Convertible Preferred Shares -
Series B for each year from the date of issuance to and including the year in
question. Holders of 12%
<PAGE>
Cumulative, Convertible Preferred Shares - Series B shall not be entitled to any
dividend other than as provided in this paragraph B.
C. CONVERSION WITHIN FIVE YEARS. Until February 28, 1993, holders of 12%
Cumulative, Convertible Preferred Shares - Series B may exchange such shares for
common shares at the rate of one share for one share by tendering to the
corporation such 12% Cumulative, Convertible Preferred Shares - Series B. After
February 28, 1993, 12% Cumulative, Convertible Preferred Shares - Series B may
not be exchanged for common shares.
D. RIGHTS IN DISSOLUTION AND DISTRIBUTIONS OF ASSETS. Upon liquidation,
dissolution, or winding up of the corporation, holders of 12% Cumulative,
Convertible Preferred Shares - Series B shall be entitled to receive prior to
any distribution to holders of common stock 40 cents 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. Holders of 12% Cumulative, Convertible Preferred
Shares - Series B shall not be entitled to any further payment as dividends in
liquidation or otherwise. In the event assets as opposed to cash are
distributed to shareholders, holders of 12% Cumulative, Convertible Preferred
Shares - Series B shall be entitled to receive prior to any distribution to the
holders of common stock of a liquidation preference in assets equal to 40 cents
per share in distributions of assets and in liquidation, dissolution, or winding
up of the corporation.
E. NO PRE-EMPTIVE RIGHTS. No holder of 12% Cumulative, Convertible
Preferred Shares - Series B shall be entitled, as such, to any pre-emptive of
preferential rights to subscribe to any unissued stock or any other securities
which the corporation may be authorized to issue.
ARTICLE VI
STOCKHOLDERS MEETING: Meetings of the shareholders shall be held at such
place within or without the State of Nevada as may be provided by the bylaws of
the corporation. Special meetings of the shareholders may be called by the
president of (sic) any other executive officer of the corporation, the board of
directors, of (sic) any member thereof, or by the record holder or holders of at
least ten percent (10%) of all shares entitled to vote at the meeting. Any
action otherwise required to be taken at a meeting of the shareholders, except
election of directors, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by shareholders having at
least a majority of the voting power.
ARTICLE VII
<PAGE>
COMMENCING BUSINESS: The corporation shall not commence business until at
least $1,000.00 has been received by it as consideration for the issuance of
shares.
ARTICLE VIII
STOCK RIGHTS: The board of directors shall have the authority to determine
the classes and series of any subsequent stock issued by the corporation and the
right and preferences pertaining thereto.
ARTICLE IX
BOARD OF DIRECTORS: The board of directors of the corporation shall
consist of not less than three nor more than twenty-five members. A majority of
the board of directors shall be necessary to constitute a quorum; and, when so
constituted, the board shall be authorized to transact such business as may be
delegated to it by the stockholders and whenever the board of directors shall be
so assembled and act as a board, either within or without the State of Nevada,
any action taken shall be the action of the board of directors and shall be
binding upon the corporation, provided that three days prior notice, given
either orally or in writing, of the time and place of the meeting and of the
nature of the business proposed to be transacted shall have been given to the
entire board of directors, unless such notice be waived as hereinafter provided.
Any director may waive notice of any meeting; in the event of such waiver,
notice shall be in writing or a written memorandum shall be made of an oral
waiver of notice.
ARTICLE X
OFFICERS: The officers of the corporation shall consist of a chairman of
the board of directors, a chief executive officer, a president, a vice
president, a secretary and a treasurer, who shall perform such duties and have
such authority as usually pertain to such offices of a corporation or as may be
prescribed by the board of directors from time to time.
QUALIFICATION OF OFFICERS: Officers and directors of the corporation need
not be residents of the State of Nevada and need not own shares of the
corporation's stock. The secretary and treasurer may, but need not be, the same
person.
ELECTION: Directors shall be elected at the annual meeting of the
shareholders, and the person receiving the highest number of votes shall be
declared duly elected, providing such numbers shall represent a majority of all
votes cast. Within ten (10) days after the election, the directors shall meet
and elect a president, vice president, secretary and treasurer.
<PAGE>
TERM OF OFFICE: The term of office of all directors and officers shall be
one year, provided all directors and officers shall hold office until their
successors are duly elected and qualified.
RESIGNATION OF OFFICERS: Any officer or director may resign by filing his
written resignation with the secretary of the corporation or, in the case of the
secretary, with the president of the corporation and upon acceptance thereof by
the board of directors or if such board shall neglect to act upon such
resignation within fourteen (14) days after receipt, the resignation shall
become effective and the office shall be deemed vacant.
REMOVAL OF OFFICERS: Any officers (sic) or director of this corporation
may be moved (sic) at any time without cause in the manner provided by the laws
of the State of Nevada for the removal of such officer or director, or by a
majority vote of the outstanding stock of the corporation at any special meeting
of the stockholders called for that purpose as herein provided.
VACANCIES: In the case of death, disability, or resignation of any
officers (sic) or director of the company, the remaining directors or director
of the company, even though less than a quorum, shall fill vacancies for the
unexpired term or terms.
ARTICLE XI
DIRECTORS: The number of directors constituting the initial board of
directors of the corporation is three (3), and the names and addresses of the
persons who are to serve as the directors until the first annual meeting of the
shareholders or until their successors are elected and qualified are:
1. Clifford D. Hughes 2929 Hillsden Drive
Salt Lake City, Utah 84117
2. Kelly L. Hunsaker 2323 Arbor Lane
Salt Lake City, Utah 84117
3. Hyrum D. Hunsaker 2323 Arbor Lane
Salt Lake City, Utah 84117
ARTICLE XII
DURATION: The period of duration of the corporation shall be perpetual.
ARTICLE XIII
<PAGE>
AMENDMENT: These articles of incorporation, by vote of not less than fifty
percent of the issued and outstanding capital stock of the corporation, may be
deemed amended in any respect amendable at law at any meeting. A copy of the
proposed amendment shall be given to the stockholders as provided in Article VI
hereof, for calling and holding meetings of the stockholders.
ARTICLE XIV
BYLAWS: The board of directors of the corporation shall have authority to
adopt such bylaws as in their judgment may be deemed necessary or advisable for
the management and transaction of the business of the corporation provided that
such bylaws are not in conflict with these articles of incorporation or the
constitution of the State of Nevada.
ARTICLE XV
INCORPORATORS: The name and address of each incorporator is:
1. Clifford D. Hughes 2929 Hillsden Drive
Salt Lake City, Utah 84117
2. Kelly L. Hunsaker 2323 Arbor Lane
Salt Lake City, Utah 84117
3. Hyrum D. Hunsaker 2323 Arbor Lane
Salt Lake City, Utah 84117
ARTICLE XVI
LIABILITY: A director or officer of the corporation shall not be
personally liable to the corporation or its stockholders for damages for breach
of fiduciary duty as a director or officers (sic), except that this provision
does not eliminate of (sic) 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) payment of dividends in violation of NRS 78.300. If
Nevada statutes are subsequently amended to authorize corporate action further
limiting the personal liability of directors or officers, then the corporation
is authorized to take such actions as the Board of Directors may determine to
further limit the fullest extent permitted by Nevada statutes, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
corporation shall not adversely affect any right or protection of a director or
officer of the corporation existing at the time of such repeal or modification.
<PAGE>
By resolution of the board of directors duly adopted on November 13, 1996,
the undersigned were authorized to prepare and execute the foregoing Restated
Articles of Incorporation, which correctly set forth the text of the Articles of
Incorporation as amended to and including January 28, 1997.
/s/ Gerald R. Cysewski /s/ Ronald P. Scott
- ------------------------------ ------------------------------
Gerald R. Cysewski Ronald P. Scott
Chairman of the Board, Executive Vice President and
Chief Executive Officer and Secretary
President
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