CYANOTECH CORPORATION
1998 ANNUAL REPORT
MICROALGAE: ORGANIC FACTORIES OF THE FUTURE.
SELECTED FINANCIAL DATA
Years ended March 31,
- ----------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996 1995 1994
==============================================================================================
Results of Operations
Net sales $ 7,627 $ 11,399 $ 8,081 $ 4,150 $ 2,697
Gross profit 3,137 6,809 4,563 1,875 1,202
Income (loss) from operations (300) 3,751 2,571 718 220
Net income (loss) (300) 4,159 2,509 769 204
Net income (loss) per common share
Basic $ (0.05) $ 0.31 $ 0.22 $ 0.05 $ (0.02)
Diluted $ (0.05) $ 0.25 $ 0.17 $ 0.05 $ (0.02)
Average shares outstanding
Basic 12,909 12,583 9,583 8,895 8,602
Diluted 12,909 16,598 14,502 8,895 8,602
Selected Balance Sheet Data
Cash and investment securities $ 1,397 $ 6,729 $ 9,409 $ 496 $ 866
Total assets 25,667 26,015 19,716 6,212 5,132
Long-term debt and
capital lease obligations 129 559 838 184 109
Stockholders' equity $ 23,174 $ 23,335 $ 17,316 $ 5,104 $ 4,160
CYANOTECH
Cyanotech is harnessing the vast potential of microalgae to produce high-value
natural products for important market applications worldwide.
The Company's products include Spirulina Pacifica(TM), a nutrient-rich
dietary supplement; NatuRose(TM), a natural astaxanthin product used in the
worldwide aquaculture industry; and phycobiliproteins, which are fluorescent
pigments used in the immunological diagnostics market. The Company is also
developing microalgae-based products for the biopesticide markets and, through
an exclusive license agreement with The Scripps Research Institute, a patented
aldolase catalytic antibody with potential applications in industrial synthesis
for the manufacture of pharmaceuticals, fine chemicals and agricultural
products.
Cyanotech's technologies, systems, processes and favorable growing location
on the Kona coast of Hawaii permit year-round growing and harvesting of its
products in a cost-effective manner. Its production system operates without the
use of pesticides and herbicides, and does not create erosion, fertilizer runoff
or water pollution.
Cyanotech is the only microalgae company in the world to be ISO-9002
registered.
Cyanotech markets its products in the United States and foreign markets
through retail, wholesale and private label channels. Nutrex, Inc., a
wholly-owned subsidiary, produces and markets spirulina-based nutritional
products for the retail market.
Additional company and product information is available on Cyanotech's
World Wide Web site at www.cyanotech.com.
The wide range of products Cyanotech is beginning to produce -- from nutritional
supplements and animal feed ingredients to industrial enzymes and biopesticides
- -- is proving the Company's concept of microalgae as broadly capable organic
factories for high-value, diverse applications.
CYANOTECH PRODUCT PIPELINE: ROBUST AND VARIED
PRODUCT INTRODUCED MARKETS
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Spirulina Pacifica(TM) 1985 Health & Natural Foods
A nutrient-rich dietary supplement, CYAN's unique strain is a vegetable-based, Over $30 million at
highly absorbable source of natural beta carotene, mixed carotenoids and other wholesale
phytonutrients, B vitamins, gamma linolenic acid (GLA), protein and essential (CYAN $7.1 million sales in
amino acids. FY98)
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Phycobiliproteins 1988 Immunological Diagnostics
Fluorescent pigments used for medical testing. Nominal
(CYAN $250,000 sales
in FY98)
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NatuRose(TM) Natural Astaxanthin 1997 Aquaculture/Animal
A red pigment used primarily in the aquaculture industry to impart color to the Feed/Pigments
flesh of pen-raised fish and shrimp. Competes with synthetic astaxanthin made Over $150 million
from petrochemicals. (one supplier)
(CYAN $250,000 sales
in FY98)
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Aldolase Catalytic Antibody 1998 Industrial Enzymes
Genetically engineered antibody may have numerous applications in industrial Undefined
synthesis, including certain anti-cancer compounds. Has efficiency rate and (varied industrial/
operative mechanism equal to natural enzyme, but with a broader scope of pharmaceutical
reactivity. Exclusive license from The Scripps Research Institute. First applications)
commercially available aldolase catalytic antibody.
- ------------------------------------------------------------------------------------------------------------------------------------
Mosquitocide 1999 Biopesticides
CYAN is genetically engineering a natural toxin from Bacillus thuringiensis var. Over $500 million
israelensis (Bti) into the blue-green algae, Synechococcus, a food for mosquito (worldwide need enormous)
larvae. When applied to a mosquito-infested body of water, the algae could act
as an effective and environmentally safe means of control.
- ------------------------------------------------------------------------------------------------------------------------------------
Other Products 2000+ Undefined
CYAN plans to develop other high-value products from microalgae. These could
include genetically-engineered pharmaceuticals, nutraceuticals, and
poly-unsaturated fatty acids.
- ------------------------------------------------------------------------------------------------------------------------------------
1
TO OUR STOCKHOLDERS
Fiscal 1998 was a profound disappointment for Cyanotech after years of steady
growth. But it was principally attributable to reduced sales to a single
Spirulina purchaser, which had been the Company's largest customer, accounting
for 34% of total sales in FY97 vs. 5% in FY98. These figures show both the
opportunity and the problem of relying on a single product and customer. The
customer is a network marketer whose sales in China were halted by the Chinese
government for much of the past fiscal year along with all network marketers
there, then banned altogether. As a result, Cyanotech's sales decreased to $7.6
million in FY98 from $11.4 million in FY97 with a net loss of $300,000 in FY98
vs. net income of $4.2 million in FY97. To return to profitability at lower
demand levels, we reduced our workforce by 25% in the fourth quarter. By
contrast, fiscal 1999 and future years look more positive due to the variety and
potential of products on the market and under development.
SPIRULINA PACIFICA(TM)
With the reduced sales to China, we worked hard during FY98 to broaden
our customer base for Spirulina. An indicator of progress is our relationship
with the General Nutrition Center (GNC) chain of retail stores in the U.S. We
are now selling our branded Nutrex(TM) Spirulina Pacifica products through 1,000
GNC stores nationwide, up from 200 stores at the beginning of FY98. We also have
increased marketing efforts in Hawaii, signed additional distributors overseas,
and are investigating new markets, such as in poultry feed where preliminary
studies indicate that Spirulina contributes to a significantly improved immune
system in poultry with the possibility of eliminating antibiotics. The Spirulina
market overall is not large, but we are working to increase our already strong
share.
NATUROSE(TM) ASTAXANTHIN
We hoped that NatuRose would be used by the aquaculture industry from
its introduction in March 1997, but we did not account for the close customer
relationships in a market characterized by a single supplier and the caution
shown in accepting a new product. During FY98, prospective customers in 12
countries engaged in more than 30 feeding trials of NatuRose with all completed
studies to date showing positive results. Although we only sold trial quantities
of astaxanthin during the fiscal year, commercial order flow has begun in the
first quarter of FY99. We also have signed a Letter of Intent with a
multi-national life sciences company ($15 billion in annual sales to 150-plus
countries) to distribute NatuRose, initially to its aquaculture customers in
Europe.
MOSQUITOCIDE
Once NatuRose was launched in 1997, we turned our development attention
to the promising potential mosquitocide we had licensed in FY 96 from the
University of Memphis. In the summer of 1997, we hired a senior molecular
biologist experienced in natural bacterial toxins to lead the mosquitocide
effort. The original genetically engineered microalgae we had licensed included
only one of the four BTI toxins, all of which are harmless to humans but deadly
2
to mosquito larvae. We are currently focused on adding up to three additional
Bti toxins to significantly increase the product's toxicity and to lessen the
risk of mosquito larvae evolving a resistance to a single-toxin product. We plan
to have the mosquitocide in limited commercial production for worldwide testing
by the end of the current fiscal year. The market potential is unknown at this
time, but the need for safe-for-human biopesticides is growing as the incidence
of mosquito-borne malarial and other diseases is increasing in both developing
and developed countries.
SCRIPPS ALDOLASE ANTIBODY
In April 1998, we signed an exclusive agreement with The Scripps
Research Institute to produce the Institute's patented aldolase catalytic
antibody 38C2 in microalgae. Previously, the antibody has only been produced in
small quantities in animal cells in the laboratory. We have long maintained that
microalgae provide an excellent vehicle for the genetic engineering of many
products due to their ease of genetic manipulation, short generation cycles and
cellular uniformity. This product with potential for applications in
pharmaceuticals, fine chemicals and agriculture exemplifies our thesis.
ROBUST PRODUCT PIPELINE
There are over 30,000 species of microalgae, many of which have
natural, beneficial properties that can be extracted to produce high-value
products, while many more can act effectively as vehicles for genetic
engineering to produce other products. Our challenge is to remain focused as we
explore the wealth of possibilities and to dedicate our efforts to those
products with the clear and present potential of success for the benefit of our
stockholders. Cyanotech's product pipeline, as shown on page 1 of this report,
is truly robust and varied -- a major advance from just a few years ago when
Spirulina was our only major product. Now Spirulina is among the products with
lesser potential in terms of overall market size and possible sales in the
future.
LOOKING AHEAD
The hardest thing we had to do in fiscal 1998 was to lay off 25% of our
dedicated workforce in Kona. We deeply appreciate their under-standing and look
forward to resuming our role as a steady employer in the region. We commend the
fine work of all our associates, past and present, in helping run a reliable
operation with excellent quality control while developing the significant new
products in our pipeline. We thank our stockholders for their understanding
during a difficult period and our Board of Directors for supportive counsel. In
brief, we have proven the process of producing high-value products from
microalgae and are developing a promising line of products. We look forward to
increased sales and a return to our traditionally higher margins.
Gerald R. Cysewski, Ph.D.
Chairman, President and Chief Executive Officer
June 18, 1998
3
CHARTS
Net Sales
$ millions
94--$2,697
85--$4,150
96--$8,081
97--$11,399
98--$7,627
Gross Profit
$ millions
94--$1,202
95--$1,875
96--$4,563
97--$6,809
98--$3,137
Net Income (Loss)
$ millions
94--$204
95--$769
96--$2,509
97--$4,159
98--$(300)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement
of operations data as a percentage of net sales for the periods indicated:
Year Ended March 31, 1998 1997 1996
================================================================================
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.9 40.3 43.5
--------------------------------------------------------------------------------
Gross profit 41.1 59.7 56.5
--------------------------------------------------------------------------------
Operating expenses:
Research and development 8.8 5.1 4.4
General and administrative 17.3 12.6 14.8
Sales and marketing 18.9 9.1 5.5
--------------------------------------------------------------------------------
Total operating expenses 45.0 26.8 24.7
--------------------------------------------------------------------------------
Income (loss) from operations (3.9) 32.9 31.8
--------------------------------------------------------------------------------
Other income (expense):
Interest income 2.6 3.9 0.3
Interest expense (0.4) (0.4) (1.1)
Other income, net 0.1 0.1 --
--------------------------------------------------------------------------------
Total other income (expense) 2.3 3.6 (0.8)
--------------------------------------------------------------------------------
Income (loss) before income taxes (1.6) 36.5 31.0
Income taxes (2.3) -- --
--------------------------------------------------------------------------------
Net income (loss) (3.9)% 36.5% 31.0%
================================================================================
Fiscal 1998 Compared to Fiscal 1997
Net Sales
Net sales for the year ended March 31, 1998 were $7,627,000, a
decrease of 33.1% from net sales of $11,399,000 for the year
ended March 31, 1997. The decrease in net sales during the
year ended March 31, 1998 is primarily due to lower sales of
Spirulina packaged consumer products to our largest customer,
a Hong Kong-based network marketing company which purchased
our packaged consumer products for sale under a private label
through their marketing organization, primarily in mainland
China. This customer experienced a delay in its annual
recertification process by the Chinese government and was
restricted by local governmental authorities from hosting any
large scale distributor meetings from March 1997 through
September 1997. These regulatory factors adversely impacted
our customer's ability to sell and, consequently, this
customer's need for our packaged consumer products was
severely reduced. For the year ended March 31, 1998, this
customer accounted for less than 5% of Cyanotech's net sales,
down from approximately 34% and 29% of net sales in the years
ended March 31, 1997 and 1996, respectively. Subsequent to the
end of fiscal 1998, the Chinese government imposed a ban on
all network market organizations, effective October 1, 1998.
Future sales to this customer are expected to be minimal. Also
contributing to the decline were lower shipments (11% lower)
and lower average selling prices (2% lower) for bulk Spirulina
powder.
Gross Profit
Gross profit represents net sales less the cost of goods sold,
which includes the cost of materials, manufacturing overhead
costs, direct labor expenses and depreciation and
amortization. Gross profit decreased to 41.1% of net sales for
the year ended March 31, 1998, from 59.7% of net sales for the
year ended March 31, 1997. This decrease in gross profit from
the prior year is primarily attributable to a shift in the
product mix to greater sales of lower priced bulk Spirulina
products (78% of net sales in fiscal 1998, up from 58% of net
sales in fiscal 1997), Spirulina production inefficiencies due
to decreased production beginning December 1997 through
February 1998 which resulted in additional charges to Cost of
Sales of approximately $264,000 during that period, and lower
average selling prices for bulk Spirulina.
4
Operating Expenses
Operating expenses increased by $379,000, an increase of 12.4%
over the prior year, primarily because of increased
expenditures for sales and marketing.
Research and Development. Expenditures for research and
development increased 15.3% to $677,000, for the year ended
March 31, 1998, from $587,000, for the year ended March 31,
1997. The increase from the prior year is primarily the result
of research and ongoing development work done on the
mosquitocide project and on optimizing production of the
natural astaxanthin product. Research and development costs
are expected to increase further during fiscal 1999 as we
continue to optimize the PhytoMax PCS technology, increase the
research activities directed at the mosquitocide project and
begin development work to produce Aldolase Catalytic Antibody
38C2 as a result of our exclusive license agreement with The
Scripps Research Institute which was signed in April 1998.
General and Administrative. General and administrative
expenses decreased 8.3% to $1,318,000, for the year ended
March 31, 1998, from $1,437,000, for the year ended March 31,
1997. The decrease from the prior year is primarily due to
reduced associate incentive bonuses which are indexed to the
Company's profitability, partially offset by an increase in
personnel costs.
Sales and Marketing. Sales and marketing expenses increased
39.5% to $1,442,000, for the year ended March 31, 1998, from
$1,034,000, for the year ended March 31, 1997. The increase
from the prior year is primarily due to higher personnel
costs, and increased domestic and international marketing
efforts associated with the introduction of the NatuRose
product.
Other Income (Expense)
Other income decreased by 57.1% to $175,000, for the year
ended March 31, 1998, from $408,000, for the year ended March
31, 1997. The decrease from the prior year is primarily
related to decreased earnings on lower balances of cash and
investment securities.
Income Taxes
The provision for income taxes was $175,000, for the year
ended March 31, 1998. This is due to an increase in the
allowance for deferred tax assets, offset in part by current
income tax benefits.
Net Income (Loss)
For the year ended March 31, 1998 and for the first time since
1991, the Company recorded a net loss. The fiscal 1998 net
loss of $300,000, compares with net income of $4,159,000, for
the year ended March 31, 1997. The net loss is primarily the
result of lower sales of Spirulina bulk and packaged consumer
products due to a reduction in orders from a single customer
in China that had previously accounted for a large percentage
of sales of packaged consumer Spirulina Pacifica products,
lower average selling prices for bulk Spirulina products,
Spirulina production inefficiencies due to decreased
production during December 1997 through February 1998 which
resulted in an additional charge to Cost of Sales of
approximately $264,000 during the third and fourth quarters of
1998, and start-up costs associated with commercialization of
NatuRose, our natural astaxanthin product.
In February 1998, the Company reduced its workforce by
approximately 25% in order to better align resources with
sales levels. The workforce reduction was part of the
Company's plans to enhance its competitive position through
improvements of operational productivity and cost reduction -
specifically more effecient utilization of assets and
employees. Production operations, sales, and administrative
functions were restructured and downsized by this action.
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales for the year ended March 31, 1997 were $11,399,000,
a 41.1% increase over net sales of $8,081,000 for the year
ended March 31, 1996. The increase in net sales during the
year ended March 31, 1997 is attributable to significantly
higher production and sales of bulk Spirulina powder and
tablets and increased sales of packaged consumer products
which carry a higher sales price than bulk Spirulina Pacifica
products. The increased production is the result of Spirulina
production expansions that were completed in February and
November 1996.
5
Gross Profit
Gross profit increased to 59.7% of net sales for the year
ended March 31, 1997 from 56.5% of net sales for the year
ended March 31, 1996. The increase in gross profit from the
prior year is primarily attributable to economies of scale
related to the production of both bulk and packaged consumer
Spirulina Pacifica products, but was partially offset by lower
average selling prices (18% lower) for bulk products.
Operating Expenses
Operating expenses increased by $1,066,000, with significant
increases in all three components.
Research and Development. Expenditures for research and
development increased 67.2% to $587,000, for the year ended
March 31, 1997, from $351,000, for the year ended March 31,
1996. The increase from the prior year is primarily the result
of the development work done on the natural astaxanthin
product and the research work done on the mosquitocide
project.
General and Administrative. General and administrative
expenses increased 20.2% to $1,437,000, for the year ended
March 31, 1997, from $1,196,000, for the year ended March 31,
1996. The increase is due to higher staff-related
expenditures, the accrual of associate incentive bonuses
indexed to the Company's profitability during the year ended
March 31, 1997, and higher insurance costs.
Sales and Marketing. Sales and marketing expenses increased
132.4% to $1,034,000, for the year ended March 31, 1997, from
$445,000, for the year ended March 31, 1996. The increase from
the prior year is primarily due to higher staff-related
expenditures, and increased domestic and international
marketing efforts associated with higher sales of packaged
consumer products and with the introduction of the NatuRose
product.
Other Income (Expense)
Other income increased to $408,000, for the year ended March
31, 1997, from other expense of $62,000, for the year ended
March 31, 1996. The increase from the prior year is primarily
related to increased earnings on larger cash and investment
securities balances.
Net Income
Net income increased to $4,159,000, for the year ended March
31, 1997, from $2,509,000, for the year ended March 31, 1996.
The increase in net income is primarily a result of increased
production and sales of bulk and packaged consumer Spirulina
Pacifica products.
Inflation during the years ended March 31, 1998, 1997 and
1996 did not have a material impact on the Company's
operations.
Variability of Results
Cyanotech Corporation was formed in 1983 and did not become
profitable on an annual basis until fiscal 1992 (the twelve
month period ended December 31, 1992). From fiscal 1992
through fiscal 1997, the Company had total net sales of
$29,401,000, and total net income of $7,931,000. In fiscal
1998, the Company had net sales of $7,627,000 and a net loss
of $300,000. As of March 31, 1998, our accumulated deficit was
$761,000. There can be no assurance that we will be
consistently profitable on either a quarterly or an annual
basis. We have experienced quarterly fluctuations in operating
results and anticipate that these fluctuations may continue in
future periods. Future operating results may fluctuate as a
result of changes in sales levels to our largest customers,
new product introductions, production difficulties, weather
patterns, the mix between sales of bulk products and packaged
consumer products, start-up costs associated with new
facilities, expansion into new markets, sales promotions,
competition, increased energy costs, the announcement or
introduction of new products by our competitors, changes in
our customer mix, overall trends in the market for Spirulina
and astaxanthin products and other factors beyond our control.
While a significant portion of our expense levels are
relatively fixed, and the timing of increases in expense
levels is based in large part on our forecasts of future
sales, if net sales are below expectations in any given
period, the adverse impact on results of operations may be
magnified by our inability to adjust spending quickly enough
to compensate for the sales shortfall. We may also choose to
reduce prices or increase spending in response to market
conditions, which may have a material adverse effect on our
results of operations.
6
New Accounting Standards
In June 1996, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No.
125 generally is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996, and is to be applied prospectively.
This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application
of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings.The adoption of
SFAS No. 125 did not have a material effect on the Company's
reported financial position, results of operations or
liquidity.
In February 1997, the FASB issued SFAS No. 128, "Earnings
per Share". SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. SFAS No. 128
requires the presentation of "Basic" earnings per share,
representing income available to common shareholders divided
by the weighted average number of common shares outstanding
during the period, and "Diluted" earnings per share, which
reflects the potential dilution that could occur if securities
or other contracts to issue Common Stock shares were exercised
or converted into Common Stock shares or resulted in the
issuance of Common Stock shares that then shared in the
earnings of the Company. SFAS No. 128 requires restatement of
all prior period per share data presented. The Company adopted
SFAS No. 128 for the quarter ended December 31, 1997 and has
restated all prior period earnings per share data presented.
Also during February 1997, the FASB issued SFAS No. 129,
"Disclosure of Information about Capital Structure," which
lists required disclosures about capital structure that had
been included in a number of previously existing statements
and opinions. SFAS No. 129 is effective for periods ending
after December 15, 1997. The Company adopted the provisions of
SFAS No. 129 as of December 31, 1997. The adoption of SFAS No.
129 did not have a material effect on the Company's reported
financial information.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its
components in a full set of general-purpose financial
statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires
reclassification of financial statements for earlier periods
provided for comparative purposes. The Company will adopt the
provisions of SFAS No. 130 for the fiscal year beginning April
1, 1998.
Also during June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for public business
enterprises to report information about operating segments in
annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to shareholders.
SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 requires restatement of
comparative information presented for earlier periods. The
Company will adopt the provisions of SFAS No. 131 for the
quarter beginning April 1, 1998. Management does not expect
adoption of SFAS No. 131 will have a material effect on the
Company's reported financial information.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 addresses disclosure only and does not
change any of the measurement or recognition provisions
provided for in SFAS Nos. 87, 88 or 106. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997
and requires restatement of comparative information presented
for earlier periods. The Company will adopt the provisions of
SFAS No. 132 for the fiscal year beginning April 1, 1998.
Management does not expect adoption of SFAS No. 132 will have
a material effect on the Company's reported financial
information.
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") Accounting Standards Executive Committee
issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use," which requires that certain costs, including certain
payroll and payroll-related costs, be capitalized and
amortized over the estimated useful life of the software. The
provisions of SOP 98-1 are effective for fiscal years
beginning after December 15, 1998. The Company has not
determined when it will adopt SOP 98-1. Management estimates
that the adoption of SOP 98-1 will not have a material effect
on the Company's financial condition, results of operations or
liquidity.
7
In April 1998, the AICPA Accounting Standards Executive
Committee issued SOP 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up
activities, including organization costs, be expensed as
incurred. The provisions of SOP 98-5 are effective for fiscal
years beginning after December 15, 1998 and earlier
application is encouraged. The Company has not determined when
it will adopt SOP 98-5. Management does not expect adoption of
SOP 98-5 will have a material effect on the Company's
financial condition, results of operations or liquidity.
Liquidity and Capital Resources
Cyanotech's cash and investment securities decreased
$5,332,000 to $1,397,000 during the fiscal year ended March
31, 1998. The decrease is primarily attributable to increased
capital expenditures for equipment and leasehold improvements.
Cash flows provided by operating activities were $988,000
in 1998, down from $2,860,000 in 1997 because of the reduction
in net income. The primary sources of 1998 cash flows from
operating activities were a decrease in net accounts
receivable, offset in large part by an increase in inventories
and decreases in accounts payable and accrued expenses.
Cash flows used in investing activities were $1,927,000 in
1998 compared to $10,962,000 in 1997. The primary uses of cash
flows in investing activities during 1998 were for capital
expenditures totaling $5,881,000, offset by proceeds from the
sale and maturities of investment securities totaling
$3,954,000.
Cash flows used in financing activities were $439,000 in
1998 compared to cash flow provided by financing activities of
$1,468,000 in 1997. The primary uses of cash flows in
financing activities were for principal payments of $401,000
on long-term debt and $130,000 on capital lease obligations,
offset somewhat by proceeds received from the exercise of
common stock options and warrants.
As of March 31, 1998, we had no significant construction
commitments. However, we have agreed with a construction
contractor to resume work on a culture pond expansion project
by January 1, 1999 in a reasonable and customary manner in
accordance with the terms of the contract and at a minimum
billable rate of $150,000 per month. The remaining balance on
the construction contract is approximately $1.9 million. If
work does not resume by January 1, 1999, and continue as
agreed because of the Company's inability to fund such
construction, then the contract may be considered to have been
terminated by Cyanotech. Assertion by the contractor of its
termination rights could have a material adverse effect on the
Company's financial condition, results of operations or
liquidity. Total costs incurred as of March 31, 1998 with
respect to this expansion project approximate $2,643,000.
Management expects to resume work on the project on or before
January 1, 1999.
We presently estimate that our existing capital resources
and anticipated cash flows from future operations will be
sufficient to fund current operations. However, we plan to
spend, subject to available financing, approximately $11
million on capital expenditures during the next three fiscal
years, primarily to continue the expansion of NatuRose
production on the newly leased 93 acres. Existing capital
resources and anticipated cash flows from future operations
will not be sufficient to fund these capital expenditures. Our
bank credit line of $1,000,000 expired on January 31, 1998 and
was not renewed. Another $1,000,000 bank line expired on
February 7, 1998 when the underlying certificate of deposit
matured. As of March 31, 1998, the Company was actively
pursuing additional credit facilities to meet any anticipated
shortfall in cash flow, but there is no assurance that such
facilities will be obtained at the amount required at a
reasonable cost to the Company.
Year 2000 Compliance
The Company has completed a comprehensive review of its
computer systems to identify the systems that could be
affected by the "Year 2000" issue and has developed an
implementation plan, to be completed by the end of fiscal
1999, to resolve the issue. The Year 2000 problem is the
result of computer programs being written using two digits
rather than four to define the applicable year. Any of the
Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or
miscalculations. The Company believes that, with modifications
to existing software and converting to new software, the Year
2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and
converted. The costs of such modifications and conversions are
not expected to be material. However, if such modifications
and conversions are not completed in a timely manner, the Year
2000 problem may have a material impact on the operations of
the Company.
8
CONSOLIDATED BALANCE SHEETS
At March 31,
-------------------------------------------------------------------------------------------------
(in thousands, except share data) 1998 1997
=================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 1,397 $ 2,775
Investment securities -- 3,954
Accounts receivable, net of allowance for doubtful
receivables of $10 in 1998 1,246 2,791
Inventories 2,229 1,138
Prepaid expenses 88 155
Deferred tax assets -- 373
-------------------------------------------------------------------------------------------------
Total current assets 4,960 11,186
Equipment and leasehold improvements, net 20,544 14,666
Other assets 163 163
-------------------------------------------------------------------------------------------------
Total assets $25,667 $ 26,015
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 50 $ 150
Note payable 975 --
Current maturities of capital lease obligations 129 130
Accounts payable 938 1,508
Accrued expenses and other 272 333
-------------------------------------------------------------------------------------------------
Total current liabilities 2,364 2,121
Long-term debt, excluding current maturities 62 363
Obligations under capital lease, excluding current maturities 67 196
-------------------------------------------------------------------------------------------------
Total liabilities 2,493 2,680
-------------------------------------------------------------------------------------------------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value
(aggregate involuntary liquidation $2,975 ($5 per share),
plus unpaid cumulative dividends). Authorized 5,000,000
shares; issued and outstanding 595,031 shares in 1998 and
734,977 shares in 1997 1 1
Common stock of $.005 par value, authorized 25,000,000 shares at
March 31, 1998 and 1997; issued and outstanding 13,599,572 shares
at March 31, 1998 and 12,712,682 shares at March 31, 1997 68 63
Additional paid-in capital 23,866 23,732
Accumulated deficit (761) (461)
------------------------------------------------------------------------------------------------
Total stockholders' equity 23,174 23,335
Commitments and contingencies
------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,667 $ 26,015
================================================================================================
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
-------------------------------------------------------------------------------------------------
(in thousands, except per-share data) 1998 1997 1996
=================================================================================================
Net sales $ 7,627 $11,399 $ 8,081
Cost of sales 4,490 4,590 3,518
-------------------------------------------------------------------------------------------------
Gross profit 3,137 6,809 4,563
-------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 677 587 351
General and administrative 1,318 1,437 1,196
Sales and marketing 1,442 1,034 445
-------------------------------------------------------------------------------------------------
Total operating expenses 3,437 3,058 1,992
-------------------------------------------------------------------------------------------------
Income (loss) from operations (300) 3,751 2,571
-------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 202 443 32
Interest expense, net of interest costs capitalized of $114 in 1998,
$23 in 1997 and nil in 1996 (35) (47) (90)
Other income (expense), net 8 12 (4)
-------------------------------------------------------------------------------------------------
Total other income (expense) 175 408 (62)
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes (125) 4,159 2,509
Income taxes (175) -- --
-------------------------------------------------------------------------------------------------
Net income (loss) $ (300) $ 4,159 $ 2,509
=================================================================================================
Net income (loss) per common share
Basic $ (0.05) $ 0.31 $ 0.22
=================================================================================================
Diluted $ (0.05) $ 0.25 $ 0.17
=================================================================================================
Weighted average number of common shares outstanding
Basic 12,909 12,583 9,583
=================================================================================================
Diluted 12,909 16,598 14,502
=================================================================================================
See accompanying notes to consolidated financial statements.
10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Preferred stock Common stock Additional Stock-
Par Par paid-in Accumulated Treasury holders'
(in thousands, except share data) Shares value Shares value capital deficit stock equity
====================================================================================================================================
Balances at March 31, 1995 1,997,477 $2 9,051,325 $ 45 $ 12,216 $ (7,129) $ (30) $ 5,104
Exercise of common stock warrants
for cash -- -- 891,200 5 507 -- -- 512
Exercise of stock options for cash -- -- 82,625 -- 76 -- -- 76
Issuance of common stock to nonemployee
directors for services -- -- 8,000 -- 40 -- -- 40
Exchange of Series A preferred stock for
common stock (1,250,000) (1) 250,000 1 -- -- -- --
Exchange of Series B preferred stock for
common stock (12,500) -- 2,500 -- -- -- -- --
Retirement of treasury stock -- -- (30,000) -- (30) -- 30 --
Common stock issued for cash, net of
costs of $556 -- -- 1,500,000 8 9,067 -- -- 9,075
Net income -- -- -- -- -- 2,509 -- 2,509
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 734,977 1 11,755,650 59 21,876 (4,620) -- 17,316
Exercise of common stock warrants
for cash -- -- 668,120 3 298 -- -- 301
Exercise of stock options for cash -- -- 57,912 -- 49 -- -- 49
Issuance of common stock options for
other assets -- -- -- -- 80 -- -- 80
Issuance of common stock to nonemployee
directors for services -- -- 6,000 -- 37 -- -- 37
Common stock issued for cash, net of
costs of $51 -- -- 225,000 1 1,392 -- -- 1,393
Net income -- -- -- -- -- 4,159 -- 4,159
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 734,977 1 12,712,682 63 23,732 (461) -- 23,335
Exercise of common stock warrants
for cash -- -- 107,880 1 43 -- -- 44
Exercise of stock options for cash -- -- 84,750 1 102 -- -- 103
Common stock purchased from
employees and canceled -- -- (13,470) -- (55) -- -- (55)
Issuance of common stock to
nonemployee directors for services -- -- 8,000 -- 47 -- -- 47
Exchange of Series C preferred stock for
common stock (139,946) -- 699,730 3 (3) -- -- --
Net loss -- -- -- -- -- (300) -- (300)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 595,031 $1 13,599,572 $ 68 $ 23,866 $ (761) -- $ 23,174
===================================================================================================================================
See accompanying notes to consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31,
------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
==================================================================================================================
Cash flows from operating activities:
Net income (loss) $ (300) $ 4,159 $ 2,509
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes 373 (373) --
Depreciation and amortization 978 691 499
Decrease (increase) in accounts receivable, net 1,545 (1,503) (640)
Increase in inventories (1,091) (644) (119)
Decrease (increase) in prepaid expenses and other assets 67 (62) (118)
Increase (decrease) in accounts payable (570) 656 223
Increase (decrease) in accrued expenses and other (61) (101) 204
Other 47 37 40
-----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 988 2,860 2,598
-----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in equipment and leasehold improvements (5,881) (7,008) (3,910)
Purchases of investment securities -- (10,827) --
Proceeds from sales and maturities of investment securities 3,954 6,873 --
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,927) (10,962) (3,910)
-----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options
and warrants, net of issuance costs 92 1,743 9,663
Proceeds from issuance of long-term debt -- -- 750
Principal payments on long-term debt (401) (150) (94)
Principal payments on capital lease obligations (130) (125) (94)
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (439) 1,468 10,225
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,378) (6,634) 8,913
Cash and cash equivalents at beginning of year 2,775 9,409 496
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,397 $ 2,775 $ 9,409
=================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of amounts capitalized $ 35 $ 36 $ 73
=================================================================================================================
Cash paid during the year for income taxes $ 56 $ 355 $ --
=================================================================================================================
Non-cash investing and financing activities:
Issuance of note payable for construction in progress $ 975 $ -- $ --
Equipment leased under capital lease obligations -- -- 303
Issuance of common stock and options for services and other assets 47 117 40
=================================================================================================================
See accompanying notes to consolidated financial statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except share data)
Note 1 Description of Business and Summary of Accounting Policies
a. Description of Business
Cyanotech Corporation (Company) develops and commercializes natural
products from microalgae.The Company is currently producing microalgae
products for the nutritional supplement, aquaculture feed/pigments and
immunological diagnostics markets and is also developing microalgae-
based products for the biopesticide, chiral chemistry and food
coloring markets.
Substantially all of the Company's net sales have been
attributable to its Spirulina Pacifica(TM) products. Sales of
Spirulina Pacifica products accounted for approximately 95% of the
Company's net sales for the year ended March 31, 1998 and 98% for
the years ended March 31, 1997 and 1996.
b. Principles of Consolidation
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial statements
include the accounts of Cyanotech Corporation, its wholly owned
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Cyanotech International FSC, Inc., was formed on April 1, 1997
as a foreign sales corporation under the Internal Revenue Code.
c. Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt securities purchased with original or
remaining maturities of three months or less to be cash equivalents.
d. Investment Securities
Investment securities at March 31, 1997 consisted of U.S.Treasury,
mortgage-backed, and other interest bearing securities. The Company
classifies its debt and equity securities in one of three categories;
trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in
which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related
tax effects, on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders'
equity until realized. Realized gains and losses from the sale of
held-to-maturity and available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any available-for-sale or held-
to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned.
e. Inventories
Inventories are stated at the lower of cost which approximates first-
in, first-out) or market. Market is determined by net realizable
value.
f. Equipment and Leasehold Improvements
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of minimum lease payments or fair value of the equipment at the
inception of the lease. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives for
equipment and furniture and fixtures and the shorter of the lease
terms or estimated useful lives for leasehold improvements and
equipment under capital lease as follows:
13
Equipment 3 to 10 years
Leasehold improvements remaining lease term (10 to 28 years)
Furniture and fixtures 7 years
Equipment under capital lease lease term (3 to 5 years)
Amortization of equipment under capital lease is included in
depreciation and amortization expense in the accompanying consolidated
financial statements.
g. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. SFAS No. 128 requires
the presentation of "Basic" earnings per share, representing income
available to common shareholders divided by the weighted average
number of common shares outstanding for the period, and "Diluted"
earnings per share, which reflects the potential dilution that could
occur if securities or other contracts to issue Common Stock shares
were exercised or converted into Common Stock shares or resulted in
the issuance of Common Stock shares that then shared in the earnings
of the Company. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. The Company adopted SFAS No. 128
for the quarter ended December 31, 1997 and has restated all prior
period earnings per share data presented.
For the year ended March 31, 1998, warrants and options to
purchase Common Stock shares of the Company and convertible preferred
stock were outstanding, but were not included in the 1998 computation
of Diluted net loss per common share because the inclusion of these
securities would have had an antidilutive effect on the net loss per
common share. As of March 31, 1998, warrants and options to aquire
431,725 shares of the Company's common stock and preferred stock
convertible into 2,975,155 shares of the Company's common stock were
outstanding.
Following is a reconciliation of the numerators and denominators
of the Basic and Diluted net income (loss) per Common Share
computations for the periods presented (in thousands except share
data):
Years ended March 31, 1998 1997 1996
=========================================================================================================================
Basic Earnings per share
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (300) $ 4,159 $ 2,509
Less: Requirement for Preferred Stock dividends (289) (294) (354)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) available to Common stockholders $ (589) $ 3,865 $ 2,155
=========================================================================================================================
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
=========================================================================================================================
Net income (loss) per Common Share $ (0.05) $ 0.31 $ 0.22
=========================================================================================================================
Diluted Earnings Per Share
Income (loss) avaliable to Common stockloders $ (589) $ 3,865 $ 2,155
Plus: Requirement for Preferred Stock dividends -- 294 354
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to Common stockholders as adjusted $ (589) $ 4,159 $ 2,509
=========================================================================================================================
Weighted average Common Shares outstanding 12,909,000 12,583,000 9,583,000
Effect of dilutive securities
Stock options and warrants -- 340,000 994,000
Convertible perferred stock -- 3,675,000 3,925,000
-------------------------------------------------------------------------------------------------------------------------
Weighted average Common Shares outstanding as adjusted 12,909,000 16,598,000 14,502,000
=========================================================================================================================
Net income (loss) per common share $ (0.05) $ 0.25 $ 0.17
h. Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $677, $587 and $351 in 1998, 1997 and
1996 respectively.
i. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their tax bases and operating
14
loss carryforwards. Deferred tax assets and liabilities are measured
using enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
j. Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense was recorded
on the date of grant only if the current market price for the
underlying stock exceeded the exercise price. Effective April 1, 1996,
the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma net income per common share disclosures for
employee stock option grants made in fiscal year 1996 and future years
as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the measurement
provisions of APB No. 25 and provide the pro forma disclosures
required by SFAS No. 123.
k. Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, effective April 1, 1996. SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount the carrying
amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of SFAS No. 121 did not have
a material impact on the Company's financial position, results of
operations or liquidity.
l. Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 125 generally is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings. Adoption
of SFAS No. 125 did not have a material impact on the Company's
financial position, results of operations or liquidity.
m. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
n. New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which lists required disclosures
about capital structure that had been included in a number of
previously existing statements and opinions. SFAS No. 129 is effective
for periods ending after December 15, 1997. The Company adopted the
provisions of SFAS No. 129 as of December 31, 1997. The adoption of
SFAS No. 129 did not have a material effect on the Company's reported
financial information.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting
and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 requires
reclassification of financial statements for earlier periods provided
for comparative purposes. The Company will adopt the provisions of
SFAS No. 130 for the fiscal year beginning April 1, 1998.
In June 1997, the FASB also issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which
establishes standards for public business enterprises to report
information about
15
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires restatement of comparative information presented
for earlier periods. The Company will adopt the provisions of SFAS
No. 131 for the quarter beginning April 1, 1998. Management does not
expect adoption of SFAS No. 131 will have a material effect on the
Company's reported financial information.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which
amends the disclosure requirements of SFAS No. 87, Employers'
Accounting for Pensions, SFAS No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 132 addresses
disclosure only and does not change any of the measurement or
recognition provisions provided for in SFAS Nos. 87, 88 or 106. SFAS
No. 132 is effective for fiscal years beginning after December 15,
1997 and requires restatement of comparative information presented for
earlier periods. The Company will adopt the provisions of SFAS No. 132
for the fiscal year beginning April 1, 1998. Management does not
expect adoption of SFAS No. 132 will have a material effect on the
Company's reported financial information.
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which
requires that certain costs, including certain payroll and payroll-
related costs, be capitalized and amortized over the estimated useful
life of the software. The provisions of SOP 98-1 are effective for
fiscal years beginning after December 15, 1998. The Company has not
determined when it will adopt SOP 98-1. Management estimates that the
adoption of SOP 98-1 will not have a material effect on the Company's
financial condition, results of operations or liquidity.
In April 1998, the AICPA Accounting Standards Executive Committee
issued SOP 98-5, Reporting on the Costs of Start-up Activities.
SOP 98-5 requires that costs of start-up activities, including
organization costs, be expensed as incurred. The provisions of SOP
98-5 are effective for fiscal years beginning after December 15, 1998
and earlier application is encouraged. The Company has not determined
when it will adopt SOP 98-5. Management does not expect adoption of
SOP 98-5 will have a material effect on the Company's financial
condition, results of operations or liquidity.
Note 2 Investment Securities
Investment securities held as available-for-sale as of March 31, 1997
were as follows (fair value approximates amortized cost):
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
classified as available for sale amounted to $3,954 in 1998 and $6,873
in 1997. Gross realized gains on the disposal of available-for-sale
investment securities during 1998 and 1997 were nil and $25,
respectively.
Note 3 Inventories
Inventories consists of the following as of March 31, 1998 and 1997:
1998 1997
=====================================================================
Raw materials $ 103 $ 166
Work in process 362 362
Finished goods 1,524 346
Supplies 240 264
---------------------------------------------------------------------
$ 2,229 $ 1,138
=====================================================================
16
Note 4 Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements consists of the following as of
March 31, 1998 and 1997:
1998 1997
==================================================================================================
Equipment $ 7,791 $ 5,715
Leasehold improvements 13,285 10,935
Furniture and fixtures 94 67
Equipment under capital lease 569 602
--------------------------------------------------------------------------------------------------
21,739 17,319
Less accumulated depreciation and amortization (4,707) (3,729)
Construction in-progress 3,512 1,076
-------------------------------------------------------------------------------------------------
Equipment and leasehold improvements, net $20,544 $ 14,666
=================================================================================================
Note 5 Long-Term Debt and Note Payable
Long term debt
Long-term debt consists of the following as of March 31, 1998 and
1997:
1998 1997
=========================================================================================================================
Notes payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted quarterly;
principal payments of $12.5 and $37.5 in 1998 and 1997, respectively, due quarterly,
plus interest $ 112 $ 513
Less current maturities of long-term debt (50) (150)
------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 62 $ 363
========================================================================================================================
On April 1, 1995, the Company executed a $250 note, payable in
principal installments of $12.5 each quarter through April 1, 2000,
plus interest, with principal and interest payments satisfied by
delivering to the lender an equivalent market value amount of salable
product or cash (at the lender's option). The note payable bears
interest at LIBOR plus 2%, adjusted quarterly, and is secured by
certain production equipment. For the quarter ended March 31, 1998,
interest on this note was calculated at 7.97%.
On July 11, 1995, the Company executed a $500 note, payable in
principal installments of $25 each quarter through July 1, 2000, plus
interest, with principal and interest payments satisfied by delivering
to the lender an equivalent market value amount of salable product or
cash (at the lender's option). The note payable bore interest at LIBOR
plus 2%, adjusted quarterly, and was secured by certain leasehold
improvements. This note was satisfied, in its entirety, in 1998.
Note payable
In March 1998, the Company reached an agreement with its general
contractor to convert certain trade accounts payable to a note
payable. Under the terms of the agreement, $975 of trade accounts
payable to the contractor for work completed on an expansion project
was converted to a note payable due December 31, 1998. Terms of the
note call for a principal and interest payment of $150 on April 1,
1998, monthly principal and interest payments of $100 beginning
June 1, 1998, and the balance due on December 31, 1998. The note
payable bears interest at prime plus 2%, beginning January 1, 1998,
and is secured by all of the assets of the Company. As of March 31,
1998, the interest rate was calculated at 10.5%.
Note 6 Leases
The Company leases certain equipment and a portable building under
capital leases expiring between 1999 and 2000, and leases facilities,
equipment and land under operating leases expiring between 1999 and
2025. The Company has agreed in principle to the lease of additional
land under an operating lease expiring in 2027. At March 31, 1998, the
net book value of equipment under the capital leases amounted to $399.
17
Future minimum lease payments under non-cancelable operating
leases, including the effect of the aforementioned land lease expiring
in 2027, and the present value of future minimum capital lease
payments as of March 31, 1998 are as follows:
Year ending March 31: Capital leases Operating leases
=================================================================================================================
1999 $ 142 $ 338
2000 68 335
2001 -- 335
2002 -- 335
2003 -- 335
Thereafter, through 2027 -- 6,379
-----------------------------------------------------------------------------------------------------------------
Total minimum lease payments 210 $ 8,057
========
Less amount representing interest (at rates ranging from 7% to 9%) (14)
-----------------------------------------------------------------------------------------
Present value of net minimum capital lease payments 196
Less current maturities of capital lease obligations 129
-----------------------------------------------------------------------------------------
Obligations under capital lease, excluding current maturities $ 67
=========================================================================================
Total rent expense under operating leases amounted to $211, $138, and
$89 for the years ended March 31, 1998, 1997, and 1996, respectively.
The land leases provide for contingent rentals in excess of
minimum rental commitments based on a percentage of the Company's
sales. Contingent rentals for the years ended March 31, 1998, 1997
and 1996 were not significant.
Note 7 Series C Preferred Stock
Series C preferred stock is convertible into common stock at the rate
of one share of preferred stock for five shares of common stock
through February 23, 2000, after which date the conversion feature is
no longer applicable. Series C preferred stock has voting rights
equal to the number of shares of common stock into which it is
convertible and has a preference in liquidation over all other series
of preferred stock of $5 per share plus any accumulated but unpaid
dividends. Holders of Series C preferred stock are entitled to 8%
cumulative annual dividends at the rate of $.40 per share; cumulative
dividends in arrears as of March 31, 1998 amount to $2,061 ($3.463
per share). Upon conversion of Series C preferred stock, cumulative
dividends in arrears on converted shares are no longer payable. The
amount of cumulative dividends foregone due to conversion during the
year ended March 31, 1998 was $457 (nil in 1997 and 1996). The consent
of Series C preferred stockholders is required to modify their present
rights or sell all or substantially all of the Company's assets.
Note 8 Stock Options and Warrants
Stock options
At the Company's annual meeting held on August 9, 1995,
the stockholders of the Company approved the Company's 1995 Stock
Option Plan (the "1995 Plan"), reserving a total of 400,000 shares
of common stock for issuance under the Plan. At the Company's annual
meeting held on September 17, 1997, the stockholders approved an
amendment to the 1995 Plan which increased the number of shares
reserved for issuance under the Plan from 400,000 to 800,000. The 1995
Plan provides for the issuance of both incentive and non-qualified
stock options. Options are to be granted at or above the fair market
value of the Company's common stock at the date of grant and generally
become exercisable over a five-year period.
The Company also has a Non-employee Director Stock Option and
Stock Grant Plan, which was approved by stockholders in 1994 (the
"1994 Plan"). Under the 1994 Plan, and upon election to the Board of
Directors, non-employee directors are granted a ten-year option to
purchase 3,000 shares of the Company's common stock at its fair market
value on the date of grant. In addition, on the date of each Annual
Meeting of Stockholders in each year that the 1994 Plan is in
effect, each non-employee director continuing in office will
be automatically granted, without payment, 2,000 shares of common
stock that is non-transferable for six months following the date of
grant. Grants of 8,000, 6,000 and 8,000 shares of common stock were
made under the 1994 Plan in September 1997 and 1996 and August 1995,
respectively. Expense recognized as a result of these stock grants
amounted to $47, $37 and $40 for the years ended March 31, 1998,
1997 and 1996, respectively.
18
In 1985, the Company adopted an Incentive Stock Option Plan
(qualified stock option plan) and authorized 200,000 shares of common
stock to be set aside for grants to officers and key employees of the
Company. In 1993, the stockholders approved an amendment to the
Incentive Stock Option Plan which increased the number of shares
reserved for issuance under this plan from 200,000 to 400,000.
Options were granted with exercise prices not lower than the fair
market value of the Company's common stock at the date of grant.
Options generally became exercisable in four equal annual
installments, commencing one year from the date of grant and expire,
if not exercised, five years from the date of grant, unless stipulated
otherwise by the Compensation and Stock Option Committee of the Board
of Directors. The Incentive Stock Option Plan terminated on March 18,
1995. Options granted prior to the plan termination date are not
affected.
At March 31, 1998, there were 466,500 additional shares available
for grant under the 1995 Plan and 63,000 additional shares available
under the 1994 Plan. The per share weighted-average fair value
of stock options granted during 1998, 1997 and 1996 was $6.31, $6.02
and $3.90, respectively, on the date of grant using a Black Scholes
option-pricing model with the following weighted-average assumptions:
1998 - expected dividend yield of 0%, risk-free interest rate of 6.6%,
expected volatility of 99%, and an expected life of 4.5 years; 1997
expected dividend yield of 0%, risk-free interest rate of 6.6%,
expected volatility of 130%, and an expected life of 4.1 years; 1996 -
expected dividend yield of 0%, risk-free interest rate of 6.2%,
expected volatility of 110%, and an expected life of 4.3 years.
The Company applies APB Opinion No. 25 in accounting for employee
stock-based compensation and, accordingly, no compensation cost has
been recognized for its employee stock options in the accompanying
financial statements. Had the Company determined compensation cost
based on the estimated fair value at the grant date for its employee
stock options under SFAS No. 123, the Company's net income (loss) and
net income (loss) per common share would have been as reflected in the
pro forma amounts below:
1998 1997 1996
==================================================================================================
Net income (loss) As reported $ (300) $ 4,159 $ 2,509
Pro forma $ (752) $ 3,738 $ 2,408
Net income (loss) per common share As reported Basic $ (0.05) $ 0.31 $ 0.22
Diluted $ (0.05) $ 0.25 $ 0.17
Pro forma Basic $ (0.08) $ 0.27 $ 0.21
Diluted $ (0.08) $ 0.23 $ 0.17
Pro forma net income (loss) and net income (loss) per common share
information reflect only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income (loss) and
net income (loss) per common share amounts presented above because
compensation cost is reflected over the options' vesting period of
5 years, and compensation cost for options granted prior to April 1,
1995 is not considered.
Stock option activity during the periods indicated is as follows:
Weighted-
Number of average
shares exercise price
=========================================================================================================
Balance at March 31, 1995 408,700 $ 1.23
Granted 101,000 5.13
Exercised (82,625) .92
Forfeited (7,375) 1.03
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 419,700 2.24
Granted 166,000 7.30
Exercised (57,912) .85
Forfeited (107,400) 1.31
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 420,388 4.42
Granted 125,000 6.31
Exercised (84,750) 1.21
Forfeited (53,913) 5.87
---------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 406,725 $ 5.48
=========================================================================================================
19
The following table summarizes information about stock options
outstanding at March 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------------------
Range of Number outstanding Weighted-avg. remaining Weighted-avg. Number exercisable Weighted-avg.
exercise prices at 3/31/98 contractual life exercise price at 3/31/98 exercise price
=========================================================================================================================
$.94 to $1.38 71,425 1.5 years $ 0.95 54,319 $ 0.96
$5.13 to $7.63 335,300 3.2 years $ 6.44 98,975 $ 6.17
-------------------------------------------------------------------------------------------------------------------------
$.94 to $7.63 406,725 2.9 years $ 5.48 153,294 $ 4.32
=========================================================================================================================
Warrants
At March 31, 1998, the Company has warrants outstanding to acquire
25,000 shares of the Company's common stock. The warrants were issued
in consideration for loans to the Company, in consideration for and in
recognition of services performed and to certain individuals who
guaranteed notes payable by the Company. Warrants granted for loans,
services and guarantees were granted with exercise prices not lower
than the fair market value of the Company's common stock on the date
of grant. The warrants are exercisable at a price of $1.00 per share
and expire in September, 1999. Warrants to acquire 107,880, 668,120
and 891,200 shares of common stock were exercised at average prices of
$.41, $.45 and $.57 in 1998, 1997 and 1996, respectively.
Note 10 Major Customers and Export Sales
Sales to major customers for the years ended March 31, 1998, 1997 and
1996 are summarized as follows (percent of product sales):
1998 1997 1996
=========================================================================================================
Customer A *% 34% 29%
Customer B *% *% 11%
---------------------------------------------------------------------------------------------------------
*% 34% 40%
=========================================================================================================
*Less than 10% of product sales.
Net product sales by geographic area for the years ended March 31,
1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
=====================================================================================================
United States $ 4,297 56% $ 4,303 38% $ 3,614 45%
Canada/South America 404 5% 851 8% 896 11%
Europe 1,284 17% 1,292 11% 747 9%
China 358 5% 3,905 34% 2,375 29%
Asia/Pacific, excluding China 1,284 17% 1,048 9% 449 6%
-----------------------------------------------------------------------------------------------------
$ 7,627 100% $ 11,399 100% $ 8,081 100%
=====================================================================================================
All foreign product sales transactions are consummated in U.S. dollars
20
Note 11 Income Taxes
The components of income taxes are as follows for the years ended
March 31, 1998 and 1997:
1998 1997
=================================================================================================
Current
Federal $ (13) $ 138
State (185) 235
-------------------------------------------------------------------------------------------------
(198) 373
-------------------------------------------------------------------------------------------------
Deferred
Federal 314 (352)
State 59 (21)
-------------------------------------------------------------------------------------------------
373 (373)
-------------------------------------------------------------------------------------------------
$ 175 $ --
=================================================================================================
The provision for income taxes for the years ended March 31, 1997 and
1996 was nil due to the utilization of net operating loss
carryforwards.
A reconciliation of the amount of income taxes computed at the
federal statutory rate of 34% to the amount reflected in the Company's
consolidated statements of operations for the years ended March
31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
=================================================================================================
Amount at the federal statutory income tax rate $ (43) $ 1,414 $ 853
State income taxes, net of federal income tax effect (83) 141 --
Benefit of operating loss carryforwards -- (1,328) (853)
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets 270 (213) --
Other 31 (14) --
-------------------------------------------------------------------------------------------------
$ 175 $ -- $ --
=================================================================================================
The significant components of deferred income tax expense (benefit)
for the years ended March 31, 1998 and 1997 are as follows:
1998 1997
=======================================================================================================================
Deferred tax expense (benefit), exclusive of the change in beginnning-of-the-year valuation
allowance balance $ 103 $ (160)
Increase (decrease) in beginning-of-the-year balance of the valuation allowance for
deferred tax assets 270 (213)
-----------------------------------------------------------------------------------------------------------------------
$ 373 $ (373)
=======================================================================================================================
21
The tax effects of temporary differences related to various assets,
liabilities and carryforwards that give rise to deferred tax assets
and deferred tax liabilities as of March 31, 1998 and 1997 are as
follows:
1998 1997
====================================================================================================================
Deferred tax assets:
Net operating loss carryforwards $ 441 $ 99
Tax credit carryforwards 255 301
Other 156 145
--------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 852 545
Less valuation allowance (404) (134)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 448 411
Deferred tax liability -- equipment and leasehold improvements, principally due to differences
in depreciation and amortization (448) (38)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ 373
====================================================================================================================
The valuation allowance for deferred tax assets as of April 1, 1997,
1996 and 1995 was $134, $1,675 and $2,751, respectively. The
valuation allowance increased by $270 during the year ended March 31,
1998 and decreased by $1,541 and $1,076 during the years ended
March 31, 1997 and 1996, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
Based upon the level of historical taxable income and projections
for future taxable income over the periods which the net deferred tax
assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at March 31,
1998. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At March 31, 1998, the Company has tax net operating tax loss
carryforwards available to offset future federal and state taxable
income and tax credit carryforwards available to offset future federal
income taxes as follows:
Research and
Net operating Investment experimentation
Expires March 31, losses tax credits tax credits
==========================================================================================================
1999 $ -- $ -- $ 3
2000 -- -- 14
2001 -- 14 15
2002 -- -- 22
2003 -- -- 15
2004 -- -- 52
2005 -- -- 5
2006 400 -- --
2011 -- -- 23
2012 44 -- 9
2013 854 -- --
----------------------------------------------------------------------------------------------------------
$ 1,298 $ 14 $ 158
==========================================================================================================
In addition, at March 31, 1998, the Company has alternative minimum
tax credit carryforwards of approximately $83 which are available to
reduce future federal regular income taxes over an indefinite period.
Investment tax credits will be recorded as a reduction of the
provision for federal income taxes in the year realized.
22
Note 12 Fair Value of Financial Instruments
SFAS Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments as of March 31, 1998
and 1997:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term
nature of these instruments.
Investment Securities
The fair value of investment securities is based on quoted market
prices at the reporting date. The carrying value of investment
securities approximates fair value.
Note Payable
The carrying value of the note payable approximates fair value as the
interest rate of the note approximates the rate currently offered to
the Company for similar debt instruments of a comparable maturity.
Long-Term Debt
The carrying amounts approximate fair value because the instruments
reprice at market rates on a quarterly basis.
Note 13 Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan for all associates
not covered under a separate management incentive plan. Under the
401(k) profit sharing plan, 5% of pre-tax profits are allocated based
on gross wages to non-management associates on a quarterly basis.
Fifty percent of each associate's profit sharing bonus is distributed
in cash on an after-tax basis, with the remainder deposited in each
associate's 401(k) account on a pre-tax basis with a six year vesting
schedule, based on years of service with the Company. All associates
may make voluntary pre-tax contributions to their 401(k) accounts.
Compensation expense relative to this plan amounted to nil, $219 and
$132 for the years ended March 31, 1998, 1997 and 1996, respectively.
Note 14 Commitments and Contingencies
As of March 31, 1998, the Company has agreed with a construction
contractor to resume work on an expansion project on or before
January 1, 1999 in a reasonable and customary manner in accordance
with the terms of the contract and at a minimum billable rate of $150
per month. The remaining balance on the construction contract is
approximately $1.9 million. If work does not resume on or before
January 1, 1999, the contract will be considered to have been
terminated by Cyanotech and each party will retain all rights with
respect to the termination of the contract. Assertion by the
contractor of its termination rights could have a material adverse
effect on the Company's financial condition, results of operations or
liquidity. Total costs incurred as of March 31, 1998 with respect to
this expansion project approximate $2,643. Management expects to
resume work on the project on or before January 1, 1999.
The Company is involved in various claims arising in the ordinary
course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect
on the Company's consolidated financial position, results of
operations or liquidity.
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors Cyanotech Corporation:
We have audited the accompanying consolidated balance sheets of
Cyanotech Corporation and subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period
ended March 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cyanotech Corporation and subsidiaries as of March 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended March 31,
1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Honolulu, Hawaii
April 27, 1998
SELECTED QUARTERLY FINANCIAL DATA
First Second Third Fourth Total
($ in thousands, except share data) Quarter Quarter Quarter Quarter Year
=================================================================================================================
1998
Net sales $ 1,774 $ 2,053 $ 1,564 $ 2,236 $ 7,627
Gross profit 872 885 542 838 3,137
Net income (loss) 125 (54) (286) (85) (300)
Net income (loss) per common share
Basic 0.00 (0.01) (0.03) (0.01) (0.05)
Diluted 0.00 (0.01) (0.03) (0.01) (0.05)
1997
Net sales $ 2,455 $ 2,812 $ 2,782 $ 3,350 $ 11,399
Gross profit 1,470 1,740 1,731 1,868 6,809
Net income 845 1,104 956 1,254 4,159
Net income per common share
Basic 0.06 0.08 0.07 0.09 0.31
Diluted 0.05 0.07 0.06 0.08 0.25
24
OFFICERS
Gerald R. Cysewski, Ph.D
President, Chief Executive Officer
and Chairman of the Board
Glenn D. Jensen
Vice President - Operations
Kelly J. Moorhead
Vice President -
Sales and Marketing
President, Nutrex, Inc.
Ronald P. Scott
Executive Vice President -
Finance & Administration
Treasurer and Secretary
BOARD OF DIRECTORS
Julian C. Baker 2
Gerald R. Cysewski, Ph.D
Eva R. Reichl 1,2
Ronald P. Scott
John T. Ushijima 1,2
Paul C. Yuen, Ph.D 1
1 Member of the Audit Committee
2 Member of the Compensation and
Stock Option Committee
CORPORATE INFORMATION
Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597
Wholly-Owned Subsidiaries
Nutrex, Inc.
Cyanoech International FSC, Inc.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 522-6645
Independent Accountants
KPMG Peat Marwick LLP
Honolulu, HI 96812-4150
Legal Counsel
Goodsill Anderson Quinn & Stifel
Honolulu, HI 96801-3196
Form 10-K
A copy of Cyanotech's annual report to the Securities
and Exchange Commission on Form 10-K is available
without charge upon written request to:
Secretary, Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, HI 96740
Notice of Annual Meeting
The 1998 annual meeting of stockholders will be held
on Thursday, September 17, 1998, at 7:00 p.m. at
Ala Moana Hotel
410 Atkinson Dr.,
Honolulu, Hawaii 96814
Additional Information:
As a service to our stockholders and prospective
investors, copies of Cyanotech news releases and
financial statements issued in the last 12 months are
available 24 hours a day, seven days a week on the
Internet's World Wide Web at http://
www.cyanotech.com
Market for Common Equity and Related
Stockholder Matters
Cyanotech's Common Stock is traded on the Nasdaq National Market under the
symbol "CYAN." The following table sets forth the high and low selling prices as
reported by the Nasdaq Stock Market for the periods indicated.
Three Months Ended High Low
=======================================
1998
June 30, 1997 $ 7.13 $ 4.75
September 30, 1997 $ 6.38 $ 4.25
December 31, 1997 $ 5.75 $ 2.44
March 31, 1998 $ 4.06 $ 2.50
1997
June 30, 1996 $ 9.88 $ 6.25
September 30, 1996 $ 8.88 $ 5.31
December 31, 1996 $ 7.38 $ 5.88
March 31, 1997 $ 8.13 $ 2.50
Cyanotech has never declared of paid cash dividends on its Common Stock. We
currently intend to retain all of our earnings for use in the business and do
not anticipate paying any cash dividends on Series C Preferred Stock or Common
Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as of
June 17, 1998 was 1,393.
Forward-Looking Information
Certain statements herein set forth management's intentions, plans, beliefs,
expectations or predictions of the future based on current facts and analyses.
Actual results may differ materially due to a variety of factors including
reduced product demand, price competition, government action, and weather
conditions. Additional information on factors that may affect the Company and
cause actual results to differ from current expectations can be found in
Cyanotech's filings with the SEC.
- --------------------------------------------
CYANOTECH CORPORATION
Hawaii Ocean and Science Technology Park
73-4460 Queen Kaahumanu Highway
Suite 102
Kailua-Kona, Hawaii 96740