UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1997 Commission file 0-146-02
CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 91-1206026
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of
the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of
the Exchange Act:
Title of class
Common Stock, Par value $.005 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
At June 20, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $ 67,469,000.
At June 20, 1997, the number of shares outstanding of registrant's
Common Stock was 12,842,912.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission on or prior to July 25, 1997 and to be used in connection
with the Annual Meeting of Stockholders expected to be held September 17, 1997
are incorporated by reference in Part III of this Form 10-K.
PART I
Item 1. Description of Business
Except for historical information contained in this document, the
matters discussed in this report contain forward looking statements that involve
risks and uncertainties. These future risks and uncertainties could cause actual
results to differ materially.
General
Cyanotech Corporation, incorporated in 1983, develops and
commercializes natural products from microalgae. Microalgae are a diverse group
of over 30,000 species of microscopic plants which have a wide range of
physiological and biochemical characteristics and naturally contain high levels
of certain nutrients. Microalgae represent a largely unexplored and unexploited
renewable natural resource, which grow much faster than land-based plants. Under
favorable growing conditions, certain microalgae produce a new crop every week.
We currently produce microalgae products for the nutritional supplement,
aquaculture feed, and immunological diagnostics markets and are developing
microalgae-based products for the biopesticide, nutraceutical, cosmetic, and
food coloring markets. Since 1983, we have designed, developed and implemented
proprietary production and harvesting technologies, systems and processes which
eliminate many of the stability and contamination problems frequently
encountered in the production of microalgae. We believe that our technology,
systems, processes and favorable growing location permitting year-round
harvesting of microalgal products in a cost effective manner.
Substantially all of our revenue currently comes from sales of
microalgae-based "Spirulina" products for the vitamin and supplement market.
Spirulina Pacifica is a unique strain of Spirulina developed by us which
provides a vegetable-based, highly absorbable source of natural beta carotene,
mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential
amino acids and other phytonutrients. We currently market our products in the
United States and seventeen other countries through a combination of retail,
wholesale, and private label channels.
In early 1997, we introduced NatuRose(TM) to the worldwide aquaculture
industry. NatuRose is our brand name for natural astaxanthin (pronounced
"as-ta-zan-thin"). Astaxanthin is a red pigment from the microalgae,
Haematococcus, and is used in aquaculture to impart a pink to red color to
pen-raised fish and shrimp. NatuRose will compete with synthetic astaxanthin
(manufactured from petrochemicals) whose worldwide annual sales are estimated at
more than $150 million.
Products in development include genetically-engineered microalgae that
contain a natural soil toxin, Bacillus thuringiensis var. israelensis, also
known as Bti. The Bti toxin is specifically toxic to mosquitoes and black fly
larvae. Synechococcus microalgae (a natural food for mosquito larvae) were
genetically-engineered to contain the Bti toxin. We believe that, when applied
to a mosquito-infested body of water, this algae could act as an effective and
environmentally safe means of mosquito control.
Cyanotech Corporation is incorporated in Nevada. Our principal
executive offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102,
Kailua-Kona, Hawaii 96740, and our telephone number is (808) 326-1353. Unless
otherwise indicated, all references in this report to the "Company", "we", and
"Cyanotech" refer to Cyanotech Corporation, a Nevada corporation, and its wholly
owned subsidiary, Nutrex, Inc.
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Industry Background
Microalgae are a diverse group of microscopic plants that have a wide
range of physiological and biochemical characteristics and naturally contain,
among other things, high levels of proteins, amino acids, vitamins, pigments and
enzymes. Microalgae grow extremely fast, making it possible to harvest a new
crop every week utilizing optimal culture and processing technologies. The raw
materials required for microalgae growth are readily available and include
sunlight, carbon dioxide and agricultural fertilizers.
Microalgae have the following properties that make commercial
production attractive: (1) microalgae grow much faster than land grown plants,
often up to 100 times faster; (2) microalgae have a uniform cell structure with
no bark, stems, branches or leaves, which permits easier extraction of products
and higher utilization of the microalgae cells; (3) the cellular uniformity of
microalgae makes it practical to manipulate and control growing conditions in
order to optimize a particular cell characteristic; (4) microalgae contain a
wide array of vitamins and other important nutrients; and (5) microalgae contain
natural pigments and are a potential source of medical products.
Commercial applications for these microscopic plants include
nutritional products, diagnostic products, aquaculture feed and pigments,
natural food colorings and research grade chemicals. The Company believes that
microalgae could potentially be used for other commercial applications,
including genetically engineered products for the biopesticide and
pharmaceutical industries. The most significant microalgae products produced
today are algae utilized as food supplements. Animal studies, published in
scientific journals, suggest that increased dietary levels of some of the
natural compounds in algae may reduce the risk of cancer and strengthen the
immune system.
While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems over the last 20 years have failed. Because
microalgae produced for food supplements are typically cultivated and harvested
outdoors, production is affected significantly by climate, weather conditions
and the chemical composition of the culture media. Without consistent sunlight,
warm temperature, low rainfall and proper chemical balance, microalgae will not
grow as quickly, resulting in longer harvesting cycles, decreased pond
utilization and increased cost. Furthermore, microalgal growth requires a very
nutrient rich environment. The high nutrient levels in the ponds promote the
growth of unwanted organisms, or "weeds," if the chemical composition of the
ponds changes from its required balance. Once contamination occurs, a pond must
be emptied, cleaned and refilled, a process that further decreases pond
utilization and increases production costs.
Microalgae producers face relatively high harvesting and processing
costs, particularly with respect to the energy costs required to dry the
microalgae prior to packaging and the labor required throughout the harvesting
and processing cycles. Once harvested, microalgal cells contain from 85% to 95%
water which cannot be removed by mechanical means. We estimate that the cost of
conventional heat-based microalgae drying processes represents approximately 30%
of total production cost. Most drying systems also damage or destroy oxygen
sensitive nutrients in the finished microalgae products.
Cyanotech's Technology
Since 1983, we have designed, developed and implemented proprietary
production and harvesting technologies, systems and processes which reduce many
of the stability and contamination problems frequently encountered in the
production of microalgae. This
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proprietary production system is known as Integrated Culture Biology Management
(or "ICBM"). Through the application of this technology, our Spirulina culture
ponds are in production year-round without any significant loss in productivity
due to contamination and many of our production ponds, all based in Hawaii, have
been in continuous production since 1988. We believe that such an accomplishment
remains unique to Cyanotech.
In addition to the advantages of our ICBM technology, we have developed
a patented system for the recovery of carbon dioxide from our drying system
exhaust gas, called Ocean-Chill Drying. Since microalgae are essentially
microscopic "plants", they require sunlight, water, carbon dioxide and nutrients
for optimal growth. By recovering carbon dioxide that would otherwise be
released into the atmosphere, we can divert the recovered carbon dioxide back to
the algae cultures. This process provides us with another significant cost
advantage over other microalgae producers who must purchase carbon dioxide.
Moreover, Ocean-Chill Drying dries microalgal products in a low oxygen
environment, which protects oxygen sensitive nutrients. In addition, we have
developed an automated Spirulina processing system, which enables a single
operator to harvest and dry the Spirulina powder.
During the fourth quarter of fiscal 1997, we began commercial
production of our natural astaxanthin product, NatuRose. The product was
produced using our newly developed large-scale photo-bioreactor system, which we
call the PhytoMax Pure Culture System(TM), or PhytoMax PCS, which incorporates
closed-culture technology and allows for the large-scale commercial cultivation
of microalgae strains that are other- wise highly susceptible to environmental
contamination. In addition, with the PhytoMax PCS we now have the potential to
produce a broader range of new products from microalgae. Such products could
include genetically-engineered biopesticides, nutraceuticals, additional
nutritional products, poly-unsaturated fatty acids, anti-microbial agents, plant
growth regulators, and anti-viral compounds.
Another major advantage for us is the location of our production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. We believe that the combination of consistent warm temperature,
abundant sunlight, and low rainfall at this facility makes this a highly
favorable location for the economical, large-scale cultivation of microalgae. In
contrast to our facility, microalgae producers in other areas lacking these
favorable characteristics stop producing for up to four months a year because of
less favorable climate or weather conditions.
At the HOST Park, we have access to cold, clean, deep sea water that is
pumped from a depth of 2,000 feet. This sea water is used both as a source of
nutrients for microalgae culture and as a cooling agent in the Ocean-Chill
Drying process. Additionally, our facility has access to a complete industrial
infrastructure and is located 30 miles from a deep water port and adjacent to an
international airport. We believe that the combination of our ICBM technology,
the new PhytoMax PCS technology, a favorable growing location with year-round
production capabilities, the Ocean-Chill Drying process, and our automated
processing system can be successfully applied to the commercial cultivation of
other species of microalgae then those that we are now marketing.
Marketing Strategy
Our primary objective is to be the leading developer and producer of
microalgal products in our existing and future markets. We seek to achieve this
objective through the following marketing strategies:
4
o Increase the Company's Spirulina Market Share. We intend to increase
our world market share for Spirulina by expanding channels of distribution,
expanding geographically and locating new potential markets for Spirulina.
During fiscal 1997, we expanded our production capacity by 50% and also expanded
our domestic sales and marketing efforts for our Nutrex products and private
label packaged products, with the goal of increasing world market share. Our
products are sold in seventeen foreign countries and we are investigating ways
to expand the global presence of our products, including through the addition of
foreign distributors. We are also investigating potential new uses for
Spirulina.
o Promote Brand Uniqueness and Packaged Products. Cyanotech is the only
Hawaiian producer of Spirulina and has developed a unique strain of Spirulina
marketed as "Spirulina Pacifica." Our private label customers also promote the
brand uniqueness of Hawaiian Spirulina, which we believe provides competitive
differentiation in the marketplace. Our plans include increased marketing
emphasis on packaged products, which generally have higher associated gross
profit per pound than bulk products.
o Increase the Company's Natural Astaxanthin Market Share. Being the
first producer of commercial quantities of natural astaxanthin from microalgae
gives us a competitive advantage that we intend to build upon. Our customer base
for NatuRose is growing and we currently supply customers in six countries and
two industries. We intend to maintain this leadership position by expanding our
natural astaxanthin production capacity as quickly as indicated by market
demand.
o Increase Breadth of Product Offerings. We are developing and plan to
develop other new products from microalgae utilizing either our open-pond
technology or the PhytoMax PCS technology. These products include
genetically-engineered biopesticides, nutraceuticals, other nutritional
products, poly-unsaturated fatty acids, anti-microbial agents, plant growth
regulators, and anti-viral compounds. We are currently conducting
laboratory-scale work on a genetically engineered mosquitocide.
o Continue Improvement Upon Production Methodologies. During the past
thirteen years we have continued to improve upon our ICBM proprietary production
system and Ocean-Chill Drying system. Recently, we applied certain aspects of
these technologies to the development of the new PhytoMax PCS technology. We
intend to apply these to the development of additional microalgae-based products
for the biopesticide, food coloring, fine chemical and nutrition markets, as
well as other potential commercial uses.
o Promote Environmental Responsibility. We have a strong commitment to
the environment. Our Ocean-Chill Drying system recovers approximately 96% of the
carbon dioxide from our drying system exhaust gas, the ICBM technology allows us
to recycle 100% of the growing media, and the entire facility operates without
the use of pesticides or herbicides. Our production system does not create
erosion, fertilizer runoff or water pollution.
Products
Spirulina
Our principal product, accounting for 98% of net sales in the 1996 and
1997 fiscal years, is a nutritional microalgae marketed as Spirulina Pacifica.
Developed by us and sold worldwide to the health and natural foods market,
Spirulina Pacifica is unique strain of microalgae that is a highly absorbable
source of natural beta carotene, mixed carotenoids, B vitamins, GLA, protein,
essential amino acids and other phytonutrients. We believe that Spirulina
Pacifica has greater concentrations of natural beta carotene, better taste and
more consistent color than
5
competing Spirulina products. We were the first Spirulina producer to have their
products and processes certified organic and we are the only microalgae producer
to have their quality system registered under the ISO 9002-94 standards.
Spirulina is a naturally occurring microscopic plant which has been
used for thousands of years as a food. Today, Spirulina is used by the health
conscious consumer for a variety of immediate and long term effects. Spirulina
is a good source of natural phytonutrients, including carotenoids and
phycocyanin, among others. Published scientific animal studies suggest that
increased levels of some of these natural compounds in the diet may reduce the
risk of cancer and strengthen the immune system.
We produce Spirulina Pacifica in three forms: powder, flake and
tablets. Powder is used as an ingredient in health food drinks while flakes are
used as a seasoning on various foods. Tablets are consumed daily as a food
supplement.
We also produce and market two products under the Hawaiian Energizer
name. Hawaiian Energizer sports drink contains complex carbohydrates and
vegetarian protein in combination with Spirulina Pacifica, Bee Pollen and
Siberian Ginseng. Hawaiian Energizer tablets contain Spirulina Pacifica, Bee
Pollen and Siberian Ginseng.
We anticipate that sales of our Spirulina Pacifica products will
continue to constitute a substantial portion of net sales during fiscal 1998. We
increased our production capacity of Spirulina products by approximately 50%
during 1996 by constructing more Spirulina ponds and expanding our Spirulina
processing facilities. While we intend to make every effort to sell the output
from the recently expanded facility, we cannot provide any assurance that the
market for Spirulina products in general, or our Spirulina Pacifica products in
particular, will support the increased output from the 1996 expansion. Any
decrease in the overall level of sales of, or the prices for, our Spirulina
Pacifica products, whether as a result of competition, change in consumer
demand, increased worldwide supply of Spirulina or any other factors, would have
a material adverse effect on our business, financial condition and results of
operations.
Natural Astaxanthin
Astaxanthin is a red pigment used primarily in the aquaculture industry
to impart pink color to the flesh of pen-raised fish and shrimp. For example,
without astaxanthin in its diet, the flesh of a pen-raised salmon is white,
reducing its commercial value by as much as half. Wild or free swimming salmon
and shrimp acquire their pink flesh or shells in nature from eating natural
astaxanthin contained in microalgae or from eating other fish that have eaten
the microalgae. Farm-raised salmon and shrimp, however, can only acquire pink
flesh or shells from the addition of astaxanthin to their feed.
The astaxanthin market currently is dominated by a single producer,
Hoffmann-LaRoche, who produces synthetic astaxanthin from petrochemicals.
Hoffmann-LaRoche currently sells synthetic astaxanthin to the aquaculture
industry at approximately $2,500 per pure kilogram. As a result of continued
growth in the world aquaculture industry, the world market for astaxanthin is
estimated to currently exceed $150 million per year.
During the fourth quarter of fiscal 1997, we began commercial
production of our natural astaxanthin product, NatuRose. The product was
introduced to the aquaculture industry at the World Aquaculture '97 Conference
in Seattle, Washington at the end of February, 1997. We currently have customers
in six countries who use the product and we anticipate that these customers will
purchase our entire NatuRose production output during fiscal 1998.
6
Phycobiliproteins
We also produce phycobiliproteins which are sold to the medical and
biotechnology research industry. Phycobiliproteins are highly fluorescent
pigments purified from microalgae. Their spectral properties make them useful as
tags or markers in many kinds of biological assays, such as flow cytometry,
fluorescence immunoassays and fluorescence microscopy. Sales of
phycobiliproteins accounted for less than 2% of our net sales for the fiscal
year ended March 31, 1997. We anticipate that sales of phycobiliproteins will
not be material in future periods.
Product Under Development
A new product which is currently under development is a genetically
engineered mosquitocide from microalgae. This genetically engineered
mosquitocide is being developed under license from the University of Memphis.
The toxin gene from Bacillus thuringiensis var. israelensis (Bti) is cloned into
the blue-green algae Synechococcus. The bacterial toxin of Bti is very specific
to mosquitoes and black flies, while the blue-green algae is a food for mosquito
larvae. We believe that when applied to a mosquito-infested body of water, this
algae could act as an effective and environmentally safe means of control.
Development of this product is continuing and there is no assurance that a
commercial product will be achieved. Our inability to successfully develop or
commercialize additional products could have a material adverse effect on our
business, financial condition and results of operations.
Research & Development
Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. Our researchers
investigate specific microalgae identified in scientific literature for
potentially marketable products and then develop the technology to grow such
microalgae on a commercial scale.
Distribution
The majority of our bulk Spirulina sales are to companies with their
own Spirulina product lines. Many of these companies identify and promote
Cyanotech's Hawaiian Spirulina in their products. In the United States, we sell
directly to health food manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network. Orders for packaged consumer products are taken at the
store level by one of 52 regional broker representatives and shipped through one
of 25 distributors. In selected foreign markets, we have appointed exclusive
sales distributors for both bulk Spirulina and packaged consumer products.
In the years ended March 31, 1997, 1996 and 1995, international sales
accounted for approximately 62%, 55% and 42%, respectively, of our net sales. We
expect that international sales will continue to represent a significant portion
of our net sales. Our business, financial condition and results of operations
may be materially adversely affected by any difficulties associated with
managing accounts receivable from international customers, tariff regulations,
imposition of governmental controls, political and economic instability or other
trade restrictions. Although our international sales are currently denominated
in United States dollars, fluctuations in currency exchange rates could cause
our products to become relatively more expensive to customers in the affected
country, leading to a reduction in sales in that country.
7
Additionally, our largest customer, a distributor located in Hong Kong (which on
July 1, 1997 becomes a part of China) resells our products principally in
mainland China, and thus we become exposed to political, legal, economic and
other risks and uncertainties associated with doing business in China.
Customers
Spirulina
We market and sell our Spirulina products to a variety of customers,
which range in size from $500 million in annual sales to small retail stores.
Several of our major customers are businesses that were established exclusively
to market and sell Spirulina products.
Approximately 47%, 49% and 32% of Cyanotech's net sales in the years
ended March 31, 1997, 1996 and 1995, respectively, were derived from sales to
our top three customers during those periods. Although we sell to almost 300
customers, our largest customer, Life Foundate, Ltd., a Hong Kong-based natural
products marketing and distribution company, accounted for approximately 34%,
29% and 3% of our net sales in the years ended March 31, 1997, 1996 and 1995,
respectively. This unaffiliated company purchases both bulk products and
packaged consumer products from us and sells them under a private label,
principally in mainland China. Hong Kong, where our largest customer is located,
reverts to China on July 1, 1997, with possible unpredictable effects on our
business with such customer. The loss of, or significant adverse change in, the
relationship between Cyanotech and its largest customer or any other major
customer would have a material adverse effect on the Company's business,
financial condition and results of operations.
Health Food Manufacturers. Health food manufacturers often use
Cyanotech's Spirulina products as a key ingredient in their Spirulina-based
products, or as an ingredient in their health food formulations. These customers
purchase bulk powder or bulk tablets and package the products under their brand
label for sale to the health and natural food markets. Many of the products
produced by these customers are often marketed and sold in direct competition
with our Nutrex line of retail consumer products. However, we differentiate our
Nutrex products from those of our bulk customers by reserving the certified
organic line of products for sale exclusively under our Nutrex label and a few
private labels.
Private Label Customers. We currently provide private label retail
consumer products to two private label international customers. Products for
these customers are manufactured only upon receipt of an order and no finished
product inventories are maintained.
Retail Distributors. Retail distributors act as product wholesalers to
independent and chain retailers. The majority of domestic Nutrex sales in the
year ended March 31, 1997 were to 25 distributors.
Natural Products Distributors. In the year ended March 31, 1997, we
sold bulk Spirulina products to seven domestic and one foreign customer engaged
in the business of distributing natural raw materials to health and natural food
manufacturers. These distributors provide their customers with standardized
quality control, warehousing and distribution services, and charge a mark-up on
the products for providing these services. These distributors may differentiate
the products they sell, but they generally treat the products as commodities,
with price being the major determining factor in their purchasing decision.
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Natural Astaxanthin
Our NatuRose product is being sold directly to end-users and
distributors in six countries for use in two industries. We believe that our
customer base and geographic distribution should increase as additional natural
astaxanthin production capacity is added.
Competition
Spirulina
Our Spirulina Pacifica products compete with a variety of vitamins,
dietary supplements, other algal products and similar nutritional products
available to consumers. The nutritional products market is highly competitive.
It includes international, national, regional and local producers and
distributors, many of whom have greater resources than Cyanotech, and many of
whom offer a greater variety of products. Our direct competition in the
Spirulina market currently is from Dainippon Ink and Chemical Company's facility
in California and several farms in China. To a lesser extent, we compete with
numerous smaller farms in India, Thailand, Brazil and South Africa. Packaged
consumer products marketed under our Nutrex brand also compete with products
marketed by health food manufacturing customers of Cyanotech who purchase bulk
Spirulina from us and package it for retail sales. Spirulina Pacifica also
competes in certain markets with other "green superfoods," such as Chlorella (a
green microalgae with sales primarily in Japan), Aphamizomenon flos-aquae (a
blue-green algae harvested from a eutrophic lake in Oregon with sales primarily
through multilevel marketing) and cereal grasses such as barley, wheat and
kamut. A decision by another company to focus on Cyanotech's existing or target
markets or a substantial increase in the overall supply of Spirulina could have
a material adverse effect on our business, financial condition and results of
operations. While we believe that our products compete favorably on factors such
as quality, brand name recognition and loyalty, our Spirulina Pacifica products
have typically been sold at prices higher than other Spirulina products. There
can be no assurance that we will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect our business,
financial condition and results of operations.
Natural Astaxanthin
Our natural astaxanthin product, NatuRose, will compete directly with
the synthetic astaxanthin product produced and marketed worldwide by
Hoffmann-LaRoche. In addition, several other companies have announced plans to
produce natural astaxanthin from microalgae or are producing small quantities
for test purposes. Although we are unaware of any studies indicating that
natural astaxanthin has any benefits not otherwise provided by synthetic
astaxanthin, we believe there is commercial demand for a natural astaxanthin
product and that our NatuRose product can compete on the basis of product
performance and price.
Phycobiliproteins
There are four major competitors which manufacture phycobiliprotein
products for sale, including Molecular Probes, Inc., Quantify Inc., Martek
Biosciences Corporation and Prozyme Inc. Cyanotech competes with these companies
on the basis of price and quality. New synthetic fluorescent compounds have been
developed by a third party which are superior to phycobiliproteins in some
applications. The advantage of the synthetic compounds is their lower molecular
weight and, in some cases, their lower cost. While our phycobiliprotein products
may
9
not be able to compete effectively against synthetic compounds in some
applications, Cyanotech's phycobiliproteins have gained a reputation for high
quality at a competitive price.
Government Regulation
Cyanotech's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). The FDA
regulates, to varying degrees and in different ways, dietary supplements, other
food products, diagnostic medical devices and pharmaceutical products, including
their manufacture, testing, exportation, labeling, and, in some cases,
advertising. Generally, prescription pharmaceuticals and certain types of
diagnostic products, such as medical devices, are regulated more rigorously than
dietary supplements. The EPA rigorously regulates pesticides, among other types
of products.
Cyanotech is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We work with foreign
distributors to ensure our compliance with foreign laws, regulations and
policies. There can be no assurance that any changes with respect to federal,
state and foreign laws, regulations and policies, and, particularly with respect
to the FDA and EPA or other such regulatory bodies, with possible retroactive
effect, will not have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that any of our
potential products will satisfy applicable regulatory requirements.
The Federal Dietary Supplement Health and Education Act ("DSHEA")
regulates the use and marketing of dietary supplements, including vitamin
products. The DSHEA covers only dietary supplements and contains a number of
provisions that differentiate dietary supplements from other foods. The DSHEA
also sets forth standards for adulteration of dietary supplements or ingredients
thereof and establishes current food Good Manufacturing Practices ("cGMP")
requirements for dietary supplements. It also provides detailed requirements for
the labeling of dietary supplements, including nutrition and ingredient
labeling. We currently believe that our Spirulina Pacifica, marketed as a
dietary supplement, is exempt from FDA regulation as a food additive.
Our Spirulina manufacturing processes and our contract bottlers are
required to adhere to cGMP as prescribed by the FDA. We believe that we are
currently in compliance with all applicable cGMP and other food regulations.
Compliance with relevant cGMP requirements can be onerous and time consuming,
and there can be no assurance that Cyanotech can continue to meet relevant FDA
manufacturing requirements for existing products or meet such requirements for
any future products. Ongoing compliance with food cGMP and other applicable
regulatory requirements are monitored through periodic inspections by state and
federal agencies, including the FDA, the Hawaii Department of Health and
comparable agencies in other countries. Our processing facility is also
inspected annually for organic certification by Quality Assurance International
and for Kosher certification by the Kosher Overseers Association. The use of
Spirulina as a food additive for seasoning on salads or pasta or for such other
food uses has not been cleared by the FDA. We currently market the product for
these food uses on the basis of our belief that its use in these food
applications is generally recognized as safe and therefore is not subject to FDA
pre-market clearances as a food additive.
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Our natural astaxanthin product, NatuRose, will need FDA clearance for
use as a feed color additive in the United States. We believe that no regulatory
approval is required for use of NatuRose as a colorant in feeds or foods in
major markets outside the United States. The process of obtaining clearances for
a new color additive is expensive and time consuming. Extensive information is
required on the toxicity of the additive, including carcinogenicity studies and
other animal testing. No assurances can be given that any of our proposed
products intended for use as a feed additive will be approved by the FDA on a
timely basis, if at all.
As in vitro diagnostic medical device components, phycobiliprotein
products do not currently require pre-market clearances by the FDA. However, as
a component of a medical device, they can nonetheless still be subject to other
various medical device requirements, including cGMP requirements.
Patents, Licenses and Trademarks
Although we regard our proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to our success, we rely
on a combination of trade secret, contract, patent, copyright and trademark law
to establish and protect our rights in our products and technology. There can be
no assurance that we will be able to protect our technology adequately or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. Cyanotech has had one United States patent issued to it. Litigation in
the United States or abroad may be necessary to enforce our patent or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, results of operations and financial condition.
Additionally, although currently there are no pending claims or lawsuits that
have been brought against us, if any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license would be available on terms
acceptable or favorable to us, if at all.
Associates
Cyanotech employed 78 associates as of March 31, 1997, of which 74 are
full-time. Approximately 31 associates are involved in the harvesting and
production process, 10 are involved in research and product development, and the
remainder are involved in sales, administration and support. Management believes
that its relations with its associates are good. We have not experienced
difficulty in attracting personnel and none of our associates are represented by
a labor union.
Effective April 1, 1995, Cyanotech implemented a profit sharing plan
for all associates not covered under a separate management incentive plan. Under
the profit sharing plan, 5% of pre-tax profits are allocated based on gross
wages to non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax basis,
the remainder is deposited in each associate's 401(k) account on a pre-tax basis
with a six year vesting schedule, based on years of service with the Company.
Cyanotech's success depends to a significant extent upon the continued
service of Dr. Gerald R. Cysewski, its President and Chief Executive Officer,
and other members of the Company's executive management. The loss of any of such
key executives could have a material adverse effect on our business, financial
condition or results of operations. Furthermore, our
11
future performance depends on our ability to identify, recruit and retain key
management personnel. The competition for such personnel is intense, and there
can be no assurance that we will be successful in such efforts. We are also
dependent on our ability to continue to attract, retain and motivate production,
distribution, sales and other personnel, of which there can be no assurance. The
failure to attract and retain such personnel could have a material adverse
effect on our business, financial condition and results of operations.
Item 2. Description of Properties
Cyanotech Corporation is located in Kailua-Kona, Hawaii, at the HOST
Park and also owns a 2,500 square foot sales office in a light industrial area
located approximately four miles from the HOST Park. The HOST Park facility
consists of approximately 90 leased acres containing production ponds, a
processing facility, a laboratory, administrative offices and additional space
for production ponds. All products are produced at this facility. The property
is leased from the State of Hawaii under a 30-year commercial lease expiring in
2025. During 1997, we reached an agreement with the State of Hawaii to lease an
additional 88 acres at the HOST Park, which will increase the total acreage
under lease to 178 acres. We plan to use this new property to construct a larger
NatuRose production facility and additional culture ponds that would use the
PhytoMax PCS technology. We believe that there is sufficient available land at
the HOST Park to meet our currently planned future needs. Our Nutrex, Inc.
subsidiary maintains sales offices in Kailua-Kona, Hawaii and Burlingame,
California.
Item 3. Legal Proceedings
Cyanotech is not currently subject to any material pending legal
proceedings.
We maintain product liability insurance in limited amounts for products
involving human consumption. In the opinion of management, broader product
liability insurance coverage is prohibitively expensive at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1997.
12
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
Until February 17, 1996, Cyanotech's Common Stock was quoted on The
Nasdaq SmallCap Market. On that date, our Common Stock began trading on the
Nasdaq National Market under the symbol "CYAN." The following table sets forth
the high and low bid quotation per share of our Common Stock on The Nasdaq
SmallCap Market and the Nasdaq National Market, as the case may be, for the
periods indicated. Quotations from The Nasdaq SmallCap Market are from the
Nasdaq Monthly Statistical Summary Report, and reflect inter-dealer prices,
without retail mark-up or commission, and may not represent actual transactions.
Three Months Ended High Low High Low
- ------------------ ------- -------- ------- ------
June 30, 1996 and 1995........... $ 9-1/8 $ 6-1/4 $ 3-3/8 $ 1-1/8
September 30, 1996 and 1995... $ 8-1/8 $ 5-5/16 $ 6-5/8 $ 2-11/16
December 31, 1996 and 1995... $ 7-3/8 $ 5-1/8 $ 14-7/8 $ 5-1/8
March 31, 1997 and 1996........ $ 8-1/8 $ 5-1/2 $ 11-3/8 $ 6-1/4
Cyanotech has never declared or paid cash dividends on its Common
Stock. Holders of Series C Preferred Stock are entitled to cumulative annual
dividends at the rate of $.40 per share if and when declared by the Board of
Directors. Cyanotech may not pay dividends on the Common Stock until it has paid
accumulated dividends on the Series C Preferred Stock. Cumulative dividends in
arrears on the Series C Preferred Stock as of March 31, 1997 amounted to
$2,251,000 ($3.063 per share). We currently intend to retain all of our earnings
for use in the business and do not anticipate paying any cash dividends on
Series C Preferred Stock or Common Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as
of June 17, 1997 was 1,450.
13
Item 6. Selected Financial Data
(in thousands, except earnings per share)
Years ended March 31,
----------------------------------------------
1997 1996 1995 1994 1993 (a)
------- ------- ------- ------- -------
Net Sales $11,399 $ 8,081 $ 4,150 $ 2,697 $ 2,485
Income from Operations 3,751 2,571 718 220 131
Net Income 4,159 2,509 769 204 255
Net Income per Common Share $0.25 $0.17 $0.05 $0.02 $0.03
Cash and Investment Securities $6,729 $9,409 $ 496 $ 866 $ 107
Total Assets 26,015 19,716 6,212 5,132 2,677
Long-term Debt and
Capital Lease Obligations 559 838 184 109 425
Stockholders' Equity $23,335 $17,316 $5,104 $4,160 $ 1,521
Average Shares Outstanding 16,598 14,548 13,589 13,330 9,159
(a) The Company changed its fiscal year end from December 31, to March 31,
effective April 1, 1993. Accordingly, the 1993 information is for the period
January 1, 1992 through December 31, 1992.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
This report on Form 10-K contains forward-looking statements regarding
the future performance of Cyanotech and future events that involve risk and
uncertainties that could cause actual results to differ materially from the
statements contained herein. This document, and the other documents that we file
from time to time with the Securities and Exchange Commission, such as our
reports on Form 10-K, Form 10-Q, Form 8-K, and our proxy materials, contain
additional important factors that could cause actual results to differ from our
current expectations and the forward-looking statements contained herein.
All references to years in this Item 7 are to fiscal years.
During 1997, substantially all of our resources were dedicated to the
production of Spirulina Pacifica, a nutritional microalgae. We sell Spirulina
Pacifica to health food manufacturers, health food distributors and retail
consumers on a worldwide basis. Through the application of our Integrated
Culture Biology Management ("ICBM") technology, we maintain continuous algae
cultures and produce a new crop from each of our 67 algal culture ponds
(aggregating approximately 60 acres) approximately every week, on average.
Historically, the majority of our net sales have been derived from
sales of bulk Spirulina Pacifica products, which have lower associated gross
profit (measured in dollars) but higher associated gross margin (measured as a
percentage of net sales) than our packaged consumer products. Accordingly, an
increase in the percentage of net sales attributable to bulk products would
increase gross margin. Conversely, an increase in the percentage of net sales
attributable to packaged consumer products would decrease gross margin but
likely increase gross profit. We expect that the product mix will vary from
period to period, and a decrease in orders from a customer such as our largest
current customer which purchases primarily packaged consumer products could
require us to reallocate greater portions of our production capacity to lower
gross profit bulk products.
14
During the second half of 1997, we began limited commercial production
of our natural astaxanthin product, NatuRose, and commenced full commercial
production in March, 1997. Also in March 1997, we announced that we had received
approval from the State of Hawaii to lease an additional 88 acres for the
purpose of expanding NatuRose production capacity. Expansion onto the 88 acres
is currently planned to be accomplished in three increments; the first increment
is planned to include 13 acres of culture systems, together with harvesting and
processing equipment sufficient to accommodate the entire site. Completion of
the first phase is planned for June 1998.
Since 1992, we have experienced substantial growth in our revenues and
operations, and have undergone substantial changes in our business that have
placed significant demands on the management, working capital and financial and
management control systems of Cyanotech. Our current and future expansion plans
may also place a significant strain on the management, working capital and
financial control systems of Cyanotech. Although we believe that our systems and
controls are adequate to address our current needs, there can be no assurance
that such systems will be adequate to address our future business expansion
plans. Our results of operations will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from any expansion and there can be no assurance that any expansion
will be profitable or that it will not adversely affect our results of
operations. In addition, the success of any current or future expansion plans
will depend in part upon our ability to continue to improve and expand our
management and financial control systems, to attract, retain and motivate key
personnel, and to raise additional required capital. There can be no assurance
that we will be successful in such respects.
Results of Operations
The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:
Year Ended March 31,
1997 1996
------ ------
Net sales..................................... 100.0% 100.0%
Cost of sales.............................. 40.3 43.5
------ ------
Gross profit.................................. 59.7 56.5
------ ------
Operating expenses:
Research and development................... 5.1 4.4
General and administrative................. 12.6 14.8
Sales and marketing........................ 9.1 5.5
------ ------
Total operating expenses................ 26.8 24.7
------ ------
Income from operations.................. 32.9 31.8
------ ------
Other income (expense):
Interest income............................ 3.9 0.3
Interest expense........................... (0.4) (1.1)
Other income, net.......................... 0.1 -
------ ------
Total other income (expense)............ 3.6 (0.8)
------ ------
Net income.............................. 36.5% 31.0%
------ ------
------ ------
15
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales for the year ended March 31, 1997 were $11,399,000, a 41.1%
increase over net sales of $8,081,000 for the year ended March 31, 1996. The
increase in net sales during the year ended March 31, 1997 is attributable to
significantly higher production and sales of bulk Spirulina powder and tablets
and increased sales of packaged consumer products which carry a higher sales
price than bulk Spirulina Pacifica products. The increased production is the
result of Spirulina production expansions that were completed in February and
November 1996.
International sales represented 62% and 55% of total net sales for the
years ended March 31, 1997 and 1996, respectively. This increase reflects the
Company's continuing emphasis on developing international markets and higher
sales of packaged consumer products into Asian retail markets. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 34% and 29% of Cyanotech's net sales in the
years ended March 31, 1997 and 1996, respectively. Hong Kong becomes a part of
China on July 1, 1997 with possible unpredictable effects on Cyanotech's
business with such customer. Loss of, or a significant decrease in such
business, would have a material adverse effect on our business, financial
condition and results of operations.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit increased to 59.7% of
net sales for the year ended March 31, 1997 from 56.5% of net sales for the year
ended March 31, 1996. The increase in gross profit from the prior year is
primarily attributable to economies of scale related to the production of both
bulk and packaged consumer Spirulina Pacifica products, but was partially offset
by lower average selling prices for bulk products.
Operating Expenses
Operating expenses increased by $1,066,000 and were 26.8% of net sales
for the year ended March 31, 1997, against 24.7% of net sales for the year ended
March 31, 1996, with significant increases in all three components.
Research and Development. Expenditures for research and development
increased 67.2% to $587,000, or 5.1% of net sales, for the year ended March 31,
1997, from $351,000, or 4.4% of net sales, for the year ended March 31, 1996.
The increase from the prior year is primarily the result of the development work
done on the natural astaxanthin product and the research work done on the
mosquitocide product. Research and development costs are expected to increase
further during fiscal 1998 as we continue to optimize the PhytoMax PCS
technology and also increase the research activities directed at the
mosquitocide product.
General and Administrative. General and administrative expenses
increased 20.2% to $1,437,000, or 12.6% of net sales, for the year ended March
31, 1997, from $1,196,000, or 14.8% of net sales, for the year ended March 31,
1996. The increase is due to higher staff-related expenditures, the accrual of
associate incentive bonuses indexed to the Company's profitability during the
year ended March 31, 1997, and higher insurance costs.
Sales and Marketing. Sales and marketing expenses increased 132.4% to
$1,034,000, or 9.1% of net sales, for the year ended March 31, 1997, from
$445,000, or 5.5% of net sales, for the year ended March 31, 1996. The increase
from the prior year is primarily due to higher staff-related expenditures, and
increased domestic and international marketing efforts associated
16
with higher sales of packaged consumer products and with the introduction of the
NatuRose product.
Other Income (Expense)
Other income increased to $408,000, or 3.6% of net sales, for the year
ended March 31, 1997, from other expense of $62,000, or (0.8%) of net sales, for
the year ended March 31, 1996. The increase from the prior year is primarily
related to increased earnings on larger cash and investment securities balances.
Net Income
Net income increased to $4,159,000, or 36.5% of net sales, for the year
ended March 31, 1997, from $2,509,000, or 31.0% of net sales, for the year ended
March 31, 1996. The increase in net income is primarily a result of increased
production and sales of bulk and packaged consumer Spirulina Pacifica products.
Fiscal 1996 Compared to Fiscal 1995
Net Sales
Net sales for the year ended March 31, 1996 were $8,081,000, a 95%
increase over net sales of $4,150,000 for the year ended March 31, 1995. The
increase in net sales during the year ended March 31, 1996 was attributable to
price increases, significantly higher production and sales of bulk Spirulina
powder and tablets and increased sales of packaged consumer products which carry
a higher sales price than bulk Spirulina Pacifica products. The increased
production is the result of Spirulina production expansions that were completed
in May, September and December of 1995 and February of 1996.
International sales represented 55% and 42% of total net sales for the
years ended March 31, 1996 and 1995, respectively. This increase reflected our
increased emphasis on developing international markets and higher sales of
packaged consumer products into Asian retail markets. Our largest customer, a
Hong Kong-based natural products marketing and distribution company, accounted
for approximately 29% and 3% of Cyanotech's net sales in the years ended March
31, 1996 and 1995, respectively.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit increased to 56.5% of
net sales for the year ended March 31, 1996 from 45.2% of net sales for the year
ended March 31, 1995. The increase in gross profit was attributable to higher
prices and higher production levels resulting in the absorption of fixed
manufacturing overhead costs over a significantly increased sales volume during
the fiscal year.
Operating Expenses
Operating expenses decreased to 24.7% of net sales for the year ended
March 31, 1996, from 27.9% of net sales for the year ended March 31, 1995. Its
components were:
17
Research and Development. Expenditures for research and development
increased to 4.4% of net sales for the year ended March 31, 1996, from 4.1% of
net sales for the year ended March 31, 1995. The increase from the prior year
was primarily the result of the research work done on beta carotene for the
joint venture partnership with Hauser Chemical Research, Inc.
and on the natural astaxanthin product.
General and Administrative. General and administrative expenses
decreased to 14.8% of net sales for the year ended March 31, 1996, from 16.5% of
net sales for the year ended March 31, 1995. The increase in absolute dollars
was due to the accrual of associate incentive bonuses indexed to the Company's
profitability during the year ended March 31, 1996, higher insurance costs, and
compensation expense associated with grants of Common Stock to non-employee
directors.
Sales and Marketing. Sales and marketing expenses increased 48% to
$445,000, or 5.5% of net sales, for the year ended March 31, 1996, from
$301,000, or 7.3% of net sales, for the year ended March 31, 1995. The increase
in absolute dollars from the prior year was primarily due to expenses related to
increasing domestic and international marketing efforts and higher staff-related
expenditures.
Proportionate Share of Loss of Joint Venture
Proportionate share of loss of joint venture represents the Company's
50% ownership interest in a joint venture with Aquasearch, Inc. for the
development of astaxanthin. The loss in the year ended March 31, 1995 represents
services, and facilities and equipment use that was contributed to the joint
venture by Cyanotech. The joint venture was terminated in November 1994 by
mutual consent and the Company has no further obligation under the joint venture
arrangement.
Net Income
Net income increased to $2,509,000, or 31.0% of net sales, for the year
ended March 31, 1996, from $769,000, or 18.5% of net sales, for the year ended
March 31, 1995. The increase in net income was primarily a result of increased
production and sales of bulk and packaged consumer Spirulina Pacifica products.
Inflation during the years ended March 31, 1997, 1996 and 1995 did not
have a material impact on the Company's operations.
Variability of Results
Cyanotech Corporation was formed in 1983 and did not become profitable
on an annual basis until fiscal 1992 (the twelve month period ended December 31,
1992). As of March 31, 1997, our accumulated deficit was $461,000. There can be
no assurance that we will be consistently profitable on either a quarterly or an
annual basis. We have experienced quarterly fluctuations in operating results
and anticipate that these fluctuations may continue in future periods. Future
operating results may fluctuate as a result of changes in sales levels to our
largest customers, new product introductions, weather patterns, the mix between
sales of bulk products and packaged consumer products, start-up costs associated
with new facilities, expansion into new markets, sales promotions, competition,
increased energy costs, the announcement or introduction of new products by our
competitors, changes in our customer mix, and overall trends in the market for
Spirulina products. While a significant portion of our expense levels are
relatively fixed, and the timing of increases in expense levels is based in
large
18
part on our forecasts of future sales, if net sales are below expectations in
any given period, the adverse impact on results of operations may be magnified
by our inability to adjust spending quickly enough to compensate for the sales
shortfall. We may also choose to reduce prices or increase spending in response
to market conditions, which may have a material adverse effect on our results of
operations.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of that loss would be
based on the fair value of the asset. Generally, SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted the provisions of SFAS No. 121 effective April 1, 1996. The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial condition, results of operations or liquidity.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of
accounting for stock-based compensation, but does not require an entity to adopt
the new method for preparing its basic financial statements. For entities not
adopting the new method, SFAS No. 123 requires footnote disclosure of pro forma
net income and net income per share information as if the fair value based
method had been adopted. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 31,
1995. Effective April 1, 1996, the Company adopted SFAS No, 123 and elected to
continue to apply the provisions of APB No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
125 generally is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company does
not expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997. The Company will adopt SFAS No. 128 in the third quarter of
fiscal 1998. SFAS No. 128 requires the presentation of "Basic" earnings per
share, representing income available to common shareholders divided by the
weighted average number of common shares outstanding during the period, and
"Diluted" earnings per share, which is similar to the current presentation of
fully diluted earnings per share. SFAS No. 128 requires restatement of all prior
period earnings per share presented. Management does not expect adoption of SFAS
No. 128 to have a material impact on the Company's previously reported earnings
per share, financial position, results of operations or liquidity.
19
Liquidity and Capital Resources
Cyanotech's cash and investment securities decreased $2,680,000 to
$6,729,000 during the fiscal year ended March 31, 1997. The decrease is
primarily attributable to increased capital expenditures for equipment and
leasehold improvements.
Cash flows provided by operating activities were $2,860,000 in 1997
compared to $2,598,000 in 1996. The primary source of 1997 cash flows from
operating activities was net income and an increase in accounts payable offset
by increases in accounts receivable , inventories, prepaid expenses and other
assets and a decrease in accrued expenses and other.
Cash flows used in investing activities were $10,962,000 in 1997
compared to $3,910,000 in 1996. The primary uses of cash flows in investing
activities during 1997 were for capital expenditures and net purchases of
investment securities.
Cash flows provided by financing activities were $1,468,000 in 1997
compared to $10,225,000 in 1996. The primary sources of cash flows provided by
financing activities were $1,393,000 in net proceeds from the sale of 225,000
shares of common stock to the underwriters of a public stock offering and
$350,000 from the exercise of common stock options and warrants, offset by
principal payments on long-term debt and capital lease obligations.
As of March 31, 1997, we had construction commitments totaling
$903,000, which we intend to fund from cash reserves and anticipated cash flows
from future operations. We presently estimate that our existing capital
resources and anticipated cash flows from future operations will be sufficient
to fund current operations. However, we plan to spend, subject to available
financing, approximately $12.3 million on capital expenditures during the next
two fiscal years, primarily to expand NatuRose production on the newly leased 88
acres and existing capital resources and anticipated cash flows from future
operations will not be sufficient to fund these capital expenditures. We are
currently seeking an increase in our credit facilities to meet any anticipated
shortfall. We currently have a $1,000,000 bank line of credit which is
collateralized by a certificate of deposit and an additional $1,000,000 bank
line of credit which is collateralized by all the assets of the Company. As of
March 31, 1997, there were no borrowings under either of these credit lines.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed herewith begin on page F-1.
20
Selected Quarterly Financial Data (unaudited)
(in thousands, except earnings per share)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
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 $ 0.05 $ 0.07 $ 0.06 $ 0.08 $ 0.25
1996
Net Sales $ 1,568 $ 2,056 $ 2,348 $ 2,109 $ 8,081
Gross Profit 778 1,112 1,298 1,375 4,563
Net Income 413 605 711 780 2,509
Net Income per Common Share $ 0.03 $ 0.04 $ 0.05 $ 0.05 $ 0.17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
Part III
Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act
Identification of Directors
The information required by this Item is incorporated by reference from the
Sections captioned "Proposal One: Election of Directors," " Security Ownership
of Certain Beneficial Owners and Management" and "Compliance with Section 16(a)
of the Exchange Act" contained in Cyanotech's definitive 1997 Proxy Statement.
Identification of Executive Officers
The executive officers of Cyanotech and their ages and positions as of March 31,
1997 are as follows:
Name Age Position
---- --- --------
Gerald R. Cysewski, Ph.D. ..... 48 Chairman of the Board, President and
Chief Executive Officer
Glenn D. Jensen. .............. 38 Vice President - Operations
Brent F. Kunimoto.............. 38 Vice President - Sales and Marketing
and
President, Nutrex, Inc.
Kelly J. Moorhead.............. 41 Vice President - International Sales
Ronald P. Scott................ 42 Executive Vice President - Finance
and Administration, Secretary,
Treasurer
Dr. Cysewski co-founded Cyanotech in 1983 and has served as a director since
that time. Since March 1990, Dr. Cysewski has served as President and Chief
Executive Officer of Cyanotech and in October 1990 was also appointed to the
position of Chairman of the Board. From 1988 to November 1990, he served as Vice
Chairman and from 1983 to June, 1996 he served as Scientific Director of the
Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae research
and development at Battelle Northwest, a major contract research and development
firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the
Department of Chemical and Nuclear Engineering at the University of California,
Santa Barbara, where he received a two-year grant from the National Science
Foundation to develop a culture system for blue-green algae. Dr. Cysewski
received his doctorate in Chemical Engineering from the University of California
at Berkeley.
Mr. Jensen has served as Vice President - Operations since May 1993. He joined
Cyanotech in 1984 as Process Manager and was promoted to Production Manager in
1991, in which position he served until his promotion to Vice President -
Operations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a
plant engineer at a Spirulina production facility, Cal-Alga, near Fresno,
California, which ceased to do business in 1983. Mr. Jensen holds a B.S. degree
in Health Science from California State University, Fresno.
Mr. Kunimoto joined Cyanotech in August 1996 and has served as Vice
President - Sales and Marketing since that time. From 1989 to August 1996, Mr.
Kunimoto worked as a Marketing Manager and Marketing Director for Nestle Food
Company. From 1987 to 1989, he was an Assistant Product Manager for General
Mills, Inc.. From 1982 to 1985 he was a Senior Consultant for Arthur Andersen &
Company. Mr. Kunimoto received a B.S. degree in Economics and an M.B.A degree
from the University of California at Los Angeles.
22
Mr. Moorhead has served as Vice President - International Sales of the Company
since August 1996. From December 1991 to August 1996 he served as Vice President
- - Sales and Marketing and President of Nutrex, Inc. From August 1987 to December
1991, he served as Vice President - Production of the Company. Mr. Moorhead
joined Cyanotech as Production Biologist in December 1984. Prior to joining
Cyanotech, Mr. Moorhead worked at the Oceanic Institute in Honolulu, Hawaii
where he conducted research on production of Spirulina from agricultural wastes.
Mr. Moorhead holds a B.S. degree in Aquatic Biology from the University of
California, Santa Barbara.
Mr. Scott was appointed to the Board of Directors of the Company in November
1995, has served as Executive Vice President - Finance and Administration since
August 1995, and has served as Secretary and Treasurer since November 1990 and
June 1990, respectively. From December 1990 until August 1995 Mr. Scott served
as Vice President - Finance and Administration. From September 1990 to December
1990, Mr. Scott served as Controller. From 1989 to 1990, he was Assistant
Controller for PRIAM Corporation, a manufacturer of Winchester disk drives. From
1980 to 1989, he served in various accounting management positions with Measurex
Corporation, a manufacturer of industrial process control systems. Mr. Scott
holds a B.S. degree in Finance and Management from California State University,
San Jose, and an M.B.A. degree from the University of Santa Clara.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
section captioned "Executive Compensation and Other Information" and "Director
Renumeration" contained in Cyanotech's definitive 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in Cyanotech's definitive 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
section captioned "Certain Transactions" contained in Cyanotech's definitive
1997 Proxy Statement.
23
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibit Number Document Description
- -------------- ---------------------
3.1 Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1996, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1995, file no. 0-14602.)
4.1 Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form SB-2 filed on February 28, 1996, file
no. 333-00951.)
4.2 Terms of the Series C Preferred Stock as Revised 1991.
(Incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990, file no. 0-14602.)
10.1 1985 Incentive Stock Option Plan dated March 18, 1985,
as amended. (Incorporated by reference to Exhibit 4(d)
to the Company's Registration Statement on Form S-8
filed on December 3, 1992, file no. 33-55310.)
10.2 Stockholders Agreement dated as of May 17, 1993.
(Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1994, file no. 0-14602.)
10.3 1994 Non-Employee Directors Stock Option and Stock
Grant Plan. (Incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1994, file no. 0-14602.)
10.4 Supply and Exclusive Marketing Agreement between the
Company and Nutrition Gandalf dated July 8, 1994.
Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated
by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December
31, 1995, file no. 0-14602.)
10.5 Facilities Rental Agreement dated November 1, 1994
between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.13.)
(Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.6 Facilities Rental Agreement dated December 2, 1994
between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.11.)
(Incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.7 Term Loan Agreement dated April 1, 1995 between
Spirulina International B.V. and the Company.
(Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
24
10.8 License Agreement by and between The University of
Memphis and the Company dated June 19, 1995.
(Incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1995, file no. 0-14602.)
10.9 Term Loan Agreement dated July 11, 1995 between the
Company and Satoshi Sakurada.(Incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995,
file no. 0-14602.)
10.10 1995 Stock Option Plan for Cyanotech Corporation dated
August 9, 1995, as amended. (Incorporated by reference
to Exhibit 4(c) to the Company's Registration Statement
on Form S-8 filed on October 27, 1995, file no.
33-63789.)
10.11 Sub-Lease Agreement between the Company and Natural
Energy Laboratory of Hawaii Authority dated December
29, 1995. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995, file no. 0-14602.)
10.12 Preferred Stock Conversion and Registration Rights
Agreement by and between the Company and Firemen's
Insurance Company of Newark, New Jersey, dated as of
February 20, 1996. (Incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement
on Form SB-2 as filed on February 28, 1996, file no.
333-00951.)
10.13 Registration Rights Agreement by and between the
Company and American Cynamid Company dated as of
February 20, 1996.(Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form
SB-2 as filed on February 28, 1996, file no 333-00951.)
10.14 Credit Agreement between the Company and First Hawaiian
Bank, dated February 27, 1997.
10.15 Promissory Note between the Company and First Hawaiian
Bank, dated February 27, 1997.
10.16 Security Agreement between the Company and First
Hawaiian Bank, dated February 27, 1997.
11.1 Statement re: Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors
27 Financial Data Schedule.
- ---------------------
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fourth
quarter of the 1997 fiscal year.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
June, 1997.
CYANOTECH CORPORATION
By:/s/Gerald R. Cysewski
---------------------
Gerald R. Cysewski, Ph.D
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Gerald R. Cysewski Chairman of the Board, President June 23, 1997
- --------------------- and Chief Executive Officer -------------
Gerald R. Cysewski, Ph.D (Principal Executive Officer)
/s/Ronald P. Scott Executive Vice President - June 23, 1997
- --------------------- Finance and Administration, -------------
Ronald P. Scott Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/Julian C. Baker Director June 26, 1997
- --------------------- -------------
Julian C. Baker
/s/Eva R. Reichl Director June 21, 1997
- --------------------- -------------
Eva R. Reichl
/s/John T. Ushijima Director June 25, 1997
- --------------------- -------------
John T. Ushijima
/s/Paul C. Yuen Director June 23, 1997
- --------------------- -------------
Paul C. Yuen
26
CYANOTECH CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-7 to F-20
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cyanotech Corporation:
We have audited the accompanying consolidated balance sheets of Cyanotech
Corporation and subsidiary as of March 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cyanotech
Corporation and subsidiary as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Honolulu, Hawaii
April 28, 1997
F-2
CYANOTECH CORPORATION
Consolidated Balance Sheets
March 31, 1997 and 1996
(in thousands, except share data)
Assets 1997 1996
---------- ----------
Current assets:
Cash and cash equivalents $ 2,775 $ 9,409
Investment securities 3,954 --
Accounts receivable 2,791 1,288
Inventories 1,138 494
Prepaid expenses 155 120
Deferred tax assets 373 --
---------- ----------
Total current assets 11,186 11,311
Equipment and leasehold improvements, net 14,666 8,349
Other assets 163 56
---------- ----------
Total assets $ 26,015 $ 19,716
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 150 $ 150
Current maturities of capital lease obligations 130 126
Accounts payable 1,508 852
Accrued expenses and other 333 434
---------- ----------
Total current liabilities 2,121 1,562
Long-term debt, excluding current maturities 363 513
Obligations under capital lease, excluding current
maturities 196 325
---------- ----------
Total liabilities 2,680 2,400
---------- ----------
Stockholders' equity:
Preferred stock 1 1
Common stock of $.005 par value, authorized
25,000,000 shares at March 31, 1997 and
18,000,000 shares at March 31, 1996; issued
and outstanding 12,712,682 shares at
March 31, 1997 and 11,755,650 shares at
March 31, 1996 63 59
Additional paid-in capital 23,732 21,876
Accumulated deficit (461) (4,620)
---------- ----------
Total stockholders' equity 23,335 17,316
---------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 26,015 $ 19,716
========== ==========
See accompanying notes to consolidated financial statements.
F-3
CYANOTECH CORPORATION
Consolidated Statements of Income
Years ended March 31, 1997, 1996 and 1995
(in thousands, except per-share data)
1997 1996 1995
---------- ---------- ----------
Net sales $ 11,399 $ 8,081 $ 4,150
Cost of sales 4,590 3,518 2,275
---------- ---------- ----------
Gross profit 6,809 4,563 1,875
---------- ---------- ----------
Operating expenses:
Research and development 587 351 171
General and administrative 1,437 1,196 685
Sales and marketing 1,034 445 301
---------- ---------- ----------
Total operating expenses 3,058 1,992 1,157
---------- ---------- ----------
Income from operations 3,751 2,571 718
---------- ---------- ----------
Other income (expense):
Interest income 443 32 17
Interest expense, net of interest
costs capitalized of $23 in 1997
and nil in 1996 and 1995 (47) (90) (27)
Other income (expense), net 12 (4) 98
Proportionate share of loss of
joint venture -- -- (37)
---------- ---------- ----------
Total other income (expense) 408 (62) 51
---------- ---------- ----------
Net income $ 4,159 $ 2,509 $ 769
========== ========== ==========
Net income per common share $ 0.25 $ 0.17 $ 0.05
========== ========== ==========
Weighted average number of common
shares and common share equivalents 16,598 14,548 13,589
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
CYANOTECH CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1997, 1996 and 1995
(in thousands, except share data)
Preferred stock Common Stock
--------------------------------------- Additional Total stock-
Par Par paid-in Accumulated Treasury holders'
Shares value Shares value capital deficit stock equity
-----------------------------------------------------------------------------------------------
Balances at March 31, 1994 2,118,507 $ 2 8,736,506 $ 44 $ 12,042 $ (7,898) $ (30) $ 4,160
Common stock issued for cash, net
of costs of $6 -- -- 146,969 1 144 -- -- 145
Exercise of common stock warrants
for cash -- -- 38,400 -- 24 -- -- 24
Exercise of stock options for cash -- -- 4,300 -- 3 -- -- 3
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock (21,030) -- 105,150 -- -- -- -- --
Conversion of 100,000 shares of
Series E preferred stock to
20,000 shares of common stock (100,000) -- 20,000 -- -- -- -- --
Issuance of common stock warrants
for services -- -- -- -- 3 -- -- 3
Net Income -- -- -- -- -- 769 -- 769
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1995 1,997,477 $ 2 9,051,325 $ 45 $ 12,216 $ (7,129) $ (30) $ 5,104
Exercise of common stock warrants
for cash -- -- 891,200 5 507 -- -- 512
Exercise of stock options for cash -- -- 82,625 -- 76 -- -- 76
Issuance of common stock to
nonemployee directors for
services -- -- 8,000 -- 40 -- -- 40
Exchange of Series A preferred
stock for common stock (1,250,000) (1) 250,000 1 -- -- -- --
Exchange of Series B preferred
stock for common stock (12,500) -- 2,500 -- -- -- -- --
Retirement of treasury stock -- -- (30,000) -- (30) -- 30 --
Common stock issued for cash, net of
costs of $556 -- -- 1,500,000 8 9,067 -- -- 9,075
Net income -- -- -- -- -- 2,509 -- 2,509
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 734,977 $ 1 11,755,650 $ 59 $ 21,876 $ (4,620) -- $ 17,316
Exercise of common stock warrants
for cash -- -- 668,120 3 298 -- -- 301
Exercise of stock options for cash -- -- 57,912 -- 49 -- -- 49
Issuance of common stock options for
other assets -- -- -- -- 80 -- -- 80
Issuance of common stock to nonemployee
directors for services -- -- 6,000 -- 37 -- -- 37
Common stock issued for cash, net
of costs of $51 -- -- 225,000 1 1,392 -- -- 1,393
Net income -- -- -- -- -- 4,159 -- 4,159
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 734,977 $ 1 12,712,682 $ 63 $ 23,732 $ (461) -- $ 23,335
=============================================================================================
See accompanying notes to consolidated financial statements.
F-5
CYANOTECH CORPORATION
Consolidated Statements of Cash Flows
Years ended March 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
--------- --------- --------
Cash flows from operating activities:
Net income $ 4,159 $ 2,509 $ 769
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (373) -- --
Proportionate share of loss of joint venture -- -- 37
Depreciation and amortization 691 499 338
Increase in accounts receivable (1,503) (640) (186)
(Increase) decrease in inventories (644) (119) 23
Increase in prepaid expenses and other
assets (62) (118) (17)
Increase in accounts payable 656 223 63
Increase (decrease) in accrued expenses
and other (101) 204 (28)
Other 37 40 --
--------- --------- ---------
Net cash provided by operating activities 2,860 2,598 999
--------- --------- ---------
Cash flows from investing activities:
Investment in equipment and leasehold
improvements (7,008) (3,910) (1,442)
Investment in joint venture -- -- (37)
Purchases of investment securities (10,827) -- --
Proceeds from sales and maturities of
investment securities (6,873) -- --
--------- --------- ---------
Net cash used in investing activities (10,962) (3,910) (1,479)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and exercise of stock options and warrants 1,743 9,663 175
Proceeds from issuance of long-term debt -- 750 --
Principal payments on long-term debt (150) (94) (13)
Principal payments on capital lease
obligations (125) (94) (52)
-------- -------- --------
Net cash provided by financing activities 1,468 10,225 110
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (6,634) 8,913 (370)
Cash and cash equivalents at beginning of year 9,409 496 866
-------- -------- ---------
Cash and cash equivalents at end of year $ 2,775 $ 9,409 $ 496
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest,
net of amounts capitalized $ 36 $ 73 $ 26
======== ======== ========
Cash paid during the year for income taxes $ 355 $ -- $ --
======== ======== ========
Non-cash investing and financing activities:
Equipment leased under capital lease
obligations $ -- $ 303 $ 166
======== ======== ========
Issuance of common stock and options
for services and other assets $ 117 $ 40 $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
CYANOTECH CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997, 1996, and 1995
(all amounts in thousands, except share data)
(1) Description of Business and Summary of Accounting Policies
(a) Description of Business
Cyanotech Corporation (Company) develops and commercializes natural
products from microalgae. The Company is currently producing
microalgae products for the nutritional supplement and immunological
diagnostics markets and is also developing microalgae-based products
for the aquaculture feed/pigments, biopesticide and food coloring
markets.
Substantially all of the Company's net sales have been attributable
to its Spirulina Pacifica products. Sales of Spirulina Pacifica
products accounted for approximately 98% of the Company's net sales
for the years ended March 31, 1997 and 1996 and 97% for the year
ended March 31, 1995.
(b) Principles of Consolidation
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial
statements include the accounts of Cyanotech Corporation and its
wholly owned subsidiary, Nutrex, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt securities purchased with
original remaining maturities of three months or less to be cash
equivalents.
(d) Investment Securities
Investment securities at March 31, 1997 consist of U.S. Treasury,
mortgage-backed, and other interest bearing securities. The Company
classifies its debt and equity securities in one of three
categories; trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose
of selling them in the near term. Held-to-maturity security are
those securities in which the Company has the ability and intent to
hold the security until maturity. All other securities not included
in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of
the related tax effects, on available-for-sale securities are
excluded from earnings and are reported as a separate component of
stockholders equity until realized. Realized gains and losses from
the sale of held-to-maturity and available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as
an adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned.
F-7
(e) Inventories
Inventories are stated at the lower of cost (which approximates
first-in, first-out) or market.
(f) Equipment and Leasehold Improvements
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of minimum lease payments or fair value of the equipment at
the inception of the lease. Depreciation and amortization are
provided using the straight-line method over the estimated useful
lives for equipment and furniture and fixtures and the shorter of
the lease terms or estimated useful lives for leasehold improvements
and equipment under capital lease as follows:
Equipment 3 to 10 years
Leasehold improvement remaining lease term (3 to 29 years)
Furniture and fixtures 7 years
Equipment under capital lease lease term (3 to 5 years)
Amortization of equipment under capital lease is included in
depreciation and amortization expense in the accompanying
consolidated financial statements.
(g) Investments in Joint Ventures
Investments in joint ventures and other investments for which the
Company has the ability to exercise significant influence over the
operating and financing policies of the enterprise are accounted for
under the equity method.
(h) Net Income Per Common Share
Net income per common share is computed based on net income after
preferred stock dividend requirements and the weighted average
number of common shares outstanding during the year, adjusted to
reflect the assumed exercise of outstanding stock options and
warrants and the conversion of preferred stock to the extent such
items have a dilutive effect on the computation. Fully diluted net
income per common share is not materially different from primary net
income per common share.
(i) Research and Development
Research and development costs are expensed as incurred. Research
and development costs amounted to $587, $351 and $171 in 1997, 1996
and 1995, respectively.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their tax bases and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted income tax rates
applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
F-8
(k) Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price for the underlying stock exceeded the exercise price.
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma net income per common share
disclosures for employee stock option grants made in fiscal year
1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, effective April 1, 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations or
liquidity.
(m) Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 125
generally is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. This Statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No.
125 will have a material impact on the Company's financial position,
results of operations or liquidity.
(n) Earnings per share
In February 1997, the FASB issued SFAS No. 128, Earnings per Share.
SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1997. The Company will adopt SFAS No. 128 in the
third quarter of fiscal 1998. SFAS No. 128 requires the presentation
of "Basic" earnings per share, representing income available to
common shareholders divided by the weighted average number of common
shares
F-9
outstanding for the period, and "Diluted" earnings per share, which
is similar to the current presentation of fully diluted earnings per
share. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. Management does not expect
adoption of SFAS No. 128 to have a material impact on the Company's
previously reported earnings per share, financial position, results
of operations or liquidity.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
(p) Reclassifications
Certain 1995 and 1996 amounts were reclassified to conform with 1997
presentations. Such reclassifications had no effect on the
previously reported results of operations.
(2) Investment Securities
Investment securities held as available-for-sale as of March 31, 1997 are
as follows (fair value approximates amortized cost):
U.S. Treasury securities $ 2,454
Mortgage-backed securities 500
Other interest bearing securities 1,000
--------
$ 3,954
========
Proceeds from the sales and maturities of investment securities classifed
as available for sale amounted to $6,873 in 1997. Gross realized gains and
losses on the disposal of investment securities available-for-sale during
1997 totaled $25 and nil, respectively. At March 31, 1997, scheduled
maturities for investment securities classified as available- for-sale were
less than twelve months for $1,000 and between twelve and twenty months for
$2,954.
(3) Inventories
Inventories consists of the following as of March 31, 1997 and 1996:
1997 1996
-------- --------
Raw materials $ 166 $ 73
Work in process 362 200
Finished goods 346 105
Supplies 264 116
-------- --------
$ 1,138 $ 494
======== ========
F-10
(4) Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements consists of the following as of March
31, 1997 and 1996:
1997 1996
-------- --------
Equipment $ 5,715 $ 3,538
Leasehold improvements 10,935 6,815
Furniture and fixtures 67 36
Equipment under capital lease 602 602
-------- --------
17,319 10,991
Less accumulated depreciation and
amortization (3,729) (3,038)
Construction in-progress 1,076 396
-------- --------
Equipment and leasehold improvements, net $14,666 $ 8,349
======== ========
(5) Long-Term Debt and Bank Lines of Credit
Long-term Debt
Long-term debt consists of the following as of March 31, 1997 and 1996:
1997 1996
-------- ---------
Notes payable at the London Interbank
Offered Rate (LIBOR) plus 2%,
adjusted quarterly; principal payments of
$37.5 due quarterly, plus interest $ 513 $ 663
Less current maturities of long-term debt (150) (150)
-------- ---------
Long-term debt, excluding current maturities $ 363 $ 513
======== =========
On April 1, 1995, the Company executed a $250 note, payable in principal
installments of $12.5 each quarter through April 1, 2000, plus interest,
with principal and interest payments satisfied by delivering to the lender
an equivalent market value amount of salable product or cash (at the
lender's option). The note payable bears interest at LIBOR plus 2%,
adjusted quarterly, and is secured by certain production equipment.
On July 11, 1995, the Company executed a $500 note, payable in principal
installments of $25 each quarter through July 1, 2000, plus interest, with
principal and interest payments satisfied by delivering to the lender an
equivalent market value amount of salable product or cash (at the lender's
option). The note payable bears interest at LIBOR plus 2%, adjusted
quarterly, and is secured by certain leasehold improvements.
F-11
Bank lines of credit
As of March 31, 1997, the Company has available two bank lines of credit
aggregating $2,000, both expiring on January 31, 1998, collateralized by
investment securities and other assets of the Company. As of March 31,
1997, there were no borrowings under either of these credit lines.
(6) Leases
The Company leases certain equipment and a portable building under capital
leases expiring between 1998 and 2000, and leases facilities, equipment and
land under operating leases expiring between 1997 and 2025. At March 31,
1997, the net book value of equipment under the capital leases amounted to
$472.
Future minimum lease payments under non-cancelable operating leases and the
present value of future minimum capital lease payments as of March 31, 1997
are as follows:
Capital leases Operating leases
--------------- ----------------
Year ending March 31:
1998 $ 152 $ 117
1999 142 114
2000 68 112
2001 -- 112
2002 -- 112
Thereafter, through 2025 -- 2,659
--------------- ----------------
Total minimum lease payments 362 $ 3,226
================
Less amount representing interest
(at rates ranging from 7% to 19%) 36
---------------
Present value of net minimum
capital lease payments 326
Less current maturities of
capital lease obligations 130
--------------
Obligations under capital lease,
excluding current maturities $ 196
==============
Total rent expense under operating leases amounted to $138, $89, and $48
for the years ended March 31, 1997, 1996, and 1995, respectively.
(7) Investment in Joint Venture
On August 31, 1994, the Company formed a joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") to develop, produce, and market
natural beta carotene. On July 1, 1996, the joint venture was terminated by
mutual consent. Under the terms of the termination agreement, Hauser had
until March 31, 1997 to acquire a license to use the Company's beta
F-12
carotene technology. The consideration for the license was to be the
payment of aggregate out-of-pocket research and development expenses
incurred by the Company on behalf of the joint venture since August 1,
1994, which totaled $380. Prior to March 31, 1997, the Company was informed
by Hauser that it would not acquire the Cyanotech technology license. All
research and development costs incurred by the Company on behalf of the
joint venture were expensed as incurred.
(8) Series C Preferred Stock
Series C preferred stock is convertible into common stock at the rate of
one share of preferred stock for five shares of common stock through
February 23, 2000, after which date the conversion feature is no longer
applicable. Series C preferred stock has voting rights equal to the number
of shares of common stock into which it is convertible and has a preference
in liquidation over all other series of preferred stock of $5 per share
plus any accumulated but unpaid dividends. Holders of Series C preferred
stock are entitled to 8% cumulative annual dividends at the rate of $.40
per share; cumulative dividends in arrears as of March 31, 1997 amount to
$2,251 ($3.063 per share). Upon conversion of Series C preferred stock,
cumulative dividends in arrears on converted shares are no longer payable.
The amount of cumulative dividends foregone due to conversion during the
year ended March 31, 1995 was $36. The consent of Series C preferred
stockholders is required to modify their present rights or sell all or
substantially all of the Company's assets.
The Series C convertible preferred stock was originally issued with a
redemption feature. Terms of the Series C preferred stock were modified in
February 1991 to eliminate such redemption feature.
Preferred stock as of March 31, 1997 and 1996 consists of the following:
1997 1996
---------- ----------
Preferred stock, authorized 5,000,000
shares; $.001 par value, issued and
outstanding:
Series C, 8% cumulative, convertible;
734,977 shares; liquidation
value $5.00 per share plus unpaid
accumulated dividends $ 1 $ 1
========== ==========
(9) Stock Options and Warrants
Stock options
At the Company's annual meeting held on August 9, 1995, the stockholders of
the Company approved the Company's 1995 Stock Option Plan (the "1995
Plan"), reserving a total of 400,000 shares of common stock for issuance
under the Plan. The 1995 Plan provides for the issuance of both incentive
and non-qualified stock options. Options are to be granted at or above the
fair market value of the Company's common stock at the date of grant and
generally become exercisable over a five-year period.
The Company also has a Non-employee Director Stock Option and Stock Grant
Plan, which was approved by stockholders in 1994 (the "1994 Plan"). Under
the 1994 Plan and upon election to the Board of Directors, non-employee
directors are granted a ten-year option to purchase 3,000
F-13
shares of the Company's common stock at its fair market value on the date
of grant. In addition, on the date of each Annual Meeting of Stockholders
in each year that the 1994 Plan is in effect, each non-employee director
continuing in office will be automatically granted, without payment, 2,000
shares of common stock that is non-transferable for six months following
the date of grant. Grants of 6,000 and 8,000 shares of common stock were
made under the 1994 Plan in September 1996 and August 1995, respectively.
Expense recognized as a result of these stock grants amounted to $37 and
$40 for the years ended March 31, 1997 and 1996, respectively.
In 1985, the Company adopted an Incentive Stock Option Plan (qualified
stock option plan) and authorized 200,000 shares of common stock to be set
aside for grants to officers and key employees of the Company. In 1993, the
stockholders approved an amendment to the Incentive Stock Option Plan which
increased the number of shares reserved for issuance under this plan from
200,000 to 400,000. Options were granted with exercise prices not lower
than the fair market value of the Company's common stock at the date of
grant. Options generally became exercisable in four equal annual
installments, commencing one year from the date of grant and expire, if not
exercised, five years from the date of grant, unless stipulated otherwise
by the Compensation and Stock Option Committee of the Board of Directors.
The Incentive Stock Option Plan terminated on March 18, 1995. Options
granted prior to the plan termination date are not affected.
At March 31, 1997, there were 142,100 additional shares available for grant
under the 1995 Plan and 71,000 additional shares available under the 1994
Plan. The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $6.02 and $3.90 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected dividend yield of 0%, a risk-free interest
rate of 6.6%, expected volatility of 130%, and an expected life of 4.1
years; 1996 - expected dividend yield of 0%, risk-free interest rate of
6.2%, expected volatility of 110%, and an expected life of 4.3 years.
The Company applies APB Opinion No. 25 in accounting for employee
stock-based compensation and, accordingly, no compensation cost has been
recognized for its employee stock options in the accompanying financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for its employee stock options under SFAS No. 123,
the Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
1997 1996
-------- --------
Net income As reported $ 4,159 $ 2,509
Pro forma $ 3,738 $ 2,408
Net income
per common share As reported $0.25 $0.17
Pro forma $0.23 $0.17
Pro forma net income and net income per common share reflects only options
granted during 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in
the pro forma net income and net income per common share amounts presented
above because compensation cost is reflected over the options' vesting
period of 5 years, and compensation cost for options granted prior to April
1, 1995 is not considered.
F-14
Stock option activity during the periods indicated is as follows:
Weighted-
average
Number exercise
of shares price
--------- ---------
Balance at March 31, 1994 223,000 $1.00
Granted 213,900 1.45
Exercised (4,300) .74
Forfeited (23,900) 1.08
Balance at March 31, 1995 408,700 1.23
Granted 101,000 5.13
Exercised (82,625) .92
Forfeited (7,375) 1.03
Balance at March 31, 1996 419,700 2.24
Granted 166,000 7.30
Exercised (57,912) .85
Forfeited (107,400) 1.31
--------- ---------
Balance at March 31, 1997 420,388 $4.42
========= =========
The following table summarizes information about stock options outstanding
at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
Weighted-avg. Weighted- Weighted-
Range of Number remaining avg. Number avg.
exercise outstanding contractual exercise exercisable exercise
prices at 3/31/97 life price at 3/31/97 price
- -------------- ------------ ------------- --------- ----------- ---------
$0.56 27,550 0.2 years $0.56 27,550 $0.56
$.94 to $1.38 76,975 2.5 years $0.95 39,987 $0.97
$1.50 55,363 1 year $1.50 55,363 $1.50
$5.13 to $7.63 260,500 3.8 years $6.47 47,800 $5.82
------- -------
$.56 to $7.63 420,388 3 years $4.42 170,700 $2.43
======= =======
Warrants
At March 31, 1997, the Company has warrants outstanding to acquire 132,880
shares of the Company's common stock. The warrants were issued in
consideration for loans to the Company, in consideration for and in
recognition of services performed and to certain individuals who guaranteed
notes payable by the Company. Warrants granted for loans, services and
guarantees were granted with exercise prices not lower than the fair market
value of the Company's common stock on the date of grant. The warrants are
exercisable at prices ranging from $.40 to $1.00 per share and expire on
various dates from May 1997 to September 1999. Warrants to acquire
F-15
668,120, 891,200 and 38,400 shares of common stock were exercised at
average prices of $.45, $.57 and $.63 in 1997, 1996 and 1995, respectively.
(10) Major Customers and Export Sales
Sales to major customers for the years ended March 31, 1997, 1996 and 1995
are summarized as follows (percent of product sales):
1997 1996 1995
---------- ---------- ----------
Customer A 34% 29% *
Customer B * 11% 17%
Customer C * * 13%
---------- ---------- ----------
34% 40% 30%
========== ========== ==========
*Less than 10% of product sales.
Net product sales by geographic area for the years ended March 31, 1997,
1996 and 1995 are summarized as follows:
1997 1996 1995
------------- ------------- -------------
United States $ 4,303 38% $ 3,614 45% $ 2,412 58%
Canada 851 8% 896 11% 696 17%
Europe 1,292 11% 747 9% 621 15%
China 3,905 34% 2,375 29% 125 3%
Asia/Pacific,
excluding China 1,048 9% 449 6% 296 7%
------- ---- ------- ---- ------- ----
$11,399 100% $ 8,081 100% $ 4,150 100%
======= ==== ======= ==== ======= ====
All foreign product sales transactions are consummated in U.S. dollars.
F-16
(11) Income Taxes
The components of income taxes are as follows for the year ended March 31,
1997:
Federal State Total
---------- ---------- ----------
Current $ 138 $ 235 $ 373
Deferred (352) (21) (373)
---------- ---------- ----------
$ (214) $ (214) $ --
========== ========== ==========
The provision for income taxes for the years ended March 31, 1997 and 1996
was nil due to the utilization of net operating loss carryforwards.
A reconciliation of the amount of income taxes computed at the federal
statutory rate of 34% to the amount provided in the Company's consolidated
statements of income for the years ended March 31, 1997, 1996 and 1995
areas follows:
1997 1996 1995
--------- --------- ---------
Amount at the federal
statutory income tax rate $ 1,414 $ 853 $ 261
State income taxes, net of
federal income tax effect 141 -- --
Benefit of operating loss
carryforwards (1,328) (853) (261)
Change in the beginning-of-the-year
balance of the valuation
allowance for deferred tax assets (213) -- --
Other (14) -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
The significant components of deferred income tax benefit for the year
ended March 31, 1997 are as follows:
Deferred tax benefit, exclusive of the change in
beginning-of-the-year valuation allowance balance
Decrease in beginning-of-the-year balance of the $ (160)
valuation allowance for deferred tax assets (213)
----------
$ (373)
==========
F-17
The tax effects of temporary differences related to various assets,
liabilities and carryforwards that give rise to deferred tax assets and
deferred tax liabilities as of March 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 99 $ 1,427
Tax credit carryforwards 301 147
Other 145 169
--------- ----------
Gross deferred tax assets 545 1,743
Less valuation allowance (134) (1,675)
--------- ------------
Net deferred tax assets 411 68
Deferred tax liability - equipment and
leasehold improvements (38) (68)
========= ============
Net deferred tax asset $ 373 $ --
========= ============
The valuation allowance for deferred tax assets as of April 1, 1996, 1995
and 1994 was $1,675, $2,751 and $3,051, respectively. The valuation
allowance decreased by $1,541, $1,076 and $300 during the years ended March
31, 1997, 1996 and 1995, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the net deferred tax assets
are deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowance at March 31, 1997. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income during the carryforward period are
reduced.
F-18
At March 31, 1997, the Company has tax net operating tax loss carryforwards
available to offset future federal and state taxable income and tax credit
carryforwards available to offset future federal income taxes as follows:
Net Research and
Expires operating Investment experimentation
March 31, losses tax credits tax credits
--------- --------- ----------- ---------------
1998 $ -- $ -- $ 3
1999 -- -- 14
2000 -- 14 15
2001 -- -- 22
2002 -- -- 15
2003 -- -- 52
2004 -- -- 5
2005 292 -- --
2011 -- -- 23
--------- ----------- --------------
$ 292 $ 14 $ 149
========= =========== ==============
In addition, at March 31, 1997, the Company has alternative minimum tax
credit carryforwards of approximately $138 which are available to reduce
future federal regular income taxes, over an indefinite period.
Investment tax credits will be recorded as a reduction of the provision for
federal income taxes in the year realized.
(12) Fair Value of Financial Instruments
SFAS Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. Note 2 presents the estimated fair values of
investment securities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of March 31, 1997:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term
nature of these instruments.
Long-Term Debt
The carrying amounts approximate fair value because the instruments reprice
at market rates on a quarterly basis.
F-19
(13) Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan for all associates not
covered under a separate management incentive plan. Under the 401(k) profit
sharing plan, 5% of pre-tax profits are allocated based on gross wages to
non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax
basis, the remainder is deposited in each associate's 401(k) account on a
pre-tax basis with a six year vesting schedule, based on years of service
with the Company. All associates can also make voluntary pre-tax
contributions to their 401(k) account. Compensation expense relative to
this plan amounted to $219, $132 and nil for years ended March 31, 1997,
1996 and 1995, respectively.
(14) Commitments and Contingencies
At March 31, 1997, the Company has entered into commitments for capital
expenditures totaling $903.
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-20