Exhibit 10.16
CYANOTECH CORPORATION
PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT
THIS PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made as of February 20, 1996, by and between Cyanotech
Corporation, a Nevada corporation (the "Company"), and Firemen's Insurance
Company of Newark, New Jersey, a New Jersey insurance company ("Firemen's
Insurance"). National-Ben Franklin Co. of Illinois, an Illinois corporation
("National-Ben"), has executed this Agreement for purposes of Article IV
hereof only.
WHEREAS, Firemen's Insurance holds 1,250,000 shares (the "Series A Shares")
of the Company's 12% Cumulative, Convertible Preferred Shares -- Series A, par
value $.001 per share, constituting all the shares of such series of the Company
currently issued and outstanding;
WHEREAS, Firemen's Insurance purchased the Series A Shares pursuant to
the Venture Capital Unit Purchase Agreement dated as of April 18, 1985 between
The Continental Corporation (the successor in interest to Firemen's Insurance)
and the Company (the "Series A Agreement");
WHEREAS, Firemen's Insurance holds 595,031 shares (the "Series C Shares")
of the Company's 8% Cumulative, Convertible Preferred Shares -- Series C, par
value $.001 per share;
WHEREAS, the 1,250,000 outstanding Series A Shares were convertible by
their terms into 250,000 shares of the Company's common stock, par value $.005
per share (all shares of the Company's common stock referred to herein as the
"Common Stock"), until February 28, 1995;
WHEREAS, the Company is contemplating an underwritten public offering of
its Common Stock (the "Contemplated Public Offering"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), which Contemplated
Public Offering is expected to occur in late March or early April 1996;
WHEREAS, the underwriters of the Contemplated Public Offering have advised
the Company that for marketing reasons, among other factors, the success of the
Contemplated Public Offering is partially dependent, among other factors, upon
agreement of Fireman's Insurance to convert the outstanding Series A Shares into
Common Stock of the Company;
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WHEREAS, Firemen's Insurance will benefit from the success of the
Contemplated Public Offering;
WHEREAS, Firemen's Insurance desires to convert, and the Company desires
Firemen's Insurance to convert, the Series A Shares into shares of Common Stock,
on the terms and subject to the terms set forth herein; and
WHEREAS, to further induce Firemen's Insurance to convert the Series A
Shares and the Series C Shares, the Company has agreed to grant certain "piggy-
back" registration rights to Firemen's Insurance with respect to its resale of
the shares of Common Stock issuable on conversion of the Series A Shares and the
Series C Shares.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I
CONVERSION OF SERIES A SHARES
1.1 CONVERSION OF SERIES A SHARES. Subject to the terms and
conditions of this Agreement, Firemen's Insurance shall convert the Series A
Shares into 250,000 shares of Common Stock (subject to appropriate adjustments
for stock splits, stock dividends, combinations, other recapitalizations and
similar events), which conversion ratio has been determined in accordance with
the independent valuation attached hereto as EXHIBIT A and the Company shall
issue to Firemen's Insurance 250,000 shares of Common Stock in respect thereof
(subject to appropriate adjustments for stock splits, stock dividends,
combinations, other recapitalizations and similar events). The aggregate
250,000 shares of Common Stock to be issued to Firemen's Insurance shall
herein be referred to as the "Common Shares."
1.2 TERMINATION OF RIGHTS UNDER OTHER AGREEMENTS. All rights of
Firemen's Insurance to cause the Company to register the resale of any of the
Company's securities existing prior to the date hereof under the Securities Act
or any state securities laws shall terminate as of the date hereof. All rights
of Firemen's Insurance under the Series A Agreement, and any other agreement to
which the Company and Firemen's Insurance is a party relating to the Series A
Shares and the Common Stock issuable upon conversion thereof shall terminate as
of the date hereof. All rights of Firemen's Insurance incident to ownership of
Series A Shares, including, without limitation, the ability of the holders of
the Series A Shares to elect one director of the Company, shall terminate as of
the Closing (as defined below).
1.3 CLOSING. The conversion of the Series A Shares and the issuance
of the Common Shares in respect thereof shall take place at such time and place
as the closing of the Contemplated Public Offering (which time and place are
designated as the "Closing"). At the Closing, Firemen's Insurance shall deliver
to the Company the certificates representing the Series A Shares and the Company
shall deliver to Firemen's Insurance certificates representing the Common Shares
as set forth in Section 1.1 hereof. This Agreement shall terminate in its
entirety and be of no further force and effect, and any
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rights terminated pursuant to Section 1.2 shall be reinstated, if the Closing
does not occur by September 30, 1996, or such later date as all parties hereto
shall agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FIREMEN'S INSURANCE
Firemen's Insurance hereby represents and warrants to the Company
that:
2.1 TITLE TO STOCK. Firemen's Insurance has good and valid title to
the Series A Shares held by it, free and clear of any lien, pledge, security
interest, or other encumbrance with full right and power to convert such shares
as set forth herein.
2.2 AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation, enforceable in accordance with its terms, subject to
bankruptcy and other laws of general application affecting the rights and
remedies of creditors, and rules of law governing specific performance,
injunctive relief, or other equitable remedies.
2.3 RESTRICTED SECURITIES. Firemen's Insurance understands that the
Common Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they were initially acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations, such securities may be resold without registration under
the Securities Act, only in certain limited circumstances. In this connection,
Firemen's Insurance represents that it is familiar with Securities and Exchange
Commission ("SEC") Rule 144 as presently in effect and it understands the resale
limitations imposed thereby and by the Securities Act. Firemen's Insurance
understands that it may be deemed an "affiliate" of the Company as that term is
defined in Rule 144.
2.4 DISCLOSURE OF INFORMATION. Firemen's Insurance believes that it
has received all the information that it considers necessary or appropriate for
deciding whether to enter into the transactions contemplated by this Agreement
and to acquire the Common Shares. Firemen's Insurance has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the Common Shares. The Company has not made any representations
to Firemen's Insurance regarding the Company, its business, prospects, financial
condition, or any other matter.
2.5 LEGENDS. It is understood that the certificates evidencing the
Common Shares, when reissued in the name of Firemen's Insurance, may bear the
following legend, or a legend substantially similar to such legend:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act
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or an opinion of counsel satisfactory to the company that such registration is
not required or unless sold pursuant to Rule 144 of such Act."
ARTICLE III
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
3.1 DEFINITIONS. For purposes of this Article III:
(a) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (1) the Common
Shares issued to Firemen's Insurance pursuant to this Agreement, (2) the shares
of Common Stock of the Company issuable or issued upon conversion of the
Series C Shares, and (3) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right, or other security which
is issued as) a dividend or other distribution with respect to, or in exchange
for or in replacement of, such Common Shares or such Common Stock, excluding in
all cases, however, any Registrable Securities sold by a person in a transaction
in which his/her rights under this Article III are not assigned;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 3.10 hereof; and
(e) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any comparable or successor form under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
3.2 COMPANY REGISTRATION. If (but without any obligation to do so
under this Agreement), at any time after the closing of the Contemplated Public
Offering, the Company proposes to register any of its stock or other securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan,
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or a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, give each Holder written notice of such registration at least 20 days
prior to the proposed date to file any registration statement. Upon the written
request of each Holder given within twenty (20) days after mailing of such
notice by the Company in accordance with Section 4.5, the Company shall, subject
to the provisions of Section 3.6, cause to be registered under the Securities
Act all of the Registrable Securities that each such Holder has requested to be
registered.
3.3 OBLIGATIONS OF THE COMPANY. Whenever required under this
Article III to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective and to remain effective
for a period of not less than 90 days or such shorter period which will
terminate when all Registrable Securities covered by such registration statement
have been sold..
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and other applicable laws and regulations with
respect to the disposition of all securities covered by such registration
statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus including all supplements
thereto, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, PROVIDED that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) Use its reasonable best efforts to list for quotation on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) such Registrable Securities.
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the
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managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement. In addition, all shares registered shall be distributed
substantially in accordance with the plan of distribution as set forth in the
registration statement.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and notice of any stop order issued or threatened by the SEC and to
take all reasonable actions to prevent the entry of such stop order or to remove
it if it is entered.
(h) If any Registrable Securities are offered for sale, on the
date that the Registrable Securities are delivered to the underwriters, if any,
and if such Registrable Securities are not being sold through underwriters, then
on the date the registration statement becomes effective, the Company shall
furnish the Holder with (A) a signed opinion, dated as of the date of such
delivery, of the legal counsel of the Company addressed to the underwriters, if
any, and if such Registrable Securities are not being sold through underwriters,
then to the Holder covering such matters as are customarily addressed in
opinions rendered to underwriters on such transactions, and (B) a letter, dated
as of the date of such delivery, of the Company's independent public accountants
addressed to the underwriters, and if such Registrable Securities are not being
sold through underwriters, then to the Holder and, if such accountants refuse to
deliver such letter to the Holder, then to the Company (x) stating that they are
independent certified public accountants within the meaning of the Securities
Act and that, in the opinion of such accountants, the financial statements and
other financial data of the Company included in the registration statement or
the prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and (y) covering such other financial matters (including information as to
the period ending not more than five (5) business days prior to the date of such
letter) with respect to the registration in respect of which such letter is
being given as the Holder may reasonably request and as would be customary in
such a transaction.
3.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Article III with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required by law or otherwise to effect the registration of such
Holder's Registrable Securities.
3.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay
all expenses incurred in connection with any registration, filing, or
qualification of
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Registrable Securities with respect to the registrations pursuant to Section 3.2
for each Holder (which right may be assigned as provided in Section 3.10),
including (without limitation) all registration, filing, and qualification fees,
printer's and accounting fees relating thereto, and fees and disbursements of
counsel for the Company, but excluding the fees and disbursements of legal
counsel for the selling Holders if separate legal counsel is employed and
underwriting discounts and commissions relating to Registrable Securities.
3.6 (a) UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 3.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then subject to the
terms set forth below only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters reasonably believe
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters believe will not jeopardize the
success of the offering (the securities so included to be apportioned pro-rata
among the selling stockholders according to the total amount of securities
entitled to be included therein owned by each selling stockholder or in such
other proportions as shall mutually be agreed to by such selling stockholders);
PROVIDED, HOWEVER, that the amount of Registrable Securities and other
securities excluded from the offering may not be reduced to less than forty
percent (40%) of such offering; and further PROVIDED, HOWEVER that Firemen's
Insurance will be entitled to include in each public offering, if it shall so
elect, no fewer than 507,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events). For purposes of the parenthetical in the
preceding sentence concerning apportionment, for any selling stockholder which
is a Holder of Registrable Securities and which is a partnership or corporation,
the partners, retired partners and stockholders of such Holder, or the estates
and family members of any such partners and retired partners and any trusts for
the benefit of any of the foregoing persons shall be deemed to be a single
"selling stockholder," and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
(b) WITHDRAWAL RIGHTS. Each Holder shall be permitted to
withdraw up to 507,000 shares (subject to appropriate adjustment for stock
splits, stock dividends, combinations, other recapitalizations and similar
events) of such Holder's Registrable Securities included in a registration at
any time prior to the effective date of such registration. In addition, to the
extent the number of Registrable Securities being sold by the Holder is greater
than 507,000 shares (subject to appropriate adjustment for stock splits, stock
dividends, combinations, other recapitalizations and similar events) the Holder
can
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withdraw any such portion above 507,000 shares if, on the date of such
withdrawal, the last reported sale price of the Company's Common Stock on Nasdaq
(or such other national exchange or national quotation system on which the
Company's Common Stock is then listed) was less than 85% of the proposed maximum
offering price per share listed on the "Calculation of Registration Fee" section
on the cover of the registration statement filed with respect to the Registrable
Securities.
3.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article III. This Section 3.7 shall
not affect any remedies at law available to the Holder for breaches of Section
3.6(a) by the Company.
3.8 INDEMNIFICATION AND CONTRIBUTION. In the event any Registrable
Securities are included in a registration statement under this Article III:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act or the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions, or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act or
the 1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter, or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER,
that the indemnity agreement contained in this subsection 3.8(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter, or
controlling person.
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(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 3.8(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 3.8(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld.
(c) Promptly after receipt by an indemnified party under this
Section 3.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 3.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain separate counsel in each
jurisdiction where separate representation would be appropriate in the judgment
of the indemnified party, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party to the extent of such prejudice of any liability
to the indemnified party under this Section 3.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 3.8.
(d) No indemnifying party, in the defense of any claim arising
out of a Violation shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from
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all liability in respect to such claim or litigation and, in the event the terms
of such judgment or settlement include any term other than the payment by the
indemnifying party of money damages, the indemnifying party shall not so consent
or enter into such a settlement without the consent of each indemnified party
(which will not be unreasonably withheld) whether or not the terms thereof
include such a release.
(e) CONTRIBUTION. If for any reason the indemnity provided for
in this Section 3.8 is unavailable to, or is insufficient to hold harmless, an
indemnified party, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and the indemnified party on the other, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, or provides a lesser sum to
the indemnified party than the amount hereinafter calculated, in such proportion
as is appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other but
also the relative fault of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties; and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 3.8(d), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.8(e) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
(f) The obligations of the Company and Holders under this
Section 3.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Article III, and otherwise.
3.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to
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sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees and covenants to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act;
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Securities Act and the 1934 Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company with the
SEC or any securities exchange, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration or
pursuant to such form; and
(d) provide the Holder with prompt notice of any failure by the
Company to comply with the requirements of Rule 144.
3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Article III may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds (i) at
least 1% of the Registrable Securities then outstanding (subject to appropriate
adjustment for stock splits, stock dividends, combinations, other
recapitalizations and similar events), or (ii) all of the shares of Registrable
Securities initially issued to such Holder, PROVIDED that, within a reasonable
time after such transfer, the Company is furnished with written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned; and PROVIDED, FURTHER,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and/or not otherwise eligible
for sale under Rule 144(k) of the Securities Act or similar exemption. For the
purposes of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants, and siblings of such partners or
spouses who acquire Registrable Securities by gift, will, or intestate
succession) shall be aggregated together and with the partnership; PROVIDED that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices, or taking any action under this
Article III.
11.
3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Article III may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities and the Company.
3.12 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled
to exercise any right provided for in this Article III after February 3, 2005.
ARTICLE IV
MISCELLANEOUS
4.1 MARKET STAND-OFF. Firemen's Insurance and National-Ben hereby
covenant that they will not, except for the conversion of the Series A Shares
contemplated by this Agreement, without the prior written consent of ▇▇▇ ▇▇▇▇▇▇
& Company (or such other investment bank that serves as the lead managing
underwriter in the Company's Contemplated Public Offering, which person is
referred to herein as the "Lead Managing Underwriter"), offer, sell, or
otherwise dispose of, directly or indirectly, any shares of the Company's Common
Stock, or any securities convertible into or exercisable or exchangeable for, or
any rights to purchase or acquire, Common Stock owned by it (otherwise than as a
bona fide gift or gifts, provided the donee or donees thereof agree in writing
to be bound by the terms of this Section 4.1) for the period beginning on the
date hereof and ending on the date one hundred and twenty (120) days after the
date of the closing of the Contemplated Public Offering. If requested by the
Lead Managing Underwriter, Firemen's Insurance and National-Ben each agree to
execute an agreement similar to that set forth in this Section 4.1 addressed to
the Lead Managing Underwriter. The Company shall be expressly entitled to
enforce the provisions of this Section 4.1 on behalf of the Lead Managing
Underwriter. This Section 4.1 shall be effective only upon the execution of a
similar provision by American Cyanamid Company.
4.2 SURVIVAL OF WARRANTIES. The warranties, representations, and
covenants of Firemen's Insurance, National-Ben and the Company contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of Firemen's Insurance or the Company.
4.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their
12.
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
4.4 EXPENSES. Except as otherwise provided in Article III hereof,
irrespective of whether the Closing is effected, each party shall pay its own
costs and expenses that such party incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement.
4.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
days after deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or by facsimile
confirmed by such certified or registered mail or at such other address as such
party may designate by ten (10) days' advance written notice to the other
parties.
4.6 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Nevada.
4.7 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.8 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This writing, together
with any exhibits annexed hereto, constitutes the entire Agreement of the
parties with respect to the subject matter hereof and shall supersede all prior
understandings and writings with respect thereto. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of all the parties hereto.
4.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.
4.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Cyanotech Corporation
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
______________________________________
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: President & CEO
Address: ▇▇-▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇.,
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇-▇▇▇▇, ▇▇ ▇▇▇▇▇
Firemen's Insurance Company of Newark, New Jersey
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
______________________________________
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Vice President
Address: ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
FOR PURPOSES OF ARTICLE IV ONLY:
National-Ben Franklin Co. of Illinois
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
______________________________________
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Vice President
Address: ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
14.
EXHIBIT A
TO
CYANOTECH CORPORATION
PREFERRED STOCK CONVERSION AGREEMENT
[▇▇▇▇ ▇ ▇▇▇▇▇▇ LETTERHEAD]
January 30, 1996
The Board of Directors
Cyanotech Corporation
▇▇-▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇., ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇-▇▇▇▇, ▇▇ ▇▇▇▇▇
Re: Fairness Opinion re Exchange of 12% Cumulative Preferred Stock - Series A
of Cyanotech Corporation
Dear Board Members:
In response to your request of January 15, 1996, I have examined the
advisability of a voluntary, negotiated exchange of the Common Stock of
Cyanotech Corporation (Cyanotech) or (the Company) for the 1,250,000 outstanding
shares of the 12% Cumulative Preferred Stock - Series A (Series A Preferred) or
(Series A) and I have considered an appropriate exchange rate. I have
considered each question based upon the benefit and fairness, from a financial
standpoint, to the holders of the Common Stock of Cyanotech.
In recognition of your need to promptly commence negotiations, should I have
found such negotiations advisable, I have previously submitted to you on January
17, 1996, a written summary of my preliminary opinion endorsing such action.
The opinion letter herewith provided to you confirms and replaces the summary
findings and contains supporting information that we have discussed and that you
will wish to include in the record.
QUALIFICATIONS OF THE ADVISOR
A summary of my background and experience relevant to this assignment is
attached as Exhibit A.
NO CONFLICT OF INTEREST
I have no direct or indirect financial interest in the Series A Preferred Stock
nor in any other security of Cyanotech. I have had no past business or
financial relationship with the holder of the Series A Preferred Stock, nor have
I any such present or expected future relationship. I have been referred to you
for this assignment by your corporate counsel, Messrs. Goodsill, Anderson, ▇▇▇▇▇
& Stifel, with whom I have had past professional contact, but with whom I have
no financial links.
DATABASE
For my analysis, I have reviewed the following documents: (1) the Cyanotech
annual report and SEC Form 10-KSB for the fiscal year ended 3/31/95; (2) the
Cyanotech SEC Forms 10-QSB for the fiscal
quarters ended 6/30/95 and 9/30/95; (3) the shareholders' Proxy Statement dated
6/26/95; (4) a financial summary of the Cyanotech FYs 1996-2000 business plan,
as prepared 11/15/95; (5) Draft, preliminary SEC Forms SB-2 dated 12/28/95 and
1/12/96, as prepared for the prospective public sale of up to 1,380,000 shares
of Cyanotech Common Stock; (6) the Restated Articles of Incorporation of
Cyanotech Corporation, as filed with the Secretary of State of the State of
Nevada on 4/23/91; and (7) news releases pertaining to Cyanotech issued during
the course of FY 1996, including the news release of 1/24/96 regarding FY 1996
third quarter and nine months' sales and earnings.
In addition, I discussed certain legal matters pertaining to the Series A
Preferred with the Company's counsel, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP, and I
tracked the daily trading prices, volumes, and other market attributes of the
Cyanotech Common Stock during the course of this assignment.
Without independent verification, I have relied upon the essential accuracy of
financial information contained in the foregoing documents, except that I viewed
the financial business plan from FY 1997 onward more as a set of goals than as a
forecast, in common with the plans of most small businesses pursuing a course of
rapid growth.
SERIES A PREFERRED STOCK
The Series A Preferred Stock is described in the attached Exhibit B.
ANALYSIS AND CONCLUSIONS
The following is a summary of the benefits to the holders of the Common Stock to
be obtained from an exchange of Common Stock for all of the outstanding shares
of the Series A Preferred Stock:
(1) Elimination of the $500,000 liquidation preference, a factor potentially of
value to the common shareholders in event of the sale or liquidation of
Cyanotech;
(2) Elimination of the $655,000 cumulative preferred dividend arrearage (as of
3/31/96), a cash payout requirement preceding payment of dividends to the
holders of the Common Stock and any prospective repurchase of Common Stock;
(3) Elimination of the after-tax $60,000 per annum perpetual future cumulative
dividend requirement, increasing earnings attributable to the Common Stock
by a like annual amount and prospectively increasing near term earnings per
share.
(4) Elimination of the perpetual right of the Series A stockholders to elect
one director, which right can, by operation of certain other provisions
applicable to the Series A stock, carry over to any successor corporation;
(5) Elimination of "Consent" requirements, which give holders of the Series A
the ability to impede, delay or block (a) the sale or merger of Cyanotech,
or (b) the entrance by the Company into certain joint ventures, whether or
not any such action would be in the interest of the holders of the Common
Stock.
The costs of the contemplated exchange to Cyanotech and to the holders of the
Common Stock are the following:
(1) Exchange of Common Stock valued at approximately $2,500,000, based upon an
assumed current market price of $10.00 per share (1/30/96 price range:
$10.25-$8.25; last sale: $8.25; closing bid and ask: $8.375 @ $8.75;
trading volume: 107,400 shares; previous day last sale: $10.25.) and an
exchange rate of 1 share of Common Stock for 5 shares of Series A
Preferred.
(2) A potential long term small percentage dilution in the earnings per share
attributable to the Common Stock. (The current breakeven point on dilution
is $0.24 per share, compared with the proforma earnings per share for FY
1996 of $0.18 contained in the Company's business plan.)
The potential dilution of earnings per share is not a material factor as (a) the
number of common shares to be exchanged will not exceed 1.58% of the total
outstanding prior to the exchange, and (b) there are no assurances with respect
to future earnings of Cyanotech.
The significant cost is therefore the market value of the Common Stock
exchanged. This cost can be compared with the benefits obtained. Benefits can
be partially quantified. Subject to variations in the beholders' perception of
values, with such variations based in part upon reasonably different points of
view as to the timing of the realization of the benefits, discount rates applied
and other considerations, the nominal value to Cyanotech and its Common
Stockholders of eliminating the Series A Preferred may be as follows:
Elimination of the Series A liquidation preference $500,000
Elimination of the dividend arrearage 655,000
Elimination of the $60,000 per annum Series A dividend,
discounted to present value @ 12% for 25 years 470,580
Total Nominal Value $1,625,580
Difference between Total Nominal Value of Quantifiable
Benefits and the current market value of the Common Stock
to be exchanged ($874,420)
In my opinion, of far greater value to the Common Stockholders than the
quantifiable benefits, are the benefits summarized above as items (4) and (5).
The perpetual right of representation through the election of one director by
the Series A Preferred, which may, as a class, have substantially different
interests and objectives than the holders of the Common Stock, is a right
disproportionate to the small economic stake of the Series A class, (as compared
with an assumed $2,500,000 exchange value of the Series A, the Common Stock
represents a proforma market value of approximately $158,750,000.) Through
operation of certain other provisions of the Series A, this right carries over
to any successor to Cyanotech. In the event of a prospective merger or sale of
Cyanotech, the right, with its carryover attribute, could be an impediment to a
transaction otherwise in the interest of the Common Stockholders, or it could be
a deal breaker. Value can be justifiably relinquished by the Common
Stockholders to the Series A holders today, in order to forestall prospectively
far greater cost in the future.
"Consent" requirements, as a whole, also potentially separate the interests of
the Series A and Common Stock, with unknown and unknowable prospective future
cost to the Common. The ramifications of these provisions are complex and need
not be dealt with in depth in this letter. For an example, reference is made to
Exhibit B, CONSENT OF HOLDERS REQUIRED, item (v). This restriction (a) gives
the Series A holders effective veto power over the sale or merger of Cyanotech
to, with or into any other entity, (b) may provide similar power over the sale
of any division or subsidiary of Cyanotech, owned now or in the future, and (c)
would preclude most conceivable joint ventures without Series A consent.
Other than by a transaction such as is contemplated and which is the subject of
this opinion, or by such other transaction voluntarily acceptable to the holders
of the Series A, Cyanotech has no method by which it can eliminate the non-
redeemable, "perpetual" Series A Preferred Stock.
In the final analysis, as the prospective future perils to the economic
interests of the holders of the Common Stock, represented by potentially
conflicting rights of the holders of the Series A Preferred Stock, while real
and severe, are nonetheless not quantifiable, the benefit and fairness of the
exchange to the holders of the Common Stock is a matter of business judgment.
In my opinion, based upon the information at hand, an exchange of Common stock
for all of the 1,250,000 Series A Preferred Stock is advisable. In my opinion
also, a negotiated exchange rate of up to and including one share of Common
Stock for each five shares of Series A Preferred Stock is appropriate. In my
opinion, the exchange, as advised herein, is both fair and beneficial, from a
financial point of view, to the holders of the Common Stock of Cyanotech
Corporation.
Sincerely,
/s/ ▇▇▇▇ ▇ ▇▇▇▇▇▇
▇▇▇▇ ▇ ▇▇▇▇▇▇
EXHIBIT A
Summary: Background and Experience
Education
B.S. University of California at ▇▇▇▇▇ 1955
M.B.A. Harvard Business School 1962
Occupation
Independent investment banker. Investment banking since 1962. Served as
partner or officer of ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, and ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇. Founded and managed ▇▇▇▇▇▇ & ▇▇▇▇▇▇, Inc. and two other
specialty broker/dealers engaged in investment banking, research and
institutional brokerage. Presently semi-retired, providing occasional advice
and counsel on matters pertaining to corporate finance, securities and business
strategies.
Transactions
As the sole or primary investment banking professional, participated and advised
in more than one hundred corporate financings, mergers, acquisitions, and sales.
Participated with others in the largest equity financing, the largest tax-exempt
industrial revenue bond financing, and the second largest Chapter XI corporate
reorganization in history at the times of such transactions. Dealt with
virtually all categories of corporate securities, including common and preferred
stocks, convertible securities, secured and unsecured debt and securities
ranging from the highest investment ratings to securities in default.
Fiduciary Responsibility
Served as a director of five public and four closely held corporations (two
currently). Served as a trustee of three non-profit organizations (one
currently).
CYANOTEK CORPORATION
EXHIBIT B
SERIES A PREFERRED STOCK
Of the 5,000,000 shares of stock authorized to be issued as special or preferred
shares, 1,250,000 shares are Series A Shares. On February 28, 1995, the right
of holders of the Series A Shares to exchange such shares for the Common Stock
of Cyanotek Corporation expired. On that same date, such holder's preemptive
rights also expired. Certain other rights, voting power, preferences,
restrictions and qualifications of the Series A Shares, as defined in the
Restated Articles of Incorporation of Cyanotek Corporation, are as follows:
VOTING POWER. The holders of Series A Shares are entitled to one vote to be
case at stockholder meetings in the election of the one member of the board of
directors that is elected by the holders of the Series A Shares. Holders of
Series A Shares are also entitled to cumulative voting.
DIVIDENDS. The holders of Series A Shares are entitled to an annual dividend
when and as declared by the Company's board of directors if there is surplus or
net profits legally available for dividends and payable quarterly on the first
business day of April, July, October and January of each year. When and if
declared, dividends are at the rate of 12% of the initial issue price of $0.40
per share (that is, $0.048 per share per annum or $0.012 per share per quarter)
and are cumulative. Dividends may be paid to the Series A Shares only when, if
and on the same basis as dividends are paid to the holders of 12% Cumulative,
Convertible Preferred Shares-Series B Shares. Dividends may not be paid in any
year to holders of Common Stock until after the Company shall have paid or
provided for the payment of dividends on all of the Series A Shares including
any amounts that may have been accumulated but undeclared and unpaid for each
year from the date of issuance to and including the year in question.
RIGHTS IN DISSOLUTION AND DISTRIBUTIONS OF ASSETS. Upon liquidation,
dissolution, or winding up of the Company, holders of the Series A Shares are
entitled to receive prior to any distribution to the holders of the Common Stock
a liquidation preference of $0.40 per share plus all dividends declared on such
shares but unpaid less any distribution of assets before any amount shall be
paid in liquidation, dissolution or winding up to the holders of Common Stock.
The Series A Shares are not entitled to any further payment as dividends in
liquidation or otherwise. In the event assets as opposed to cash are
distributed to stockholders, the Series A Shares shall be entitled to receive
prior to any distribution to holders of Common Stock, a liquidation preference
in assets equal to $0.40 per share in distributions of assets and in
liquidation, dissolution or winding up of the Company.
CONSENT OF HOLDERS REQUIRED. So long as the Series A Shares are outstanding,
the Company may not without the prior written consent of the holders of a
majority of the Series A Shares do any of the following: (i) issue or propose
to issue any other shares of the Series A Shares, (ii) sell all or substantially
all of the assets of the corporation or consolidate or merge the Company with
any other corporation (an Acquisition Transaction) unless any securities
exchange for the Series A Shares shall be cumulative, convertible preferred
stock the terms of which are identical in all material respects to the Series A
Shares of the Company; (iii) alter or change the powers, preferences or rights
given the Series A Shares; (iv) enter into any transaction in which the holders
of the Series A Shares would be required to accept cash in exchange for their
shares; or (v) enter into any transaction in which the Company's trade secrets
or proprietary technical information or know how is assigned, sold or made
available to any other entity; however, the Company is not prevented from
entering into contracts to provide research and development to other entities,
on an arms length basis, in the ordinary course of business.
CYANOTEK CORPORATION
EXHIBIT C
Common Stock
For the purpose of this analysis, the following tabulation of issued and
proforma outstanding Common Stock has been used:
Common Stock outstanding as of 12/31/95 9,807,575 shares
Conversion of Series C Preferred Stock (Proforma) 3,674,885
In-the-money Warrants (Unexercised) 997,000
Proposed New Common Stock Issuance and Sale
including "Green Shoe" 1,380,000
Current Total Proforma Common Shares 15,859,460
Proposed Series A Exchange 250,000
Adjusted Total Proforma Common Shares 16,109,460