UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1997 Commission file 0-146-02
CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 91-1206026
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of
the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of
the Exchange Act:
Title of class
Common Stock, Par value $.005 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
At June 20, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $ 67,469,000.
At June 20, 1997, the number of shares outstanding of registrant's
Common Stock was 12,842,912.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission on or prior to July 25, 1997 and to be used in connection
with the Annual Meeting of Stockholders expected to be held September 17, 1997
are incorporated by reference in Part III of this Form 10-K.
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PART I
Item 1. Description of Business
Except for historical information contained in this document, the
matters discussed in this report contain forward looking statements that involve
risks and uncertainties. These future risks and uncertainties could cause actual
results to differ materially.
General
Cyanotech Corporation, incorporated in 1983, develops and
commercializes natural products from microalgae. Microalgae are a diverse group
of over 30,000 species of microscopic plants which have a wide range of
physiological and biochemical characteristics and naturally contain high levels
of certain nutrients. Microalgae represent a largely unexplored and unexploited
renewable natural resource, which grow much faster than land-based plants. Under
favorable growing conditions, certain microalgae produce a new crop every week.
We currently produce microalgae products for the nutritional supplement,
aquaculture feed, and immunological diagnostics markets and are developing
microalgae-based products for the biopesticide, nutraceutical, cosmetic, and
food coloring markets. Since 1983, we have designed, developed and implemented
proprietary production and harvesting technologies, systems and processes which
eliminate many of the stability and contamination problems frequently
encountered in the production of microalgae. We believe that our technology,
systems, processes and favorable growing location permitting year-round
harvesting of microalgal products in a cost effective manner.
Substantially all of our revenue currently comes from sales of
microalgae-based "Spirulina" products for the vitamin and supplement market.
Spirulina Pacifica is a unique strain of Spirulina developed by us which
provides a vegetable-based, highly absorbable source of natural beta carotene,
mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential
amino acids and other phytonutrients. We currently market our products in the
United States and seventeen other countries through a combination of retail,
wholesale, and private label channels.
In early 1997, we introduced NatuRose(TM) to the worldwide aquaculture
industry. NatuRose is our brand name for natural astaxanthin (pronounced
"as-ta-zan-thin"). Astaxanthin is a red pigment from the microalgae,
Haematococcus, and is used in aquaculture to impart a pink to red color to
pen-raised fish and shrimp. NatuRose will compete with synthetic astaxanthin
(manufactured from petrochemicals) whose worldwide annual sales are estimated at
more than $150 million.
Products in development include genetically-engineered microalgae that
contain a natural soil toxin, Bacillus thuringiensis var. israelensis, also
known as Bti. The Bti toxin is specifically toxic to mosquitoes and black fly
larvae. Synechococcus microalgae (a natural food for mosquito larvae) were
genetically-engineered to contain the Bti toxin. We believe that, when applied
to a mosquito-infested body of water, this algae could act as an effective and
environmentally safe means of mosquito control.
Cyanotech Corporation is incorporated in Nevada. Our principal
executive offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102,
Kailua-Kona, Hawaii 96740, and our telephone number is (808) 326-1353. Unless
otherwise indicated, all references in this report to the "Company", "we", and
"Cyanotech" refer to Cyanotech Corporation, a Nevada corporation, and its wholly
owned subsidiary, Nutrex, Inc.
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Industry Background
Microalgae are a diverse group of microscopic plants that have a wide
range of physiological and biochemical characteristics and naturally contain,
among other things, high levels of proteins, amino acids, vitamins, pigments and
enzymes. Microalgae grow extremely fast, making it possible to harvest a new
crop every week utilizing optimal culture and processing technologies. The raw
materials required for microalgae growth are readily available and include
sunlight, carbon dioxide and agricultural fertilizers.
Microalgae have the following properties that make commercial
production attractive: (1) microalgae grow much faster than land grown plants,
often up to 100 times faster; (2) microalgae have a uniform cell structure with
no bark, stems, branches or leaves, which permits easier extraction of products
and higher utilization of the microalgae cells; (3) the cellular uniformity of
microalgae makes it practical to manipulate and control growing conditions in
order to optimize a particular cell characteristic; (4) microalgae contain a
wide array of vitamins and other important nutrients; and (5) microalgae contain
natural pigments and are a potential source of medical products.
Commercial applications for these microscopic plants include
nutritional products, diagnostic products, aquaculture feed and pigments,
natural food colorings and research grade chemicals. The Company believes that
microalgae could potentially be used for other commercial applications,
including genetically engineered products for the biopesticide and
pharmaceutical industries. The most significant microalgae products produced
today are algae utilized as food supplements. Animal studies, published in
scientific journals, suggest that increased dietary levels of some of the
natural compounds in algae may reduce the risk of cancer and strengthen the
immune system.
While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems over the last 20 years have failed. Because
microalgae produced for food supplements are typically cultivated and harvested
outdoors, production is affected significantly by climate, weather conditions
and the chemical composition of the culture media. Without consistent sunlight,
warm temperature, low rainfall and proper chemical balance, microalgae will not
grow as quickly, resulting in longer harvesting cycles, decreased pond
utilization and increased cost. Furthermore, microalgal growth requires a very
nutrient rich environment. The high nutrient levels in the ponds promote the
growth of unwanted organisms, or "weeds," if the chemical composition of the
ponds changes from its required balance. Once contamination occurs, a pond must
be emptied, cleaned and refilled, a process that further decreases pond
utilization and increases production costs.
Microalgae producers face relatively high harvesting and processing
costs, particularly with respect to the energy costs required to dry the
microalgae prior to packaging and the labor required throughout the harvesting
and processing cycles. Once harvested, microalgal cells contain from 85% to 95%
water which cannot be removed by mechanical means. We estimate that the cost of
conventional heat-based microalgae drying processes represents approximately 30%
of total production cost. Most drying systems also damage or destroy oxygen
sensitive nutrients in the finished microalgae products.
Cyanotech's Technology
Since 1983, we have designed, developed and implemented proprietary
production and harvesting technologies, systems and processes which reduce many
of the stability and contamination problems frequently encountered in the
production of microalgae. This
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proprietary production system is known as Integrated Culture Biology Management
(or "ICBM"). Through the application of this technology, our Spirulina culture
ponds are in production year-round without any significant loss in productivity
due to contamination and many of our production ponds, all based in Hawaii, have
been in continuous production since 1988. We believe that such an accomplishment
remains unique to Cyanotech.
In addition to the advantages of our ICBM technology, we have developed
a patented system for the recovery of carbon dioxide from our drying system
exhaust gas, called Ocean-Chill Drying. Since microalgae are essentially
microscopic "plants", they require sunlight, water, carbon dioxide and nutrients
for optimal growth. By recovering carbon dioxide that would otherwise be
released into the atmosphere, we can divert the recovered carbon dioxide back to
the algae cultures. This process provides us with another significant cost
advantage over other microalgae producers who must purchase carbon dioxide.
Moreover, Ocean-Chill Drying dries microalgal products in a low oxygen
environment, which protects oxygen sensitive nutrients. In addition, we have
developed an automated Spirulina processing system, which enables a single
operator to harvest and dry the Spirulina powder.
During the fourth quarter of fiscal 1997, we began commercial
production of our natural astaxanthin product, NatuRose. The product was
produced using our newly developed large-scale photo-bioreactor system, which we
call the PhytoMax Pure Culture System(TM), or PhytoMax PCS, which incorporates
closed-culture technology and allows for the large-scale commercial cultivation
of microalgae strains that are other- wise highly susceptible to environmental
contamination. In addition, with the PhytoMax PCS we now have the potential to
produce a broader range of new products from microalgae. Such products could
include genetically-engineered biopesticides, nutraceuticals, additional
nutritional products, poly-unsaturated fatty acids, anti-microbial agents, plant
growth regulators, and anti-viral compounds.
Another major advantage for us is the location of our production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. We believe that the combination of consistent warm temperature,
abundant sunlight, and low rainfall at this facility makes this a highly
favorable location for the economical, large-scale cultivation of microalgae. In
contrast to our facility, microalgae producers in other areas lacking these
favorable characteristics stop producing for up to four months a year because of
less favorable climate or weather conditions.
At the HOST Park, we have access to cold, clean, deep sea water that is
pumped from a depth of 2,000 feet. This sea water is used both as a source of
nutrients for microalgae culture and as a cooling agent in the Ocean-Chill
Drying process. Additionally, our facility has access to a complete industrial
infrastructure and is located 30 miles from a deep water port and adjacent to an
international airport. We believe that the combination of our ICBM technology,
the new PhytoMax PCS technology, a favorable growing location with year-round
production capabilities, the Ocean-Chill Drying process, and our automated
processing system can be successfully applied to the commercial cultivation of
other species of microalgae then those that we are now marketing.
Marketing Strategy
Our primary objective is to be the leading developer and producer of
microalgal products in our existing and future markets. We seek to achieve this
objective through the following marketing strategies:
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o Increase the Company's Spirulina Market Share. We intend to increase
our world market share for Spirulina by expanding channels of distribution,
expanding geographically and locating new potential markets for Spirulina.
During fiscal 1997, we expanded our production capacity by 50% and also expanded
our domestic sales and marketing efforts for our Nutrex products and private
label packaged products, with the goal of increasing world market share. Our
products are sold in seventeen foreign countries and we are investigating ways
to expand the global presence of our products, including through the addition of
foreign distributors. We are also investigating potential new uses for
Spirulina.
o Promote Brand Uniqueness and Packaged Products. Cyanotech is the only
Hawaiian producer of Spirulina and has developed a unique strain of Spirulina
marketed as "Spirulina Pacifica." Our private label customers also promote the
brand uniqueness of Hawaiian Spirulina, which we believe provides competitive
differentiation in the marketplace. Our plans include increased marketing
emphasis on packaged products, which generally have higher associated gross
profit per pound than bulk products.
o Increase the Company's Natural Astaxanthin Market Share. Being the
first producer of commercial quantities of natural astaxanthin from microalgae
gives us a competitive advantage that we intend to build upon. Our customer base
for NatuRose is growing and we currently supply customers in six countries and
two industries. We intend to maintain this leadership position by expanding our
natural astaxanthin production capacity as quickly as indicated by market
demand.
o Increase Breadth of Product Offerings. We are developing and plan to
develop other new products from microalgae utilizing either our open-pond
technology or the PhytoMax PCS technology. These products include
genetically-engineered biopesticides, nutraceuticals, other nutritional
products, poly-unsaturated fatty acids, anti-microbial agents, plant growth
regulators, and anti-viral compounds. We are currently conducting
laboratory-scale work on a genetically engineered mosquitocide.
o Continue Improvement Upon Production Methodologies. During the past
thirteen years we have continued to improve upon our ICBM proprietary production
system and Ocean-Chill Drying system. Recently, we applied certain aspects of
these technologies to the development of the new PhytoMax PCS technology. We
intend to apply these to the development of additional microalgae-based products
for the biopesticide, food coloring, fine chemical and nutrition markets, as
well as other potential commercial uses.
o Promote Environmental Responsibility. We have a strong commitment to
the environment. Our Ocean-Chill Drying system recovers approximately 96% of the
carbon dioxide from our drying system exhaust gas, the ICBM technology allows us
to recycle 100% of the growing media, and the entire facility operates without
the use of pesticides or herbicides. Our production system does not create
erosion, fertilizer runoff or water pollution.
Products
Spirulina
Our principal product, accounting for 98% of net sales in the 1996 and
1997 fiscal years, is a nutritional microalgae marketed as Spirulina Pacifica.
Developed by us and sold worldwide to the health and natural foods market,
Spirulina Pacifica is unique strain of microalgae that is a highly absorbable
source of natural beta carotene, mixed carotenoids, B vitamins, GLA, protein,
essential amino acids and other phytonutrients. We believe that Spirulina
Pacifica has greater concentrations of natural beta carotene, better taste and
more consistent color than
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competing Spirulina products. We were the first Spirulina producer to have their
products and processes certified organic and we are the only microalgae producer
to have their quality system registered under the ISO 9002-94 standards.
Spirulina is a naturally occurring microscopic plant which has been
used for thousands of years as a food. Today, Spirulina is used by the health
conscious consumer for a variety of immediate and long term effects. Spirulina
is a good source of natural phytonutrients, including carotenoids and
phycocyanin, among others. Published scientific animal studies suggest that
increased levels of some of these natural compounds in the diet may reduce the
risk of cancer and strengthen the immune system.
We produce Spirulina Pacifica in three forms: powder, flake and
tablets. Powder is used as an ingredient in health food drinks while flakes are
used as a seasoning on various foods. Tablets are consumed daily as a food
supplement.
We also produce and market two products under the Hawaiian Energizer
name. Hawaiian Energizer sports drink contains complex carbohydrates and
vegetarian protein in combination with Spirulina Pacifica, Bee Pollen and
Siberian Ginseng. Hawaiian Energizer tablets contain Spirulina Pacifica, Bee
Pollen and Siberian Ginseng.
We anticipate that sales of our Spirulina Pacifica products will
continue to constitute a substantial portion of net sales during fiscal 1998. We
increased our production capacity of Spirulina products by approximately 50%
during 1996 by constructing more Spirulina ponds and expanding our Spirulina
processing facilities. While we intend to make every effort to sell the output
from the recently expanded facility, we cannot provide any assurance that the
market for Spirulina products in general, or our Spirulina Pacifica products in
particular, will support the increased output from the 1996 expansion. Any
decrease in the overall level of sales of, or the prices for, our Spirulina
Pacifica products, whether as a result of competition, change in consumer
demand, increased worldwide supply of Spirulina or any other factors, would have
a material adverse effect on our business, financial condition and results of
operations.
Natural Astaxanthin
Astaxanthin is a red pigment used primarily in the aquaculture industry
to impart pink color to the flesh of pen-raised fish and shrimp. For example,
without astaxanthin in its diet, the flesh of a pen-raised salmon is white,
reducing its commercial value by as much as half. Wild or free swimming salmon
and shrimp acquire their pink flesh or shells in nature from eating natural
astaxanthin contained in microalgae or from eating other fish that have eaten
the microalgae. Farm-raised salmon and shrimp, however, can only acquire pink
flesh or shells from the addition of astaxanthin to their feed.
The astaxanthin market currently is dominated by a single producer,
Hoffmann-LaRoche, who produces synthetic astaxanthin from petrochemicals.
Hoffmann-LaRoche currently sells synthetic astaxanthin to the aquaculture
industry at approximately $2,500 per pure kilogram. As a result of continued
growth in the world aquaculture industry, the world market for astaxanthin is
estimated to currently exceed $150 million per year.
During the fourth quarter of fiscal 1997, we began commercial
production of our natural astaxanthin product, NatuRose. The product was
introduced to the aquaculture industry at the World Aquaculture '97 Conference
in Seattle, Washington at the end of February, 1997. We currently have customers
in six countries who use the product and we anticipate that these customers will
purchase our entire NatuRose production output during fiscal 1998.
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Phycobiliproteins
We also produce phycobiliproteins which are sold to the medical and
biotechnology research industry. Phycobiliproteins are highly fluorescent
pigments purified from microalgae. Their spectral properties make them useful as
tags or markers in many kinds of biological assays, such as flow cytometry,
fluorescence immunoassays and fluorescence microscopy. Sales of
phycobiliproteins accounted for less than 2% of our net sales for the fiscal
year ended March 31, 1997. We anticipate that sales of phycobiliproteins will
not be material in future periods.
Product Under Development
A new product which is currently under development is a genetically
engineered mosquitocide from microalgae. This genetically engineered
mosquitocide is being developed under license from the University of Memphis.
The toxin gene from Bacillus thuringiensis var. israelensis (Bti) is cloned into
the blue-green algae Synechococcus. The bacterial toxin of Bti is very specific
to mosquitoes and black flies, while the blue-green algae is a food for mosquito
larvae. We believe that when applied to a mosquito-infested body of water, this
algae could act as an effective and environmentally safe means of control.
Development of this product is continuing and there is no assurance that a
commercial product will be achieved. Our inability to successfully develop or
commercialize additional products could have a material adverse effect on our
business, financial condition and results of operations.
Research & Development
Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. Our researchers
investigate specific microalgae identified in scientific literature for
potentially marketable products and then develop the technology to grow such
microalgae on a commercial scale.
Distribution
The majority of our bulk Spirulina sales are to companies with their
own Spirulina product lines. Many of these companies identify and promote
Cyanotech's Hawaiian Spirulina in their products. In the United States, we sell
directly to health food manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network. Orders for packaged consumer products are taken at the
store level by one of 52 regional broker representatives and shipped through one
of 25 distributors. In selected foreign markets, we have appointed exclusive
sales distributors for both bulk Spirulina and packaged consumer products.
In the years ended March 31, 1997, 1996 and 1995, international sales
accounted for approximately 62%, 55% and 42%, respectively, of our net sales. We
expect that international sales will continue to represent a significant portion
of our net sales. Our business, financial condition and results of operations
may be materially adversely affected by any difficulties associated with
managing accounts receivable from international customers, tariff regulations,
imposition of governmental controls, political and economic instability or other
trade restrictions. Although our international sales are currently denominated
in United States dollars, fluctuations in currency exchange rates could cause
our products to become relatively more expensive to customers in the affected
country, leading to a reduction in sales in that country.
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Additionally, our largest customer, a distributor located in Hong Kong (which on
July 1, 1997 becomes a part of China) resells our products principally in
mainland China, and thus we become exposed to political, legal, economic and
other risks and uncertainties associated with doing business in China.
Customers
Spirulina
We market and sell our Spirulina products to a variety of customers,
which range in size from $500 million in annual sales to small retail stores.
Several of our major customers are businesses that were established exclusively
to market and sell Spirulina products.
Approximately 47%, 49% and 32% of Cyanotech's net sales in the years
ended March 31, 1997, 1996 and 1995, respectively, were derived from sales to
our top three customers during those periods. Although we sell to almost 300
customers, our largest customer, Life Foundate, Ltd., a Hong Kong-based natural
products marketing and distribution company, accounted for approximately 34%,
29% and 3% of our net sales in the years ended March 31, 1997, 1996 and 1995,
respectively. This unaffiliated company purchases both bulk products and
packaged consumer products from us and sells them under a private label,
principally in mainland China. Hong Kong, where our largest customer is located,
reverts to China on July 1, 1997, with possible unpredictable effects on our
business with such customer. The loss of, or significant adverse change in, the
relationship between Cyanotech and its largest customer or any other major
customer would have a material adverse effect on the Company's business,
financial condition and results of operations.
Health Food Manufacturers. Health food manufacturers often use
Cyanotech's Spirulina products as a key ingredient in their Spirulina-based
products, or as an ingredient in their health food formulations. These customers
purchase bulk powder or bulk tablets and package the products under their brand
label for sale to the health and natural food markets. Many of the products
produced by these customers are often marketed and sold in direct competition
with our Nutrex line of retail consumer products. However, we differentiate our
Nutrex products from those of our bulk customers by reserving the certified
organic line of products for sale exclusively under our Nutrex label and a few
private labels.
Private Label Customers. We currently provide private label retail
consumer products to two private label international customers. Products for
these customers are manufactured only upon receipt of an order and no finished
product inventories are maintained.
Retail Distributors. Retail distributors act as product wholesalers to
independent and chain retailers. The majority of domestic Nutrex sales in the
year ended March 31, 1997 were to 25 distributors.
Natural Products Distributors. In the year ended March 31, 1997, we
sold bulk Spirulina products to seven domestic and one foreign customer engaged
in the business of distributing natural raw materials to health and natural food
manufacturers. These distributors provide their customers with standardized
quality control, warehousing and distribution services, and charge a mark-up on
the products for providing these services. These distributors may differentiate
the products they sell, but they generally treat the products as commodities,
with price being the major determining factor in their purchasing decision.
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Natural Astaxanthin
Our NatuRose product is being sold directly to end-users and
distributors in six countries for use in two industries. We believe that our
customer base and geographic distribution should increase as additional natural
astaxanthin production capacity is added.
Competition
Spirulina
Our Spirulina Pacifica products compete with a variety of vitamins,
dietary supplements, other algal products and similar nutritional products
available to consumers. The nutritional products market is highly competitive.
It includes international, national, regional and local producers and
distributors, many of whom have greater resources than Cyanotech, and many of
whom offer a greater variety of products. Our direct competition in the
Spirulina market currently is from Dainippon Ink and Chemical Company's facility
in California and several farms in China. To a lesser extent, we compete with
numerous smaller farms in India, Thailand, Brazil and South Africa. Packaged
consumer products marketed under our Nutrex brand also compete with products
marketed by health food manufacturing customers of Cyanotech who purchase bulk
Spirulina from us and package it for retail sales. Spirulina Pacifica also
competes in certain markets with other "green superfoods," such as Chlorella (a
green microalgae with sales primarily in Japan), Aphamizomenon flos-aquae (a
blue-green algae harvested from a eutrophic lake in Oregon with sales primarily
through multilevel marketing) and cereal grasses such as barley, wheat and
kamut. A decision by another company to focus on Cyanotech's existing or target
markets or a substantial increase in the overall supply of Spirulina could have
a material adverse effect on our business, financial condition and results of
operations. While we believe that our products compete favorably on factors such
as quality, brand name recognition and loyalty, our Spirulina Pacifica products
have typically been sold at prices higher than other Spirulina products. There
can be no assurance that we will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect our business,
financial condition and results of operations.
Natural Astaxanthin
Our natural astaxanthin product, NatuRose, will compete directly with
the synthetic astaxanthin product produced and marketed worldwide by
Hoffmann-LaRoche. In addition, several other companies have announced plans to
produce natural astaxanthin from microalgae or are producing small quantities
for test purposes. Although we are unaware of any studies indicating that
natural astaxanthin has any benefits not otherwise provided by synthetic
astaxanthin, we believe there is commercial demand for a natural astaxanthin
product and that our NatuRose product can compete on the basis of product
performance and price.
Phycobiliproteins
There are four major competitors which manufacture phycobiliprotein
products for sale, including Molecular Probes, Inc., Quantify Inc., Martek
Biosciences Corporation and Prozyme Inc. Cyanotech competes with these companies
on the basis of price and quality. New synthetic fluorescent compounds have been
developed by a third party which are superior to phycobiliproteins in some
applications. The advantage of the synthetic compounds is their lower molecular
weight and, in some cases, their lower cost. While our phycobiliprotein products
may
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not be able to compete effectively against synthetic compounds in some
applications, Cyanotech's phycobiliproteins have gained a reputation for high
quality at a competitive price.
Government Regulation
Cyanotech's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). The FDA
regulates, to varying degrees and in different ways, dietary supplements, other
food products, diagnostic medical devices and pharmaceutical products, including
their manufacture, testing, exportation, labeling, and, in some cases,
advertising. Generally, prescription pharmaceuticals and certain types of
diagnostic products, such as medical devices, are regulated more rigorously than
dietary supplements. The EPA rigorously regulates pesticides, among other types
of products.
Cyanotech is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We work with foreign
distributors to ensure our compliance with foreign laws, regulations and
policies. There can be no assurance that any changes with respect to federal,
state and foreign laws, regulations and policies, and, particularly with respect
to the FDA and EPA or other such regulatory bodies, with possible retroactive
effect, will not have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that any of our
potential products will satisfy applicable regulatory requirements.
The Federal Dietary Supplement Health and Education Act ("DSHEA")
regulates the use and marketing of dietary supplements, including vitamin
products. The DSHEA covers only dietary supplements and contains a number of
provisions that differentiate dietary supplements from other foods. The DSHEA
also sets forth standards for adulteration of dietary supplements or ingredients
thereof and establishes current food Good Manufacturing Practices ("cGMP")
requirements for dietary supplements. It also provides detailed requirements for
the labeling of dietary supplements, including nutrition and ingredient
labeling. We currently believe that our Spirulina Pacifica, marketed as a
dietary supplement, is exempt from FDA regulation as a food additive.
Our Spirulina manufacturing processes and our contract bottlers are
required to adhere to cGMP as prescribed by the FDA. We believe that we are
currently in compliance with all applicable cGMP and other food regulations.
Compliance with relevant cGMP requirements can be onerous and time consuming,
and there can be no assurance that Cyanotech can continue to meet relevant FDA
manufacturing requirements for existing products or meet such requirements for
any future products. Ongoing compliance with food cGMP and other applicable
regulatory requirements are monitored through periodic inspections by state and
federal agencies, including the FDA, the Hawaii Department of Health and
comparable agencies in other countries. Our processing facility is also
inspected annually for organic certification by Quality Assurance International
and for Kosher certification by the Kosher Overseers Association. The use of
Spirulina as a food additive for seasoning on salads or pasta or for such other
food uses has not been cleared by the FDA. We currently market the product for
these food uses on the basis of our belief that its use in these food
applications is generally recognized as safe and therefore is not subject to FDA
pre-market clearances as a food additive.
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Our natural astaxanthin product, NatuRose, will need FDA clearance for
use as a feed color additive in the United States. We believe that no regulatory
approval is required for use of NatuRose as a colorant in feeds or foods in
major markets outside the United States. The process of obtaining clearances for
a new color additive is expensive and time consuming. Extensive information is
required on the toxicity of the additive, including carcinogenicity studies and
other animal testing. No assurances can be given that any of our proposed
products intended for use as a feed additive will be approved by the FDA on a
timely basis, if at all.
As in vitro diagnostic medical device components, phycobiliprotein
products do not currently require pre-market clearances by the FDA. However, as
a component of a medical device, they can nonetheless still be subject to other
various medical device requirements, including cGMP requirements.
Patents, Licenses and Trademarks
Although we regard our proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to our success, we rely
on a combination of trade secret, contract, patent, copyright and trademark law
to establish and protect our rights in our products and technology. There can be
no assurance that we will be able to protect our technology adequately or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. Cyanotech has had one United States patent issued to it. Litigation in
the United States or abroad may be necessary to enforce our patent or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, results of operations and financial condition.
Additionally, although currently there are no pending claims or lawsuits that
have been brought against us, if any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license would be available on terms
acceptable or favorable to us, if at all.
Associates
Cyanotech employed 78 associates as of March 31, 1997, of which 74 are
full-time. Approximately 31 associates are involved in the harvesting and
production process, 10 are involved in research and product development, and the
remainder are involved in sales, administration and support. Management believes
that its relations with its associates are good. We have not experienced
difficulty in attracting personnel and none of our associates are represented by
a labor union.
Effective April 1, 1995, Cyanotech implemented a profit sharing plan
for all associates not covered under a separate management incentive plan. Under
the profit sharing plan, 5% of pre-tax profits are allocated based on gross
wages to non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax basis,
the remainder is deposited in each associate's 401(k) account on a pre-tax basis
with a six year vesting schedule, based on years of service with the Company.
Cyanotech's success depends to a significant extent upon the continued
service of Dr. Gerald R. Cysewski, its President and Chief Executive Officer,
and other members of the Company's executive management. The loss of any of such
key executives could have a material adverse effect on our business, financial
condition or results of operations. Furthermore, our
11
<PAGE>
future performance depends on our ability to identify, recruit and retain key
management personnel. The competition for such personnel is intense, and there
can be no assurance that we will be successful in such efforts. We are also
dependent on our ability to continue to attract, retain and motivate production,
distribution, sales and other personnel, of which there can be no assurance. The
failure to attract and retain such personnel could have a material adverse
effect on our business, financial condition and results of operations.
Item 2. Description of Properties
Cyanotech Corporation is located in Kailua-Kona, Hawaii, at the HOST
Park and also owns a 2,500 square foot sales office in a light industrial area
located approximately four miles from the HOST Park. The HOST Park facility
consists of approximately 90 leased acres containing production ponds, a
processing facility, a laboratory, administrative offices and additional space
for production ponds. All products are produced at this facility. The property
is leased from the State of Hawaii under a 30-year commercial lease expiring in
2025. During 1997, we reached an agreement with the State of Hawaii to lease an
additional 88 acres at the HOST Park, which will increase the total acreage
under lease to 178 acres. We plan to use this new property to construct a larger
NatuRose production facility and additional culture ponds that would use the
PhytoMax PCS technology. We believe that there is sufficient available land at
the HOST Park to meet our currently planned future needs. Our Nutrex, Inc.
subsidiary maintains sales offices in Kailua-Kona, Hawaii and Burlingame,
California.
Item 3. Legal Proceedings
Cyanotech is not currently subject to any material pending legal
proceedings.
We maintain product liability insurance in limited amounts for products
involving human consumption. In the opinion of management, broader product
liability insurance coverage is prohibitively expensive at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1997.
12
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
Until February 17, 1996, Cyanotech's Common Stock was quoted on The
Nasdaq SmallCap Market. On that date, our Common Stock began trading on the
Nasdaq National Market under the symbol "CYAN." The following table sets forth
the high and low bid quotation per share of our Common Stock on The Nasdaq
SmallCap Market and the Nasdaq National Market, as the case may be, for the
periods indicated. Quotations from The Nasdaq SmallCap Market are from the
Nasdaq Monthly Statistical Summary Report, and reflect inter-dealer prices,
without retail mark-up or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Three Months Ended High Low High Low
- ------------------ ------- -------- ------- ------
<S> <C> <C> <C> <C>
June 30, 1996 and 1995........... $ 9-1/8 $ 6-1/4 $ 3-3/8 $ 1-1/8
September 30, 1996 and 1995... $ 8-1/8 $ 5-5/16 $ 6-5/8 $ 2-11/16
December 31, 1996 and 1995... $ 7-3/8 $ 5-1/8 $ 14-7/8 $ 5-1/8
March 31, 1997 and 1996........ $ 8-1/8 $ 5-1/2 $ 11-3/8 $ 6-1/4
</TABLE>
Cyanotech has never declared or paid cash dividends on its Common
Stock. Holders of Series C Preferred Stock are entitled to cumulative annual
dividends at the rate of $.40 per share if and when declared by the Board of
Directors. Cyanotech may not pay dividends on the Common Stock until it has paid
accumulated dividends on the Series C Preferred Stock. Cumulative dividends in
arrears on the Series C Preferred Stock as of March 31, 1997 amounted to
$2,251,000 ($3.063 per share). We currently intend to retain all of our earnings
for use in the business and do not anticipate paying any cash dividends on
Series C Preferred Stock or Common Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as
of June 17, 1997 was 1,450.
13
<PAGE>
Item 6. Selected Financial Data
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------
1997 1996 1995 1994 1993 (a)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $11,399 $ 8,081 $ 4,150 $ 2,697 $ 2,485
Income from Operations 3,751 2,571 718 220 131
Net Income 4,159 2,509 769 204 255
Net Income per Common Share $0.25 $0.17 $0.05 $0.02 $0.03
Cash and Investment Securities $6,729 $9,409 $ 496 $ 866 $ 107
Total Assets 26,015 19,716 6,212 5,132 2,677
Long-term Debt and
Capital Lease Obligations 559 838 184 109 425
Stockholders' Equity $23,335 $17,316 $5,104 $4,160 $ 1,521
Average Shares Outstanding 16,598 14,548 13,589 13,330 9,159
</TABLE>
(a) The Company changed its fiscal year end from December 31, to March 31,
effective April 1, 1993. Accordingly, the 1993 information is for the period
January 1, 1992 through December 31, 1992.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
This report on Form 10-K contains forward-looking statements regarding
the future performance of Cyanotech and future events that involve risk and
uncertainties that could cause actual results to differ materially from the
statements contained herein. This document, and the other documents that we file
from time to time with the Securities and Exchange Commission, such as our
reports on Form 10-K, Form 10-Q, Form 8-K, and our proxy materials, contain
additional important factors that could cause actual results to differ from our
current expectations and the forward-looking statements contained herein.
All references to years in this Item 7 are to fiscal years.
During 1997, substantially all of our resources were dedicated to the
production of Spirulina Pacifica, a nutritional microalgae. We sell Spirulina
Pacifica to health food manufacturers, health food distributors and retail
consumers on a worldwide basis. Through the application of our Integrated
Culture Biology Management ("ICBM") technology, we maintain continuous algae
cultures and produce a new crop from each of our 67 algal culture ponds
(aggregating approximately 60 acres) approximately every week, on average.
Historically, the majority of our net sales have been derived from
sales of bulk Spirulina Pacifica products, which have lower associated gross
profit (measured in dollars) but higher associated gross margin (measured as a
percentage of net sales) than our packaged consumer products. Accordingly, an
increase in the percentage of net sales attributable to bulk products would
increase gross margin. Conversely, an increase in the percentage of net sales
attributable to packaged consumer products would decrease gross margin but
likely increase gross profit. We expect that the product mix will vary from
period to period, and a decrease in orders from a customer such as our largest
current customer which purchases primarily packaged consumer products could
require us to reallocate greater portions of our production capacity to lower
gross profit bulk products.
14
<PAGE>
During the second half of 1997, we began limited commercial production
of our natural astaxanthin product, NatuRose, and commenced full commercial
production in March, 1997. Also in March 1997, we announced that we had received
approval from the State of Hawaii to lease an additional 88 acres for the
purpose of expanding NatuRose production capacity. Expansion onto the 88 acres
is currently planned to be accomplished in three increments; the first increment
is planned to include 13 acres of culture systems, together with harvesting and
processing equipment sufficient to accommodate the entire site. Completion of
the first phase is planned for June 1998.
Since 1992, we have experienced substantial growth in our revenues and
operations, and have undergone substantial changes in our business that have
placed significant demands on the management, working capital and financial and
management control systems of Cyanotech. Our current and future expansion plans
may also place a significant strain on the management, working capital and
financial control systems of Cyanotech. Although we believe that our systems and
controls are adequate to address our current needs, there can be no assurance
that such systems will be adequate to address our future business expansion
plans. Our results of operations will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from any expansion and there can be no assurance that any expansion
will be profitable or that it will not adversely affect our results of
operations. In addition, the success of any current or future expansion plans
will depend in part upon our ability to continue to improve and expand our
management and financial control systems, to attract, retain and motivate key
personnel, and to raise additional required capital. There can be no assurance
that we will be successful in such respects.
Results of Operations
The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996
------ ------
<S> <C> <C>
Net sales..................................... 100.0% 100.0%
Cost of sales.............................. 40.3 43.5
------ ------
Gross profit.................................. 59.7 56.5
------ ------
Operating expenses:
Research and development................... 5.1 4.4
General and administrative................. 12.6 14.8
Sales and marketing........................ 9.1 5.5
------ ------
Total operating expenses................ 26.8 24.7
------ ------
Income from operations.................. 32.9 31.8
------ ------
Other income (expense):
Interest income............................ 3.9 0.3
Interest expense........................... (0.4) (1.1)
Other income, net.......................... 0.1 -
------ ------
Total other income (expense)............ 3.6 (0.8)
------ ------
Net income.............................. 36.5% 31.0%
------ ------
------ ------
</TABLE>
15
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales for the year ended March 31, 1997 were $11,399,000, a 41.1%
increase over net sales of $8,081,000 for the year ended March 31, 1996. The
increase in net sales during the year ended March 31, 1997 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 the
result of Spirulina production expansions that were completed in February and
November 1996.
International sales represented 62% and 55% of total net sales for the
years ended March 31, 1997 and 1996, respectively. This increase reflects the
Company's continuing emphasis on developing international markets and higher
sales of packaged consumer products into Asian retail markets. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 34% and 29% of Cyanotech's net sales in the
years ended March 31, 1997 and 1996, respectively. Hong Kong becomes a part of
China on July 1, 1997 with possible unpredictable effects on Cyanotech's
business with such customer. Loss of, or a significant decrease in such
business, would have a material adverse effect on our business, financial
condition and results of operations.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit increased to 59.7% of
net sales for the year ended March 31, 1997 from 56.5% of net sales for the year
ended March 31, 1996. The increase in gross profit from the prior year is
primarily attributable to economies of scale related to the production of both
bulk and packaged consumer Spirulina Pacifica products, but was partially offset
by lower average selling prices for bulk products.
Operating Expenses
Operating expenses increased by $1,066,000 and were 26.8% of net sales
for the year ended March 31, 1997, against 24.7% of net sales for the year ended
March 31, 1996, with significant increases in all three components.
Research and Development. Expenditures for research and development
increased 67.2% to $587,000, or 5.1% of net sales, for the year ended March 31,
1997, from $351,000, or 4.4% of net sales, for the year ended March 31, 1996.
The increase from the prior year is primarily the result of the development work
done on the natural astaxanthin product and the research work done on the
mosquitocide product. Research and development costs are expected to increase
further during fiscal 1998 as we continue to optimize the PhytoMax PCS
technology and also increase the research activities directed at the
mosquitocide product.
General and Administrative. General and administrative expenses
increased 20.2% to $1,437,000, or 12.6% of net sales, for the year ended March
31, 1997, from $1,196,000, or 14.8% of net sales, for the year ended March 31,
1996. The increase is due to higher staff-related expenditures, the accrual of
associate incentive bonuses indexed to the Company's profitability during the
year ended March 31, 1997, and higher insurance costs.
Sales and Marketing. Sales and marketing expenses increased 132.4% to
$1,034,000, or 9.1% of net sales, for the year ended March 31, 1997, from
$445,000, or 5.5% of net sales, for the year ended March 31, 1996. The increase
from the prior year is primarily due to higher staff-related expenditures, and
increased domestic and international marketing efforts associated
16
<PAGE>
with higher sales of packaged consumer products and with the introduction of the
NatuRose product.
Other Income (Expense)
Other income increased to $408,000, or 3.6% of net sales, for the year
ended March 31, 1997, from other expense of $62,000, or (0.8%) of net sales, for
the year ended March 31, 1996. The increase from the prior year is primarily
related to increased earnings on larger cash and investment securities balances.
Net Income
Net income increased to $4,159,000, or 36.5% of net sales, for the year
ended March 31, 1997, from $2,509,000, or 31.0% of net sales, for the year ended
March 31, 1996. The increase in net income is primarily a result of increased
production and sales of bulk and packaged consumer Spirulina Pacifica products.
Fiscal 1996 Compared to Fiscal 1995
Net Sales
Net sales for the year ended March 31, 1996 were $8,081,000, a 95%
increase over net sales of $4,150,000 for the year ended March 31, 1995. The
increase in net sales during the year ended March 31, 1996 was attributable to
price increases, 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 the result of Spirulina production expansions that were completed
in May, September and December of 1995 and February of 1996.
International sales represented 55% and 42% of total net sales for the
years ended March 31, 1996 and 1995, respectively. This increase reflected our
increased emphasis on developing international markets and higher sales of
packaged consumer products into Asian retail markets. Our largest customer, a
Hong Kong-based natural products marketing and distribution company, accounted
for approximately 29% and 3% of Cyanotech's net sales in the years ended March
31, 1996 and 1995, respectively.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit increased to 56.5% of
net sales for the year ended March 31, 1996 from 45.2% of net sales for the year
ended March 31, 1995. The increase in gross profit was attributable to higher
prices and higher production levels resulting in the absorption of fixed
manufacturing overhead costs over a significantly increased sales volume during
the fiscal year.
Operating Expenses
Operating expenses decreased to 24.7% of net sales for the year ended
March 31, 1996, from 27.9% of net sales for the year ended March 31, 1995. Its
components were:
17
<PAGE>
Research and Development. Expenditures for research and development
increased to 4.4% of net sales for the year ended March 31, 1996, from 4.1% of
net sales for the year ended March 31, 1995. The increase from the prior year
was primarily the result of the research work done on beta carotene for the
joint venture partnership with Hauser Chemical Research, Inc.
and on the natural astaxanthin product.
General and Administrative. General and administrative expenses
decreased to 14.8% of net sales for the year ended March 31, 1996, from 16.5% of
net sales for the year ended March 31, 1995. The increase in absolute dollars
was due to the accrual of associate incentive bonuses indexed to the Company's
profitability during the year ended March 31, 1996, higher insurance costs, and
compensation expense associated with grants of Common Stock to non-employee
directors.
Sales and Marketing. Sales and marketing expenses increased 48% to
$445,000, or 5.5% of net sales, for the year ended March 31, 1996, from
$301,000, or 7.3% of net sales, for the year ended March 31, 1995. The increase
in absolute dollars from the prior year was primarily due to expenses related to
increasing domestic and international marketing efforts and higher staff-related
expenditures.
Proportionate Share of Loss of Joint Venture
Proportionate share of loss of joint venture represents the Company's
50% ownership interest in a joint venture with Aquasearch, Inc. for the
development of astaxanthin. The loss in the year ended March 31, 1995 represents
services, and facilities and equipment use that was contributed to the joint
venture by Cyanotech. The joint venture was terminated in November 1994 by
mutual consent and the Company has no further obligation under the joint venture
arrangement.
Net Income
Net income increased to $2,509,000, or 31.0% of net sales, for the year
ended March 31, 1996, from $769,000, or 18.5% of net sales, for the year ended
March 31, 1995. The increase in net income was primarily a result of increased
production and sales of bulk and packaged consumer Spirulina Pacifica products.
Inflation during the years ended March 31, 1997, 1996 and 1995 did not
have a material impact on the Company's operations.
Variability of Results
Cyanotech Corporation was formed in 1983 and did not become profitable
on an annual basis until fiscal 1992 (the twelve month period ended December 31,
1992). As of March 31, 1997, our accumulated deficit was $461,000. There can be
no assurance that we will be consistently profitable on either a quarterly or an
annual basis. We have experienced quarterly fluctuations in operating results
and anticipate that these fluctuations may continue in future periods. Future
operating results may fluctuate as a result of changes in sales levels to our
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 our
competitors, changes in our customer mix, and overall trends in the market for
Spirulina products. While a significant portion of our expense levels are
relatively fixed, and the timing of increases in expense levels is based in
large
18
<PAGE>
part on our 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 our inability to adjust spending quickly enough to compensate for the sales
shortfall. We may also choose to reduce prices or increase spending in response
to market conditions, which may have a material adverse effect on our results of
operations.
New Accounting Standards
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, results of operations or liquidity.
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 preparing its basic financial statements. For entities not
adopting the new method, SFAS No. 123 requires footnote disclosure of pro forma
net income and net income 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 31,
1995. Effective April 1, 1996, the Company adopted SFAS No, 123 and elected to
continue to apply the provisions of APB No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
125 generally is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company does
not expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997. The Company will adopt SFAS No. 128 in the third quarter of
fiscal 1998. SFAS No. 128 requires the presentation of "Basic" earnings per
share, representing income available to common shareholders divided by the
weighted average number of common shares outstanding during the period, and
"Diluted" earnings per share, which is similar to the current presentation of
fully diluted earnings per share. SFAS No. 128 requires restatement of all prior
period earnings per share presented. Management does not expect adoption of SFAS
No. 128 to have a material impact on the Company's previously reported earnings
per share, financial position, results of operations or liquidity.
19
<PAGE>
Liquidity and Capital Resources
Cyanotech's cash and investment securities decreased $2,680,000 to
$6,729,000 during the fiscal year ended March 31, 1997. The decrease is
primarily attributable to increased capital expenditures for equipment and
leasehold improvements.
Cash flows provided by operating activities were $2,860,000 in 1997
compared to $2,598,000 in 1996. The primary source of 1997 cash flows from
operating activities was net income and an increase in accounts payable offset
by increases in accounts receivable , inventories, prepaid expenses and other
assets and a decrease in accrued expenses and other.
Cash flows used in investing activities were $10,962,000 in 1997
compared to $3,910,000 in 1996. The primary uses of cash flows in investing
activities during 1997 were for capital expenditures and net purchases of
investment securities.
Cash flows provided by financing activities were $1,468,000 in 1997
compared to $10,225,000 in 1996. The primary sources of cash flows provided by
financing activities were $1,393,000 in net proceeds from the sale of 225,000
shares of common stock to the underwriters of a public stock offering and
$350,000 from the exercise of common stock options and warrants, offset by
principal payments on long-term debt and capital lease obligations.
As of March 31, 1997, we had construction commitments totaling
$903,000, which we intend to fund from cash reserves and anticipated cash flows
from future operations. We presently estimate that our existing capital
resources and anticipated cash flows from future operations will be sufficient
to fund current operations. However, we plan to spend, subject to available
financing, approximately $12.3 million on capital expenditures during the next
two fiscal years, primarily to expand NatuRose production on the newly leased 88
acres and existing capital resources and anticipated cash flows from future
operations will not be sufficient to fund these capital expenditures. We are
currently seeking an increase in our credit facilities to meet any anticipated
shortfall. We currently have a $1,000,000 bank line of credit which is
collateralized by a certificate of deposit and an additional $1,000,000 bank
line of credit which is collateralized by all the assets of the Company. As of
March 31, 1997, there were no borrowings under either of these credit lines.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed herewith begin on page F-1.
20
<PAGE>
Selected Quarterly Financial Data (unaudited)
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
1997
<S> <C> <C> <C> <C> <C>
Net Sales $ 2,455 $ 2,812 $ 2,782 $ 3,350 $11,399
Gross Profit 1,470 1,740 1,731 1,868 6,809
Net Income 845 1,104 956 1,254 4,159
Net Income per Common Share $ 0.05 $ 0.07 $ 0.06 $ 0.08 $ 0.25
1996
Net Sales $ 1,568 $ 2,056 $ 2,348 $ 2,109 $ 8,081
Gross Profit 778 1,112 1,298 1,375 4,563
Net Income 413 605 711 780 2,509
Net Income per Common Share $ 0.03 $ 0.04 $ 0.05 $ 0.05 $ 0.17
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
<PAGE>
Part III
Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act
Identification of Directors
The information required by this Item is incorporated by reference from the
Sections captioned "Proposal One: Election of Directors," " Security Ownership
of Certain Beneficial Owners and Management" and "Compliance with Section 16(a)
of the Exchange Act" contained in Cyanotech's definitive 1997 Proxy Statement.
Identification of Executive Officers
The executive officers of Cyanotech and their ages and positions as of March 31,
1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerald R. Cysewski, Ph.D. ..... 48 Chairman of the Board, President and
Chief Executive Officer
Glenn D. Jensen. .............. 38 Vice President - Operations
Brent F. Kunimoto.............. 38 Vice President - Sales and Marketing
and
President, Nutrex, Inc.
Kelly J. Moorhead.............. 41 Vice President - International Sales
Ronald P. Scott................ 42 Executive Vice President - Finance
and Administration, Secretary,
Treasurer
</TABLE>
Dr. Cysewski co-founded Cyanotech in 1983 and has served as a director since
that time. Since March 1990, Dr. Cysewski has served as President and Chief
Executive Officer of Cyanotech and in October 1990 was also appointed to the
position of Chairman of the Board. From 1988 to November 1990, he served as Vice
Chairman and from 1983 to June, 1996 he served as Scientific Director of the
Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae research
and development at Battelle Northwest, a major contract research and development
firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the
Department of Chemical and Nuclear Engineering at the University of California,
Santa Barbara, where he received a two-year grant from the National Science
Foundation to develop a culture system for blue-green algae. Dr. Cysewski
received his doctorate in Chemical Engineering from the University of California
at Berkeley.
Mr. Jensen has served as Vice President - Operations since May 1993. He joined
Cyanotech in 1984 as Process Manager and was promoted to Production Manager in
1991, in which position he served until his promotion to Vice President -
Operations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a
plant engineer at a Spirulina production facility, Cal-Alga, near Fresno,
California, which ceased to do business in 1983. Mr. Jensen holds a B.S. degree
in Health Science from California State University, Fresno.
Mr. Kunimoto joined Cyanotech in August 1996 and has served as Vice
President - Sales and Marketing since that time. From 1989 to August 1996, Mr.
Kunimoto worked as a Marketing Manager and Marketing Director for Nestle Food
Company. From 1987 to 1989, he was an Assistant Product Manager for General
Mills, Inc.. From 1982 to 1985 he was a Senior Consultant for Arthur Andersen &
Company. Mr. Kunimoto received a B.S. degree in Economics and an M.B.A degree
from the University of California at Los Angeles.
22
<PAGE>
Mr. Moorhead has served as Vice President - International Sales of the Company
since August 1996. From December 1991 to August 1996 he served as Vice President
- - Sales and Marketing and President of Nutrex, Inc. From August 1987 to December
1991, he served as Vice President - Production of the Company. Mr. Moorhead
joined Cyanotech as Production Biologist in December 1984. Prior to joining
Cyanotech, Mr. Moorhead worked at the Oceanic Institute in Honolulu, Hawaii
where he conducted research on production of Spirulina from agricultural wastes.
Mr. Moorhead holds a B.S. degree in Aquatic Biology from the University of
California, Santa Barbara.
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.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
section captioned "Executive Compensation and Other Information" and "Director
Renumeration" contained in Cyanotech's definitive 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in Cyanotech's definitive 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
section captioned "Certain Transactions" contained in Cyanotech's definitive
1997 Proxy Statement.
23
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibit Number Document Description
- -------------- ---------------------
<S> <C>
3.1 Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1996, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1995, file no. 0-14602.)
4.1 Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form SB-2 filed on February 28, 1996, file
no. 333-00951.)
4.2 Terms of the Series C Preferred Stock as Revised 1991.
(Incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990, file no. 0-14602.)
10.1 1985 Incentive Stock Option Plan dated March 18, 1985,
as amended. (Incorporated by reference to Exhibit 4(d)
to the Company's Registration Statement on Form S-8
filed on December 3, 1992, file no. 33-55310.)
10.2 Stockholders Agreement dated as of May 17, 1993.
(Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1994, file no. 0-14602.)
10.3 1994 Non-Employee Directors Stock Option and Stock
Grant Plan. (Incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1994, file no. 0-14602.)
10.4 Supply and Exclusive Marketing Agreement between the
Company and Nutrition Gandalf dated July 8, 1994.
Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated
by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1995, file no. 0-14602.)
10.5 Facilities Rental Agreement dated November 1, 1994
between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.13.)
(Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.6 Facilities Rental Agreement dated December 2, 1994
between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.11.)
(Incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.7 Term Loan Agreement dated April 1, 1995 between
Spirulina International B.V. and the Company.
(Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
24
<PAGE>
10.8 License Agreement by and between The University of
Memphis and the Company dated June 19, 1995.
(Incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.9 Term Loan Agreement dated July 11, 1995 between the
Company and Satoshi Sakurada.(Incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995,
file no. 0-14602.)
10.10 1995 Stock Option Plan for Cyanotech Corporation dated
August 9, 1995, as amended. (Incorporated by reference
to Exhibit 4(c) to the Company's Registration Statement
on Form S-8 filed on October 27, 1995, file no.
33-63789.)
10.11 Sub-Lease Agreement between the Company and Natural
Energy Laboratory of Hawaii Authority dated December
29, 1995. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995, file no. 0-14602.)
10.12 Preferred Stock Conversion and Registration Rights
Agreement by and between the Company and Firemen's
Insurance Company of Newark, New Jersey, dated as of
February 20, 1996. (Incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement
on Form SB-2 as filed on February 28, 1996, file no.
333-00951.)
10.13 Registration Rights Agreement by and between the
Company and American Cynamid Company dated as of
February 20, 1996.(Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form
SB-2 as filed on February 28, 1996, file no 333-00951.)
10.14 Credit Agreement between the Company and First Hawaiian
Bank, dated February 27, 1997.
10.15 Promissory Note between the Company and First Hawaiian
Bank, dated February 27, 1997.
10.16 Security Agreement between the Company and First
Hawaiian Bank, dated February 27, 1997.
11.1 Statement re: Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors
27 Financial Data Schedule.
</TABLE>
- ---------------------
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fourth
quarter of the 1997 fiscal year.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
June, 1997.
CYANOTECH CORPORATION
By:/s/Gerald R. Cysewski
---------------------
Gerald R. Cysewski, Ph.D
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Gerald R. Cysewski Chairman of the Board, President June 23, 1997
- --------------------- and Chief Executive Officer -------------
Gerald R. Cysewski, Ph.D (Principal Executive Officer)
/s/Ronald P. Scott Executive Vice President - June 23, 1997
- --------------------- Finance and Administration, -------------
Ronald P. Scott Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/Julian C. Baker Director June 26, 1997
- --------------------- -------------
Julian C. Baker
/s/Eva R. Reichl Director June 21, 1997
- --------------------- -------------
Eva R. Reichl
/s/John T. Ushijima Director June 25, 1997
- --------------------- -------------
John T. Ushijima
/s/Paul C. Yuen Director June 23, 1997
- --------------------- -------------
Paul C. Yuen
</TABLE>
26
<PAGE>
<PAGE>
CYANOTECH CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-7 to F-20
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cyanotech Corporation:
We have audited the accompanying consolidated balance sheets of Cyanotech
Corporation and subsidiary as of March 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cyanotech
Corporation and subsidiary as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Honolulu, Hawaii
April 28, 1997
F-2
<PAGE>
CYANOTECH CORPORATION
Consolidated Balance Sheets
March 31, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,775 $ 9,409
Investment securities 3,954 --
Accounts receivable 2,791 1,288
Inventories 1,138 494
Prepaid expenses 155 120
Deferred tax assets 373 --
---------- ----------
Total current assets 11,186 11,311
Equipment and leasehold improvements, net 14,666 8,349
Other assets 163 56
---------- ----------
Total assets $ 26,015 $ 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 1,508 852
Accrued expenses and other 333 434
---------- ----------
Total current liabilities 2,121 1,562
Long-term debt, excluding current maturities 363 513
Obligations under capital lease, excluding current
maturities 196 325
---------- ----------
Total liabilities 2,680 2,400
---------- ----------
Stockholders' equity:
Preferred stock 1 1
Common stock of $.005 par value, authorized
25,000,000 shares at March 31, 1997 and
18,000,000 shares at March 31, 1996; issued
and outstanding 12,712,682 shares at
March 31, 1997 and 11,755,650 shares at
March 31, 1996 63 59
Additional paid-in capital 23,732 21,876
Accumulated deficit (461) (4,620)
---------- ----------
Total stockholders' equity 23,335 17,316
---------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 26,015 $ 19,716
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYANOTECH CORPORATION
Consolidated Statements of Income
Years ended March 31, 1997, 1996 and 1995
(in thousands, except per-share data)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 11,399 $ 8,081 $ 4,150
Cost of sales 4,590 3,518 2,275
---------- ---------- ----------
Gross profit 6,809 4,563 1,875
---------- ---------- ----------
Operating expenses:
Research and development 587 351 171
General and administrative 1,437 1,196 685
Sales and marketing 1,034 445 301
---------- ---------- ----------
Total operating expenses 3,058 1,992 1,157
---------- ---------- ----------
Income from operations 3,751 2,571 718
---------- ---------- ----------
Other income (expense):
Interest income 443 32 17
Interest expense, net of interest
costs capitalized of $23 in 1997
and nil in 1996 and 1995 (47) (90) (27)
Other income (expense), net 12 (4) 98
Proportionate share of loss of
joint venture -- -- (37)
---------- ---------- ----------
Total other income (expense) 408 (62) 51
---------- ---------- ----------
Net income $ 4,159 $ 2,509 $ 769
========== ========== ==========
Net income per common share $ 0.25 $ 0.17 $ 0.05
========== ========== ==========
Weighted average number of common
shares and common share equivalents 16,598 14,548 13,589
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CYANOTECH CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred stock Common Stock
--------------------------------------- Additional Total stock-
Par Par paid-in Accumulated Treasury holders'
Shares value Shares value capital deficit stock equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1994 2,118,507 $ 2 8,736,506 $ 44 $ 12,042 $ (7,898) $ (30) $ 4,160
Common stock issued for cash, net
of costs of $6 -- -- 146,969 1 144 -- -- 145
Exercise of common stock warrants
for cash -- -- 38,400 -- 24 -- -- 24
Exercise of stock options for cash -- -- 4,300 -- 3 -- -- 3
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock (21,030) -- 105,150 -- -- -- -- --
Conversion of 100,000 shares of
Series E preferred stock to
20,000 shares of common stock (100,000) -- 20,000 -- -- -- -- --
Issuance of common stock warrants
for services -- -- -- -- 3 -- -- 3
Net Income -- -- -- -- -- 769 -- 769
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1995 1,997,477 $ 2 9,051,325 $ 45 $ 12,216 $ (7,129) $ (30) $ 5,104
Exercise of common stock warrants
for cash -- -- 891,200 5 507 -- -- 512
Exercise of stock options for cash -- -- 82,625 -- 76 -- -- 76
Issuance of common stock to
nonemployee directors for
services -- -- 8,000 -- 40 -- -- 40
Exchange of Series A preferred
stock for common stock (1,250,000) (1) 250,000 1 -- -- -- --
Exchange of Series B preferred
stock for common stock (12,500) -- 2,500 -- -- -- -- --
Retirement of treasury stock -- -- (30,000) -- (30) -- 30 --
Common stock issued for cash, net of
costs of $556 -- -- 1,500,000 8 9,067 -- -- 9,075
Net income -- -- -- -- -- 2,509 -- 2,509
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 734,977 $ 1 11,755,650 $ 59 $ 21,876 $ (4,620) -- $ 17,316
Exercise of common stock warrants
for cash -- -- 668,120 3 298 -- -- 301
Exercise of stock options for cash -- -- 57,912 -- 49 -- -- 49
Issuance of common stock options for
other assets -- -- -- -- 80 -- -- 80
Issuance of common stock to nonemployee
directors for services -- -- 6,000 -- 37 -- -- 37
Common stock issued for cash, net
of costs of $51 -- -- 225,000 1 1,392 -- -- 1,393
Net income -- -- -- -- -- 4,159 -- 4,159
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 734,977 $ 1 12,712,682 $ 63 $ 23,732 $ (461) -- $ 23,335
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CYANOTECH CORPORATION
Consolidated Statements of Cash Flows
Years ended March 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,159 $ 2,509 $ 769
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (373) -- --
Proportionate share of loss of joint venture -- -- 37
Depreciation and amortization 691 499 338
Increase in accounts receivable (1,503) (640) (186)
(Increase) decrease in inventories (644) (119) 23
Increase in prepaid expenses and other
assets (62) (118) (17)
Increase in accounts payable 656 223 63
Increase (decrease) in accrued expenses
and other (101) 204 (28)
Other 37 40 --
--------- --------- ---------
Net cash provided by operating activities 2,860 2,598 999
--------- --------- ---------
Cash flows from investing activities:
Investment in equipment and leasehold
improvements (7,008) (3,910) (1,442)
Investment in joint venture -- -- (37)
Purchases of investment securities (10,827) -- --
Proceeds from sales and maturities of
investment securities (6,873) -- --
--------- --------- ---------
Net cash used in investing activities (10,962) (3,910) (1,479)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and exercise of stock options and warrants 1,743 9,663 175
Proceeds from issuance of long-term debt -- 750 --
Principal payments on long-term debt (150) (94) (13)
Principal payments on capital lease
obligations (125) (94) (52)
-------- -------- --------
Net cash provided by financing activities 1,468 10,225 110
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (6,634) 8,913 (370)
Cash and cash equivalents at beginning of year 9,409 496 866
-------- -------- ---------
Cash and cash equivalents at end of year $ 2,775 $ 9,409 $ 496
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest,
net of amounts capitalized $ 36 $ 73 $ 26
======== ======== ========
Cash paid during the year for income taxes $ 355 $ -- $ --
======== ======== ========
Non-cash investing and financing activities:
Equipment leased under capital lease
obligations $ -- $ 303 $ 166
======== ======== ========
Issuance of common stock and options
for services and other assets $ 117 $ 40 $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CYANOTECH CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997, 1996, and 1995
(all amounts in thousands, except share data)
(1) Description of Business and Summary of Accounting Policies
(a) Description of Business
Cyanotech Corporation (Company) develops and commercializes natural
products from microalgae. The Company is currently producing
microalgae products for the nutritional supplement and immunological
diagnostics markets and is also developing microalgae-based products
for the aquaculture feed/pigments, biopesticide and food coloring
markets.
Substantially all of the Company's net sales have been attributable
to its Spirulina Pacifica products. Sales of Spirulina Pacifica
products accounted for approximately 98% of the Company's net sales
for the years ended March 31, 1997 and 1996 and 97% for the year
ended March 31, 1995.
(b) Principles of Consolidation
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial
statements include the accounts of Cyanotech Corporation and its
wholly owned subsidiary, Nutrex, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt securities purchased with
original remaining maturities of three months or less to be cash
equivalents.
(d) Investment Securities
Investment securities at March 31, 1997 consist of U.S. Treasury,
mortgage-backed, and other interest bearing securities. The Company
classifies its debt and equity securities in one of three
categories; trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose
of selling them in the near term. Held-to-maturity security are
those securities in which the Company has the ability and intent to
hold the security until maturity. All other securities not included
in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of
the related tax effects, on available-for-sale securities are
excluded from earnings and are reported as a separate component of
stockholders equity until realized. Realized gains and losses from
the sale of held-to-maturity and available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as
an adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned.
F-7
<PAGE>
(e) Inventories
Inventories are stated at the lower of cost (which approximates
first-in, first-out) or market.
(f) Equipment and Leasehold Improvements
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of minimum lease payments or fair value of the equipment at
the inception of the lease. Depreciation and amortization are
provided using the straight-line method over the estimated useful
lives for equipment and furniture and fixtures and the shorter of
the lease terms or estimated useful lives for leasehold improvements
and equipment under capital lease as follows:
<TABLE>
<S> <C>
Equipment 3 to 10 years
Leasehold improvement remaining lease term (3 to 29 years)
Furniture and fixtures 7 years
Equipment under capital lease lease term (3 to 5 years)
</TABLE>
Amortization of equipment under capital lease is included in
depreciation and amortization expense in the accompanying
consolidated financial statements.
(g) Investments in Joint Ventures
Investments in joint ventures and other investments for which the
Company has the ability to exercise significant influence over the
operating and financing policies of the enterprise are accounted for
under the equity method.
(h) Net Income Per Common Share
Net income per common share is computed based on net income after
preferred stock dividend requirements and the weighted average
number of common shares outstanding during the year, adjusted to
reflect the assumed exercise of outstanding stock options and
warrants and the conversion of preferred stock to the extent such
items have a dilutive effect on the computation. Fully diluted net
income per common share is not materially different from primary net
income per common share.
(i) Research and Development
Research and development costs are expensed as incurred. Research
and development costs amounted to $587, $351 and $171 in 1997, 1996
and 1995, respectively.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their tax bases and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted income tax rates
applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
F-8
<PAGE>
(k) Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price for the underlying stock exceeded the exercise price.
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma net income per common share
disclosures for employee stock option grants made in fiscal year
1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, effective April 1, 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations or
liquidity.
(m) Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 125
generally is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. This Statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No.
125 will have a material impact on the Company's financial position,
results of operations or liquidity.
(n) Earnings per share
In February 1997, the FASB issued SFAS No. 128, Earnings per Share.
SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1997. The Company will adopt SFAS No. 128 in the
third quarter of fiscal 1998. SFAS No. 128 requires the presentation
of "Basic" earnings per share, representing income available to
common shareholders divided by the weighted average number of common
shares
F-9
<PAGE>
outstanding for the period, and "Diluted" earnings per share, which
is similar to the current presentation of fully diluted earnings per
share. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. Management does not expect
adoption of SFAS No. 128 to have a material impact on the Company's
previously reported earnings per share, financial position, results
of operations or liquidity.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the 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.
(p) Reclassifications
Certain 1995 and 1996 amounts were reclassified to conform with 1997
presentations. Such reclassifications had no effect on the
previously reported results of operations.
(2) Investment Securities
Investment securities held as available-for-sale as of March 31, 1997 are
as follows (fair value approximates amortized cost):
<TABLE>
<S> <C>
U.S. Treasury securities $ 2,454
Mortgage-backed securities 500
Other interest bearing securities 1,000
--------
$ 3,954
========
</TABLE>
Proceeds from the sales and maturities of investment securities classifed
as available for sale amounted to $6,873 in 1997. Gross realized gains and
losses on the disposal of investment securities available-for-sale during
1997 totaled $25 and nil, respectively. At March 31, 1997, scheduled
maturities for investment securities classified as available- for-sale were
less than twelve months for $1,000 and between twelve and twenty months for
$2,954.
(3) Inventories
Inventories consists of the following as of March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 166 $ 73
Work in process 362 200
Finished goods 346 105
Supplies 264 116
-------- --------
$ 1,138 $ 494
======== ========
</TABLE>
F-10
<PAGE>
(4) Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements consists of the following as of March
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Equipment $ 5,715 $ 3,538
Leasehold improvements 10,935 6,815
Furniture and fixtures 67 36
Equipment under capital lease 602 602
-------- --------
17,319 10,991
Less accumulated depreciation and
amortization (3,729) (3,038)
Construction in-progress 1,076 396
-------- --------
Equipment and leasehold improvements, net $14,666 $ 8,349
======== ========
</TABLE>
(5) Long-Term Debt and Bank Lines of Credit
Long-term Debt
Long-term debt consists of the following as of March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Notes payable at the London Interbank
Offered Rate (LIBOR) plus 2%,
adjusted quarterly; principal payments of
$37.5 due quarterly, plus interest $ 513 $ 663
Less current maturities of long-term debt (150) (150)
-------- ---------
Long-term debt, excluding current maturities $ 363 $ 513
======== =========
</TABLE>
On April 1, 1995, the Company executed a $250 note, payable in principal
installments of $12.5 each quarter through April 1, 2000, plus interest,
with principal and interest payments satisfied by delivering to the lender
an equivalent market value amount of salable product or cash (at the
lender's option). The note payable bears interest at LIBOR plus 2%,
adjusted quarterly, and is secured by certain production equipment.
On July 11, 1995, the Company executed a $500 note, payable in principal
installments of $25 each quarter through July 1, 2000, plus interest, with
principal and interest payments satisfied by delivering to the lender an
equivalent market value amount of salable product or cash (at the lender's
option). The note payable bears interest at LIBOR plus 2%, adjusted
quarterly, and is secured by certain leasehold improvements.
F-11
<PAGE>
Bank lines of credit
As of March 31, 1997, the Company has available two bank lines of credit
aggregating $2,000, both expiring on January 31, 1998, collateralized by
investment securities and other assets of the Company. As of March 31,
1997, there were no borrowings under either of these credit lines.
(6) Leases
The Company leases certain equipment and a portable building under capital
leases expiring between 1998 and 2000, and leases facilities, equipment and
land under operating leases expiring between 1997 and 2025. At March 31,
1997, the net book value of equipment under the capital leases amounted to
$472.
Future minimum lease payments under non-cancelable operating leases and the
present value of future minimum capital lease payments as of March 31, 1997
are as follows:
<TABLE>
<CAPTION>
Capital leases Operating leases
--------------- ----------------
<S> <C> <C>
Year ending March 31:
1998 $ 152 $ 117
1999 142 114
2000 68 112
2001 -- 112
2002 -- 112
Thereafter, through 2025 -- 2,659
--------------- ----------------
Total minimum lease payments 362 $ 3,226
================
Less amount representing interest
(at rates ranging from 7% to 19%) 36
---------------
Present value of net minimum
capital lease payments 326
Less current maturities of
capital lease obligations 130
--------------
Obligations under capital lease,
excluding current maturities $ 196
==============
</TABLE>
Total rent expense under operating leases amounted to $138, $89, and $48
for the years ended March 31, 1997, 1996, and 1995, respectively.
(7) Investment in Joint Venture
On August 31, 1994, the Company formed a joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") to develop, produce, and market
natural beta carotene. On July 1, 1996, the joint venture was terminated by
mutual consent. Under the terms of the termination agreement, Hauser had
until March 31, 1997 to acquire a license to use the Company's beta
F-12
<PAGE>
carotene technology. The consideration for the license was to be the
payment of aggregate out-of-pocket research and development expenses
incurred by the Company on behalf of the joint venture since August 1,
1994, which totaled $380. Prior to March 31, 1997, the Company was informed
by Hauser that it would not acquire the Cyanotech technology license. All
research and development costs incurred by the Company on behalf of the
joint venture were expensed as incurred.
(8) Series C Preferred Stock
Series C preferred stock is convertible into common stock at the rate of
one share of preferred stock for five shares of common stock through
February 23, 2000, after which date the conversion feature is no longer
applicable. Series C preferred stock has voting rights equal to the number
of shares of common stock into which it is convertible and has a preference
in liquidation over all other series of preferred stock of $5 per share
plus any accumulated but unpaid dividends. Holders of Series C preferred
stock are entitled to 8% cumulative annual dividends at the rate of $.40
per share; cumulative dividends in arrears as of March 31, 1997 amount to
$2,251 ($3.063 per share). Upon conversion of Series C preferred stock,
cumulative dividends in arrears on converted shares are no longer payable.
The amount of cumulative dividends foregone due to conversion during the
year ended March 31, 1995 was $36. The consent of Series C preferred
stockholders is required to modify their present rights or sell all or
substantially all of the Company's assets.
The Series C convertible preferred stock was originally issued with a
redemption feature. Terms of the Series C preferred stock were modified in
February 1991 to eliminate such redemption feature.
Preferred stock as of March 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Preferred stock, authorized 5,000,000
shares; $.001 par value, issued and
outstanding:
Series C, 8% cumulative, convertible;
734,977 shares; liquidation
value $5.00 per share plus unpaid
accumulated dividends $ 1 $ 1
========== ==========
</TABLE>
(9) Stock Options and Warrants
Stock options
At the Company's annual meeting held on August 9, 1995, the stockholders of
the Company approved the Company's 1995 Stock Option Plan (the "1995
Plan"), reserving a total of 400,000 shares of common stock for issuance
under the Plan. The 1995 Plan provides for the issuance of both incentive
and non-qualified stock options. Options are to be granted at or above the
fair market value of the Company's common stock at the date of grant and
generally become exercisable over a five-year period.
The Company also has a Non-employee Director Stock Option and Stock Grant
Plan, which was approved by stockholders in 1994 (the "1994 Plan"). Under
the 1994 Plan and upon election to the Board of Directors, non-employee
directors are granted a ten-year option to purchase 3,000
F-13
<PAGE>
shares of the Company's common stock at its fair market value on the date
of grant. In addition, on the date of each Annual Meeting of Stockholders
in each year that the 1994 Plan is in effect, each non-employee director
continuing in office will be automatically granted, without payment, 2,000
shares of common stock that is non-transferable for six months following
the date of grant. Grants of 6,000 and 8,000 shares of common stock were
made under the 1994 Plan in September 1996 and August 1995, respectively.
Expense recognized as a result of these stock grants amounted to $37 and
$40 for the years ended March 31, 1997 and 1996, respectively.
In 1985, the Company adopted an Incentive Stock Option Plan (qualified
stock option plan) and authorized 200,000 shares of common stock to be set
aside for grants to officers and key employees of the Company. In 1993, the
stockholders approved an amendment to the Incentive Stock Option Plan which
increased the number of shares reserved for issuance under this plan from
200,000 to 400,000. Options were granted with exercise prices not lower
than the fair market value of the Company's common stock at the date of
grant. Options generally became exercisable in four equal annual
installments, commencing one year from the date of grant and expire, if not
exercised, five years from the date of grant, unless stipulated otherwise
by the Compensation and Stock Option Committee of the Board of Directors.
The Incentive Stock Option Plan terminated on March 18, 1995. Options
granted prior to the plan termination date are not affected.
At March 31, 1997, there were 142,100 additional shares available for grant
under the 1995 Plan and 71,000 additional shares available under the 1994
Plan. The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $6.02 and $3.90 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected dividend yield of 0%, a risk-free interest
rate of 6.6%, expected volatility of 130%, and an expected life of 4.1
years; 1996 - expected dividend yield of 0%, risk-free interest rate of
6.2%, expected volatility of 110%, and an expected life of 4.3 years.
The Company applies APB Opinion No. 25 in accounting for employee
stock-based compensation and, accordingly, no compensation cost has been
recognized for its employee stock options in the accompanying financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for its employee stock options under SFAS No. 123,
the Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income As reported $ 4,159 $ 2,509
Pro forma $ 3,738 $ 2,408
Net income
per common share As reported $0.25 $0.17
Pro forma $0.23 $0.17
</TABLE>
Pro forma net income and net income per common share reflects only options
granted during 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in
the pro forma net income and net income per common share amounts presented
above because compensation cost is reflected over the options' vesting
period of 5 years, and compensation cost for options granted prior to April
1, 1995 is not considered.
F-14
<PAGE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
average
Number exercise
of shares price
--------- ---------
<S> <C> <C>
Balance at March 31, 1994 223,000 $1.00
Granted 213,900 1.45
Exercised (4,300) .74
Forfeited (23,900) 1.08
Balance at March 31, 1995 408,700 1.23
Granted 101,000 5.13
Exercised (82,625) .92
Forfeited (7,375) 1.03
Balance at March 31, 1996 419,700 2.24
Granted 166,000 7.30
Exercised (57,912) .85
Forfeited (107,400) 1.31
--------- ---------
Balance at March 31, 1997 420,388 $4.42
========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
Weighted-avg. Weighted- Weighted-
Range of Number remaining avg. Number avg.
exercise outstanding contractual exercise exercisable exercise
prices at 3/31/97 life price at 3/31/97 price
- -------------- ------------ ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.56 27,550 0.2 years $0.56 27,550 $0.56
$.94 to $1.38 76,975 2.5 years $0.95 39,987 $0.97
$1.50 55,363 1 year $1.50 55,363 $1.50
$5.13 to $7.63 260,500 3.8 years $6.47 47,800 $5.82
------- -------
$.56 to $7.63 420,388 3 years $4.42 170,700 $2.43
======= =======
</TABLE>
Warrants
At March 31, 1997, the Company has warrants outstanding to acquire 132,880
shares of the Company's common stock. The warrants were issued in
consideration for loans to the Company, in consideration for and in
recognition of services performed and to certain individuals who guaranteed
notes payable by the Company. Warrants granted for loans, services and
guarantees were granted with exercise prices not lower than the fair market
value of the Company's common stock on the date of grant. The warrants are
exercisable at prices ranging from $.40 to $1.00 per share and expire on
various dates from May 1997 to September 1999. Warrants to acquire
F-15
<PAGE>
668,120, 891,200 and 38,400 shares of common stock were exercised at
average prices of $.45, $.57 and $.63 in 1997, 1996 and 1995, respectively.
(10) Major Customers and Export Sales
Sales to major customers for the years ended March 31, 1997, 1996 and 1995
are summarized as follows (percent of product sales):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Customer A 34% 29% *
Customer B * 11% 17%
Customer C * * 13%
---------- ---------- ----------
34% 40% 30%
========== ========== ==========
</TABLE>
*Less than 10% of product sales.
Net product sales by geographic area for the years ended March 31, 1997,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 4,303 38% $ 3,614 45% $ 2,412 58%
Canada 851 8% 896 11% 696 17%
Europe 1,292 11% 747 9% 621 15%
China 3,905 34% 2,375 29% 125 3%
Asia/Pacific,
excluding China 1,048 9% 449 6% 296 7%
------- ---- ------- ---- ------- ----
$11,399 100% $ 8,081 100% $ 4,150 100%
======= ==== ======= ==== ======= ====
</TABLE>
All foreign product sales transactions are consummated in U.S. dollars.
F-16
<PAGE>
(11) Income Taxes
The components of income taxes are as follows for the year ended March 31,
1997:
<TABLE>
<CAPTION>
Federal State Total
---------- ---------- ----------
<S> <C> <C> <C>
Current $ 138 $ 235 $ 373
Deferred (352) (21) (373)
---------- ---------- ----------
$ (214) $ (214) $ --
========== ========== ==========
</TABLE>
The provision for income taxes for the years ended March 31, 1997 and 1996
was nil due to the utilization of net operating loss carryforwards.
A reconciliation of the amount of income taxes computed at the federal
statutory rate of 34% to the amount provided in the Company's consolidated
statements of income for the years ended March 31, 1997, 1996 and 1995
areas follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Amount at the federal
statutory income tax rate $ 1,414 $ 853 $ 261
State income taxes, net of
federal income tax effect 141 -- --
Benefit of operating loss
carryforwards (1,328) (853) (261)
Change in the beginning-of-the-year
balance of the valuation
allowance for deferred tax assets (213) -- --
Other (14) -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
The significant components of deferred income tax benefit for the year
ended March 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax benefit, exclusive of the change in
beginning-of-the-year valuation allowance balance
Decrease in beginning-of-the-year balance of the $ (160)
valuation allowance for deferred tax assets (213)
----------
$ (373)
==========
</TABLE>
F-17
<PAGE>
The tax effects of temporary differences related to various assets,
liabilities and carryforwards that give rise to deferred tax assets and
deferred tax liabilities as of March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 99 $ 1,427
Tax credit carryforwards 301 147
Other 145 169
--------- ----------
Gross deferred tax assets 545 1,743
Less valuation allowance (134) (1,675)
--------- ------------
Net deferred tax assets 411 68
Deferred tax liability - equipment and
leasehold improvements (38) (68)
========= ============
Net deferred tax asset $ 373 $ --
========= ============
</TABLE>
The valuation allowance for deferred tax assets as of April 1, 1996, 1995
and 1994 was $1,675, $2,751 and $3,051, respectively. The valuation
allowance decreased by $1,541, $1,076 and $300 during the years ended March
31, 1997, 1996 and 1995, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the net deferred tax assets
are deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowance at March 31, 1997. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income during the carryforward period are
reduced.
F-18
<PAGE>
At March 31, 1997, the Company has tax net operating tax loss carryforwards
available to offset future federal and state taxable income and tax credit
carryforwards available to offset future federal income taxes as follows:
<TABLE>
<CAPTION>
Net Research and
Expires operating Investment experimentation
March 31, losses tax credits tax credits
--------- --------- ----------- ---------------
<S> <C> <C> <C>
1998 $ -- $ -- $ 3
1999 -- -- 14
2000 -- 14 15
2001 -- -- 22
2002 -- -- 15
2003 -- -- 52
2004 -- -- 5
2005 292 -- --
2011 -- -- 23
--------- ----------- --------------
$ 292 $ 14 $ 149
========= =========== ==============
</TABLE>
In addition, at March 31, 1997, the Company has alternative minimum tax
credit carryforwards of approximately $138 which are available to reduce
future federal regular income taxes, over an indefinite period.
Investment tax credits will be recorded as a reduction of the provision for
federal income taxes in the year realized.
(12) Fair Value of Financial Instruments
SFAS Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. Note 2 presents the estimated fair values of
investment securities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of March 31, 1997:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term
nature of these instruments.
Long-Term Debt
The carrying amounts approximate fair value because the instruments reprice
at market rates on a quarterly basis.
F-19
<PAGE>
(13) Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan for all associates not
covered under a separate management incentive plan. Under the 401(k) profit
sharing plan, 5% of pre-tax profits are allocated based on gross wages to
non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax
basis, the remainder is deposited in each associate's 401(k) account on a
pre-tax basis with a six year vesting schedule, based on years of service
with the Company. All associates can also make voluntary pre-tax
contributions to their 401(k) account. Compensation expense relative to
this plan amounted to $219, $132 and nil for years ended March 31, 1997,
1996 and 1995, respectively.
(14) Commitments and Contingencies
At March 31, 1997, the Company has entered into commitments for capital
expenditures totaling $903.
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-20
EXHIBIT 10.14
CREDIT AGREEMENT
THIS is an agreement (the "Agreement") made this 27th day of February
1997, by FIRST HAWAIIAN BANK, a Hawaii corporation, as lender, and CYANOTECH
CORPORATION, a Nevada corporation, as borrower.
This Agreement concerns the establishment of a credit facility in the
amount of ONE MILLION AND NO/000 DOLLARS ($1,000,000.00) made available to the
Borrower by the Lender, pursuant to which the Borrower may obtain Advances from
the Lender, all upon the terms and conditions set forth below.
In consideration of the mutual covenants hereinafter set forth, and
intending to be legally bound thereby, the Borrower and the Lender hereby agree
as follows:
SECTION 1. Definitions.
As used in this Agreement, each of the following terms shall have the
meaning set forth below with respect thereto:
"Advance" means a disbursement of loan proceeds pursuant to the terms
and conditions set forth in Section 2 of this Agreement.
"Banking Day" means a day on which First Hawaiian Bank is open for
business in the State of Hawaii.
"Borrower" means Cyanotech Corporation, a Nevada corporation.
"Borrowing Base" means the aggregate of (i) seventy-five percent (75%)
of Eligible Domestic Accounts Receivable and (ii) fifty percent (50%) of
Eligible Foreign Accounts Receivable.
"Borrowing Base Certificate" means the certificate in the form attached
hereto as Exhibit "1" and made a part hereof.
"Capital Lease" means any lease of any property (whether real, personal
or mixed) which, in conformity with GAAP, is or should be accounted for as a
capital lease on a balance sheet.
"Closing Date" means the date on which the Lender determines that all
of the conditions set forth in Section 4 of this Agreement have been satisfied.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commitment" means the Lender's agreement to make Advances of loan
proceeds to the Borrower, pursuant to, but subject to the terms and conditions
of, this Agreement and, where the context so requires, the aggregate principal
amount of all Advances disbursed or to
<PAGE>
be disbursed, thereunder. The amount of the Commitment shall be the lesser of
(i) ONE MILLION AND NO/000 DOLLARS ($1,000,000.00) and (ii) the Borrowing Base.
"Compliance Certificate" means the certificate in the form attached
hereto as Exhibit "2" and made a part hereof.
"Current Liabilities" means the principal amount of all loans and short
term notes payable within one year, "funded debt" (i.e., current principal
amounts of long-term debt and Capital Leases which are to be paid within one
year), trade accounts payable, accrued expenses, cash dividends payable,
unearned revenues, income taxes payable and such other items of indebtedness and
other obligations of the Borrower in accordance with GAAP, would be included as
current liabilities on the balance sheet as of the date to which liabilities are
to be determined.
"Eligible Domestic Accounts Receivable" means receivables from
customers located within the United States of America which are less than ninety
(90) days from invoice date; provided, however, in determining Eligible Domestic
Accounts Receivable (i) receivables from governmental entities and Subsidiaries
of Borrower, and intracompany accounts, shall not be included; (ii) receivables
from customers to whom Borrower is indebted, including any accounts payable to
such customers, shall only be included to the extent of the excess, if any, of
such accounts receivable over such indebtedness; (iii) if over fifty percent
(50%) of the value of all receivables from any customer are older than ninety
(90) days from their respective invoice dates, no receivables from such customer
shall be included; and (iv) the portion of each account receivable in excess of
twenty-five percent (25%) of the total of Eligible Domestic Accounts Receivable
plus Eligible Foreign Accounts Receivable (as determined following any such
exclusions) shall not be included.
"Eligible Foreign Accounts Receivable" means receivables from customers
located outside of the United States of America for which credit support is
provided by Export Letters of Credit which have been provided to the Lender for
negotiation.
"ERISA" means the Employees Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" means any of the events described in Section 7.1 of
this Agreement.
"Expenses" means the fees, costs and expenses described in Section 6.7
of this Agreement.
"Export Letter of Credit" means a documentary letter of credit, issued
by a bank preapproved in writing by Lender, which bank has accepted
documentation for payment.
"Financing Statement" means the UCC-1 Financing Statement dated
concurrently with the Security Agreement, executed by the Borrower in favor of
the Lender, perfecting a first security interest in and to the collateral
described in the Security Agreement.
2
<PAGE>
"GAAP" means generally accepted accounting principles.
"Lender" means First Hawaiian Bank, a Hawaii corporation.
"Loan Documents" means all of the documents and instruments executed by
or for the benefit of the Borrower in connection with the Commitment, including,
without limitation, this Agreement, the Note, the Security Agreement and the
Financing Statement.
"Loan Fee" means an amount equal to TWO THOUSAND FIVE HUNDRED DOLLARS
($2,500.00), one-half of which was payable by the Borrower upon the acceptance
of the Lender's offer of the Commitment, the receipt of which is acknowledged by
the Lender, and one-half of which is payable by the Borrower on or before the
Closing Date.
"Maturity Date" means (a) January 31, 1998 or (b) the date, following
the occurrence of an Event of Default, on which the Lender notifies the Borrower
that the entire Principal Balance, together with all accrued interest thereon,
and all fees, charges, expenses and other sums payable under this Agreement and
the other Loan Documents, shall become due and payable.
"Net Available Collected Balances" means balances in demand deposit and
maximizer accounts with and analyzed by the Lender, after deducting (a)
provisional credits for items in the process of collection; (b) reserves; (c)
the collected balance necessary to support account activity charges; and (d) the
collected balance necessary to support earnings paid to the Borrower as
interest.
"Net Income" means the net income of the Borrower (i.e., gross revenues
received by the Borrower, less operating expenses, taxes, insurance and other
proper expenses in accordance with GAAP. Net Income shall not include (i) gains
resulting from the sale or other disposition of assets which do not relate to
the activities of the Borrower in the ordinary course of business, (ii) gains
arising from changes in accounting principles or practices and, (iii) gains
arising from the write-up of assets.
"Note" means the promissory note dated the date of this Agreement,
executed by the Borrower in favor of the Lender, evidencing the Borrower's
agreement to repay the Principal Balance hereunder, together with interest
thereon, as provided therein.
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated association, and or government or any
department or agency thereof.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code, and is maintained by the Borrower for its own
employees.
"Principal Balance" means the aggregate outstanding principal balance
of all Advances.
3
<PAGE>
"Quarter" means any one of the following three-calendar-month periods
in any calendar year: January 1 to and including March 31; April 1 to and
including June 30; July 1 to and including September 30; and October 1 to and
including December 31.
"Quick Assets" means cash and cash equivalents, marketable securities
and accounts receivable (less doubtful accounts) in accordance with GAAP as of
the date to which Quick Assets are to be determined.
"Quick Ratio" means Quick Assets divided by Current Liabilities.
"Subsidiary" means (a) any corporation of which the Borrower, or a
subsidiary of the Borrower, owns or controls, directly or indirectly, 51% or
more of the outstanding capital stock, or (b) any partnership or other entity in
which the Borrower, or a subsidiary of the Borrower, holds 51% or more of the
equity interest, and of which the Borrower, or a subsidiary of the Borrower,
controls the management or policies.
"Tangible Net Worth" means the excess of Total Assets over Total
Liabilities, as determined in accordance with GAAP.
"Total Assets" means all items of property owned by the Borrower and it
Subsidiaries which, in accordance with GAAP, would be included as an asset on
the balance sheet as of the date to which assets are to be determined,
excluding, however, (a) all assets which would be classified as intangible
assets under GAAP, such as, goodwill (whether representing the excess of cost
over book value of assets acquired or otherwise), patents, trademarks, trade
names, copyrights, franchises, and deferred charges (including, without
limitation, organization costs, and research and development costs), (b)
treasury stock and minority interests in Subsidiaries, (c) cash set apart and
held in a sinking or other analogous fund established for the purpose of
redemption or other retirement of capital stock, (d) to the extent not already
deducted from total assets, reserves for depreciation, depletion, obsolescence
or amortization of properties and all other reserves or appropriations of
retained earnings which, in accordance with GAAP, should be established in
connection with the business conducted by the Borrower, and (e) any evaluation
or other write-up in book value of assets subsequent to December 31, 1995.
"Total Liabilities" means the principal amount of all items of
indebtedness and other obligations of the Borrower and its Subsidiaries which,
in accordance with GAAP, would be included as a liability on the balance sheet
as of the date to which liabilities are to be determined, including, without
limitation, (i) indebtedness for borrowed money or for the deferred purchase
price of property or services, (ii) obligations as lessee under leases which
shall have been or should be, in accordance with GAAP, recorded as Capital
Leases, (iii) reserves for loan losses, (iv) obligations under direct or
indirect guarantees, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise assure a creditor against loss in respect of,
indebtedness or obligations of others, and (v) obligations in respect of
unfunded vested benefits in excess of $100,000.00 in the aggregate under all
Plans covered by Title IV of ERISA.
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SECTION 2. The Commitment.
2.1 Amount. The Lender agrees, subject to the terms and conditions
contained in this Agreement, to make Advances to the Borrower in the aggregate
amount which shall not exceed, at any one time, the amount of the Commitment.
Within the limits of the Commitment, and subject to the terms and conditions
contained herein, the Borrower may borrow, repay and reborrow.
2.2 Advances. Applications for each desired Advance under this
Agreement shall be made by the Borrower in accordance with the terms and
provisions of the Note and shall be accompanied by a Borrowing Base Certificate.
No Advance shall cause the Principal Balance to exceed the amount of the
Commitment. The Borrower shall use the proceeds of the Advances for Borrower's
working capital purposes, and for such other purposes as the Lender may approve
in writing.
2.3 Interest. Interest on the Principal Balance shall accrue as
provided in the Note.
2.4 Payments. The Borrower shall pay to the Lender interest on the
Principal Balance as provided in the Note. The Borrower shall repay the
Principal Balance, all accrued but unpaid interest thereon, and all fees,
charges and other sums payable under the Loan Documents, to the Lender on the
Maturity Date. The Borrower may prepay principal on the terms and conditions set
forth in the Note.
2.5 Security Agreement. In order to provide further assurance to the
Lender of the due and punctual payment of the Note and the observance and
performance by the Borrower of all of its obligations under the Loan Documents,
the Borrower shall, on or before the Closing Date, deliver to the Lender, the
Security Agreement, duly executed by the Borrower, in form and substance
satisfactory to the Lender.
2.6 Closing. Closing of the Commitment shall be subject to the
satisfaction of all of the conditions precedent set forth in Section 4 of this
Agreement, and shall occur no later than March 14, 1997.
SECTION 3. Representations and Warranties by the Borrower.
The Borrower represents and warrants to the Lender that:
3.1 Organization, Standing and Authority of Borrower. The Borrower is
a Nevada corporation duly registered, validly existing and in good standing
under the laws of the State of Nevada, is authorized to do business and is in
good standing in the State of Hawaii and has all requisite power and authority
to carry on the business and to own the property that it now carries on and
owns. Each Subsidiary is duly registered, validly existing and in good standing
under the laws of the jurisdiction where it was formed, and each Subsidiary has
all requisite power and authority to carry on the business and to own the
property that it now carries on and owns. The Borrower has all requisite
power and authority to execute and deliver the Loan Documents and to observe and
perform all of the provisions and conditions
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thereof. The execution and delivery of the Loan Documents have been duly
authorized by the Board of Directors of the Borrower and, to the extent required
by law, by the stockholders of the Borrower, and no other corporate action of
the Borrower is requisite to the execution and delivery of the Loan Documents.
3.2 Tax Returns and Payments. All tax returns and reports of the
Borrower required by law to be filed have been duly filed, and all taxes,
assessments, contributions, fees and other governmental charges (other than
those presently payable without penalty or interest and those which have been
disclosed to the Lender but which are currently being contested in good faith)
upon the Borrower or upon the properties or assets or income of the Borrower,
which are due and payable, have been paid.
3.3 Litigation. There is, to the knowledge of the Borrower, no action,
suit, proceeding or investigation pending at law or in equity or before any
federal, state, territorial, municipal or other governmental department,
commission, board, bureau, agency or instrumentality or threatened against or
affecting the Borrower, which might materially adversely affect the Borrower's
ability to perform its obligations under the Loan Documents.
3.4 Compliance with Other Instruments, None Burdensome. The Borrower
is not in violation of or in default with respect to any term or provision
of its Articles of Incorporation or Bylaws or any mortgage, indenture, contract,
agreement or instrument applicable to it or by which it may be bound; and the
execution, delivery, performance of and compliance with each and all of the Loan
Documents will not result in any such violation or be in conflict with or
constitute a default under any such term or provision or result in the creation
of any mortgage, lien or charge on any of the properties or assets of the
Borrower not contemplated by this Agreement; and there is no term or provision
of the Articles of Incorporation or Bylaws, of the Borrower or any mortgage,
indenture, contract, agreement or instrument applicable to the Borrower or by
which it may be bound, which may adversely affect the business or prospects or
condition (financial or other) of the Borrower or of any of its properties or
assets. Without limiting the foregoing, the Borrower is not a party to, or
otherwise subject to, any agreement which limits the amount of, or otherwise
imposes restrictions on, the incurring of indebtedness by the Borrower of the
type contemplated by this Agreement.
3.5 Compliance with Law. The consummation of the transactions
contemplated by the Loan Documents will not conflict with or result in a breach
of any law, statute, ordinance, regulation, order, writ, injunction, judgment of
any court or governmental instrumentality, domestic or foreign.
3.6 Governmental Authorization. No consent, approval or authorization
of, or registration, declaration or filing with, any governmental or public body
or authority in connection with the valid execution and delivery of each of the
Loan Documents is required or, if required, such consent, approval, order or
authorization shall have been obtained prior to the Closing Date.
3.7 Financial Statements. All financial statements heretofore
delivered to the Lender by the Borrower are true and correct in all respects,
have been prepared in
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accordance with GAAP, consistently applied, and fairly represent the financial
condition of the Borrower as of the dates thereof; and no material, adverse
changes have occurred in the financial condition reflected therein since the
dates thereof.
3.8 Brokers, Finders and Agents. The Borrower has not employed or
engaged any broker, finder or agent who may claim a commission or fee or other
compensation with respect to the Commitment. The Borrower will indemnify and
hold the Lender harmless from any and all claims of brokers or other claims for
commissions or fees in connection with the Commitment and will further hold the
Lender harmless and indemnify the Lender against all losses, damages, costs and
charges (including attorneys' fees) which the Lender may sustain because of such
claims or in consequence of defending against such claims.
3.9 Compliance with Funding Standards. The Borrower has fulfilled its
obligations under the minimum funding standards of ERISA and the Code with
respect to each Plan and is in compliance in all material respects with the
currently applicable provisions of ERISA and the Code, and has not incurred any
liability to the Pension Benefit Guaranty Corporation or a Plan under Title IV
of ERISA.
3.10 Character of Representations and Warranties. None of the financial
statements or any certificate or statement furnished to the Lender by or on
behalf of the Borrower in connection with the Commitment, and none of the
representations and warranties in this Agreement, contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
the statements contained therein or herein not misleading. To the best knowledge
of the Borrower, there is no fact which materially adversely affects or in the
future (so far as the Borrower can now foresee) may materially adversely affect
the ability of the Borrower to observe or perform its obligations under the Loan
Documents which has not been set forth herein or in a certificate or opinion of
counsel or other written statement furnished to the Lender by or on behalf of
the Borrower.
SECTION 4. Conditions of the Lender's Obligation.
The Lender's obligation to make Advances hereunder, is subject to the
fulfillment, to its reasonable satisfaction, of the following conditions:
4.1 Representations and Warranties True at Closing. The representations
and warranties contained in Section 3 of this Agreement and otherwise made by or
on behalf of the Borrower in connection with the Commitment shall be true and
correct as of the time of each request by the Borrower for an Advance hereunder,
with the same effect as if made at such time.
4.2 Execution of Loan Documents. The Borrower shall have executed and
delivered to the Lender and the Lender shall have approved, all of the Loan
Documents.
4.3 Expenses; Loan Fee. The Borrower shall have paid to the Lender on
the Closing Date the Loan Fee and all of the fees and expenses (including,
without limitation, fees and disbursements and expenses of legal counsel for the
Lender) provided for in Section 6.7 which the Lender shall determine to be due
and payable as of the Closing Date.
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4.4 No Event of Default. There shall exist at the time each Advance
is made no condition or event which would constitute an Event of Default or
which, after notice or lapse of time, or both, would constitute an Event of
Default.
4.5 Opinion of Counsel. The Borrower shall have delivered to the
Lender, and the Lender shall have approved, an opinion of legal counsel for the
Borrower in substantially the form set forth in Exhibit "3" attached hereto and
made a part hereof.
4.6 Corporate Proceedings and Documents. All corporate proceedings
taken by the Borrower in connection with the Commitment shall be satisfactory in
form and substance to the Lender and its counsel, and the Lender shall have
received; (i) properly certified resolutions of the Board of Directors of the
Borrower duly authorizing the execution and delivery of the Loan Documents and
the consummation of the transactions contemplated hereby, (ii) a certificates of
good standing of the Borrower issued by the Secretary of State of the State of
Nevada and by Director of the Department of Commerce and Consumer Affairs of the
State of Hawaii, (iii) a copy of the Articles of Incorporation of the Borrower,
certified as true and exact by said Director, (iv) a copy of the Bylaws of the
Borrower certified as true, correct and complete by the secretary of the
Borrower, and (v) such authenticated copies of such other corporate documents as
the Lender may reasonably request.
4.7 Evidence of Tax Payments; Tax Clearance Certificate. The Lender
shall have received a Tax Clearance Certificate issued by the Department of
Taxation of the State of Hawaii certifying that all taxes due to the State of
Hawaii by the Borrower up to and including a date within thirty (30) days of the
Closing Date have been paid.
4.8 Financing Statement and Personal Property Lien Report; Court
Report. The Borrower shall have delivered to the Lender a financing statement
and personal property lien report and court report, in form and substance
satisfactory to the Lender, issued by a recognized corporate searcher of titles,
advising the Lender that a search of the public records discloses, as of the
Closing Date, no judgments, pending actions in state or federal court, security
agreements, chattel mortgages, financing statements, title retention agreements,
notices or certificates of tax liens or other instruments or documents filed or
recorded against the Borrower except those which may be approved by the Lender
in writing.
4.9 Insurance. Borrower shall have delivered to the Lender evidence
that the requirements of Section 6.5 have been satisfied.
SECTION 5. Making of Advances.
Each Advance shall be made upon and subject to the following terms and
conditions:
5.1 Application for Advances. Applications for Advances shall be made
as provided in the Note. Each application for an Advance shall be deemed a
certification by the Borrower that, as of the date of such application, all
representations and warranties contained in Section 3 are true and correct, and
the Borrower is in compliance with all of the provisions of Sections 4 and 5 of
this Agreement. All statements contained in any such
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application shall be deemed a representation and warranty made by the Borrower
in connection with the Commitment.
5.2 Conditions Precedent to Each Advance. The Lender's obligation to
make each Advance hereunder shall be subject to the fulfillment, to the Lender's
satisfaction, as of the time of application and as of the time of the Advance,
of all of the conditions precedent set forth in this Section 5.2:
(a) Representations and Warranties. The representations and
warranties contained in any application for an Advance, or in Section 3 of this
Agreement, or otherwise made by or on behalf of the Borrower in connection with
the Commitment, shall be true and correct as of the time of each Advance made by
the Lender under this Agreement, with the same effect as if made at such time.
(b) No Event of Default. There shall exist at the time of
each Advance no condition which would constitute an Event of Default or which,
after notice or lapse of time, or both, would constitute an Event of Default.
(c) Payment of Expenses. The Borrower shall have paid to the
Lender all expenses provided for in Section 6.7 which the Lender shall determine
to be due.
(d) Insolvency, Bankruptcy, etc. The Borrower shall not have
become insolvent; or made an assignment for the benefit of creditors; or failed
generally to pay its debts as they become due; or become the subject of an order
for relief in an involuntary case under the bankruptcy laws as now or hereafter
constituted, and such order shall remain in effect and unstayed for a period of
sixty (60) consecutive days; or commenced a voluntary case under the bankruptcy
laws as now or hereafter constituted; or filed any petition or answer seeking
for itself any arrangement, composition, adjustment, liquidation, dissolution or
similar relief to which it may be entitled under any present or future statute,
law or regulation; or filed any answer admitting the material allegations of any
petition filed against it in any such proceedings; or sought or consented to or
acquiesced in the appointment of, or taking possession by, any custodian,
trustee, receiver or liquidator of it or of all or a substantial part of its
properties or assets; or taken any action looking to its dissolution or
liquidation; or within sixty (60) days after commencement of any proceedings
against it seeking any arrangement, composition, adjustment, liquidation,
dissolution or similar relief to which it may be entitled under any present or
future statute, law or regulation, such proceeding shall not have been
dismissed; or within sixty (60) days after the appointment of, or taking
possession by, any custodian, trustee, receiver or liquidator of any or of all
or a substantial part of its properties or assets, without its consent or
acquiescence, any such appointment or possession shall not have been vacated or
terminated.
5.3 Conditions are Solely for Benefit of the Lender. All conditions of
the obligations of the Lender to make Advances hereunder, are imposed solely and
exclusively for the benefit of the Lender, and its successors and assigns, and
no other person shall have standing to require satisfaction of such conditions
in accordance with their terms, and no other person shall, under any
circumstances, be deemed to be the beneficiary of such
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conditions, any or all of which may be freely waived, in whole or in part, by
the Lender at any time if, in its sole judgment, the Lender deems it advisable
to do so.
SECTION 6. Other Covenants of the Borrower.
The Borrower covenants and agrees with the Lender as follows:
6.1 Information. The Borrower shall (a) furnish directly to the Lender
with reasonable promptness such data and information, financial or otherwise,
(including such financial information as may be required in any separate
agreement between the Borrower and the Lender) concerning the Borrower as from
time to time may reasonably be requested by the Lender, including, but not
limited to, an annual audit of Borrower's accounts receivable prepared by an
auditor selected by the Lender which may be requested at the sole discretion of
the Lender; (b) promptly notify the Lender of any condition or event which
constitutes a breach or event of default of any covenant, condition, warranty,
representation or provision of any of the Loan Documents, and of any materially
adverse change in the financial condition or operations of the Borrower; (c)
furnish directly to the Lender, promptly upon transmission thereof such other
information as the Borrower provides to its other lenders; (d) furnish directly
to the Lender not more than thirty (30) days after the end of each calendar
month, a Compliance Certificate of the Borrower signed by an authorized
executive officer of the Borrower together with the financial statements
required to be provided pursuant to Section 6.9(A) of this Agreement; and (e)
furnish directly to the Lender not more than fifteen (15) days after the end of
each calendar month, a Borrowing Base Certificate, including an accounts
receivable aging report, signed by an authorized executive officer of the
Borrower.
6.2 Preservation of Juristic Existence. The Borrower shall maintain
its juristic existence in good standing under the laws of the State of Nevada
and any other jurisdiction in which it conducts business, and shall not, without
the prior written consent of the Lender, amend, modify, or terminate its
constituent documents, true and correct copies of which the Borrower represents
have been provided to the Lender.
6.3 Payment of Taxes. The Borrower shall pay or cause to be paid all
taxes, assessments, or other governmental charges levied upon any of its
properties or assets, or in respect of its income before the same become
delinquent, except that the Borrower will have the right to contest assessments
and other charges in the manner provided in Section 7.2.
6.4 Maintenance and Performance of Contracts. The Borrower shall at
all times maintain and perform all material contracts, licenses, permits, and
other agreements applicable to its business and operations and provide timely
notice to the Lender of any default by the Borrower or any third party under
any of such contracts, licenses, permits or agreements.
6.5 Insurance. The Borrower shall maintain at all times during the
term of the Commitment such business insurance and casualty insurance on all
assets of the Borrower as is normally carried by prudent entities engaged in the
same or similar businesses and all such policies shall include a "Lender's Loss
Payable Clause" naming the Lender as beneficiary.
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6.6 Indemnification of the Lender. The Borrower shall indemnify and
hold the Lender harmless from any and all claims asserted against the Lender by
any person, entity or governmental authority arising out of or in connection
with the Commitment except for claims arising out of the Lender's gross
negligence or wilful misconduct. The Lender shall be entitled to appear in any
action or proceeding to defend itself against such claims, and all reasonable
costs incurred by the Lender in connection therewith, including reasonable
attorneys' fees, shall be reimbursed by the Borrower to the Lender within ten
(10) days after presentment, as provided in Section 6.7. Any failure to so
reimburse the Lender within the specified time period shall constitute an Event
of Default under this Agreement, and the unreimbursed amount shall thereupon be
added to the Principal Balance, and shall bear interest at the default rate
specified in the Note.
The Lender shall, at its sole option, be entitled to settle or
compromise any asserted claim against it, and such settlement shall be binding
upon the Borrower for purposes of this indemnification. Payment thereof by the
Lender or the payment by the Lender of any judgment or claim successfully
perfected against the Lender shall constitute an additional Advance hereunder,
shall bear interest at the default rate specified in the Note until paid, and
shall be payable upon demand of the Lender. The agreements contained in this
section shall survive termination of the Commitment and any other portions of
this Agreement.
6.7 Expenses. Whether or not the transactions hereby contemplated
shall be consummated, the Borrower shall assume and pay upon demand of the
Lender:
(a) All reasonable out-of-pocket expenses incurred by the
Lender in connection with the making and continued administration of any portion
of the Commitment, including, but not limited to, the reasonable fees and
disbursements and expenses of legal counsel for the Lender;
(b) Any and all advances or payments made by the Lender
pursuant to this Agreement or any other Loan Documents, and other similar or
dissimilar expenses and charges in connection with the administration, servicing
or collection of any portion of the Commitment, including restructuring of the
Commitment, all of which shall constitute an additional liability owing by the
Borrower to the Lender; and
(c) All costs and expenses, including, but not limited to,
reasonable attorneys' fees, incurred by the Lender as a result of an Event of
Default or for the purpose of negotiating a resolution of any default (whether
by means of refinancing or otherwise and whether or not successful) or for the
purpose of effecting collection of the amounts outstanding under the Commitment,
principal, interest, fees and charges, or any other sums required to be paid by
the Borrower pursuant to any of the Loan Documents, when the same shall become
due and payable (whether at the stated maturity thereof or upon any acceleration
of the maturity thereof).
6.8 Banking Relationships. The Borrower shall maintain its primary
depository relationship with the Lender. Borrower shall have opened one or more
investment accounts (including time deposit accounts) with the Lender which
shall have initial balances of not less than four million dollars
($4,000,000.00) and the balances of which may be reduced to the
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extent of capital expenditures by Borrower. Borrower shall maintain Net
Available Collected Balances with the Lender of not less than one hundred
thousand dollars ($100,000.00).
6.9 Financial Statements. The Borrower shall furnish to the Lender
the following:
(a) as soon as available, but not later than thirty (30) days
after the end of each calendar month, comparative company-prepared financial
statements of the Borrower for such month, prepared in accordance with GAAP,
containing, among other matters, consolidated statements of income and retained
earnings, setting forth in each case comparative figures for the same quarter of
the previous fiscal year, and a balance sheet reflecting the financial condition
of the Borrower as of the end of such month.
(b) as soon as available, but not later than ninety (90) days
after the end of each fiscal year of the Borrower, comparative audited financial
statements of the Borrower for such fiscal year, prepared in accordance with
GAAP, containing, among other matters, consolidated and consolidating statements
of income and retained earnings, and consolidated and consolidating statements
of cash flow, setting forth in each case comparative figures for the previous
fiscal year, and a balance sheet reflecting the financial condition of the
Borrower as of the end of such fiscal year, and accompanied by the opinion of
independent certified public accountants of recognized standing, containing no
qualifications, or only such qualification as are reasonably acceptable to the
Lender.
6.10 Litigation. The Borrower will give the Lender prompt notice of:
(a) Any litigation or claims of any kind which might subject
the Borrower to any liability in excess of one hundred thousand dollars
($100,000.00), whether covered by insurance or not; and
(b) All complaints and charges filed by any governmental
agency or any other party affecting or exercising supervision or control of the
Borrower or its businesses or assets which may impair the security of the Lender
or adversely affect any of its rights under the Loan Documents.
6.11 Inspection of Properties and Records. The Borrower will permit
the officers, employees, attorneys, and authorized agents of the Lender to visit
and inspect any of the properties of the Borrower to examine the books and
records of the Borrower and to make copies thereof or extracts therefrom and to
discuss the affairs, finances and accounts of the Borrower with the principal
officers of the Borrower and its accountants, all at such reasonable times and
as often as the Lender shall deem necessary.
6.12 Maintenance of Properties; Compliance with Laws. The Borrower
will maintain all of its properties and assets in good repair, working order and
condition and will make or cause to be made all appropriate repairs, renewals
and replacements thereof; and will comply with all applicable laws, rules,
regulations and orders relating thereto.
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6.13 Financial Covenants.
(a) The Borrower shall at all times maintain a Tangible Net
Worth of not less than seventeen million three hundred thousand dollars
($17,300,000.00);
(b) The Borrower shall at all times maintain a Quick Ratio of
at least 2.50 to 1.00; and
(c) The Borrower shall for each Quarter have Net Income of
not less than one hundred thousand dollars ($100,000).
6.14 Negative Covenants. As long as any portion of the indebtedness
hereunder remains unpaid, the Borrower shall not, without the prior written
consent of the Lender:
(a) create, incur, assume, or suffer to exist any lien,
encumbrance, mortgage, security interest, pledge, or charge of any kind upon any
of its property or assets of any character, whether now owned or hereafter
acquired, or transfer any of such property or assets for the purpose of
subjecting the same to the payment of any indebtedness or performance of any
other obligation, or acquire or have an option to acquire any property or assets
upon conditional sale or other title retention agreement, device or arrangement;
provided, however, that the Borrower may create or incur or suffer to be created
or incurred or to exist:
(i) liens for taxes or assessments for governmental
charges or levies if payment thereof shall not at the time be required to be
made or which the Borrower is then contesting in good faith and which are not in
excess of five hundred thousand dollars ($500,000.00) or for which reserves have
been established by Borrower;
(ii) liens in respect of pledges and deposits under
workers' compensation laws or similar legislation, and in respect of pledges or
deposits in connection with appeal or similar bonds incidental to the conduct of
litigation, and liens incidental to the conduct of its business not incurred in
connection with the borrowing of money or the obtaining of advances or credit
and which do not in the aggregate materially detract from the value of its
assets or property; or
(iii) any other liens with the prior written approval
of the Lender;
(b) create, assume or become or remain liable for, or
committed to incur directly or indirectly, any indebtedness except indebtedness
in respect of the Loan Documents or indebtedness (including any additional
advances under the loan agreements identified in Subsections 6.14(b)(iii) and
(iv) of this Agreement) which by its terms is expressly made subordinate to the
Principal Balance, all accrued but unpaid interest thereon, and all fees,
charges and other sums payable under the Loan Documents and which is:
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(i) indebtedness for taxes, assessments, governmental
charges or levies to the extent that payment thereof shall not at the time be
required to be made or which the Borrower is then contesting in good faith and
which are not in excess of five hundred thousand dollars ($500,000.00) or for
which reserves have been established by Borrower;
(ii) indebtedness incurred in the ordinary course of
business which will not materially impair the ability of the Borrower to repay
the amounts due hereunder;
(iii) indebtedness outstanding as of the date hereof to
Spirulina International B.V. pursuant to a term loan agreement, dated April 1,
1995, in the amount of $162,500.00;
(iv) indebtedness outstanding as of the date hereof to
Satochi Sakurada pursuant to a term loan agreement, dated July 11, 1995, in the
amount of $350,000.00; and
(vi) indebtedness approved by the Lender in writing;
(c) directly or indirectly purchase or acquire any stocks,
bonds, notes, debentures or other securities of or acquire by purchase or
otherwise all or substantially all of the business or assets, or stock,
partnership interests or other evidence of ownership (beneficial or otherwise)
or make any other investment in, any corporation, association, partnership,
organization or individual except such as may be approved in writing by the
Lender;
(d) directly or indirectly make or commit to make any loan,
advance, guaranty or extension of credit to any corporation, association,
partnership, organization or individual except such as may be approved in
writing by the Lender;
(e) assume, endorse, be or become liable for, or guarantee
directly or indirectly any debt or obligation of any corporation, association,
partnership, organization or individual except such as may be approved in
writing by the Lender;
(f) merge with or into or consolidate with any other Person;
or sell, lease, transfer or otherwise dispose of assets comprising more than
five percent (5%) of the Total Assets of the Borrower, on a cumulative basis,
from the Closing Date; provided, however, that any Subsidiary may merge with
another Subsidiary, or with the Borrower (if the Borrower is the continuing or
surviving entity);
(g) terminate any Plan so as to result in any unfunded
liability of the Borrower in excess of $500,000.00 under Title IV of ERISA or
permit to exist any occurrence of any reportable event (as defined in Title IV
of ERISA); or
(h) make any significant change in accounting treatment or
reporting practices, except as required by GAAP.
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SECTION 7. Default; Remedies on Default.
7.1 Events of Default. If and for so long as any of the following
events (herein called "Events of Default") shall occur:
(a) The Borrower shall default in the payment of principal
or interest under the Note when the same becomes due; or
(b) The Borrower shall default in the performance of or
compliance with any term, covenant, condition or provision contained in any of
the Loan Documents, and such default, if capable of being remedied, shall not
have been remedied within twenty (20) days after the Lender or any other person
notifies the Borrower in writing of such default; or
(c) The Borrower shall become insolvent, or shall make an
assignment for the benefit of creditors or shall fail generally to pay its debts
as they become due; or the Borrower shall become the subject of an order for
relief in an involuntary case under the bankruptcy laws as now or hereafter
constituted, and such order shall remain in effect and unstayed for a period of
sixty (60) consecutive days, or shall commence a voluntary case under the
bankruptcy laws as now or hereafter constituted, or shall file any petition or
answer seeking for itself any arrangement, composition, adjustment, liquidation,
dissolution or similar relief to which it may be entitled under any present or
future statute, law or regulation, or shall file any answer admitting the
material allegations of any petition filed against it in any such proceedings;
or the Borrower shall seek or consent to or acquiesce in the appointment of or
taking possession by, any custodian, trustee, receiver or liquidator of it or of
all or a substantial part of its properties or assets; or the Borrower shall
take action looking to its dissolution or liquidation; or within sixty (60) days
after commencement of any proceedings against the Borrower seeking any
arrangement, composition, adjustment, liquidation, dissolution or similar relief
to which it may be entitled under any present or future statute, law or
regulation, such proceedings shall not have been dismissed; or within sixty (60)
days after the appointment of, or taking possession by, any custodian, trustee,
receiver or liquidator of any or of all or a substantial part of its properties
or assets, without the consent or acquiescence of the Borrower, any such
appointment or possession shall not have been vacated or terminated; or
(d) Any representation made by or on behalf of the Borrower
herein or otherwise in writing in connection with the Commitment shall prove to
have been false or incorrect in any material respect on the date as of which
such representation was made; or
(e) A final judgment which alone exceeds $100,000.00 in
amount shall be rendered against the Borrower, and shall not be discharged or
have execution thereof stayed pending appeal within thirty (30) days after entry
of such judgment or shall not be discharged within thirty (30) days after the
expiration of any such stay; or
(f) The Borrower shall default under any Capital Lease, or
under any agreement respecting deferred payment for goods, or under any
agreement involving the extension of credit to which the Borrower is a party (if
such default gives the holder of the obligation the right to accelerate the
indebtedness) and such default shall not be waived or
15
<PAGE>
remedied within the time permitted for the remedying of such default under the
applicable document; or
(g) The Borrower shall fail to comply with any financial
covenant contained in any Capital Lease, or any agreement respecting deferred
payment for goods, or any agreement involving the extension of credit to which
the Borrower is a party (whether or not such agreement is hereafter amended or
terminated) and such failure shall not be waived or remedied within the time
permitted for the remedying of such failure under the applicable document; or
(h) There occurs any adverse change in the business, assets
or general financial condition of the Borrower which has or, in the reasonable
opinion of the Lender, could have, a material adverse effect upon the ability of
the Borrower to observe and perform its obligations under the Loan Documents,
THEN, AND IN ANY SUCH EVENT, in addition to all remedies conferred by
law, the Lender shall have no further obligation to make Advances under the
Commitment, and the Lender shall have the option to declare the Note to be due
and payable, whereupon the entire aggregate unpaid Principal Balance under the
Note, all accrued but unpaid interest thereon, and all fees, charges and other
sums payable under the Loan Documents shall forthwith mature and become due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, and upon such maturity by acceleration or
otherwise, all such principal, interest, amounts, fees, charges and other sums,
shall bear interest at the rate provided in the Note to be paid following an
Event of Default.
7.2 Right of Contest. The Borrower shall have the right to contest in
good faith any claim, demand, levy or assessment by a third party the assertion
of which would constitute an Event of Default hereunder; provided, however, any
such contest shall be prosecuted diligently and in a manner not prejudicial to
the Lender hereunder; and, upon demand by the Lender, the Borrower shall make
suitable provision by payment to the Lender or by bond satisfactory to the
Lender for the possibility that the contest will be unsuccessful. Such provision
shall be made within ten (10) days after demand therefor and, if made by payment
of funds to the Lender, the amount so deposited shall be disbursed in accordance
with the resolution of the contest either to the Borrower or the adverse
claimant.
7.3 Marshalling. The Borrower hereby waives any and all rights to
require any security given hereunder to be marshalled and agrees and
acknowledges that after the occurrence of any Event of Default, the Lender may,
in its sole and absolute discretion, proceed to enforce its rights under the
Loan Documents and to realize on any or all of the security for the repayment of
the amounts outstanding under the Commitment or any portion or portions thereof,
irrespective of the differing nature of such security and whether or not the
same constitutes real or personal property.
SECTION 8. Miscellaneous Provisions.
8.1 Authority to File Notices. The Borrower irrevocably appoints,
constitutes and designates the Lender its attorney-in-fact to file for record
any notice that the Lender
16
<PAGE>
reasonably deems necessary or desirable to protect its interest hereunder or
under any of the Loan Documents. Such power shall be deemed coupled with an
interest and shall be irrevocable while any sum remains due and owing under any
of the Loan Documents or any obligation of the Borrower thereunder remains
unperformed.
8.2 Actions. The Lender shall have the right to commence, appear in or
defend any action or proceeding purporting to affect the rights, duties or
liabilities of the parties hereunder, or the amounts outstanding or available
under the Commitment, whether or not an Event of Default has occurred hereunder.
In connection therewith, the Lender may incur and pay reasonable costs and
expenses, including, but not limited to, reasonable attorneys' fees. The
Borrower shall pay to the Lender within ten (10) days after demand therefor, all
such expenses, and the Lender is authorized to disburse funds from the
Commitment for such purposes.
8.3 Timeliness; Term of Agreement; Survival of Representations and
Warranties. Time is of the essence of this Agreement. This Agreement shall
continue in full force and effect until all indebtedness of the Borrower to the
Lender under the Loan Documents shall have been paid in full, all obligations of
the Borrower under this Agreement and the Loan Documents have been observed and
performed, and all obligations of the Lender under this Agreement and the other
Loan Documents have been terminated. All representations and warranties
contained herein or made in writing by or on behalf of the Borrower in
connection with the Commitment shall survive the execution and delivery of the
Loan Documents and any investigation at any time made by, through or on behalf
of the Lender. All statements contained in any certificate or other instrument
delivered to the Lender on behalf of the Borrower pursuant to this Agreement or
otherwise in connection with the Commitment shall constitute representations and
warranties hereunder.
8.4 Amendments and Waivers. Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated orally, but only by an
instrument in writing, signed by the party against whom enforcement of the
amendment, waiver, discharge or termination is sought.
8.5 Remedies Are Cumulative. All rights, powers and remedies herein
given to the Lender are cumulative and not alternative, are in addition to all
rights, powers and remedies afforded by statutes or rules of law and may be
exercised concurrently, independently, or successively in any order whatsoever.
Without limiting the generality of the foregoing, the Lender may enforce any one
or more of the Loan Documents without enforcing all of them concurrently or in
any particular order.
8.6 No Waiver. No failure, forbearance or delay on the part of the
Lender in exercising any power or right under any of the Loan Documents shall
operate as a waiver of the same or any other power or right, and no single or
partial exercise of any such power or right shall preclude any other or further
exercise thereof or the exercise of any other such power or right. No Advance
made by the Lender hereunder shall constitute a waiver of any of the conditions
precedent to the Lender's obligation to make further Advances, nor, in the event
the Borrower is unable to satisfy any such condition, shall any such waiver have
the
17
<PAGE>
effect of precluding the Lender from thereafter declaring such inability to be
an Event of Default as provided in Section 7.1 of this Agreement.
8.7 No Joint Venture. The execution of this Agreement, the making of
the Commitment, the making of any Advance, and the exercise of any rights
hereunder, are not intended, and shall not be construed, to create a partnership
or joint venture between the Lender and the Borrower.
8.8 Notices. All notices, requests, demands or documents which are
required or permitted to be given or served hereunder shall be in writing and
personally delivered, or sent by registered or certified mail addressed as
follows:
TO BORROWER at: Hawaiian Ocean Science and Technology Park
73-4460 Queen Kaahumanu Hwy., #102
Kailua-Kona, Hawaii 96740
Attention: Executive Vice President,
Finance & Administration
TO LENDER at: 999 Bishop Street
Honolulu, Hawaii 96813
Attention: Corporate Banking Division
The addresses may be changed from time to time by the addressee by serving
notice as heretofore provided. Service of such notice or demand shall be deemed
complete on the date of actual delivery as shown by the addressee's registry or
certification receipt or at the expiration of the second day after the date of
mailing, whichever is earlier in time.
The Borrower hereby irrevocably authorizes the Lender to accept
facsimile ("FAX") transmissions of such notices, requests, demands and
documents, provided such transmission is signed by an officer of the Borrower
authorized to do so in a corporate resolution. The Borrower shall and does
hereby hold the Lender harmless from, and indemnify the Lender against, any
loss, cost, expense, claim or demand which may be incurred by or asserted
against the Lender by virtue of the Lender acting upon any such notices,
requests, demands or documents transmitted in accordance with the above
provisions. The Borrower shall confirm any such FAX transmission separately by
telephone conference between the Lender and the individuals signing such FAX
transmission, and shall thereafter transmit to the Lender the actual "hard copy"
of the notice, request, demand or document in question.
8.9 Waiver of Jury Trial. The Borrower hereby knowingly, voluntarily
and intentionally waives any right it may have to a jury trial in any legal
proceeding which may be hereinafter instituted by the Lender or the Borrower to
assert any of their respective claims arising out of or relating to any of the
Loan Documents or any other agreement, instrument or document contemplated
thereby. In such event, the Borrower, at the request of the Lender, shall cause
its attorney of record to effectuate such waiver in compliance with the Hawaii
Rules of Civil Procedure, as the same may be amended from time to time.
18
<PAGE>
8.10 Entire Agreement. The Loan Documents constitute all of the
agreements between the parties relating to the Commitment and supersede all
other prior or concurrent oral or written letters, agreements or understandings.
8.11 Assignment; Parties in Interest. The Borrower shall not assign
its interest in this Agreement without the prior written consent of the Lender,
which consent may be withheld by the Lender in its sole and absolute discretion.
All of the terms and provisions of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns, whether or not hereinabove so expressed and,
in particular, shall inure to the benefit of and be enforceable by the holder or
holders from time to time of the Note or any part thereof or interest therein.
8.12 Headings of Paragraphs. The headings of paragraphs and
sub-paragraphs herein are inserted only for convenience and reference and shall
in no way define, limit or describe the scope or intent of any provision of this
Agreement.
8.13 Applicable Law. This Agreement is executed and delivered in
and shall be construed and enforced in accordance with the laws of the State of
Hawaii.
8.14 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument, and in making proof of this
Agreement, it shall not be necessary to produce or account for more than one
such counterpart.
8.15 Severability. If any provision of this Agreement or the other
Loan Documents is held to be invalid or unenforceable, the validity and
enforceability of the other provisions of this Agreement and the other Loan
Documents will remain unaffected.
8.16 Terms and Conditions of this Agreement Supplement Other Loan
Documents. The terms and conditions of this Agreement and the covenants,
representations and warranties of the Borrower under this Agreement shall not be
deemed to supersede, amend or modify the obligations and duties of the Borrower
under the other Loan Documents. The terms and conditions of this Agreement and
the covenants, representations and warranties of the Borrower hereunder merely
supplement, and do not supplant or supersede, provisions of similar effect or
subject matter in the other Loan Documents. The Loan Documents shall, however,
constitute and be deemed amendments to any inconsistent provisions of any
commitment letter issued by the Lender to the Borrower in connection with the
Commitment, and, upon the execution of this Agreement, any such commitment
letter shall be deemed superseded by the Loan Documents and canceled.
8.17 Agents. In exercising any rights under this Agreement or the
other Loan Documents, the Lender may act through its employees, agents or
independent contractors; provided that the Lender shall remain responsible for
the actions of its employees and agents.
8.18 Consent by the Lender. Whenever the consent of the Lender is
required by the terms of this Agreement, then, except where the granting of such
consent is reserved to the
19
<PAGE>
Lender in its sole judgment, option or discretion, such consent shall not be
unreasonably or arbitrarily withheld.
8.19 Lender's Right of Setoff. Upon the occurrence of any Event of
Default, or if the Lender shall be served with garnishee process, whether or not
the Borrower shall be in default hereunder at the time, the Lender may, but
shall not be required to, set off any indebtedness owing by the Lender to the
Borrower against any indebtedness under the Loan Documents, without prejudice to
any other rights or remedies of the Lender thereunder.
IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Agreement on the day and year first above stated.
FIRST HAWAIIAN BANK
By /s/Kathryn Anderson
-------------------
Its Vice President
Lender
CYANOTECH CORPORATION
By /s/ Ronald P. Scott
-------------------
Its Exec. V.P./CFO
Borrower
20
<PAGE>
STATE OF HAWAII )
) SS.
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/ Lei T. Cablin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS.
COUNTY OF HAWAII )
On this 27th day of February, 1997 , personally appeared Ronald P. Scott,
to me personally known, who, being by me duly sworn or affirmed did say that
such person(s) executed the foregoing instrument as the free act and deed of
such person(s), and if applicable, in the capacity shown, having been duly
authorized to execute such instrument in such capacity.
/s/ Lei T. Cablin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
EXHIBIT "1"
BORROWING BASE CERTIFICATE
CYANOTECH CORPORATION, a Nevada corporation (the "Borrower"), certifies
to FIRST HAWAIIAN BANK (the "Lender"), in connection with that certain Credit
Agreement dated February , 1997 (the "Loan Agreement") executed by and between
the Borrower and the Lender, as follows:
1. The undersigned is authorized by the Borrower to submit this
Compliance Certificate to the Lender [for the month of , ] [in connection with
the application for an Advance dated , ].
2. The undersigned has reviewed the relevant terms of this Loan
Agreement, and the other Loan Documents, and has made, or caused to be made
under his supervision, a review of the transactions and condition of the
Borrower during such month sufficient to provide the information set forth in
Schedule 1 attached hereto.
3. The information contained in Schedule 1 [, and set forth in the
accounts receivable aging report attached thereto, was true and correct as of
the last day of such month] [is true and correct as of the date hereof].
Capitalized terms used herein have the meanings given to them in the
Loan Agreement unless otherwise herein defined.
DATED: , .
CYANOTECH CORPORATION
By
Its
Exhibit "1", Page 1
<PAGE>
Schedule 1 to
Borrowing Base Certificate
Total Eligible Domestic Accounts Receivable: $
times 75% $
Total Foreign Accounts Receivable: $
times 50% $
Total: Borrowing Base $
[The following information is required in connection with a request for an
Advance]
Outstanding Principal Balance: $
Amount of Advance Requested: $
Total: $
[The following information is required for the monthly certification]
An accounts receivable aging report for the month of , 199 is attached
hereto.
ACCOUNTS RECEIVABLE:
Current Over 30 Days Over 60 Days Over 90 Days
$ $ $ $
--------- ------------ ------------ ------------
ACCOUNTS PAYABLE:
Current Over 30 Days Over 60 Days Over 90 Days
$ $ $ $
--------- ------------ ------------ ------------
Exhibit "1", Page 2
<PAGE>
EXHIBIT "2"
COMPLIANCE CERTIFICATE
CYANOTECH CORPORATION, a Nevada corporation (the "Borrower"), certifies
to FIRST HAWAIIAN BANK (the "Lender"), in connection with that certain Credit
Agreement dated February , 1997 (the "Loan Agreement") executed by and between
the Borrower and the Lender, as follows:
1. The undersigned is authorized by the Borrower to submit this
Compliance Certificate to the Lender for the month of , .
2. The undersigned has reviewed the relevant terms of this Loan
Agreement, and the other Loan Documents, and has made, or caused to be made
under his supervision, a review of the transactions and condition of the
Borrower during such month and such review has not disclosed, and the
undersigned does not have knowledge of the existence, of any Event of Default,
or, if any Event of Default has occurred or exists, the nature and period of
existence thereof and what action the Borrower has taken or is taking or
proposes to take with respect thereto is described in Schedule 1 attached
hereto.
3. The information contained in the financial statements attached
hereto was true and correct as of the last day of such month.
Capitalized terms used herein have the meanings given to them in the
Loan Agreement unless otherwise herein defined.
DATED: , .
CYANOTECH CORPORATION
By
Its
Exhibit "2"
<PAGE>
EXHIBIT "3"
Opinion of Counsel
[Counsel's Letterhead]
February , 1997
First Hawaiian Bank
999 Bishop Street, 11th Floor
Honolulu, Hawaii 96813
Attention: Corporate Banking Division
Re: Cyanotech Corporation
Gentlemen/Ladies:
We are counsel for Cyanotech Corporation, a Nevada corporation (the
"Borrower"), in connection with its request for a loan from First Hawaiian Bank
(the "Lender"). Pursuant to Section 4.5 of the Credit Agreement dated February ,
1997 executed by and between the Borrower and the Lender, we provide you with
our opinion as follows:
1. The Borrower is a Nevada corporation duly registered, validly
existing and in good standing under the laws of the State of Nevada, is
authorized to do business and is in good standing in the State of Hawaii and has
all requisite power and authority to carry on the business and to own the
property that it now carries on and owns. The Borrower has all requisite power
and authority to execute and deliver the Loan Documents and to observe and
perform all of the provisions and conditions thereof. The execution and delivery
of the Loan Documents has been duly authorized by all requisite corporate action
on the part of the Borrower.
2. The Loan Documents when executed and delivered by the Borrower will
be enforceable in accordance with their terms against the Borrower and shall
constitute the valid and legally binding obligations of the Borrower.
Sincerely,
Exhibit "3"
EXHIBIT 10.15
PROMISSORY NOTE
Honolulu, Hawaii
$1,000,000.00 February 27, 1997
FOR VALUE RECEIVED, CYANOTECH CORPORATION, a Nevada corporation, (the
"Maker"), promises to pay to the order of FIRST HAWAIIAN BANK, a Hawaii
corporation, at its main office at 999 Bishop Street, Honolulu, Hawaii 96813, or
at such other place as the holder of this Note (the "Holder") may from time to
time designate, the principal sum of ONE MILLION AND NO/000 DOLLARS
($1,000,000.00), or so much thereof as is from time to time advanced, together
with interest on each advance of the principal sum, from the date thereof, at
the interest rate specified below on the principal balance remaining unpaid from
time to time.
Interest. The interest payable under this Note shall be a fluctuating
rate per annum equal to one (1.0%) percentage point higher than the Prime
Interest Rate (as hereinafter defined) in effect from time to time during the
term of this Note. Each change in such fluctuating rate shall take effect
simultaneously with the corresponding change in the Prime Interest Rate. As used
herein, the term "Prime Interest Rate" shall mean the lending rate of interest
per annum announced publicly by First Hawaiian Bank from time to time as its
"Prime Interest Rate", which rate shall not necessarily be the best or lowest
rate charged by First Hawaiian Bank from time to time. Interest shall be
computed on the basis of a year of 365 days, and the actual number of days
elapsed.
Payments; Maturity Date. Interest only shall be payable monthly in
arrears, commencing on the last day of February, 1997, and continuing on the
last day of each calendar month thereafter until the principal and interest on
this Note are fully paid. All unpaid principal and accrued but unpaid interest
shall be due and payable on January 31, 1998, unless sooner due as hereinafter
provided (the "Maturity Date").
Application of Payments. Except in the case of an election to the
contrary by the Holder, and to the extent permitted by law, all payments will be
applied first to charges, then interest, then principal.
Prepayments. The Maker may make prepayments of principal without a
prepayment charge, but with accrued interest thereon. Any prepayment shall be
applied against the principal sum outstanding and shall not postpone the due
date of any subsequent monthly payment or change the amount of any subsequent
monthly payment.
Default. If the Maker shall default in the payment of principal,
interest or other fees or charges when due under this Note, or if an Event of
Default, as defined in that certain Credit Agreement executed concurrently
herewith by the Maker, shall occur (this Note, the Credit Agreement and all
other agreements and security instruments referred to therein as "Loan
Documents", being hereinafter called the "Loan Documents"), then, and in any
such event, the Holder shall have the option to declare the unpaid principal sum
of this Note, together with all interest accrued thereon, and all fees, charges
and other sums payable under the Loan Documents, including any applicable
prepayment charge, to be immediately due and payable, and such principal sum and
interest, and all such fees, charges and other sums, including any
<PAGE>
applicable prepayment charge, shall thereupon become and be due and payable
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived, and, upon such maturity, by acceleration or otherwise,
the unpaid principal balance, all accrued but unpaid interest, and all such
fees, charges and other sums, including any applicable prepayment charge, shall
thereafter bear interest until fully paid at a rate per annum equal to four (4)
percentage points higher than the rate that would otherwise be in effect from
time to time under this Note. Failure to exercise this option shall not
constitute a waiver of the right to exercise the same in the event of the same
or any subsequent default.
Late Charges. If any monthly installment payment shall not have been
paid within ten (10) days after the same becomes due and payable, the Holder, in
addition to its other remedies, may collect, and the Maker shall pay on demand,
a late charge equal to five percent (5%) of the amount overdue.
Reasonableness of Default Charges. The Maker acknowledges that
nonpayment of any monthly payment when due and nonpayment at maturity (whether
or not resulting from acceleration due to an event of default under the Loan
Documents) will result in damages to the Holder by reason of the additional
expenses incurred in servicing the indebtedness evidenced by this Note and by
reason of the loss to the Holder of the use of the money due and frustration to
the Holder in meeting its other commitments. The Maker also acknowledges and
agrees that the occurrence of any other event of default under the Loan
Documents will result in damages to the Holder by reason of the detriment caused
thereby. The Maker further acknowledges that it is and will be extremely
difficult and impracticable to ascertain the extent of such damages caused by
nonpayment of any sums when due or resulting from any other event of default
under the Loan Documents. The Maker by its execution and delivery of this Note,
and the Holder by the acceptance of this Note agree that a reasonable estimate
of such damages must be based in part upon the duration of the default and that
the rate of interest prescribed above with respect to the amount due and payable
after maturity or acceleration and the late charge specified above with respect
to delinquent payments would not unreasonably compensate the Holder for such
damages.
U. S. Money. Principal and interest shall be payable in lawful money
of the United States of America, in immediately available funds.
Attorneys' Fees. The Maker promises to pay the Holder's attorneys' fees
and such expenses as are incurred to induce or compel the payment of this Note
or any portion of the indebtedness evidenced hereby, whether suit is brought
hereon or not.
Waiver. Except as otherwise provided herein, the Maker, indorsers and
guarantors hereof and all others who may become liable for any part of this
obligation severally waive presentment, protest, demand and notice of protest,
demand, dishonor and nonpayment of this Note and consent to any number of
renewals or extensions of the time of payment hereof and to any release of
parties obligated hereunder or forbearance in the enforcement hereof.
No Oral Waiver, Modification or Cancellation. No provision in this Note
may be waived, modified or canceled orally, but only by an agreement in writing
and signed by the
2
<PAGE>
party against whom enforcement of any waiver, modification, discharge or
cancellation is sought.
Governing Law. This Note shall be governed by and construed according
to the laws of the State of Hawaii.
Limitations on Interest. Notwithstanding any provision to the contrary
contained in the Loan Documents, the rate and amount of interest which the Maker
shall be required to pay to the Holder shall in no event, contingency or
circumstance exceed the maximum rate or amount limitation, if any, imposed by
applicable law. If, from any circumstance whatsoever, performance by the Maker
of any obligation under the Loan Documents at the time performance shall be due
(including, without limiting the generality of the foregoing, the payment of any
fee, charge or expense paid or incurred by the Maker which shall be held to be
interest), shall involve transcending the limits of validity prescribed by law,
if any, then, automatically, such obligation to be performed shall be reduced to
the limit of such validity prescribed by applicable law. If, notwithstanding the
foregoing limitations, any excess interest shall at the maturity of this Note be
determined to have been received, the same shall be deemed to have been held as
additional security. The foregoing provisions shall never be superseded or
waived and shall control every other provision of all agreements between the
Holder and the Maker.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed.
CYANOTECH CORPORATION
"Maker"
By /s/Ronald P. Scott
------------------
Its Exec. V.P./CEO
By
------------------
Its
"Maker"
WITNESSED:
/s/T. Kelii Leong
- ------------------
3
<PAGE>
STATE OF HAWAII )
) SS:
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS:
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS.
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS.
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
EXHIBIT 10.16
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Security Agreement") made as of February 27,
1997 by and between CYANOTECH CORPORATION, a Nevada corporation (hereinafter
called the "Debtor"), and FIRST HAWAIIAN BANK, a Hawaii corporation (hereinafter
called the "Secured Party"),
WITNESSETH THAT
To secure the repayment of a loan made by the Secured Party to the
Debtor in the principal sum of ONE MILLION AND NO/000 DOLLARS ($1,000,000.00),
which loan is evidenced by that certain promissory note of even date herewith in
that amount, executed by the Debtor, as maker, and made payable to the Secured
Party, the provisions of such note and any renewals, extensions or modifications
thereof being incorporated herein by reference, being secured hereby and being
hereinafter referred to as the "Note";
AND ALSO to secure the observance and performance by the Debtor of all
covenants, agreements, obligations and conditions required to be observed and
performed by the Debtor under this Security Agreement, including, but not
limited to, the payment by the Debtor to the Secured Party of all sums expended
or advanced by the Secured Party pursuant to the provisions of this Security
Agreement;
AND ALSO to secure the observance and performance by the Debtor of all
covenants, agreements, obligations and conditions required to be observed and
performed by the Debtor under that certain Credit Agreement executed by the
Debtor and the Secured Party concurrently herewith (the "Credit Agreement") and
under all of the "Loan Documents", as defined therein;
AND ALSO to secure the payment by the Debtor to the Secured Party of
all other sums now or hereafter loaned or advanced by the Secured Party to the
Debtor, expended by the Secured Party for the account of the Debtor, or
otherwise owing by the Debtor to the Secured Party on any and every account
whatsoever;
THE DEBTOR DOES HEREBY grant, assign, convey, transfer, deliver, and
set over to the Secured Party, its successors and assigns, absolutely and
forever, all of the property set forth in Exhibit "1" attached hereto and made a
part hereof (hereinafter called the "Collateral"), TOGETHER WITH a security
interest, as that term is defined in the Uniform Commercial Code (Chapter 490,
Hawaii Revised Statutes, as amended), in such property, upon the terms and
conditions hereinafter set forth.
TOGETHER WITH all right, title and interest of the Debtor in, and to
use, lease or dispose of, the Collateral as well as any proceeds deriving from
such Collateral;
TO HAVE AND TO HOLD the same unto the Secured Party and its successors
and assigns, absolutely and forever, as security as aforesaid;
<PAGE>
UPON CONDITION that if the Debtor shall well and truly pay to the
Secured Party the principal amount of the Note, with interest, fees, charges and
premium, if any, according to its provisions and effect, and if the Debtor shall
discharge any and all obligations that now or hereafter may be or become owing,
directly or contingently, by the Debtor to the Secured Party on any and every
account, whether or not the same are mature, of which obligations the books of
the Secured Party shall be prima facie evidence, and if the Debtor shall observe
and perform all of the covenants, agreements, obligations and conditions to be
observed and performed by the Debtor under this Security Agreement and the other
Loan Documents, and if the Debtor shall pay the costs of release, the Secured
Party will, upon request of the Debtor, release the Collateral from the security
interest created by this Security Agreement and these presents shall be void, it
being understood, however, that an affidavit, certificate, letter or statement
of any officer of the Secured Party showing that any part of the indebtedness
remains unpaid or any covenants, agreements, obligations or conditions remain
unperformed shall constitute conclusive evidence of the validity, effectiveness
and continuing force of this Security Agreement.
Subject to the terms hereof, until the happening of an Event of
Default, as hereinafter defined, the Debtor shall be entitled to use and to
possess the Collateral.
BUT, if any one or more of the following events, hereinafter called
"Events of Default" shall occur:
(a) Default shall be made by the Debtor in the payment of principal,
interest, fees or charges when due on the Note; or
(b) Default shall be made by the Debtor in the due and punctual
observance or performance of any other covenant, agreement, obligation or
condition required to be observed or performed by the Debtor under this Security
Agreement or any of the other Loan Documents and such default shall not be
remedied within twenty (20) days after the Secured Party notifies the Debtor of
such default; or
(c) The Debtor shall become voluntarily or involuntarily dissolved or
become insolvent, or the Debtor shall admit in writing the Debtor's inability to
meet the Debtor's debts as they become due, or shall file a voluntary petition
in bankruptcy, or make an assignment for the benefit of creditors, or consent to
the appointment of a receiver or trustee for all or a substantial part of the
Debtor's properties, or file a petition, answer or other instrument seeking or
acquiescing to the arrangement of the Debtor's debts, or other relief under the
federal bankruptcy laws or any other applicable law of the United States of
America or any state or territory thereof for the relief of debtors; or
(d) A decree or order of a court having jurisdiction in the premises
shall be entered (i) adjudging the Debtor to be bankrupt or insolvent, or (ii)
appointing a receiver or trustee or assignee in bankruptcy or insolvency of the
Debtor or the Debtor's properties, or (iii) directing the winding up or
liquidation of the Debtor's affairs; or
(e) Any representation or warranty made by the Debtor herein or in
connection with the Loan Documents shall be untrue in any material respect; or
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(f) All or a material part of the Collateral shall substantially
decrease in value and, after demand by the Secured Party, the Debtor shall fail
to furnish additional security satisfactory to the Secured Party; or
(g) There shall be any attachment, execution, forfeiture or other
seizure of, or affecting, the Collateral, or any part thereof, unless the Debtor
sets aside, dissolves, bonds off or otherwise eliminates such attachment,
execution or seizure within thirty (30) days after its occurrence; or
(h) There shall be entered against the Debtor a final judgment which
alone or with other outstanding final judgments against the Debtor exceeds in
the aggregate $100,000.00, and within thirty (30) days after entry thereof such
judgment or judgments shall not have been discharged or execution thereof stayed
pending appeal, or within thirty (30) days after the expiration of any such stay
such judgment or judgments shall not have been discharged; or
(i) Any other "Event of Default", as defined in the Credit Agreement,
shall have occurred and such default shall not have been remedied within the
applicable grace period, if any, therefor.
THEN, AND IN ANY SUCH EVENT, the Secured Party, without obligation to
do so and without releasing or waiving any of its rights, shall have the right,
power, and authority, without notice, presentment or demand, to declare the
unpaid principal amount of the Note and any interest thereon accrued and unpaid,
and all fees, charges, and other sums due under the Loan Documents, to be
immediately due and payable, whereupon such principal amount and interest and
all such fees, charges and other sums, shall become and be immediately due and
payable, and shall thereafter bear interest until fully paid at the rate
specified in the Note to be paid in the event of default, and the Secured Party
may, at its option, without notice and irrespective of whether declaration of
default is required to be delivered to any party named in the Loan Documents or
other instrument or obligations securing the Note or secured hereunder or
whether remedies under other security instruments have been exercised, exercise
all rights and remedies contained in the Loan Documents, including this Security
Agreement, and shall have all rights and remedies available to the Secured Party
under the Uniform Commercial Code or other applicable laws.
Without limiting the generality of the foregoing, upon the occurrence
of an Event of Default:
(a) The Secured Party may, at the Secured Party's option and at the
Debtor's expense, either in the Secured Party's own right or in the name of the
Debtor and in the same manner and to the same extent that the Debtor might
reasonably so act if this Security Agreement had not been made, (i) demand, sue
for, collect, recover, receive and otherwise enforce payment of all proceeds and
other sums due and payable from the Collateral, the Debtor hereby requesting and
instructing all other parties to the accounts and contract rights described in
paragraph (a) of Exhibit "1" (the "Contracts") or liable to the Debtor in
connection with the Collateral to make all payments then due or which may
thereafter become due thereunder or thereby directly to the Secured Party, and
the Debtor further
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agreeing that the receipt by the Secured Party of any such payments shall be a
complete release and discharge of the obligor or obligors thereof to the extent
of the payment or payments so made; (ii) do all things requisite, convenient,
or necessary to enforce the performance and observance of any and all other
covenants, agreements, conditions, terms and provisions of the Contracts, and to
exercise all the rights, remedies and privileges of the Debtor contained in the
Contracts or arising from the Collateral, or any part thereof, including, but
not limited to, the making, modifying, amending, enforcing, canceling,
surrendering or accepting the surrender of, terminating or extending any of the
Contracts now or hereafter in effect, and also including the compromising,
waiving, excusing, or in any manner releasing or discharging of any obligation
of any party to or arising from the Collateral; (iii) take possession of the
books, papers, and accounts of the Debtor, wherever located, relating to the
Collateral; (iv) receive, and the Debtor will forthwith surrender to the
Secured Party, the possession of the Collateral, and, to the extent permitted
by law, the Secured Party may itself or by such officers or agents as it may
appoint (A) manage or operate the Collateral or any part thereof, (B) exclude
the Debtor, its agents and servants therefrom, (C) make, enforce, modify and
accept the surrender of any Contracts, and (D) do all acts, including the making
of contracts, which the Secured Party deems necessary for the care or management
of the property or the Contracts described in Exhibit "1"; (v) sue or otherwise
collect and receive moneys; and (vi) do all other things requisite, convenient
or necessary to require the other parties to the Contracts to perform the same,
or which the Secured Party deems proper to protect the security given hereunder.
(b) The Secured Party may foreclose this Security Agreement in the manner
now or hereafter provided or permitted by law, including treatment of the
Collateral as real property subject to judicial foreclosure pursuant to Chapter
667, Hawaii Revised Statutes, as amended, and shall have the immediate right to
receivership on ex parte order and without bond pending foreclosure, and may
sell, assign, transfer or otherwise dispose of the Collateral at public or
private sale, in whole or in part, and the Secured Party may, in its own name or
as the irrevocably appointed attorney-in-fact of the Debtor, effectually assign
and transfer the Collateral, or any part thereof, absolutely, and execute and
deliver all necessary assignments, deeds, conveyances, bills of sale and other
instruments with power to substitute one or more persons or corporations with
like power; and, if the Secured Party so instructs the Debtor, the Debtor shall
assemble, without expense to the Secured Party, all of the Collateral at a
convenient place on the island where the Property is located, and the Debtor
shall ratify and confirm any such sale or transfer by delivering all proper
instruments to such persons or corporations as may be designated in any such
request. Any such foreclosure sale, assignment or transfer shall, to the extent
permitted by law, be a perpetual bar, both at law and in equity, against the
Debtor and all persons and entities claiming by or through or under the Debtor.
Any such sale may be adjourned from time to time. Upon any sale, the Secured
Party may bid for and purchase the Collateral, or any part thereof, and upon
compliance with the terms of sale, may hold, retain and possess and dispose of
the Collateral, in its absolute right without further accountability, and the
Secured Party, at any such sale may, if permitted by law, after allowing for the
proportion of the total purchase price required to be paid in cash for the costs
and expenses of the sale, commissioner's compensation and other charges, apply
as a credit against the purchase price, in lieu of cash, all amounts owing by
the Debtor under the Note and the other Loan Documents, to the extent required.
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In case of any Event of Default, neither the Debtor nor anyone
claiming by, through or under the Debtor, to the extent the Debtor may lawfully
so agree, shall or will set up, claim or seek to take advantage of any
appraisement, valuation, stay, extension or redemption law now or hereafter in
force in any locality where any of the Collateral is situated in order to
prevent or hinder the enforcement of this Security Agreement, or the absolute
sale of the Collateral, or the final and absolute putting into possession
thereof, immediately after such sale, of the purchasers thereof; and the Debtor
in the Debtor's own right and for all who may claim under the Debtor, hereby
waives, to the full extent that the Debtor may lawfully do so, the benefit of
all such laws and any and all right to have the estates comprised in the
security intended to be created hereby marshalled upon any enforcement of the
lien hereof and agrees that the Secured Party or any court having jurisdiction
to foreclose such lien may sell the Collateral in parts or as an entirety. The
Secured Party may apply the proceeds of any such sale in such order as the
Secured Party shall choose, (i) to the costs and expenses of such sale and all
proceedings in connection therewith, including counsel fees; (ii) to the payment
of any unreimbursed disbursements made by the Secured Party for taxes or
assessments or other charges affecting the Collateral; (iii) to the repayment of
all other unreimbursed disbursements and expenses and unpaid charges and fees
due and owing to the Secured Party under the provisions of this Security
Agreement or any of the other Loan Documents; and (iv) to the payment of the
unpaid principal of and interest on the Note, and all other obligations of the
Debtor under the Loan Documents; and the remainder, if any, shall be paid over
to the Debtor. If such proceeds shall be insufficient to discharge the entire
indebtedness under the Loan Documents, the Secured Party may have any other
legal recourse against the Debtor for the deficiency.
Nothing in this Security Agreement, the Note or any of the other Loan
Documents shall affect or impair the right, which is unconditional and absolute,
of the holder of the Note to enforce payment of the principal of, and interest
and other charges on, the Note at or after the date therein expressed as the
date when the same shall become due, or the obligation of the Debtor, which is
likewise unconditional and absolute, to pay such amounts at the respective times
and places therein expressed.
A. DEBTOR'S WARRANTIES. The Debtor warrants and represents to the
Secured Party as follows:
1. The Debtor is a party to each of the Contracts and is the
absolute and sole owner of the interest in and to the Contracts subject to this
Security Agreement, with full right and title to assign the same to the Secured
Party and to grant the Secured Party a security interest in the same and the
sums due or to become due thereunder; the Debtor has to date fully and
faithfully observed and performed all of the terms, obligations, covenants,
conditions, and warranties to be observed and performed by the Debtor
thereunder, and no event has occurred and is continuing which constitutes, or
with notice or the passage of time would constitute, a default thereunder; the
Contracts are genuine, valid, subsisting and enforceable upon all parties
thereto according to their terms; the Debtor has not alienated, assigned,
pledged, transferred, mortgaged or otherwise encumbered any of the rights or
interests of the Debtor therein or thereto, including the sums due or to become
due thereunder; there have been no amendments or modifications to any of the
Contracts; no financing statement or any other lien or encumbrance covering
any of the Collateral is on file
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in the Bureau of Conveyances of the State of Hawaii, or is otherwise outstanding
(other than in favor of Secured Party); nothing in any of the Contracts would
prevent the Secured Party from enforcing any of the rights and remedies that the
Debtor might have if this Security Agreement had not been executed; and, other
than in the ordinary course of business, (i) the other parties to the Contracts
have no offsets, counterclaims or defenses against the Debtor, whether arising
out of the Contracts or otherwise; (ii) no payments of any kind required
thereunder have been anticipated, discounted, waived, released, or set-off;
(iii) no parties thereto have been discharged, excused, or released; (iv) no
claims under the Contracts have been compromised; (v) the Debtor has not
accepted any payments under any of the Contracts, except as permitted by the
terms thereof; and (vi) all payments thereunder are current.
2. The Debtor is the lawful owner of the Collateral and has the right
to the use and possession of the Collateral and has good right to grant or
convey the same as security under this Security Agreement; the Collateral is
free and clear of any lien or right prior to or on a parity with the lien of
this Security Agreement, except as noted above; the Debtor will, on behalf of
the Secured Party, defend forever against any claims or demands thereon made by
all persons; and there exist no offsets, counterclaims or defenses to the
Debtor's rights therein or thereto.
3. The Debtor is a corporation duly organized and validly existing and
in good standing under the laws of the State of Nevada, is authorized to do
business and is in good standing in the State of Hawaii, and has all requisite
corporate power and authority to carry on the business and own the property that
it now carries on and owns.
4. The Debtor have all requisite power and authority to execute this
Security Agreement, to secure the payment of the Note by the execution of this
Security Agreement and to carry out the provisions of this Security Agreement.
The execution and delivery of this Security Agreement have been duly authorized
by the Board of Directors of the Debtor and, to the extent required by law, by
the stockholders of the Debtor, and no other corporate action of the Debtor is
requisite to the execution and delivery of this Security Agreement.
5. All tax returns and reports of the Debtor required by law to be
filed have been duly filed, and all taxes, assessments, contributions, fees and
other governmental charges (other than those currently payable without penalty
or interest and those currently being contested in good faith) upon the Debtor
or upon the Debtor's properties, assets or income which are due and payable have
been paid.
6. There are no actions, suits or proceedings pending or, to the
knowledge of the Debtor, threatened against or affecting the Debtor or the
Collateral in any court at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality, an adverse
decision in which might materially affect the Debtor's ability to perform the
Debtor's obligations under this Security Agreement.
7. The Debtor is not in violation of or in default with respect to any
provision of its articles of incorporation or bylaws or any mortgage, indenture,
contract,
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agreement or instrument applicable to the Debtor, or by which the Debtor is
bound, and the execution, delivery, performance of and compliance with this
Security Agreement will not result in any such violation or be in conflict with
or constitute a default under any such provision, or result in the creation of
any mortgage, lien, security interest or charge on any of the properties or
assets of the Debtor not contemplated by this Security Agreement; and there is
no provision of its articles of incorporation or bylaws or any mortgage,
indenture, contract, agreement or instrument applicable to the Debtor or by
which the Debtor is bound which materially adversely affects, or in the future
(so far as the Debtor can now foresee) will materially adversely affect, the
business or prospects or condition (financial or other) of the Debtor or of any
of its properties or assets.
8. Any financial statements heretofore delivered to the Secured Party
by the Debtor are true and correct in all respects, have been prepared in
accordance with generally accepted accounting principles, and fairly represent
the respective financial conditions of the subjects thereof as of the respective
dates thereof; no materially adverse change has occurred in the financial
conditions reflected therein since the respective dates thereof; and no
additional borrowings have been made by the Debtor since the date thereof.
B. DEBTOR'S COVENANTS. The Debtor hereby covenants and agrees with the
Secured Party as follows:
1. Payment of Taxes, Assessments, etc. The Debtor will punctually
pay and discharge, or cause to be paid and discharged from time to time as the
same shall become due, other than those which the Debtor is then contesting in
good faith and which are not in excess of five hundred thousand dollars
($500,000.00) or for which reserves have been established by the Debtor, all
taxes, rates, assessments, impositions, duties and other charges of every
description to which the Collateral, or any part thereof, may during the term
of this Security Agreement become liable by authority of law, the payment of
which shall be secured by this Security Agreement. The Debtor will, upon
request, deposit copies of the receipts therefor with the Secured Party no later
than five (5) days prior to the final date such taxes, rates, assessments,
impositions, duties and other charges may be paid without penalty.
2. Preservation of Contracts. Except with the prior written consent
of the Secured Party, or in the ordinary course of business, the Debtor will
not: (a) modify, change, alter, extend, terminate, cancel, tender or accept
surrender of any of the Contracts; (b) reduce, discount, compromise, settle,
waive, release, or set-off the amount of any sums payable thereunder, vary the
terms of payment or otherwise change, alter or modify the same, or consent
to the subordination of interest of any part thereto, or waive, excuse, condone,
or in any manner release or discharge any party thereunder of or from their
respective obligations, covenants, conditions, and agreements required to be
performed; (c) execute any agreement which would prevent the Secured Party from
acting as the Debtor, as provided herein; nor (d) alienate, assign, pledge,
transfer, or encumber any of the rights or interests of the Debtor therein or
thereto, including the sums due or to become due thereunder.
3. Performance. The Debtor will fully and faithfully abide by,
observe, discharge, perform and enforce the performance of the terms,
obligations, covenants,
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conditions, agreements and warranties required to be observed and performed
under each of the Contracts, and under the Loan Documents, including this
Security Agreement, and any other instrument secured hereunder, and will give
prompt notice to the Secured Party of any default thereunder, whether by the
Debtor or by any party thereto, together with an accurate and complete copy of
any notice either received or sent by the Debtor. Other than in the ordinary
course of business, the Debtor will not anticipate, discount, compromise,
settle, waive, release, or set off any sums due under the Contracts or in
respect of the rights and property described in paragraphs (b) through (d) of
Exhibit "1" (the "Personal Property") or receive any sums in any manner
inconsistent with the provisions of the Contracts or this Security Agreement.
4. Indemnification. The Debtor will indemnify and hold and save the
Secured Party harmless from and against any and all liability, loss, damage or
expense of whatever kind or nature, including attorneys' fees, which the Secured
Party may at any time sustain or incur hereunder, including, but not limited to,
any claims or demands whatsoever which may be asserted against the Secured Party
as a result of any failure on the part of the Debtor to perform, observe or
discharge its obligations under any of the Contracts or involving any of the
Collateral. Prior to actual entry and taking possession of any property by the
Secured Party, this Security Agreement shall not operate to place responsibility
upon the Secured Party for the control, care, management or repair of any
property constituting security hereunder.
5. Enforcement and Collection. The Debtor will, at no cost to the
Secured Party, diligently enforce and secure the performance and observance of
each and every obligation, covenant, condition and agreement of the other
parties under all of the Contracts.
6. Duplicate Originals. At the request of the Secured Party, the
Debtor will furnish to the Secured Party a duplicate original of each Contract
now existing or hereafter executed by the Debtor.
7. Litigation. The Debtor will appear in and defend any action or
proceeding at law or in equity affecting in any manner all or part of the
Collateral; and in such event (except where the purported defect affecting the
security hereof arises or results from any act or omission of the Secured
Party), the Debtor will pay all costs, charges and expenses, including cost of
evidence of title and attorneys' fees incurred, and will fully indemnify the
Secured Party from and against any loss, damage, or expense, including
attorneys' fees, sustained or incurred by the Secured Party as a result of any
failure on the part of the Debtor to comply with its obligations under this
paragraph.
8. Liens. The Debtor will maintain the valid security interest of the
Secured Party in the Collateral and the sums due thereunder, free and clear of
all liens, claims, and encumbrances that may be, or are threatened to be, made
prior to or on a parity with the security interest of the Secured Party herein,
except liens for taxes or assessments not yet payable or payable without penalty
so long as payable. The Debtor will not claim any credit on interest payable on
the Note or on any other payment secured hereby for any portion of the taxes
assessed against the Collateral, and the provisions of any law entitling
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the Debtor to such creditare hereby expressly waived by the Debtor to the extent
they may be lawfully waived.
9. Further Assurances. The Debtor will assist in the preparation of
and execute and acknowledge from time to time, alone or with the Secured Party,
and deliver, file or record any further instruments, including security
agreements, financing or continuation statements, mortgages or other
instruments, and do such further acts as the Secured Party may request to
confirm, establish, continue, maintain and perfect the security interest of the
Secured Party created by this Security Agreement and to subject the Collateral
to the lien hereof, including all renewals, additions, substitutions,
replacements or betterments thereto and all proceeds therefrom, and otherwise to
protect the same against the rights and interests of third parties, and to
execute all documents and perform all acts necessary to enforce the Contracts
and to make the same binding, the Debtor agreeing to pay the cost of preparing,
filing and recording the same.
10. Acknowledgment of Debt. The Debtor, within five (5) days after
request by the Secured Party in writing, will furnish to the Secured Party, or
to any proposed assignee of this Security Agreement, a written statement duly
acknowledged of the amount due under this Security Agreement and the Note, and
whether any off-sets, counterclaims or defenses exist against the secured debt.
11. Personal Property. The Debtor agrees: (a) to keep all Personal
Property reasonably intact and in good condition, order and repair; (b) at the
Debtor's own expense to replace any portion thereof which may be broken or
become obsolete or worn out or unfit for use; (c) to comply with all laws, rules
and regulations made by governmental authority and applicable thereto; (d) not
to commit or suffer any strip or waste of the Personal Property; and (e) not to
alienate, assign, pledge, transfer, or encumber any of the rights or interests
of the Debtor therein and thereto.
12. Insurance. The Debtor will, in the name and for the benefit of the
Secured Party, during the term of this Security Agreement, keep all of the
Personal Property insured against hazards of such type or types and in such
amount or amounts and form of policy as the Secured Party may from time to time
reasonably require and will deposit the policies with the Secured Party. The
Debtor further agrees to keep paid in advance all premiums and costs of all
insurance required hereunder and, upon demand of the Secured Party, will furnish
evidence of payment of such premiums. The Debtor, not less than ten (10) days
prior to the expiration date of each policy, shall deliver to the Secured Party
a renewal policy or policies, accompanied by evidence of payment satisfactory to
the Secured Party. All insurance required hereunder shall be effected under
valid and enforceable policies issued by insurance companies authorized to do
business in the State of Hawaii, the Debtor hereby acknowledging receipt of
written notice from the Secured Party that the Secured Party may not make the
granting of the loan evidenced by the Note contingent upon the Debtor procuring
any required insurance with an insurance company designated by the Secured
Party. The Secured Party shall not be responsible for such insurance or for the
collection of any insurance moneys, or for the insolvency of any insurer or
insurance underwriter. The amount collected from any fire or other insurance
policy may be applied by the Secured Party upon any indebtedness secured hereby
and in such order as the Secured
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Party may determine, or, at the option of the Secured Party, the entire amount
so collected, or any part thereof, may be applied to the restoration of the
Personal Property, or released to the Debtor, without being deemed a payment on
any of the indebtedness secured hereby. Such application or release shall not
cure or waive any default or notice of default hereunder or invalidate any act
done pursuant to such notice. No lien upon any of such policies of insurance,
or upon any refund or return premium which may be payable on the cancellation or
termination thereof, shall be given to anyone other than the Secured Party,
except by proper endorsement affixed to such policy and approved by the Secured
Party. In the event of loss or physical damage to the Personal Property, the
Debtor shall give immediate notice thereof by mail to the Secured Party, and
the Secured Party may make proof of loss if the same is not made promptly by the
Debtor. In the event of foreclosure of this Security Agreement, or other
transfer of title to the Collateral in the extinguishment of the indebtedness
secured hereby, all right, title and interest of the Debtor in and to any
insurance policies then in force shall pass to the purchaser or the grantee.
All such policies or other contracts for such insurance issued by the
respective insurers shall, to the extent obtainable, be without contribution
and contain an agreement by the insurer that the policy or other contract shall
not be canceled or materially changed without at least thirty (30) days' prior
written notice to the Secured Party.
C. MUTUAL COVENANTS. The Debtor and the Secured Party mutually covenant
and agree each with the other as follows:
1. Secured Party Not Obligated to Perform. Neither the acceptance
of this Security Agreement by the Secured Party, nor the exercise of any rights
hereunder by the Secured Party, shall be construed in any way as an assumption
by the Secured Party of any obligations, responsibilities or duties of the
Debtor arising from the Collateral assigned hereunder or otherwise bind the
Secured Party to the performance of any of the terms and provisions contained in
any of the Contracts or of any obligations respecting the Personal Property, it
being expressly understood that the Secured Party shall not be obligated to
perform, observe or discharge any obligation, responsibility, duty, or liability
of the Debtor under any of the Collateral, including, but not limited to,
appearing in or defending any action, expending any money or incurring any
expenses in connection therewith.
2. Right of Secured Party to Defend Action Affecting Security. The
Secured Party may, at the Debtor's expense, appear in and defend any action or
proceeding at law or in equity purporting to affect the Secured Party's security
interest under this Security Agreement.
3. Right of Secured Party to Prevent or Remedy Default. If the
Debtor shall fail to perform any of the covenants, conditions or agreements
required to be performed and observed by the Debtor under the Loan Documents,
including this Security Agreement, the Contracts, or any other instruments
secured hereby, or in respect of the Personal Property, the Secured Party (a)
may but shall not be obligated to take action the Secured Party deems necessary
or desirable to prevent or remedy any such default by the Debtor or otherwise to
protect the security interest of the Secured Party under this Security
Agreement, and (b) shall have the absolute and immediate right to enter in and
upon the Property in order to take possession of the Collateral or any part
thereof to such extent and as often as
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the Secured Party, in its sole discretion, deems necessary or desirable in order
to prevent or to cure any such default by the Debtor, or otherwise to protect
the security of this Security Agreement. The Secured Party may advance or
expend such sums of money for the account of the Debtor, as the Secured Party in
its sole discretion deems necessary for any such purpose.
4. Secured Party's Expenses. All advances, costs, expenses, charges
and reasonable attorneys' fees which the Secured Party may make, pay or incur
under any provision of this Security Agreement for the protection of its
security or for the enforcement of any of its rights hereunder, or in
foreclosure proceedings commenced and subsequently abandoned, or in any dispute
or litigation in which the Secured Party or the holder of the Note may become
involved by reason of or arising out of the Loan Documents, including this
Security Agreement, or any other instrument secured hereby, or the Collateral or
the care and management of the Collateral, shall be paid by the Debtor to the
Secured Party, upon demand, and shall bear interest until paid at the rate
specified by the Note to be paid in the event of default thereunder, all of
which obligations shall be additional charges upon the Collateral and be equally
secured hereby.
5. Secured Party's Right of Set-Off. Upon the happening of any event
entitling the Secured Party to pursue any remedy provided herein, or if the
Secured Party shall be served with garnishee process in which the Debtor shall
be named as defendant, whether or not the Debtor shall be in default hereunder
at the time, the Secured Party may, but shall not be required to, set off any
indebtedness owing by the Secured Party to the Debtor against any indebtedness
secured hereby, without first resorting to the security hereunder and without
prejudice to any other rights or remedies of the Secured Party or its security
interest herein.
6. No Waiver. In case the Secured Party shall have proceeded to
enforce any right or remedy hereunder and such proceedings shall have been
discontinued or abandoned for any reason, then in every such case, the Debtor
and the Secured Party shall be restored to their former positions and rights
hereunder with respect to the Collateral, and all rights, remedies and powers of
the Secured Party shall continue as if no such proceeding had been taken. No
failure or delay on the part of the Secured Party in exercising any right,
remedy or power under this Security Agreement or in giving or insisting upon
strict performance by the Debtor hereunder or in giving notice hereunder shall
operate as a waiver of the same or any other power or right, and no single or
partial exercise of any such power or right shall preclude any other or further
exercise thereof or the exercise of any other such power or right. The Secured
Party, notwithstanding any such failure, shall have the right thereafter to
insist upon the strict performance by the Debtor of any and all of the terms and
provisions of this Security Agreement to be performed by the Debtor. The
collection and application of proceeds, the entering onto the Property and
taking possession of the Collateral, and the exercise of the rights of the
Secured Party contained in the Loan Documents, including this Security
Agreement, shall not cure or waive any default, or affect any notice of default,
or invalidate any acts done pursuant to such notice. No waiver by the Secured
Party of any breach or default of or by any party hereunder, shall be deemed to
alter or affect the Secured Party's rights hereunder with respect to any prior
or subsequent defaults.
11
<PAGE>
7. Remedies. No right or remedy herein reserved to the Secured Party
is intended to be exclusive of any other right or remedy, but each and every
such remedy shall be cumulative, and not in lieu of but in addition to any other
rights or remedies given under this Security Agreement. Any and all of the
Secured Party's rights and remedies may be exercised from time to time and as
often as such exercise is deemed necessary or desirable by the Secured Party.
8. Right of Secured Party to Extend Time of Payment, Substitute,
Release Security, etc. Without affecting the liability of any person, including
the Debtor, for the payment of any indebtedness secured hereby, r the lien of
this Security Agreement on the Collateral, or the remainder thereof, for the
full amount of any indebtedness unpaid, the Secured Party may from time to time,
without notice and without affecting or impairing any of the Secured Party's
rights under this Security Agreement: (a) release any person liable for the
payment of any of the indebtedness, (b) extend the time or otherwise alter the
terms of payment of any of the indebtedness or accept a renewal note or notes to
evidence such an extension or alteration, (c) accept additional security
therefor of any kind, including (but not limited to) deeds of trust or
mortgages, (d) alter, ubstitute or release from any security interest or lien
held by the Secured Party any property securing the indebtedness, (e) resort for
the payment of the indebtedness secured hereby to its several securities
therefor in such order and manner as it may deem fit, (f) join in granting any
easement or creating any restriction thereon, or (g) join in any extension,
subordination or other agreement affecting this Security Agreement or the lien
or charge thereof.
D. MISCELLANEOUS.
1. Terms Commercially Reasonable. The terms of this Security
Agreement shall be deemed commercially reasonable within the meaning of the
Uniform Commercial Code.
2. Definitions. The terms "advances", "costs", and "expenses" shall
include, but shall not be limited to, attorneys' fees whenever incurred. The
terms "indebtedness" and "obligations" shall mean and include, but shall not be
limited to, all claims, demands, obligations and liabilities whatsoever, however
arising, whether owing by the Debtor individually or as a joint venturer, or
jointly or in common with any other party, and whether absolute or contingent,
and whether owing by the Debtor as principal debtor or as accommodation maker or
as endorser, liquidated or unliquidated, and whenever contracted, accrued or
payable. In this Security Agreement, whenever the context so requires, the
neuter gender includes the masculine or feminine, and singular number includes
the plural and vice versa.
3. Paragraph Headings. The headings of paragraphs herein are
inserted only for convenience and shall in no way define, describe or limit the
scope or intent of any provisions of this Security Agreement.
4. Change, Amendment, etc. No change, amendment, modification,
cancellation or discharge of any provision of this Security Agreement shall be
valid unless consented to in writing by the Secured Party.
12
<PAGE>
5. Assignment of Secured Party's Interest. The Secured Party shall
have the right to assign its interest in this Security Agreement to any
subsequent holder of the Note.
6. Parties in Interest. As and when used herein, the term "Debtor"
shall mean and include the Debtor and the Debtor's heirs, personal
representatives, successors, successors in trust and permitted assigns, and the
term "Secured Party" shall mean and include the Secured Party herein named and
its successors and assigns, and all covenants and agreements herein shall be
binding upon and inure to the benefit of the Debtor, the Secured Party, and
their respective successors and permitted assigns.
7. Applicable Laws; Severability. This Security Agreement shall be
governed by and shall be construed and interpreted under and pursuant to the
laws of the State of Hawaii. If any provision of this Security Agreement is held
to be invalid or unenforceable, the validity or enforceability of the other
provisions of this Security Agreement shall remain unaffected.
8. Notices. All notices, demands or documents which are required or
permitted to be given or served hereunder shall be in writing and personally
delivered, or sent by registered or certified mail addressed as follows:
To DEBTOR at: Hawaiian Ocean Science and Technology Park
73-4460 Queen Kaahumanu Hwy., #102
Kailua-Kona, Hawaii 96740
Attn: Executive Vice President,
Finance and Administration
To SECURED PARTY at: 999 Bishop Street, 11th Floor
Honolulu, Hawaii 96813
Attention: Corporate Banking Division
Such addresses may be changed from time to time by the addressee by serving
notice as provided above. Service of such notice or demand shall be deemed
complete upon the earlier of the date of actual delivery or the second day after
the date of mailing if mailed in Hawaii.
9. Counterparts. This Security Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same instrument, and in making proof of this
Security Agreement, it shall not be necessary to produce or account for more
than one such counterpart.
10. Terms and Conditions of this Security Agreement Supplement Other
Loan Documents. The terms and conditions of this Security Agreement and the
covenants, representations and warranties of the Debtor under this Security
Agreement shall not be deemed to supersede, amend or modify the obligations and
duties of the Debtor or other parties under the Loan Documents. The terms and
conditions of this Security Agreement and the covenants, representations and
warranties of the Debtor hereunder merely supplement,
13
<PAGE>
and do not supplant or supersede provisions of similar effect or subject matter
in the other Loan Documents.
IN WITNESS WHEREOF, the Debtor and the Secured Party have executed
these presents on the day and year first above written.
FIRST HAWAIIAN BANK
------------------------------
By /s/Kathryn Anderson
Its Vice President
Lender
CYANOTECH CORPORATION
------------------------------
By /s/ Ronald P. Scott
Its Exec. V.P./CFO
Borrower
14
<PAGE>
STATE OF HAWAII )
) SS:
CITY AND COUNTY OF HONOLULU )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS:
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
STATE OF HAWAII )
) SS:
COUNTY OF HAWAII )
On this 27th day of February, 1997, personally appeared Ronald P. Scott, to
me personally known, who, being by me duly sworn or affirmed did say that such
person(s) executed the foregoing instrument as the free act and deed of such
person(s), and if applicable, in the capacity shown, having been duly authorized
to execute such instrument in such capacity.
/s/Lei T. Cabilin
------------------------------
Notary Public, State of Hawaii
My commission Expires: 7/03/99
<PAGE>
EXHIBIT "1"
(a) Accounts. All accounts, accounts receivable, other
receivables, contract rights, chattel paper, instruments and documents, and
notes; any other obligations or indebtedness owed to the Debtor from whatever
source arising; all rights of the Debtor to receive any performance or any
payments in money or kind; all guaranties of the foregoing and security
therefor; all of the right, title and interest of the Debtor in and with respect
to the goods, services, or other property that gave rise or that secure any of
the foregoing and insurance policies and proceeds relating thereto, and all
rights of the Debtor as an unpaid seller of goods and services, including, but
not limited to, the rights to stoppage in transit, replevin, reclamation, and
resale; and all of the foregoing whether now owned or existing or hereafter
created or acquired. The word "Accounts" as used herein also includes
"documents," "instruments" and "chattel paper" as such terms are defined in the
Uniform Commercial Code.
(b) Equipment. All of Debtor's now owned or hereafter acquired
machinery, equipment, furniture, furnishings and fixtures, together with tools,
aircraft and motor vehicles of every kind and description, all parts therefor,
all other tangible personal property of the Debtor which is not Inventory or
Farm Products or used by the Debtor as consumer household goods, and all
improvements, accessions or appurtenances thereto.
(c) General Intangibles. All choses in action and causes of
action and all other intangible personal property of Debtor of every kind and
nature (other than Accounts) now owned or hereafter acquired by Debtor,
including, without limitation, corporate or other business records, inventions,
designs, blueprints, plans, specifications, patents, patent applications,
trademarks, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, beneficial interests in trusts, partnership interests, tax
refund claims, insurance proceeds thereof, including without limitation,
insurance covering the lives of key employees on which the Debtor is beneficiary
and any letter of credit, guarantee, claim, security interest or other security
held by or granted to Debtor to secure payment by an account debtor of any of
the Accounts.
(d) Inventory. Any and all now owned or hereafter acquired
goods, merchandise, or other personal property, raw materials, parts, supplies,
work-in-process and finished products intended for sale, of every kind and
description, in the custody or possession, actual or constructive, of Debtor,
including insurance proceeds from insurance on any of the above, any returns
upon any Accounts and other proceeds, resulting from the sale or disposition of
any of the foregoing, including without limitation, raw materials,
work-in-process, and finished goods.
(e) Farm Products. All of Debtor's crops, livestock, supplies
used or produced in farming operations, unmanufactured products of crops,
livestock or aquaculture.
EXHIBIT "1"
Exhibit 11.1
CYANOTECH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Fiscal years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net Income $ 4,159,000 $ 2,509,000 $ 769,000
Less: requirement
for preferred stock dividends -- -- 60,600
----------- ----------- -----------
Net income available to common $ 4,159,000 $ 2,509,000 $ 708,400
stockholders ----------- ----------- -----------
----------- ----------- -----------
Earnings per Share: (1)
- -----------------------
Weighted Average Common Shares
Outstanding 12,583,000 9,833,000 8,894,000
Weighted Average Common Equivalent
Shares Outstanding 4,015,000 4,715,000 4,695,000
----------- ----------- -----------
Weighted Average Common and Common
Equivalent Shares Outstanding 16,598,000 14,548,000 13,589,000
----------- ----------- -----------
----------- ----------- -----------
Net Income per Common and Common $ 0.25 $ 0.17 $ 0.05
Equivalent Shares ----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(1) There was no difference between the computation of earnings per share
on a primary versus fully-diluted basis; accordingly, dual presentation
is not required.
Exhibit 21.1
CYANOTECH CORPORATION
---------------------
Subsidiaries of the Company
(all wholly-owned by the Company)
1. NUTREX, Inc., incorporated in the State of Hawaii.
Exhibit 23.1
The Board of Directors
Cyanotech Corporation
We consent to incorporation by reference in the registration statement Nos.
(33-63789 and 33-55310) on Form S-8 of Cyanotech Corporation of our report dated
April 28, 1997, relating to the consolidated balance sheets of Cyanotech
corporation and subsidiary as of March 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended March 31, 1997, which report appears
in the March 31, 1997 annual report on Form 10-K of Cyanotech Corporation.
KPMG Peat Marwick LLP
Honolulu, Hawaii
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 768408
<NAME> Cyanotech Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2775
<SECURITIES> 3954
<RECEIVABLES> 2791
<ALLOWANCES> 0
<INVENTORY> 1138
<CURRENT-ASSETS> 11186
<PP&E> 18395
<DEPRECIATION> 3729
<TOTAL-ASSETS> 26015
<CURRENT-LIABILITIES> 2121
<BONDS> 559
0
1
<COMMON> 63
<OTHER-SE> 23271
<TOTAL-LIABILITY-AND-EQUITY> 26015
<SALES> 11399
<TOTAL-REVENUES> 11399
<CGS> 4590
<TOTAL-COSTS> 4590
<OTHER-EXPENSES> 3058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> 4159
<INCOME-TAX> 0
<INCOME-CONTINUING> 4159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4159
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
