CYANOTECH CORPORATION
73-4460 Queen Kaahumanu Hwy., Suite 102
Kailua-Kona, HI 96740
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held Wednesday, September 17, 1997 at 2:00 P.M.
To Our Stockholders:
You are cordially invited to attend the Annual Meeting of Stockholders of
Cyanotech Corporation (the "Company") to be held on Wednesday, September 17,
1997 at 2:00 P.M., local time, at the King Kamehameha's Kona Beach Hotel,
75-5660 Palani Road, Kailua-Kona, Hawaii, for the following purposes:
1. To elect six directors to serve until the next Annual Meeting or
until their successors are elected, by vote of holders of Common
Stock and Series C Preferred Stock;
2. To approve an amendment to the Company's 1995 Stock Option Plan
(the "Plan"), increasing the number of shares which are reserved
for issuance of options under the Plan from 400,000 to 800,000;
3. To ratify the selection of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending March 31, 1998;
and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
These matters are more fully described in the Proxy Statement
accompanying this notice.
The Board of Directors has fixed the close of business on July 21, 1997
as the record date for Stockholders entitled to notice of and to vote at this
meeting and any adjournment thereof. The stock transfer books will not be closed
between the record date and the date of the meeting. Only stockholders of record
at the close of business on July 21, 1997 are entitled to notice of and to vote
at the Annual Meeting; however all stockholders are cordially invited to attend
the meeting.
By Order of the Board of Directors
Ronald P. Scott
Secretary
Kailua-Kona, Hawaii
July 21, 1997
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE. THIS WILL ENSURE THAT YOUR SHARES ARE VOTED IN ACCORDANCE
WITH YOUR WISHES AND SAVE THE EXPENSE OF FURTHER COMMUNICATION. IF YOU ATTEND
THE MEETING AND WISH TO VOTE IN PERSON, YOU MAY DO SO, BECAUSE YOU MAY REVOKE
YOUR PROXY AT ANY TIME PRIOR TO ITS USE.
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Stockholders Should Read the Entire Proxy Statement
Carefully Prior to Returning Their Proxies
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS OF
CYANOTECH CORPORATION
To Be Held September 17, 1997
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CYANOTECH CORPORATION ("Cyanotech" or the "Company")
of proxies to be voted at the Annual Meeting of Stockholders (the "Annual
Meeting") which will be held at 2:00 p.m., local time, on September 17, 1997 at
the King Kamehameha's Kona Beach Hotel, 75- 5660 Palani Road, Kailua-Kona,
Hawaii, or at any adjournment or postponement thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders. This Proxy
Statement and the proxy card were first mailed to stockholders on or about July
28, 1997.
The Company's principal executive offices are located at 73-4460 Queen
Kaahumanu Highway, Suite 102, Kailua-Kona, HI 96740.
VOTING RIGHTS AND SOLICITATION
The enclosed proxy is being solicited on behalf of the Board of Directors
of Cyanotech for use at the Annual Meeting.
The close of business on July 21, 1997 is the record date for stockholders
entitled to notice of and to vote at the Annual Meeting. All holders of the
Company's Common Stock outstanding on the record date are entitled to vote at
the Annual Meeting. Such stockholders have one (1) vote for each share so held
on the matters to be voted on. Holders of 8% Cumulative Convertible Preferred
Shares - Series C ("Series C Preferred Stock") of record at the close of
business on July 21, 1997 are entitled to five votes for each share of such
stock on all matters to be voted on. At July 21, 1997, Cyanotech had 12,848,962
shares of Common Stock, $.005 par value per share (the "Common Stock"), issued
and outstanding; and 734,977 shares of 8% Series C Preferred Stock, each
convertible into five shares of Common Stock. The presence in person or by proxy
of the holders of record of a majority of the voting power of the outstanding
shares entitled to vote constitutes a quorum. A plurality of votes cast by the
holders of Common Stock and Series C Preferred Stock, voting as a single class,
present at the meeting at which a quorum is present, is required for election of
each of the six directors. A majority of the voting power of stockholders
holding the Common Stock and Series C Preferred Stock, voting as a single class,
present at the meeting at which a quorum is present, is required for approval of
all other matters to be voted on. Abstentions are counted only for purposes of
determining whether a quorum is present. Broker non-votes are not treated as
votes nor are they counted in determining the existence of a quorum.
Shares of the Company's Stock represented by proxies in the accompanying
form which are properly executed and returned to Cyanotech will be voted at the
Annual Meeting in accordance with the stockholders' instructions contained
therein. In the absence of contrary instructions, shares represented by such
proxies will be voted FOR the election of each of the directors as described
herein under "Proposal One - Election of Directors," FOR the increase in shares
reserved for issuance under the Company's 1995 Stock Option Plan as described
herein under "Proposal Two - Amendment to the 1995 Stock Option Plan," and FOR
ratification of the selection of accountants as described herein under "Proposal
Three - Ratification of Selection of
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Independent Public Accountants." Management does not know of any matters to be
presented at this Annual Meeting other than those set forth in this Proxy
Statement and in the Notice accompanying this Proxy Statement. If other matters
should properly come before the meeting, the proxy holders will vote on such
matters in accordance with their best judgment.
The entire cost of soliciting proxies will be borne by Cyanotech. Proxies
will be solicited principally through the use of the mails, but, if deemed
desirable, may be solicited personally or by telephone, e-mail, or facsimile or
special letter by officers and regular Cyanotech employees who will receive no
additional compensation. Arrangements may be made with brokerage houses and
other custodians, nominees and fiduciaries to send proxies and proxy material to
the beneficial owners of the Company's Common Stock, and such persons may be
reimbursed for their expenses.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 73-4460
Queen Kaahumanu Hwy, Suite 102, Kailua- Kona, HI 96740, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be considered at the 1998 Annual Meeting
of Stockholders must be received by Cyanotech no later than April 1, 1998. The
proposal must be mailed to the Company's principal executive offices, 73-4460
Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, Hawaii 96740, Attention: Corporate
Secretary. Such proposals may be included in next year's proxy statement if they
comply with certain rules and regulations promulgated by the Securities and
Exchange Commission.
PROPOSAL ONE:
ELECTION OF DIRECTORS
Nominees
A board of six (6) directors are to be elected at the meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
FOR the election of the six nominees named below, all of whom are presently
directors of the Company. Each nominee has consented to be named a nominee in
this Proxy Statement and to continue to serve as a director if elected. If any
nominee becomes unable or declines to serve as a director or if additional
persons are nominated at the meeting, the proxy holders intend to vote all
proxies received by them in such a manner as will assure the election of as many
nominees listed below as possible (or, if new nominees have been designated by
the Board of Directors, in such a manner as to elect such nominees) and the
specific nominees to be voted for will be determined by the proxy holders. The
Company is not aware of any reason that any nominee will be unable or will
decline to serve as a director. Each director elected at this Annual Meeting
will serve until the next Annual Meeting or until such director's successor has
been elected and qualified. Voting for the election of directors is
non-cumulative.
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
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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. She has nominated herself at this election. 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 an entity controlled by Ms. Reichl.
The following table sets forth certain information regarding the nominees
for election by holders of Common and Series C Preferred Stock to the Board of
Directors, all of whom were elected at the last annual meeting.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Director
Name Principal Occupation Since Age
- ---- -------------------- ----- ---
Julian C. Baker Portfolio Manager for 1995 31
Laurence A. Tisch and
Preston R. Tisch
Gerald R. Cysewski, Ph.D. Chairman of the Board, 1983 48
President and Chief
Executive Officer,
Cyanotech Corporation
Eva R. Reichl Private investor 1993 78
Ronald P. Scott Executive Vice President, 1995 42
Finance and Administration,
Cyanotech Corporation
John T. Ushijima Partner, Ushijima & 1984 73
Ushijima (law firm)
Paul C. Yuen, Ph.D. Dean, College of Engineering 1993 69
University of Hawaii at Manoa
(public university)
</TABLE>
Mr. Baker has served as a director of the Company since November 1995. Mr.
Baker has been a portfolio manager for Laurence A. Tisch and Preston R. Tisch
and for members of their family since 1994. From 1988 to 1993, 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 major stockholder of Cyanotech. See "
Security Ownership of Certain Beneficial Owners and Management."
Dr. Cysewski co-founded the Company in 1983 and has served as a director of
the Company since that time. Until June 1996, he also served as Scientific
Director. 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
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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.
Mrs. Reichl has served as a director of the Company since 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. Scott was appointed to the Board of Directors of the Company 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 State University, San Jose, and an M.B.A. degree from the
University of Santa Clara.
Mr. Ushijima has served as a director of the Company since 1984. He has
been a Partner of the law firm of Ushijima & Ushijima, Hilo, Hawaii, for more
than ten years. Mr. Ushijima is also a former Hawaii State Senator.
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. Dr. Yuen is also a director of Hawaiian Electric Company, Inc., a
wholly owned subsidiary of Hawaiian Electric Industries, Inc.
The Board of Directors recommends that holders of Common Stock and Series C
Preferred Stock vote FOR all of the above named director nominees.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held five regular meetings in fiscal
1997. No incumbent director attended less than 75% of all meetings of the Board
of Directors and of the committees, if any, upon which such director served.
The Board of Directors of the Company has an Audit Committee and a
Compensation and Stock Option Committee. The Board of Directors does not have a
standing nominating committee.
The Audit Committee, which consisted of independent non-employee directors
Yuen (chair), Reichl, and Ushijima held one regularly scheduled meeting during
fiscal year 1997. The principal functions of the Audit Committee are to
recommend engagement of the Company's independent auditors, to review and
approve the services performed by the Company's independent auditors and to
review the Company's accounting principles, its internal control structure,
policies and procedures.
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The Compensation and Stock Option Committee, which also consisted of
independent non-employee directors Ushijima (chair), Reichl, and Yuen in fiscal
1997, held three regularly scheduled meetings and one special meeting during the
last fiscal year. Mr. Baker was added to the Compensation and Stock Option
Committee as chairman in September, 1997, replacing Mr. Yuen. The Compensation
and Stock Option Committee reviews and makes recommendations to the Board
concerning the Company's executive compensation policy, bonus plans and
incentive option plans, and approves the grants of stock options to officers and
employees.
DIRECTOR REMUNERATION
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 has
received, pursuant to the Company's 1994 Non-Employee Directors Stock Option and
Stock Grant Plan (the "Non-Employee Directors Plan"), 10-year options to
purchase 3,000 shares of the Company's Common Stock. On the date of the 1996
Annual Meeting of Stockholders, Mr. Baker received a 10-year option to purchase
3,000 shares of the Company's Common Stock. During the fiscal year ended March
31, 1997, each of the director nominees other than Messrs. Baker, Cysewski, and
Scott received grants of 2,000 shares of Common Stock. On the date of the 1997
Annual Meeting of Stockholders, each non-employee director continuing as a
director 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.
PROPOSAL TWO:
PROPOSAL TO APPROVE AN AMENDMENT TO THE
1995 STOCK OPTION PLAN
General
The 1995 Incentive Stock Option Plan (the "Plan") was adopted by the Board
of Directors and approved by the stockholders in 1995 and a total of 400,000
shares of Common Stock were reserved for issuance thereunder.
On May 22, 1997, the Board of Directors approved an amendment to the Plan
to increase the number of shares reserved for issuance thereunder by an
additional 400,000 to an aggregate of 800,000 shares. At the Annual Meeting, the
stockholders are being requested to approve this amendment. As of July 15, 1997,
and without giving effect to the proposed amendment, a total of 400,000 shares
had been reserved for issuance under the Plan, of which options to acquire
382,900 shares were issued and outstanding and options to acquire 17,100 shares
remained available for future issuance.
The Board of Directors believes that it is in the best interests of the
Company to continue to provide employees with an opportunity to acquire Common
Stock of the Company through stock options, thereby furthering the purposes of
the Plan, to attract and retain employees and encourage their ownership of the
Company's Common Stock. The Board of Directors has determined that the remaining
shares available for grants under the Plan are insufficient for such purposes.
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Summary of Plan
The following is a summary of the principal features of the 1995 Plan. This
summary, however, does not purport to be a complete description of all the
provisions of the 1995 Plan. Any stockholder who wishes to obtain a copy of the
actual plan document may do so by written request to the corporate Secretary at
the Company's executive offices in Kailua-Kona, Hawaii, at 73-4460 Queen
Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740.
Option Grant Programs
The 1995 Plan, which became effective with the approval by the stockholders
at the 1995 Annual Meeting, contains two separate equity incentive programs: (i)
a Discretionary Grant Program, under which employees and consultants may be
granted options to purchase shares of the Company's common stock, and (ii) a
Discounted Grant Program, under which employees 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 designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-qualified options not intended to satisfy such
requirements. All grants under the Discounted Grant Program will be
non-qualified options.
Shares Reserved
With the approval of this amendment, 800,000 shares of the Company's common
stock will be reserved for issuance over the remainder of the original ten (10)
year term of the 1995 Plan. The shares issuable under the 1995 Plan will be
either shares of the Company's authorized but previously unissued common stock
or shares of the Company's common stock reacquired by the Company, including
shares purchased on the open market and held as treasury shares.
If an option issued under the 1995 Plan expires or terminates for any
reason prior to exercise in full, the shares subject to the portion of the
option not so exercised will be available for subsequent option grants under the
1995 Plan. Shares subject to any option surrendered in accordance with the stock
appreciation right provisions of the 1995 Plan and all shares issued under the
1995 Plan will reduce on a share-for-share basis the number of shares of common
stock available for subsequent grants.
Plan Administration
The Discretionary Grant Program and the Discounted Grant Program will be
administered by a committee of two or more non-employee Board members appointed
by the Board, presently the Stock Option and Compensation Committee
("Committee").
Eligibility
Any person who is employed by the Company or its subsidiaries (including
officers) and consultants under contract to the Company are eligible to
participate in the 1995 Plan. As of June 15, 1997, approximately ninety-two (92)
employees were eligible to participate in the Plan and sixty-seven (67) such
employees were participants.
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Valuation
For all purposes under the 1995 Plan, the fair market value per share of
Common Stock on any relevant date will be the last reported (or in some cases
the closing) price per share on such date as provided by a national reporting
service. If there is no such price for such date, then the last reported (or in
some cases the closing) price for the last previous date for which such
quotation exists will be determinative of fair market value. On July 15, 1997,
the fair market value of the Common Stock was $4.81 per share.
Discretionary Grant Program
The option price per share for incentive stock options will not be less
than 100% of the fair market value of the Common Stock on the grant date. The
option price per share for non-statutory stock options will be determined by the
Committee. No option will have a maximum term in excess of ten (10) years
measured from the grant date. The Committee will have complete discretion to
grant options (i) which are immediately exercisable for vested shares, or (ii)
which become exercisable in installments for vested shares over the optionee's
period of service.
The option price for shares purchased under the Discretionary Grant Program
may be paid in cash or in shares of Common Stock valued at the fair market value
on the exercise date. The option may also be exercised through a same-day
program without any cash outlay on the optionee's part, and the Committee has
the authority to extend loans to assist optionees in exercising options and to
allow the payment of the purchase price of the shares issued upon exercise to be
paid in installments over a period of years, with or without collateral.
Any option held by the optionee at the time of cessation of service will
not remain exercisable beyond the limited period designated by the Committee at
the time of the option grant. Under no circumstances, however, may any option be
exercised after the specified expiration date of the option term. Each such
option will normally, during such limited period, be exercisable only to the
extent of the number of shares of Common Stock in which the optionee is vested
at the time of cessation of service. The optionee will be deemed to continue in
service for so long as such individual performs services for the Company or any
subsidiary corporation, whether as an employee or consultant.
The Committee will have complete discretion to extend the period following
the optionee's cessation of service during which his or her outstanding options
may be exercised and/or to accelerate the exercisability of such options in
whole or in part. Such discretion may be exercised at any time while the options
remain outstanding, whether before or after the optionee's actual cessation of
service.
The optionee is not to have any stockholder rights with respect to the
option shares until the option is exercised and the option price is paid for the
purchased shares. Options are not assignable or transferable other than by will,
a domestic relations order, or by the laws of inheritance following the
optionee's death, and the option may, during the optionee's lifetime, be
exercised only by the optionee.
The Committee may grant options with tandem or limited stock appreciation
rights. Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from the Company equal
in amount to the excess of (i) the fair market value of the shares of Common
Stock subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may, at the discretion
of the Committee, be made in cash or in Common Stock. Officers of the Company
subject to the short-swing profit restrictions of the Federal securities laws
may also be granted limited stock appreciation rights in connection with their
option grants.
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Any option with such a limited stock appreciation right in effect for at least
six (6) months may be surrendered to the Company upon the occurrence of a
Hostile Take-Over (as defined below), to the extent the option is at the time
exercisable for shares of the Company's Common Stock. In return for the
surrendered option, the officer will be entitled to a cash distribution from the
Company in an amount per canceled option share equal to the excess of (i) the
Take-Over Price per share over (ii) the option exercise price. The balance of
the option (if any) will continue to remain outstanding and become exercisable
and vested in accordance with the agreement evidencing such grant.
For purposes of such limited stock appreciation right, the following
definitions will be in effect:
Hostile Take-Over: the acquisition by any person or related group of
persons (other than the Company or its affiliates) of securities possessing more
than 50% of the combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend the stockholders accept,
provided at least 50% of the securities so acquired in such tender or exchange
offer are obtained from holders other than the Company's officers and directors.
Take-Over Price: the greater of (A) the fair market value of the vested
shares of Common Stock subject to the canceled option, measured on the option
cancellation date in accordance with the valuation provisions of the 1995 Plan
described above, or (B) the highest reported price per share paid by the tender
offerer in effecting the Hostile Take-Over.
The Committee will have discretion to extend such limited stock
appreciation rights to any or all outstanding options held by officers under the
1995 Plan. The Committee will also have the authority to effect, on one or more
separate occasions, the cancellation of outstanding options under the
Discretionary Grant Program which have exercise prices in excess of the then
fair market value of the Common Stock and to issue replacement options with an
exercise price based on the lower market value of the Common Stock at the time
of the new grant.
Discounted Grant Program
The Committee will have complete discretion in selecting the persons who
are to participate in the Discounted Grant Program. As a condition to such
participation, each selected person must, prior to the start of the calendar
year of participation, file with the Committee an irrevocable authorization to
the Company to reduce, by a designated multiple of 5%, his or her base salary
for the upcoming calendar year. To the extent the Committee approves one or more
salary reduction authorizations, those participants will be immediately granted
options under the Discount Grant Program.
Each option will be subject to substantially the same terms and conditions
applicable to options grants made under the Discretionary Grant Program, except
for the following differences:
(i) The Option price for the shares subject to each grant will
be 33-1/3% of the fair market value per share of Common Stock on the
grant date.
(ii) Each Discount Option will be for the number of shares
determined by dividing the total dollar amount of the approved
reduction in the participant's base salary by 66-2/3% of the fair
market value per share of Common Stock on the grant date.
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(iii) Provided the optionee continues in service, each
Discount Option will become exercisable for 50% of the option shares
twelve calendar months following the grant date and will become
exercisable for the balance of the option shares in a series of six (6)
equal successive monthly installments on the last day of each of the
next six (6) calendar months.
(iv) If the optionee dies or becomes disabled while in
service, any Unexercisable Discount Option will become exercisable for
that number of option shares equal to (A) one-twelfth (1/12) of the
total number of option shares multiplied by (B) the number of full
calendar months which will have elapsed from the first calendar year
for which the option is granted and the last day of the calendar month
during which the optionee ceases service. Such option will expire at
the earliest of its specified expiration date or one year after the
date of death or disability.
(v) Each discount option will have a term of ten (10) years
measured from the grant date, whether or not the optionee continues in
service.
General Provisions
Option Acceleration
Outstanding options under the 1995 Plan will become immediately exercisable
in the event of certain changes in the ownership or control of the Company. The
transactions which will trigger such option acceleration are as follows:
Corporate Transaction: any one of the following stockholder-approved
transactions:
(i) a merger or consolidation in which the Company is not the surviving
entity, except for change of state of incorporation;
(ii) the sale, transfer or other disposition of substantially all of the
Company's assets in liquidation or dissolution of the Company; or
(iii) any reverse merger in which the Company is the surviving entity but
in which more than 50% of the Company's outstanding voting securities are
transferred to persons other than those who held such securities immediately
prior to the merger.
Change in Control: any of the following events:
(i) the acquisition of more than 50% of the Company's outstanding voting
stock pursuant to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend the stockholders accept; or
(ii) a change in the composition of the Board of Directors over a period of
thirty-six (36) months or less such that a majority of the Board members ceases,
by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (a) have been members of the Board
continuously since the beginning of such period or (b) have been elected or
nominated for election as Board members during such period by at least a
majority of the Board members described in clause (a) who were still in office
at the time such election or nomination was approved by the Board.
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In the event of a Corporate Transaction, each option at the time
outstanding under the 1995 Plan will automatically become exercisable for all of
the shares of Common Stock at the time subject to such option and may be
exercised for any or all of such shares. However, an outstanding option under
the Discretionary Grant or Discount Grant Program will not so accelerate if and
to the extent: (i) such option is either to be assumed by the successor
corporation (or parent thereof) or is otherwise to be replaced by a comparable
option to purchase shares of the capital stock of the successor corporation (or
parent thereof) or (ii) the acceleration of such option is subject to other
limitations imposed by the Committee at the time of grant. The Committee will
have the discretion to provide for the subsequent acceleration of any option
which does not accelerate at the time of the Corporate Transaction, in the event
the optionee's service terminates within a designated period following such
Corporate Transaction. Upon the consummation of the Corporate Transaction, all
outstanding options under the 1995 Plan will, to the extent not previously
exercised by the optionees or assumed by the successor corporation (or its
parent company), terminate and cease to be exercisable.
The Committee has full power and authority, exercisable either in advance
of any anticipated Change in Control or at the time of an actual Change in
Control, to provide for the automatic acceleration of one or more outstanding
options under the Discretionary Grant Program so that each such option will,
immediately prior to the Change in Control, become exercisable for the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of such shares. The Committee may condition such
accelerated option vesting upon the optionee's cessation of service under
certain prescribed circumstances following the Change in Control. Upon a Change
in Control, each outstanding option under the Discount Grant Program will become
immediately exercisable for all of the shares of Common Stock at the time
subject to such option.
The acceleration of options in the event of a Corporate Transaction or
Change in Control may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt or other efforts to
gain control of the Company.
Changes in Capitalization
In the event any change is made to the Common Stock issuable under the 1995
Plan by reason of any recapitalization, stock dividend, stock split, combination
of shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
1995 Plan, and (ii), the number and/or class of securities and price per share
in effect under each outstanding option.
Each outstanding option which is assumed or is otherwise to continue in
effect after a Corporate Transaction (as defined above) will be appropriately
adjusted to apply and pertain to the number and class of securities which would
have been issuable, in connection with such Corporate Transaction, to an actual
holder of the same number of shares of Common Stock as are subject to such
option immediately prior to such Corporate Transaction. Appropriate adjustments
will also be made to the option price payable per share and to number and class
of securities available for issuance under the 1995 Plan.
Option grants under the 1995 Plan will not affect the right of the Company
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
11
<PAGE>
Financial Assistance
The Committee may authorize loans or installment payments in order to
assist optionees in financing the exercise of outstanding options under the
Discretionary Grant or Discount Grant Program. The form in which such assistance
is to be made available (including Company loans or installment payments) and
the terms upon which such assistance is to be provided will be determined by the
Committee. However, the maximum amount of financing provided any optionee may
not exceed the amount of cash consideration payable for the issued shares plus
all applicable Federal, State and local taxes incurred in connection with the
acquisition of the shares. 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.
Special Tax Election
The Committee may provide one or more holders of nonqualified options under
the Discretionary Grant or Discounted Grant Program with the right to have the
Company withhold a portion of the shares of Common Stock otherwise issuable to
such optionees in satisfaction of the Federal and State income and employment
tax withholding liability incurred by them in connection with the exercise of
their options. Alternatively, the Committee may allow such individuals to
deliver already existing shares of the Company's Common Stock in payment of such
tax liability.
Amendment and Termination
The Board may amend or modify the 1995 Plan in any or all respects
whatsoever. However, no such amendment may adversely affect the rights of
existing optionees without their consent. In addition, the Board may not,
without the approval of the Company's stockholders, (i) materially increase the
maximum number of shares issuable under the 1995 Plan, except to reflect certain
changes in the Company's capital structure, (ii) materially modify the
eligibility requirements for option grants or (iii) otherwise materially
increase the benefits accruing to optionees under the 1995 Plan.
The Board may terminate the 1995 Plan at any time, and the 1995 Plan will
in all events terminate on August 9, 2005. Each stock option or unvested share
issuance outstanding at the time of such termination will remain in force in
accordance with the provisions of the instruments evidencing such grant or
issuance.
Federal Income Tax Consequences
General
The following is a brief description of certain Federal income tax
considerations with respect to the Plan and participation therein. There can be
no assurance that such considerations will not be altered by future changes in
the law or administrative interpretations. In addition, optionees may be subject
to certain State and local taxes which are not described herein and which may
differ from taxes imposed under Federal law.
Because an optionee's tax circumstances may differ from those of other
optionees, and because there may be changes in applicable tax law, it is
recommended that each optionee consult with a qualified tax adviser concerning
the tax consequences of participation in the Plan.
Incentive Tax Options
In general, no income will be recognized by an optionee and no deduction
will be allowed to the Company with respect to the grant or exercise of an
Incentive Stock Option under the Plan, provided that the
12
<PAGE>
Option is exercised within three months after the termination of the optionee's
employment (one year in the case of the optionee's death or disability). The
difference between the exercise price and the fair market value of the shares of
Common Stock on the date the Option is exercised is, however, an adjustment item
for purposes of the optionee's alternative minimum tax. When the stock received
upon exercise of the Option is sold, provided that the stock is held for more
than two years from the date of grant of the option and more than one year from
the date of exercise, the optionee will recognize long-term capital gain or loss
equal to the difference between the amount realized and the exercise price of
the Option related to such stock. If the above-mentioned holding period
requirements are not satisfied, the subsequent sale of stock received upon
exercise of an Incentive Stock Option is treated as a "disqualifying
disposition." In general, an optionee will recognize taxable income at the time
of a disqualifying disposition as follows: (i) ordinary income in an amount
equal to the excess of (A) the lesser of the fair market value of the shares of
Common Stock on the date the Incentive Stock Option is exercised or the amount
realized on such disqualifying disposition over (B) the exercise price; and (ii)
capital gain to the extent of any excess of the amount realized on such
disqualifying disposition over the fair market value of the shares of Common
Stock on the date the Incentive Stock Option is exercised (or capital loss to
the extent of any excess of the exercise price over the amount realized on
disposition). Any capital gain or loss recognized by the optionee will be
long-term or short-term depending upon the holding period for the stock sold.
The Company may claim a deduction at the time of the disqualifying disposition
equal to the amount of ordinary income the optionee recognizes.
If an Incentive Stock Option is not exercised within the three months after
the termination of the optionee's employment (one year in the case of death or
disability of the optionee), it will be treated for Federal income tax purposes
as a nonqualified stock option, as described below.
In general, an optionee who pays the exercise price of an Incentive Stock
Option, in whole or in part, by delivering shares of Common Stock already owned
by the optionee will recognize no gain or loss for Federal income tax purposes
on the shares surrendered. However, if the shares delivered to exercise the
Incentive Stock Option were acquired pursuant to the prior exercise of an
Incentive Stock Option and the holding period requirements discussed above have
not been met with respect to such shares, the delivery of such shares to
exercise the Incentive Stock Option will be considered a taxable disposition of
the shares. Under proposed Treasury Regulations, a portion of shares received
upon exercise of an Incentive Stock Option equal in number to the shares
surrendered will have a basis equal to the basis of the shares surrendered
(increased, if applicable, by any income recognized as a result of the
exchange), and the holding period of such shares will include the holding period
of the shares surrendered (except for purposes of determining whether there has
been a disqualifying disposition of the shares). The basis of the additional
shares received upon such exercise will be zero, and the holding period of such
shares for all purposes will begin on the day after the day that the Option is
exercised.
Nonqualified Stock Options
The grant of Nonqualified Stock Options under the Plan will not result in
the recognition of taxable income to an optionee or in a deduction to the
Company. Upon exercise an optionee will recognize ordinary income in an amount
equal to the excess of the fair market value of each share of Common Stock
purchased over the exercise price. The Company is required to withhold tax on
the amount of income so recognized, and is entitled to a tax deduction equal to
the amount of such income. Gain or loss upon a subsequent sale of any shares of
Common Stock received upon the exercise of a Nonqualified Stock Option is taxed
as capital gain or loss to the optionee (long-term or short-term, depending upon
the holding period of the stock sold).
An optionee who pays the exercise price of a Nonqualified Stock Option, in
whole or in part, by delivering shares of Common Stock already owned by the
optionee will recognize no gain or loss for Federal income tax purposes on the
shares surrendered. With respect to shares of Common Stock acquired upon
13
<PAGE>
exercise which are equal in number to the shares of Common Stock surrendered,
the basis and holding period of such shares will be equal to the basis and
holding period of the shares surrendered. With respect to any additional shares
of Common Stock acquired upon exercise, the basis of such shares will be equal
to the fair market value of such shares on the date of exercise, and the holding
period for such additional shares will commence on the day after the day that
the Option is exercised.
Stock Appreciation Rights
The grant of a stock appreciation right (a "SAR") to an optionee under the
Plan will not result in the recognition of taxable income to the optionee or in
a deduction for the Company. In general, upon exercise of a SAR granted in
connection with an Incentive Stock Option or a Nonqualified Stock Option, the
optionee will recognize ordinary income for Federal income tax purposes equal to
the amount of any cash received plus the fair market value of any shares of
Common Stock received. The Company is required to withhold income tax on amounts
recognized as ordinary income, and is entitled to a tax deduction equal to the
amount of income recognized by the optionee.
Accounting Treatment
Option grants to employees with exercise prices less than the fair market
value of the option shares on the grant date will result in a compensation
expense to the Company's earnings equal to the difference between the exercise
price and the fair market value of the shares on the grant date. Such expense
will be accrued by the Company over the period the optionee vests in the option
shares. Option grants at 100% of fair market value will not result in any charge
to the Company's earnings. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis.
If one or more optionees are granted stock appreciation rights which have
no conditions upon exercisability, then such rights will result in a
compensation expense to be charged against the Company's earnings. Accordingly,
at the end of each fiscal quarter, the amount (if any) by which the fair market
value of the shares of common stock subject to such outstanding stock
appreciation rights has increased from the prior quarter-end will be accrued as
compensation expense, to the extent such amount is in excess of the aggregate
exercise price in effect for those rights.
Stockholder Approval
The affirmative vote of a majority of the voting power of the Company's
common stock and Series C Preferred Stock, voting as a single class, present at
the 1997 Annual Meeting, at which a quorum is present, is required for approval
of this amendment to the 1995 Plan. If such approval is obtained, the amendment
to the 1995 Plan will become effective immediately. Should such stockholder
approval not be obtained, then the amendment to the 1995 Plan will not be
effective.
The Board of Directors recommends that you vote FOR this proposal. The
enclosed Proxy will be voted for the proposal unless a contrary specification is
made.
14
<PAGE>
PROPOSAL THREE:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP has served as independent public
accountants for the Company since 1987. The Board of Directors has selected the
firm to continue in this capacity for the current fiscal year ending March 31,
1998. A representative of KPMG Peat Marwick LLP is expected to attend the annual
meeting with the opportunity to make a statement and to respond to appropriate
questions from stockholders present at the meeting.
Although it is not required to do so, the Company wishes to provide
stockholders with the opportunity to indicate their approval of the selection of
auditors and accordingly is submitting a proposal to ratify the selection of
KPMG Peat Marwick LLP. If the stockholders should fail to approve this proposal,
the Board of Directors will consider the selection of another auditing firm.
A majority of the voting power of the Common Stock and Series C Preferred
Shares, voting as a single class, present at a meeting at which a quorum is
present, is required for approval of the proposal.
The Board of Directors recommends that you vote FOR ratification of KPMG
Peat Marwick LLP to serve as the Company's auditors for the year ending March
31, 1998.
15
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Company's Common Stock as of July 21, 1997 by (i) each person who is known
by the Company to own beneficially more than 5% of the outstanding shares of the
Common Stock of the Company and Common Stock equivalents, (ii) each of the
Company's executive officers named in the Summary Compensation Table appearing
herein, (iii) each director and (iv) all directors and executive officers as a
group. Holders of Common Stock have one vote per share; holders of Series C
Preferred Stock have five votes per share. The following table sets forth what
such persons' beneficial security ownership position would be assuming the
conversion of all Series C Preferred Stock and the exercise of all outstanding
stock options and warrants, exercisable on the date hereof or within 60 days of
July 21, 1997. All shares shown are subject to the named person's sole voting
and investment power, subject to community property laws where applicable.
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Shares Approximate
Beneficially Percent Owned(1)
Name and Address Owned
- ---------------- ----------------- ----------------
CNA Financial Corporation 3,408,641 (2) 20.6
CNA Plaza
Chicago, IL 60685
American Cyanamid Company 699,730 (4) 4.2
(A wholly owned subsidiary of American
Home Products Corporation)
5 Giralda Farms
Madison, NJ 07940
Julian C. Baker (3) 3,000 (5) *
Gerald R. Cysewski (3) 469,433 (6) 2.8
Eva R. Reichl (3) 1,807,000 10.9
Ronald P. Scott (3) 29,625 (7) *
John T. Ushijima (3) 285,600 1.7
Paul C. Yuen (3) 15,100 *
All directors and executive officers as 2,720,508 (9) 16.3
a group (9 persons)(8)
</TABLE>
- --------------------------------
* Less than 1.0%
(1) Approximate percentage owned assumes full conversion of all 734,977
outstanding shares of Series C Preferred Stock into shares of Common
Stock (for a total of 16,523,847 shares of Common Stock and Common
Stock equivalents at July 21, 1997.)
(2) Represents 250,000 shares held by Fireman's Insurance Company of
Newark, NJ ("Fireman'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 Fireman's Insurance. National-Ben
Franklin and Fireman's Insurance are indirect wholly owned subsidiaries
of CNA Financial Corporation. Fireman's Insurance holds approximately
81.0% of the Series C Preferred Stock.
(3) Address is c/o Cyanotech Corporation, 73-4460 Queen Kaahumanu Hwy.,
Suite 102, Kailua-Kona, HI 96740.
(4) 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.
16
<PAGE>
(5) Includes options exercisable within 60 days of July 21, 1997 for 3,000
shares of Common Stock. Does not include 250,000 shares held by
Fireman'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 Fireman's Insurance. Mr.
Baker is a representative of CNA Financial Corporation, the parent
company of Fireman's Insurance and National Ben-Franklin, and he
disclaims beneficial ownership of such shares.
(6) Includes options exercisable within 60 days of July 21, 1997 for 30,125
shares of Common Stock.
(7) Includes options exercisable within 60 days of July 21, 1997 for 16,375
shares of Common Stock.
(8) Does not include 250,000 shares held by Fireman'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 Fireman's Insurance. Mr. Baker is a representative of
CNA Financial Corporation, the parent company of Fireman's Insurance
and National Ben-Franklin, and he disclaims beneficial ownership of
such shares.
(9) Includes 124,750 shares issuable under option to purchase shares of
Common Stock exercisable within 60 days of July 21, 1997 to: Julian C.
Baker (3,000 shares); Gerald R. Cysewski (30,125 shares); Glenn D.
Jensen (28,250 shares); Brent F. Kunimoto (18,000 shares); Kelly J.
Moorhead (29,000 shares); Ronald P. Scott (16,375 shares).
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"SEC") and the National Association of Securities Dealers, Inc. initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and any written representations that no other
reports were required, all Section 16(a) filing requirements for the fiscal year
ended March 31, 1997, applicable to its officers, directors and greater than ten
percent stockholders were complied with.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation paid or accrued by the
Company to the Chief Executive Officer and all executive officers of the Company
who earned more than $100,000 for services rendered in all capacities to the
Company (hereinafter referred to as the "named executive officers") for the
fiscal years ended March 31, 1997, 1996, and 1995. No executive officers who
would have otherwise been includable in such tables on the basis of salary and
bonus earned for fiscal 1997 have resigned or terminated employment during the
fiscal year.
17
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------------
Name and Securities
Principal Fiscal underlying
Position Year Salary($) Bonus($) Options(#)
- --------- ------ --------- -------- ------------
Gerald R. Cysewski 1997 $99,352 $ 7,427 14,500
Chairman of the Board, 1996 94,640 37,500 14,500
President and Chief 1995 86,809 10,000 11,000
Executive Officer
</TABLE>
Stock Options
The following table contains information concerning the grant of stock
options made under the Company's 1995 Stock Option Plan ("1995 Plan") for the
1997 fiscal year to the named executive officer. No stock appreciation rights
("SARs") have been granted under the 1995 Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Potential
Number of % of Total Realized Value at
Securities Options Assumed Annual
Underlying Granted to Exercise Rates of Stock Price
Options Employees in Price Expiration Appreciation
Name Granted(1) Fiscal Year Per Share Date For Option Term
- ---- ---------- ------------ --------- ---------- --------------------
5% 10%
Gerald R. Cysewski 14,500 11.6% $7.625 7/02/01 $30,515 $67,554
</TABLE>
- --------------
(1) The options were granted under the 1995 Plan on July 2, 1996, and
are exercisable in four equal and cumulative annual installments over the
optionee's period of service with the Company, beginning one year after the
grant date. The option has a term of five (5) years.
Option Exercises and Holdings
The following table provides information with respect to the above
named executive officer concerning the exercise of options during the 1997
fiscal year and unexercised options held as of the end of the 1997 fiscal year.
No SARs have been granted under the 1995 Plan.
18
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired Number of Securities Value of Unexercised
on Value Underlying Unexercised In-the-Money
Exercise Realized Options at FY-End (#) Options at FY-End ($)(1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------- -------- -------- ----------- ------------- ----------- -------------
Gerald R.
Cysewski -0- $ 0 20,125 30,875 $71,711 $30,195
</TABLE>
(1) Market value of shares covered by in-the-money options on March 31,
1997 ($5.563), less the option exercise price. Options are in-the-money
if the market value of the shares covered thereby is greater than the
option exercise price.
Reports of the Compensation and Stock Option Committee of the Board of
Directors on Executive Compensation
The Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is composed of a minimum of two non-employee directors. During
fiscal 1997 the Committee was composed of Ms. Reichl, and Messrs. Ushijima and
Yuen. Since September 1996, Mr. Baker has been chairman of the Committee,
replacing Mr. Yuen.
The Committee is responsible for setting and administering the compensation
policies, annual executive officer compensation, making recommendations on
potential bonus and stock option plans, granting bonuses and recommending to the
Board of Directors grants of stock options to executive officers.
Compensation Philosophy
The goals of the compensation program are to align compensation with
business objectives and performance, and to enable the Company to attract,
motivate and retain executives of outstanding ability, potential, and drive
commensurate with the size and development requirements of the Company. Key
elements of this philosophy are:
- The Company pays competitively with comparable small companies
with which the Company competes for talent. To ensure that pay
is competitive, the Company compares its pay practices with
these companies and sets it pay parameters based in part on
this review.
- The Company maintains annual incentive opportunities
sufficient to provide motivation to achieve specific operating
goals and to generate rewards that bring total compensation to
competitive levels.
- The Company provides significant equity-based incentives for
executives to ensure that they are motivated over the long
term to respond to the Company's business challenges.
The Committee endeavors to balance Company needs and values with the
employees' needs and believes that it is important that the Committee maintain
this relationship.
19
<PAGE>
Cash Compensation
Base Salary. The base salaries of the executive officers are determined
initially on the basis of one or more salary surveys conducted by third parties
as well as surveys of biopharmaceutical companies both nationally and more
specifically in the Western United States obtained from public information such
as filings with the Securities and Exchange Commission. Based on such surveys,
the executive officer salaries are set within the ranges of the surveys targeted
at the median; the exact level is determined after the Committee considers the
experience and capability of the executive officer, the level of responsibility,
and the needs of the Company.
Incentive Bonus Compensation. The Committee believes that, as a general
rule, annual compensation in excess of base salaries should be dependent on the
employee's performance and the Company's performance, and should be awarded
based on recommendations of the Committee, and in the discretion of the Board.
Accordingly, at the beginning of each fiscal year, the Committee establishes a
Management Incentive Plan for executive officers and other key management
personnel under which executive officers and other key management personnel may
earn bonuses, in amounts ranging up to 100% of the annual salaries, provided the
Company achieves or exceeds the pre-tax net income goal established for the
year.
The net income goal is established in part on the basis of an annual
operating plan developed by management and approved by the Board of Directors.
The annual operating plan is designed to maximize profitability, within the
constraints of economic and competitive conditions, some of which are outside
the control of the Company, and is developed on the basis of: (i) the Company's
performance in the prior year; (ii) estimates of sales revenue for the plan year
based upon recent market conditions and trends and other factors which, based on
historical experience, are expected to affect the level of sales that can be
achieved; (iii) historical operating cost and cost savings that management
believes can be achieved; and (iv) competitive conditions faced by the Company.
Taking all of these factors into account, as part of the operating plan, bonus
awards are determined under the Management Incentive Plan, and are fixed at what
is believed to be a realistic level so as to make the incentives meaningful to
executives and to avoid penalizing executives and other key management personnel
for conditions outside of their control.
In certain instances, bonuses under the Management Incentive Plan are
awarded not only on the basis of the Company's overall profitability, but also
on the achievement by an executive of specific objectives within his or her area
of responsibility. For example, a bonus may be awarded for an executive's
efforts in achieving greater than anticipated cost savings, or establishing new
or expanded markets for the Company's products. Typically, the maximum bonus
that may be awarded for achievement of specific objectives is determined at the
beginning of the year to provide the requisite incentive for such performance.
As a result of this performance-based Management Incentive Plan, executive
compensation, and the proportion of each executive's total cash compensation
that is represented by incentive or bonus income, increases in those years in
which the Company achieves the anticipated level of growth and profitability. On
the other hand, in years in which the Company experiences less than anticipated
profit growth, bonuses, and therefore also total executive compensation, should
tend to be lower.
Long-term Equity-based Compensation
The Committee intends to make stock option grants on an annual basis.
Each grant is designed to align the interests of the executive officers with
those of the stockholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an equity
stake in the business. Each grant generally allows the executive officer to
acquire shares of the Company's Common Stock at
20
<PAGE>
a fixed price per share (generally the market price on the grant date) over a
specified period of time (up to 10 years), thus providing a return to the
executive officer only if he or she remains in the employ of the Company and the
market price of the shares appreciate over the option term. The size of the
option grant to each executive officer generally is set at a level that is
intended to create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, but also taken into account are
the size of comparable awards made to individuals in similar positions in the
industry as reflected in external surveys, the individual's potential for future
responsibility and promotion over the option term, the individual's personal
performance in recent periods and the number of options held by the individual
at the time of grant. Generally, as an executive officer's level of
responsibility increases, a greater portion of his or her total compensation
will be dependent upon Company performance and stock price appreciation rather
than base salary. The relative weight given to these factors varies with each
individual, in the sole discretion of the Committee.
Chief Executive Officer's Compensation
The Committee uses the same philosophy and procedures described above with
respect to the other executive officers in setting the cash compensation and
equity incentives for the Chief Executive Officer.
The Committee reviewed Dr. Cysewski's fiscal year 1997 performance based
upon the Company's achievements in terms of revenue growth and operating
results, as well as the complexity of managing a high technology company. The
Committee noted that Dr. Cysewski's base salary was the lowest salary for Chief
Executive Officers of U.S. based biopharmaceutical companies of comparable size.
Based on these considerations, the Committee decided in May 1996 that Dr.
Cysewski's base salary should be increased by 5.3% to $100,000.
Dr. Cysewski was a participant in the Company's 1997 Management Incentive
Plan as described above. During fiscal 1997, the Company achieved record net
sales and net income and, at the sole discretion of the Committee, Dr. Cysewski
received a cash bonus of $7,427.
Dr. Cysewski received a grant of an option to purchase 14,500 shares of
Common Stock in 1997 based on his position as Chief Executive Officer, and the
desire to provide him with a continuing economic interest in the long term
appreciation of the Company's Common Stock.
Submitted by the Compensation and Stock Option Committee of the Company's
Board of Directors.
Julian C. Baker, Chairman
Eva R. Reichl
John T. Ushijima
The material in this report and the accompanying Stockholder Return
Performance Table is not "soliciting material," is not deemed filed with the SEC
and is not to be incorporated by reference in any filing of the Company under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, whether made before or after the date hereof and irrespective of any
general incorporation language in such filing.
21
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No current member of the Company's Compensation Committee is a current or
former officer or employee of the Company or its subsidiaries and no executive
officer of the Company was a member of the Compensation Committee of any
corporation of which a member of the Company's Compensation Committee is an
executive officer.
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph sets forth the Corporation's total cumulative
stockholder return as compared to the NASDAQ Composite Index and the NASDAQ
Pharmaceutical index for the period beginning March 31, 1992 and ending March
31, 1997. Total stockholder return assumes $100.00 invested at the beginning of
the period in the Common Stock of the Corporation, the stocks represented in the
NASDAQ Composite - US Index and the NASDAQ Pharmaceutical Index, respectively.
Total return assumes reinvestment of dividends; the Corporation has paid no
dividends on its Common Stock. Historical price performance should not be relied
upon as indicative of future performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nasdaq
Cyanotech Nasdaq Pharmaceutical
Corporation Composite Index
----------- --------- --------------
3/92................................ $ 100 $ 100 $ 100
3/93................................ 171 115 69
3/94................................ 121 124 70
3/95................................ 157 138 70
3/96................................ 814 187 123
3/97................................ 636 208 112
</TABLE>
22
<PAGE>
CERTAIN TRANSACTIONS
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. She has nominated herself at this
election. 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 an entity controlled by Ms.
Reichl. See " Security Ownership of Certain Beneficial Owners and Management."
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors does not know
of any business to be presented for consideration at the meeting other than
those set forth herein and in the Notice accompanying this Proxy Statement. If
any other business should properly come before the meeting, the shares
represented by Proxies will be voted in accordance with the judgment of the
persons named in such proxies.
The Company will provide, without charge, to each person whose proxy is
solicited by this Proxy Statement, on the written request of such person, a copy
of the Company's most recent Annual Report on Form 10-K, including the exhibits
thereto, as filed by the Company with the Securities and Exchange Commission.
Requests should be directed to: Secretary, Cyanotech Corporation, 73-4460 Queen
Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740.
The Annual Report to the Stockholders of the Company, for the fiscal year
ended March 31, 1997, including financial statements, is enclosed with this
proxy statement.
You are most cordially invited to attend this meeting in person. However,
whether or not you plan to attend the meeting, please sign, date and return the
enclosed proxy as promptly as possible in the envelope provided. This will not
prevent you from voting in person at the meeting if you so desire.
By Order of the Board of Directors
Ronald P. Scott
Secretary
Kailua-Kona, Hawaii
July 21, 1997
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PROXY CYANOTECH CORPORATION PROXY
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 17, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald P. Scott and Gerald R. Cysewski and
each of them (with full power to act without the other), as proxies, each having
full power to substitute, to represent and to vote, as designated below, all
shares of stock of Cyanotech Corporation which the undersigned would be entitled
to vote if personally present at the Annual Meeting of the Corporation to be
held at the King Kamehameha's Kona Beach Hotel, 75-5660 Palani Road,
Kailua-Kona, Hawaii on Wednesday, September 17, 1997 at 2:00 p.m. prevailing
local time, and any adjournment thereof, with respect to matters set forth below
and described in the Notice of Annual Meeting and Proxy Statement dated July 21,
1997.
1. ELECTION OF DIRECTORS.
FOR all nominees listed below WITHHOLD AUTHORITY to vote for all
(except as marked to the contrary) nominees.
(To withhold authority to vote for any
nominee, strike a line through nominee's
name in list below.)
Directors to be elected by holders of Common Stock and Series C Preferred
Stock:
JULIAN C. BAKER, GERALD R. CYSEWSKI, EVA R. REICHL, RONALD P. SCOTT, JOHN T.
USHIJIMA, PAUL C. YUEN
2. APPROVE AN AMENDMENT TO THE COMPANY'S 1995 STOCK OPTION PLAN (THE "PLAN")
INCREASING THE NUMBER OF SHARES RESERVED FOR ISSUANCE OF OPTIONS UNDER THE
PLAN FROM 400,000 TO 800,000. For Against Abstain
3. RATIFY SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT ACCOUNTANTS FOR
FISCAL YEAR 1998. For Against Abstain
WHEN PROPERLY EXECUTED THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY THE
STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,
2, AND 3.
All other proxies heretofore given by the undersigned to vote shares of
stock of Cyanotech Corporation which the undersigned would be entitled to vote
if personally present at said Annual Meeting or any adjournment thereof are
hereby expressly revoked. This proxy may be revoked at any time prior to the
voting hereof as set forth in the Proxy Statement.
Please date this proxy and sign it exactly as your name or names appear on
your share. If signing as an attorney, executor, administrator, guardian or
trustee, please give full title as such. If a corporation, please sign full
corporate name by duly authorized officer or officers.
Dated: 1997
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Signature
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Signature
Please sign and date this proxy and return it promptly whether you expect
to attend the meeting or not. If you do attend the meeting you may vote in
person.
