UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1998
Commission File Number 0-14602
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 91-1206026
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes xx No
Number of common shares outstanding as of July 31, 1998:
Title of Class Shares Outstanding
Common stock - $.005 par value stock 13,599,572
1
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets (unaudited)
June 30, 1998 and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations (unaudited)
Three month periods ended
June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows (unaudited)
Three month periods ended
June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<S> <C> <C>
June 30, March 31,
1998 1998
Assets (Unaudited) (Audited)
----------- ----------
Current assets:
Cash and cash equivalents $ 770 $ 1,397
Accounts receivable, net 1,219 1,246
Inventories (note 2) 1,882 2,229
Prepaid expenses 116 88
----------- ----------
Total current assets 3,987 4,960
Equipment and leasehold improvements, net (note 3) 20,260 20,544
Other assets 182 163
----------- ----------
Total assets $ 24,429 $ 25,667
=========== ==========
Current liabilities:
Current maturities of long-term debt $ 50 $ 50
Note payable 90 975
Current maturities of capital lease obligations 119 129
Accounts payable 608 938
Other accrued liabilities 250 272
----------- ----------
Total current liabilities 1,117 2,364
Long-term debt, excluding current maturities 50 62
Note payable, refinanced on a long-term basis 675 -
Obligations under capital leases, excluding current maturities 44 67
----------- ----------
Total liabilities 1,886 2,493
----------- ----------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par
value (aggregate involuntary liquidation preference $2,975
($5 per share), plus unpaid cumulative dividends).
Authorized 5,000,000 shares; issued and outstanding
595,031 shares at June 30, 1998 and March 31, 1998 1 1
Common Stock of $0.05 par value, authorized 25,000,000
shares at June 30, 1998 and March 31, 1998; issued and
outstanding 13,599,572 shares at June 30, 1998 and
March 31, 1998 68 68
Additional paid-in capital 23,866 23,866
Accumulated deficit (1,392) (761)
----------- ----------
Total stockholders' equity 22,543 23,174
----------- ----------
Total liabilities and stockholders' equity $ 24,429 $ 25,667
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
---------------------------------
<S> <C> <C>
1998 1997
---------- ----------
NET SALES $ 1,763 $ 1,774
COST OF PRODUCT SALES 1,584 902
---------- ----------
Gross Profit 179 872
OPERATING EXPENSES:
Research and development 222 141
General and administrative 331 331
Sales and marketing 257 381
---------- ----------
Total operating expenses 810 853
---------- ----------
Income (loss) from operations (631) 19
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 2 117
Interest expense (35) (11)
Other income (expense), net (7) -
---------- ----------
Total other income (expense) (40) 106
---------- ----------
Income (loss) before income taxes (671) 125
Income tax benefit 40 -
---------- ----------
NET INCOME (LOSS) (631) 125
Other comprehensive income (loss) - -
---------- ----------
COMPREHENSIVE INCOME (LOSS) $ (631) $ 125
=========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.05) $ 0.00
Diluted $ (0.05) $ 0.00
SHARES USED IN CALCULATION OF:
Basic 13,600 12,804
Diluted 13,600 12,804
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
June 30,
---------------------------------
<S> <C> <C>
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (631) $ 125
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes - (20)
Depreciation and amortization 343 201
Net (increase) decrease in:
Accounts receivable 27 1,025
Inventories 347 (471)
Prepaid expenses and other assets (47) (58)
Net increase (decrease) in:
Accounts payable (330) 61
Other accrued liabilities (22) (153)
----------- ----------
Net cash provided by (used in) operating activities (313) 710
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (59) (3,007)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of warrants and options - 51
Principal payments on note payable (210) -
Principal payments on capital lease obligations (33) (49)
Principal payments on long-term debt (12) (25)
----------- ----------
Net cash used in financing activities (255) (23)
----------- ----------
Net decrease in cash and cash equivalents (627) (2,320)
Cash and cash equivalents at beginning of period 1,397 2,775
----------- ----------
Cash and cash equivalents at end of period $ 770 $ 455
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated
financial statements and notes should be read in conjunction with the
Company's consolidated financial statements contained in the Company's
previously filed report on Form 10-K for the year ended March 31, 1998.
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
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been eliminated
in consolidation. While the financial information furnished for the
three month period ended June 30, 1998 is unaudited, the statements in
this report reflect all material items which, in the opinion of
management, are necessary for a fair presentation of the results of
operations for the interim periods covered and of the financial
condition of the Company at the dates of the consolidated balance
sheets. The operating results for the interim period presented are not
necessarily indicative of the results that may be expected for the year
ending March 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost (which approximates
first-in, first-out) or market and consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1998 March 31, 1998
------------- --------------
Raw materials $ 79 $ 103
Work in process 332 362
Finished goods 1,227 1,524
Supplies 244 240
------------- --------------
$ 1,882 $ 2,229
============= ==============
</TABLE>
6
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3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of the minimum lease payments or fair value 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
furniture and fixtures and the shorter of the lease terms or estimated
useful lives for leasehold improvements and equipment under capital
lease as follows:
Equipment 3 to 10 years
Leasehold improvements Remaining lease term (10 to 28 years)
Furniture and fixtures 7 years
Equipment under capital lease Lease term (3 to 5 years)
<TABLE>
<CAPTION>
Equipment and leasehold improvements consist of the following (dollars
in thousands):
<S> <C> <C>
June 30, 1998 March 31, 1998
------------- --------------
Equipment $ 7,931 $ 7,791
Leasehold improvements 13,288 13,285
Furniture and fixtures 94 94
Equipment under capital lease 569 569
-------------- --------------
21,882 21,739
-------------- --------------
Less accumulated depreciation and amortization (5,050) (4,707)
Construction in-progress 3,428 3,512
-------------- --------------
Equipment and leasehold improvements, net $ 20,260 $ 20,544
============== ==============
</TABLE>
4. 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
June 30, 1998 amount to $2,120 ($3.563 per share). Upon conversion of
Series C preferred stock, cumulative dividends in arrears on converted
shares are no longer payable. 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.
7
<PAGE>
5. EARNINGS PER SHARE
The company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") during the quarter ended
December 31, 1997. All prior period earnings per share information has
been restated to reflect the provisions of SFAS No. 128.
For the three months ended June 30, 1998 and 1997, warrants and options
to purchase Common Stock shares of the Company and convertible
preferred stock were outstanding, but were not included in the compu-
tation of Diluted net income (loss) per common share because the
inclusion of these securities would have had an antidilutive effect on
the net income (loss) per common share. As of June 30, 1998, warrants
and options to acquire 638,425 shares of the Company's common stock
and preferred stock convertible into 2,975,155 shares of the Company's
common stock were outstanding.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented (in
thousands except share data):
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, June 30,
Basic Earnings per share 1998 1997
------------- -------------
Net income (loss) $ (631) $ 125
Less: Requirement for Preferred Stock dividends (60) (73)
------------- -------------
Income (loss) available to Common stockholders $ (691) $ 52
============= =============
Weighted average Common Shares outstanding 13,599,572 12,803,790
============= =============
Net Income (loss) per Common Share $ (0.05) $ 0.00
============= =============
Diluted Earnings per share
Income (loss) available to Common stockholders $ (691) $ 52
Plus: Requirement for Preferred Stock dividends - -
------------- -------------
Net income (loss) available to Common stockholders as adjusted $ (691) $ 52
============= =============
Weighted average Common Shares outstanding 13,599,572 12,803,790
Effect of dilutive securities:
Stock options and warrants - -
Convertible preferred stock - -
------------- --------------
Weighted average Common Shares outstanding as adjusted 13,599,572 12,803,790
============= ==============
Net income (loss) per Common Share $ (0.05) $ 0.00
============= ==============
</TABLE>
8
<PAGE>
6. ACCOUNTING CHANGES
COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The
Company adopted the provisions of SFAS No. 130 effective April 1, 1998.
SFAS No. 130 requires reclassification of financial statements for
earlier periods provided for comparative purposes. Adoption of SFAS No.
130 did not affect the Company's reported financial information.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997. The Company adopted the
provisions of SFAS No. 131 effective April 1, 1998. SFAS No. 131
requires restatement of comparative information presented for earlier
periods. Adoption of SFAS No. 131 had no impact on the Company's
segment disclosures.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENE-
FITS. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which
amends the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 addresses
disclosure only and does not change any of the measurement or recog-
nition provisions provided for in SFAS Nos. 87, 88 or 106. SFAS No. 132
is effective for fiscal years beginning after December 15, 1997 and
requires restatement of comparative information presented for earlier
periods. The Company will adopt the provisions of SFAS No. 132 for its
fiscal year 1999 financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management does not expect adoption of SFAS No.
133 will have a material effect on the Company's financial condition,
results of operations or liquidity.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE. In March 1998, the American Institute of Certified Public
Accountants ("AICPA") Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which
requires that certain costs, including certain payroll and
payroll-related costs, be capitalized and amortized over the estimated
useful life of the software. The provisions of SOP 98-1 are effective
for fiscal years beginning after December 15, 1998. The company has not
determined when it will adopt SOP 98-1. Management does not expect that
adoption of SOP 98-1 will have a material effect on the Company's
financial condition, results of operations or liquidity.
9
<PAGE>
REPORTING ON THE COSTS OF START-UP ACTIVITIES. In April 1998, the AICPA
Accounting Standards Executive Committee issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." SOP 98-5 requires that costs of
start-up activities, including organization costs, be expensed as
incurred. The provisions of SOP 98-5 are effective for fiscal years
beginning after December 15, 1998 and earlier application is
encouraged. The Company has not determined when it will adopt SOP 98-5.
Management does not expect that adoption of SOP 98-5 will have a
material effect on the Company's financial condition, results of
operations or liquidity.
10
<PAGE>
CYANOTECH CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report on Form 10-Q contains forward-looking statements regarding
the future performance of Cyanotech and future events that involve risks and
uncertainties that could cause actual results to differ materially from the
statements contained herein. This document, and the other documents that the
Company files from time to time with the Securities and Exchange Commission,
such as its reports on Form 10-K, Form 10-Q, Form 8-K, and its proxy materials,
contain additional important factors that could cause actual results to differ
from our current expectations and the forward-looking statements contained
herein.
Results of Operations
The following table sets forth certain consolidated statement of
operations data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
<S> <C> <C>
1998 1997
---------- ----------
Net Sales 100.0 % 100.0 %
Cost of product sales 89.8 50.8
---------- ----------
Gross profit 10.2 49.2
---------- ----------
Operating expenses:
Research and development 12.6 7.9
General and administrative 18.8 18.7
Sales and marketing 14.6 21.5
---------- ----------
Total operating expenses 46.0 48.1
---------- ----------
Income (loss) from operations (35.8) 1.1
---------- ----------
Other income (expense):
Interest income 0.1 6.6
Interest expense (2.0) (0.6)
Other income (expense), net (0.4) -
---------- ----------
Total other income (expense) (2.3) 6.0
---------- ----------
Income (loss) before income taxes (38.1) 7.1
Income tax benefit 2.3 -
---------- ----------
Net Income (Loss) (35.8) 7.1
Other comprehensive income (loss) - -
---------- ----------
Comprehensive income (Loss) (35.8) % 7.1 %
========== ==========
</TABLE>
11
<PAGE>
First Quarter of Fiscal 1999 Compared to First Quarter of Fiscal 1998
Net Sales
Net sales for the three month period ended June 30, 1998 decreased
slightly. This decrease is primarily due to lower sales of bulk Spirulina powder
and tablets, offset by an increase in sales of NatuRose(TM), our natural
astaxanthin product.
International sales represented 50% and 34% of total net sales for the
three month periods ended June 30, 1998 and 1997, respectively. This increase
was due to sales to new customers, including those for NatuRose, resulting from
our expanded NatuRose marketing efforts in fiscal 1998.
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 decreased 79% to
$179,000 for the three month period ended June 30, 1998, from $872,000 in the
comparable period of fiscal 1998. Our gross profit margin decreased to 10% for
the three month period ended June 30, 1998, compared to 49% for the comparable
period of fiscal 1998. This decrease in gross profit margin from the prior year
period is primarily attributable to negative margins on sales of NatuRose caused
by high initial production costs of the product, plus one-time costs incurred to
optimize the NatuRose production process. Also contributing to lower gross
profit were higher depreciation expense and additional costs incurred in
re-starting previously idled Spirulina culture ponds.
Operating Expenses
Operating expenses were $810,000 during the three month period ended
June 30, 1998, a decrease of 5% from $853,000 in the comparable period of fiscal
1998. This decrease was primarily due to decreased sales and marketing expenses,
partially offset by increased research and development costs.
Research and Development. Research and development expenses amounted to
$222,000 for the three month period ended June 30, 1998, an increase of 57% from
$141,000 for the comparable period of fiscal 1998. This increase from the prior
year was primarily due to higher personnel related expenditures for the ongoing
development work done on our genetically engineered mosquitocide project.
Sales and Marketing. Sales and marketing expenses amounted to $257,000
for the three month period ended June 30, 1998, a decrease of 33% from $381,000
for the comparable period of fiscal 1998. This decrease from the prior year is
primarily due to reduced expenditures during the three month period ended June
30, 1998 for outside consulting services, decreased trade show costs and travel
expenses, and decreased sales personnel costs.
Other Income (Expense)
Other expense amounted to $40,000 for the first three months of fiscal
1999, compared to other income of $106,000 for the comparable period of fiscal
1998. This fluctuation is primarily attributable to a decrease in interest
income on investment securities and an increase in interest expense due to
higher average outstanding balances for notes payable.
12
<PAGE>
Income Taxes
The Company presently expects that its fiscal year 1999 results will
require a provision for Hawaii State income taxes. Accordingly, an interperiod
tax benefit of $40,000 has been recorded for the three months ended June 30,
1998.
Net Income (Loss)
The Company recorded a net loss after taxes of $631,000 for the first
quarter of fiscal 1999, compared to net income of $125,000 for the comparable
period of fiscal 1998. This decrease in net income is primarily attributable to
lower sales of Spirulina powder and tablets, negative margins on sales of
NatuRose and the effect of unfilled orders for Spirulina caused by the delay in
restarting culture ponds previously idled.
Variability of Results
The Company has experienced quarterly fluctuations in operating results
and anticipates that these fluctuations may continue in future periods. Future
operating results may fluctuate as a result of changes in sales levels to the
Company's largest customers, new product introductions, government action,
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 competitors, changes in the Company's
customer mix, overall trends in the market for Spirulina and astaxanthin
products, and other factors. A significant portion of the Company's expense
levels are relatively fixed, and the timing of increases in expense levels is
based in large part on 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 an inability to adjust spending quickly enough to compensate
for the sales shortfall. The Company may also choose to reduce prices or
increase spending in response to market conditions, which may have a material
adverse effect on financial condition and results of operations.
Liquidity and Capital Resources
Our working capital increased $274,000 during the first three months of
fiscal 1999 to $2,870,000 primarily due to the refinancing of a note payable,
$675,000 of which was previously classified as a current liability at March 31,
1998. Our cash and cash equivalents balances decreased by $627,000 to $770,000
and is primarily attributable to cash flows used in operating and financing
activities of $313,000 and $255,000, respectively.
Cash used in operating activities during the first three months of
fiscal 1999 amounted to $313,000 compared to cash provided by operating
activities of $710,000 in the comparable period of fiscal 1998. The primary uses
of cash flows from operating activities during the first three months of fiscal
1999 were the net loss of $631,000 and a reduction in accounts payable of
$330,000, offset in part by a decrease in inventories of $347,000 and
depreciation and amortization of $343,000.
Cash used in investing activities (for capital expenditures) during the
first three months of fiscal 1999 amounted to only $59,000 compared to
$3,007,000 for the comparable period of fiscal 1998.
13
<PAGE>
Cash used in financing activities during the first three months of
fiscal 1999 amounted to $255,000, compared to $23,000 in fiscal 1998. The
primary uses of cash flows in financing activities during the first quarter of
fiscal 1999 were for principal payments on a note payable, capital lease
obligations and long-term debt.
As of March 31, 1998, the Company had agreed with a construction
contractor to resume work on a suspended expansion project on or before January
1, 1999 in a reasonable and customary manner in accordance with the terms of the
contract and at a minimum billable rate of $150,000 per month. The remaining
balance on the construction contract is approximately $1.9 million. If work does
not resume on or before January 1, 1999, the contract will be considered to have
been terminated by Cyanotech. Assertion by the contractor of its termination
rights could have a material adverse effect on the Company's financial
condition, results of operations or liquidity. Total costs incurred as of June
30, 1998 with respect to this expansion project approximate $2,643,000.
Management expects to resume work on the project, on or before January 1, 1999.
Year 2000 Compliance
The Company has completed a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has developed an implementation plan, to be completed by the end of fiscal
1999, to resolve the issue. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company believes
that, with modifications to existing software and converting to new software,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted. The costs of such
modifications and conversions are not expected to be material. However, if such
modifications and conversions are not completed in a timely manner, the Year
2000 problem may have a material impact on the operations of the Company.
Subsequent Event
On July 28, 1998, the Company entered into a Loan and Security
Agreement with a lender which provides for up to $3 million in credit
facilities, secured by all the assets of the Company. The credit facility
includes working capital loans on a revolving basis, subject to the availability
of eligible accounts receivable and inventory, a sub-limit term loan of up to
$750,000 (amortized over sixty months) secured by eligible machinery and
equipment, and a sub-limit term loan of up to $2 million (amortized over sixty
months and subject to the Company achieving and maintaining specific levels of
financial performance) for the acquisition of new machinery and equipment. On
the closing date of the loan, August 5, 1998, the Company drew down $750,000 on
the equipment term loan and approximately $250,000 on the revolving working
capital facility. The interest rate on the credit facility is prime plus 2.5%
(currently 11%) until the Company achieves certain financial performance levels,
at which time the interest rate will decrease to prime plus 1.25%. Approximately
$675,000 of the aggregate loan proceeds were used to retire a short-term note
payable, and the remaining $325,000 was used for working capital purposes. The
portion of the short-term note payable retired using the loan proceeds of
$675,000 has been classified as a non-current liability in the consolidated
balance sheet at June 30, 1998.
14
<PAGE>
Outlook
This outlook section contains a number of forward-looking statements,
all of which are based on current expectations. Actual results may differ
materially. See also the note at the beginning of this Item 2.
The Company believes that it has resolved the Spirulina production
problems which resulted from restarting the Spirulina culture ponds that were
idle from December 1997 to February 1998. At June 30, 1998 Spirulina production
had returned to 90% of full capacity compared to the full production capacity
achieved in the comparable period of fiscal 1998. We plan to balance Spirulina
production with NatuRose production resources to meet our customers' require-
ments during the remainder of fiscal 1999. On July 7, 1998, we received a
purchase contract from our agent in Japan for a minimum commitment of $1.5
million of NatuRose, our natural astaxanthin product, over the 12 months ending
May 31, 1999. As a result of increasing acceptance and promotion, we expect
second quarter sales of NatuRose to be approximately $500,000. Gross profit
margin for NatuRose is currently negative due to the high initial production
costs, but is expected to improve as current high-cost inventory is reduced.
Gross profit margin on NatuRose production is expected to improve as we optimize
processing systems and production throughput; however, the higher costs related
to production of NatuRose may persist into the near future.
Research and development costs are expected to increase throughout this
fiscal year as we continue to optimize the PhytoMax PCS(sm) technology, continue
the research and development activities directed at the genetically engineered
mosquitocide project and begin work on production of Aldolase Catalytic Antibody
38C2 as a result of our April 1998 agreement with The Scripps Research
Institute.
Cyanotech's strategy has been, and continues to be, to produce higher
value natural products from microalgae. To continue the implementation of this
strategy, we have broadened our product offerings with the addition of NatuRose,
our natural astaxanthin product, and are continuing development work on the
genetically-engineered mosquitocide project which we plan to have in limited
production for worldwide testing by the end of the current fiscal year.
Additionally, development work is scheduled to begin in the second quarter on
production of Aldolase Catalytic Antibody 38C2. We are continuing our emphasis
on selling higher value packaged Spirulina consumer products over Spirulina bulk
products as well as exploring and developing new markets for our bulk products.
The Company's future results of operations and the other
forward-looking statements contained in this Outlook, in particular the
statements regarding revenues, gross margin, research and development, and
capital spending, involve a number of risks and uncertainties. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: business conditions and growth
in the natural products industry and in the general economy; changes in customer
order patterns, and changes in demand for natural products in general; changes
in weather conditions; competitive factors, such as competing Spirulina
producers increasing their production capacity and their impact on world market
prices for Spirulina; government actions; shortage of manufacturing capacity;
and other factors beyond our control.
Cyanotech believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success, but future revenues, costs, margins and profits are all influenced by a
number of factors, as discussed above, all of which are inherently difficult to
forecast.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 13, 1998, the Company filed a complaint in United States
District Court for the District of Hawaii (Case No. CV98-00600)
against Aquasearch, Inc. ("Aquasearch"), seeking declaratory
judgement of patent noninfringement, patent invalidity, and non-
misappropriation of trade secrets relating to closed culture
production of astaxanthin. The complaint was filed in response
to assertions by Aquasearch regarding their alleged intellectual
property rights. Aquasearch has not yet responded to the com-
plaint. The Company intends to pursue this litigation vigorously.
Item 5. Pursuant to SEC Rule 14a-4(c)(1) management proxies for the 1999
Annual Meeting of Stockholders will exercise their discretionary
authority to be presented at such meeting of which the Registrant
has not received notice by June 12, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished with this report:
Exhibit 10.1 - Loan and Security Agreement and Schedule
to the Loan and Security Agreement dated
July 28, 1998 between the registrant and
Coast Business Credit.
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1998.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYANOTECH CORPORATION (Registrant)
August 13 , 1998 By: /s/Gerald R. Cysewski
- --------------- ------------------------------
(Date) Gerald R. Cysewski
Chairman of the Board,
President and Chief Executive Officer
By: /s/Ronald P. Scott
------------------------------
Ronald P. Scott
Executive Vice President - Finance &
Administration
(Principal Financial and
Accounting Officer)
17
Coast
Loan and Security Agreement
Borrower: Cyanotech Corporation Nutrex, Inc.
Address: 73-4460 Queen Kaahumanu Hwy. 73-5574 Maiau Street
#102 #1
Kailua-Kona, HI 96740 Kailua-Kona, HI 96740
Date: July 28, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT(R), a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrowers named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 1 below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Astaxanthin" means aquacultural feed product processed from microalgae.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"Borrower" has the meaning set forth in the introduction to this Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Changes of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than forty percent
(40%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
"Closing Date" date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
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"Consolidated Net Worth" means Borrowers' stockholders' combined equity
plus subordinated debt otherwise permitted hereunder prepared in accordance with
GAAP.
"Credit Limit" means the maximum amount of Loans that Coast may make from
time to time to Borrower pursuant to the amounts and percentages shown on the
Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Dilution" means all non-cash reductions, including, but not limited to
allowances, returns, write-offs, credit memos, discounts, journal entries and
similar items, in the total amount of Receivables, expressed as a percentage of
Receivables.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBITDA" means for any period, the net income for such period of Borrower
determined in accordance with GAAP (excluding any extraordinary income items,
including, without limitation, gain on sale of assets, income relating to
foreign exchange, swap or other derivative transactions and changes in GAAP and
excluding only non-cash extraordinary expenses due to changes in GAAP), plus the
following items, to the extent deducted from the revenues of Borrower in the
calculation of net income or loss; (i) depreciation, (ii) amortization of
intangibles and any other non-cash items, (iii) cash interest expense (excluding
any interest paid-in-kind) and (iv) tax expenses.
"Eligible Foreign Receivables" means Receivables arising from Borrower's
customers located outside the United States and Canada which Coast otherwise
approves for borrowing in its sole and absolute discretion. Without limiting the
foregoing, Coast will consider the following in determining the eligibility of
such receivables: (i) whether the Borrower's goods are shipped backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with a Dun & Bradstreet rating,
or (vi) whether Borrower's goods are shipped to an account that has credit
insurance.
"Eligible Inventory" means Inventory which Coast, in its sole judgment,
deems eligible for borrowing, based on such considerations as Coast may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Coast's discretion,
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of finished goods, in good,
new and salable condition which is not perishable, not obsolete or unmer-
chantable, and is not comprised of raw materials, work in process, packaging
materials or supplies; (ii) meets all applicable governmental standards; (iii)
has been manufactured in compliance with the Fair Labor Standards Act; (iv)
conforms in all respects to the warranties and representations set forth in this
Agreement; (v) is at all times subject to Coast's duly perfected, first priority
security interest; (vi) is situated at a one of the locations set forth on the
Schedule; and (vii) Spirulina and Astaxanthin Products with a remaining shelf
life of six (6) months or more before expiry date.
"Eligible Receivables" means Receivables and Eligible Foreign Receivables
arising in the ordinary course of Borrower's business from the sale of goods or
rendition of services, which Coast, in its sole judgment, shall deem eligible
for borrowing, based on such considerations as Coast may from time to time deem
appropriate. Eligible Receivables shall not include the following:
(a) Receivables that the Account Debtor has failed to pay within 90
days of invoice date or Accounts with selling terms of more than 90 days;
(b) Receivables owed by an Account Debtor or its Affiliates where
twenty-five (25%) percent or more of all Receivables owed by that Account Debtor
(or its
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Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent (other than a distributor) of Borrower;
(d) Receivables with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional;
(e) Receivables, other than Eligible Foreign Receivables, that are not
payable in Dollars or with respect to which the Account Debtor: (i) does not
maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Receivable is supported by an irrevocable letter of credit satisfactory
to Coast (as to form, substance, and issuer or domestic confirming bank) that
has been delivered to Coast and is directly drawable by Coast, or (z) the
Receivable is covered by credit insurance in form and amount, and by an insurer,
satisfactory to Coast;
(f) Receivables with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31
U.S.C. ss. 3727), or (ii) any State of the United States (exclusive, however, of
Receivables owed by any State that does not have a statutory counterpart to the
Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a creditor
of Borrower, has or has asserted a right of setoff, has disputed its liability,
or has made any claim with respect to the Receivables, except for Account
Debtors that have executed "No Offset Letters" acceptable to Coast;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower exceed twenty percent (20%) of all Eligible
Receivables, to the extent of the obligations owing by such Account Debtor in
excess of such percentage;
(i) Receivables with respect to which the Account Debtor is subject to
any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation proceeding, or becomes insolvent, or goes out of
business;
(j) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the services
giving rise to such Receivable have not been performed and accepted by the
Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Equipment Acquisition Loans" means the Loans described in Section 2.1(d)
of the Schedule.
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<PAGE>
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Inventory Loans" means the Loans described in Section 2.1(b) of the
Schedule.
"Investment Property" has the meaning set forth in Section 9115 of the Code
as in effect as of the date hereof.
"Letter of Credit" has the meaning set forth in Section 2.2 hereof.
"Letter of Credit Sublimit" has the meaning set forth in Section 2.2
hereof.
"Loan Documents" means this Agreement, the agreements and documents listed
on Section 5 of the Schedule, and any other agreement, instrument or document
executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or resu lts of operations
of Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees,
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attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy),
expert witness fees, audit fees, letter of credit fees, collateral moni-
toring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or
under any other present or future instrument or agreement between Borrower and
Coast.
"Permitted Liens" means the following:
(a) purchase money security interests in specific items of Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business or in the course of
construction projects and securing obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of the Bank of America NT & SA, or its successor whether or not that rate is the
lowest interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal on the first business day of the applicable month, as
the base rate on corporate loans at large U.S. money center commercial banks.
"Real Property" means Borrower's real property located in Kailua-Kona, HI.
"Receivable Loans" means the Loans described in Section 2.1(a) of the
Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the
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sum of the debts, including contingent liabilities, of such Person, (b) the
present fair salable value of the properties and assets of such Person is not
less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (c) such Person
is able to realize upon its properties and assets and pay its debts and other
liabilities, contingent obligations and other commitments as they mature in the
normal course of business, (d) such Person does not intend to, and does not
believe that it will, incur debts beyond such Person's ability to pay as such
debts mature, and (e) such Person is not engaged in business or a transaction,
and is not about to engage in business or a transaction, for which such Person's
properties and assets would constitute unreasonably small capital after giving
due consideration to the prevailing practices in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount that,
in light of all the facts and circumstances existing at such time, represents
the amount that reasonably can be expected to become an actual or matured
liability.
"Spirulina" means nutritional supplement processed from microalgae.
"Term Loan" means the Loans described in Section 2.1 (c) of the Schedule.
"Total Debt Service Coverage Ratio" means the quotient of (x) EBITDA less
all capital expenditures except that portion which is financed, less taxes paid
during such period, divided by (y) the sum of all principal, interest and other
payments made or required to be made by Borrower on indebtedness during each
period, including any fees and charges owed by Borrower in connection with any
such indebtedness.
"Year 2000 Problem" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 Loans. Coast will from time to time make loans to Borrower (the
"Loans"), in amounts and in percentages to be determined by Coast in its good
faith discretion, up to the Credit Limit as provided in Section 2.1 of the
Schedule, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables or Eligible Inventory without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
2.2 Letters of Credit. At the request of Borrower, Coast may, in its
sole discretion, arrange for the issuance of letters of credit for the account
of Borrower (collectively, "Letters of Credit"), by issuing guarantees to the
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issuer of the letter of credit or by other means. All Letters of Credit shall be
in form and substance satisfactory to Coast in its sole discretion. The
aggregate face amount of all outstanding Letters of Credit from time to time
shall not exceed the amount shown on the Schedule (the "Letter of Credit
Sublimit"), and shall be reserved against Loans which would otherwise be
available hereunder. Borrower shall pay all bank charges for the issuance of
Letters of Credit. Any payment by Coast under or in connection with a Letter of
Credit shall constitute a Loan hereunder on the date such payment is made. Each
Letter of Credit shall have an expiry date no later than thirty (30) days prior
to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast
harmless from any loss, cost, expense, or liability, including payments made by
Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of
or in connection with any Letters of Credit. Borrower agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Coast and opened for Borrower's account or by Coast's
interpretations of any Letter of Credit issued by Coast for Borrower's account,
and Borrower understands and agrees that Coast shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Coast to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect
to any loss, cost, expense, or liability incurred by Coast under any Letter of
Credit as a result of Coast's indemnification of any such issuing bank. The
provisions of this Agreement, as it pertains to Letters of Credit, and any other
present or future documents or agreements between Borrower and Coast relating to
Letters of Credit are cumulative.
3. INTEREST AND FEES.
3.1 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Receivable Loans and the Inventory
Loans in the amount set forth on the Schedule.
3.2 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are deemed
fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 Status of Accounts at Closing. No accounts payable shall be due and
unpaid ninety (90) days past its due date except for such accounts payable being
contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 Minimum Availability. Borrower shall have minimum availability imme-
diately following the initial funding in the amount set forth on the Schedule.
5.3 Landlord Waiver. Coast shall have received duly executed
(a) landlord waivers and access agreements in form and substance
satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed
appropriate by Coast, in form for recording in the appropriate recording office,
with respect to all leased locations where Borrower maintains any inventory or
equipment.
(b) warehouse waivers in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and when deemed appropriate by Coast, in
form for recording in the appropriate recording office, with respect to all
warehouse locations where Borrower maintains any inventory or equipment.
5.4 Real Property. Coast shall have received duly executed mortgages and/or
deeds of trust in form and substance satisfactory to Coast, in Coast's sole and
absolute discretion, in form for recording in the appropriate recording office,
with respect to the Real Property.
5.5 Executed Agreement. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 Opinion of Borrower's Counsel. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
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5.7 Priority of Coast's Liens. Coast shall have received the results of "of
record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.8 Insurance. Coast shall have received copies of the insurance binders or
certificates evidencing Borrower's compliance with Section 8.2 hereof, including
lender's loss payee endorsements.
5.9 Borrower's Existence. Coast shall have received copies of Borrower's
articles of incorporation and all amendments thereto, and a Certificate of Good
Standing, each certified by the Secretary of State of the state of Borrower's
organization, and dated a recent date prior to the Closing Date, and Coast shall
have received Certificates of Foreign Qualification for Borrower from the
Secretary of State of each state wherein the failure to be so qualified could
have a Material Adverse Effect.
5.10 Organizational Documents. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.11 Taxes. Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal Revenue Service regulations,
in form and substance satisfactory to Coast in its sole and absolute discretion.
5.12 Year 2000 Problem Assessment Certificate. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as the
result of a comprehensive assessment undertaken by Borrower of Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
that would cause Borrower to reasonably believe that the Year 2000 Problem will
cause a Material Adverse Effect.
5.13 Due Diligence. Coast shall have completed its due diligence with
respect to Borrower.
5.14 Other Documents and Agreements. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection with
the transactions contemplated hereby, all in form and substance satisfactory to
Coast in Coast's sole and absolute discretion, and in form for filing in the
appropriate filing office, including, but not limited to, those documents listed
in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
6.1 Existence and Authority. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower
inaccordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
articles of incorporation, or Borrower's by-laws, or any law or any material
agreement or instrument which is binding upon Borrower or its property, and (d)
do not constitute grounds for acceleration of any material indebtedness or
obligation under any material agreement or instrument which is binding upon
Borrower or its property.
6.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of
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business under a fictitious business name.
6.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
6.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Coast now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend Coast and the Collateral against all claims of others. Except for
underground electrical and water pipes and other leasehold improvements located
at 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona, Hawaii 96740, none
of the Collateral now is or will be affixed to any real property in such a
manner, or with such intent, as to become a fixture. Borrower is not and will
not become a lessee under any real property lease pursuant to which the lessor
may obtain any rights in any of the Collateral and no such lease now prohibits,
restrains, impairs or will prohibit, restrain or impair Borrower's right to
remove any Collateral from the leased premises. Whenever any Collateral is
located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Coast, use its best efforts to cause such
third party to execute and deliver to Coast, in form acceptable to Coast, such
waivers and subordinations as Coast shall specify, so as to ensure that Coast's
rights in the Collateral are, and will continue to be, superior to the rights of
any such third party. Borrower will keep in full force and effect, and will
comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
6.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, except for normal wear and tear and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise
Coast in writing of any material loss or damage to the Collateral.
6.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial statements, for
the absence of footnotes and subject to normal year-end adjustments) and now and
in the future will fairly reflect the financial condition of Borrower, at the
times and for the periods therein stated. Between the last date covered by any
such statement provided to Coast and the date hereof, there has been no Material
Adverse Effect. Borrower is now and will continue to be Solvent.
6.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll
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taxes payable by Borrower.
6.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
6.12 Year 2000 Compliance. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers Borrower represents and warrants that the Year 2000
problem will not result in a Material Adverse Effect.
7. RECEIVABLES.
7.1 Representations Relating to Receivables. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct in all material respects and
all such invoices, instruments and other documents and all of Borrower's books
and records are and shall be genuine and in all respects what they purport to
be. All sales and other transactions underlying or giving rise to each
Receivable shall fully comply in all material respects with all applicable laws
and governmental rules and regulations. All signatures and indorsements on all
documents, instruments, and agreements relating to all Receivables are and shall
be genuine, and all such documents, instruments and agreements are and shall be
legally enforceable in accordance with their terms.
7.3 Schedules and Documents relating to Receivables. Borrower shall deliver
to Coast via facsimile, unless otherwise directed by Coast, at such locations
and at such intervals as Coast may request, transaction reports and loan
requests, schedules of Receivables, and schedules of collections, all on Coast's
standard forms; provided, however, that Borrower's failure to execute and
deliver the same shall not affect or limit Coast's security interest and other
rights in all of Borrower's Receivables, nor shall Coast's failure to advance or
lend against a specific Receivable affect or limit Coast's security interest and
other rights therein. Loan requests received after 10:30 A.M. Los Angeles,
California time, will not be considered by Coast until the next Business Day.
Together with each such schedule, or later if requested by Coast, Borrower shall
furnish Coast with copies (or, at Coast's request, originals) of all contracts,
orders, invoices, and other similar documents, and all original shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Coast an aged accounts eceivable trial balance in
such form and at such intervals as Coast shall reasonably request. In addition,
Borrower shall deliver to Coast the originals of all instruments, chattel paper,
security agreements, guarantees and other documents and property evidencing or
securing any Receivables, upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Coast with copies of all credit memos as and when requested
by Coast.
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7.4 Collection of Receivables. Borrower shall have the right to collect all
Receivables, unless and until an Event of Default has occurred. Borrower shall
hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
7.5 Remittance of Proceeds. All proceeds arising from the disposition of
any Collateral shall be sent to Coast within one (1) Business Day after receipt
by Borrower, by over night service, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Borrower agrees that it will not commingle proceeds of Collateral with any of
Borrower's other funds or property, but will hold such proceeds separate and
apart from such other funds and property and in an express trust for Coast.
Nothing in this Section limits the restrictions on disposition of Collateral set
forth elsewhere in this Agreement.
7.6 Disputes. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (a) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an Event
of Default, settle or adjust disputes or claims directly with Account Debtors
for amounts and upon terms which Coast considers advisable in its reasonable
credit judgment and, in all cases, Coast shall credit Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.
7.7 Returns. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
7.8 Verification. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
7.9 No Liability. Coast shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 Financial and Other Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
8.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an
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additional insured, and all property casualty and related insurance policies
of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a
lender's loss payee endorsement in form reasonably acceptable to Coast. Upon
receipt of the proceeds of any such insurance, Coast shall apply such proceeds
in reduction of the Obligations as Coast shall determine in its sole discretion,
except that, provided no Default or Event of Default has occurred and is conti-
nuing, Coast shall release to Borrower insurance proceeds ith respect to Equip-
ment totaling less than the amount set forth in Section 8 of the Schedule, which
shall be utilized by Borrower for the replacement of the Equipment with respect
to which the insurance proceeds were paid. Coast may require reasonable
assurance that the insurance proceeds so released will be so used. If Borrower
fails to provide or pay for any insurance, Coast may, but is not obligated to,
obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast
copies of all reports made to insurance companies.
8.3 Reports. Borrower, at its expense, shall provide Coast with the written
reports set forth in Section 8 of the Schedule, and such other written reports
with respect to Borrower (including budgets, sales projections, operating plans
and other financial documentation), as Coast shall from time to time reasonably
specify.
8.4 Access to Collateral, Books and Records. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice, Coast, or
its agents, shall have the right to perform Audits. Coast shall use its best
effort and take all reasonable steps to keep and maintain confidential all
confidential information (including trade secrets) obtained in any Audit, but
Coast shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower's expense and the charge for the Audits
shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher
amount as shall represent Coast's then current standard charge for the same),
plus reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will, on a timely basis, adequately and
completely address the Year 2000 Problem in all material respects.
8.5 Negative Covenants. Borrower shall not, without Coast's prior written
consent which consent shall not be unreasonably withheld, do any of the
following:
(a) merge or consolidate with another entity, except in a transaction
in which (i) the owners of the Borrower hold at least fifty percent (50%) of the
ownership interest in the surviving entity immediately after such merger or
consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business,
or (ii) in a transaction or a series of transactions not involving the payment
of an aggregate amount in excess of the amount set forth in Section 8.5 of the
Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party except where there is a warehouse agreement acceptable to
Coast;
(f) sell any Inventory on a sale-or-return, guaranteed sale, consign-
ment, or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
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(i) guarantee or otherwise become liable in a material respect with
respect to the obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would have
a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default is continuing or would occur as
a result of such transaction.
8.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 Further Assurances. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
9. TERM.
9.1 Maturity Date. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than One Hundred Twenty (120) days prior to the Maturity Date or
the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date. If this Agreement is
renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the
amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and
payable on the Renewal Date and thereafter shall bear interest at a rate equal
to the rate applicable to the Receivable Loans.
9.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
9.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, the
Renewal Date, or on any earlier effective date of termination, there are any
outstanding Letters of Credit issued by Coast or issued by another institution
based upon an application, guarantee, indemnity or similar agreement on the part
of Coast, then on such date Borrower shall provide to Coast cash collateral in
an amount equal to the face amount of all such Letters of Credit plus all
interest, fees and costs due or to become due in connection therewith, to secure
all of the Obligations relating to said Letters of Credit, pursuant to Coast's
then standard form cash pledge agreement. Notwithstanding any termination of
this Agreement, all of Coast's security interests in all of the Collateral and
all of the terms and provisions of this Agreement shall continue in full force
and effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Coast, Coast may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Coast shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Coast's security interests.
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10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers, employees
or agents, now or in the future, shall be untrue or misleading and results in a
Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to Coast
as provided in Section 7.5 above, or shall fail to give Coast access to its
books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within five (5) Business Days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same and resulting
in a Material Adverse Effect; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien and resulting in
a Material Adverse Effect; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within thirty
(30) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of liability
upon, any guaranty of the Obligations or any attempt to do any of the foregoing,
or commencement of proceedings by any guarantor of any of the Obligations under
any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of liability
upon, any pledge of any certificate of deposit, securities or other property or
asset of any kind pledged by any third party to secure any or all of the
Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer or
experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
(o) Borrower shall generally not pay its debts
14
<PAGE>
as they become due, or Borrower shall conceal, remove or transfer any part of
its property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or
(p) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 Remedies. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may be
found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store or remove any of the Collateral, and remain
on the premises or cause a custodian to remain on the premises in exclusive
control thereof, without charge for so long as Coast deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should Coast seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and make
it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any Collateral
prior to a disposition thereof and, for such purpose and for the purpose of
removal, Coast shall have the right to use Borrower's premises, vehicles,
hoists, lifts, cranes, equipment and all other property without charge. Coast is
hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and Borrower's rights under all
licenses and all franchise agreements shall inure to Coast's benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
15
<PAGE>
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
reasonably incurred by Coast (including attorneys' fees and expenses incurred in
connection with bankruptcy) with respect to the foregoing shall be due from the
Borrower to Coast on demand. Coast may charge the same to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as is
applicable to the Receivable Loans. Without limiting any of Coast's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional three
percent per annum.
10.3 Standards for Determining Commercial Reasonableness. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted with a copy of such
published notice provided to Borrower;
(b) Notice of the sale describes the collateral in general, non-
specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.
Hawaii Standard Time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but
is not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 Power of Attorney. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower (however, Coast shall
use its best efforts to immediately provide notice to Borrower by facsimile),
and at Borrower's expense, to do any or all of the following, in Borrower's name
or otherwise, but Coast agrees to exercise the following powers in a
commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
16
<PAGE>
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure
the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same rights of
access and other rights with respect thereto as Coast has under this Agreement;
and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually and reasonably incurred in connection therewith (as
and when they are incurred and irrespective of whether suit is brought), at any
time asserted against, imposed upon, or incurred by any of them in connection
with or as a result of or related to the execution, delivery, enforcement,
performance, and administration of this Agreement and any other Loan Documents
or the transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability that a
court of competent jurisdiction finally determines to have resulted from the
gross negligence or willful misconduct of such Indemnified Person. This
provision shall survive the termination of this Agreement and the repayment of
the Obligations.
10.5 Application of Proceeds. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 Remedies Cumulative. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies accorded a
secured party in equity, under the Code, and under all other applicable laws,
and under any other instrument or agreement now or in the future entered into
between Coast and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Coast of one or more of
its rights or remedies shall not be deemed an election, nor bar Coast from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Coast to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been indefeasibly paid and
performed.
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11. GENERAL PROVISIONS.
11.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations two (2) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such two (2) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such two (2) Business Days of "clearance" or "float" actually occur, and
shall be deemed to be the equivalent of charging two (2) Business Days of
interest on such collections. This across-the-board two (2) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 Application of Payments. Subject to Section 7.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole discretion
reversed and re-applied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 Charges to Accounts. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
11.4 Monthly Accountings. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of two (2) Business Day following delivery
to the private delivery service, or three (3) Business Days following the
deposit thereof in the United States mail, with postage prepaid.
11.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
11.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
11.8 Waivers. The failure of Coast at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand,
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protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by Coast on which Borrower is or may in any way be liable, and
notice of any action taken by Coast, unless expressly required by this
Agreement.
11.9 No Liability for Ordinary Negligence. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
11.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast for
all reasonable attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs reasonably incurred by Coast, pursuant to, or
in connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in
order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees (including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
11.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder without consent of Borrower, however, Coast will
immediately fax notice of such assignment to Borrower. Coast reserves the right
to syndicate all or a portion of the transaction created herein, or sell,
assign, transfer, negotiate, or grant participations in all or any part of, or
any interest in Coast's rights and benefits hereunder. In connection with any
such syndication, assignment or participation, Coast may disclose all documents
and information which Coast now or hereafter may have relating to Borrower or
Borrower's business, subject to an agreement to maintain all such information
confidential provided there is no Event of Default. To the extent that Coast
assigns its rights and obligations hereunder to a third Person, Coast thereafter
shall be released from such assigned obligations to Borrower.
11.14 Publicity. Coast and Borrower each are hereby authorize, at their
expense, to issue appropriate press releases and/or to cause a tombstone to be
published announcing the consummation of this transaction and the aggregate
amount thereof.
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11.15 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Coast acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including (but not limited to)".
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Coast or Borrower under any rule of construction or
otherwise.
11.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
CYANOTECH CORPORATION
By /s/Gerald R. Cysewski
-----------------------------------
Gerald R. Cysewski
Title: Chairman & President
By /s/Ronald P. Scott
-----------------------------------
Ronald P. Scott
Title: Executive Vice President
NUTREX, INC.
By /s/Larry L. Line
-----------------------------------
Larry L. Line
Title: President
By /s/Ronald P. Scott
-----------------------------------
Ronald P. Scott
Title: Executive Vice President
COAST:
COAST BUSINESS CREDIT(R),
a division of Southern Pacific
Bank
By /s/Robert D. Peters
-----------------------------------
Robert D. Peters
Title: Vice President
20
Coast
Schedule to the Loan and Security Agreement
Borrower: Cyanotech Corporation Nutrex, Inc.
Address: 73-4460 Queen Kaahumanu Hwy. 73-5574 Maiau Street
#102 #1
Kailua-Kona, HI 96740 Kailua-Kona, HI 96740
Date: July 28, 1998
This Schedule forms an integral part of the Loan and Security Agreement
between Coast Business Credit(R), a division of Southern Pacific Bank, and the
above-borrower of even date.
================================================================================
SECTION 2 - CREDIT FACILITIES
Section 2.1 - Credit Limit: Loans in a total amount at any time
outstanding not to exceed the lesser of a
total of Three Million Dollars ($3,000,000)
at any one time outstanding (the "Maximum
Dollar Amount"), or the sum of (a), (b), (c)
and (d) below:
(a) Receivable Loans in an amount not to
exceed 80% of the amount of Borrower's
Eligible Receivables (as defined in
Section 1 of the Agreement) and if
Dilution is less than 5%, the advance
rate will be increased to 85% with a
Sublimit of Seven Hundred Fifty Thousand
Dollars ($750,000) for Foreign
Receivables(excluding receivables backed
by Letters of Credit acceptable to
Coast), plus
(b) Inventory Loans in an amount not to
exceed the lesser of:
(1) up to 60% of cost of eligible
First Grade Spirulina finished
goods inventory, 60% of cost of
eligible Drum Dry Spirulina
finished goods inventory, 60% of
the cost of eligible Bulk Spirulina
Tablets finished goods inventory,
60% of the cost of eligible
Packaged Spirulina finished goods
inventory, 50% of the cost of
eligible Spirulina Feed Grade
finished goods inventory, and 30%
of the cost of eligible Astaxanthin
finished goods inventory,calculated
at cost on a first-in, first-out
basis, or
(2) Seven Hundred Fifty Thousand
Dollars ($750,000), plus
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(c) A Term Loan in the original
principal amount of Seven Hundred Fifty
Thousand Dollars ($750,000) (an amount
equal to 80% of the orderly liquidation
value of Borrower's existing Machinery
and Equipment) (the "Equipment Loan"),
repayable in sixty (60) equal monthly
principal installments.
(d) Equipment Acquisition Loans, to be
drawn within Twenty-four (24) months
from the date hereof, in minimum
advances of One Hundred Thousand Dollars
($100,000) with principal payments
amortized over sixty months in a total
amount not to exceed the lesser of:
(1) Eighty percent (80%) of the
cost of new Equipment (after sub-
tracting taxes and installation
charges); up to eighty (80%) of the
appraised forced liquidation value
of used Equipment acquired by Bor-
rower (after subtracting taxes and
installation charges); or
(2) Two Million Dollars
($2,000,000).
Availability for Equipment Acquisition
Loans shall be subject to maintenance of
a Debt Service Coverage Ratio of at
least 1.25:1 for the prior two full
consecutive quarters on a combined
basis.
SECTION 3 - INTEREST AND FEES
Section 3.1 - Interest Rate: For all Loans, an interest rate equal to the
Prime Rate plus 2.50% per annum, calculated
on the basis of a 360-day year for the actual
number of days elapsed. In the event the
Borrower reports net income of at least 80%
of projected net income (as set forth in
Exhibit "A" attached to this Schedule) for
the two quarters ending December 31, 1998,
the interest rate will decrease to the Prime
Rate plus 1.25% per annum. Thereafter,
the Borrower must continue to maintain 80% of
cumulative projected quarterly net income
to continue to receive the interest rate of
Prime Rate plus 1.25% annum. Otherwise, the
interest rate will revert to Prime Rate plus
2.50% per annum (Cumulative is defined as the
quarter beginning July 1, 1998 through the
most recent quarter). The interest rate
applicable to all Loans shall be adjusted
monthly as of the
first day of each month, and the interest to
be charged for each month shall be based on
the highest Prime Rate in effect during said
month, but in no event shall the rate of
interest charged on any Loans in any month be
less than 8.5% per annum.
Projections for fiscal year end 2000 and
fiscal year end 2001 may be
2
<PAGE>
revised 30 days prior to the beginning of a
fiscal year end. However, projected net
income during fiscal year end 2000 and fiscal
year end 2001 cannot be less than $270,000
for each quarter.
Section 3.1 - Minimum Monthly
Interest: Based on daily outstandings equal to Thirty-
three percent (33%) of the Maximum Dollar
Amount.
Section 3.2 - Loan Fee: Thirty Thousand Dollars ($30,000), such
amount being fully earned on the Closing
Date, and payable Fifteen Thousand Dollars
($15,000) on the Closing Date and Fifteen
Thousand Dollars ($15,000) on the first
anniversary of the Closing Date.
Section 3.2 - Facility Fee: Twenty Five Hundred Dollars ($2,500) per
calendar quarter, payable on the Closing Date
(prorated for any partial quarter at the
beginning of the term of this Agreement) and
continuing each quarter thereafter during the
term of this Agreement.
Section 9.1 Renewal Fee: One half of one percent (1/2%) of the Maximum
Dollar Amount at the end of the initial Term
of this Agreement and thereafter.
Section 9.2 - Early Termination
Fee: An amount equal to three percent (3%) of the
Maximum Dollar Amount (as defined in the
Schedule), if termination occurs on or before
the first anniversary of the Closing Date of
this Agreement; two percent (2%) of the
Maximum Dollar Amount, if termination occurs
after the first anniversary and on or before
the second anniversary of the Closing Date of
this Agreement; and one percent (1%) of the
Maximum Dollar Amount, if termination occurs
after the second anniversary of the Closing
Date of this Agreement.
SECTION 5 - CONDITIONS PRECEDENT
Section 5.2 Minimum Availability: Five Hundred Thousand Dollars ($500,000).
Section 5.14 - Other Documents
and Agreements:
1. Joint and Several Borrower Rider.
2. First Deed of Trust on the property
located at 73-5574 Maiau Street, #1,
Kailua-Kona, HI.
3. UCC-1 financing statements, fixture
filings and termination statements.
4. Security Agreements (including those
covering copyrights, patents and
3
<PAGE>
trademarks).
5. Receipt of Certified Public Accountant
audited financial statement for fiscal
year ended March 31, 1998 that are not
materially different from draft of
fiscal year ended March 31, 1998
financial statement.
6. No accounts payable over 120 days past
invoice date at date of funding.
7. All taxes to be current at funding and
ongoing, except where Borrower in good
faith contests its obligation to pay the
taxes as provided for in Section 6.8 of
this Agreement.
8. Perfected first security interest on all
assets, including all tangible and
intangible assets, including accounts
receivable, inventory, machinery and
equipment (except equipment financed by
Spirulina International, Heller Leasing,
KeyCorp Leasing, GE Capital and First
Hawaiian Leasing), real estate and
patents.
9. Collections to be submitted to Coast via
lockbox.
10. Minimum ongoing Consolidated Net Worth
of Twenty Million Dollars ($20,000,000)
as determined at the end of each month.
11. Warehouse waivers for all locations
where Borrower maintains inventory,
except at Accord Packaging and Olympex
International (Nutrex inventory located
at these sites will be considered
ineligible).
12. Borrower shall increase insurance
coverage for inventory located at
73-5581 Lawehana St., Bay 3, 5, & 6,
Kailua-Kona, HI 96740 to $750,000.
13. Receivables of Nutrex shall be
considered ineligible for calculation of
availability until Coast re-audits
Nutrex's books and records within One
Hundred Twenty (120) day from funding.
14. Registration Certificates showing Coast
as a lender shall be required on all
vehicles financed by Coast.
15. Borrower shall insure inventory located
at Allied Cold Storage, 74-5540 Kaiwi
St., Kailua-Kona, HI.
16. Review of equipment liens and validation
that said equipment is not included in
the appraisal to be completed prior to
funding.
4
<PAGE>
17. Coast shall maintain a rent reserve of
$80,000 until such time a Landlord's
Waiver and Agreement with the State of
Hawaii is executed by all parties.
================================================================================
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 6.2 - Prior Names of
Borrower: None
Section 6.2 - Prior Trade Names
of Borrower: None
Section 6.2 - Existing Trade Names
of Borrower: Cyanotech Asia (Unaffiliated)
Cyanotech International FSC, Ltd.
(Affiliate)
Section 6.3 - Other Locations and
Addresses: 73-5581 Lawehana Street, Bay 3, 5 & 6
Kailua-Kona, HI 96740
(Cyanotech Corporation & Nutrex Inc.);
Allied Cold Storage
Div. of J.F.B. Enterprises
74-5540 Kaiwi Street
Kailua-Kona, HI 96740
(Cyanotech Corporation);
Olympex International
4587 Maywood Avenue
Vernon City, CA 90058
(Nutrex, Inc.);
Accord Packaging
741 E. Santa Ana St.
Ontario, CA 91761
(Nutrex, Inc.);
Buyers and Shippers
Current Address:
12500 E. Slauson Avenue, Unit B3
Santa Fe Springs, CA 90670
Future Address:
19801 S. Santa Fe Avenue
Rancho Domingues, CA 90221
(Cyanotech Corporation).
Section 6.10 - Material Adverse
Litigation: Na Kamalii O'Kaina O'Hoona, et al. vs.
Cyanotech Corporation,
5
<PAGE>
State of Hawaii, Case No.3CC98-0076K
filed April 8, 1998; Cyanotech Corpo-
ration vs. Aquasearch, Inc., State of
Hawaii, Case No. CU98-00600 filed July
13, 1998.
Section 6.10 - Future Claims and
Litigation: Borrower will promptly inform Coast in
writing of any claim, proceeding,
litigation or investigation in the
future threatened or instituted by or
against Borrower involving any single
claim of Fifty Thousand Dollars
($50,000) or more, or involving One
Hundred Thousand Dollars ($100,000) or
more in the aggregate.
================================================================================
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
Section 8.1 - Other Provisions: 1. Borrower is prohibited from
upstreaming and sidestreaming of
funds. Borrower will not, during
the term of this Agreement, make
any payments or transfers of money,
property, rights or assets of any
kind or nature (including without
limitation sales, repayment of
loans, capital contributions, pur-
chases, compensation arrangements,
consulting fees, management fees,
license, or any other transactions
of any kind or nature) to Cyanotech
International FSC, Ltd. or any
other Affiliate of Borrower without
the prior written consent of Coast.
2. Review of Certificate of Inspection
Requirements.
3. Borrower shall immediately notify
Coast in the event royalty payments
under the Stanford Licensing Agree-
ment increase above ten percent
(10%) for all non-licensed
customers.
4. Only the President and Executive
Vice President of Cyanotech
Corporation shall be authorized to
borrow under this credit facility.
Section 8.2 - Insurance: Subject to the limitations set forth in
Section 8.2 of the Agreement, Coast
shall release to Borrower insurance
proceeds with respect to Equipment
totaling less than One Hundred Thousand
Dollars ($100,000)
Section 8.3 - Reporting: Borrower shall provide Coast with the
following:
1. Monthly Receivable agings, aged by
invoice date, within ten (10) days
after the end of each month,
reconciled to the
6
<PAGE>
general ledger and rolled forward
from the prior month together with
the calculated month end Ineligible
Receivables.
2. Monthly accounts payable agings,
aged by invoice date, and
outstanding or held check registers
within ten (10) days after the end
of each month.
3. Monthly inventory report detailing
monthly sales by product type,
inventory on hand, and sell-through
with values by category and
location reconciled to the general
ledger, within ten (10) days after
the end of each month.
4. Weekly inventory reports for the
Inventory broken down by category,
location, lot number and expiration
date, valued on a first-in, first-
out basis at the lower of cost (in
accordance with GAAP) or such other
inventory reports as are reasonably
requested by Coast, due by Tuesday
of the following week.
5. Monthly internally prepared
financial statements, as soon as
available, and in any event within
thirty (30) days after the end of
each month.
6. Quarterly internally prepared
financial statements, as soon as
available, and in any event within
forty-five (45) days after the end
of each fiscal quarter of Borrower.
7. Quarterly customer lists, including
customer name, address, and phone
number.
8. Annual financial statements, as
soon as available, and in any
event within ninety (90) days
following the end of Borrower's
fiscal year, containing the
unqualified opinion of, and
certified by, an independent
certified public accountant
acceptable to Coast.
9. Monthly accrued warranty and
advertising allowances by customer
within ten (10) days after the end
of each month.
10. Month end reconciled bank state-
ments within ten (10) days after
the end of each month.
11. Monthly Certification of Financial
Documents and Covenants within ten
(10) days after the end of each
month.
12. Borrower shall maintain shipping
records that include purchase order
number, and invoice number on a
dated and signed bill of lading.
7
<PAGE>
Section 8.5 - Negative Covenants
(Acquired Assets): One Hundred Thousand Dollars ($100,000)
================================================================================
SECTION 9 - TERM
Section 9.1 - Maturity Date: July 31, 2001, subject to automatic renewal as
provided in Section 9.1 of the Agreement, and
early termination as provided in Section 9.2
of the Agreement.
<TABLE>
<CAPTION>
<S> <C>
BORROWER: COAST:
COAST BUSINESS CREDIT(R), a division of
CYANOTECH CORPORATION Southern Pacific Bank
By /s/Gerald R. Cysewski By /s/Robert D. Peters
------------------------ -------------------------
Gerald R. Cysewski Robert D. Peters
Title: Chairman & President Title: Vice President
By /s/Ronald P. Scott
------------------------
Ronald P. Scott
Title: Executive Vice President
NUTREX, INC.
By /s/Larry L. Line
------------------------
Larry L. Line
Title: President
By /s/Ronald P. Scott
------------------------
Ronald P. Scott
Title: Executive Vice President
8
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 770
<SECURITIES> 0
<RECEIVABLES> 1,229
<ALLOWANCES> 10
<INVENTORY> 1,882
<CURRENT-ASSETS> 3,987
<PP&E> 21,882
<DEPRECIATION> 5,050
<TOTAL-ASSETS> 24,429
<CURRENT-LIABILITIES> 1,117
<BONDS> 0
0
1
<COMMON> 68
<OTHER-SE> 22,474
<TOTAL-LIABILITY-AND-EQUITY> 24,429
<SALES> 1,763
<TOTAL-REVENUES> 1,763
<CGS> 1,584
<TOTAL-COSTS> 1,584
<OTHER-EXPENSES> 810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (671)
<INCOME-TAX> (40)
<INCOME-CONTINUING> (631)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (631)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
