UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998 Commission file 0-146-02
CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)
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Nevada 91-1206026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of class
Common Stock, Par value $.005 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes/X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
At June 5, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $ 37,564,631.
At June 5, 1998, the number of shares outstanding of registrant's Common
Stock was 13,599,572.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Stockholders for the fiscal year
ended March 31, 1998 are incorporated by reference into Part II and Part IV of
this Report. Portions of the Registrant's Definitive Proxy Statement for its
1998 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on or prior to July 29, 1998 and to be used in connection
with the Annual Meeting of Stockholders expected to be held September 17, 1998,
are incorporated by reference in Part III of this Form 10-K.
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PART I
Item 1. Description of Business
Except for historical information contained in this document, the matters
discussed in this report contain forward looking statements that involve risks
and uncertainties. These future risks and uncertainties could cause actual
results to differ materially.
General
Cyanotech Corporation is a leader in the development and commercialization
of high value products derived from microalgae. Microalgae are a diverse group
of over 30,000 species of microscopic plants which have a wide range of
physiological and biochemical characteristics and naturally contain high levels
of proteins, amino acids, vitamins, pigments and enzymes. Since 1983, we have
designed, developed and implemented proprietary production and harvesting
technologies, systems and processes which eliminate many of the stability and
contamination problems frequently encountered in the production of microalgae.
We believe that our technology, systems, processes and favorable growing
location permit year-round harvesting of our microalgal products in a cost
effective manner.
We currently produce natural products from microalgae for the nutritional
supplement, aquaculture feed, and immunological diagnostics markets. Since 1985,
Cyanotech has been producing microalgae-based "Spirulina" products for the
vitamin and supplement market. Spirulina Pacifica(TM), which is our principal
source of revenue, is a unique strain of Spirulina developed by us which
provides a vegetable-based, highly absorbable source of natural beta-carotene,
mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential
amino acids and other phytonutrients. We currently market our Spirulina products
in the United States and thirty-seven other countries though a combination of
retail, wholesale, and private label channels. In early 1997, we introduced
NatuRose(TM) to the worldwide aquaculture industry. NatuRose is our brand name
for natural astaxanthin (pronounced "as-ta-zan-thin"). Astaxanthin is a red
pigment from the microalgae, Haematococcus, and is used in aquaculture to impart
a pink to red color to pen-raised fish and shrimp. NatuRose competes with
synthetic astaxanthin whose worldwide annual sales are estimated at more
than $150 million.
Cyanotech has recently increased its commitment to developing microalgae
for the expression of native as well as heterologous proteins through molecular
biology. Because microalgae naturally contain high levels of protein, because
they have a uniform cell structure, and because they can grow up to 100 times
faster than land plants, they offer unique advantages over plant, bacterial or
mammalian systems for the expression of proteins. Like higher plants, algal
expression systems can be produced on a large-scale with culture volumes of up
to 600,000 liters without problems of contamination by bacterial endotoxins or
animal viruses. Unlike higher plants, however, the time required to grow
transgenic algae expressing the desired protein is on the order of one to two
months rather than the one to two years that would be required in corn or
soybeans, for example. Since 1996, Cyanotech has been developing a genetically
engineered biopesticide for the control of mosquitoes. A natural toxin gene from
Bacillus thuringiensis var. israelensis (Bti) is being transformed into a
blue-green algae, Synechococcus, a food for mosquito larvae. When applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control. In April 1998, we announced the signing
of a licensing agreement and collaboration with The Scripps Research Institute
in La Jolla, California to produce a new compound for use in chiral chemistry.
Under the terms of this agreement, Cyanotech will be responsible for the large
scale production and purification of a catalytic antibody which was generated in
the Scripps laboratory and subsequently expressed as a transgene in algae by
Scripps scientists. Cyanotech intends to continue to exploit the largely
untapped commercial opportunities of microalgae by producing natural products
and also genetically engineered products through molecular biology.
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Cyanotech Corporation is incorporated in Nevada. Our principal executive
offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona,
Hawaii 96740, and our telephone number is (808) 326-1353. Unless otherwise
indicated, all references in this report to the "Company", "we", and "Cyanotech"
refer to Cyanotech Corporation, a Nevada corporation, its wholly owned
subsidiaries, Nutrex, Inc., a Hawaii corporation, and Cyanotech International
FSC, Inc., a Barbados corporation.
Industry Background
Microalgae are a diverse group of microscopic plants that have a wide
range of physiological and biochemical characteristics and naturally contain,
among other things, high levels of proteins, amino acids, vitamins, pigments and
enzymes. Microalgae have the following properties that make commercial
production attractive: (1) microalgae grow much faster than land grown plants,
often up to 100 times faster; (2) microalgae have a uniform cell structure with
no bark, stems, branches or leaves, which permits easier extraction of products
and higher utilization of the microalgae cells; (3) the cellular uniformity of
microalgae makes it practical to manipulate and control growing conditions in
order to optimize a particular cell characteristic; (4) microalgae contain a
wide array of vitamins and other important nutrients; (5) microalgae contain
natural pigments; and (6) are a potential source of medical products.
Current commercial applications for these microscopic plants include
nutritional products, diagnostic products, aquaculture feed and pigments,
natural food colorings and research grade chemicals. The Company believes that
microalgae could potentially be used for other commercial applications,
including genetically engineered products for the biopesticide and
pharmaceutical industries. The most significant microalgae products produced
today are algae utilized as food supplements.
While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems over the last 20 years have failed. Because
microalgae produced for food supplements are typically cultivated and harvested
outdoors, production is significantly affected by climate, weather conditions
and the chemical composition of the culture media. Without consistent sunlight,
warm temperature, low rainfall and proper chemical balance, microalgae will not
grow quickly, resulting in longer harvesting cycles, decreased pond utilization
and increased cost. Furthermore, microalgal growth requires a very nutrient rich
environment. The high nutrient levels in the ponds promote the growth of
unwanted organisms, or "weeds," if the chemical composition of the ponds changes
from its required balance. Once contamination occurs, a pond must be emptied,
cleaned and refilled, a process that further decreases pond utilization and
increases production costs.
Cyanotech's Technology
Since 1983, we have designed, developed and implemented proprietary
production and harvesting technologies, systems and processes which reduce many
of the stability and contamination problems frequently encountered in the
production of microalgae. This proprietary production system is known as
Integrated Culture Biology Management (or "ICBM"). Through the application of
this technology, our Spirulina culture ponds can be productive year-round
without any significant loss in productivity due to contamination and many of
our production ponds, all based in Hawaii, have been in continuous production
since 1988. We believe that such an accomplishment remains unique to Cyanotech.
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In addition to the advantages of our ICBM technology, we have developed
a patented system for the recovery of carbon dioxide from our drying system
exhaust gas, called Ocean-Chill Drying. Since microalgae are essentially
microscopic "plants", they require sunlight, water, carbon dioxide and nutrients
for optimal growth. By recovering carbon dioxide that would otherwise be
released into the atmosphere, we can divert the recovered carbon dioxide back to
the algae cultures. This process provides us with another significant cost
advantage over other microalgae producers who must purchase carbon dioxide.
Moreover, Ocean-Chill Drying dries microalgal products in a low oxygen
environment, which protects oxygen sensitive nutrients. In addition, we have
developed an automated Spirulina processing system, which enables a single
operator to harvest and dry the Spirulina powder.
Another major advantage for us is the location of our production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. We believe that the combination of consistent warm temperature,
abundant sunlight, and low rainfall at this facility makes this a highly
favorable location for the economical, large-scale cultivation of microalgae. In
contrast to our facility, microalgae producers in other areas lacking these
favorable characteristics stop producing for up to four months a year because of
less favorable climate or weather conditions. At the HOST Park, we have access
to cold, clean, deep sea water that is pumped from a depth of 2,000 feet. This
sea water is used both as a source of nutrients for microalgae culture and as a
cooling agent in the Ocean-Chill Drying process. Additionally, our facility has
access to a complete industrial infrastructure and is located 30 miles from a
deep water port and adjacent to an international airport.
Applying our experience in cultivating and harvesting Spirulina, we
began commercial production of our natural astaxanthin product, NatuRose, during
the fourth quarter of fiscal 1997. The product is produced using our large-scale
photo-bioreactor system, referred to as the PhytoMax Pure Culture System, or
PhytoMax PCS, which incorporates closed-culture technology and allows for the
large-scale commercial cultivation of microalgae strains that are otherwise
highly susceptible to environmental contamination. With the PhytoMax PCS, we now
have the potential to produce a broader range of new products from microalgae.
Such products could include genetically-engineered biopesticides,
nutraceuticals, additional nutritional products, pharmaceuticals,
poly-unsaturated fatty acids, anti-microbial agents, plant growth regulators,
and anti-viral compounds.
Our primary objective is to be the leading developer and producer of
microalgal products in our existing and future markets. We believe that the
combination of our ICBM technology, our PhytoMax PCS technology, our Ocean-Chill
Drying process, our automated processing system and a favorable growing location
with year-round production capabilities, can be successfully applied to the
commercial cultivation of many species of microalgae.
Products
Spirulina
Our principal product, accounting for 95% and 98% of net sales for the
years ended March 31, 1998 and 1997, respectively, is a nutritional microalgae
marketed as Spirulina Pacifica. Developed by us and sold worldwide to the health
and natural foods market, Spirulina Pacifica is a unique strain of microalgae
that is a highly absorbable source of natural beta carotene, mixed carotenoids,
B vitamins, GLA, protein, essential amino acids and other phytonutrients. We
believe we were the first Spirulina producer to have its products and processes
certified organic and we are the only microalgae producer to have its quality
system registered under the ISO 9002-94 standards.
Cyanotech produces Spirulina Pacifica in three forms: powder, flake and
tablets. Powder is used as an ingredient in nutritional supplements and health
food drinks while flakes are used as a seasoning on various foods. Tablets are
consumed daily as a dietary supplement. We also produce and market two products
under the Hawaiian Energizer name. Hawaiian Energizer sports drink contains
complex carbohydrates and vegetarian protein in combination with Spirulina
Pacifica, Bee Pollen and Siberian Ginseng. Hawaiian Energizer tablets contain
Spirulina Pacifica, Bee Pollen and Siberian Ginseng.
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We anticipate that sales of our Spirulina Pacifica products will
continue to constitute a substantial portion of net sales during fiscal 1999.
Any decrease in the overall level of sales of, or the prices for, our Spirulina
Pacifica products, whether as a result of competition, change in consumer
demand, increased worldwide supply of Spirulina or any other factors, would have
a material adverse effect on our business, financial condition and results of
operations.
Natural Astaxanthin
The fiscal year ended March 31, 1998 was the first full year of
commercial production for our natural astaxanthin product, NatuRose. Astaxanthin
is a red pigment used primarily in the aquaculture industry to impart pink color
to the flesh of pen-raised fish and shrimp. The astaxanthin market currently is
dominated by a single producer, Hoffmann-LaRoche, who produces synthetic
astaxanthin from petrochemicals. Hoffmann-LaRoche currently sells synthetic
astaxanthin to the aquaculture industry at approximately $2,500 per pure
kilogram. As a result of continued growth in the world aquaculture industry, the
world market for astaxanthin is estimated to currently exceed $150 million per
year. Although sales of NatuRose for the fiscal year ended March 31, 1998 were
nominal, we anticipate that such sales will constitute a significant portion of
total sales in future periods.
Phycobiliproteins
Cyanotech also produces phycobiliproteins which are sold to the medical
and biotechnology research industry. Phycobiliproteins are highly fluorescent
pigments purified from microalgae. Their spectral properties make them useful as
tags or markers in many kinds of biological assays, such as flow cytometry,
fluorescence immunoassays and fluorescence microscopy. We anticipate that sales
of phycobiliproteins will not represent a significant component of total sales
in future periods.
Products Under Development
A new product which we are continuing to develop is a genetically
engineered mosquitocide from microalgae. The toxin gene from Bacillus
thuringiensis var. israelensis (Bti) is being cloned into the blue-green algae
Synechococcus. The bacterial toxin Bti is very specific to mosquitoes and black
flies, while the blue-green algae is a food for mosquito larvae. We believe
that, when applied to a mosquito-infested body of water, this algae could act as
an effective and environmentally safe means of control.
In April 1998, we signed an exclusive agreement with The Scripps
Research Institute to produce the Institute's patented Aldolase Catalytic
Antibody 38C2 in microalgae. The genetically engineered aldolase catalytic
antibody may have numerous potential applications in industrial synthesis,
including the synthesis of certain anti-cancer compounds. Under the terms of the
exclusive license agreement, Scripps will provide the genetically engineered,
live microalgae containing the catalytic aldolase protein to Cyanotech.
Production of reagent quantities is expected to be available within eight months
if development tests prove its feasibility.
Development of these products is continuing and there is no assurance
that commercial products will be achieved. Our inability to successfully develop
or commercialize additional products could have a material adverse effect on our
business, financial condition and results of operations.
Research & Development
Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. Our researchers
investigate specific microalgae identified in scientific literature for
potentially marketable products and then develop the technology to grow such
microalgae on a commercial scale.
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During fiscal 1998, the Company incurred $677,000 in research and
development expenses, compared with $587,000 and $351,000 in the years 1997 and
1996, respectively. The Company intends to continue to develop new products and
prioritizes its research and development activities to focus on projects that it
believes will have the greatest market acceptance and achieve the highest return
on the Company's investment. Successful microalgal product development is highly
uncertain and is dependent on numerous factors, many of which are beyond the
Company's control. Products that appear promising in early phases of development
may be found to be ineffective, may be uneconomical because of manufacturing
costs or other factors, may be precluded from commercialization due to the
proprietary rights of other companies, or may fail to receive necessary
regulatory approvals.
Distribution
The majority of our bulk Spirulina sales are to companies with their
own Spirulina product lines. Many of these companies identify and promote
Cyanotech's Hawaiian Spirulina in their products. In the United States, we sell
directly to health food manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network. Orders for packaged consumer products are taken at the
store level by one of 23 regional broker representatives and shipped through one
of 36 distributors. In selected foreign markets, we have appointed exclusive
sales distributors for both bulk Spirulina and packaged consumer products.
In the years ended March 31, 1998, 1997 and 1996, international sales
accounted for approximately 44%, 62% and 55%, respectively, of our net sales. We
expect that international sales will continue to represent a significant portion
of our net sales. Our business, financial condition and results of operations
may be materially adversely affected by any difficulties associated with
managing accounts receivable from international customers, tariff regulations,
imposition of governmental controls, political and economic instability or other
trade restrictions. Although our international sales are currently denominated
in United States dollars, fluctuations in currency exchange rates could cause
our products to become relatively more expensive to customers in the affected
country, leading to a reduction in sales in that country.
Customers
Spirulina
No single customer accounted for more than 10% of net sales during the
year ended March 31, 1998. Our largest customer during 1997 and 1996 was a Hong
Kong-based network marketing company which purchases both bulk Spirulina and our
packaged consumer products for distribution, primarily in mainland China. From
March through September 1997, this customer was restricted from hosting any
large scale distributor meetings due to a delay in receiving recertification
from the Chinese government. As a result, orders from this customer were
significantly reduced from previous periods. For the year ended March 31, 1998,
this customer accounted for less than 5% of Cyanotech's net sales, down from
approximately 34% and 29% of sales in the years ended March 31, 1997 and 1996,
respectively. Subsequent to the end of fiscal 1998, the Chinese government
imposed a ban on all network market organizations, effective October 1, 1998.
Sales to this customer are expected to be minimal.
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We market and sell our Spirulina products to a variety of other
customers, including:
Health Food Manufacturers. Health food manufacturers often use
Cyanotech's Spirulina products as a key ingredient in their Spirulina-based
products, or as an ingredient in their health food formulations. These customers
purchase bulk powder or bulk tablets and package the products under their brand
label for sale to the health and natural food markets. Many of the products
produced by these customers are often marketed and sold domestically in direct
competition with our Nutrex line of retail consumer products. However, we
differentiate our Nutrex products from those of our bulk customers by reserving
the certified organic line of products for sale in the United States exclusively
under our Nutrex label.
Private Label Customers. We currently provide private label retail
consumer products to two international customers. Products for these customers
are manufactured only upon receipt of an order and no finished product
inventories are maintained.
Retail Distributors. Retail distributors act as product wholesalers to
independent and chain retailers. The majority of domestic Nutrex sales in the
year ended March 31, 1998 were to 36 distributors.
Natural Products Distributors. In the year ended March 31, 1998, we
sold bulk Spirulina products to ten domestic and seven foreign customers engaged
in the business of distributing natural raw materials to health and natural food
manufacturers. These distributors provide their customers with standardized
quality control, warehousing and distribution services, and charge a mark-up on
the products for providing these services. These distributors may differentiate
the products they sell, but they generally treat the products as commodities,
with price being the major determining factor in their purchasing decision.
Natural Astaxanthin
Our NatuRose product is being sold through a network of agents and
distributors directly to aquaculture farmers, vitamin suppliers, aquaculture
feed manufacturers and other end users in 15 countries for use in aquaculture
feed, poultry feed and pet feed industries. In March 1998, the Company signed a
letter of intent with a major European life sciences company operating in over
150 countries for sales and distribution of NatuRose and other Cyanotech
products in certain European countries. This distributor posesses significant
expertise and worldwide marketing experience in animal nutrition products.
Initially, the distributor will test NatuRose and Spirulina for use in animal
feeds for up to six months and, if the testing is successful, we would negotiate
a definitive sales and distribution agreement.
Competition
Spirulina
Our Spirulina Pacifica products compete with a variety of vitamins,
dietary supplements, other algal products and similar nutritional products
available to consumers. The nutritional products market is highly competitive.
It includes international, national, regional and local producers and
distributors, many of whom have greater resources than Cyanotech, and many of
whom offer a greater variety of products. Our direct competition in the
Spirulina market currently is from Dainippon Ink and Chemical Company's facility
in California and several farms in China. To a lesser extent, we compete with
numerous smaller farms in China, India, Thailand, Brazil and South Africa.
Packaged consumer products marketed under our Nutrex brand also compete with
products marketed by health food manufacturing customers of Cyanotech who
purchase bulk Spirulina from us and package it for retail sales. A decision by
another company to focus on Cyanotech's existing or target markets or a
substantial increase in the overall supply of Spirulina could have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that we will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect our business,
financial condition and results of operations.
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Natural Astaxanthin
Our natural astaxanthin product, NatuRose, competes directly with the
synthetic astaxanthin product produced and marketed worldwide by
Hoffmann-LaRoche. In addition, several other companies have announced plans to
produce commercial quantities of natural astaxanthin from microalgae and Phaffia
yeast. We believe that these companies are only producing small quantities for
test purposes. Although we are unaware of any studies indicating that natural
astaxanthin has any benefits not otherwise provided by synthetic astaxanthin, we
believe there is commercial demand for a natural astaxanthin product and that
our NatuRose product can compete on the basis of product performance and price.
Phycobiliproteins
Four major competitors manufacture phycobiliprotein products for sale,
including Molecular Probes, Inc., Quantify Inc., Martek Biosciences Corporation
and Prozyme Inc. Cyanotech competes with these companies on the basis of price
and quality. New synthetic fluorescent compounds have been developed by a third
party which are superior to phycobiliproteins in some applications. The
advantage of the synthetic compounds is their lower molecular weight and, in
some cases, their lower cost. While our phycobiliprotein products may not be
able to compete effectively against synthetic compounds in some applications,
Cyanotech's phycobiliproteins have gained a reputation for high quality at a
competitive price.
Government Regulation
Cyanotech's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). The FDA
regulates, to varying degrees and in different ways, dietary supplements, other
food products, diagnostic medical devices and pharmaceutical products, including
their manufacture, testing, exportation, labeling, and, in some cases,
advertising. Generally, prescription pharmaceuticals and certain types of
diagnostic products, such as medical devices, are regulated more rigorously than
dietary supplements. The EPA also rigorously regulates pesticides, among other
types of products.
Cyanotech is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We work with foreign
distributors to ensure our compliance with foreign laws, regulations and
policies. There can be no assurance that any changes with respect to federal,
state and foreign laws, regulations and policies, and, particularly with respect
to the FDA and EPA or other such regulatory bodies, with possible retroactive
effect, will not have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that any of our
potential products will satisfy applicable regulatory requirements.
The Federal Dietary Supplement Health and Education Act ("DSHEA")
regulates the use and marketing of dietary supplements, including vitamin
products. The DSHEA covers only dietary supplements and contains a number of
provisions that differentiate dietary supplements from other foods. The DSHEA
also sets forth standards for adulteration of dietary supplements or ingredients
thereof and establishes current food Good Manufacturing Practices ("cGMP")
requirements for dietary supplements. It also provides detailed requirements for
the labeling of dietary supplements, including nutrition and ingredient
labeling. We currently believe that Spirulina Pacifica, marketed as a dietary
supplement, is exempt from FDA regulation as a food additive.
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Our Spirulina manufacturing processes and our contract bottlers are
required to adhere to cGMP as prescribed by the FDA. We believe that we are
currently in compliance with all applicable cGMP and other food regulations.
Compliance with relevant cGMP requirements can be onerous and time consuming,
and there can be no assurance that Cyanotech can continue to meet relevant FDA
manufacturing requirements for existing products or meet such requirements for
any future products. Ongoing compliance with food cGMP and other applicable
regulatory requirements are monitored through periodic inspections by state and
federal agencies, including the FDA, the Hawaii Department of Health and
comparable agencies in other countries. Our processing facility is also
inspected annually for organic certification by Quality Assurance International
and for Kosher certification by the Kosher Overseers Association. The use of
Spirulina as a food additive for seasoning on salads or pasta or for such other
food uses has not been cleared by the FDA, however, the FDA has recognized
Spirulina as a safe food. We currently market the product for these food uses on
the basis of our belief that its use in these food applications is generally
recognized as safe and therefore is not subject to FDA pre-market clearances as
a food additive.
Our natural astaxanthin product, NatuRose, has received clearance for
use as a feed and food color additive in Japan but will need clearance for use
as a feed color additive in the United States and Canada. We are actively
pursuing clearance for use in the U.S. markets and in February 1998, submitted
our petition for FDA approval. We are presently assembling our petition for
approval for the Canadian Food Industry Agency, and expect to submit this
petition by the end of calendar 1998. The process of obtaining clearances for a
new color additive is expensive and time consuming. Extensive information is
required on the toxicity of the additive, including carcinogenicity studies and
other animal testing. No assurances can be given that any of our proposed
products intended for use as a feed additive will be approved for use in the
United States or Canada on a timely basis, if at all.
As in vitro diagnostic medical device components, phycobiliprotein
products do not currently require pre-market clearances by the FDA. However, as
a component of a medical device, they can be subject to other various medical
device requirements, including cGMP requirements.
Work is continuing on our genetically-engineered mosquitocide project.
We are aware that any resulting product will be subject to validation of
efficacy though field trials. If proven effective, any potential commercial
product will be subject to regulatory approval by the EPA for use in the United
States. However, Bti is currently approved for use as a biopesticide by the EPA
and the World Health Organization. We are uncertain of regulatory requirements
in other potential markets at this point.
Patents, Licenses and Trademarks
Although we regard our proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to our success, we rely
on a combination of trade secret, contract, patent, copyright and trademark law
to establish and protect our rights in our products and technology. There can be
no assurance that we will be able to protect our technology adequately or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. Cyanotech has had two United States patents issued to it. Litigation in
the United States or abroad may be necessary to enforce our patent or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, results of operations and financial condition.
Additionally, although currently there are no pending claims or lawsuits that
have been brought against us, if any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license would be available on terms
acceptable or favorable to us, if at all.
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Associates
Cyanotech employed 65 associates as of March 31, 1998, of which 64 are
full-time. Approximately 31 associates are involved in the harvesting and
production process, 16 are involved in research and product development, and the
remainder are involved in sales, administration and support. Management believes
that its relations with its associates are good. We have not experienced
difficulty in attracting personnel and none of our associates are represented by
a labor union.
Industry Segments and Export Sales
The Company has no assets oustide of the United States. The Company's
business consists of one industry segment and is grouped into five geographic
areas: United States, Canada/South America, Europe, China and Asia/Pacific,
excluding China. The following table summarizes the product sales revenues from
unaffiliated customers in each of the five geographic regions:
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1998 1997 1996
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United States $ 4,297 56% $ 4,303 38% $ 3,614 45%
Canada/South America 404 5% 851 8% 896 11%
Europe 1,284 17% 1,292 11% 747 9%
China 358 5% 3,905 34% 2,375 29%
Asia/Pacific, excluding China 1,284 17% 1,048 9% 449 6%
------------ --------- ----------- ---------- ------------ ----------
Total Product Sales Revenues $ 7,627 100% $ 11,399 100% $ 8,081 100%
============ ========= =========== ========== ============ ==========
</TABLE>
The Company believes that its profit margin on export sales is not
significantly different from that realized on sales in the United States. All
foreign product sales transactions are consummated in U.S. dollars.
Item 2. Description of Properties
Cyanotech Corporation is located in Kailua-Kona, Hawaii, at the HOST
Park and also owns a 2,500 square foot sales office in a light industrial area
located approximately four miles from the HOST Park. The HOST Park facility
consists of approximately 183 leased acres. Approximately 90 acres have been
fully developed and contain production ponds, a processing facility, a
laboratory, and administrative offices. All products are produced at this
facility. The property is leased from the State of Hawaii under a 30-year
commercial lease expiring in 2025. During 1997, we reached a preliminary
agreement with the State of Hawaii to lease an additional 93 acres for 30 years
at the HOST Park, which increased the total acreage under lease to 183 acres. We
plan to use this new property to construct a larger NatuRose production facility
and additional culture ponds that would use the PhytoMax PCS technology. We
believe that there is sufficient available land at the HOST Park to meet our
currently planned future needs. Our Nutrex, Inc. subsidiary maintains a sales
office in Kailua-Kona, Hawaii.
Item 3. Legal Proceedings
Cyanotech is not currently subject to any material pending legal
proceedings.
We maintain product liability insurance in limited amounts for products
involving human consumption. In the opinion of management, broader product
liability insurance coverage is prohibitively expensive at this time.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1998.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The information required by this Item is incorporated by reference to
the Section labeled "Market for Common Equity and Related Stockholder Matters"
appearing in the Company's 1998 Annual Report to Stockholders.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference to
the Section labeled "Selected Financial Data" appearing in the Company's 1998
Annual Report to Stockholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is incorporated by reference to
the Section labeled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing in the Company's 1998 Annual Report to
Stockholders.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets of the Company and subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1998, together with the related notes and the report of
KPMG Peat Marwick LLP, independent certified public accountants, all contained
in the Company's 1998 Annual Report to Stockholders are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act
(a) Identification of Directors
The information required by this Item is incorporated by reference from the
Sections captioned "Proposal One: Election of Directors," "Certain
Transactions," " Security Ownership of Certain Beneficial Owners and Management"
and "Compliance with Section 16(a) of the Exchange Act" contained in Cyanotech's
definitive 1998 Proxy Statement.
11
<PAGE>
(b) Identification of Executive Officers
The executive officers of Cyanotech and their ages and positions as of March 31,
1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerald R. Cysewski, Ph.D. ................ 49 Chairman of the Board, President and Chief
Executive Officer
Glenn D. Jensen........................... 39 Vice President - Operations
Kelly J. Moorhead......................... 42 Vice President - Sales and Marketing
President - Nutrex, Inc.
Ronald P. Scott........................... 43 Executive Vice President - Finance and
Administration, Secretary, Treasurer
</TABLE>
Dr. Cysewski co-founded Cyanotech in 1983 and has served as a director since
that time. Since March 1990, Dr. Cysewski has served as President and Chief
Executive Officer of Cyanotech and in October 1990 was also appointed to the
position of Chairman of the Board. From 1988 to November 1990, he served as Vice
Chairman and from 1983 to June, 1996 he served as Scientific Director of the
Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae research
and development at Battelle Northwest, a major contract research and development
firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the
Department of Chemical and Nuclear Engineering at the University of California,
Santa Barbara, where he received a two-year grant from the National Science
Foundation to develop a culture system for blue-green algae. Dr. Cysewski
received his doctorate in Chemical Engineering from the University of California
at Berkeley.
Mr. Jensen has served as Vice President - Operations since May 1993. He joined
Cyanotech in 1984 as Process Manager and was promoted to Production Manager in
1991, in which position he served until his promotion to Vice President -
Operations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a
plant engineer at a Spirulina production facility, Cal-Alga, near Fresno,
California, which ceased to do business in 1983. Mr. Jensen holds a B.S. degree
in Health Science from California State University, Fresno.
Mr. Moorhead has served as Vice President - Sales and Marketing and of the
Company and President of Nutrex, Inc. since October 1997. From August 1996 to
October 1997 he served as Vice President - International Sales. From December
1991 to August 1996 he served as Vice President - Sales and Marketing and
President of Nutrex, Inc. From August 1987 to December 1991, he served as Vice
President - Production of the Company. Mr. Moorhead joined Cyanotech as
Production Biologist in December 1984. Prior to joining Cyanotech, Mr. Moorhead
worked at the Oceanic Institute in Honolulu, Hawaii where he conducted research
on production of Spirulina from agricultural wastes. Mr. Moorhead holds a B.S.
degree in Aquatic Biology from the University of California, Santa Barbara.
Mr. Scott was appointed to the Board of Directors of the Company in November
1995, has served as Executive Vice President - Finance and Administration since
August 1995, and has served as Secretary and Treasurer since November 1990 and
June 1990, respectively. From December 1990 until August 1995 Mr. Scott served
as Vice President - Finance and Administration. From September 1990 to December
1990, Mr. Scott served as Controller. From 1989 to 1990, he was Assistant
Controller for PRIAM Corporation, a manufacturer of Winchester disk drives. From
1980 to 1989, he served in various accounting management positions with Measurex
Corporation, a manufacturer of industrial process control systems. Mr. Scott
holds a B.S. degree in Finance and Management from California State University,
San Jose, and an M.B.A. degree from the University of Santa Clara.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
section captioned "Executive Compensation and Other Information," "Director
Remuneration" and "Stockholder Return Performance Graph" contained in
Cyanotech's definitive 1998 Proxy Statement.
12
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in Cyanotech's definitive 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Not applicable.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1). The following Consolidated Financial Statements of Cyanotech
Corporation and its subsidiaries are incorporated herein by reference pursuant
to Item 8:
Page in 1998
Annual Report
To Stockholders
Independent Auditors' Report.................................... 24
Consolidated Balance Sheets as of March 31, 1998 and 1997....... 9
Consolidated Statements of Operations for each of the years
in the three-year period ended March 31, 1998................... 10
Consolidated Statements of Stockholders' Equity for
each of the years in the three-year period ended March 31, 1998.. 11
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended March 31, 1998.................... 12
Notes to Consolidated Financial Statements....................... 13 to 23
(a) (2). The following financial statement schedules are included in this report
on the pages indicated below:
Schedule of Valuation and Qualifying Accounts.................... Page 16
Independent Auditors' Report..................................... Page 17
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the consolidated financial statements or notes thereto, which financial
statements are incorporated herein by reference.
13
<PAGE>
(a) (3). Index to exhibits
<TABLE>
<CAPTION>
Exhibit Number Document Description
<S> <C>
3.1 Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1996, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995, file no. 0-14602.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form SB-2 filed on February 28, 1996,
file no. 333-00951.)
4.2 Terms of the Series C Preferred Stock as Revised 1991. (Incorporated by reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, file no. 0-14602.)
10.1 1985 Incentive Stock Option Plan dated March 18, 1985, as amended. (Incorporated
by reference to Exhibit 4(d) to the Company's Registration Statement on Form S-8
filed on December 3, 1992, file no. 33-55310.)
10.2 Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1994, file no. 0-14602.)
10.3 1994 Non-Employee Directors Stock Option and Stock Grant Plan. (Incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1994, file no. 0-14602.)
10.4 Term Loan Agreement dated April 1, 1995 between Spirulina International B.V. and
the Company. (Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.5 License Agreement by and between The University of Memphis and the Company dated
June 19, 1995. (Incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no.
0-14602.)
10.6 Term Loan Agreement dated July 11, 1995 between the Company and Satoshi Sakurada.
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602)
10.7 1995 Stock Option Plan for Cyanotech Corporation dated August 9, 1995, as
amended. (Incorporated by reference to Exhibit 4(c) to the Company's Registration
Statement on Form S-8 filed on October 27, 1995, file no. 33-63789.)
10.8 Sub-Lease Agreement between the Company and Natural Energy Laboratory of Hawaii
Authority dated December 29, 1995. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1995, file no. 0-14602.)
10.9 Preferred Stock Conversion and Registration Rights Agreement by and between
the Company and Firemen's Insurance Company of Newark, New Jersey, dated as
of February 20, 1996.(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 as filed on February 28, 1996, file no.
333-00951.)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.10 Registration Rights Agreement by and between the Company and American Cynamid
Company dated as of February 20, 1996. (Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form SB-2 as filed on February
28, 1996, file no 333-00951.)
10.11 Credit Agreement between the Company and First Hawaiian Bank, dated February 27,
1997. (Incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602.)
10.12 Promissory Note between the Company and First Hawaiian Bank, dated February 27,
1997. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602)
10.13 Security Agreement between the Company and First Hawaiian Bank, dated February
27, 1997. (Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602)
10.14 License agreement by and between The Scripps Research Institute and the Company
dated April 14, 1998.
10.15 Workout/Suspension Agreement between the Company and Kiewit Pacific Co. dated
March 30, 1998.
10.16 Security Agreement between the Company and Kiewit Pacific Co. dated January 1,
1998.
11.1 Statement re: Computation of Earnings per Share
13 1998 Annual Report to Stockholders (portions only)
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent
27 Financial Data Schedule.
</TABLE>
- ---------------------
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fourth quarter of
the 1998 fiscal year.
No Annual Report to Stockholders or proxy material has been sent to Stockholders
as of this date. Such report and proxy material will be furnished to
Stockholders after the filing of this Form and copies of such materials will be
furnished to the Commission when they are sent to Stockholders.
15
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Cyanotech Corporation and Subsidiaries
Valuation and Qualifying Accounts (in thousands)
Years Ended March 31, 1998, 1997 and 1996
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of year Expenses Accounts Deductions Year
Allowance for Doubtful Receivables
1998 $ -- 10 -- -- $ 10
1997 $ -- -- -- -- $ --
1996 $ -- -- -- -- $ --
`</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Cyanotech Corporation:
Under date of April 27, 1998, we reported on the consolidated balance sheets of
Cyanotech Corporation and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1998, as
contained in the 1998 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended March 31, 1998. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule as listed in the accompanying
index. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
Honolulu, Hawaii
April 27, 1998
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
June, 1998.
CYANOTECH CORPORATION
By:/s/Gerald R. Cysewski, Ph.D
----------------------------
Gerald R. Cysewski, Ph.D
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Gerald R. Cysewski, Ph.D Chairman of the Board, President and June 23, 1998
- -------------------------- Chief Executive Officer (Principal
Gerald R. Cysewski, Ph.D Executive Officer)
/s/Ronald P. Scott Executive Vice President - Finance and June 23, 1998
- -------------------------- Administration, Secretary and Treasurer
Ronald P. Scott (Principal Financial and Accounting
Officer)
Director -------------
- --------------------------
Julian C. Baker
Director -------------
- --------------------------
Eva R. Reichl
/s/John T. Ushijima Director June 23, 1998
- --------------------------
John T. Ushijima
/s/Paul C. Yuen Director June 23, 1998
- --------------------------
Paul C. Yuen
</TABLE>
18
LICENSE AGREEMENT
by and between
THE SCRIPPS RESEARCH INSTITUTE,
a California nonprofit
public benefit corporation
and
CYANOTECH,
a Nevada corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
1. Definitions............................................................................................ 1
1.1 Affiliate..................................................................................... 1
1.2 Aldolase Catalytic Antibody 38C2.............................................................. 1
1.3 Confidential Information...................................................................... 2
1.4 Field......................................................................................... 2
1.5 Licensed Process.............................................................................. 2
1.6 Licensed Product.............................................................................. 2
1.7 Net Sales..................................................................................... 2
1.8 Scripps Patent Rights......................................................................... 2
1.9 Scripps Technology............................................................................ 3
2. License Terms and Conditions........................................................................... 3
2.1 Grant of License.............................................................................. 3
2.2 Royalties..................................................................................... 3
2.3 Combination Products.......................................................................... 3
2.3.1 Definition of Combination Product..................................................... 3
2.3.2 Royalty Payable on Combination Products............................................... 3
2.4 Quarterly Payments............................................................................ 4
2.5 Term of License............................................................................... 4
2.6 Duration of Royalty Obligations............................................................... 4
2.7 Reports....................................................................................... 5
2.8 Records....................................................................................... 5
2.9 Foreign Sales................................................................................. 5
2.10 Foreign Taxes................................................................................. 5
3. Patent Matters......................................................................................... 6
3.1 Patent Prosecution and Maintenance............................................................ 6
3.2 Ownership..................................................................................... 6
4. Obligations Related to Commercialization............................................................... 6
4.1 Commercial Development Obligation............................................................. 6
4.2 Governmental Approvals and Marketing of Licensed Products...................................... 7
4.3 Indemnity...................................................................................... 7
4.4 Patent Marking................................................................................. 7
4.5 No Use of Name................................................................................ 7
4.6 U.S. Manufacture............................................................................... 7
4.7 Foreign Registration........................................................................... 7
5. Limited Warranty........................................................................................ 7
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
6. Interests in Intellectual Property Rights............................................................... 8
6.1 Preservation of Title.......................................................................... 8
6.2 Royalty-free License to Improvements........................................................... 8
6.3 Governmental Interest......................................................................... 8
6.4 Reservation of Rights.......................................................................... 8
7. Confidentiality and Publication......................................................................... 8
7.1 Treatment of Confidential Information.......................................................... 8
7.2 Publicity...................................................................................... 9
8. Term and Termination.................................................................................... 9
8.1 Term........................................................................................... 9
8.2 Termination Upon Default....................................................................... 9
8.3 Termination Upon Bankruptcy or Insolvency...................................................... 9
8.4 Rights Upon Expiration........................................................................ 10
8.5 Rights Upon Termination....................................................................... 10
8.6 Work-in-Progress.............................................................................. 10
9. Assignment; Successors................................................................................. 10
9.1 Assignment.................................................................................... 10
9.2 Binding Upon Successors and Assigns........................................................... 10
10. General Provisions..................................................................................... 11
10.1 Independent Contractors....................................................................... 11
10.2 Arbitration................................................................................... 11
10.2.1 Location............................................................................. 11
10.2.2 Selection of Arbitrators............................................................. 11
10.2.3 Discovery............................................................................ 11
10.2.4 Case Management...................................................................... 12
10.2.5 Remedies............................................................................. 12
10.2.6 Expenses............................................................................. 12
10.2.7 Confidentiality...................................................................... 12
10.3 Entire Agreement; Modification................................................................ 12
10.4 California Law................................................................................ 12
10.5 Headings...................................................................................... 13
10.6 Severability.................................................................................. 13
10.7 No Waiver..................................................................................... 13
10.8 Name.......................................................................................... 13
10.9 Attorneys' Fees............................................................................... 13
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
10.10 Notices....................................................................................... 13
10.11 Compliance with U.S. Laws..................................................................... 14
</TABLE>
iii
<PAGE>
LICENSE AGREEMENT
This License Agreement is entered into and made effective as
of this 13th day of April, 1998, by and between THE SCRIPPS RESEARCH INSTITUTE,
a California nonprofit public benefit corporation ("Scripps") located at 10550
North Torrey Pines Road, La Jolla, California 92037, and CYANOTECH, a Nevada
corporation ("Licensee") located at 73-4460 Queen Kaahumanu Highway, Hawaii
96740, with respect to the facts set forth below.
RECITALS
A. Scripps is engaged in fundamental scientific research
including research relating to catalytic antibodies and the expression of
proteins in algae.
B. Licensee is engaged in the development of algal protein
expression systems for the large-scale production of proteins useful in research
and industrial enterprises.
C. Scripps desires to grant to Licensee, and Licensee wishes to
acquire, an exclusive worldwide license to certain technology of Scripps
relating to the production of an aldolase catalytic antibody in microalgae.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, Scripps and Licensee hereby agree as follows:
1. Definitions. Capitalized terms shall have the meaning set forth below.
1.1 Affiliate. The term "Affiliate" shall mean any entity which directly or
indirectly controls, is controlled by or is under common control with Licensee.
The term "control" as used herein means the possession of the power to direct or
cause the direction of the management and the policies of an entity, whether
through the ownership of a majority of the outstanding voting securities or by
contract or otherwise.
1.2 Aldolase Catalytic Antibody 38C2. The term "Aldolase Catalytic Antibody
38C2" shall mean an aldol addition reaction catalyzing antibody or antibody
fragment having an amino acid residue sequence equivalent to that of an aldol
addition reaction catalyzing antibody or antibody fragment encoded by nucleic
acid in or from hybridoma 38C2 described in U.S. Patent No. 5,733,757.
1
<PAGE>
1.3 Confidential Information. The term "Confidential Information" shall
mean any and all proprietary or confidential information of Scripps or Licensee
which may be exchanged between the parties at any time and from time to time
during the term of this Agreement. Information shall not be considered
confidential to the extent that it:
a. Is publicly disclosed through no fault of any party hereto, either
before or after it becomes known to the receiving party; or
b. Was known to the receiving party prior to the date of this Agreement,
which knowledge was acquired independently and not from another party hereto (or
such party's employees); or
c. Is subsequently disclosed to the receiving party in good faith by a
third party who has a right to make such disclosure; or
d. Has been published by a third party as a matter of right.
1.4 Field. The term "Field" shall mean all applications or products except
those adapted or intended for preventing, treating, mitigating or diagnosing a
disease or condition in humans or vertebrate animals.
1.5 Licensed Process. The term "Licensed Process" shall mean any process
utilizing Scripps Technology to produce Aldolase Catalytic Antibody 38C2 in
microalgae.
1.6 Licensed Product. The term "Licensed Product" shall mean any
composition of matter containing Aldolase Catalytic Antibody 38C2.
1.7 Net Sales. The term "Net Sales" shall mean the gross amount invoiced by
Licensee, or its Affiliates and sublicensees, or any of them, on all sales of
Licensed Product, less (i) discounts actually allowed, (ii) credits for claims,
allowances, retroactive price reductions or returned goods, (iii) prepaid
freight and (iv) sales taxes or other governmental charges actually paid in
connection with sales of Licensed Product (but excluding what is commonly known
as income taxes). For purposes of determining Net Sales, a sale shall be deemed
to have occurred when an invoice therefor shall be generated or the Licensed
Product shipped for delivery. Sales of Licensed Product by Licensee, or an
Affiliate or sublicensee of Licensee to any Affiliate or sublicensee which is a
reseller thereof shall be excluded, and only the subsequent sale of such
Licensed Products by Affiliates or sublicensees of Licensee to unrelated parties
shall be deemed Net Sales hereunder.
1.8 Scripps Patent Rights. The term "Scripps Patent Rights" shall mean
rights arising out of or resulting from (I) United States Patent Serial
No.5,733,757 and all reissues, reexaminations, and extensions thereof, so long
as said patent(s) has not been held
2
<PAGE>
invalid and/or unenforceable by a court of competent jurisdiction from which
there is no appeal or, if appealable, from which no appeal has been taken, (ii)
PCT/US Patent Application Serial No. 98/00840 and all continuations and
divisionals thereof and (iii) all foreign counterpart patents and patent
applications for (i) and (ii).
1.9 Scripps Technology. The term "Scripps Technology" shall mean
proprietary property of Scripps developed in the laboratory of Dr. Stephen
Mayfield for producing Aldolase Catalytic Antibody 38C2, including materials,
processes, information and know-how related thereto, whether or not the same is
eligible for protection under the patent laws of the United States or elsewhere,
and whether or not any such materials, processes and technology, or information
related thereto, would be enforceable as a trade secret or the copying of which
would be enjoined or restrained by a court as constituting unfair competition.
2. License Terms and Conditions.
2.1 Grant of License. Scripps hereby grants to Licensee an exclusive,
worldwide license, without the right to sublicense, to Scripps Technology and
under Scripps Patent Rights, to use the Licensed Process to make Licensed
Product and to use and sell Licensed Product in the Field, subject to the terms
of this Agreement, provided, however, such exclusive license shall convert to a
non-exclusive license either (a) on the second anniversary of the Effective Date
if Licensee has failed to sell Licensed Product prior to such anniversary or (b)
on the fifth anniversary of the Effective Date.
2.2 Royalties. Licensee shall pay to Scripps a continuing royalty on a
country-by-country basis in the amount of (i) seven percent (7%) of Net Sales of
Licensed Product which cannot be made, used or sold in such country without
infringing one or more valid claims under Scripps Patent Rights or (ii) three
and one-half percent (3.5%) of Net Sales of all other Licensed Product.
2.3 Combination Products.
2.3.1 Definition of Combination Product. As used herein, the term
"Combination Product" shall mean a Licensed Product which cannot be
manufactured, used or sold without infringing Scripps Patent Rights, utilizing
Scripps Technology licensed hereunder, infringing or utilizing one or more
patents or proprietary technology or know-how of (I) Licensee, (ii) a third
party licensed pursuant to an agreement between Licensee and such third party,
or (iii) Scripps under a license agreement other than this Agreement (referred
to herein as "other licensed rights").
2.3.2 Royalty Payable on Combination Products. The royalty payable on
Combination Products shall be the royalty rate set forth in Section 2.2. above
based
<PAGE>
on a pro rata portion of Net Sales of Combination Products in accordance with
the following formula:
A
X = ---
B, where
X = the pro rata portion of Net
Sales attributable to Scripps Patent Rights
or other Scripps Technology licensed herein
(expressed as a percentage), and
A = the fair market value of the
component in the Combination Product
utilizing Scripps Technology licensed
hereunder, and
B = A plus the fair market value of
all other components in the Combination
Product using other licensed rights.
The fair market values described above shall be determined by the parties hereto
in good faith. In the absence of agreement as to the fair market value of all of
the components contained in a Combination Product, the fair market value of each
component shall be determined by arbitration in accordance with the provisions
of Section 10.2 hereof.
2.4 Quarterly Payments. With regard to Net Sales made by Licensee or its
Affiliates, royalties shall be payable by Licensee quarterly, within sixty (60)
days after the end of each calendar quarter, based upon the Net Sales of
Licensed Product during such preceding calendar quarter, commencing with the
calendar quarter in which the first commercial sale of any Licensed Product is
made.
2.5 Term of License. Unless terminated sooner in accordance with the
provisions of this Agreement, the term of this license shall expire when the
last of the royalty obligations set forth has expired. Notwithstanding the
foregoing, if applicable government regulations require a shorter term and/or a
shorter term of exclusivity than provided for herein, then the term of this
License Agreement shall be so shortened or this License Agreement shall be
amended to provide for a non-exclusive license, and, in such event, the parties
shall negotiate in good faith to reduce appropriately the royalties payable as
set forth under the section heading "Royalties" hereof.
2.6 Duration of Royalty Obligations. The royalty obligations of Licensee as
to each Licensed Product shall terminate on a country-by-country basis
concurrently with the expiration of the last to expire of Scripps Patent Rights
utilized by or in such Licensed Product in each such country or, with respect to
Licensed Product not utilizing
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any Scripps Patent Rights, fifteen (15) years after the date of first commercial
sale of such Licensed Product in such country.
2.7 Reports. Licensee shall furnish to Scripps at the same time as each
royalty payment is made by Licensee, a detailed written report of Net Sales of
the Licensed Product and the royalty due and payable thereon, including a
description of any offsets or credits deducted therefrom, on a
product-by-product and country-by-country basis, for the calendar quarter upon
which the royalty payment is based.
2.8 Records. Licensee shall keep, and cause its Affiliates and sublicensees
to keep, full, complete and proper records and accounts of all sales of Licensed
Product in sufficient detail to enable the royalties payable on Net Sales of
each Licensed Product to be determined. Scripps shall have the right to appoint
an independent certified public accounting firm approved by Licensee, which
approval shall not be unreasonably withheld, to audit the records of Licensee,
its Affiliates and sublicensees as necessary to verify the royalties payable
pursuant to this Agreement. Licensee, its Affiliates and sublicensees shall pay
to Scripps an amount equal to any additional royalties to which Scripps is
entitled as disclosed by the audit, plus interest thereon at the rate of one and
one-half percent (1.5%) per month. Such audit shall be at Scripps's expense;
provided, however, that if the audit discloses that Scripps was underpaid
royalties with respect to any Licensed Product by at least five percent (5%) for
any calendar quarter, then Licensee, its Affiliates or sublicensee, as the case
may be, shall reimburse Scripps for any such audit costs. Scripps may exercise
its right of audit as to each of Licensee, its Affiliates or sublicensees no
more frequently than once in any calendar year. The accounting firm shall
disclose to Scripps only information relating to the accuracy of the royalty
payments. Licensee, its Affiliates and sublicensees shall preserve and maintain
all such records required for audit for a period of three (3) years after the
calendar quarter to which the record applies.
2.9 Foreign Sales. The remittance of royalties payable on sales outside the
United States, if sold in other than United States Dollars, shall be payable to
Scripps in United States Dollar equivalents at the official rate of exchange of
the currency of the country from which the royalties are payable, as quoted in
the Wall Street Journal for the last business day of the calendar quarter in
which the royalties are payable. If the transfer of or the conversion into the
United States Dollar equivalents of any such remittance in any such instance is
not lawful or possible, the payment of such part of the royalties as is
necessary shall be made by the deposit thereof, in the currency of the county
where the sale was made on which the royalty was based to the credit and account
of Scripps or its nominee in any commercial bank or trust company of Scripps's
choice located in that country, prompt written notice of which shall be given by
Licensee to Scripps.
2.10 Foreign Taxes. Any tax required to be withheld by Licensee under the
laws of any foreign country for the accounts of Scripps shall be promptly paid
by Licensee for and on behalf of Scripps to the appropriate governmental
authority, and Licensee
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shall use its best efforts to furnish Scripps with proof of payment of such tax
together with official or other appropriate evidence issued by the applicable
government authority. Any such tax actually paid on Scripps's behalf shall be
deducted from royalty payments due Scripps.
3. Patent Matters.
3.1 Patent Prosecution and Maintenance. From and after the date of this
Agreement, the provisions of this Section 3 shall control the prosecution and
maintenance of any patent included within Scripps Patent Rights. Subject to the
requirements, limitations and conditions set forth in this Agreement, Scripps
shall direct and control (I) the preparation, filing and prosecution of the
United States and foreign patent applications within Scripps Patent Rights
(including any interferences and foreign oppositions) and (ii) maintain the
patents issuing therefrom.
3.2 Ownership. The patent applications filed and the patents obtained by
Scripps pursuant to Section 3.1 hereof shall be owned solely by Scripps,
assigned to Scripps and deemed a part of Scripps Patent Rights.
4. Obligations Related to Commercialization.
4.1 Commercial Development Obligation. In order to maintain the license
granted hereunder in force, Licensee shall use reasonable efforts and due
diligence to develop Scripps Technology and Scripps Patent Rights which are
licensed hereunder into commercially viable Licensed Product, as promptly as is
reasonably and commercially feasible, and thereafter to produce and sell
reasonable quantities of Licensed Product. Licensee shall keep Scripps generally
informed as to Licensee's progress in such development, production and sale,
including its efforts, if any, to sublicense Scripps Technology and Scripps
Patent Rights, and Licensee shall deliver to Scripps a quarterly written report
and such other reports as Scripps may reasonably request. The parties hereto
acknowledge and agree that achievement of the milestones described in Exhibit A
attached hereto on or before the dates set forth therein shall be evidence of
compliance by Licensee with its commercial development obligations hereunder for
the time periods specified in Exhibit A. In the event Scripps has a reasonable
basis to believe that Licensee is not using reasonable efforts and due diligence
as required hereunder, upon notice by Scripps to Licensee which specifies the
basis for such belief, Scripps and Licensee shall negotiate in good faith to
attempt to mutually resolve the issue. In the event Scripps and Licensee cannot
agree upon any matter related to Licensee's commercial development obligations,
the parties agree to utilize arbitration pursuant to Section 10.2 hereof in
order to resolve the matter. If the arbitrator determines that Licensee has not
complied with its obligations hereunder, and such default is not fully cured
within sixty (60) days after the arbitrator's decision, Scripps may terminate
Licensee's rights under this Agreement.
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4.2 Governmental Approvals and Marketing of Licensed Products. Licensee
shall be responsible for obtaining all necessary governmental approvals for the
development, production, distribution, sale and use of any Licensed Product, at
Licensee's expense, including, without limitation, any safety studies. Licensee
shall have sole responsibility for any warning labels, packaging and
instructions as to the use of Licensed Product and for the quality control for
any Licensed Product.
4.3 Indemnity. Licensee hereby agrees to indemnify, defend and hold
harmless Scripps and any parent, subsidiary or other affiliated entity and their
trustees, officers, employees, scientists and agents from and against any
liability or expense arising from any product liability claim asserted by any
party as to any Licensed Product or any claims arising from the use of any
Scripps Patent Rights or Scripps Technology pursuant to this Agreement. Such
indemnity and defense obligation shall apply to any product liability or other
claims, including without limitation, personal injury, death or property damage,
made by employees, subcontractors, sublicensees, or agents of Licensee, as well
as any member of the general public. Licensee shall use its best efforts to have
Scripps and any parent, subsidiary or other affiliated entity and their
trustees, officers, employees, scientists and agents named as additional insured
parties on any product liability insurance policies maintained by Licensee, its
Affiliates and sublicensees applicable to Licensed Products.
4.4 Patent Marking. To the extent required by applicable law, Licensee
shall mark all Licensed Products or their containers in accordance with the
applicable patent marking laws.
4.5 No Use of Name. The use of the name "The Scripps Research Institute",
"Scripps", or any variation thereof in connection with the advertising or sale
of Licensed Products is expressly prohibited.
4.6 U.S. Manufacture. To the extent required by applicable United States
laws, if at all, Licensee agrees that Licensed Products will be manufactured in
the United States, or its territories, subject to such waivers as may be
required, or obtained, if at all, from the United States Department of Health
and Human Services, or its designee.
4.7 Foreign Registration. Licensee agrees to register this Agreement with
any foreign governmental agency which requires such registration, and Licensee
shall pay all costs and legal fees in connection therewith. In addition,
Licensee shall assure that all foreign laws affecting this Agreement or the sale
of Licensed Products are fully satisfied.
5. Limited Warranty. Scripps hereby represents and warrants that it has
full right and power to enter into this Agreement. SCRIPPS MAKES NO OTHER
WARRANTIES CONCERNING SCRIPPS PATENT RIGHTS OR SCRIPPS TECHNOLOGY COVERED BY
THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A
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PARTICULAR PURPOSE AS TO SCRIPPS PATENT RIGHTS, SCRIPPS TECHNOLOGY OR ANY
LICENSED PRODUCT. SCRIPPS MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY
OR SCOPE OF SCRIPPS PATENT RIGHTS, OR THAT ANY LICENSED PRODUCT WILL BE FREE
FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING SCRIPPS PATENT
RIGHTS OR SCRIPPS TECHNOLOGY COVERED BY THIS AGREEMENT.
6. Interests in Intellectual Property Rights.
6.1 Preservation of Title. Scripps shall retain full ownership and title to
Scripps Technology, and Scripps Patent Rights licensed hereunder and shall use
its reasonable best efforts to preserve and maintain such full ownership and
title, subject to Licensee fully performing all of its obligations under this
Agreement.
6.2 Royalty-free License to Improvements. Licensee hereby grants to Scripps
a non-exclusive, royalty-free license to any improvement to Scripps Technology
developed by Licensee, to use for its own research purposes or grant to other
nonprofit institutions for their research purposes.
6.3 Governmental Interest. Licensee and Scripps acknowledge that Scripps
has received, and expects to continue to receive, funding from the United States
Government in support of Scripps's research activities. Licensee and Scripps
acknowledge and agree that their respective rights and obligations pursuant to
this Agreement shall be subject to Scripps's obligations and the rights of the
United States Government, if any, which arise or result from Scripps's receipt
of research support from the United States Government, including without
limitation, the grant by Scripps to the United States a non-exclusive,
irrevocable, royalty-free license to Scripps Technology and Scripps Patent
Rights licensed hereunder for governmental purposes.
6.4 Reservation of Rights. Scripps reserves the right to use for any
non-commercial research purposes and the right to allow other nonprofit
institutions to use for any non-commercial research purposes any Scripps
Technology and Scripps Patent Rights licensed hereunder, without Scripps or such
other institutions being obligated to pay Licensee any royalties or other
compensation.
7. Confidentiality and Publication.
7.1 Treatment of Confidential Information. The parties agree that during
the term of this Agreement, and for a period of three (3) years after this
Agreement terminates, a party receiving Confidential Information of the other
party will (I) maintain in confidence such Confidential Information to the same
extent such party maintains its own proprietary industrial information, (ii) not
disclose such Confidential Information to any third
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party without prior written consent of the other party and (iii) not use such
Confidential Information for any purpose except those permitted by this
Agreement.
7.2 Publicity. Except as otherwise provided herein or required by law, no
party shall originate any publication, news release or other public
announcement, written or oral, whether in the public press, stockholders'
reports, or otherwise, relating to this Agreement or to any sublicense
hereunder, or to the performance hereunder or any such agreements, without the
prior written approval of the other party, which approval shall not be
unreasonably withheld. Scientific publications published in accordance with
Section 7.2 of this Agreement shall not be construed as publicity governed by
this Section 7.3.
8. Term and Termination.
8.1 Term. Unless terminated sooner in accordance with the terms set forth
herein, this Agreement, and the license granted hereunder, shall terminate as
provided in Section 2.6 hereof.
8.2 Termination Upon Default. Any one or more of the following events shall
constitute an event of default hereunder: (i) the failure of a party to pay any
amounts when due hereunder and the expiration of fifteen (15) days after receipt
of a written notice requesting the payment of such amount; (ii) the failure of a
party to perform any obligation required of its to be performed hereunder, and
the failure to cure within sixty (60) days after receipt of notice from the
other party specifying in reasonable detail the nature of such default. Upon the
occurrence of any event of default, the non-defaulting party may deliver to the
defaulting party written notice of intent to terminate, such termination to be
effective upon the date set forth in such notice.
Such termination rights shall be in addition to and not in substitution for
any other remedies that may be available to the non-defaulting party.
Termination pursuant to this Section 8.2 shall not relieve the defaulting party
from liability and damages to the other party for breach of this Agreement.
Waiver by either party of a single default or a succession of defaults shall not
deprive such party of any right to terminate this Agreement arising by reason of
any subsequent default.
8.3 Termination Upon Bankruptcy or Insolvency. This Agreement may be
terminated by Scripps giving written notice of termination to Licensee upon the
filing of bankruptcy or bankruptcy of Licensee or the appointment of a receiver
of any of Licensee's assets, or the making by Licensee of any assignment for the
benefit of creditors, or the institution of any proceedings against Licensee
under any bankruptcy law. Termination shall be effective upon the date specified
in such notice.
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8.4 Rights Upon Expiration. Neither party shall have any further rights or
obligations upon the expiration of this Agreement upon its regularly scheduled
expiration date with respect to this Agreement, other than the obligation of
Licensee to make any and all reports and payments for the final quarter period.
Provided, however, that upon such expiration, each party shall be required to
continue to abide by its non-disclosure obligations as described in Section 7.1,
and Licensee shall continue to abide by its obligation to indemnify Scripps as
described in Section 4.3 and by its obligations under Section 6.2 hereof.
8.5 Rights Upon Termination. Notwithstanding any other provision of this
Agreement, upon any termination of this Agreement prior to the regularly
scheduled expiration date of this Agreement, the license granted hereunder shall
terminate. Except as otherwise provided in Section 8.6 of this Agreement with
respect to work-in-progress, upon such termination, Licensee shall have no
further right to develop, manufacture or market any Licensed Product, or to
otherwise use any Scripps Patent Rights or any Scripps Technology not otherwise
includable therein. Upon any such termination, Licensee shall promptly return
all materials, samples, documents, information, and other materials which embody
or disclose Scripps Patent Rights or any Scripps Technology not otherwise
includable therein; provided, however, that Licensee shall not be obligated to
provide Scripps with proprietary information which Licensee can show that it
independently developed. Any such termination shall not relieve either party
from any obligations accrued to the date of such termination. Upon such
termination, each party shall be required to abide by its nondisclosure
obligations as described in Section 7.1, and Licensee shall continue to abide by
its obligations to indemnify Scripps as described in Section 4.3.
8.6 Work-in-Progress. Upon any such early termination of the license
granted hereunder in accordance with this Agreement, Licensee shall be entitled
to finish any work-in-progress and to sell any completed inventory of a Licensed
Product covered by such license which remain on hand as of the date of the
termination, so long as Licensee pays to Scripps the royalties applicable to
said subsequent sales in accordance with the terms and conditions as set forth
in this Agreement, provided that no such sales shall be permitted after the
expiration of six (6) months after the date of termination.
9. Assignment; Successors.
9.1 Assignment. Neither this Agreement nor any rights granted hereunder may
be assigned or transferred by Licensee except (I) to an Affiliate of Licensee or
(ii) as expressly permitted hereunder, without the prior written consent of
Scripps.
9.2 Binding Upon Successors and Assigns. Subject to the limitations on
assignment herein, this Agreement shall be binding upon and inure to the benefit
of any successors in interest and assigns of Scripps and Licensee. Any such
successor or assignee of
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Licensee's interest shall expressly assume in writing the performance of all the
terms and conditions of this Agreement to be performed by Licensee.
10. General Provisions.
10.1 Independent Contractors. The relationship between Scripps and Licensee
is that of independent contractors. Scripps and Licensee are not joint
venturers, partners, principal and agent, master and servant, employer or
employee, and have no other relationship other than independent contracting
parties. Scripps and Licensee shall have no power to bind or obligate each other
in any manner, other than as is expressly set forth in this Agreement.
10.2 Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by binding arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), and the procedures set forth below. In the event of any
inconsistency between the Rules of AAA and the procedures set forth below, the
procedures set forth below shall control. Judgment upon the award rendered by
the arbitrators may be enforced in any court having jurisdiction thereof.
10.2.1 Location. The location of the arbitration shall be in the County of
San Diego.
10.2.2 Selection of Arbitrators. The arbitration shall be conducted by a
panel of three neutral arbitrators who are independent and disinterested with
respect to the parties, this Agreement, and the outcome of the arbitration. Each
party shall appoint one neutral arbitrator, and these two arbitrators so
selected by the parties shall then select the third arbitrator. If one party has
given written notice to the other party as to the identity of the arbitrator
appointed by the party, and the party thereafter makes a written demand on the
other party to appoint its designated arbitrator within the next ten days, and
the other party fails to appoint its designated arbitrator within ten days after
receiving said written demand, then the arbitrator who has already been
designated shall appoint the other two arbitrators.
10.2.3 Discovery. Unless the parties mutually agree in writing to some
additional and specific pre-hearing discovery, the only pre-hearing discovery
shall be (a) reasonably limited production of relevant and non-privileged
documents, and (b) the identification of witnesses to be called at the hearing,
which identification shall give the witness's name, general qualifications and
position, and a brief statement as to the general scope of the testimony to be
given by the witness. The arbitrators shall decide any disputes and shall
control the process concerning these pre-hearing discovery matters. Pursuant to
the Rules of AAA, the parties may subpoena witnesses and documents for
presentation at the hearing.
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10.2.4 Case Management. Prompt resolution of any dispute is important to
both parties; and the parties agree that the arbitration of any dispute shall be
conducted expeditiously. The arbitrators are instructed and directed to assume
case management initiative and control over the arbitration process (including
scheduling of events, pre-hearing discovery and activities, and the conduct of
the hearing), in order to complete the arbitration as expeditiously as is
reasonably practical for obtaining a just resolution of the dispute.
10.2.5 Remedies. The arbitrators may grant any legal or equitable remedy or
relief that the arbitrators deem just and equitable, to the same extent that
remedies or relief could be granted by a state or federal court, provided
however, that no punitive damages may be awarded. No court action may be
maintained seeking punitive damages. The decision of any two of the three
arbitrators appointed shall be binding upon the parties.
10.2.6 Expenses. The expenses of the arbitration, including the
arbitrators' fees, expert witness fees, and attorney's fees, may be awarded to
the prevailing party, in the discretion of the arbitrators, or may be
apportioned between the parties in any manner deemed appropriate by the
arbitrators. Unless and until the arbitrators decide that one party is to pay
for all (or a share) of such expenses, both parties shall share equally in the
payment of the arbitrators' fees as and when billed by the arbitrators.
10.2.7 Confidentiality. Except as set forth below, the parties shall keep
confidential the fact of the arbitration, the dispute being arbitrated, and the
decision of the arbitrators. Notwithstanding the foregoing, the parties may
disclose information about the arbitration to persons who have a need to know,
such as directors, trustees, management employees, witnesses, experts,
investors, attorneys, lenders, insurers, and others who may be directly
affected. Additionally, if a party has stock which is publicly traded, the party
may make such disclosures as are required by applicable securities laws.
Further, if a party is expressly asked by a third party about the dispute or the
arbitration, the party may disclose and acknowledge in general and limited terms
that there is a dispute with the other party which is being (or has been)
arbitrated. Once the arbitration award has become final, if the arbitration
award is not promptly satisfied, then these confidentiality provisions shall no
longer be applicable.
10.3 Entire Agreement; Modification. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter hereof.
There shall be no amendments or modifications to this Agreement, except by a
written document which is signed by both parties.
10.4 California Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of California.
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10.5 Headings. The headings for each article and section in this Agreement
have been inserted for convenience of reference only and are not intended to
limit or expand on the meaning of the language contained in the particular
article or section.
10.6 Severability. Should any one or more of the provisions of this
Agreement be held invalid or unenforceable by a court of competent jurisdiction,
it shall be considered severed from this Agreement and shall not serve to
invalidate the remaining provisions thereof. The parties shall make a good faith
effort to replace any invalid or unenforceable provision with a valid and
enforceable one such that the objectives contemplated by them when entering this
Agreement may be realized.
10.7 No Waiver. Any delay in enforcing a party's rights under this
Agreement or any waiver as to a particular default or other matter shall not
constitute a waiver of such party's rights to the future enforcement of its
rights under this Agreement, excepting only as to an express written and signed
waiver as to a particular matter for a particular period of time.
10.8 Name. Whenever there has been an assignment or a sublicense by
Licensee as permitted by this Agreement, the term "Licensee" as used in this
Agreement shall also include and refer to, if appropriate, such assignee or
sublicensee.
10.9 Attorneys' Fees. In the event of a dispute between the parties hereto
or in the event of any default hereunder, the party prevailing in the resolution
of any such dispute or default shall be entitled to recover its reasonable
attorneys' fees and other costs incurred in connection with resolving such
dispute or default.
10.10 Notices. Any notices required by this Agreement shall be in writing,
shall specifically refer to this Agreement and shall be sent by registered or
certified airmail, postage prepaid, or by telefax, telex or cable, charges
prepaid, or by overnight courier, postage prepaid and shall be forwarded to the
respective addresses set forth below unless subsequently changed by written
notice to the other party:
For Scripps: The Scripps Research Institute
10550 North Torrey Pines Road
La Jolla, California 92037
Attention:
Fax No.: (619) 784-9910
For Licensee: Cyanotech Corporation
73-4460 Queen Kaahumanu Highway
Kailua-Kona, HI 96740
Attention: President and CEO
Fax No.: (808) 329-3597
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Notice shall be deemed delivered upon the earlier of (i) when received, (ii)
three (3) days after deposit into the mail, or (iii) the date notice is sent via
telefax, telex or cable, (iv) the day immediately following delivery to
overnight courier (except Sunday and holidays).
10.11 Compliance with U.S. Laws. Nothing contained in this Agreement shall
require or permit Scripps or Licensee to do any act inconsistent with the
requirements of any United States law, regulation or executive order as the same
may be in effect from time to time.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives as of the date set forth above.
SCRIPPS: LICENSEE:
THE SCRIPPS RESEARCH INSTITUTE CYANOTECH CORPORATION
By:/s/Arnold LaGuardia By:/s/Gerald R. Cysewski
------------------- ---------------------
Senior Vice President President & CEO
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EXHIBIT A
Milestones
I. Pilot production of Licensed Product and shipment of sufficient Licensed
Product to Scripps for evaluation. To be completed within four months after
receipt of Licensed Product from Scripps.
II. Production of reagent quantities of Licensed Product (1 to 10 grams).
To be completed within eight months after receipt of Licensed Product from
Scripps.
III. Commercial Sales of Licensed Product. To commence within 12 months
after receipt of Licensed Product from Scripps.
15
March 30, 1998
HAND DELIVERY
E. Laurence Gay, Esq.
Goodsill Anderson Quinn & Stifel
1800 Alii Place
1099 Alakea Street
Honolulu, Hawaii 96813
Re: Workout/Suspension Agreement - Kiewit Pacific Co.
and Cyanotech Corporation
Dear Mr. Gay:
I am writing to memorialize the key terms and conditions of
the Workout/Suspension Agreement negotiated by and between Kiewit Pacific Co.
"Kiewit" and Cyanotech Corporation "Cyanotech" (collectively referred to as the
"Parties") on Friday, March 13, 1998.
A. The Parties agree that the amount presently due and owing
on the Construction Contract dated April 10, 1997 between Kiewit and Cyanotech
is $975,000.
B. Cyanotech agrees to execute a promissory note in the
principal amount of $975,000 in favor of Kiewit. The Note shall bear Interest at
the rate of Prime plus 2% as set forth in article 7.2 of the Construction
Contract (AIA A-101). The Note shall contain customary terms and conditions for
financing of this nature including but not limited to providing: for costs of
collection including attorney fees, that upon default the entire amount is due
and owing, and for late fees. Interest under the Note shall begin to run from
January 1, 1998.
C. Payments under the Note shall be as follows:
1. First payment shall be made no later than April 1,
1998 and shall be a principal and interest payment
in the amount of $150,000.
<PAGE>
E. Laurence Gay, Esq.
March 30, 1998
Page 2
2. Second payment shall be made no later than June 1,
1998 and shall be a principal and interest payment
in the amount of $100,000.
3. The third through eight payments shall each be
made on the first business day of the month
starting July 1, 1998 and running through
December 1, 1998. These payments shall be
principal and interest payments in the amount of
$100,000.
4. The final payment shall be made on December 31,
1998 and shall be a principal and interest
payment in such amount as to completely pay off
all remaining amounts due under the Note.
D. There is no penalty for early repayment of the Note.
E. In the event Cyanotech obtains new funding by way of debt,
equity or any other form of financing, the Note shall be immediately prepaid to
the extent of such funding or paid off in its entirety, if the funding exceeds
the balance on the Note.
F. No later than April 1, 1998, Cyanotech shall execute a
security agreement and UCC 1 granting to Kiewit a security interest in
Cyanotech's inventory, equipment, accounts receivable, furniture and fixtures,
stockpiled construction material (including but not limited to any stockpiled
rock), and any proceeds thereof and after acquired good.
G. Kiewit agrees to suspend work on the Construction Contract
until December 31,1998. If Kiewit is not authorized to re-start work under the
Construction Contract to begin in 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/mo, then the contract shall be considered to have been
terminated by Cyanotech and each party shall retain all rights with respect to
the termination of the contract.
H. The Parties agree to meet on or before November 30, 1998
to discuss the possibility of an additional period of suspension of the
Construction Contract. However, there is no obligation to extend the period of
suspension.
<PAGE>
E. Laurence Gay, Esq.
March 30, 1998
Page 3
I. Cyanotech shall provide such financial information as
reasonably requested by Kiewit, including quarterly financial statements, and a
copy of the State of Hawaii Facilities Lease. In the event any payment is not
made as required under this agreement and the promissory note referenced herein,
Cyanotech shall immediately provide to Kiewit a copy of its customer list and
its equipment vendor lists. Kiewit shall keep this information confidential.
J. The Parties to execute a suspension agreement.
K. Unless otherwise specifically modified herein, all other
terms of the Construction Contract shall remain in full force and effect.
It is my understanding from our phone conversations that this
is agreeable to your client. Please have your client execute where indicated
below to bind Cyanotech to the terms and conditions of this agreement. I will
forward the drafts of the note, security agreement, UCC 1 and suspension
agreement to you for your review shortly. Tomorrow morning I will also provide
you with the information necessary to transfer the funds to Kiewit by Wire.
Very truly yours,
/s/CHARLES W. GALL
-------------------------
CHARLES W. GALL
for
KOBAYASHI, SUGITA & GODA
cc: Lance Wilhelm
Dave Beaudoin, Esq.
Execution binds Cyanotech, Inc.
to the Terms and Conditions
Set Forth Herein Above
Cyanotech, Inc.
by /s/Ronald P. Scott
------------------------------
Ronald P. Scott
Executive Vice President & CFO
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") made as of the 1st day
of January, 1998, by CYANOTECH CORPORATION, a Nevada Corporation, whose address
is 73-4460 Queen Kaahumanu Highway, #102, Kailua-Kona, Hawaii 96740, hereinafter
referred to as the "Debtor", in favor and for the benefit of KIEWIT PACIFIC CO.,
a Delaware corporation, whose address is 1001 Kamokila Boulevard, Suite 305,
Kapolei, Hawaii 96707, hereinafter called the "Secured Party",
WITNESSETH THAT:
A. OBLIGATIONS AND LIABILITIES SECURED BY THIS SECURITY AGREEMENT. The Debtor
does hereby covenant and agree as follows:
1. THIS SECURITY AGREEMENT DOES HEREBY SECURE the repayment of that certain
loan (the "Loan") made by the Secured Party to the Debtor in the principal
amount of NINE HUNDRED SEVENTY FIVE THOUSAND AND NO/100 DOLLARS (U.S.
$975,000.00), and all renewals, extensions and modifications thereof, together
with interest thereon, and the payment (including, but not limited to, all sums
expended or advanced pursuant to), the observance and the performance of, all
covenants, conditions and agreements required to be paid, observed and performed
by the Debtor under the following loan documents:
(1) This Security Agreement covering the furniture, fixtures,
equipment, appliances, inventory, farm products and accounts receivable
and any other personal property now or hereafter acquired by the
Debtor, on the property described as Kalaoa 1st - 4th and Ooma 1st
North Kona, Island of Hawaii identified by Tax Map Key 7-3-43, portion
42 (3) and wherever else located, and all production equipment,
research and development lab equipment, tool and equipment and
stockpiled crushed rock, arising out of or respecting the operations of
the Debtor;
(2) That certain Promissory Note executed concurrently
herewith by the Debtor, as Maker, such note and any renewals,
extensions and modifications thereof being hereinafter referred to as
the "Note";
(3) That certain Financing Statement (UCC-1) covering the
furniture, fixtures, equipment, appliances, inventory and accounts
receivable and any other personal property now or hereafter acquired by
the Debtor, on the property described as Kalaoa 1st - 4th and Ooma 1st
North Kona, Island of Hawaii identified by Tax Map Key 7-3-43, portion
of 42 (3) and wherever else located, and all production equipment,
research and development lab equipment, tool and equipment and
stockpiled crushed rock, arising out of or respecting the operations of
the Debtor; and
(4) Any other instruments or agreements executed by any party
concurrently herewith or otherwise in connection with the loan
documents,
all of the foregoing loan documents, together with all future modifications
thereof, being hereinafter collectively referred to as the "Loan Documents";
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2. THIS SECURITY AGREEMENT DOES ALSO HEREBY SECURE the payment by the
Debtor to the Secured Party of all other sums now or hereafter loaned or
advanced by the Secured Party to the Debtor, or expended by the Secured Party
for the account of the Debtor, or otherwise owing by the Debtor to the Secured
Party, directly or indirectly, on any and every account whatsoever; and
3. THIS SECURITY AGREEMENT DOES ALSO HEREBY SECURE all judgment issued by
any court in favor of the Secured Party or the Secured Party's assigns against
the Debtor related to or arising out of any default of the Debtor under the Loan
Documents.
B. GRANT OF SECURITY INTEREST
THE DEBTOR DOES HEREBY grant, assign, convey, transfer, deliver, and
set over to the Secured Party, its successors and assigns, absolutely and
forever, the following described property, as a security interest, as that term
is defined in the Uniform Commercial code (Chapter 490, Hawaii Revised Statutes,
as amended), upon the terms and conditions hereinafter set forth:
FIRST:
All right, title and interest of the Debtor in and to any and
all assets and personal property interests of the Debtor (the "Debtor's
Property and Assets") related to or located at the property described
as Kalaoa 1st - 4th and Ooma 1st North Kona, Island of Hawaii
identified by Tax Map Key 7-3-43, portion 42 (3) (the "Property") or
wherever else located in the State of Hawaii, and in and to the
business carried on by the Debtor in any location, and in and to any
replacements thereof or additional or supplementary agreements related
thereto;
Together with all of the Debtor's rights and remedies under
the Debtor's Property and Assets, and the benefit of all covenants
therein;
SECOND:
All right, title and interest of the Debtor in and to any and
all furniture, furnishings, machinery, apparatus, appliances,
equipment, fittings, fixtures, improvements, decorations and articles
of personal property of every kind and nature whatsoever, now and
hereafter located in the building or buildings erected on the premises
located on the Property or wherever else located in the State of
Hawaii, or any part thereof, and used or usable in connection with the
business of the Debtor, or in connection with any present or future
occupancy of said building or buildings and now owned or hereafter
acquired by the Debtor (hereinafter called "furniture, fixtures and
equipment"), including, but without limiting the generality of the
foregoing, all heating, lighting, incinerating and power equipment,
engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing,
lifting, cleaning, fire prevention, fire extinguishing, refrigerating,
ventilating and communications apparatus, air attached cabinets,
partitions, ducts and compressors, save and except personal property,
if any, belonging to others than the Debtor, the Debtor hereby agreeing
that all such furniture, fixtures and equipment shall be a part and
parcel of the premises and appropriated to the use thereof and, whether
affixed or annexed to the premises or not;
Together with all substitutions therefor and additions and
accessions to the furniture, fixtures and equipment and parts used or
intended to be used therewith.
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THIRD:
All production equipment, research and development lab
equipment, tool and equipment and stockpiled crushed rock, arising out
of or respecting the operations of the Debtor;
Together with all substitutions therefor and additions and
accessions thereto.
FOURTH:
All accounts, accounts receivable, other receivables, contract
rights, chattel paper, instruments and documents, and notes; any other
obligations or indebtedness owed to the Debtor from whatever source
arising; all rights of the Debtor to receive any performance or any
payments in money or kind; all guaranties of the foregoing and security
therefor; all of the right, title and interest of the Debtor in and
with respect to the goods, services, or other property that gave rise
to or that secure any of the foregoing and insurance policies and
proceeds relating thereto, and all rights of the Debtor as an unpaid
seller of goods services, including, but not limited to, the rights to
stoppage in transit, replevin, reclamation, and resale; all of the
foregoing whether now owned or existing or hereafter created or
acquired by the Debtor, hereinafter separately and collectively
referred to as the "Accounts". The word "Accounts" as used in this
Security Agreement also includes "documents," "instruments" and
"chattel paper" as such terms are defined in the Uniform Commercial
Code.
Together with all of the Debtor's rights and remedies under
the Accounts, and the benefit of all covenants therein and all proceeds
therefrom.
FIFTH:
All of the right, title and interest of the Debtor in and to
any and all goods, merchandise, or other property, raw materials,
parts, supplies, work-in-process and finished products intended for
sale, of every kind and description, in the custody or possession,
actual or constructive, of the Debtor, including insurance proceeds
from insurance on any of the above, any returns upon any Accounts and
other proceeds, resulting from sale or disposition of any of the
foregoing, including without limitation, raw materials,
work-in-process, and finished goods, hereinafter separately and
collectively referred to as the "Inventory"; all of the foregoing
whether now owned or existing or hereafter created or acquired by the
Debtor.
Together with all substitutions therefor and additions and
accessions to the Inventory.
SIXTH:
All of the right, title and interest of the Debtor in and to
all crops, livestock, supplies used or produced in farming operations,
unmanufactured products of crops livestock or aquaculture, hereinafter
separately and collectively referred to as the "Farm Products"; all of
the foregoing whether now owned or existing or hereafter created or
acquired by the Debtor.
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All articles of property described in items FIRST through SIXTH are
hereinafter sometimes collectively called the "Personal Property" and the
"Collateral".
TOGETHER WITH all right, title and interest of the Debtor in, and to
use, lease or dispose of, the Collateral as well as any proceeds deriving from
such Collateral;
TO HAVE AND TO HOLD the same unto the Secured Party and its successors
and assigns, absolutely and forever, as security as aforesaid;
UPON CONDITION that if the Debtor shall well and truly pay to the
Secured Party the principal amount of the Note, with interest and premium, if
any, according to its provisions and effect and shall discharge any and all
obligations that now or hereafter may be or become owing, directly or
indirectly, by the Debtor to the Secured Party under the Loan Documents on any
and every account, whether or not the same are matured, of which obligations the
books of the Secured Party shall be prima facie evidence, and if the Debtor
shall fully and faithfully perform and observe all of the covenants, conditions
and agreements to be performed and observed by the debtor in the Loan Documents,
including this Security Agreement, and any and every other instrument or
document secured hereby, and if the Debtor shall pay the cost of release, the
Secured Party will, upon request of the Debtor, release the Collateral from the
security interest created by this Security Agreement and these presents shall be
void, it being understood, however, that an affidavit, certificate, letter or
statement of any officer of the Secured Party showing that any part of the
indebtedness remains unpaid or any terms, covenants, conditions and agreements
remain unperformed shall constitute evidence of the validity, effectiveness and
continuing force of this Security Agreement.
Subject to the terms hereof, until the happening of an Event of
Default, as hereinafter defined, the Debtor shall be entitled to use and to
possess the Collateral.
C. EVENTS OF DEFAULT. If any one or more of the following events,
hereinafter called "Events of Default" shall occur:
(1) The Debtor shall default in the payment of principal or interest on the
Note or any other obligation secured hereby; or
(2) The Debtor shall default in the due and punctual observance or
performance of any other covenant, condition or agreement required to be
observed or performed under this Security Agreement, and such default shall not
be remedied within twenty (20 days) after the occurrence of such default; or
(3) Any one or more of the Events of Default defined in any of the Loan
Documents shall occur; or
(4) There shall be any attachment, execution or other judicial seizure of,
or affecting, the Collateral, or any part thereof, unless the Debtor sets aside,
dissolves, bonds off or otherwise eliminates such attachment, execution or
seizure within twenty (20 days) after its occurrence; or
(5) The Debtor shall become insolvent or shall admit in writing its
inability to meet its debts as they become due, or shall file a voluntary
petition in bankruptcy, or make an assignment for the benefit of creditors, or
consent to the appointment of a receiver or trustee for all or a substantial
part of its properties, or file a petition, answer or other instrument seeking
or acquiescing to the arrangement of its debts, or other relief under the
federal bankruptcy laws or any other applicable law of the United States of
America or any state or territory for the relief of debtors; or
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(6) A decree or order of a court having jurisdiction in the premises shall
be entered (i) adjudging the Debtor to be bankrupt or insolvent, or (ii)
appointing a receiver or trustee or assignee in bankruptcy or insolvency of the
Debtor or its properties, or (iii) directing the winding up or liquidation of
its affairs; or
(7) Any representation or warranty herein made by the Debtor shall be
untrue in any material respect; or
(8) The forfeiture or seizure by any governmental authority under 18 U.S.C.
ss.981, or under any other federal, state or other law, of any of the Collateral
or any of the properties which are covered by the security instruments which are
part of the Loan Documents; or
(9) The failure of the Debtor to file cash transaction receipts as required
by federal law; or limited to 18 U.S.C. ss.1956(a)(3).
D. REMEDIES FOR EVENT OF DEFAULT.
UPON THE OCCURRENCE OF ANY ONE OR MORE OF EVENTS OF DEFAULT, THEN, AND
IN ANY SUCH EVENT,
1. The Secured Party, without obligation to do so and without releasing or
waiving any of its rights, shall have the right, power, and authority, without
notice, presentment or demand to declare the unpaid principal amount of the Note
and any other indebtedness secured hereby, whether matured or not, together with
any interest thereon accrued and unpaid, to be immediately due and payable, and
such indebtedness and interest shall thereupon become and be immediately due and
payable, and shall bear interest until fully paid at the rate specified in the
Note to be paid in the event of default; and
2. The Secured Party may, at its option, without notice and irrespective of
whether declaration of default is required to be delivered to any party named in
the Loan Documents or other instrument or obligations securing the Note or
secured hereunder or whether remedies under other security instruments have been
exercised, exercise all rights and remedies contained in the Loan Documents,
including this Security Agreement, or any other security instruments and
obligations, and shall have all rights and remedies available to the Secured
Party under the Uniform Commercial code or other applicable laws.
3. Without limiting the generality of the foregoing, upon the occurrence of
an Event of Default:
a. The Secured Party may, at the Secured Party's option and at the
Debtor's expense, either in the Secured Party's own right or in the name of the
Debtor and in the same manner and to the same extent that the Debtor might
reasonably so act if this Security Agreement had not been made:
(1) demand, sue for, collect, recover, receive and otherwise
enforce payment of all proceeds and other sums due and payable from the
Collateral, the Debtor hereby requesting and instructing all other
parties liable to the Debtor in connection with the Collateral to make
all payments then due or which may thereafter become due thereunder or
thereby to the Secured Party, and the Debtor further agreeing that the
receipt by the Secured Party of any such
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payments shall be a complete release and discharge of the obligor or
obligors thereof to the extent of the payment or payments so made;
(2) to exercise all the rights, remedies and privileges of the
Debtor arising from the Collateral, or any party thereof, including the
compromising, waiving, excusing, or in any manner releasing or
discharging of any obligation of any party to or arising from the
Collateral;
(3) take possession of the books, papers, and accounts of the
Debtor, wherever located, relating to the Collateral;
(4) receive, and the Debtor will forthwith surrender to the
Secured Party, the possession of the Collateral, and, to the extent
permitted by law, the Secured Party may itself or by such officers or
agents as it may appoint (A) manage or operate the Collateral or any
part thereof, (B) exclude the Debtor, its agents and servants
therefrom, (C) fix or modify purchase prices, and lease the Property or
Personal Property, or any part thereof, and (D) do all acts, including
the making of contracts, which the Secured Party deems necessary for
the care or management of the Property or Personal Property; and
(5) sue or otherwise collect and receive money.
b. The Secured Party may foreclose this Security Agreement in the
manner now or hereafter provided or permitted by law, including treatment of the
Collateral as real property subject to judicial foreclosure pursuant to Chapter
667, Hawaii Revised Statutes, as amended, and shall have the immediate right to
receivership on ex parte order and without bond pending foreclosure, and may
sell, assign, transfer or otherwise dispose of the Collateral at public or
private sale, in whole or in part, and the Secured Party may, in its own name or
as the irrevocably appointed attorney-in-fact of the Debtor, effectually assign
and transfer the Collateral, or any part thereof, absolutely, and execute and
deliver all necessary assignments, deeds, conveyances, bills of sale and other
instruments with power to substitute one or more persons or corporations with
like power; and, if the Secured Party so instructs the Debtor, the Debtor shall
assemble, without expense to the Secured Party, all of the Collateral at a
convenient place on the island where the Property is located, and the Debtor
shall ratify and confirm any such sale or transfer by delivering all proper
instruments to such persons or corporations as may be designated in any such
request. Any such foreclosure sale, assignment or transfer shall, to the extent
permitted by law, be a perpetual bar, both at law and in equity, against the
Debtor and all persons and entities lawfully claiming by or through or under the
Debtor. Any such sale may be adjourned from time to time. Upon any sale, the
Secured Party may bid for and purchase the Collateral, or any part thereof, and
upon compliance with the terms of sale, may hold, retain and possess and dispose
of the Collateral, in its absolute right without further accountability, and any
purchaser, including the Secured Party, at any such sale may, if permitted by
law, after allowing for the proportion of the total purchase price required to
be paid in cash for the costs and expenses of the sale, commissioner's
compensation and other charges, in paying purchase money, turn in the Note,
including interest and charges thereon, in lieu of cash, up to the amount which
shall, upon distribution of the net proceeds of such sale, be payable thereon.
c. In case of any Event of Default, neither the Debtor nor anyone
claiming by, through or under the Debtor, to the extent the Debtor may lawfully
so agree, shall or will set up, claim or seek to take advantage of any
appraisement, valuation, stay, extension or redemption law now or hereafter in
force in any locality where any of the Collateral is situated in order to
prevent or hinder the enforcement of this Security Agreement, or the absolute
sale of the Collateral, or the final and absolute putting into possession
thereof, immediately after such sale, of the purchasers thereat; and the Debtor
in the Debtor's own right and for all who may claim under the
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Debtor, hereby waives, to the full extent that the Debtor may lawfully do so,
the benefit of all such laws and any and all right to have the estates comprised
in the security intended to be created hereby marshalled upon any enforcement of
the lien hereof and agrees that the Secured Party or any court having
jurisdiction to foreclose such lien may sell the Collateral in parts or as an
entirety. The Secured Party may apply the proceeds of any such sale first, to
the costs and expenses of such sale and all proceedings in connection therewith,
including counsel fees; next, to the payment of any disbursements made by the
Secured Party for taxes or assessments or other charges prior to the Security
interest of this Security Agreement which the Secured Party shall deem it
expedient to pay; next, to the repayment of any other disbursements made by the
Secured Party according to the terms hereof; next, to the payment of the unpaid
principal of and interest on the Note, and any other obligations of the Debtor
under the Loan Documents; and the remainder, if any, shall be paid over to the
Debtor. If such proceeds shall be insufficient to discharge the entire
indebtedness owing by the Debtor under the Security Agreement, the Loan
Documents, and any other instrument or obligation secured hereunder, the Secured
Party may have any other legal recourse against the Debtor for the deficiency.
d. Nothing in this Security Agreement or the Note shall impair the
right, which is unconditional and absolute, of the holder of the Note to enforce
payment of the principal of, and interest on, the Note and all fees, charges and
other sums due under the Loan documents at or after the date therein expressed
as the date when the same shall become due, or the obligation of the Debtor
secured hereunder, which is likewise unconditional and absolute, to pay such
amounts at the respective times and places therein expressed.
E. THE DEBTOR'S WARRANTIES. The Debtor warrants and represents to the
Secured Party as follows:
1. Warranties Regarding the Collateral. The Debtor warrants and represents
to the Secured Party as follows:
a. The Debtor is the lawful owner of the Collateral and has
the right to the use and possession of the Collateral and has good
right to grant or convey the same as security under this Security
Agreement.
b. The Collateral is free and clear of any lien or right prior
to or on a parity with the lien of this Security Agreement, and except
for any prior existing liens, including without limitation, liens in
favor of Spirulina International B.V.
c. The Debtor will, on behalf of the Secured Party, defend
forever against any claims or demands thereon made by all persons.
d. There exist no offsets, counterclaims or defenses to the
Debtor's rights therein or thereto.
F. THE DEBTOR'S COVENANTS. The Debtor hereby covenants and agrees with the
Secured Party as follows:
1. Payment of Taxes, Assessments, etc. The Debtor will punctually pay and
discharge, or cause to be paid and discharged from time to time as the same
shall become due, all taxes, rates, assessments, impositions, duties and other
charges of every description to which the Collateral, or any part thereof, may
during the term of this Security Agreement become liable by authority of law,
the payment of which shall be secured by this Security Agreement. The Debtor
will, upon request, deposit copies of the receipts therefor with the Secured
Party at least
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twenty (20) days prior to the final date such taxes, rates, assessments,
impositions, duties and other charges may be paid without penalty.
2. Indemnification. The Debtor will indemnify and hold and save the Secured
Party harmless and against any and all liability, loss, damage or expense of
whatever kind or nature, including reasonable attorneys' fees, which the Secured
Party may at any time sustain or incur hereunder, including, but not limited to,
any claims or demands whatsoever which may be asserted against the Secured Party
as a result of any failure on the part of the Debtor to perform, observe or
discharge its obligations involving any of the Collateral. Prior to actual entry
and taking possession of any property by the Secured Party, this Security
Agreement shall not operate to place responsibility upon the Secured Party for
the control, care, management or repair of any property constituting security
hereunder.
3. Duplicate Originals. At the request of the Secured Party, the Debtor
will furnish to the Secured Party a duplicate original of each material Contract
now existing or hereafter executed by the Debtor.
4. Litigation. The Debtor will appear in and defend any action or
proceeding at law or in equity affecting in any manner all or part of the
Collateral; and in such event (except where the purported defect affecting the
security hereof arises or results from any act or omission of the Secured
Party), the Debtor will pay all costs, charges and expense, including cost of
evidence of title and reasonable attorneys' fees incurred, and will fully
indemnify the Secured Party from and against any loss, damage, or expense,
including reasonable attorneys' fees, sustained or incurred by the Secured Party
as a result of any failure on the part of the Debtor to comply with its
obligations under this paragraph.
5. Liens. The Debtor will maintain the valid security interest of the
Secured Party in the Collateral and the sums due thereunder, free and clear of
all liens, claims, and encumbrances that may be, or are threatened to be, made
prior to or on a parity with the security interest of the Secured Party herein,
except liens for taxes or assessments not yet payable or payable without penalty
so long as payable. The Debtor will not claim any credit on interest payable on
the Note or on any other payment secured hereby for any portion of the taxes
assessed against the Collateral, and the provisions of any law entitling the
Debtor to such credit are hereby expressly waived by the Debtor to the extent
they may be lawfully waived.
6. Further Assurances. The Debtor will assist in the preparation of and
execute and acknowledge from time to time, alone or with the Secured Party, and
deliver, file or record any further instruments, including security agreements,
financing or continuation statements, mortgages or other instruments, and do
such further acts as the Secured Party may request to confirm, establish,
continue, maintain and perfect the security interest of the Security Party
created by this Security Agreement and to subject the Collateral to the lien
hereof, including all renewals, additions, substitutions, replacements or
betterments thereto and all proceeds therefrom, and otherwise to protect the
same against the rights and interests of third parties, the Debtor agreeing to
pay the cost of preparing, filing and recording the same.
7. Acknowledgment of Debt. The Debtor, within five (5) days after request
by the Secured Party in writing, will furnish to the Secured Party, or to any
proposed assignee of this Security Agreement, a written statement duly
acknowledged of the amount due under this Security Agreement and the Note, and
whether any offsets, counterclaims or defenses exist against the secured debt.
8. Personal Property. The Debtor agrees: (a) to keep all Personal Property
intact and in good condition, order and repair reasonable wear and tear
excepted; (b) at the Debtor's own expense to replace any
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portion thereof which may be broken or become obsolete or worn out or unfit for
use; (c) to comply with all laws, rules and regulations made by governmental
authority and applicable thereto; (d) not to commit or suffer any strip or waste
of the Personal Property; and (e) not to alienate, assign, pledge, transfer, or
encumber any of the rights or interests of the Debtor therein and thereto.
9. Insurance. The Debtor will, during the terms of this Security Agreement,
keep all of the Personal Property insured against hazards of such type or types
and in such amount or amounts and form of policy as the Secured Party may from
time to time reasonably require and will provide copies of the premiums and
costs of all insurance required hereunder and, upon demand of the Secured Party,
will furnish evidence of payment of such premiums. The debtor, not less than
twenty (20) days prior to the expiration date of each policy, shall deliver to
the Secured Party a copy of renewal policy or policies, accompanied by evidence
of payment satisfactory to the Secured Party. All insurance required hereunder
shall be effected under valid and enforceable policies issued by insurance
companies authorized to do business in the State of Hawaii, the Debtor hereby
acknowledging receipt of written notice from the Secured Party that the Debtor
is free to procure any such insurance from any insurance company so authorized.
The Secured Party shall not be responsible for such insurance or for the
collection of any insurance moneys, or for the insolvency of any insurer or
insurance underwriter. The amount collected from any fire or other insurance
policy may be applied by the Secured Party upon any indebtedness secured hereby
and in such order as the Secured Party may determine, or, at the option of the
Secured Party, the entire amount so collected, or any part thereof, may be
applied to the restoration of the Personal Property, or released to the Debtor,
without being deemed a payment on any of the indebtedness secured hereby. Such
application or release shall not cure or waive any default or notice of default
hereunder or invalidate any act done pursuant to such notice. No lien upon any
of such policies of insurance, or upon any refund or return premium which may be
payable on the cancellation or termination thereof, shall be given to anyone
other than the Secured Party, except by proper endorsement affixed to such
policy and approved by the Secured Party. In the event of loss or physical
damage to the Personal Property, the Debtor shall give immediate notice thereof
by mail to the Secured Party, and the Secured Party may make proof of loss if
the same is not made promptly by the Debtor. In the event of foreclosure of this
Security Agreement, or other transfer of title to the Collateral in the
extinguishment of the indebtedness secured hereby, all right, title and interest
of the Debtor in and to any insurance policies then in force shall pass to the
purchaser or the grantee. All such policies or other contracts for such
insurance issued by the respective insurers shall, to the extent obtainable, be
without contribution and contain an agreement by the insurer that the policy or
other contract shall not be cancelled or materially changed without at least
thirty (30) days', prior written notice to the Secured Party.
10. No Violation of Forfeiture Laws. The Debtor warrants and covenants as
follows:
a. The Debtor will not violate any federal, state, or other
governmental law, including but not limited to 18 U.S.C. ss.1956(a)(3), that may
in any way affect or impair the value of the Collateral or the properties
covered by the security instruments which are part of the Loan Documents or the
Secured Party's priority therein;
b. To the best of the Debtor's knowledge, there has been no violation
of any federal, state, or other law affecting or impairing the value of the
Collateral or the properties covered by the security instruments which are part
of the Loan Documents; and
c. The Debtor shall make every good faith effort to prevent any
violation of any federal, state, or other governmental law, including but not
limited to 18 U.S.C. ss.1956(a)(3), that may in any way affect or impair the
value of the Collateral or the properties covered by the security instruments
which are part of the Loan Documents or the Secured Party's priority therein.
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In the event that the Secured Party has reasonable cause to believe
that any portion of the Collateral or any other property or collateral securing
the Loan might be or become subject to forfeiture under the foregoing laws, the
Debtor agrees that the Secured Party may, in its sole discretion, and addition
to its other remedies under this Agreement and at law or in equity, refuse to
make any further disbursements of Loan proceeds, of any kind whatsoever, until
the Secured Party no longer has any reasonable belief that any portion of the
Collateral or any other property or collateral securing the Loan is subject to
or may become subject to forfeiture under any of the foregoing laws.
G. MUTUAL COVENANTS. The Debtor and the Secured Party mutually covenant and
agree each with the other as follows:
1. The Secured Party Not Obligated to Perform. Neither the acceptance of
this Security Agreement by the Secured Party, nor the exercise of any rights
hereunder by the Secured Party, shall be construed in any way as an assumption
by the Secured Party of any obligations, responsibilities or duties of the
Debtor arising from the collateral assigned hereunder or otherwise bind the
Secured Party to the performance of any of the terms and provisions contained in
any obligations respecting the Personal Property, it being expressly understood
that the Secured Party shall not be obligated to perform, observe or discharge
any obligation, responsibility, duty, or liability of the Debtor under any of
the Collateral, including, but not limited to, appearing in or defending any
action, expending any money or incurring any expenses in connection herewith.
2. Right of the Secured Party to Defend Action Affecting Security. The
Secured Party may, at the Debtor's expense, appear in and defend any action or
proceeding at law or in equity purporting to affect the Secured Party's security
interest under this Security Agreement.
3. Right of the Secured Party to Prevent or Remedy Default. If the Debtor
shall fail to perform any of the covenants, conditions and agreements required
to be performed and observed by the Debtor under the Loan Documents, including
this Security Agreement, or any other instruments secured hereby, or in respect
of the Personal Property, the Secured Party (a) may but shall not be obligated
to take action the Secured Party deems necessary or desirable to prevent or
remedy any such default by the Debtor or otherwise to protect the security
interest of the Secured Party under this Security Agreement, and (b) shall have
the absolute and immediate right to enter in and upon or take possession of the
Property, Collateral or any part thereof to such extent and as often as the
Secured Party, in its sole discretion, deems necessary or desirable in order to
prevent or to cure any such default by the Debtor, or otherwise to protect the
security of this Security Agreement. The Secured Party may advance or expend
such sums of money for the account of the Debtor, as the Secured Party in its
sole discretion deems necessary for any such purpose.
4. The Secured Party's Expenses. All reasonable advances, costs, expenses,
charges and attorneys' fees which the Secured Party may make, pay or incur under
any provision of this Security Agreement for the protection of its security or
for the enforcement of any of its rights hereunder, or in foreclosure
proceedings commenced and subsequently abandoned, or in any dispute or
litigation in which the Secured Party or the holder of the Note may become
involved by reason of or arising out of the Loan Documents, including this
Security Agreement, or any other instrument secured hereby, or the Collateral or
the care and management of the Collateral, shall be paid by the Debtor to the
Secured Party, upon demand, and shall bear interest until paid at the rate
specified by the Note to be paid in the event of default thereunder, all of
which obligations shall be additional charges upon the Collateral and be equally
secured hereby.
-10-
<PAGE>
5. The Secured Party's Right of Set-Off. Upon the happening of any event
entitling the Secured Party to pursue any remedy provided herein, or if the
Secured Party shall be served with garnishee process in which the Debtor shall
be named as defendant, whether or not the Debtor shall be in default hereunder
at the time, the Secured Party may, but shall not be required to, set off any
indebtedness owing by the Secured Party to the Debtor against any indebtedness
secured hereby, without first resorting to the security hereunder and without
prejudice to any other rights or remedies of the Secured Party or its security
interest herein.
6. No Waiver. In case the Secured Party shall have proceeded to enforce any
right or remedy hereunder and such proceedings shall have been discontinued or
abandoned for any reason, then in every such case, the Debtor and the Secured
Party shall be restored to their former positions and rights hereunder with
respect to the Collateral, and all rights, remedies and powers of the Secured
Party shall continue as if no such proceeding had been taken. No failure or
delay on the part of the Secured Party in exercising any right, remedy or power
under this Security Agreement or in giving or insisting upon strict performance
by the Debtor hereunder or in giving notice hereunder shall operate as a waiver
of the same or any other power or right, and no single or partial exercise of
any such power or right shall preclude another or further exercise thereof or
the exercise of any other such power or right. The Secured Party,
notwithstanding any such failure, shall have the right thereafter to insist upon
the strict performance by the Debtor of any and all of the terms and provisions
of this Security Agreement to be performed by the Debtor. The collection and
application of proceeds, the entering and taking possession of the Collateral,
and the exercise of the rights of the Secured Party contained in the Loan
Documents, including this Security Agreement, shall not cure or waive any
default, or affect any notice of default, or invalidate any acts done pursuant
to such notice. No waiver by the Secured Party of any breach or default of or by
any party hereunder, shall be deemed to alter or affect the Secured Party's
rights hereunder with respect to any prior or subsequent defaults.
7. Remedies. No right or remedy herein reserved to the Secured Party is
intended to be exclusive of any other right or remedy, but each and every such
remedy shall be cumulative and is not in lieu of but shall be in addition to any
other rights or remedies given under this Security Agreement. Any and all of the
Secured Party's rights and remedies may be exercised from time to time and as
often as such exercise is deemed necessary or desirable by the Secured Party.
8. Right of the Secured Party to Extend Time of Payment, Substitute,
Release Security, etc. Without affecting the liability of any person, including
the Debtor, for the payment of any indebtedness secured hereby, or the lien of
this Security Agreement on the Collateral, or the remainder thereof, for the
full amount of any indebtedness unpaid, the Secured Party may from time to time,
without notice or without affecting or impairing any of the Secured Party's
rights under this Security Agreement:
(a) release any person liable for the payment of any of the
indebtedness,
(b) extend the time or otherwise alter the terms of payment of any of
the indebtedness or accept a renewal Note or Notes to evidence such an extension
or alteration,
(c) accept payments or prepayments of principal without reducing the
aggregate amount secured by this Agreement, and make subsequent advances to the
Debtor up to the amount described herein;
(d) accept additional security therefor of any kind, including (but not
limited to) deeds of trust or mortgages,
-11-
<PAGE>
(e) alter, substitute or release from any security interest or lien
held by the Secured Party any property securing the indebtedness,
(f) resort for the payment of the indebtedness secured hereby to its
several securities therefor in such order and manner as it may deem fit,
(g) join in granting any easement or creating any restriction thereon,
or
(h) join in any extension, subordination or other agreement affecting
this Security Agreement or the lien or charge thereof.
H. MISCELLANEOUS
1. Terms Commercially Reasonable. The terms of this Security Agreement
shall be deemed commercially reasonable within the meaning of the Uniform
Commercial Code.
2. Definitions. The terms "advances", "costs", and "expenses" shall
include, but shall not be limited to reasonable attorneys' fees whenever
incurred. The terms "indebtedness" and "obligations" shall mean and include, but
shall not be limited to, all claims, demands, obligations and liabilities
whatsoever, however arising, whether owing by the Debtor individually or as a
joint venturer, or jointly or in common with any other party, and whether
absolute or contingent, and whether owing by the Debtor as principal debtor or
as accommodation maker or as endorser, liquidated or unliquidated, and whenever
contracted, accrued or payable. In this Security Agreement, whenever the context
so requires, the neuter gender includes the masculine and feminine, and singular
number includes the plural and vice versa.
3. Paragraph Headings. The headings of paragraphs herein are inserted only
for convenience and shall in no way define, describe or limit the scope or
intent of any provisions of this Security Agreement.
4. Change, Amendment, etc. No change, amendment, modification, cancellation
or discharge or any provision of this Security Agreement shall be valid unless
consented to in writing by the Secured Party.
5. Assignment of Secured Party's Interest. The Secured Party shall have the
right to assign its interest in this Security Agreement to any subsequent holder
of the Note.
6. Applicable Laws; Severability. This Security Agreement shall be governed
by and shall be construed and interpreted under and pursuant to the laws of the
State of Hawaii. If any provision of this Security Agreement is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Security Agreement shall remain unaffected.
7. Terms and Conditions of this Security Agreement Supplement Other Loan
Documents. The terms and conditions of this Security Agreement applicable to the
Debtor and the covenants, representations and warranties of the Debtor under
this Security Agreement shall not be deemed to supersede, amend or modify the
obligations and duties of the Debtor or other parties under the Loan Documents.
The terms and conditions of this Security Agreement and the covenants,
representations and warranties of the Debtor hereunder merely supplement, and do
not supplant or supersede provisions of similar effect or subject matter in the
other Loan Documents.
-12-
<PAGE>
8. Notices. All notices, demands or documents which are required or
permitted to be given or served hereunder shall be in writing and personally
delivered, or sent by registered or certified mail addressed to the parties at
their respective addresses set forth on page 1 hereof. Such addresses may be
changed from time to time by the addressee by serving notice as provided above.
Service of such notice or demand shall be deemed complete upon the earlier of
the date of actual delivery or the third day after the date of mailing if mailed
in Hawaii.
9. Parties in Interest. As and when used herein, the terms "Debtor" and
"Secured Party" shall mean and include the Debtor and the Secured Party
above-named and their respective heirs, personal representatives, successors,
successors-in-trust, and assigns, and all covenants and agreements herein shall
be binding upon and inure to the benefit of the Debtor and the Secured Party,
and their respective heirs, personal representatives, successors,
successors-in-trust, and assigns.
10. Counterparts. This Security Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument, and in making proof of this
Security Agreement, it shall not be necessary to produce or account for more
than one such counterpart.
IN WITNESS WHEREOF, the parties hereto have executed these presents on
the day and year first above written.
CYANOTECH CORPORATION
By /s/Gerald Cysewski
------------------
Gerald Cysewski
President and CEO
By /s/Ronald P. Scott
------------------
Ronald P. Scott
Executive Vice President & CFO
"Debtor"
-13-
<TABLE>
<CAPTION>
Exhibit 11.1
CYANOTECH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Fiscal years ended March 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
---------------- -------------- --------------
BASIC EARNINGS PER SHARE
Net income (loss) $ (300,000) $ 4,159,000 $ 2,509,000
Less: Requirement for Preferred Stock dividends (289,000) (294,000) (354,000)
---------------- -------------- --------------
Net income (loss) available to Common stockholders $ (589,000) $ 3,865,000 $ 2,155,000
================ ============== ==============
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
================ ============== ==============
Net income (loss) per Common Share $ (0.05) $ 0.31 $ 0.22
================ ============== ==============
DILUTED EARNINGS PER SHARE
Net income (loss) available to Common stockholders $ (589,000) $ 3,865,000 $ 2,155,000
Plus: Requirement for Preferred Stock dividends -- 294,000 354,000
---------------- -------------- --------------
Net income (loss) available to Common stockholders as
adjusted $ (589,000) $ 4,159,000 $ 2,509,000
================ ============== ==============
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
Effect of dilutive securities
Stock Options and Warrants -- 340,000 994,000
Convertible Preferred Stock -- 3,675,000 3,925,000
---------------- -------------- --------------
Weighted average Common Shares outstanding as adjusted 12,909,000 16,598,000 14,502,000
================ ============== ==============
Net income (loss) per Common Share (1) $ (0.05) $ 0.25 $ 0.17
================ ============== ==============
</TABLE>
(1) For the year ended March 31, 1998, warrants and options to purchase Common
Stock shares of the Company and convertible preferred stock were outstanding,
but were not included in the 1998 computation of Diluted net loss per common
share because the inclusion of these securities would have had an antidilutive
effect on the net loss per common share.
CYANOTECH CORPORATION
1998 ANNUAL REPORT
MICROALGAE: ORGANIC FACTORIES OF THE FUTURE.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended March 31,
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data) 1998 1997 1996 1995 1994
==============================================================================================
Results of Operations
Net sales $ 7,627 $ 11,399 $ 8,081 $ 4,150 $ 2,697
Gross profit 3,137 6,809 4,563 1,875 1,202
Income (loss) from operations (300) 3,751 2,571 718 220
Net income (loss) (300) 4,159 2,509 769 204
Net income (loss) per common share
Basic $ (0.05) $ 0.31 $ 0.22 $ 0.05 $ (0.02)
Diluted $ (0.05) $ 0.25 $ 0.17 $ 0.05 $ (0.02)
Average shares outstanding
Basic 12,909 12,583 9,583 8,895 8,602
Diluted 12,909 16,598 14,502 8,895 8,602
Selected Balance Sheet Data
Cash and investment securities $ 1,397 $ 6,729 $ 9,409 $ 496 $ 866
Total assets 25,667 26,015 19,716 6,212 5,132
Long-term debt and
capital lease obligations 129 559 838 184 109
Stockholders' equity $ 23,174 $ 23,335 $ 17,316 $ 5,104 $ 4,160
</TABLE>
CYANOTECH
Cyanotech is harnessing the vast potential of microalgae to produce high-value
natural products for important market applications worldwide.
The Company's products include Spirulina Pacifica(TM), a nutrient-rich
dietary supplement; NatuRose(TM), a natural astaxanthin product used in the
worldwide aquaculture industry; and phycobiliproteins, which are fluorescent
pigments used in the immunological diagnostics market. The Company is also
developing microalgae-based products for the biopesticide markets and, through
an exclusive license agreement with The Scripps Research Institute, a patented
aldolase catalytic antibody with potential applications in industrial synthesis
for the manufacture of pharmaceuticals, fine chemicals and agricultural
products.
Cyanotech's technologies, systems, processes and favorable growing location
on the Kona coast of Hawaii permit year-round growing and harvesting of its
products in a cost-effective manner. Its production system operates without the
use of pesticides and herbicides, and does not create erosion, fertilizer runoff
or water pollution.
Cyanotech is the only microalgae company in the world to be ISO-9002
registered.
Cyanotech markets its products in the United States and foreign markets
through retail, wholesale and private label channels. Nutrex, Inc., a
wholly-owned subsidiary, produces and markets spirulina-based nutritional
products for the retail market.
Additional company and product information is available on Cyanotech's
World Wide Web site at www.cyanotech.com.
<PAGE>
The wide range of products Cyanotech is beginning to produce -- from nutritional
supplements and animal feed ingredients to industrial enzymes and biopesticides
- -- is proving the Company's concept of microalgae as broadly capable organic
factories for high-value, diverse applications.
CYANOTECH PRODUCT PIPELINE: ROBUST AND VARIED
<TABLE>
<CAPTION>
<S> <C> <C>
PRODUCT INTRODUCED MARKETS
- ------------------------------------------------------------------------------------------------------------------------------------
Spirulina Pacifica(TM) 1985 Health & Natural Foods
A nutrient-rich dietary supplement, CYAN's unique strain is a vegetable-based, Over $30 million at
highly absorbable source of natural beta carotene, mixed carotenoids and other wholesale
phytonutrients, B vitamins, gamma linolenic acid (GLA), protein and essential (CYAN $7.1 million sales in
amino acids. FY98)
- ------------------------------------------------------------------------------------------------------------------------------------
Phycobiliproteins 1988 Immunological Diagnostics
Fluorescent pigments used for medical testing. Nominal
(CYAN $250,000 sales
in FY98)
- -----------------------------------------------------------------------------------------------------------------------------------
NatuRose(TM) Natural Astaxanthin 1997 Aquaculture/Animal
A red pigment used primarily in the aquaculture industry to impart color to the Feed/Pigments
flesh of pen-raised fish and shrimp. Competes with synthetic astaxanthin made Over $150 million
from petrochemicals. (one supplier)
(CYAN $250,000 sales
in FY98)
- ------------------------------------------------------------------------------------------------------------------------------------
Aldolase Catalytic Antibody 1998 Industrial Enzymes
Genetically engineered antibody may have numerous applications in industrial Undefined
synthesis, including certain anti-cancer compounds. Has efficiency rate and (varied industrial/
operative mechanism equal to natural enzyme, but with a broader scope of pharmaceutical
reactivity. Exclusive license from The Scripps Research Institute. First applications)
commercially available aldolase catalytic antibody.
- ------------------------------------------------------------------------------------------------------------------------------------
Mosquitocide 1999 Biopesticides
CYAN is genetically engineering a natural toxin from Bacillus thuringiensis var. Over $500 million
israelensis (Bti) into the blue-green algae, Synechococcus, a food for mosquito (worldwide need enormous)
larvae. When applied to a mosquito-infested body of water, the algae could act
as an effective and environmentally safe means of control.
- ------------------------------------------------------------------------------------------------------------------------------------
Other Products 2000+ Undefined
CYAN plans to develop other high-value products from microalgae. These could
include genetically-engineered pharmaceuticals, nutraceuticals, and
poly-unsaturated fatty acids.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
TO OUR STOCKHOLDERS
Fiscal 1998 was a profound disappointment for Cyanotech after years of steady
growth. But it was principally attributable to reduced sales to a single
Spirulina purchaser, which had been the Company's largest customer, accounting
for 34% of total sales in FY97 vs. 5% in FY98. These figures show both the
opportunity and the problem of relying on a single product and customer. The
customer is a network marketer whose sales in China were halted by the Chinese
government for much of the past fiscal year along with all network marketers
there, then banned altogether. As a result, Cyanotech's sales decreased to $7.6
million in FY98 from $11.4 million in FY97 with a net loss of $300,000 in FY98
vs. net income of $4.2 million in FY97. To return to profitability at lower
demand levels, we reduced our workforce by 25% in the fourth quarter. By
contrast, fiscal 1999 and future years look more positive due to the variety and
potential of products on the market and under development.
SPIRULINA PACIFICA(TM)
With the reduced sales to China, we worked hard during FY98 to broaden
our customer base for Spirulina. An indicator of progress is our relationship
with the General Nutrition Center (GNC) chain of retail stores in the U.S. We
are now selling our branded Nutrex(TM) Spirulina Pacifica products through 1,000
GNC stores nationwide, up from 200 stores at the beginning of FY98. We also have
increased marketing efforts in Hawaii, signed additional distributors overseas,
and are investigating new markets, such as in poultry feed where preliminary
studies indicate that Spirulina contributes to a significantly improved immune
system in poultry with the possibility of eliminating antibiotics. The Spirulina
market overall is not large, but we are working to increase our already strong
share.
NATUROSE(TM) ASTAXANTHIN
We hoped that NatuRose would be used by the aquaculture industry from
its introduction in March 1997, but we did not account for the close customer
relationships in a market characterized by a single supplier and the caution
shown in accepting a new product. During FY98, prospective customers in 12
countries engaged in more than 30 feeding trials of NatuRose with all completed
studies to date showing positive results. Although we only sold trial quantities
of astaxanthin during the fiscal year, commercial order flow has begun in the
first quarter of FY99. We also have signed a Letter of Intent with a
multi-national life sciences company ($15 billion in annual sales to 150-plus
countries) to distribute NatuRose, initially to its aquaculture customers in
Europe.
MOSQUITOCIDE
Once NatuRose was launched in 1997, we turned our development attention
to the promising potential mosquitocide we had licensed in FY 96 from the
University of Memphis. In the summer of 1997, we hired a senior molecular
biologist experienced in natural bacterial toxins to lead the mosquitocide
effort. The original genetically engineered microalgae we had licensed included
only one of the four BTI toxins, all of which are harmless to humans but deadly
2
<PAGE>
to mosquito larvae. We are currently focused on adding up to three additional
Bti toxins to significantly increase the product's toxicity and to lessen the
risk of mosquito larvae evolving a resistance to a single-toxin product. We plan
to have the mosquitocide in limited commercial production for worldwide testing
by the end of the current fiscal year. The market potential is unknown at this
time, but the need for safe-for-human biopesticides is growing as the incidence
of mosquito-borne malarial and other diseases is increasing in both developing
and developed countries.
SCRIPPS ALDOLASE ANTIBODY
In April 1998, we signed an exclusive agreement with The Scripps
Research Institute to produce the Institute's patented aldolase catalytic
antibody 38C2 in microalgae. Previously, the antibody has only been produced in
small quantities in animal cells in the laboratory. We have long maintained that
microalgae provide an excellent vehicle for the genetic engineering of many
products due to their ease of genetic manipulation, short generation cycles and
cellular uniformity. This product with potential for applications in
pharmaceuticals, fine chemicals and agriculture exemplifies our thesis.
ROBUST PRODUCT PIPELINE
There are over 30,000 species of microalgae, many of which have
natural, beneficial properties that can be extracted to produce high-value
products, while many more can act effectively as vehicles for genetic
engineering to produce other products. Our challenge is to remain focused as we
explore the wealth of possibilities and to dedicate our efforts to those
products with the clear and present potential of success for the benefit of our
stockholders. Cyanotech's product pipeline, as shown on page 1 of this report,
is truly robust and varied -- a major advance from just a few years ago when
Spirulina was our only major product. Now Spirulina is among the products with
lesser potential in terms of overall market size and possible sales in the
future.
LOOKING AHEAD
The hardest thing we had to do in fiscal 1998 was to lay off 25% of our
dedicated workforce in Kona. We deeply appreciate their under-standing and look
forward to resuming our role as a steady employer in the region. We commend the
fine work of all our associates, past and present, in helping run a reliable
operation with excellent quality control while developing the significant new
products in our pipeline. We thank our stockholders for their understanding
during a difficult period and our Board of Directors for supportive counsel. In
brief, we have proven the process of producing high-value products from
microalgae and are developing a promising line of products. We look forward to
increased sales and a return to our traditionally higher margins.
Gerald R. Cysewski, Ph.D.
Chairman, President and Chief Executive Officer
June 18, 1998
3
<PAGE>
CHARTS
Net Sales
$ millions
94--$2,697
85--$4,150
96--$8,081
97--$11,399
98--$7,627
Gross Profit
$ millions
94--$1,202
95--$1,875
96--$4,563
97--$6,809
98--$3,137
Net Income (Loss)
$ millions
94--$204
95--$769
96--$2,509
97--$4,159
98--$(300)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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>
<S> <C> <C> <C> <C>
Year Ended March 31, 1998 1997 1996
================================================================================
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.9 40.3 43.5
--------------------------------------------------------------------------------
Gross profit 41.1 59.7 56.5
--------------------------------------------------------------------------------
Operating expenses:
Research and development 8.8 5.1 4.4
General and administrative 17.3 12.6 14.8
Sales and marketing 18.9 9.1 5.5
--------------------------------------------------------------------------------
Total operating expenses 45.0 26.8 24.7
--------------------------------------------------------------------------------
Income (loss) from operations (3.9) 32.9 31.8
--------------------------------------------------------------------------------
Other income (expense):
Interest income 2.6 3.9 0.3
Interest expense (0.4) (0.4) (1.1)
Other income, net 0.1 0.1 --
--------------------------------------------------------------------------------
Total other income (expense) 2.3 3.6 (0.8)
--------------------------------------------------------------------------------
Income (loss) before income taxes (1.6) 36.5 31.0
Income taxes (2.3) -- --
--------------------------------------------------------------------------------
Net income (loss) (3.9)% 36.5% 31.0%
================================================================================
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Net Sales
Net sales for the year ended March 31, 1998 were $7,627,000, a
decrease of 33.1% from net sales of $11,399,000 for the year
ended March 31, 1997. The decrease in net sales during the
year ended March 31, 1998 is primarily due to lower sales of
Spirulina packaged consumer products to our largest customer,
a Hong Kong-based network marketing company which purchased
our packaged consumer products for sale under a private label
through their marketing organization, primarily in mainland
China. This customer experienced a delay in its annual
recertification process by the Chinese government and was
restricted by local governmental authorities from hosting any
large scale distributor meetings from March 1997 through
September 1997. These regulatory factors adversely impacted
our customer's ability to sell and, consequently, this
customer's need for our packaged consumer products was
severely reduced. For the year ended March 31, 1998, this
customer accounted for less than 5% of Cyanotech's net sales,
down from approximately 34% and 29% of net sales in the years
ended March 31, 1997 and 1996, respectively. Subsequent to the
end of fiscal 1998, the Chinese government imposed a ban on
all network market organizations, effective October 1, 1998.
Future sales to this customer are expected to be minimal. Also
contributing to the decline were lower shipments (11% lower)
and lower average selling prices (2% lower) for bulk Spirulina
powder.
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 to 41.1% of net sales for
the year ended March 31, 1998, from 59.7% of net sales for the
year ended March 31, 1997. This decrease in gross profit from
the prior year is primarily attributable to a shift in the
product mix to greater sales of lower priced bulk Spirulina
products (78% of net sales in fiscal 1998, up from 58% of net
sales in fiscal 1997), Spirulina production inefficiencies due
to decreased production beginning December 1997 through
February 1998 which resulted in additional charges to Cost of
Sales of approximately $264,000 during that period, and lower
average selling prices for bulk Spirulina.
4
<PAGE>
Operating Expenses
Operating expenses increased by $379,000, an increase of 12.4%
over the prior year, primarily because of increased
expenditures for sales and marketing.
Research and Development. Expenditures for research and
development increased 15.3% to $677,000, for the year ended
March 31, 1998, from $587,000, for the year ended March 31,
1997. The increase from the prior year is primarily the result
of research and ongoing development work done on the
mosquitocide project and on optimizing production of the
natural astaxanthin product. Research and development costs
are expected to increase further during fiscal 1999 as we
continue to optimize the PhytoMax PCS technology, increase the
research activities directed at the mosquitocide project and
begin development work to produce Aldolase Catalytic Antibody
38C2 as a result of our exclusive license agreement with The
Scripps Research Institute which was signed in April 1998.
General and Administrative. General and administrative
expenses decreased 8.3% to $1,318,000, for the year ended
March 31, 1998, from $1,437,000, for the year ended March 31,
1997. The decrease from the prior year is primarily due to
reduced associate incentive bonuses which are indexed to the
Company's profitability, partially offset by an increase in
personnel costs.
Sales and Marketing. Sales and marketing expenses increased
39.5% to $1,442,000, for the year ended March 31, 1998, from
$1,034,000, for the year ended March 31, 1997. The increase
from the prior year is primarily due to higher personnel
costs, and increased domestic and international marketing
efforts associated with the introduction of the NatuRose
product.
Other Income (Expense)
Other income decreased by 57.1% to $175,000, for the year
ended March 31, 1998, from $408,000, for the year ended March
31, 1997. The decrease from the prior year is primarily
related to decreased earnings on lower balances of cash and
investment securities.
Income Taxes
The provision for income taxes was $175,000, for the year
ended March 31, 1998. This is due to an increase in the
allowance for deferred tax assets, offset in part by current
income tax benefits.
Net Income (Loss)
For the year ended March 31, 1998 and for the first time since
1991, the Company recorded a net loss. The fiscal 1998 net
loss of $300,000, compares with net income of $4,159,000, for
the year ended March 31, 1997. The net loss is primarily the
result of lower sales of Spirulina bulk and packaged consumer
products due to a reduction in orders from a single customer
in China that had previously accounted for a large percentage
of sales of packaged consumer Spirulina Pacifica products,
lower average selling prices for bulk Spirulina products,
Spirulina production inefficiencies due to decreased
production during December 1997 through February 1998 which
resulted in an additional charge to Cost of Sales of
approximately $264,000 during the third and fourth quarters of
1998, and start-up costs associated with commercialization of
NatuRose, our natural astaxanthin product.
In February 1998, the Company reduced its workforce by
approximately 25% in order to better align resources with
sales levels. The workforce reduction was part of the
Company's plans to enhance its competitive position through
improvements of operational productivity and cost reduction -
specifically more effecient utilization of assets and
employees. Production operations, sales, and administrative
functions were restructured and downsized by this action.
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales for the year ended March 31, 1997 were $11,399,000,
a 41.1% increase over net sales of $8,081,000 for the year
ended March 31, 1996. The increase in net sales during the
year ended March 31, 1997 is attributable to significantly
higher production and sales of bulk Spirulina powder and
tablets and increased sales of packaged consumer products
which carry a higher sales price than bulk Spirulina Pacifica
products. The increased production is the result of Spirulina
production expansions that were completed in February and
November 1996.
5
<PAGE>
Gross Profit
Gross profit increased to 59.7% of net sales for the year
ended March 31, 1997 from 56.5% of net sales for the year
ended March 31, 1996. The increase in gross profit from the
prior year is primarily attributable to economies of scale
related to the production of both bulk and packaged consumer
Spirulina Pacifica products, but was partially offset by lower
average selling prices (18% lower) for bulk products.
Operating Expenses
Operating expenses increased by $1,066,000, with significant
increases in all three components.
Research and Development. Expenditures for research and
development increased 67.2% to $587,000, for the year ended
March 31, 1997, from $351,000, for the year ended March 31,
1996. The increase from the prior year is primarily the result
of the development work done on the natural astaxanthin
product and the research work done on the mosquitocide
project.
General and Administrative. General and administrative
expenses increased 20.2% to $1,437,000, for the year ended
March 31, 1997, from $1,196,000, for the year ended March 31,
1996. The increase is due to higher staff-related
expenditures, the accrual of associate incentive bonuses
indexed to the Company's profitability during the year ended
March 31, 1997, and higher insurance costs.
Sales and Marketing. Sales and marketing expenses increased
132.4% to $1,034,000, for the year ended March 31, 1997, from
$445,000, for the year ended March 31, 1996. The increase from
the prior year is primarily due to higher staff-related
expenditures, and increased domestic and international
marketing efforts associated with higher sales of packaged
consumer products and with the introduction of the NatuRose
product.
Other Income (Expense)
Other income increased to $408,000, for the year ended March
31, 1997, from other expense of $62,000, for the year ended
March 31, 1996. The increase from the prior year is primarily
related to increased earnings on larger cash and investment
securities balances.
Net Income
Net income increased to $4,159,000, for the year ended March
31, 1997, from $2,509,000, for the year ended March 31, 1996.
The increase in net income is primarily a result of increased
production and sales of bulk and packaged consumer Spirulina
Pacifica products.
Inflation during the years ended March 31, 1998, 1997 and
1996 did not have a material impact on the Company's
operations.
Variability of Results
Cyanotech Corporation was formed in 1983 and did not become
profitable on an annual basis until fiscal 1992 (the twelve
month period ended December 31, 1992). From fiscal 1992
through fiscal 1997, the Company had total net sales of
$29,401,000, and total net income of $7,931,000. In fiscal
1998, the Company had net sales of $7,627,000 and a net loss
of $300,000. As of March 31, 1998, our accumulated deficit was
$761,000. There can be no assurance that we will be
consistently profitable on either a quarterly or an annual
basis. We have experienced quarterly fluctuations in operating
results and anticipate that these fluctuations may continue in
future periods. Future operating results may fluctuate as a
result of changes in sales levels to our largest customers,
new product introductions, production difficulties, weather
patterns, the mix between sales of bulk products and packaged
consumer products, start-up costs associated with new
facilities, expansion into new markets, sales promotions,
competition, increased energy costs, the announcement or
introduction of new products by our competitors, changes in
our customer mix, overall trends in the market for Spirulina
and astaxanthin products and other factors beyond our control.
While a significant portion of our expense levels are
relatively fixed, and the timing of increases in expense
levels is based in large part on our forecasts of future
sales, if net sales are below expectations in any given
period, the adverse impact on results of operations may be
magnified by our inability to adjust spending quickly enough
to compensate for the sales shortfall. We may also choose to
reduce prices or increase spending in response to market
conditions, which may have a material adverse effect on our
results of operations.
6
<PAGE>
New Accounting Standards
In June 1996, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No.
125 generally is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996, and is to be applied prospectively.
This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application
of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings.The adoption of
SFAS No. 125 did not have a material effect on the Company's
reported financial position, results of operations or
liquidity.
In February 1997, the FASB issued SFAS No. 128, "Earnings
per Share". SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. SFAS No. 128
requires the presentation of "Basic" earnings per share,
representing income available to common shareholders divided
by the weighted average number of common shares outstanding
during the period, and "Diluted" earnings per share, which
reflects the potential dilution that could occur if securities
or other contracts to issue Common Stock shares were exercised
or converted into Common Stock shares or resulted in the
issuance of Common Stock shares that then shared in the
earnings of the Company. SFAS No. 128 requires restatement of
all prior period per share data presented. The Company adopted
SFAS No. 128 for the quarter ended December 31, 1997 and has
restated all prior period earnings per share data presented.
Also during February 1997, the FASB issued SFAS No. 129,
"Disclosure of Information about Capital Structure," which
lists required disclosures about capital structure that had
been included in a number of previously existing statements
and opinions. SFAS No. 129 is effective for periods ending
after December 15, 1997. The Company adopted the provisions of
SFAS No. 129 as of December 31, 1997. The adoption of SFAS No.
129 did not have a material effect on the Company's reported
financial information.
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. SFAS No. 130 requires
reclassification of financial statements for earlier periods
provided for comparative purposes. The Company will adopt the
provisions of SFAS No. 130 for the fiscal year beginning April
1, 1998.
Also during June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for public business
enterprises to 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 fiscal years beginning after
December 15, 1997. SFAS No. 131 requires restatement of
comparative information presented for earlier periods. The
Company will adopt the provisions of SFAS No. 131 for the
quarter beginning April 1, 1998. Management does not expect
adoption of SFAS No. 131 will have a material effect on the
Company's reported financial information.
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 recognition 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 the fiscal year beginning April 1, 1998.
Management does not expect adoption of SFAS No. 132 will have
a material effect on the Company's reported financial
information.
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 estimates
that the adoption of SOP 98-1 will not have a material effect
on the Company's financial condition, results of operations or
liquidity.
7
<PAGE>
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 adoption of
SOP 98-5 will have a material effect on the Company's
financial condition, results of operations or liquidity.
Liquidity and Capital Resources
Cyanotech's cash and investment securities decreased
$5,332,000 to $1,397,000 during the fiscal year ended March
31, 1998. The decrease is primarily attributable to increased
capital expenditures for equipment and leasehold improvements.
Cash flows provided by operating activities were $988,000
in 1998, down from $2,860,000 in 1997 because of the reduction
in net income. The primary sources of 1998 cash flows from
operating activities were a decrease in net accounts
receivable, offset in large part by an increase in inventories
and decreases in accounts payable and accrued expenses.
Cash flows used in investing activities were $1,927,000 in
1998 compared to $10,962,000 in 1997. The primary uses of cash
flows in investing activities during 1998 were for capital
expenditures totaling $5,881,000, offset by proceeds from the
sale and maturities of investment securities totaling
$3,954,000.
Cash flows used in financing activities were $439,000 in
1998 compared to cash flow provided by financing activities of
$1,468,000 in 1997. The primary uses of cash flows in
financing activities were for principal payments of $401,000
on long-term debt and $130,000 on capital lease obligations,
offset somewhat by proceeds received from the exercise of
common stock options and warrants.
As of March 31, 1998, we had no significant construction
commitments. However, we have agreed with a construction
contractor to resume work on a culture pond expansion project
by 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 by January 1, 1999, and continue as
agreed because of the Company's inability to fund such
construction, then the contract may 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 March 31, 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.
We presently estimate that our existing capital resources
and anticipated cash flows from future operations will be
sufficient to fund current operations. However, we plan to
spend, subject to available financing, approximately $11
million on capital expenditures during the next three fiscal
years, primarily to continue the expansion of NatuRose
production on the newly leased 93 acres. Existing capital
resources and anticipated cash flows from future operations
will not be sufficient to fund these capital expenditures. Our
bank credit line of $1,000,000 expired on January 31, 1998 and
was not renewed. Another $1,000,000 bank line expired on
February 7, 1998 when the underlying certificate of deposit
matured. As of March 31, 1998, the Company was actively
pursuing additional credit facilities to meet any anticipated
shortfall in cash flow, but there is no assurance that such
facilities will be obtained at the amount required at a
reasonable cost to the Company.
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.
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At March 31,
-------------------------------------------------------------------------------------------------
(in thousands, except share data) 1998 1997
=================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 1,397 $ 2,775
Investment securities -- 3,954
Accounts receivable, net of allowance for doubtful
receivables of $10 in 1998 1,246 2,791
Inventories 2,229 1,138
Prepaid expenses 88 155
Deferred tax assets -- 373
-------------------------------------------------------------------------------------------------
Total current assets 4,960 11,186
Equipment and leasehold improvements, net 20,544 14,666
Other assets 163 163
-------------------------------------------------------------------------------------------------
Total assets $25,667 $ 26,015
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 50 $ 150
Note payable 975 --
Current maturities of capital lease obligations 129 130
Accounts payable 938 1,508
Accrued expenses and other 272 333
-------------------------------------------------------------------------------------------------
Total current liabilities 2,364 2,121
Long-term debt, excluding current maturities 62 363
Obligations under capital lease, excluding current maturities 67 196
-------------------------------------------------------------------------------------------------
Total liabilities 2,493 2,680
-------------------------------------------------------------------------------------------------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value
(aggregate involuntary liquidation $2,975 ($5 per share),
plus unpaid cumulative dividends). Authorized 5,000,000
shares; issued and outstanding 595,031 shares in 1998 and
734,977 shares in 1997 1 1
Common stock of $.005 par value, authorized 25,000,000 shares at
March 31, 1998 and 1997; issued and outstanding 13,599,572 shares
at March 31, 1998 and 12,712,682 shares at March 31, 1997 68 63
Additional paid-in capital 23,866 23,732
Accumulated deficit (761) (461)
------------------------------------------------------------------------------------------------
Total stockholders' equity 23,174 23,335
Commitments and contingencies
------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,667 $ 26,015
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except per-share data) 1998 1997 1996
=================================================================================================
Net sales $ 7,627 $11,399 $ 8,081
Cost of sales 4,490 4,590 3,518
-------------------------------------------------------------------------------------------------
Gross profit 3,137 6,809 4,563
-------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 677 587 351
General and administrative 1,318 1,437 1,196
Sales and marketing 1,442 1,034 445
-------------------------------------------------------------------------------------------------
Total operating expenses 3,437 3,058 1,992
-------------------------------------------------------------------------------------------------
Income (loss) from operations (300) 3,751 2,571
-------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 202 443 32
Interest expense, net of interest costs capitalized of $114 in 1998,
$23 in 1997 and nil in 1996 (35) (47) (90)
Other income (expense), net 8 12 (4)
-------------------------------------------------------------------------------------------------
Total other income (expense) 175 408 (62)
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes (125) 4,159 2,509
Income taxes (175) -- --
-------------------------------------------------------------------------------------------------
Net income (loss) $ (300) $ 4,159 $ 2,509
=================================================================================================
Net income (loss) per common share
Basic $ (0.05) $ 0.31 $ 0.22
=================================================================================================
Diluted $ (0.05) $ 0.25 $ 0.17
=================================================================================================
Weighted average number of common shares outstanding
Basic 12,909 12,583 9,583
=================================================================================================
Diluted 12,909 16,598 14,502
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Preferred stock Common stock Additional Stock-
Par Par paid-in Accumulated Treasury holders'
(in thousands, except share data) Shares value Shares value capital deficit stock equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995 1,997,477 $2 9,051,325 $ 45 $ 12,216 $ (7,129) $ (30) $ 5,104
Exercise of common stock warrants
for cash -- -- 891,200 5 507 -- -- 512
Exercise of stock options for cash -- -- 82,625 -- 76 -- -- 76
Issuance of common stock to nonemployee
directors for services -- -- 8,000 -- 40 -- -- 40
Exchange of Series A preferred stock for
common stock (1,250,000) (1) 250,000 1 -- -- -- --
Exchange of Series B preferred stock for
common stock (12,500) -- 2,500 -- -- -- -- --
Retirement of treasury stock -- -- (30,000) -- (30) -- 30 --
Common stock issued for cash, net of
costs of $556 -- -- 1,500,000 8 9,067 -- -- 9,075
Net income -- -- -- -- -- 2,509 -- 2,509
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 734,977 1 11,755,650 59 21,876 (4,620) -- 17,316
Exercise of common stock warrants
for cash -- -- 668,120 3 298 -- -- 301
Exercise of stock options for cash -- -- 57,912 -- 49 -- -- 49
Issuance of common stock options for
other assets -- -- -- -- 80 -- -- 80
Issuance of common stock to nonemployee
directors for services -- -- 6,000 -- 37 -- -- 37
Common stock issued for cash, net of
costs of $51 -- -- 225,000 1 1,392 -- -- 1,393
Net income -- -- -- -- -- 4,159 -- 4,159
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 734,977 1 12,712,682 63 23,732 (461) -- 23,335
Exercise of common stock warrants
for cash -- -- 107,880 1 43 -- -- 44
Exercise of stock options for cash -- -- 84,750 1 102 -- -- 103
Common stock purchased from
employees and canceled -- -- (13,470) -- (55) -- -- (55)
Issuance of common stock to
nonemployee directors for services -- -- 8,000 -- 47 -- -- 47
Exchange of Series C preferred stock for
common stock (139,946) -- 699,730 3 (3) -- -- --
Net loss -- -- -- -- -- (300) -- (300)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 595,031 $1 13,599,572 $ 68 $ 23,866 $ (761) -- $ 23,174
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
==================================================================================================================
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ (300) $ 4,159 $ 2,509
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes 373 (373) --
Depreciation and amortization 978 691 499
Decrease (increase) in accounts receivable, net 1,545 (1,503) (640)
Increase in inventories (1,091) (644) (119)
Decrease (increase) in prepaid expenses and other assets 67 (62) (118)
Increase (decrease) in accounts payable (570) 656 223
Increase (decrease) in accrued expenses and other (61) (101) 204
Other 47 37 40
-----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 988 2,860 2,598
-----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in equipment and leasehold improvements (5,881) (7,008) (3,910)
Purchases of investment securities -- (10,827) --
Proceeds from sales and maturities of investment securities 3,954 6,873 --
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,927) (10,962) (3,910)
-----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options
and warrants, net of issuance costs 92 1,743 9,663
Proceeds from issuance of long-term debt -- -- 750
Principal payments on long-term debt (401) (150) (94)
Principal payments on capital lease obligations (130) (125) (94)
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (439) 1,468 10,225
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,378) (6,634) 8,913
Cash and cash equivalents at beginning of year 2,775 9,409 496
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,397 $ 2,775 $ 9,409
=================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of amounts capitalized $ 35 $ 36 $ 73
=================================================================================================================
Cash paid during the year for income taxes $ 56 $ 355 $ --
=================================================================================================================
Non-cash investing and financing activities:
Issuance of note payable for construction in progress $ 975 $ -- $ --
Equipment leased under capital lease obligations -- -- 303
Issuance of common stock and options for services and other assets 47 117 40
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except share data)
Note 1 Description of Business and Summary of Accounting Policies
a. Description of Business
Cyanotech Corporation (Company) develops and commercializes natural
products from microalgae.The Company is currently producing microalgae
products for the nutritional supplement, aquaculture feed/pigments and
immunological diagnostics markets and is also developing microalgae-
based products for the biopesticide, chiral chemistry and food
coloring markets.
Substantially all of the Company's net sales have been
attributable to its Spirulina Pacifica(TM) products. Sales of
Spirulina Pacifica products accounted for approximately 95% of the
Company's net sales for the year ended March 31, 1998 and 98% for
the years ended March 31, 1997 and 1996.
b. Principles of Consolidation
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial statements
include the accounts of Cyanotech Corporation, its wholly owned
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Cyanotech International FSC, Inc., was formed on April 1, 1997
as a foreign sales corporation under the Internal Revenue Code.
c. Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt securities purchased with original or
remaining maturities of three months or less to be cash equivalents.
d. Investment Securities
Investment securities at March 31, 1997 consisted of U.S.Treasury,
mortgage-backed, and other interest bearing securities. The Company
classifies its debt and equity securities in one of three categories;
trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in
which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related
tax effects, on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders'
equity until realized. Realized gains and losses from the sale of
held-to-maturity and available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any available-for-sale or held-
to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned.
e. Inventories
Inventories are stated at the lower of cost which approximates first-
in, first-out) or market. Market is determined by net realizable
value.
f. Equipment and Leasehold Improvements
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of minimum lease payments or fair value of the equipment at the
inception of the lease. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives for
equipment and furniture and fixtures and the shorter of the lease
terms or estimated useful lives for leasehold improvements and
equipment under capital lease as follows:
13
<PAGE>
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)
Amortization of equipment under capital lease is included in
depreciation and amortization expense in the accompanying consolidated
financial statements.
g. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. SFAS No. 128 requires
the presentation of "Basic" earnings per share, representing income
available to common shareholders divided by the weighted average
number of common shares outstanding for the period, and "Diluted"
earnings per share, which reflects the potential dilution that could
occur if securities or other contracts to issue Common Stock shares
were exercised or converted into Common Stock shares or resulted in
the issuance of Common Stock shares that then shared in the earnings
of the Company. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. The Company adopted SFAS No. 128
for the quarter ended December 31, 1997 and has restated all prior
period earnings per share data presented.
For the year ended March 31, 1998, warrants and options to
purchase Common Stock shares of the Company and convertible preferred
stock were outstanding, but were not included in the 1998 computation
of Diluted net loss per common share because the inclusion of these
securities would have had an antidilutive effect on the net loss per
common share. As of March 31, 1998, warrants and options to aquire
431,725 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 net income (loss) per Common Share
computations for the periods presented (in thousands except share
data):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended March 31, 1998 1997 1996
=========================================================================================================================
Basic Earnings per share
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (300) $ 4,159 $ 2,509
Less: Requirement for Preferred Stock dividends (289) (294) (354)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) available to Common stockholders $ (589) $ 3,865 $ 2,155
=========================================================================================================================
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
=========================================================================================================================
Net income (loss) per Common Share $ (0.05) $ 0.31 $ 0.22
=========================================================================================================================
Diluted Earnings Per Share
Income (loss) avaliable to Common stockloders $ (589) $ 3,865 $ 2,155
Plus: Requirement for Preferred Stock dividends -- 294 354
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to Common stockholders as adjusted $ (589) $ 4,159 $ 2,509
=========================================================================================================================
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
Effect of dilutive securities
Stock options and warrants -- 340,000 994,000
Convertible perferred stock -- 3,675,000 3,925,000
-------------------------------------------------------------------------------------------------------------------------
Weighted average Common Shares outstanding as adjusted 12,909,000 16,598,000 14,502,000
=========================================================================================================================
Net income (loss) per common share $ (0.05) $ 0.25 $ 0.17
</TABLE>
h. Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $677, $587 and $351 in 1998, 1997 and
1996 respectively.
i. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their tax bases and operating
14
<PAGE>
loss carryforwards. Deferred tax assets and liabilities are measured
using enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
j. Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense was recorded
on the date of grant only if the current market price for the
underlying stock exceeded the exercise price. Effective April 1, 1996,
the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma net income per common share disclosures for
employee stock option grants made in fiscal year 1996 and future years
as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the measurement
provisions of APB No. 25 and provide the pro forma disclosures
required by SFAS No. 123.
k. Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, effective April 1, 1996. SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount the carrying
amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of SFAS No. 121 did not have
a material impact on the Company's financial position, results of
operations or liquidity.
l. Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 125 generally is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings. Adoption
of SFAS No. 125 did not have a material impact on the Company's
financial position, results of operations or liquidity.
m. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
n. New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which lists required disclosures
about capital structure that had been included in a number of
previously existing statements and opinions. SFAS No. 129 is effective
for periods ending after December 15, 1997. The Company adopted the
provisions of SFAS No. 129 as of December 31, 1997. The adoption of
SFAS No. 129 did not have a material effect on the Company's reported
financial information.
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. SFAS No. 130 requires
reclassification of financial statements for earlier periods provided
for comparative purposes. The Company will adopt the provisions of
SFAS No. 130 for the fiscal year beginning April 1, 1998.
In June 1997, the FASB also issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which
establishes standards for public business enterprises to report
information about
15
<PAGE>
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 fiscal years beginning after December 15, 1997.
SFAS No. 131 requires restatement of comparative information presented
for earlier periods. The Company will adopt the provisions of SFAS
No. 131 for the quarter beginning April 1, 1998. Management does not
expect adoption of SFAS No. 131 will have a material effect on the
Company's reported financial information.
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
recognition 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 the fiscal year beginning April 1, 1998. Management does not
expect adoption of SFAS No. 132 will have a material effect on the
Company's reported financial information.
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 estimates that the
adoption of SOP 98-1 will not have a material effect on the Company's
financial condition, results of operations or liquidity.
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 adoption of
SOP 98-5 will have a material effect on the Company's financial
condition, results of operations or liquidity.
Note 2 Investment Securities
Investment securities held as available-for-sale as of March 31, 1997
were as follows (fair value approximates amortized cost):
<TABLE>
<CAPTION>
<S> <C>
U.S. Treasury securities $ 2,454
Mortgage-backed securities 500
Other interest bearing securities 1,000
----------------------------------------------------------------------
$ 3,954
======================================================================
</TABLE>
Proceeds from the sales and maturities of investment securities
classified as available for sale amounted to $3,954 in 1998 and $6,873
in 1997. Gross realized gains on the disposal of available-for-sale
investment securities during 1998 and 1997 were nil and $25,
respectively.
Note 3 Inventories
Inventories consists of the following as of March 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
=====================================================================
Raw materials $ 103 $ 166
Work in process 362 362
Finished goods 1,524 346
Supplies 240 264
---------------------------------------------------------------------
$ 2,229 $ 1,138
=====================================================================
</TABLE>
16
<PAGE>
Note 4 Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements consists of the following as of
March 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
==================================================================================================
Equipment $ 7,791 $ 5,715
Leasehold improvements 13,285 10,935
Furniture and fixtures 94 67
Equipment under capital lease 569 602
--------------------------------------------------------------------------------------------------
21,739 17,319
Less accumulated depreciation and amortization (4,707) (3,729)
Construction in-progress 3,512 1,076
-------------------------------------------------------------------------------------------------
Equipment and leasehold improvements, net $20,544 $ 14,666
=================================================================================================
</TABLE>
Note 5 Long-Term Debt and Note Payable
Long term debt
Long-term debt consists of the following as of March 31, 1998 and
1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
=========================================================================================================================
Notes payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted quarterly;
principal payments of $12.5 and $37.5 in 1998 and 1997, respectively, due quarterly,
plus interest $ 112 $ 513
Less current maturities of long-term debt (50) (150)
------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 62 $ 363
========================================================================================================================
</TABLE>
On April 1, 1995, the Company executed a $250 note, payable in
principal installments of $12.5 each quarter through April 1, 2000,
plus interest, with principal and interest payments satisfied by
delivering to the lender an equivalent market value amount of salable
product or cash (at the lender's option). The note payable bears
interest at LIBOR plus 2%, adjusted quarterly, and is secured by
certain production equipment. For the quarter ended March 31, 1998,
interest on this note was calculated at 7.97%.
On July 11, 1995, the Company executed a $500 note, payable in
principal installments of $25 each quarter through July 1, 2000, plus
interest, with principal and interest payments satisfied by delivering
to the lender an equivalent market value amount of salable product or
cash (at the lender's option). The note payable bore interest at LIBOR
plus 2%, adjusted quarterly, and was secured by certain leasehold
improvements. This note was satisfied, in its entirety, in 1998.
Note payable
In March 1998, the Company reached an agreement with its general
contractor to convert certain trade accounts payable to a note
payable. Under the terms of the agreement, $975 of trade accounts
payable to the contractor for work completed on an expansion project
was converted to a note payable due December 31, 1998. Terms of the
note call for a principal and interest payment of $150 on April 1,
1998, monthly principal and interest payments of $100 beginning
June 1, 1998, and the balance due on December 31, 1998. The note
payable bears interest at prime plus 2%, beginning January 1, 1998,
and is secured by all of the assets of the Company. As of March 31,
1998, the interest rate was calculated at 10.5%.
Note 6 Leases
The Company leases certain equipment and a portable building under
capital leases expiring between 1999 and 2000, and leases facilities,
equipment and land under operating leases expiring between 1999 and
2025. The Company has agreed in principle to the lease of additional
land under an operating lease expiring in 2027. At March 31, 1998, the
net book value of equipment under the capital leases amounted to $399.
17
<PAGE>
Future minimum lease payments under non-cancelable operating
leases, including the effect of the aforementioned land lease expiring
in 2027, and the present value of future minimum capital lease
payments as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ending March 31: Capital leases Operating leases
=================================================================================================================
1999 $ 142 $ 338
2000 68 335
2001 -- 335
2002 -- 335
2003 -- 335
Thereafter, through 2027 -- 6,379
-----------------------------------------------------------------------------------------------------------------
Total minimum lease payments 210 $ 8,057
========
Less amount representing interest (at rates ranging from 7% to 9%) (14)
-----------------------------------------------------------------------------------------
Present value of net minimum capital lease payments 196
Less current maturities of capital lease obligations 129
-----------------------------------------------------------------------------------------
Obligations under capital lease, excluding current maturities $ 67
=========================================================================================
</TABLE>
Total rent expense under operating leases amounted to $211, $138, and
$89 for the years ended March 31, 1998, 1997, and 1996, respectively.
The land leases provide for contingent rentals in excess of
minimum rental commitments based on a percentage of the Company's
sales. Contingent rentals for the years ended March 31, 1998, 1997
and 1996 were not significant.
Note 7 Series C Preferred Stock
Series C preferred stock is convertible into common stock at the rate
of one share of preferred stock for five shares of common stock
through February 23, 2000, after which date the conversion feature is
no longer applicable. Series C preferred stock has voting rights
equal to the number of shares of common stock into which it is
convertible and has a preference in liquidation over all other series
of preferred stock of $5 per share plus any accumulated but unpaid
dividends. Holders of Series C preferred stock are entitled to 8%
cumulative annual dividends at the rate of $.40 per share; cumulative
dividends in arrears as of March 31, 1998 amount to $2,061 ($3.463
per share). Upon conversion of Series C preferred stock, cumulative
dividends in arrears on converted shares are no longer payable. The
amount of cumulative dividends foregone due to conversion during the
year ended March 31, 1998 was $457 (nil in 1997 and 1996). 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.
Note 8 Stock Options and Warrants
Stock options
At the Company's annual meeting held on August 9, 1995,
the stockholders of the Company approved the Company's 1995 Stock
Option Plan (the "1995 Plan"), reserving a total of 400,000 shares
of common stock for issuance under the Plan. At the Company's annual
meeting held on September 17, 1997, the stockholders approved an
amendment to the 1995 Plan which increased the number of shares
reserved for issuance under the Plan from 400,000 to 800,000. The 1995
Plan provides for the issuance of both incentive and non-qualified
stock options. Options are to be granted at or above the fair market
value of the Company's common stock at the date of grant and generally
become exercisable over a five-year period.
The Company also has a Non-employee Director Stock Option and
Stock Grant Plan, which was approved by stockholders in 1994 (the
"1994 Plan"). Under the 1994 Plan, and upon election to the Board of
Directors, non-employee directors are granted a ten-year option to
purchase 3,000 shares of the Company's common stock at its fair market
value on the date of grant. In addition, on the date of each Annual
Meeting of Stockholders in each year that the 1994 Plan is in
effect, each non-employee director continuing in office will
be automatically granted, without payment, 2,000 shares of common
stock that is non-transferable for six months following the date of
grant. Grants of 8,000, 6,000 and 8,000 shares of common stock were
made under the 1994 Plan in September 1997 and 1996 and August 1995,
respectively. Expense recognized as a result of these stock grants
amounted to $47, $37 and $40 for the years ended March 31, 1998,
1997 and 1996, respectively.
18
<PAGE>
In 1985, the Company adopted an Incentive Stock Option Plan
(qualified stock option plan) and authorized 200,000 shares of common
stock to be set aside for grants to officers and key employees of the
Company. In 1993, the stockholders approved an amendment to the
Incentive Stock Option Plan which increased the number of shares
reserved for issuance under this plan from 200,000 to 400,000.
Options were granted with exercise prices not lower than the fair
market value of the Company's common stock at the date of grant.
Options generally became exercisable in four equal annual
installments, commencing one year from the date of grant and expire,
if not exercised, five years from the date of grant, unless stipulated
otherwise by the Compensation and Stock Option Committee of the Board
of Directors. The Incentive Stock Option Plan terminated on March 18,
1995. Options granted prior to the plan termination date are not
affected.
At March 31, 1998, there were 466,500 additional shares available
for grant under the 1995 Plan and 63,000 additional shares available
under the 1994 Plan. The per share weighted-average fair value
of stock options granted during 1998, 1997 and 1996 was $6.31, $6.02
and $3.90, respectively, on the date of grant using a Black Scholes
option-pricing model with the following weighted-average assumptions:
1998 - expected dividend yield of 0%, risk-free interest rate of 6.6%,
expected volatility of 99%, and an expected life of 4.5 years; 1997
expected dividend yield of 0%, risk-free interest rate of 6.6%,
expected volatility of 130%, and an expected life of 4.1 years; 1996 -
expected dividend yield of 0%, risk-free interest rate of 6.2%,
expected volatility of 110%, and an expected life of 4.3 years.
The Company applies APB Opinion No. 25 in accounting for employee
stock-based compensation and, accordingly, no compensation cost has
been recognized for its employee stock options in the accompanying
financial statements. Had the Company determined compensation cost
based on the estimated fair value at the grant date for its employee
stock options under SFAS No. 123, the Company's net income (loss) and
net income (loss) per common share would have been as reflected in the
pro forma amounts below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998 1997 1996
==================================================================================================
Net income (loss) As reported $ (300) $ 4,159 $ 2,509
Pro forma $ (752) $ 3,738 $ 2,408
Net income (loss) per common share As reported Basic $ (0.05) $ 0.31 $ 0.22
Diluted $ (0.05) $ 0.25 $ 0.17
Pro forma Basic $ (0.08) $ 0.27 $ 0.21
Diluted $ (0.08) $ 0.23 $ 0.17
</TABLE>
Pro forma net income (loss) and net income (loss) per common share
information reflect only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income (loss) and
net income (loss) per common share amounts presented above because
compensation cost is reflected over the options' vesting period of
5 years, and compensation cost for options granted prior to April 1,
1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted-
Number of average
shares exercise price
=========================================================================================================
Balance at March 31, 1995 408,700 $ 1.23
Granted 101,000 5.13
Exercised (82,625) .92
Forfeited (7,375) 1.03
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 419,700 2.24
Granted 166,000 7.30
Exercised (57,912) .85
Forfeited (107,400) 1.31
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 420,388 4.42
Granted 125,000 6.31
Exercised (84,750) 1.21
Forfeited (53,913) 5.87
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 406,725 $ 5.48
=========================================================================================================
</TABLE>
19
<PAGE>
The following table summarizes information about stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------------------
Range of Number outstanding Weighted-avg. remaining Weighted-avg. Number exercisable Weighted-avg.
exercise prices at 3/31/98 contractual life exercise price at 3/31/98 exercise price
=========================================================================================================================
$.94 to $1.38 71,425 1.5 years $ 0.95 54,319 $ 0.96
$5.13 to $7.63 335,300 3.2 years $ 6.44 98,975 $ 6.17
-------------------------------------------------------------------------------------------------------------------------
$.94 to $7.63 406,725 2.9 years $ 5.48 153,294 $ 4.32
=========================================================================================================================
</TABLE>
Warrants
At March 31, 1998, the Company has warrants outstanding to acquire
25,000 shares of the Company's common stock. The warrants were issued
in consideration for loans to the Company, in consideration for and in
recognition of services performed and to certain individuals who
guaranteed notes payable by the Company. Warrants granted for loans,
services and guarantees were granted with exercise prices not lower
than the fair market value of the Company's common stock on the date
of grant. The warrants are exercisable at a price of $1.00 per share
and expire in September, 1999. Warrants to acquire 107,880, 668,120
and 891,200 shares of common stock were exercised at average prices of
$.41, $.45 and $.57 in 1998, 1997 and 1996, respectively.
Note 10 Major Customers and Export Sales
Sales to major customers for the years ended March 31, 1998, 1997 and
1996 are summarized as follows (percent of product sales):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
=========================================================================================================
Customer A *% 34% 29%
Customer B *% *% 11%
---------------------------------------------------------------------------------------------------------
*% 34% 40%
=========================================================================================================
</TABLE>
*Less than 10% of product sales.
Net product sales by geographic area for the years ended March 31,
1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
=====================================================================================================
United States $ 4,297 56% $ 4,303 38% $ 3,614 45%
Canada/South America 404 5% 851 8% 896 11%
Europe 1,284 17% 1,292 11% 747 9%
China 358 5% 3,905 34% 2,375 29%
Asia/Pacific, excluding China 1,284 17% 1,048 9% 449 6%
-----------------------------------------------------------------------------------------------------
$ 7,627 100% $ 11,399 100% $ 8,081 100%
=====================================================================================================
</TABLE>
All foreign product sales transactions are consummated in U.S. dollars
20
<PAGE>
Note 11 Income Taxes
The components of income taxes are as follows for the years ended
March 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
=================================================================================================
Current
Federal $ (13) $ 138
State (185) 235
-------------------------------------------------------------------------------------------------
(198) 373
-------------------------------------------------------------------------------------------------
Deferred
Federal 314 (352)
State 59 (21)
-------------------------------------------------------------------------------------------------
373 (373)
-------------------------------------------------------------------------------------------------
$ 175 $ --
=================================================================================================
</TABLE>
The provision for income taxes for the years ended March 31, 1997 and
1996 was nil due to the utilization of net operating loss
carryforwards.
A reconciliation of the amount of income taxes computed at the
federal statutory rate of 34% to the amount reflected in the Company's
consolidated statements of operations for the years ended March
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
=================================================================================================
Amount at the federal statutory income tax rate $ (43) $ 1,414 $ 853
State income taxes, net of federal income tax effect (83) 141 --
Benefit of operating loss carryforwards -- (1,328) (853)
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets 270 (213) --
Other 31 (14) --
-------------------------------------------------------------------------------------------------
$ 175 $ -- $ --
=================================================================================================
</TABLE>
The significant components of deferred income tax expense (benefit)
for the years ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
=======================================================================================================================
Deferred tax expense (benefit), exclusive of the change in beginnning-of-the-year valuation
allowance balance $ 103 $ (160)
Increase (decrease) in beginning-of-the-year balance of the valuation allowance for
deferred tax assets 270 (213)
-----------------------------------------------------------------------------------------------------------------------
$ 373 $ (373)
=======================================================================================================================
</TABLE>
21
<PAGE>
The tax effects of temporary differences related to various assets,
liabilities and carryforwards that give rise to deferred tax assets
and deferred tax liabilities as of March 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
====================================================================================================================
Deferred tax assets:
Net operating loss carryforwards $ 441 $ 99
Tax credit carryforwards 255 301
Other 156 145
--------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 852 545
Less valuation allowance (404) (134)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 448 411
Deferred tax liability -- equipment and leasehold improvements, principally due to differences
in depreciation and amortization (448) (38)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ 373
====================================================================================================================
</TABLE>
The valuation allowance for deferred tax assets as of April 1, 1997,
1996 and 1995 was $134, $1,675 and $2,751, respectively. The
valuation allowance increased by $270 during the year ended March 31,
1998 and decreased by $1,541 and $1,076 during the years ended
March 31, 1997 and 1996, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
Based upon the level of historical taxable income and projections
for future taxable income over the periods which the net deferred tax
assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at March 31,
1998. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At March 31, 1998, the Company has tax net operating tax loss
carryforwards available to offset future federal and state taxable
income and tax credit carryforwards available to offset future federal
income taxes as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Research and
Net operating Investment experimentation
Expires March 31, losses tax credits tax credits
==========================================================================================================
1999 $ -- $ -- $ 3
2000 -- -- 14
2001 -- 14 15
2002 -- -- 22
2003 -- -- 15
2004 -- -- 52
2005 -- -- 5
2006 400 -- --
2011 -- -- 23
2012 44 -- 9
2013 854 -- --
----------------------------------------------------------------------------------------------------------
$ 1,298 $ 14 $ 158
==========================================================================================================
</TABLE>
In addition, at March 31, 1998, the Company has alternative minimum
tax credit carryforwards of approximately $83 which are available to
reduce future federal regular income taxes over an indefinite period.
Investment tax credits will be recorded as a reduction of the
provision for federal income taxes in the year realized.
22
<PAGE>
Note 12 Fair Value of Financial Instruments
SFAS Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments as of March 31, 1998
and 1997:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term
nature of these instruments.
Investment Securities
The fair value of investment securities is based on quoted market
prices at the reporting date. The carrying value of investment
securities approximates fair value.
Note Payable
The carrying value of the note payable approximates fair value as the
interest rate of the note approximates the rate currently offered to
the Company for similar debt instruments of a comparable maturity.
Long-Term Debt
The carrying amounts approximate fair value because the instruments
reprice at market rates on a quarterly basis.
Note 13 Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan for all associates
not covered under a separate management incentive plan. Under the
401(k) profit sharing plan, 5% of pre-tax profits are allocated based
on gross wages to non-management associates on a quarterly basis.
Fifty percent of each associate's profit sharing bonus is distributed
in cash on an after-tax basis, with the remainder deposited in each
associate's 401(k) account on a pre-tax basis with a six year vesting
schedule, based on years of service with the Company. All associates
may make voluntary pre-tax contributions to their 401(k) accounts.
Compensation expense relative to this plan amounted to nil, $219 and
$132 for the years ended March 31, 1998, 1997 and 1996, respectively.
Note 14 Commitments and Contingencies
As of March 31, 1998, the Company has agreed with a construction
contractor to resume work on an 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
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 and each party will retain all rights with
respect to the termination of the contract. 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 March 31, 1998 with respect to
this expansion project approximate $2,643. Management expects to
resume work on the project on or before January 1, 1999.
The Company is involved in various claims arising in the ordinary
course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect
on the Company's consolidated financial position, results of
operations or liquidity.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Cyanotech Corporation:
We have audited the accompanying consolidated balance sheets of
Cyanotech Corporation and subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period
ended March 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cyanotech Corporation and subsidiaries as of March 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended March 31,
1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Honolulu, Hawaii
April 27, 1998
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
First Second Third Fourth Total
($ in thousands, except share data) Quarter Quarter Quarter Quarter Year
=================================================================================================================
1998
Net sales $ 1,774 $ 2,053 $ 1,564 $ 2,236 $ 7,627
Gross profit 872 885 542 838 3,137
Net income (loss) 125 (54) (286) (85) (300)
Net income (loss) per common share
Basic 0.00 (0.01) (0.03) (0.01) (0.05)
Diluted 0.00 (0.01) (0.03) (0.01) (0.05)
1997
Net sales $ 2,455 $ 2,812 $ 2,782 $ 3,350 $ 11,399
Gross profit 1,470 1,740 1,731 1,868 6,809
Net income 845 1,104 956 1,254 4,159
Net income per common share
Basic 0.06 0.08 0.07 0.09 0.31
Diluted 0.05 0.07 0.06 0.08 0.25
</TABLE>
24
<PAGE>
OFFICERS
Gerald R. Cysewski, Ph.D
President, Chief Executive Officer
and Chairman of the Board
Glenn D. Jensen
Vice President - Operations
Kelly J. Moorhead
Vice President -
Sales and Marketing
President, Nutrex, Inc.
Ronald P. Scott
Executive Vice President -
Finance & Administration
Treasurer and Secretary
BOARD OF DIRECTORS
Julian C. Baker 2
Gerald R. Cysewski, Ph.D
Eva R. Reichl 1,2
Ronald P. Scott
John T. Ushijima 1,2
Paul C. Yuen, Ph.D 1
1 Member of the Audit Committee
2 Member of the Compensation and
Stock Option Committee
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597
Wholly-Owned Subsidiaries
Nutrex, Inc.
Cyanoech International FSC, Inc.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 522-6645
Independent Accountants
KPMG Peat Marwick LLP
Honolulu, HI 96812-4150
Legal Counsel
Goodsill Anderson Quinn & Stifel
Honolulu, HI 96801-3196
Form 10-K
A copy of Cyanotech's annual report to the Securities
and Exchange Commission on Form 10-K is available
without charge upon written request to:
Secretary, Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, HI 96740
Notice of Annual Meeting
The 1998 annual meeting of stockholders will be held
on Thursday, September 17, 1998, at 7:00 p.m. at
Ala Moana Hotel
410 Atkinson Dr.,
Honolulu, Hawaii 96814
Additional Information:
As a service to our stockholders and prospective
investors, copies of Cyanotech news releases and
financial statements issued in the last 12 months are
available 24 hours a day, seven days a week on the
Internet's World Wide Web at http://
www.cyanotech.com
<PAGE>
Market for Common Equity and Related
Stockholder Matters
Cyanotech's Common Stock is traded on the Nasdaq National Market under the
symbol "CYAN." The following table sets forth the high and low selling prices as
reported by the Nasdaq Stock Market for the periods indicated.
Three Months Ended High Low
=======================================
1998
June 30, 1997 $ 7.13 $ 4.75
September 30, 1997 $ 6.38 $ 4.25
December 31, 1997 $ 5.75 $ 2.44
March 31, 1998 $ 4.06 $ 2.50
1997
June 30, 1996 $ 9.88 $ 6.25
September 30, 1996 $ 8.88 $ 5.31
December 31, 1996 $ 7.38 $ 5.88
March 31, 1997 $ 8.13 $ 2.50
Cyanotech has never declared of paid cash dividends on its Common Stock. We
currently intend to retain all of our earnings for use in the business and do
not anticipate paying any cash dividends on Series C Preferred Stock or Common
Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as of
June 17, 1998 was 1,393.
Forward-Looking Information
Certain statements herein set forth management's intentions, plans, beliefs,
expectations or predictions of the future based on current facts and analyses.
Actual results may differ materially due to a variety of factors including
reduced product demand, price competition, government action, and weather
conditions. Additional information on factors that may affect the Company and
cause actual results to differ from current expectations can be found in
Cyanotech's filings with the SEC.
<PAGE>
- --------------------------------------------
CYANOTECH CORPORATION
Hawaii Ocean and Science Technology Park
73-4460 Queen Kaahumanu Highway
Suite 102
Kailua-Kona, Hawaii 96740
Exhibit 21.1
CYANOTECH CORPORATION
---------------------
Subsidiaries of the Company
(all wholly-owned by the Company)
1. NUTREX, Inc., incorporated in the State of Hawaii.
2. CYANOTECH INTERNATIONAL FSC, Inc. a Foreign Sales Corporation, incorporated
in Barbados.
Accountants' Consent
The Board of Directors
Cyanotech Corporation:
We consent to incorporation by reference in Registration Statement Nos. 33-63789
and 33-55310 on Form S-8 of Cyanotech Corporation of our report dated April 27,
1998, relating to the consolidated balance sheets of Cyanotech Corporation and
subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1998, which report is
incorporated by reference in the 1998 annual report on Form 10-K of Cyanotech
Corporation. We also consent to incorporation by reference of our report dated
April 27, 1998 relating to the financial statement schedule of Cyanotech
Corporation in the aforementioned 1998 annual report on Form 10-K, which report
is included in said Form 10-K.
/s/KPMG Peat Marwick LLP
Honolulu, Hawaii
June 26, 1998
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