U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB Amendment 1
Mariculture Systems, Inc.
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(Name of Small Business Issuer in its charter)
Florida 65-0677315
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 968
Lake Stevens, Washington 98258
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (425) 397-0409
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered each class to be registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
Copies of Communications Sent to:
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
Tel: (561) 832-5696
Fax: (561) 659-5371
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Item 1: Description of Business:
(a) Business Development
Mariculture Systems, Inc. (the "Company" or "Mariculture") is
incorporated in the State of Florida. The Company is not presently trading on an
exchange, but intends to apply to have its Common Stock quoted on the Over the
Counter Bulletin Board once its Form 10SB has been accepted. Its executive
offices are presently located at P.O. Box 968, Lake Stevens, WA 98258. Its
telephone number is (425) 397-0409 and its facsimile number is (425) 672-8012.
The Company was incorporated in the State of Florida on July 8, 1996.
On August 22, 1996, the Company entered into a share exchange agreement whereby
the Company issued and exchanged 8,800,000 shares of its Common Stock for one
hundred percent (100%) of the issued and outstanding stock of Mariculture
Systems, Inc., a Washington corporation ("MSIW") (the "Share Exchange"). As a
result of that transaction, MSIW became a wholly owned subsidiary of the
Company.
MSIW was incorporated on August 25, 1994 with the goal of becoming a
major supplier of proprietary and non-proprietary equipment to the aquaculture
industry. MSIW concentrated its initial efforts to fund raising through private
placements of its unregistered stock and on the engineering necessary to take
the licensed technology to commercial reality via a pilot system for rearing
finfish. When MSIW entered into the Share Exchange agreement with the Company
and became a wholly owned subsidiary of the Company, MSIW was administratively
dissolved on September 19, 1997 with all assets and liabilities transferred to
the Company.
The Company is filing this Form 10-SB on a voluntary basis so that
the public will have access to the required periodic reports on Mariculture's
current status and financial condition. The Company will file periodic reports
in the event its obligation to file such reports is suspended under the
Securities and Exchange Act of 1934 (the "Exchange Act").
Mariculture Systems, Inc. develops, manufactures, and markets
proprietary systems that allow commercial "fish farmers" to increase
productivity and profits while reducing risks to their crop and limiting
environmental impact. The Company has engineered and developed proprietary
systems that are manufactured to its specifications by one or more specialty
firms. Reinforced Tank Products, Inc. of Drain, Oregon is a primary supplier for
the tanks. Other components utilized in the system are either off the shelf
items or slightly modified to meet the Company's needs and specifications.
Included are pumps by Flygt, generators by Stewart & Stevenson, and many other
well-known vendors of marine rated equipment. Marketing and the system sales are
actively being handled through both full-time inside sales personnel and
part-time sales representatives. An extensive web site (www.sargo.net) is on the
Internet and several links to other listings are presently in place. Discussions
are underway with advertising agencies to represent the Company's products.
Brochures and other media have been produced and are being disseminated on a
regular basis. At this time, sales contacts and ongoing discussions have been
made with responses to direct inquiries. Additional sales positions are
currently being interviewed for expansion of the sales staff. See Part I, Item
1. "Description of the Business - (b) Business of Issuer."
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In April 1996, prior to its acquisition by the Company, MSIW executed
a Promissory Note in favor of William Evans, the Company's then current Vice
President of Sales, in the amount of eighteen thousand dollars ($18,000) at an
interest rate of ten percent (10%) per annum. The Note was in exchange for
monies lent by Mr. Evans to the Company for working capital. The Note was
payable in full by July 31, 1996. See Part I, Item 2. "Management's Discussion
and Analysis or Plan of Operation - Operating Expenses - Interest and Other
Income (Expense), Net" and Part II, Item 4, "Recent Sales of Unregistered
Securities."
In July 1996, prior to its acquisition of MSIW, the Company sold
1,200,000 shares of its Common Stock to one hundred nineteen (119) individuals
for a total of $12,000. For such offering, the Company relied upon Section 3(b)
of the Securities Act of 1933, as amended ("the Act"), Rule 504 of Regulation D
promulgated thereunder ("Rule 504"), Section 517.061(11) of the Florida Code,
Section 10-5-9(13) of the Georgia Code, Section 502.203 (9) of the Iowa Code,
Section 80A.15(Subd. 2)(h) of the Minnesota Code, Section 49:3-50 (b)(9) of the
New Jersey Code, Section 90.530(11) of the Nevada Code, Section 35-1-320(9) of
the South Carolina Code, Section 48-2- 103(b)(4) of the Tennessee Code, Section
5[581-5]I(c) of the Texas Code and Section 551.23 (11) of the Wisconsin Code. No
state exemption was necessary for the sales made to Aruban, Bahamian, Canadian,
French or Taiwanese investors. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In August 1996, the Company entered into a share exchange agreement
with MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its restricted
Common Stock to the shareholders of MSIW for all of the issued and outstanding
stock of MSIW. As part of the transaction, David Meilahn, the Company's current
President, Secretary, Treasurer and Chairman received 2,226,421 shares of the
Company's Common Stock. This offering was conducted pursuant to Section 4(2) of
the Act, Rule 506 of Regulation D promulgated thereunder ("Rule 506"), Section
517.061(11) of the Florida Code, Section 10-5-9 (13) of the Georgia Code, Rule
###-##-#### of the Oregon Code and Section 460- 44A-506 of the Washington Code.
See Part I, Item 1. "Employees and Consultants"; Part I, Item 4. "Security
Ownership of Certain Beneficial Owners and Management"; Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part 1, Item 6.
"Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered Securities."
In January 1997, the Company executed a second Promissory Note in
favor of William Evans, the Company's then present Vice President of Sales, in
the amount of ten thousand dollars ($10,000) at an interest rate of ten percent
(10%) per annum. The Note was in exchange for monies lent by Mr. Evans to the
Company for working capital. The Note was payable in full by April 30, 1997. See
Part I, Item 2. "Management's Discussion and Analysis or Plan of Operation -
Operating Expenses - Interest and Other Income (Expense), Net" and Part II, Item
4, "Recent Sales of Unregistered Securities."
In April 1997, the Company executed a third Promissory Note in favor
of William Evans, the Company's then current Vice President of Sales, in the
amount of twenty two thousand dollars
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($22,000) at an interest rate of ten percent (10%) per annum. The Note was in
exchange for monies lent by Mr. Evans to the Company for working capital. The
Note was payable in full by December 15, 1997. See Part I, Item 2. "Management's
Discussion and Analysis or Plan of Operation - Operating Expenses - Interest and
Other Income (Expense), Net" and Part II, Item 4, "Recent Sales of Unregistered
Securities."
In July 1997, the Company issued 31,000 shares of its restricted
Common Stock to Corporate Imaging in connection with their production of a
corporate profile. The shares were issued pursuant to Section 4(2) of the Act,
Rule 506 and Section R14-4-126 of the Arizona Code. See Part I, Item 1.
"Employees and Consultants"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered Securities."
In July 1997, the Company issued 10,766 shares of its restricted
Common Stock valued at $3,122 to Jeff & Jill Caven in connection with their
photography services on behalf of the Company. The shares were issued pursuant
to Section 4(2) of the Act, Rule 506, Section 58-13B-24(R) of the New Mexico
Code and New Mexico Rule 12NMAC11.4.11.2. See Part I, Item 1. "Employees and
Consultants"; Part 1, Item 7 "Certain Relationships and Related Transactions"
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In July 1997, the Company issued 14,946 shares of its restricted
Common Stock valued at $9,715 to John Sabella as payment for producing brochures
on behalf of the company. The shares were issued pursuant to Section 4(2) of the
Act, Rule 506 and Section 460-44A-506 of the Washington Code. See Part I, Item
1. "Employees and Consultants"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
In August 1997, an agreement was entered into whereby the Company
issued 54,027 shares of its Common Stock to Stephen Jaeb in exchange for the
cancellation of a debt by the Company to Mr. Jaeb in the amount of $54,027. The
shares were issued pursuant to Section 3(b) of the Act, Rule 504 and Section
517.061(11) of the Florida Code. See Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
In April 1998, an agreement was entered into, whereby the Company
issued 20,600 shares of its unrestricted Common Stock to Reinforced Tank
Products, Inc. in connection with their agreement to provide engineering
services at the University of California in Long Beach, California. The services
were valued at $20,600. The shares were issued pursuant to Section 3(b) of the
Act, Rule 504 and Section 59.035(12) of the Oregon Code. See Part I, Item 1.
"Employees and Consultants"; Part I, Item 7. "Certain Relationships and Related
Transactions" and Part II, Item 4. "Recent Sales of Unregistered Securities."
In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her services
were valued at $8,700. The shares were actually issued in January 2000. The
shares were issued pursuant to Section 4(2) of the Act, Rule 506 and Section
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460-44A-506 of the Washington Code. See Part I, Item 1. "Employees and
Consultants"; Part I, Item 4. "Security Ownership of Certain Beneficial Owners
and Management"; Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons"; Part I, Item 6 "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In December 1998, the Company sold 1,409 shares of its restricted
Common Stock to three (3) investors. No offering memorandum was used in
connection with these sales. This offering was conducted pursuant to Section
4(2) of the Act, Rule 506 and Section 109.13 of the Texas Code. See Part II,
Item 4. "Recent Sales of Unregistered Securities."
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which has not yet been paid, and additionally
agreed to pay a quarterly royalty payment of three percent (3%) of total sales
of Licensed Technology Products from the agreement date until the final
abandonment, expiration, or invalidation of the last remaining patent rights.
See Part I, Item 1. "Employees and Consultants"; Part I, Item 2. "Management's
Discussion and Analysis or Plan of Operation - Operating Expenses - Interest and
Other Income (Expense), Net"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation" and
Part I, Item 7. "Certain Relationships and Related Transactions."
From December 1998 through April 1999, the Company sold 93,069 shares
of its unrestricted Common Stock to twenty two (22) investors. For such
offering, the Company relied upon Section 3(b) of the Act, Rule 504, Section
11-51-308(1)(j) of the Colorado Code, Section 517.061(11) of the Florida Code,
Section 10-5-9(13) of the Georgia Code, Section 59.035(12) of the Oregon Code,
Section 48-2-103(b)(4) of the Tennessee Code and Section 551.23 (11) of the
Wisconsin Code. See Part II, Item 4. "Recent Sales of Unregistered Securities."
In April 1999, the Company issued 27,000 shares of its unrestricted
Common Stock to Neil Rand in connection with his production of a corporate
profile. The shares were issued pursuant to Section 3(b) of the Act, Rule 504
and Section 517.061(11) of the Florida Code. See Part I, Item 1. "Employees and
Consultants"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In April 1999, an agreement was entered into, whereby the Company
issued 11,930 shares of its restricted Common Stock to Sanford Tager, President
of Methow Valley Excavating, Inc., in connection with their agreement to
dismantle and remove the Company's pilot test site. The services were valued at
$11,929.54. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and Section 460-44A-506 of the Washington Code. See Part I, Item 1. "Employees
and Consultants"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4.
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"Recent Sales of Unregistered Securities."
In March 2000, the Company issued 250,000 shares of its restricted
Common Stock to Donald Mintmire in connection with his legal services on behalf
of the Company. The shares were issued pursuant to Section 3(b), Rule 701 and
Section 517.061(11) of the Florida Code. See Part I, Item 1. "Employees and
Consultants"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In March 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn, in the amount of fourteen thousand four hundred dollars
($14,400) at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital. The
Note is payable on demand. See Part I, Item 2. "Management's Discussion and
Analysis or Plan of Operation - Operating Expenses - Interest and Other Income
(Expense), Net", Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation"; Part
I, Item 7. "Certain Relationships and Related Transactions"; and Part II, Item
4. "Recent Sales of Unregistered Securities."
In March 2000, the Company executed a Promissory Note in favor of
David Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The Note was
in exchange for monies lent by Mr. Meilahn to the Company for working capital.
The Note is payable on demand. See Part I, Item 2. "Management's Discussion and
Analysis or Plan of Operation - Operating Expenses - Interest and Other Income
(Expense), Net", Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation"; Part
I, Item 7. "Certain Relationships and Related Transactions"; and Part II, Item
4. "Recent Sales of Unregistered Securities."
In March 2000, pursuant to the Company's Bylaws, a vacancy was created
in the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until election by
the shareholders at the 2001 shareholders meeting. See Part I, Item 1.
"Employees and Consultants"; Part I, Item 4. "Security Ownership of Certain
Beneficial Owners and Management"; Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part 1, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions."
In March 2000, pursuant to the Company's Bylaws, a vacancy was created
in the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Don N. Jonas by an affirmative vote of a majority of the
remaining directors. Mr. Jonas shall serve until election by the shareholders at
the 2001 shareholders meeting. See Part I, Item 1. "Employees and Consultants";
Part I, Item 4. "Security Ownership of Certain Beneficial Owners and
Management"; Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons"; Part 1, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions."
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In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses presented by each member of
the board. See Part I, Item 1. "Employees and Consultants"; Part I, Item 4.
"Security Ownership of Certain Beneficial Owners and Management"; Part I, Item
5. "Directors, Executive Officers, Promoters and Control Persons"; Part 1, Item
6. "Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"and Part II, Item 4 "Recent Sales of Unregistered Securities."
January 2000 through April 2000, the Company sold 32,000 shares of
its Restricted Common Stock to seven (7) investors for a total of thirty two
thousand dollars ($32,000). The offering was conducted pursuant to Section 4(2)
of the Act, Rule 506, Section 25102.1 of the California Code, Section 80 A.15
Subd. 2(h) of the Minnesota Code, Section 109.13 of the Texas Code, and Section
460-44A-506 of the Washington Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In August 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable in demand. See Part I, Item 2. "Management's Discussion and Analysis or
Plan of Operation - Operating Expenses - Interest and Other Income (Expense),
Net"; Part I, Item 4. "Security Ownership of Certain Beneficial Owners and
Management"; Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In September 2000, the Company entered into an Employment Agreement
with Richard J. Luce ("Luce"), to employ Luce as Vice President of Sales and
Marketing. The term of the agreement is for a period of four (4) years and is
automatically renewable for one (1) year. Mr. Luce's annual base salary is
ninety three thousand five hundred dollars ($93,500.00) for the first year, one
hundred thousand forty five dollars ($100,045) for the second year, one hundred
seven thousand forty eight dollars ($107,048) for the third year, and one
hundred fourteen thousand five hundred forty one dollars ($114,541) for the
fourth year. However no salary will be accrued during the first four (4) months
of employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one half
percent (0.5%) for all direct sales by Luce. Luce is also granted the right to
purchase up to one hundred thousand (100,000) shares of the Company's restricted
Common Stock at a price of four dollars ($4.00) per share. Twenty-five percent
(25%) of the options shall become vested on January 1, 2001, and the remaining
seventy-five percent (75%) of the options shall become vested at the equal rate
of twenty-five percent (25%) upon each successive one (1) year anniversary date
of employment. All vested options shall expire with three (3) years from the
date of vesting. See Part I, Item 1. "Employees and Consultants"; Part I, Item
4. "Security Ownership of Certain Beneficial Owners and Management"; Part I,
Item 5. "Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6. "Executive Compensation"; and Part I, Item 7. "Certain Relationships and
Related
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Transactions."
In November 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of five thousand dollars ($5,000) at an interest
rate of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part I, Item 2. "Management's Discussion and Analysis or Plan of
Operation - Operating Expenses - Interest and Other Income (Expense), Net"; Part
I, Item 4. "Security Ownership of Certain Beneficial Owners and Management";
Part I, Item 5. "Directors, Executive Officers, Promoters and Control Persons";
Part I, Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
In November 2000, the Company entered into a Consulting Agreement
with Websters' Inc. The Consulting Agreement provides that the Company is to
engage Websters' Inc. as a registered professional engineering firm for the
purposes of performing the comprehensive design, development and production of a
functional integrated commercial SARGO system, and to provide technical support
to the installation of the resulting device into SARGO commercial fish rearing
vessels. Websters' Inc. agrees to provide approximately two hundred fifty (250)
hours of service to the Company, and to accept restricted Common Stock of the
Company in lieu of cash payment at a rate of one hundred (100) shares for every
one (1) hour of services, or a pro-rata amount thereof, or, upon the approval of
the Company's Board of Directors, in a cash amount of one hundred fifty dollars
($150) per hour of service. Websters' Inc. is to receive an initial deposit in
advance against the Consulting Agreement of one thousand (1,000) shares of
restricted Common Stock of the Company. Payments for services in shares will be
presented as a certificate of the restricted Common Stock on a quarterly basis
upon approval of the Company's Board of Directors. The agreement also provides
that the Company agrees to exchange for cash, at the same rate of value as at
original issue, any designated part or the total of all stock issued to
Websters' Inc. as a fee from the Consulting Agreement. The exchange for cash
will only be in the event that the stock tendered to Websters' Inc. is unable to
be sold in a brokers' transaction after a period of one year from the date of
issue of the certificate. The agreement expires December 1, 2002. The offering
was conducted pursuant to Section 4(2) of the Act, Rule 506 and Section
460-44A-506 of the Washington Code. See Part I, Item 1. "Employees and
Consultants" and Part II, Item 4. "Recent Sales of Unregistered Securities."
See (b) "Business of Issuer" immediately below for a description of
the Company's business.
(b) Business of Issuer.
General
The Company was formed in July 1996 and had little or no operations
until August 1996, when it acquired MSIW through the Share Exchange. MSIW was
incorporated on August 25, 1994 with the goal of becoming a major supplier of
proprietary and non-proprietary equipment to the aquaculture industry. MSIW
concentrated its initial efforts to fund raising through private
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placements of its unregistered stock and on the engineering necessary to take
the licensed technology to commercial reality via a pilot system for rearing
finfish. As a result of the Share Exchange, MSIW became a wholly owned
subsidiary of the Company, and then administratively dissolved on September 19,
1997. Mariculture is an aquaculture technology company involved in the business
of "farming" aquatic animals and plants. Its principal activity is to develop,
manufacture and market proprietary systems that enable commercial fish farmers
to increase productivity and profits while reducing risks to their crop and
limiting environmental impact. Ultimately, the Company seeks to lead the world
in providing turnkey, state-of-the-art equipment solutions for productive
farming of the global aquatic resources.
The Company's independent certified public accountant has referred to
the Company as a "going concern" in the Company's financial statements.
Accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 5 to the financial
statements, the Company has a working capital deficiency and faces uncertain
conditions regarding its ability to transition from a development stage company
to an operating entity that raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are also
described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
World Wide Fishing Industry
Management's market analysis has found that the world's oceans have
been fished nearly to the limits of their sustainable yields. Inasmuch as
worldwide environmental degradation of the oceans contributes to the decline of
marine life, overfishing is the primary cause of dwindling fish populations. The
oceans are not an unlimited reservoir, and human demands are approaching the
limits of oceanic fisheries to supply fish.
Global demand for fresh seafood has steadily increased in recent
years. During the 1980's and 1990's, per capita seafood consumption in the
United States has also steadily increased. Seafood consumption is projected by
management to continue to increase in the coming years. Meanwhile, world
population is growing exponentially annually.
It is widely known that worldwide commercial fishing yields have
declined, mostly due to extensive fishing by large-scale industrial operations
and often in waters that are becoming increasingly polluted. Catches in all
fishing grounds in the Atlantic and Pacific Oceans, as well as the Mediterranean
and Black Seas, are in substantial decline with hundreds of fish species
endangered or becoming extinct due to overfishing and the human caused pollution
of our global oceans.
Aquaculture Industry
Aquaculture is the art of cultivating the products of water or the
raising of fish. It includes the culture of fish, mollusks, crustaceans, algae,
seaweed and even bullfrogs and alligators. Fish farming is the process of
rearing desirable species of fish in captivity and managing both the fish and
their
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environment to improve growth and reproduction. Fish are reared in fish farms
much as farm animals are raised in the barnyard. The fish culturist manages the
aquatic environment to protect the fish from predators, parasites and disease.
The culturist also feeds the fish and controls water quality to prevent
pollution.
The decline of wild catches during the past decade has spawned new
growth in the fish farming industry. As happened with other basic meats, the
traditional "hunting" means of providing fish, is now being replaced by a
"farming" means, known as aquaculture. This growth in aquaculture created many
new fish culture facilities around the world, producing a wide variety of
finfish species. Currently, large finfish sea farms cultivate Salmon, Sea Bass
and Seabream. Tuna, Sturgeon and Halibut are now being developed and farmed on a
small scale.
The animal aquaculture industry continues to be a large and growing
segment of the world's seafood economy. Management expects the world aquaculture
production to exceed fifty percent (50%) of seafood consumption in the early
2000's. To meet that demand, management expects that world aquaculture will have
to increase production at least five-fold by the year 2025.
Existing Aquaculture Methods
Aquaculture facilities now operate in lakes, ponds, on land, in the
ocean near shore and in the open ocean. Current marine finfish farming
techniques employ "open net pens," that are commonly clustered into "farms"
located within cold or warm near-shore coastal waters, in warm water ponds as
well as in cool water impoundment areas. At this time, the net pens are
predominantly used to farm Atlantic salmon. Research is now being performed to
develop the techniques and knowledge base to rear many other species of finfish.
Nearly all open net pen cages are suspended from floating walkways or
support structures that are moored near shore. Normally, pens or cages are sized
either forty feet square (40 sq. ft.) or fifty feet square (50 sq. ft.) by
twenty feet (22 ft.) to forty feet (40 ft.) in depth, although larger nets up to
eighty feet (80 ft.) are now being introduced in some farms. Farms typically
consist of twenty (20) to eighty (80) cages floating in two (2) to five (5)
acres of surface water. These cage operations must be placed in high tidal water
exchange locations to maintain adequate levels of dissolved oxygen and to
dispose of accumulated fish and food wastes that fall through the nets to the
bottom.
Operation of a net pen facility is relatively labor intensive. As the
fish grow in size and require more water flow, the nets must be replaced with
different mesh sizes or the fish must be moved from pen to pen. Removal and
cleaning of the nets must be performed on a regular basis to reduce marine
fouling that grows over and closes the mesh. Constant inspection of the nets is
required to find predator damage and immediately repair the nets to avoid escape
of the crop. Feeding of the fish is usually performed by hand or with
semi-automatic feeders and must be done on a regular schedule to maintain
growth. Handling and moving the fish is kept to a minimum as it creates
excessive stress and increases mortality losses.
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With net pen facilities, many factors contribute to a high incidence
of disease and mortality, resulting in a less than ideal survival rate, thus
challenging the net pen farmer's ability to raise fish and maintain
profitability. These are:
* Location - net pens must be located where there is pollution-free high
tidal water flow.
* Diseases - high mortality rate fluctuations due to "red tide" and
other shallow water diseases
* Biological - predators penetrate or damage nets, and eat or release
fish crop.
* High Food Cost - water currents carry away much of the feed.
* Environment - discharge of high levels of organic fish waste and
pollutants.
* Scenic View - the increase in shore-side landowners not wanting a
facility within sight.
New SARGO(TM) Technology
Management believes the SARGO rearing system is the first to offer the
industry unparalleled control of the growing environment. The system is a
floating farm facility that uses methods proven in land-based systems and makes
them work in the near-shore ocean and lake locations.
A SARGO system consists of one (1) or more modular pods. Each pod is
composed of four (4), rigid wall, floating fish reservoirs. Each pod also has a
centralized service platform fitted with required pumps, feeding equipment and
sensor control systems. Ideal, deep source water is pumped into the reservoirs
continuously, replenishing oxygen levels for the fish and providing a water
current "raceway" for the fish to school naturally. One hundred percent (100%)
of the solid fish waste and other organic matter is collected for disposal in a
waste management and optional treatment system.
In a typical farm, there are multiples of pods, each of which provide
the fish raising ability of over forty (40) net pens. A SARGO farm, physically
equivalent in site size to the largest net pen farms currently in operation,
would produce approximately eight thousand (8,000) metric tons of salmon per
year. The production capacity of the comparably sized net pen operation is only
1,000 metric tons per year.
Technology Comparison
There are many advantages that the SARGO system offers over its
biggest current competitor, the common net pen. The system can substantially
reduce operating costs through improved feed management, reduced labor and
eliminating the predator losses and fish escapes that plague all net-pen
operators. In addition, the system offers unprecedented control over waste
containment, water flow and oxygen, permitting three hundred percent (300%) and
higher stocking densities. A fully contained SARGO system offers the finfish
farmer complete control of the fish- rearing environment leading to the lowest
production cost per pound of fish.
Many of the key SARGO features provide advantages so pronounced, that
when compared to current net pen technology, management believes the system will
create new environmental and
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regulatory standards for commercial fish farming facilities. Such concerns, as
discussed under "Existing Aquaculture Methods", are quickly resolved with a
SARGO system. Management's research has created the following chart, which
estimates the comparison of these specific attributes and the SARGO benefits:
<TABLE>
<CAPTION>
Traditional Net Pens SARGO System
<S> <C> <C>
ENVIRONMENTAL Fish waste and excess food accumulations Controlled removal of food and organic waste for
STANDARDS beneath pens are cause for significant treatment or disposal minimizes environmental
environmental concern among regulatory controversies. Provides regulatory agencies with
agencies, environmentalists and public interest viable alternatives for permitting as aquaculture
groups. proliferates.
CONTAMINATION Danger of 50% to 100% crop losses from toxic Phytoplankton bloom phenomena do not occur at
CONTROL phytoplankton blooms that thrive in surface depths from which water is supplied. Surface
waters. No control is currently available. water pollution avoided since source is a clean
deep-water site.
SURVIVAL Source of growth environment water is from Nonporous rigid pen reservoir isolates fish from
RATES surface down to 40 feet. Very limited control surrounding environment. Growth environment
over environment characteristics. Survival rates water controlled by supply from desired depths.
less than ideal. Survival rates expected to consistently reach 95%
or more.
DISEASE ISOLATION No control over spread of disease to adjacent Independent pen environment provides significant
pens. Indiscriminate or uncontrolled use of control over disease outbreak and transmission.
medicines results in highly erratic effectiveness Allows for discriminate use of antibiotics for
and can negatively impact surrounding ecology. more consistent results and reduced ecological
side effects.
PREDATION Very susceptible to predation losses from seals, Impenetrable, opaque, rigid-wall reservoir shields
LOSS sea lions, dog fish, otters and other predators. fish crops from predators, eliminates predation
losses.
STRESS Stress is caused by all the above factors. It is Growth environment control reduces stress
the major factor in disease outbreak and subsequent factors. Promotes greater fish growth and higher
mortality. survival rates.
OXYGEN Loading densities per pen volume are limited by Pumped water provides sufficient water exchange
LEVELS surface water exchange, oxygenation levels and and oxygenation levels to support 3 to 5 times
temperature. All of which vary greatly by greater fish loading densities per comparable pen
location and by tidal action. volume. Reduces farm size and capital costs thus
yielding better profits.
TEMPERATURE Susceptible to variable surface water Water pumped from 60 to 200+ feet source, provides
CONTROL conditions which stress organisms and slow stable temperature and salinity control. Environment
growth. Water temperatures and salinity is consistent with species requirements that promote
characteristics at near surface levels not optimal growth and health.
optimal for many species. Warmer water promotes requirements that promote optimal growth and
disease outbread. health.
PRODUCT Lack of open water current discourages fish from Controlled current flow promotes schooling and
QUALITY exercising thus lowering flesh quality. continuous exercise, resulting in more consistent
firm flesh characteristics.
FEED Open net pen design contributes to loss of feed Collection and analysis of waste by-products
UTILIZATION through the netting and increased feed costs. maximizes feed utilization and helps reduce over-
feeding waste and excess costs.
SYSTEM Nets require replacement every 3-4 years, Reservoir life estimated at 30 years plus. Reduces
MAINTENANCE increasing capital costs. Cleaning, repair, long term capital costs. Less maintenance and
LIFE maintenance and labor costs are high. Frequent cleaning required. Minimizes fish handling and
cleaning and repair increases fish stress. the resulting stress.
PERMITTING and Lengthy and costly permitting process. Many Offers alternatives for speedier regulatory
LICENSING COSTS sites are not available for permitting due to permitting. Sites are made available that would
environmental issues. not be possible for open net pens.
</TABLE>
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Product Development
Mariculture developed the SARGO design with over three (3) years of
research into addressing the aquaculturists' needs and engineering a sustainable
alternative. All major design work was done by the Mariculture staff and outside
consulting engineers were used for evaluation of the subsystems and various
issues associated with water based platforms. Patents are issued or pending on
all proprietary system and software designs. (See "Patents, Copyrights and
Trademarks").
The Company produced and installed a full-scale demonstration unit at
a pilot site in June 1996. The scope of the project at National Marine Fisheries
Service ("NMFS") was a pilot-scale test of a new concept in floating aquaculture
systems for the marine culture of finfish. The project, a 24-month trial, was to
test the economic and technical feasibility of floating, rigid-wall circular
tank systems containing Atlantic salmon. Permission to place the test facility,
with no cost to the governing agencies, at the existing NMFS site was obtained
through earlier Orders issued by the United States Department of Commerce,
National Oceanic and Atmospheric Administration for the NMFS. There was no
formal contract regarding this test site. Mariculture was allowed by National
Marine Fisheries Service, of the United States Department of Commerce, to
utilize a portion their existing permit from the United States Corp of
Engineers.
Cooperation between NMFS and Mariculture was consistent with federal
science policy elements establishing working relationships with the private
sector (Stevenson-Wydler Technology Innovation Act of 1980 {P.L. 96-480}, and
the Technology Transfer Act of 1986 {P.L. 99-502}. Cooperation is likewise
consistent with recent NFMS policy and goals regarding development of
sustainable aquaculture through improving the efficiency and profitability of
aquaculture production systems.
In addition, the Department of Commerce Administrative Order 217-19,
dated November 13, 1986, entitled "Use of Department of Commerce Facilities for
Proprietary or Non-Proprietary Research Purposes" states in part that
specialized Federal facilities, laboratories, observatories, vessels, aircraft,
and scientific equipment are a high-cost national resource that should be used
to the maximum. The Department encourages sharing these resources for research
by Federal agencies and, when appropriate, by State and local governments,
educations institutions, and the private sector. This order consolidates
existing authorities, procedures, and responsibilities for managing the use of
Commerce facilities under these circumstances. Under the conditions established
in this Order, the head of an operating unit will allow the use of specifically
designated facilities by scientific and other qualified outside individuals and
entities. These directives permitted Mariculture the benefit of using a free
site for its pilot test.
Fish were installed in the test site unit in October 1996 with harvest
of the crop accomplished in August 1997. The demonstration unit performed very
effectively and beyond original expectations. The fish growth characteristics of
the system have been verified to exceed all
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parameters. As a result of the demonstration unit, the economic model has been
confirmed and updated. The pilot was done as a comparison to a traditional
net-pen system, and the comparison results are approximated in the following
table:
<TABLE>
<S> <C> <C>
Food Conversion Ratio
(ratio of feed to produced muscle tissue): 1.26/lb 1.40/lb
Mortality rate: 3.5% 20%
Time to grow to marketable size: 10 months 13-14 months
Cost of Production: $1.24/lb $1.65/lb
Harvest Densities: 29.4 kg per cubic meter 15 kg per cubic meter
Sediment quality: no impact Benthic (sea floor) kill zones observed
Red tide bloom: zero mortality $3 million loss
Predation: zero loss 40,000 fish lost
Escapement: none 300,000 Atlantic salmon escaped
</TABLE>
Due to the results achieved to date, several environmental groups in
the United States and Canada have contacted Mariculture. Recent lawsuits against
fish farming and the endangered species issues have cited the need that the
aquaculture industry must use the best currently available technology to raise
fish. These lawsuits have named Mariculture's SARGO technology as a basis for
comparison.
In November 2000, the Company entered into a Consulting Agreement
with Websters' Inc. The Consulting Agreement provides that the Company is to
engage Websters' Inc. as a registered professional engineering firm for the
purposes of performing the comprehensive design, development and production of a
functional integrated commercial SARGO system, and to provide technical support
to the installation of the resulting device into SARGO commercial fish rearing
vessels.
Business Strategy
Currently, the Company has no contracts in place for sale of a SARGO
system. Any discussion of business strategy contained herein is therefore
contingent upon the ability of the Company to continue as a going concern.
The Company intends to exploit its leading edge technology to replace
the use of inferior net pen products currently in use. Additionally, the Company
aspires to eliminate the increasing problem of water pollution as it affects
current fish farming operations, decrease vulnerability to occurrences such as
red tides and predation and to provide consumers with more efficiently raised
fish products which will result in a cost savings to the farm and ultimately to
the end consumer.
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Generally, the Company plans to continue to research and further
develop its product and to market its existing product to potential customers.
The Company's revenues are dependent on the volume of sales from its products
and services it provides.
Revenues from sales and services are recognized in the period in
which sales are made or services are provided. The Company's gross profit margin
will be determined in part by its ability to estimate and control direct costs
of manufacturing and production costs and its ability to incorporate such costs
in the price charged to customers and clients.
Marketing and Distribution
Marketing
Management's research has found that the worldwide market for
aquaculture is growing rapidly. From the early 1980's to the early 1990's the
market grew tremendously. Management expects the world aquaculture production to
exceed fifty percent (50%) of seafood consumption in the early 2000's.
To meet that demand, management expects that world aquaculture will
have to increase production at least five-fold by the year 2025. Management
projects that the total aquaculture capital equipment market will grow to over
$8 billion by the year 2003, and that finfish aquaculture equipment will grow to
over $5 billion by the end of 2003. Mariculture believes it needs to capture
less than two percent (2%) of the total finfish aquaculture capital equipment
market to meet its projections.
Tremendous marketing opportunities continue to develop for SARGO
throughout the world as extraordinary political pressures intensify to address
endangerment and extinction of various finfish species. In Japan, where food
resource security is a high government priority, the government has set up an
incentive funding program to subsidize fish farms that invest in environmental
technology.
A persuasive argument can be made for purchasing a SARGO considering
its environmental compliance capabilities alone. However, Mariculture management
believes the primary purchase motivation for its environmentally engineered
systems will come from the system's ability to greatly reduce the cost of
rearing fish.
Marketing's initial objective was to build a SARGO pilot facility
installation. A Pacific Northwest commercially permitted farm location was
chosen for convenience of access. This first facility was installed with the
support of the National Marine Fisheries Service at their existing site with
existing permits in Manchester, Washington. The size and production capabilities
of the pilot farm were designed to allow for direct extrapolation of all
production data.
Mariculture will market its state-of-the-art SARGO fish rearing
technology based on its' superior return on investment results and environmental
design versus traditional means, Mariculture's customer service and a guaranteed
yield.
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Financial Model
A comprehensive Return On Investment, (ROI) computer based sales tool
will be used by the Company, allowing a potential system customer to enter
various Mariculture system data inputs to determine realistic farm financial
results. This model has been completed for salmon and is currently being
developed for mahi-mahi and trout.
Turnkey Service
The SARGO system is sold as a turnkey installation that will be fully
operational when turned over to the customer. Mariculture will offer its
customers a complete customer service program consisting of site survey
assistance, system installation and contracted farm operation support.
Mariculture Systems do not include any site work, ground tackle or shore based
equipment. A basic system is sold as four tanks, a service module with emergency
power, water handling pumps and basic oxygenation controls. Liquid oxygen tanks,
shore power, feeding equipment, crew quarters, etc. are all the responsibility
of the customer. The Company may sell its products and services piecemeal, or as
an entire installation, and the responsibility for installation is to be
negotiated between the Company and the customer. All negotiated terms are then
incorporated into the contract. If a customer under contract so desires, the
Company will oversee the installation and startup of this equipment.
Product and Species Diversification
Providing the turnkey solution involves the acquisition and
development of additional products and services that benefit the customer by
providing ready availability from a single source and peace of mind. This may
range from PC based remote monitoring solutions to outfitting and providing
workboats. These peripheral products may be necessary for the Company to become
a full service provider to the aquaculture marketplace. New technologies for
raising finfish and shellfish may be sought, so that the Company may expand its
line to meet the demand for high value species.
Guarantee
SARGO fish rearing systems can be sold with an industry precedent
setting limited warranty, conditionally guaranteeing a specific fish crop yield
minimum. This fish crop yield number is expected to be a conservative total fish
volume which, however, is a noteworthy improvement over traditional net pen
yields and well within SARGO technology yield potential. The warranted total
fish volume would be documented in a performance based contract between the
Company and its customers. Both parties are expected to agree to provide
specific farm functions whose results are to be cooperatively, periodically,
measured and documented so as to maximize desired results. The Company knows of
no other supplier of aquaculture systems that offers its customers a warrantee
on the amount of yield the system will produce. Currently, the Company does not
have any warranty contracts in place with any of its customers. If the purchaser
desires, the Company will negotiate with the individual purchaser, the terms of
which would be defined at each circumstance. The Company will report any such
contracts upon entering into them.
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Global Marketing of the SARGO System
After publicizing the Company's success in its pilot program,
Mariculture hopes to leverage the expected media attention to acquire interested
distribution channels. Mariculture also expects to aggressively pursue selected
strategic relationships to quickly place the SARGO technology in Latin America,
Asia, the Middle East and the Mediterranean while focusing the Company's direct
sales effort in North America and Europe. Although there are moratoriums in the
United States and Canada, there is partial lifting of the moratorium in favor of
new technology that would demonstrate a positive environmental impact. The
policy reason for the moratoriums is that the old technology, the net pen
systems, have a negative effect on the biological balance of the waters due to
the waste that is dropped onto the sea floor and excreted into the surrounding
waters. The SARGO System contains the waste and so the negative environmental
impact is not an issue. However, the moratorium still inhibits the possibilities
of some new installations, but this does not impact the "retro-fitting," or the
replacement of parts of existing sites. The Company therefore would not be
inhibited from servicing and replacing parts of existing systems.
Distribution
The Company has spoken with representatives of governments,
corporations and individuals worldwide that have an interest in aquaculture.
These meetings may generate future sales opportunities for the Company. In
addition, the Company has spoken with several government and corporate entities
in developing countries that have targeted aquaculture as a significant area for
growth.
The following are a variety of potential SARGO purchasers to be
targeted by the Company's marketing team:
EXISTING NET PEN FISH FARMERS: Current users of traditional net pen fish rearing
systems offer Mariculture its greatest potential customer base. Small, standard
SARGO modules or reservoirs can be supplied for retrofit installation into
existing net cage permitted areas. A new four (4) reservoir SARGO with pumps and
service platform is available for either new fish farms or additions to existing
farms. Existing net pen fish farmers can easily justify exclusive use of
Mariculture systems in the future once they are convinced by the advantages
inherent to SARGO technology.
FOOD CORPORATIONS: Several large processors of chicken, beef, pork, and turkey
currently own sizable seafood concerns and are interested in producing their own
competitively priced "home grown" fish. This fulfills their goals to augment
their existing seafood processing operations and to provide the United States
domestic market, which is highly dependent on imports, with a constant supply of
fish. Many of these companies are not yet aware of SARGO technology, but they
currently manage their other meat operations utilizing similar methods.
FISH PROCESSING & EQUIPMENT COMPANIES: Fish processing is a highly seasonal
business and in recent years one of increasingly great uncertainty over fish
supplies. Many fish processing companies also own and operate fishing vessels
that compete for limited fish resources along with their customers. These
companies are now forced to look for alternative, year around sources of fish.
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Other companies supplying essential products to farming operations, such as
equipment, feed, and medications are potential customers with channels for
global distribution and could become VAR's (Value Added Resellers).
COMMERCIAL FISHERMEN: Over the last several years, depletion of natural fish
stocks has significantly affected commercial fishermen's personal cash flows.
These commercial fishing revenues are declining very rapidly, are highly
seasonal and subject to canceled seasons. There is growing interest from these
independent operators in fish farming as a means to provide a sustainable year
round income.
FISH RESEARCH FACILITIES: Fish research has increased as native fish populations
decrease worldwide. These research labs require technology for rearing juvenile
and adult aquatic species.
Status of Publicly Announced Products and Services
The SARGO System is ready for purchase at any time. If an order were
placed today, the Company would require two to three months to complete the
engineering evaluations plus another two months to begin fabrication and
installation. Installation of a basic system would normally be expected to be
complete within six months from date of order. A basic system is sold as four
tanks, a service module with emergency power, water handling pumps and basic
oxygenation controls.
Mariculture has no other products at this time. The expected sales
price of a basic SARGO installation in the US would be approximately $2,000,000.
Competition
The market is highly fragmented with no leader. Direct competitors
supplying the finfish aquaculture equipment industry include the makers of net
pen systems, high-energy open ocean pens, bag type pens and land-based
recirculating systems.
There are new technology advancements in land-based aquaculture
systems that are being successfully applied in fish farms in Northern Europe.
These advancements eliminate most of the noted challenges against net pens,
however at a prohibitive cost. The SARGO System evolved as a lower cost variant
of these land-based concepts, but is a self contained floating system located
near shore with access to deep water.
Current natural stocks of fish have been over-fished and impacted to
the point that the fishery in certain areas has disappeared or is discontinued.
This bodes well for aquaculture as an alternative to supply the demand for those
diminished resources. However, traditional wild harvests are still considered
the profitable industry to support and subsidize. This commitment to established
methods has slowed the growth of aquaculture and competes with Mariculture's
ability to sell.
Mariculture's initial focus is to gain a significant share of the new
sales and potential retrofit sales opportunities for near shore finfish rearing
systems. This directly targets the Company at farms that are raising primarily
salmonids in the Northern Hemisphere. Open net pen technology, whether located
near shore or offshore, is the major competitor to a floating, near shore, rigid
wall fish
18
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rearing system. This net pen technology and the fish farming industry's robust
growth in total fish capacity during the last 15 years has been reinforced
principally by an infrastructure of well established vendors. These firms are
supplying fishing nets, rubber, galvanized metal and plastic products to
commercial fishermen. Fishing nets combined with the flotation gear are the
predominant materials used in salt-water aquaculture to enclose commercial fish
crops. As a consequence, several fish net and plastics manufacturers have
diversified into supplying floating net pen systems to the fish farming
industry.
Net pen or net cage systems today are not just nets with simple
flotation. Rather, they are cage systems that range from offshore
semi-submersible structures to robust steel platforms. These platforms can be
self-contained with automated centralized feeding and processing systems. Most
of our competitors provide additional products, such as work boats, mooring
systems, processing equipment and feeding systems in an effort to be "a total
solution" company to their customers. The leading suppliers of aquaculture net
pen systems are located in Norway, Sweden Ireland, Scotland, Canada and
recently, Japan.
Wavemaster Ltd.,based in Ireland with manufacturing and sales offices
in Vancouver, British Columbia, Canada is the largest aquaculture facility
producer. The volume of fish reared from these net pens represents 2.5% of the
world salmon production but only 0.16% of the world finfish production.
Wavemaster Ltd. has sold installations in Scotland, Ireland, Greece, Canada, the
Faroe Islands, Iceland and the Middle East. This firm also supplies other
equipment such as landing stages, net washers and workboats.
Only one of the ten most prominent net pen suppliers, Ocean Spar
Technologies of Bainbridge Island, Washington is based in the United States.
Their operation primarily focuses on providing a very large submersible
tensioned netting system that may be raised and lowered as desired. Their
product is used primarily for deep water and high current locations. Therefore,
Mariculture's initial competition in the Pacific Northwest will be principally
from foreign, primarily European, based companies. Many net pen systems are sold
as turnkey operations with floats, nets, walkways and moorage included in the
capital costs. All replacement components are priced and sold on an individual
basis.
Moratoriums exist in the United States, Canada and other locations
around the world preventing the installation of new fish farms that use the old
technology. Countries with national agendas, such as Norway, Chile and Japan,
that are pushing aquaculture as a high agribusiness opportunity are target
markets for Mariculture and offer the least resistance to the introduction of
new technology.
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One of the alternative competitive technologies utilized in recent
years has been some unsuccessful attempts to grow salmon in floating barges.
High start up costs, relatively high production costs, and low fish volume
densities identified this as a noncompetitive means of rearing salmon in salt
water. The bag system is another limited success product that uses a non-porous
flexible membrane in place of an open net. These systems solve some of the
problems but only work in the calmest of waters due to loss of shape in rough
currents and difficulties associated with maintenance and mooring.
The Aquaculture industry in general is very competitive, with several
major companies involved. The Company will be competing with larger competitors
in international, national, regional and local markets. In addition, the Company
may encounter substantial competition from new market entrants. Many of the
Company's competitors have significantly greater name recognition and have
greater marketing, financial and other resources than the Company. There can be
no assurance that the Company will be able to complete effectively against such
competitors in the future.
Sources and Availability of Raw Materials
The materials needed to produce the SARGO system and related
aquaculture products are widely available from numerous third parties for rent
or for sale. These materials include post- stressed wood, high density
polyethylene, polystyrene foam, Alaska yellow cedar, treated fir, zinc
galvanized steel, fiberglass reinforced plastic and/or polyester resin, plastic
film, fiberglass and fish food. The final product is then manufactured and
produced by the Company. No shortage of materials is expected in the foreseeable
future.
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Dependence on one or few customers
Presently, the Company has no customers. The Company will rely
heavily on its quality of technology, products and services, in providing its
customers with turnkey service, and being a full service provider to the
aquaculture customers. Should Mariculture obtain customers in the future, it is
likely to depend heavily on their business, as it is likely to represent all or
significantly all of the Company's source of income. If the Company is unable to
attain this customer base, this may have a material adverse effect on the
Company.
Patents, Copyrights and Trademarks
The Company intends to protect its original intellectual property
with patents, copyrights and/or trademarks as appropriate.
Mariculture developed the SARGO design with over three (3) years of
research into addressing the aquaculturists' needs and engineering a sustainable
alternative. All major design work was done by the Mariculture staff and outside
consulting engineers were used for evaluation of the subsystems and various
issues associated with water based platforms. Patents are issued or pending on
all proprietary system and software designs.
To date, the Company has registered one (1) patent. Mr. Meilahn is
the originator of the SARGOTM concept and has been awarded United States Patent
# 5,762,024 titled "Aquaculture System."
To date, the Company has one (1) Canadian patent pending.
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which has not yet been paid, and additionally
agreed to pay a quarterly royalty payment of three percent (3%) of total sales
of Licensed Technology Products from the agreement date until the final
abandonment, expiration, or invalidation of the last remaining patent rights.
Since the agreed upon fee for such license has not yet been paid to Mr. Meilahn,
he therefore retains the right to pull the grant of his license at any time. As
an officer to the Company, Mr. Meilahn has not yet pulled the grant to this
license, and has indicated that he does not intend to do so. In the event Mr.
Meilahn does pull the grant to his license, the company would no longer be able
to sell any products related to his license. There are other aquaculture
products, equipment and services that the Company would still be able to
provide, but the Company would have to revise its direction and product line.
See Part I, Item 1. "Employees and Consultants"; Part I, Item 2. "Management's
Discussion and Analysis or Plan of Operation - Operating Expenses - Interest and
Other Income (Expense), Net"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation" and
Part I, Item 7. "Certain Relationships and Related Transactions."
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Governmental Regulation
There are currently no uniform set guidelines or cooperative
regulations that an installer of fish farming equipment may follow to obtain
installation and operation permits. It depends upon the site chosen for the
system. There exists a myriad of regulations on the local, state, provincial and
federal levels in most developed countries. In the United States most
aquaculture guidelines have been established by the federal government by the
National Oceanic and Atomospheric Administration and the National Marine
Fisheries Service. The process of obtaining all of the necessary permits usually
begins with the local governments, such as a State Department of Ecology, which
controls and monitors water quality and water use, specifically those managing
the various waters where a permit is intended for salt water, fresh water,
navigable waters and whether the waters are under state or federal control.
However, it is the responsibility of the purchaser or farm operator of a system
to obtain a site and to acquire the correct permits for installation of the
system. Since the Company is only in the business of selling the systems or
parts to the system and servicing the systems, there is no governmental
regulation on its sales or servicing, and therefore is not required by the
government to obtain any such permits. The Company is also not required to nor
does it assist the customer in obtaining whichever necessary permits are
required for their site.
State and Local Licensing Requirements
The regulations in the United States that impact SARGO are those
licensing provisions mandated by virtually all jurisdictions where fish farms
are placed. These licensing requirements pose no hindrance to the Company, as it
is the sole responsibility of the owner or operator of the system to obtain the
necessary permits. It is their responsibility to show the Company proof of
permitting prior to contract for installation of a system. In most instances,
the owner or operator will already have permits available that permit increasing
the production capacity of an existing permitted farm site.
Effect of Probable Governmental Regulation on the Business
The Company does not expect that any law presently in place or
proposed will negatively impact the sale or operation of SARGO Sytems.
Regulations vary from one location or jurisdiction to another, thus the Company
cannot measure the affect until an actual application for a permit for a
particular site is made. If the customer is unable to obtain a permit for a
particular site, they can apply in another jurisdiction. If the customer is
unable to obtain a permit in any jurisdiction, then it would impact the
Company's sales of such systems.
Most regulations of fish farms address the issue of discharge of
uneaten food and expelled solid fecal waste into the surrounding waters of the
farm and thus endangering marine life on the seafloor. The Company's SARGO
system does not expel food or waste into the surrounding waters as it is a
contained system, and thus eliminates the claim of endangering marine life on
the seafloor. Therefore these controls do not affect the SARGO system. At this
time, the Company knows of no other fish rearing systems that have this
capacity.
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Cost of Research and Development
For fiscal year 1998 the Company expended twenty three thousand two
hundred seventy seven dollars ($23,277) and for fiscal year 1999, the Company
expended three thousand eight hundred fifty one dollars ($3,851) on research and
development efforts. At the current time, the costs associates with research and
development are bourne primarily by subscribers to the Company, and secondarily
from additional debt financing. The costs associated with research and
development are currently not bourne directly by the customer, however there is
no guarantee that such costs will not be bourne by customers in the future and,
at the current time, the Company does not know the extent to which such costs
will be bourne by the customer, if at all.
New technologies for raising finfish and shellfish will be sought, so
that the Company may expand its line to meet the demand for high value species.
Constant research and improvements will attempt to keep the productivity above
any other competitor entering the market. The Company is developing additional
engineering improvements especially in the waste collection and treatment
functions of the system. The Company is improving the performance, reducing the
cost of manufacturing and ultimately expects to take at least 15% out of the
overall cost.
Mariculture will also pursue various government-sponsored technology
and research grants targeted at programs for environmental mitigation and
aquaculture or fisheries enhancement.
Cost and Effects of Compliance with Environmental Laws
The major cost of fish farming's compliance with environmental laws is
in the management of fecal and food waste released by the farms net
installations. SARGO offers as an option for an environmentally friendly waste
treatment facility that is incorporated directly into the daily operation of the
facility. The discharge from this United States Coast Guard rated plant is
suitable for any navigable waterway in the world. At this time, SARGO can exceed
the requirements of virtually any restriction imposed by governments on fish
farms. Management believes that SARGO is a favored product because it does not
release waste byproducts to the environment.
Employees and Consultants
At June 30, 2000, the Company employed four (4) persons. Two (2) of
these employees are full time, and two (2) of these employees are part-time.
None of these employees are represented by a labor union for purposes of
collective bargaining. The Company considers its relations with its employees to
be excellent. The Company plans to employ additional personnel as needed upon
product rollout to accommodate fulfillment needs.
In August 1996, the Company entered into a share exchange agreement
with MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its restricted
Common Stock to the shareholders of MSIW for all of the issued and outstanding
stock of MSIW. As part of the transaction, David Meilahn received 2,226,421
shares of the Company's Common Stock. This offering was conducted pursuant to
Section 4(2) of the Act, Rule 506, Section 517.061(11) of the Florida Code,
Section 10-5-9 (13) of the Georgia Code, Rule ###-##-#### of the Oregon Code and
Section 460-44A-506 of the
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Washington Code. See Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation"; Part
I, Item 7. "Certain Relationships and Related Transactions"; and Part II, Item
4. "Recent Sales of Unregistered Securities."
In July 1997, the Company issued 31,000 shares of its restricted
Common Stock to Corporate Imaging in connection with their production of a
corporate profile. The shares were issued pursuant to Section 4(2) of the Act,
Rule 506 and Section R14-4-126 of the Arizona Code. See Part I, Item 7. "Certain
Relationships and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
In July 1997, the Company issued 10,766 shares of its restricted
Common Stock valued at $3,122 to Jeff & Jill Caven in connection with their
photography services on behalf of the Company. The shares were issued pursuant
to Section 4(2) of the Act, Rule 506, Section 58-13B-24(R) of the New Mexico
Code and New Mexico Rule 12NMAC11.4.11.2. See Part 1, Item 7 "Certain
Relationships and Related Transactions" and Part II, Item 4. "Recent Sales of
Unregistered Securities."
In July 1997, the Company issued 14,946 shares of its restricted
Common Stock valued at $9,715 to John Sabella as payment for producing brochures
on behalf of the company. The shares were issued pursuant to Section 4(2) of the
Act, Rule 506 and Section 460-44A-506 of the Washington Code. See Part I, Item
7. "Certain Relationships and Related Transactions"; and Part II, Item 4.
"Recent Sales of Unregistered Securities."
In April 1998, an agreement was entered into, whereby the Company
issued 20,600 shares of its unrestricted Common Stock to Reinforced Tank
Products, Inc. in connection with their agreement to provide engineering
services at the University of California in Long Beach, California. The services
were valued at $20,600. The shares were issued pursuant to Section 3(b) of the
Act, Rule 504 and Section 59.035(12) of the Oregon Code. See Part I, Item 7.
"Certain Relationships and Related Transactions" and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her services
were valued at $8,700. The shares were actually issued in January 2000. The
shares were issued pursuant to Section 4(2) of the Act, Rule 506 and Section
460-44A-506 of the Washington Code. See Part I, Item 4. "Security Ownership of
Certain Beneficial Owners and Management"; Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part I, Item 6 "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which
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has not yet been paid, and additionally agreed to pay a quarterly royalty
payment of three percent (3%) of total sales of Licensed Technology Products
from the agreement date until the final abandonment, expiration, or invalidation
of the last remaining patent rights. See Part I, Item 2. "Management's
Discussion and Analysis or Plan of Operation - Operating Expenses - Interest and
Other Income (Expense), Net"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation" and
Part I, Item 7. "Certain Relationships and Related Transactions."
In April 1999, the Company issued 27,000 shares of its unrestricted
Common Stock to Neil Rand in connection with his production of a corporate
profile. The shares were issued pursuant to Section 3(b) of the Act, Rule 504
and Section 517.061(11) of the Florida Code. See Part I, Item 7. "Certain
Relationships and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
In April 1999, an agreement was entered into, whereby the Company
issued 11,930 shares of its restricted Common Stock to Sanford Tager, President
of Methow Valley Excavating, Inc., in connection with their agreement to
dismantle and remove the Company's pilot test site. The services were valued at
$11,929.54. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and Section 460-44A-506 of the Washington Code. See Part I, Item 7. "Certain
Relationships and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
In March 2000, the Company issued 250,000 shares of its restricted
Common Stock to Donald Mintmire in connection with his legal services on behalf
of the Company. The shares were issued pursuant to Section 3(b), Rule 701 and
Section 517.061(11) of the Florida Code. See Part I, Item 7. "Certain
Relationships and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until election by
the shareholders at the 2001 shareholders meeting. See Part I, Item 4. "Security
Ownership of Certain Beneficial Owners and Management"; Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part 1, Item 6.
"Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions."
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Don N. Jonas by an affirmative vote of a majority of
the remaining directors. Mr. Jonas shall serve until election by the
shareholders at the 2001 shareholders meeting. See Part I, Item 4. "Security
Ownership of Certain Beneficial Owners and Management"; Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part 1, Item 6.
"Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions."
In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses
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presented by each member of the board. See Part I, Item 4. "Security Ownership
of Certain Beneficial Owners and Management"; Part I, Item 5. "Directors,
Executive Officers, Promoters and Control Persons"; Part 1, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"and Part II, Item 4 "Recent Sales of Unregistered Securities."
In September 2000, the Company entered into an Employment Agreement
with Richard J. Luce to employ him as Vice President of Sales and Marketing. The
term of the agreement is for a period of four (4) years and is automatically
renewable for one (1) year. Mr. Luce's annual base salary is ninety three
thousand five hundred dollars ($93,500.00) for the first year, one hundred
thousand forty five dollars ($100,045) for the second year, one hundred seven
thousand forty eight dollars ($107,048) for the third year, and one hundred
fourteen thousand five hundred forty one dollars ($114,541) for the fourth year.
However no salary will be accrued during the first four (4) months of
employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one half
percent (0.5%) for all direct sales by Luce. Luce is also granted the right to
purchase up to one hundred thousand (100,000) shares of the Company's restricted
Common Stock at a price of four dollars ($4.00) per share. Twenty-five percent
(25%) of the options shall become vested on January 1, 2001, and the remaining
seventy-five percent (75%) of the options shall become vested at the equal rate
of twenty-five percent (25%) upon each successive one (1) year anniversary date
of employment. All vested options shall expire with three (3) years from the
date of vesting. See Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 6. "Executive Compensation"; and
Part I, Item 7. "Certain Relationships and Related Transactions."
In November 2000, the Company entered into a Consulting Agreement
with Websters' Inc. The Consulting Agreement provides that the Company is to
engage Websters' Inc. as a registered professional engineering firm for the
purposes of performing the comprehensive design, development and production of a
functional integrated commercial SARGO system, and to provide technical support
to the installation of the resulting device into SARGO commercial fish rearing
vessels. Websters' Inc. agrees to provide approximately two hundred fifty (250)
hours of service to the Company, and to accept restricted Common Stock of the
Company in lieu of cash payment at a rate of one hundred (100) shares for every
one (1) hour of services, or a pro-rata amount thereof, or, upon the approval of
the Company's Board of Directors, in a cash amount of one hundred fifty dollars
($150) per hour of service. Websters' Inc. is to receive an initial deposit in
advance against the Consulting Agreement of one thousand (1,000) shares of
restricted Common Stock of the Company. Payments for services in shares will be
presented as a certificate of the restricted Common Stock on a quarterly basis
upon approval of the Company's Board of Directors. The agreement also provides
that the Company agrees to exchange for cash, at the same rate of value as at
original issue, any designated part or the total of all stock issued to
Websters' Inc. as a fee from the Consulting Agreement. The exchange for cash
will only be in the event that the stock tendered to Websters' Inc. is unable to
be sold in a brokers' transaction after a period of one year from the date of
issue of the certificate. The agreement expires December 1, 2002. The offering
was conducted pursuant to Section 4(2) of the Act, Rule 506 and Section
460-44A-506 of the Washington Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
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Risk Factors
Before making an investment decision, prospective investors in the
Company's Common Stock should carefully consider, along with other matters
referred to herein, the following risk factors inherent in and affecting the
business of the Company.
1. History of Losses. Although the Company has been in business since
July 1996, it is still in the development stage. As of December 31, 1999, the
Company had total assets of $57,802, a cumulative net loss of $1,017,187, with
no revenues and a stockholders deficit of $281,053. As of December 31, 1998, the
Company had total assets of $52,650, a cumulative net loss of $990,516 on no
revenues and stockholders deficit of $286,382. Due to the Company's operating
history and limited resources, among other factors, there can be no assurance
that profitability or significant revenue will occur in the future. Moreover,
the Company expects to continue to incur operating losses through at least
fiscal 2000, and there can be no assurance that losses will not continue
thereafter. The ability of the Company to establish itself as a going concern is
dependent upon the receipt of additional funds from operations or other sources
to continue those activities. The Company is subject to all of the risks
inherent in the operation of a development stage business and there can be no
assurance that the Company will be able to successfully address these risks.
2. Minimal Assets. Working Capital and Net Worth. As of December 31,
1999, the Company's total assets in the amount of $57,802, consisted,
principally, of the sum of $2,373 in cash, and $55,429 in its testing facility.
As a result of its minimal assets and a net loss from operations, in the amount
of $26,671, as of December 31, 1999, the Company had a net worth of $(281,053).
Further, there can be no assurance that the Company's financial condition will
improve. Even though management believes, without assurance, that it will obtain
sufficient capital with which to implement its expansion plan, the Company is
not expected to proceed with its expansion without an infusion of capital. In
order to obtain additional equity financing, management may be required to
dilute the interest of existing shareholders or forego a substantial interest of
its revenues, if any.
3. Need for Additional Capital. Without an infusion of capital or
profits from operations, the Company is not expected to proceed with its
expansion as planned. Accordingly, the Company is not expected to overcome its
history of losses unless additional equity and/or debt financing is obtained.
While the Company anticipates the receipt of increased operating revenues, such
increased revenues cannot be assured. Further, the Company may incur significant
unanticipated expenditures which deplete its capital at a more rapid rate
because of among other things, the stage of its business, its limited personnel
and other resources and its lack of a widespread client base and market
recognition. Because of these and other factors, management is presently unable
to predict what additional costs might be incurred by the Company beyond those
currently contemplated. The Company has not identified sources of additional
capital funds, and there can be no assurance that resources will be available to
the Company when needed.
4. Dependence on Management. The possible success of the Company is
expected to be largely dependent on the continued services of its Founder,
President, Secretary, Treasurer and Chairman, David Meilahn. Virtually all
decisions concerning the production, marketing, distribution and sales of the
Company's products and services will be made or significantly influenced by Mr.
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Meilahn. Officers and directors are expected to devote only such time and effort
to the business and affairs of the Company as may be necessary to perform their
responsibilities. The loss of the services of any of these officers and
directors, but particularly David Meilahn, would adversely affect the conduct of
the Company's business and its prospects for the future. The Company presently
has one (1) employment agreement with its Vice President of Sales and Marketing.
The Company presently holds no key-man life insurance on the lives of, and has
no other agreement with any of these officers. (See Part I, Item 5. "Directors,
Executive Officers, Promoters and Control Persons.")
5. Limited Distribution Capability. The Company's success depends in
large part upon its ability to distribute its products and services. As compared
to the Company, which lacks the financial, personnel and other resources
required to compete with its larger, better-financed competitors, virtually all
of the Company's competitors have much larger budgets for securing customers.
Depending upon the level of operating capital or funding obtained by the
Company, management believes, without assurance, that it may be possible for the
Company to attract distributors for its products and services. However, in the
event that only limited funds are available from operations or obtained, the
Company anticipates that its limited finances and other resources may be a
determinative factor in the decision to go forward with planned expansion. Until
such time, if ever, as the Company is successful in generating sufficient cash
flow from operations or securing additional capital, of which there is no
assurance, it intends to continue to operate at its current stage.
6. High Risks and Unforeseen Costs Associated with the Company's
Expanded Entry into the Aquaculture and Related Industries. There can be no
assurance that the marketing and sales costs associated with the rollout of its
products and services will not be significantly greater than those estimated by
Company management or that significant expenditures will not be needed to
manufacture and produce the Company's products. Therefore, the Company may
expend significant unanticipated funds or significant funds may be expended by
the Company without development of a commercial market for its products. There
can be no assurance that cost overruns will not occur or that such cost overruns
will not adversely affect the Company. Further, unfavorable general economic
conditions and/or a downturn in customer acceptance and appeal could have an
adverse affect on the Company's business. Additionally, competitive pressures
and changes in customer mix, among other things, which management expects the
Company to experience in the uncertain event that it achieves commercial
viability, could reduce the Company's gross profit margin from time to time.
Accordingly, there can be no assurance that the Company will be capable of
establishing itself in a commercially viable position in the local, state,
nationwide and international aquaculture industry.
7. No Customers Under Contract or Customer Base. The Company
presently has no established customers under contract. The Company will be
dependent upon its President, Mr. Meilahn, to find and solicit potential
customers. Mr. Meilahn will utilize the contacts with government officials and
agencies, existing net pen fish farmers, food corporations and others which he
has developed to select and target potential purchasers of the SARGO system.
There can be no assurance that any such contacts will lead to the sale of any
SARGO systems.
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8. Fluctuations in Results of Operations. To date, the Company has
not had any revenues. The Company has experienced and may in the future
experience significant fluctuations in revenues, gross margins and operating
results. In addition, a single order for the Company's products can represent a
significant portion of the Company's potential sales for such quarter. As with
many developing businesses, the Company expects that some orders may not
materialize or delivery schedules may have to be deferred as a result of changes
in distribution schedules, among other factors. As a result, the Company's
operating results for a particular period to date have been and may in the
future be materially adversely affected by a delay, rescheduling or cancellation
of even one purchase order. Moreover, purchase orders are anticipated to be
received and accepted substantially in advance of shipment, and the failure to
reduce actual production costs to the extent anticipated or an increase in
anticipated costs before shipment could materially, adversely affect the gross
margins for such order, and as a result, the Company's results of operations.
Moreover, anticipated orders could be canceled since orders are expected to be
made substantially in advance of shipment, and even though the Company's
contracts will not typically provide that orders may be canceled, if an
important customer wishes to cancel an order, the Company may be compelled, due
to competitive conditions, to accede to such request. As a result, backlog, if
any, will not necessarily be indicative of future sales for any particular
period. Furthermore, a substantial portion of net sales may be realized near the
end of each quarter. A delay in a shipment near the end of a particular quarter,
due, for example, to an unanticipated shipment rescheduling, to cancellations or
deferrals by customers or to unexpected production difficulties experienced by
the Company, may cause net revenues in a particular quarter to fall
significantly below the company's expectations and may materially adversely
affect the Company's operating results for such quarter.
A large portion of the Company's expenses are variable but difficult
to reduce should revenues not meet the Company's expectations, thus magnifying
the material adverse effect of any revenue shortfall. Furthermore, announcements
by the Company or its competitors of new technology or facilities could cause
customers to defer purchases of the Company's products or a reevaluation of
products under development, which would materially adversely affect the
Company's business, financial condition and results of operations. Additional
factors that may cause the Company's revenues, gross margins and results of
operations to vary significantly from period to period include: product
production costs, patent processing, possible government regulation of the
Company's business and/or products and their method of distribution, mix of
products sold, manufacturing efficiencies, costs and capacity, price discounts,
market acceptance and the timing of availability of new products by the Company,
usage of different distribution and sales channels and methods and general
economic and political conditions. In addition, the Company's results of
operations are influenced by competitive factors, including the pricing and
availability of and demand for seafood. All of the above factors are difficult
for the company to forecast, and these or other factors could materially
adversely affect the Company's business, financial condition and results of
operations. As a result, the Company believes that period-to-period comparisons
are not necessarily meaningful and should not be relied upon as indications of
future performance. (See Part I, Item. 2. "Management's Discussion and Analysis
of Financial Condition or Plan of Operation.")
9. Potential for Unfavorable Interpretation of Future Government
Regulation. The Company is not subject to regulations governing its products at
the present time. The Company may be subject to regulation if the Federal
government enacts controls in which case the Company will be required to comply
with new and emerging laws, the interpretation of which will be uncertain and
unclear. In such event the Company shall have all of the uncertainties such laws
present including the risk
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of loss of substantial capital in the event the Company is unable to comply with
the law or is unable to utilize the method of distribution it thinks will best
serve the Company's products.
10. No Assurance of Product Quality. Performance and Reliability. The
Company expects that its customers will continue to establish demanding
specifications for quality, performance and reliability. Although the Company
will attempt to purchase equipment and raw materials from manufacturers who
adhere to good manufacturing practice standards, there can be no assurance that
problems will not occur in the future with respect to quality, performance,
reliability and price. If such problems occur, the Company could experience
increased costs, delays in or cancellations or rescheduling of orders or
shipments and product returns and discounts, any of which would have a material
adverse effect on the Company's business, financial condition or results of
operations.
11. Future Capital Requirements. The Company's future capital
requirements will depend upon many factors, including the cost of production of
the Company's products, requirements to either rent or construct adequate
facilities to produce the Company's products and to conduct services on behalf
of customers. The Company believes that it will require additional funding in
order to fully exploit its plan for operations. There can be no assurance,
however, that the Company will secure such additional financing. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders will result. If
adequate funds are not available, the Company may be required to delay, scale
back or even eliminate its production schedules or obtain funds through
arrangements with partners or others that may require the Company to relinquish
rights to certain of its existing or potential products or other assets.
Accordingly, the inability to obtain such financing could have a material
adverse effect on the Company's business, financial condition and results of
operations. (See Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition or Plan of Operation.")
12. Uncertainty Regarding Protection of Proprietary Rights. The
Company does not currently own any petents. However, the Company will attempt to
protect any of its intellectual property rights through patents, trademarks,
secrecy agreements, trade secrets and a variety of other measures. However,
there can be no assurance that such measures will provide adequate protection
for the Company's proprietary rights, that additional disputes with respect to
the ownership of its intellectual property rights will not arise between the
Company and the customers it contracts with, that the Company's products will
not otherwise be copied by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. There can be no assurance
that any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
similar products which appeal to the same industries or duplicate the Company's
products or that third parties will not assert intellectual property
infringement claims against the Company. In addition, there can be no assurance
that foreign intellectual property laws will adequately protect the Company's
intellectual property rights abroad. The failure of the Company to protect its
proprietary rights could have a material adverse effect on its business,
financial condition and results of operations.
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Litigation may be necessary to protect the Company's intellectual
property rights, to determine the validity of and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
13. Ability to Grow. The Company expects to grow through one (1) or
more strategic alliances, acquisitions, and by internal growth. There can be no
assurance that the Company will be able to create a greater market presence, or
if such market is created, to expand its market presence or successfully enter
other markets. The ability of the Company to grow will depend on a number of
factors, including the availability of working capital to support such growth,
existing and emerging competition, one (1) or more qualified strategic alliances
and the Company's ability to achieve and maintain sufficient profit margins in
the face of pricing pressures. The Company must also manage costs in an
environment which is notorious for unforeseen and underestimated costs and adapt
its infrastructure and systems to accommodate growth within the niche market
which it hopes to create.
The Company also plans to expand its business, in part, through
acquisitions. Although the Company will continuously review potential
acquisition candidates, it has not entered into any agreement, understanding or
commitment with respect to any additional acquisitions at this time. There can
be no assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions on favorable terms, or at all, or
integrate acquired businesses into its operations. Moreover, there can be no
assurance that acquisitions will not have a material adverse effect on the
Company's operating results, particularly in the fiscal quarters immediately
following the consummation of such transactions, while the operations of the
acquired business are being integrated into the Company's operations. Once
integrated, acquisitions may not achieve comparable levels of revenues,
profitability or productivity as the then existing Company products or otherwise
perform as expected. The Company is unable to predict whether or when any
prospective acquisition candidate will become available or the likelihood that
any acquisitions will be completed. The Company will be competing for
acquisition and expansion opportunities with entities that have substantially
greater resources than the Company. In addition, acquisitions involve a number
of special risks, such as diversion of management's attention, difficulties in
the integration of acquired operations and retention of personnel, unanticipated
problems or legal liabilities, and tax and accounting issues, some or all of
which could have a material adverse effect on the Company's results of
operations and financial condition.
14. Competition. The aquaculture industry in general is very
competitive, with several major companies involved. The Company will be
competing with larger competitors in international, national, regional and local
markets. In addition, the Company may encounter
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substantial competition from new market entrants. Many of the Company's
competitors have significantly greater name recognition and have greater
marketing, financial and other resources than the Company. There can be no
assurance that the Company will be able to complete effectively against such
competitors in the future.
15. Requirement for Response to Rapid Technological Change and
Requirement for Frequent New Product Introductions. The aquaculture industry is
subject to rapid technological change, frequent new equipment and product
introductions and enhancements, product obsolescence and changes in end-user
requirements. The Company's ability to be competitive in this market will depend
in significant part upon its ability to successfully obtain, utilize and produce
for sale and distribution new products and services on a timely and
cost-effective basis that are based upon this new technology. Any success of the
Company in developing new and enhanced products and services will depend upon a
variety of factors, including new product selection, timely and efficient
completion of production schedules, its cost reduction program and the
development, completion, performance, quality and reliability of competitive
products and services by competitors. The Company may experience delays from
time to time in completing development and introduction of new products and
services. Moreover, there can be no assurance that the Company will be
successful in selecting and developing new products or product enhancements, or
in producing and marketing new products and services. There can be no assurance
that defects will not be found in the Company's products and services after
commencement of commercial shipments, which could result in the loss of or delay
in market acceptance. The inability of the Company to introduce in a timely
manner new products that contribute to revenues could have a material adverse
effect on the Company's business, financial condition and results of operations.
16. Possible Adverse Affect of Fluctuations in the General Economy
and Business of Customers. Historically, the general level of economic activity
has affected the demand for new sales. There can be no assurance that an
economic downturn would not adversely affect the demand for the Company's
products and services. There can be no assurance that such economic factors will
not adversely affect the Company's planned products and services.
17. Lack of Working Capital Funding Source. Other than revenues from
the anticipated sale of its products, the Company has no current source of
working capital funds, and should the Company be unable to secure additional
financing on acceptable terms, its business, financial condition, results of
operations and liquidity would be materially adversely affected.
18. Dependence on Contract Manufacturers and Lease of Equipment;
Reliance on Sole or Limited Sources of Supply. As of the date hereof, the
Company has no internal manufacturing/production capacity, nor does it own the
equipment necessary to produce SARGO systems. The Company also intends to
occasionally utilize contract manufacturers to produce its products once the
Company has the capability to produce its products itself. No formal agreements
are currently in place. The Company will also indirectly rely on raw material
suppliers to provide. The materials needed to produce the SARGO system and
related aquaculture products are widely available from numerous third parties
for rent or for sale. These materials include post-stressed wood, high density
polyethylene, polystyrene foam, Alaska yellow cedar, treated fir, zinc
galvanized steel, fiberglass reinforced plastic and/or polyester resin, plastic
film, fiberglass, fish food and other raw materials necessary to manufacture its
products. Certain necessary raw materials anticipated
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<PAGE>
to be necessary for the manufacture and production of the Company's future
products could be required to be obtained from a sole supplier or a limited
group of suppliers. There can be no assurance that the Company's contract
manufacturers, will be sufficient to fulfill the Company's orders.
Should the Company be required to rely solely on contract
manufacturers and a limited group of suppliers, such increasing reliance
involves several risks, including a potential inability to obtain an adequate
supply of finished products and required components, and reduced control over
the price, timely delivery, reliability and quality of finished products and
components. The Company does not believe that it is currently necessary to have
any long-term supply agreements with its manufacturers or suppliers but this may
change in the future. The Company may experience delays in the delivery of and
quality problems with its products and certain components from vendors. Certain
of the Company's suppliers may have relatively limited financial and other
resources. Any inability to obtain timely deliveries of acceptable quality or
any other circumstances that would require the Company to seek alternative
sources of supply, or to manufacture its finished products internally, could
delay the Company's ability to ship its products which could damage
relationships with current or prospective customers and have a material adverse
effect on the Company's business, financial condition and operating results.
19. Uncertainty of Market Acceptance. The future operating results of
the Company depend to a significant extent upon the development of products and
services deemed appealing, attractive and affordable by consumers of aquaculture
equipment. There can be no assurance that the Company has the ability to
continuously introduce original products and services into the marketplace which
will achieve the market penetration and acceptance necessary for the Company to
grow and become profitable on a sustained basis, especially given the
competition that exists from companies more established and well financed than
the Company.
20. International Operations; Risks of Doing Business in Developing
Countries. Substantially all of the Company's products will be initially made to
distribute to customers located inside of the United States. The Company
anticipates, however that international sales will account for revenues from
product sales for the foreseeable future. The Company's international sales may
be denominated in foreign or United States currencies. The Company does not
currently engage in foreign currency hedging transactions. As a result, a
decrease in the value of foreign currencies relative to the United States dollar
could result in losses from transactions denominated in foreign currencies. With
respect to the Company's international sales that are United States dollar-
denominated, such a decrease could make the Company's products less
price-competitive. Additional risks inherent in the Company's international
business activities include changes in regulatory requirements, costs and risks
of local customers in foreign countries, availability of suitable export
financing, timing and availability of export licenses, tariffs and other trade
barriers, political and economic instability, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, potentially
adverse tax consequences, foreign currency exchange fluctuations, the burden of
complying with a wide variety of complex foreign laws and treaties and the
possibility of difficulty in accounts receivable collections. Some of the
Company's customer purchase agreements may be governed by foreign laws, which
may differ significantly from U.S. laws. Therefore, the Company may be limited
in its ability to enforce its rights under such agreements and to collect
damages, if awarded. There can be no assurance that any of these factors
33
<PAGE>
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
21. No Dividends. While payments of dividends on the Common Stock
rests with the discretion of the Board of Directors, there can be no assurance
that dividends can or will ever be paid. Payment of dividends is contingent
upon, among other things, future earnings, if any, and the financial condition
of the Company, capital requirements, general business conditions and other
factors which cannot now be predicted. It is highly unlikely that cash dividends
on the Common Stock will be paid by the Company in the foreseeable future.
22. No Cumulative Voting. The election of directors and other
questions will be decided by a majority vote. Since cumulative voting is not
permitted and a majority of the Company's outstanding Common Stock constitute a
quorum, investors who purchase shares of the Company's Common Stock may not have
the power to elect even a single director and, as a practical matter, the
current management will continue to effectively control the Company.
23. Control by Present Shareholders. The present shareholders of the
Company's Common Stock will, by virtue of their percentage share ownership and
the lack of cumulative voting, be able to elect the entire Board of Directors,
establish the Company's policies and generally direct its affairs. Accordingly,
persons investing in the Company's Common Stock will have no significant voice
in Company management, and cannot be assured of ever having representation on
the Board of Directors.
24. Potential Anti-Takeover and Other Effects of Issuance of
Preferred Stock May Be Detrimental to Common Shareholders. Potential
Anti-Takeover and Other Effects of Issuance of Preferred Stock May Be
Detrimental to Common Shareholders. The Company is authorized to issue shares of
preferred stock. ("Preferred Stock") although none has been issued to date. The
issuance of Preferred Stock may not require approval by the shareholders of the
Company's Common Stock. The Board of Directors, in its sole discretion, may have
the power to issue shares of Preferred Stock in one or more series and to
establish the dividend rates and preferences, liquidation preferences, voting
rights, redemption and conversion terms and conditions and any other relative
rights and preferences with respect to any series of Preferred Stock. Holders of
Preferred Stock may have the right to receive dividends, certain preferences in
liquidation and conversion and other rights; any of which rights and preferences
may operate to the detriment of the shareholders of the Company's Common Stock.
Further, the issuance of any shares of Preferred Stock having rights superior to
those of the Company's Common Stock may result in a decrease in the value of
market price of the Common Stock provided a market exists, and additionally,
could be used by the Board of Directors as an anti-takeover measure or device to
prevent a change in control of the Company.
25. No Secondary Trading Exemption. Secondary trading in the Common
Stock will not be possible in each state until the shares of Common Stock are
qualified for sale under the applicable securities laws of the state or the
Company verifies that an exemption, such as listing in certain recognized
securities manuals, is available for secondary trading in the state. There can
be no assurance that the Company will be successful in registering or qualifying
the Common Stock for secondary trading, or availing itself of an exemption for
secondary trading in the Common Stock, in any state. If the Company fails to
register or qualify, or to obtain or verify an exemption for the secondary
trading of, the Common Stock in any particular state, the shares of Common Stock
could
34
<PAGE>
not be offered or sold to, or purchased by, a resident of that state. In the
event that a significant number of states refuse to permit secondary trading in
the Company's Common Stock, a public market for the Common Stock will fail to
develop and the shares could be deprived of any value.
26. Possible Adverse Effect of Penny Stock Regulations on Liquidity
of Common Stock in any Secondary Market. Although the Company does not currently
trade on any medium, the Common Stock when listed is expected to come within the
meaning of the term "penny stock" under 17 CAR 240.3a51-1 because such shares
are issued by a small company; are expected to be low- priced (under five
dollars); and will not traded on NASDAQ or on a national stock exchange. The SEC
has established risk disclosure requirements for broker-dealers participating in
penny stock transactions as part of a system of disclosure and regulatory
oversight for the operation of the penny stock market. Rule 15g-9 under the
Securities Exchange Act of 1934, as amended, obligates a broker-dealer to
satisfy special sales practice requirements, including a requirement that it
make an individualized written suitability determination of the purchaser and
receive the purchaser's written consent prior to the transaction. Further, the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990 require a
broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure instrument that provides information about penny
stocks and the risks in the penny stock market. Additionally, the customer must
be provided by the broker-dealer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and the salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. For so long as the Company's Common
Stock is considered penny stock, the penny stock regulations can be expected to
have an adverse effect on the liquidity of the Common Stock in the secondary
market, if any, which develops.
Item 2. Management's Discussion and Analysis or Plan of Operation
Discussion and Analysis
Initially the Company was engaged in the business of installing cable
and fiber optic systems. The Company began an offering to raise money and
interest in the Company. The Company began contacting possible suppliers of raw
materials necessary for entering into the cable and fiber optic business, but
found it difficult to establish this type of business. When the Company
encountered MSIW, its sole officer and director decided it would be more
profitable to enter into the aquaculture business. In August 1996, at the time
it acquired MSIW as a wholly-owned subsidiary, its purpose changed to
Mariculture's initial purpose of producing Aquaculture systems, specifically the
SARGO system, which is a self-contained fish farming unit. Mariculture's
founding philosophy arose from the experience of its management in the
aquaculture and related industries.
The Company was in the development stage until August 1996 when the
Share Exchange took place between MSIW and the Company and is still emerging
from that stage. The Company has only recently begun marketing the SARGO system
and has not yet sold any units. From the date of the Share Exchange in August
1996 through June 30,2000, the Company generated no revenues. Since the date of
the Share Exchange through June 30, 2000, the Company has generated cumulative
losses of approximately $1,107,551. Due to the Company's limited operating
history and limited resources, among other factors, there can be no assurance
that profitability or significant revenues on a quarterly or annual basis will
occur in the future.
35
<PAGE>
The Company has begun to make preparations for a period of growth,
which may require it to significantly increase the scale of its operations. This
increase will include the hiring of additional personnel in all functional areas
and will result in significantly higher operating expenses. The increase in
operating expenses is expected to be matched by a concurrent increase in
revenues. However, the Company's net loss may continue even if revenues increase
and operating expenses may still continue to increase. Expansion of the
Company's operations may cause a significant strain on the Company's management,
financial and other resources. The Company's ability to manage recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its accounting and other internal management systems and the
implementation and subsequent improvement of a variety of systems, procedures
and controls. There can be no assurance that significant problems in these areas
will not occur. Any failure to expand these areas and implement and improve such
systems, procedures and controls in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's business, financial condition and results of operations. As a result
of such expected expansion and the anticipated increase in its operating
expenses, as well as the difficulty in forecasting revenue levels, the Company
expects to continue to experience significant fluctuations in its revenues,
costs and gross margins, and therefore its results of operations.
Results of Operations - Full Fiscal Years
Revenues
To date the Company has no revenues. The Company will focus its
efforts on the solicitation and marketing to new customers. The Company intends
to advertise its products at trade shows, through the use of advertising, and
through other methods.
The Company currently has no contracts in place. Therefore, there is
no assurance that the Company will be able to successfully contract with new
customers.
Operating Expenses
Sales and Marketing
These expenses consist of advertising, meetings and conventions and
entertainment related to product exhibitions and related travel expenses. Since
inception, the Company has spent approximately $37,870 on sales and marketing
expenses. For the years ended December 31, 1998 and December 31, 1999, sales and
marketing expenses were $0 and $0 respectively. The Company intends to invest
significant resources to expand its sales and marketing effort, including the
hiring of additional personnel and to establish the infrastructure necessary to
support future operations. The Company expects that such expenses in 2000 will
increase in absolute dollars as compared to 1999.
General and Administrative
These expenses consist primarily of the general and administrative
expenses for salaries, contract labor and other expenses for management and
finance and accounting, legal and other professional services including ongoing
expenses as a publicly owned Company related to legal, accounting and other
administrative services and expenses. Since inception, the Company has spent
36
<PAGE>
approximately $340,951 on general and administrative expenses. For the years
ended December 31, 1998 and December 31, 1999, general and administrative
expenses were $24,865 and $9,820 respectively. The Company expects general and
administrative expenses to increase in absolute dollars in 2000 as compared to
1999, as the Company continues to expand its operations.
Interest and Other Income (Expense), Net
In April 1996, prior to its acquisition by the Company, MSIW executed
a Promissory Note in favor of William Evans, the Company's then current Vice
President of Sales, in the amount of eighteen thousand dollars ($18,000) at an
interest rate of ten percent (10%) per annum. The Note was in exchange for
monies lent by Mr. Evans to the Company for working capital. The Note was
payable in full by July 31, 1996. See Part II, Item 4, "Recent Sales of
Unregistered Securities."
In January 1997, the Company executed a second Promissory Note in
favor of William Evans, the Company's then present Vice President of Sales, in
the amount of ten thousand dollars ($10,000) at an interest rate of ten percent
(10%) per annum. The Note was in exchange for monies lent by Mr. Evans to the
Company for working capital. The Note was payable in full by April 30, 1997. See
Part II, Item 4, "Recent Sales of Unregistered Securities."
In April 1997, the Company executed a third Promissory Note in favor
of William Evans, the Company's then current Vice President of Sales, in the
amount of twenty two thousand dollars ($22,000) at an interest rate of ten
percent (10%) per annum. The Note was in exchange for monies lent by Mr. Evans
to the Company for working capital. The Note was payable in full by December 15,
1997. See Part II, Item 4, "Recent Sales of Unregistered Securities."
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which has not yet been paid, and additionally
agreed to pay a quarterly royalty payment of three percent (3%) of total sales
of Licensed Technology Products from the agreement date until the final
abandonment, expiration, or invalidation of the last remaining patent rights.
See Part I, Item 5. "Directors, Executive Officers, Promoters and Control
Persons"; Part I, Item 6. "Executive Compensation" and Part I, Item 7. "Certain
Relationships and Related Transactions."
In March 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn, in the amount of fourteen thousand four hundred dollars
($14,400) at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital. The
Note is payable on demand. See Part I, Item 4. "Security Ownership of Certain
Beneficial Owners and Management"; Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
37
<PAGE>
In March 2000, the Company executed a Promissory Note in favor of
David Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The Note was
in exchange for monies lent by Mr. Meilahn to the Company for working capital.
The Note is payable on demand. See Part I, Item 4. "Security Ownership of
Certain Beneficial Owners and Management"; Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In August 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable in demand. See Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
In November 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of five thousand dollars ($5,000) at an interest
rate of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part I, Item 4. "Security Ownership of Certain Beneficial Owners and
Management"; Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
The Company did not report foreign currency gains or losses for the
year ended December 31, 1999 since the Company has had no foreign transactions
to date. In the event that the Company contracts with a foreign entity for the
purchase of its products, the Company may in the future be exposed to the risk
of foreign currency gains or losses depending upon the magnitude of a change in
the value of a local currency in an international market. The Company does not
currently engage in foreign currency hedging transactions, although it may
implement such transactions in the future.
Financial Condition, Liquidity and Capital Resources
At December 31, 1999 the Company had assets totaling $57,802 and
liabilities totaling $338,855. Since the Share Exchange in August 1996, the
Company has financed its operations and met its capital requirements through
borrowing from current shareholders.
Operating activities used net cash of $17,470 and $4,798 in 1998 and
1999, respectively.
Research and Experimentation expenses were $23,277 and $3,851 in 1998
and 1999, respectively. The reason for the decrease in these expenses is that
there was virtuously no activity in the engineering department during 1999,
principally because the Company did not have excess funds to support extended
research and development.
At December 31, 1999, the Company had a working capital deficiency of
approximately $336,482.
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<PAGE>
The Company's principal commitments for capital expenditures are
those associated with advertising and marketing the SARGO units for sale to the
public and manufacturing those units once the Company has signed contracts.
Many factors, both known and unknown, will certainly have an affect
on the liquidity of the Company during the production and sale of fish farm
systems. Limits presently imposed on new installations of systems may likely be
changed to a more favorable attitude, thereby allowing for more sites and
therefore more sales. One concern is supplying feed for the fish themselves.
Recent developments in improving fish diet and lessening the waste of natural
fisheries products appears however to weaken the argument that there will not be
enough food to raise all the fish that is demanded. Recycling of the normally
wasted byproducts of fish processing into ground meal and oil to provide feed
additives is needed, but this process can be costly. Management expects that the
pressing need for consumable proteins will increase the demand for farmed fish
as an economical source of food. Fish rearing is, however the most economical
for animal proteins available when comparing the feed conversion ratios that
apply to cattle, fowl and hogs.
The Company has an ongoing private placement offering, however no
offering memorandum is being used in connection with this offering. The amount
of funding required from this offering is $100,000. The nature of the offering
is that the Company will only accept subscriptions for stock from accredited
investors, and only the Company's officers and directors will accept such
subscriptions. The amount of funds that will be raised through this offering is
yet to be determined. The Company may rely upon Regulation D, 4(2) Rule 506 or
any other applicable exemptions, and the applicable state exemption upon receipt
of subscriptions. The wife of Mr. Meilahn has thus far funded the Company as
evidenced by the Promissory Notes which have been disclosed herein, and although
there is no formal agreement, she intends to continue to lend to the Company
what it needs until it can sustain its operations itself through revenues and
through the private sale of its securities.
The Company's future capital requirements will depend upon many
factors, including the execution of a contract with the ability of the Company
to successfully recruit new potential purchasers of its SARGO system, the extent
and timing of acceptance of the Company's products and services in the market,
expansion of the Company's marketing and sales efforts, the Company's results of
operations and the status of competitive products and services. The Company
believes that cash on hand, cash flow from operations, if any, and funds
available from the current private placement offering will be adequate to fund
its operations for at least the next six (6) months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations. In addition, the Company may require additional
financing after such date to fund its operations. There can be no assurance that
any additional financing will be available to the Company on acceptable terms,
or at all, when required by the Company. If additional funds are raised by
issuing equity securities, further dilution to the existing stockholders will
result. If additional funds are raised by issuing debt securities future
interest expense will be incurred. If adequate funds are not available, the
Company may be required to delay, scale back the development of new or improved
products or to scale back or eliminate one or more of its research and
development programs or obtain funds through arrangements with partners or
others that may require the Company to relinquish rights to certain of its
products or potential products or other assets that the Company would not
otherwise relinquish. Accordingly, the inability to obtain such financing could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In July 1996, prior to its acquisition of MSIW, the Company sold
1,200,000 shares of its Common Stock to one hundred nineteen (119) individuals
for a total of $12,000. For such offering, the Company relied upon Section 3(b)
of the Act, Rule 504, the Florida Exemption, the Georgia Exemption, Section
502.203 (9) of the Iowa Code, Section 80A.15(Subd. 2)(h) of the Minnesota Code,
Section 49:3-50 (b)(9) of the New Jersey Code, Section 90.530(11) of the Nevada
Code, Section 35-1-320(9) of the South Carolina Code, Section 48-2-103(b)(4) of
the Tennessee Code,
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<PAGE>
Section 5[581-5]I(c) of the Texas Code and Section 551.23 (11) of the Wisconsin
Code. No state exemption was necessary for the sales made to Aruban, Bahamian,
Canadian, French or Taiwanese investors.
In December 1998, the Company sold 1,409 shares of its restricted
Common Stock to three (3) investors. No offering memorandum was used in
connection with these sales. This offering was conducted pursuant to Section
4(2) of the Act, Rule 506 and Section 109.13 of the Texas Code.
From December 1998 through April 1999, the Company sold 93,069 shares
of its unrestricted Common Stock to twenty two (22) investors. For such
offering, the Company relied upon Section 3(b) of the Act, Rule 504, Section
11-51-308(1)(j) of the Colorado Code, the Florida Exemption, the Georgia
Exemption, Section 59.035(12) of the Oregon Code, Section 48-2-103(b)(4) of the
Tennessee Code and Section 551.23 (11) of the Wisconsin Code.
January 2000 through April 2000, the Company sold 32,000 shares of
its Restricted Common Stock to seven (7) investors for a total of thirty two
thousand dollars ($32,000). The offering was conducted pursuant to Section 4(2)
of the Act, Rule 506, Section 25102.1 of the California Code, Section 80 A.15
Subd. 2(h) of the Minnesota Code, Section 109.13 of the Texas Code, and the
Washington Exemption.
Results of Operations - Six month Interim periods ended June 30, 1999 and June
30, 2000
Revenues
To date the Company has no revenues.
Operating Expenses
Sales and Marketing
These expenses consist of advertising, meetings and conventions and
entertainment related to product exhibitions and related travel expenses. Since
inception, the Company has spent approximately $37,870 on sales and marketing
expenses. For the six month interim periods ended June 30, 1999 and June 30,
2000, sales and marketing expenses were $0 and $0 respectively.
General and Administrative
These expenses consist primarily of the general and administrative
expenses for salaries, contract labor and other expenses for management and
finance and accounting, legal and other professional services including ongoing
expenses as a publicly owned Company related to legal, accounting and other
administrative services and expenses. Since inception, the Company has spent
approximately $340,951 on general and administrative expenses. For the six month
interim periods ended June 30, 1999 and June 30, 2000, general and
administrative expenses were $3,371 and $60,501 respectively.
Financial Condition, Liquidity and Capital Resources
At the six month interim period ended June 30, 2000 the Company had
assets totaling $56,953, and liabilities totaling $357,739. Since the Share
Exchange in August 1996, the Company has financed its operations and met its
capital requirements through borrowing from current shareholders.
Operating activities used net cash of $94,364 and $6,406 for the six
month interim periods ended June 30, 1999 and June 30, 2000 respectively.
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<PAGE>
Research and Experimentation expenses were $3,035 and $23,863 for the
six month interim periods ended June 30, 1999 and June 30, 2000, respectively.
At the six month interim period ended June 30, 2000, the Company had
a working capital deficiency of $359,263.
Item 3. Description of Property
The Company has been located in offices at 2504 Hartford Drive, Lake
Stevens, Washington, 98258, since November 1998. Mail service is provided only
through Post Office Box 968 in Lake Stevens. Its telephone number is (425)
397-0409, and its facsimile number is (425) 672-8012.
The Company's headquarters are owned by Sanford Tager, president of
Methow Valley Excavating, Inc. and have been provided gratis for an indefinite
period of time in exchange for past renovation services and ongoing computer
services.
The office space consists of 360 square feet. The facilities provide
enough space to support current operations. Therefore, Mariculture anticipates
the necessity to move its headquarters when additional personnel are engaged. At
this time, Mariculture and Mr. Meilahn have no further obligation to Mr. Tager
or to Methow Valley Excavating, Inc, other than the ongoing computer services.
The Company owns no real property and its personal property consists
of furniture, fixtures and equipment, with an original cost of $43,690 on
December 1, 1996.
Item 4. Security Ownership of Certain Beneficial Owners and Management:
The following table sets forth information as of August 31, 2000,
regarding the ownership of the Company's Common Stock by each shareholder known
by the Company to be the beneficial owner of more than five percent (5%) of its
outstanding shares of Common Stock, each officer and director, and all executive
officers and directors as a group. Except as otherwise indicated, each of the
shareholders has sole voting and investment power with respect to the share of
Common Stock beneficially owned.
<TABLE>
<CAPTION>
Name and Address of Title of Amount and Nature of Percent of
Beneficial Owner Class Beneficial Owner Class
----------------------- -------- -------------------- ----------
<S> <C> <C> <C>
David Meilahn (1)(2)(3) Common 2,365,960 22.4%
(4)(5)(6)(7)(11)
Robert Work (1) Common 2,226,421 21.0%
William Evans (1) Common 2,033,615 19.3%
Mark Kruschwitz (1) Common 629,191 6.0%
Richard Luce (1) (8) Common 0 0.0%
Robert Janeczko (1) (9) Common 0 0.0%
Don Jonas (1) (10) Common 0 0.0%
All Executive Officers and Common 2,365,960 22.4%
Directors as a Group
(four (4) persons)
</TABLE>
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<PAGE>
-----------------------------
(1) The address for each of the above is c/o Mariculture Systems, Inc., P.O.
968, Lake Stevens, WA, 98258.
(2) In August 1996, the Company entered into a share exchange agreement with
MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its
restricted Common Stock to the shareholders of MSIW for all of the issued
and outstanding stock of MSIW. As part of the transaction, David Meilahn,
received 2,226,421 shares of the Company's Common Stock. See Part I, Item
5. "Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
(3) In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her
services were valued at $8,700. The shares were actually issued in January
2000. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and Section 460-44A-506 of the Washington Code. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6 "Executive Compensation"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(4) In March 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn, in the amount of fourteen thousand four hundred dollars ($14,400)
at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital.
The Note is payable on demand. See Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(5) In March 2000, the Company executed a Promissory Note in favor of David
Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The
Note was in exchange for monies lent by Mr. Meilahn to the Company for
working capital. The Note is payable on demand. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
(6) In August 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange
for monies lent by Ms. Meilahn to the Company for working capital. The Note
is payable in demand. See Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; See Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(7) David Meilahn and his wife Elaine Meilahn own 95,966 and 26,173 shares,
respectively, in their own self directed IRA accounts.
(8) In September 2000, the Company entered into an Employment Agreement with
Richard J. Luce to employ him as Vice President of Sales and Marketing. The
term of the agreement
42
<PAGE>
is for a period of four (4) years and is automatically renewable for one
(1) year. Mr. Luce's annual base salary is ninety three thousand five
hundred dollars ($93,500.00) for the first year, one hundred thousand forty
five dollars ($100,045) for the second year, one hundred seven thousand
forty eight dollars ($107,048) for the third year, and one hundred fourteen
thousand five hundred forty one dollars ($114,541) for the fourth year.
However no salary will be accrued during the first four (4) months of
employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one
half percent (0.5%) for all direct sales by Luce. Luce is also granted the
right to purchase up to one hundred thousand (100,000) shares of the
Company's restricted Common Stock at a price of four dollars ($4.00) per
share. Twenty-five percent (25%) of the options shall become vested on
January 1, 2001, and the remaining seventy-five percent (75%) of the
options shall become vested at the equal rate of twenty-five percent (25%)
upon each successive one (1) year anniversary date of employment. All
vested options shall expire with three (3) years from the date of vesting.
See Part I, Item 5. "Directors, Executive Officers, Promoters and Control
Persons"; Part I, Item 6. "Executive Compensation"; and Part I, Item 7.
"Certain Relationships and Related Transactions."
(9) In March 2000, pursuant to the Company's Bylaws, a vacancy was created in
the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until
election by the shareholders at the 2001 shareholders meeting. See Part I,
Item 5. "Directors, Executive Officers, Promoters and Control Persons";
Part 1, Item 6. "Executive Compensation"; Part I, Item 7. "Certain
Relationships and Related Transactions."
(10) In March 2000, pursuant to the Company's Bylaws, a vacancy was created in
the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Don N. Jonas by an affirmative vote of a majority of
the remaining directors. Mr. Jonas shall serve until election by the
shareholders at the 2001 shareholders meeting. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part 1,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions."
(11) In November 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn in the amount of five thousand dollars ($5,000) at an interest rate
of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4.
"Recent Sales of Unregistered Securities."
There are no arrangements which may result in the change of control
of the Company.
43
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons:
Executive Officers and Directors
Set forth below are the names, ages, positions with the Company and
business experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
---------------- ---- -----------------------------
David Meilahn 61 President, Secretary, Treasurer, Chairman
Richard Luce 40 Vice President, Sales & Marketing
Robert Janeczko 59 Director
Don Jonas 59 Director
All directors hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and qualify,
which date has not yet been determined. Officers serve at the pleasure of the
Board of Directors. The officers and directors will devote such time and effort
to the business and affairs of the Company as may be necessary to perform their
responsibilities as executive officers and/or directors of the Company.
In August 1996, the Company entered into a share exchange agreement
with MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its restricted
Common Stock to the shareholders of MSIW for all of the issued and outstanding
stock of MSIW. As part of the transaction, David Meilahn received 2,226,421
shares of the Company's Common Stock. This offering was conducted pursuant to
Section 4(2) of the Act, Rule 506 of Regulation D promulgated thereunder ("Rule
506"), Section 517.061(11) of the Florida Code, Section 10-5-9 (13) of the
Georgia Code, Rule ###-##-#### of the Oregon Code and Section 460-44A-506 of the
Washington Code. Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her services
were valued at $8,700. The shares were actually issued in January 2000. The
shares were issued pursuant to Section 4(2) of the Act, Rule 506 and Section
460-44A-506 of the Washington Code. See Part I, Item 6 "Executive Compensation";
Part I, Item 7. "Certain Relationships and Related Transactions"; and Part II,
Item 4. "Recent Sales of Unregistered Securities."
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
44
<PAGE>
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which has not yet been paid, and additionally
agreed to pay a quarterly royalty payment of three percent (3%) of total sales
of Licensed Technology Products from the agreement date until the final
abandonment, expiration, or invalidation of the last remaining patent rights.
See Part I, Item 7. "Certain Relationships and Related Transactions."
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until election by
the shareholders at the 2001 shareholders meeting. See Part 1, Item 6.
"Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions."
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Don N. Jonas by an affirmative vote of a majority of
the remaining directors. Mr. Jonas shall serve until election by the
shareholders at the 2001 shareholders meeting. See Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions."
In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses presented by each member of
the board. See Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"and Part II, Item 4 "Recent
Sales of Unregistered Securities."
In September 2000, the Company entered into an Employment Agreement
with Richard J. Luce, to employ him as Vice President of Sales and Marketing.
The term of the agreement is for a period of four (4) years, and is
automatically renewable for one (1) year. Mr. Luce's annual base salary will be
ninety three thousand five hundred dollars ($93,500.00), however no salary will
be accrued during the first four (4) months. Mr. Luce is also granted the right
to purchase up to one hundred thousand (100,000) shares of the Company's
restricted Common Stock at a price of four dollars ($4.00) per share.
In March 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn, in the amount of fourteen thousand four hundred dollars
($14,400) at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital. The
Note is payable on demand. See Part I, Item 6. "Executive Compensation"; Part I,
Item 7. "Certain Relationships and Related Transactions"; and Part II, Item 4.
"Recent Sales of Unregistered Securities."
In March 2000, the Company executed a Promissory Note in favor of
David Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The Note was
in exchange for monies lent by Mr. Meilahn to the Company for working capital.
The Note is payable on demand. See Part I, Item 6. "Executive Compensation";
Part I, Item 7. "Certain Relationships and Related Transactions"; and Part II,
Item
45
<PAGE>
4. "Recent Sales of Unregistered Securities."
In August 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable in demand. See Part 8, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In September 2000, the Company entered into an Employment Agreement
with Richard J. Luce to employ him as Vice President of Sales and Marketing. The
term of the agreement is for a period of four (4) years and is automatically
renewable for one (1) year. Mr. Luce's annual base salary is ninety three
thousand five hundred dollars ($93,500.00) for the first year, one hundred
thousand forty five dollars ($100,045) for the second year, one hundred seven
thousand forty eight dollars ($107,048) for the third year, and one hundred
fourteen thousand five hundred forty one dollars ($114,541) for the fourth year.
However no salary will be accrued during the first four (4) months of
employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one half
percent (0.5%) for all direct sales by Luce. Luce is also granted the right to
purchase up to one hundred thousand (100,000) shares of the Company's restricted
Common Stock at a price of four dollars ($4.00) per share. Twenty-five percent
(25%) of the options shall become vested on January 1, 2001, and the remaining
seventy-five percent (75%) of the options shall become vested at the equal rate
of twenty-five percent (25%) upon each successive one (1) year anniversary date
of employment. All vested options shall expire with three (3) years from the
date of vesting. See Part I, Item 6. "Executive Compensation"; and Part I, Item
7. "Certain Relationships and Related Transactions."
In November 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of five thousand dollars ($5,000) at an interest
rate of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part I, Item 6. "Executive Compensation"; Part I, Item 7. "Certain
Relationships and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
Family Relationships
There are no family relationships between or among the executive
officers and directors of the Company.
Business Experience
David E. Meilahn, age 61, currently serves as President, Secretary,
Treasurer and Chairman, to the Company. He has served in this capacity since
December 1997 and also served as President of the MSIW since August of 1994. His
duties in this position include directing all activities of the Company,
including engineering, new product development, and origination. From September
1957 to May 1963, Mr. Meilahn attended the University of Wisconsin, Menomonie,
where he received a Bachelor of Science in Industrial Technology. From September
1978 to May1980 he attended the
46
<PAGE>
University of Wisconsin, Milwaukee, where he received a Masters in Business
Administration.
Richard J. Luce, age 40, currently serves as Vice President, Sales
and Marketing. He has served as Vice President of Sales and Marketing since
September 2000. His duties at Mariculture include sales and marketing. From
April 1999 to January 2000, Mr. Luce was employed as Operations Manager of
G-Zero Technologies. His responsibilities were to develop and implement business
strategies, minimizing inventory and production problems. From March 1996 to
April 1999, Mr. Luce was employed as Product Marketing Manager of Menasha
Corporation. His responsibilities at Menasha Corporation were to lead the
development, manufacturing, pricing, promotion, and marketing goals of their
product line. From June1994 to March1996 Mr. Luce was the Owner/Operator of
Pendulum Productions, Inc. His duties at Pendulum Productions, Inc. included
product development, sales and administration of product. From September 1978 to
January 1982, Mr. Luce attended the University of Wisconsin at Oshkosh, where he
received a Bachelors in Science. From July 1988 to May1990, Mr. Luce attended
the University of Wisconsin, Milwaukee, where he received a Masters in Business
Administration.
Dr. Robert J. Janeczko, age 59, currently serves as Director to the
Company. He has served in that capacity since March 2000. His duties at
Mariculture include manufacturing and administration. He is also currently the
President of the Morton Metalcraft Co., a Division of the Morton Industrial
Group, Inc. ("Morton"). He has served as President of Morton since May 1995. His
duties at Morton include directing all activities of the corporation, as well as
dealing directly with major customers. From September 1959 to June 1963, Dr.
Janeczko attended the University of Wisconsin, Stout, where he received a
Bachelor of Science. From, September 1965 to June 1966 he attended Ball State
University, where he received a Masters in Science. And from September 1970 to
May 1971, he attended the University of Missouri where he received an E.D.D.
Don N. Jonas, CPA, age 59, currently serves as Director to the
Company. He has served in that capacity since March 2000. His duties at
Mariculture include business, finance and administration. He is also currently a
Manager in the certified public accounting firm of Davis & Jonas PS. He has been
employed with Davis & Jonas since 1973. His duties at Davis & Jonas PS include
general management. From September 1962 to May 1966, Mr. Jonas attended the
University of Washington, Spokane, where he received a B.B.A. in Accounting.
47
<PAGE>
Item 6. Executive Compensation
<TABLE>
<CAPTION>
Annual Annual Annual LT Comp LT All
Name and Comp Comp Comp Rest Comp LTIP Other
Post Year Salary Bonus Other Stock Options Payouts (1)
(1) ($)
------------ ---- ------ ----- ----- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David 1996 $0 2,348,560
Meilahn, 1997 $0
President, 1998 $0 17,400
Secretary, 1999 $0
Treasurer 2000 $0
and
Chairman
(2) (3) (4)
(5) (6) (7)
(8) (12)
Richard 1996 $0
Luce, V.P., 1997 $0
Sales & 1998 $0
Marketing 1999 $0
(9) 2000 $0
Robert 1996 $0
Janeczko, 1997 $0
Director (10) 1998 $0
1999 $0
2000 $0
Don Jonas, 1996 $0
Director (11) 1997 $0
1998 $0
1999 $0
2000 $0
</TABLE>
(1) All other compensation includes certain health and life insurance benefits
paid by the Company on behalf of its employee.
(2) In August 1996, the Company entered into a share exchange agreement with
MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its
restricted Common Stock to the shareholders of MSIW for all of the issued
and outstanding stock of MSIW. As part of the transaction, David Meilahn,
received 2,226,421 shares of the Company's Common Stock. See Part I, Item
5. "Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
48
<PAGE>
(3) In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her
services were valued at $8,700. The shares were actually issued in January
2000. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and Section 460-44A-506 of the Washington Code. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6 "Executive Compensation"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(4) In December 1998, a License Agreement was entered into between the Company
and David Meilahn, whereby Meilahn assigned a license to utilize a patent
to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from
the technology. In consideration of the grant of license by Mr. Meilahn,
the Company agreed to pay a one time fee in the amount of two hundred
thousand dollars ($200,000) in December 1999, which has not yet been paid,
and additionally agreed to pay a quarterly royalty payment of three percent
(3%) of total sales of Licensed Technology Products from the agreement date
until the final abandonment, expiration, or invalidation of the last
remaining patent rights. See Part I, Item 7. "Certain Relationships and
Related Transactions."
(5) In March 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn, in the amount of fourteen thousand four hundred dollars ($14,400)
at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital.
The Note is payable on demand. See Part I, Item 5. "Directors, Executive
Officers, Promoters and Control Persons"; Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(6) In March 2000, the Company executed a Promissory Note in favor of David
Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The
Note was in exchange for monies lent by Mr. Meilahn to the Company for
working capital. The Note is payable on demand. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part I,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions"; and Part II, Item 4. "Recent Sales of
Unregistered Securities."
(7) In August 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange
for monies lent by Ms. Meilahn to the Company for working capital. The Note
is payable in demand. See Part I, Item 5. "Directors, Executive Officers,
Promoters and Control Persons"; See Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(8) David Meilahn and his wife Elaine Meilahn own 95,966 and 26,173 shares,
respectively, in their own self directed IRA accounts.
49
<PAGE>
(9) In September 2000, the Company entered into an Employment Agreement with
Richard J. Luce, to employ him as Vice President of Sales and Marketing.
The term of the agreement is for a period of four (4) years and is
automatically renewable for one (1) year. Mr. Luce's annual base salary is
ninety three thousand five hundred dollars ($93,500.00) for the first year,
one hundred thousand forty five dollars ($100,045) for the second year, one
hundred seven thousand forty eight dollars ($107,048) for the third year,
and one hundred fourteen thousand five hundred forty one dollars ($114,541)
for the fourth year. However no salary will be accrued during the first
four (4) months of employment. Luce will also receive commission payments
of one half percent (0.5%) based on gross sales of the Company products and
an additional one half percent (0.5%) for all direct sales by Luce. Luce is
also granted the right to purchase up to one hundred thousand (100,000)
shares of the Company's restricted Common Stock at a price of four dollars
($4.00) per share. Twenty-five percent (25%) of the options shall become
vested on January 1, 2001, and the remaining seventy-five percent (75%) of
the options shall become vested at the equal rate of twenty-five percent
(25%) upon each successive one (1) year anniversary date of employment. All
vested options shall expire with three (3) years from the date of vesting.
See Part I, Item 5. "Directors, Executive Officers, Promoters and Control
Persons"; Part I, Item 6. "Executive Compensation"; and Part I, Item 7.
"Certain Relationships and Related Transactions."
(10) In March 2000, pursuant to the Company's Bylaws, a vacancy was created in
the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until
election by the shareholders at the 2001 shareholders meeting. See Part I,
Item 5. "Directors, Executive Officers, Promoters and Control Persons";
Part 1, Item 6. "Executive Compensation"; Part I, Item 7. "Certain
Relationships and Related Transactions."
(11) In March 2000, pursuant to the Company's Bylaws, a vacancy was created in
the Board of Directors by an increase in the number of the directors. The
vacancy was filled by Don N. Jonas by an affirmative vote of a majority of
the remaining directors. Mr. Jonas shall serve until election by the
shareholders at the 2001 shareholders meeting. See Part I, Item 5.
"Directors, Executive Officers, Promoters and Control Persons"; Part 1,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships
and Related Transactions."
(12) In November 2000, the Company executed a Promissory Note in favor of Elaine
Meilahn in the amount of five thousand dollars ($5,000) at an interest rate
of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
Key Man Life Insurance
The Company intends to apply for Key Man Life Insurance and
Officer/Director Insurance upon becoming a reporting company under the 1934 Act.
50
<PAGE>
Employee and Consultants Stock Option Plans
There is currently no employee nor consultant stock option plan in
place, although the Company plans to submit such a plan or plans to the
shareholders at the next annual meeting.
Compensation of Directors
In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses presented by each member of
the board. See Part I, Item 7. "Certain Relationships and Related
Transactions"and Part II, Item 4 "Recent Sales of Unregistered Securities."
Item 7. Certain Relationships and Related Transactions
In August 1996, the Company entered into a share exchange agreement
with MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its restricted
Common Stock to the shareholders of MSIW for all of the issued and outstanding
stock of MSIW. As part of the transaction, David Meilahn received 2,226,421
shares of the Company's Common Stock. This offering was conducted pursuant to
Section 4(2) of the Act, Rule 506 of Regulation D promulgated thereunder ("Rule
506"), Section 517.061(11) of the Florida Code, Section 10-5-9 (13) of the
Georgia Code, Rule ###-##-#### of the Oregon Code and Section 460-44A-506 of the
Washington Code. See Part II, Item 4. "Recent Sales of Unregistered Securities."
In July 1997, the Company issued 31,000 shares of its restricted
Common Stock to Corporate Imaging in connection with their production of a
corporate profile. The shares were issued pursuant to Section 4(2) of the Act,
Rule 506 and Section R14-4-126 of the Arizona Code. See Part II, Item 4. "Recent
Sales of Unregistered Securities."
In July 1997, the Company issued 10,766 shares of its restricted
Common Stock valued at $3,122 to Jeff & Jill Caven in connection with their
photography services on behalf of the Company. The shares were issued pursuant
to Section 4(2) of the Act, Rule 506, Section 58-13B-24(R) of the New Mexico
Code and New Mexico Rule 12NMAC11.4.11.2. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In July 1997, the Company issued 14,946 shares of its restricted
Common Stock valued at $9,715 to John Sabella as payment for producing brochures
on behalf of the company. The shares were issued pursuant to Section 4(2) of the
Act, Rule 506 and Section 460-44A-506 of the Washington Code. See Part II, Item
4. "Recent Sales of Unregistered Securities."
In August 1997, an agreement was entered into whereby the Company
issued 54,027 shares of its Common Stock to Stephen Jaeb in exchange for the
cancellation of a debt by the Company to Mr. Jaeb in the amount of $54,027. The
shares were issued pursuant to Section 3(b) of the Act, Rule 504 and Section
517.061(11) of the Florida Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In April 1998, an agreement was entered into, whereby the Company
issued 20,600 shares of its unrestricted Common Stock to Reinforced Tank
Products, Inc. in connection with their
51
<PAGE>
agreement to provide engineering services at the University of California in
Long Beach, California. The services were valued at $20,600. The shares were
issued pursuant to Section 3(b) of the Act, Rule 504 and Section 59.035(12) of
the Oregon Code. See Part II, Item 4. "Recent Sales of Unregistered Securities."
In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her services
were valued at $8,700. The shares were actually issued in January 2000. The
shares were issued pursuant to Section 4(2) of the Act, Rule 506 and Section
460-44A-506 of the Washington Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In December 1998, a License Agreement was entered into between the
Company and David Meilahn, whereby Meilahn assigned a license to utilize a
patent to a proprietary fish farming technology. The agreement provides the
Company with license rights to Mr. Meilahn's intellectual property, and the
Company will in turn develop, manufacture and install products derived from the
technology. In consideration of the grant of license by Mr. Meilahn, the Company
agreed to pay a one time fee in the amount of two hundred thousand dollars
($200,000) in December 1999, which has not yet been paid, and additionally
agreed to pay a quarterly royalty payment of three percent (3%) of total sales
of Licensed Technology Products from the agreement date until the final
abandonment, expiration, or invalidation of the last remaining patent rights.
In April 1999, the Company issued 27,000 shares of its unrestricted
Common Stock to Neil Rand in connection with his production of a corporate
profile. The shares were issued pursuant to Section 3(b) of the Act, Rule 504
and Section 517.061(11) of the Florida Code. See Part II, Item 4.
"Recent Sales of Unregistered Securities."
In April 1999, an agreement was entered into, whereby the Company
issued 11,930 shares of its restricted Common Stock to Sanford Tager, President
of Methow Valley Excavating, Inc., in connection with their agreement to
dismantle and remove the Company's pilot test site. The services were valued at
$11,929.54. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and Section 460-44A-506 of the Washington Code. See Part II, Item 4. "Recent
Sales of Unregistered Securities."
In March 2000, the Company issued 250,000 shares of its restricted
Common Stock to Donald Mintmire in connection with his legal services on behalf
of the Company. The shares were issued pursuant to Section 3(b), Rule 701 and
Section 517.061(11) of the Florida Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In March 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn, in the amount of fourteen thousand four hundred dollars
($14,400) at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital. The
Note is payable on demand. See Part II, Item 4. "Recent Sales of Unregistered
Securities."
In March 2000, the Company executed a Promissory Note in favor of
David Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of
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twelve percent (12%) per annum. The Note was in exchange for monies lent by Mr.
Meilahn to the Company for working capital. The Note is payable on demand. See
Part II, Item 4. "Recent Sales of Unregistered Securities."
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Dr. Robert J. Janeczko by an affirmative vote of a
majority of the remaining directors. Dr. Janeczko shall serve until election by
the shareholders at the 2001 shareholders meeting.
In March 2000, pursuant to the Company's Bylaws, a vacancy was
created in the Board of Directors by an increase in the number of the directors.
The vacancy was filled by Don N. Jonas by an affirmative vote of a majority of
the remaining directors. Mr. Jonas shall serve until election by the
shareholders at the 2001 shareholders meeting.
In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses presented by each member of
the board. See Part II, Item 4 "Recent Sales of Unregistered Securities."
In August 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable in demand. See Part II, Item 4. "Recent Sales of Unregistered
Securities."
In September 2000, the Company entered into an Employment Agreement
with Richard J. Luce to employ him as Vice President of Sales and Marketing. The
term of the agreement is for a period of four (4) years and is automatically
renewable for one (1) year. Mr. Luce's annual base salary is ninety three
thousand five hundred dollars ($93,500.00) for the first year, one hundred
thousand forty five dollars ($100,045) for the second year, one hundred seven
thousand forty eight dollars ($107,048) for the third year, and one hundred
fourteen thousand five hundred forty one dollars ($114,541) for the fourth year.
However no salary will be accrued during the first four (4) months of
employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one half
percent (0.5%) for all direct sales by Luce. Luce is also granted the right to
purchase up to one hundred thousand (100,000) shares of the Company's restricted
Common Stock at a price of four dollars ($4.00) per share. Twenty-five percent
(25%) of the options shall become vested on January 1, 2001, and the remaining
seventy-five percent (75%) of the options shall become vested at the equal rate
of twenty-five percent (25%) upon each successive one (1) year anniversary date
of employment. All vested options shall expire with three (3) years from the
date of vesting.
In November 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of five thousand dollars ($5,000) at an interest
rate of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand. See Part II, Item 4. "Recent Sales of Unregistered Securities."
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Item 8. Description of Securities
Description of Capital Stock
The Company's authorized capital stock consists of 20,000,000 shares
of Common Stock, $0.001 par value per share and 1,000,000 shares of Preferred
Stock, $0.001 par value per share. As of August 31, 2000, the Company had
10,564,147 shares of its Common Stock outstanding and none of its Preferred
Stock outstanding.
There are no anti-takeover provisions in the Company's Certificate of
Incorporation or in its By-Laws.
Description of Common Stock
All shares of Common Stock have equal voting rights and, when validly
issued and outstanding, are entitled to one (1) vote per share in all matters to
be voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as
fully-paid and non-assessable shares. Cumulative voting in the election of
directors is not permitted; which means that the holders of a majority of the
issued and outstanding shares of Common Stock represented at any meeting at
which a quorum is present will be able to elect the entire Board of Directors if
they so choose and, in such event, the holders of the remaining shares of Common
Stock will not be able to elect any directors. In the event of liquidation of
the Company, each shareholder is entitled to receive a proportionate share of
the Company's assets available for distribution to shareholders after the
payment of liabilities and after distribution in full of preferential amounts,
if any, to be distributed to holders of the Preferred Stock. All shares of the
Company's Common Stock issued and outstanding are fully-paid and nonassessable.
Dividend Policy
Holders of shares of Common Stock are entitled to share pro rata in
dividends and distribution with respect to the Common Stock when, as and if
declared by the Board of Directors out of funds legally available therefore,
after requirements with respect to preferential dividends on, and other matters
relating to, the Preferred Stock, if any, have been met. The Company has not
paid any dividends on its Common Stock and intends to retain earnings, if any,
to finance the development and expansion of its business. Future dividend policy
is subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, capital requirements and the
financial condition of the Company.
Description of Preferred Stock
Shares of Preferred Stock may be issued from time to time in one or
more series as may be determined by the Board of Directors. The voting powers
and preferences, the relative rights of each such series and the qualifications,
limitations and restrictions thereof shall be established by the Board of
Directors, except that no holder of Preferred Stock shall have preemptive
rights.
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Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
internet Transfer Co., Inc. which is located at 1981 East Murray Holliday Road,
Suite 100, Salt Lake City, Utah 84117, telephone (801) 272-9294 and facsimile
(801) 277-3147. There is no transfer agent for shares of the Company's preferred
stock.
PART II.
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
a) Market Information.
The Company is not presently trading on an exchange, but intends to
apply to have its Common Stock quoted on the Over the Counter Bulletin Board
once its Form 10SB has been accepted.
(b) Holders.
As of August 31, 2000 the Company had 144 shareholders of record of
its 10,564,147 outstanding shares of Common Stock, 9,187,591 of which are
restricted Rule 144 shares and 1,376,556 of which are free-trading. Of the Rule
144 shares, 6,486,457 shares have been held by affiliates of the Company for
more than one (1) year.
(c) Dividends.
The Company has never paid or declared any dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
Item 2. Legal Proceedings
No legal proceedings have been initiated either by or against the
Company to date.
Item 3. Changes in and Disagreements with Accountants
None.
Item 4. Recent Sales of Unregistered Securities
The Company relied upon Section 4(2) of the Act and Rule 506, ("Rule
506") for several transactions regarding the issuance of its unregistered
securities. In each instance, such reliance was based upon the fact that (i) the
issuance of the shares did not involve a public offering, (ii) there were no
more than 35 investors (excluding "accredited investors"), (iii) each investor
who was not an accredited investor either alone or with his purchaser
representative(s) has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of
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the prospective investment, or the issuer reasonably believes immediately prior
to making any sale that such purchaser comes within this description, (iv) the
offers and sales were made in compliance with Rules 501 and 502, (v) the
securities were subject to Rule 144 limitation on resale and (vi) each of the
parties is a sophisticated purchaser and had full access to the information on
the Company necessary to make an informed investment decision by virtue of the
due diligence conducted by the purchaser or available to the purchaser prior to
the transaction.
The Company relied upon Section 3(b) of the Act and Rule 504 for
several transactions regarding the issuance of its unregistered securities. In
each instance, such reliance was based on the following: (i) the aggregate
offering price of the offering of the shares of Common Stock and warrants did
not exceed $1,000,000, less the aggregate offering price for all securities sold
with the twelve months before the start of and during the offering of shares in
reliance on any exemption under Section 3(b) of, or in violation of Section 5(a)
of the Act; (ii) no general solicitation or advertising was conducted by the
Company in connection with the offering of any of the shares; (iii) the fact the
Company has not been since its inception (a) subject to the reporting
requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended,
(b) and "investment company" within the meaning of the Investment Company Act of
1940, as amended, or (c) a development stage company that either has no specific
business plan or purpose or has indicated that its business plan is to engage in
a merger or acquisition with an unidentified company or companies or other
entity or person.
The Company relied upon Florida Code Section 517.061(11) for several
transactions. In each instance, such reliance is based on the following: (i)
sales of the shares of Common Stock were not made to more than 35 persons; (ii)
neither the offer nor the sale of any of the shares was accomplished by the
publication of any advertisement; (iii) all purchasers either had a preexisting
personal or business relationship with one or more of the executive officers of
the Company or, by reason of their business or financial experience, could be
reasonably assumed to have the capacity to protect their own interests in
connection with the transaction; (iv) each purchaser represented that he was
purchasing for his own account and not with a view to or for sale in connection
with any distribution of the shares; and (v) prior to sale, each purchaser had
reasonable access to or was furnished all material books and records of the
Company, all material contracts and documents relating to the proposed
transaction, and had an opportunity to question the executive officers of the
Company. Pursuant to Rule 3E-500.005, in offerings made under Section
517.061(11) of the Florida Statutes, an offering memorandum is not required;
however each purchaser (or his representative) must be provided with or given
reasonable access to full and fair disclosure of material information. An issuer
is deemed to be satisfied if such purchaser or his representative has been given
access to all material books and records of the issuer; all material contracts
and documents relating to the proposed transaction; and an opportunity to
question the appropriate executive officer. In the regard, the Company supplied
such information and was available for such questioning (the "Florida
Exemption").
The Company relied upon Geogia Code Section 10-5-9(13) for several
transactions. In each instance such reliance is based on the following: (i) the
number of Georgia purchasers did not exceed fifteen (15); (ii) the securities
were not offered for sale by means of any form of general or public
solicitations or advertisements; (iii) a legend was placed upon the
certificates; and (iv) each purchaser represented that he purchased for
investment. (the "Georgia Exemption").
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The Company relied upon Section 460-44A-506 of the Washington Code for
several transactions. The facts relied upon to make the Washington Exemption
include the following: (i) the Company filed a completed SEC Form D with the
Washington Department of Financial Institutions, Securities Division; (ii) the
Form was filed not later than 15 days after the first sale; and (iii) the
Company executed a Form U-2 consent to service of process, and (iv) the Company
paid an appropriate filing fee of $300.00 to the Washington State Treasurer.
(the "Washington Exemption").
In April 1996, prior to its acquisition by the Company, MSIW executed
a Promissory Note in favor of William Evans, the Company's then current Vice
President of Sales, in the amount of eighteen thousand dollars ($18,000) at an
interest rate of ten percent (10%) per annum. The Note was in exchange for
monies lent by Mr. Evans to the Company for working capital. The Note was
payable in full by July 31, 1996.
In July 1996, prior to its acquisition of MSIW, the Company sold
1,200,000 shares of its Common Stock to one hundred nineteen (119) individuals
for a total of $12,000. For such offering, the Company relied upon Section 3(b)
of the Act, Rule 504, the Florida Exemption, the Georgia Exemption, Section
502.203 (9) of the Iowa Code, Section 80A.15(Subd. 2)(h) of the Minnesota Code,
Section 49:3-50 (b)(9) of the New Jersey Code, Section 90.530(11) of the Nevada
Code, Section 35-1-320(9) of the South Carolina Code, Section 48-2-103(b)(4) of
the Tennessee Code, Section 5[581-5]I(c) of the Texas Code and Section 551.23
(11) of the Wisconsin Code. No state exemption was necessary for the sales made
to Aruban, Bahamian, Canadian, French or Taiwanese investors.
The Company relied upon Iowa Code Section 502.203 (9) for this
transaction. The facts upon which the Company relied in Iowa are: (1) Sales were
made to less than thirty-five (35) purchasers in Iowa, exclusive of purchasers
by bona fide institutional investors for their own account for investment in a
period of twelve (12) consecutive months; (2) The issue was not an issue of: (a)
fractional undivided interests in oil, gas, or other mineral leases, rights, or
royalties or (b) interests in a partnership organized under the laws of or
having its principal place of business in a foreign jurisdiction; (3) The issuer
reasonably believed that all buyers in Iowa purchased for investment; (4)
Commission or other remuneration was not paid or given, directly or indirectly,
for the sale, except as was permitted by the administrator by rule; and (4) The
issuer or a person acting on behalf of the issuer did not offer or sell the
securities by any form of general solicitation or advertising.
The Company relied upon Minnesota Code Section 80A.15(Subd. 2)(h) for
several transactions. The facts upon which the Company relied in Minnesota are
as follows: (1) (a) no person made more than ten (10) sales of securities of the
same issuer during any period of twelve (12) consecutive months; (b) the seller
reasonably believed that all buyers were purchasing for investment; (c) the
securities were not advertised for sale to the general public; and (2) (a) the
issuer did not make more than twenty-five (25) sales of its securities according
to the Minnesota exemption, exclusive of sales pursuant to clause (1), during
any period of twelve (12) consecutive months; (b) filed with the Commissioner,
ten (10) days before any sale, a Statement of Issuer" form; (c) filed the
appropriate filing fee; and (d) no commission or remuneration was paid in
connection with a sale.
The Company relied upon New Jersey Code Section 49:3-50 (b)(9) for
several transactions.
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The facts upon which the Company relied in New Jersey are as follows: the
transaction was part of an issue in which (a) there were no more than ten (10)
sales in New Jersey during any period of twelve (12) consecutive months; (b) the
seller reasonably believed that all buyers were purchasing for investment; (c)
no general solicitation or general advertising is used in connection with the
offer to sell or sale of the securities; and (d) no commission or remuneration
was paid in connection with a sale.
The Company relied upon Nevada Code Section 90.530(11) for several
transactions. The facts upon which the Company relied in Nevada are as follows:
the transaction was part of an issue in which (a) there were no more than 25
purchasers in Nevada, other than those designated in subsection 10, during any
12 consecutive months; (b) no general solicitation or general advertising is
used in connection with the offer to sell or sale of the securities; (c) no
commission or other similar compensation is paid or given, directly or
indirectly, to a person, other than a broker-dealer licensed or not required to
be licensed under this chapter, for soliciting a prospective purchaser in
Nevada; and (d) one of the following conditions was satisfied: (1) the seller
reasonably believed that all the purchasers in Nevada, other than those
designated in subsection 10, were purchasing for investment; or (2) immediately
before and immediately after the transaction, the Company reasonably believed
that its securities were held by 50 or fewer beneficial owners, other than those
designated in subsection 10, and the transaction was part of an aggregate
offering that does not exceed $500,000 during any 12 consecutive months.
The Company relied upon South Carolina Code Section 35-1-320(9) for
several transactions. The Company relied upon a South Carolina exemption from
registration, which states: any transaction was pursuant to an offer directed by
the Mariculture to not more than twenty-five persons, other than those
designated in item (8) of this section, in this State during any period of
twelve (12) consecutive months, and (a) the seller reasonably believed that all
the buyers in South Carolina, other than those designated in item (8) of this
section, are purchasing for investment and (b) no commission or other
remuneration was paid or given directly or indirectly for soliciting any
prospective buyer in South Carolina, other than those designated in item (8) of
this section; but the Securities Commissioner may by rule or order, as to any
security or transaction or any type of security or transaction, withdraw or
further condition this exemption, increase or decrease the number of offerees
permitted or waive the conditions in clauses (a) and (b) with or without the
substitution of a limitation on remuneration and the Securities Commissioner,
further, may require persons claiming this exemption to notify him in writing of
the claim of exemption, the number of offers extended and to whom made at any
point during the offering process.
The Company relied upon Tennessee Code Section 48-2-103(b)(4) for
several transactions. The facts upon which the Company relied in Tennessee are
as follows: (A) The aggregate number of persons in Tennessee purchasing the
securities from the Company and all affiliates of the Company pursuant to this
exemption during the twelve month period ending on the date of such sale did not
exceed fifteen (15) persons, exclusive of persons who acquired the securities in
transactions which were not subject to this exemption or which were otherwise
exempt from registration under the provisions of this exemption or which have
been registered pursuant to Sec. 48-2-105 or Sec. 48- 2-106. (B) The securities
were not offered for sale by means of publicly disseminated advertisements or
sales literature; and (C) All purchasers in Tennessee purchased such securities
with the intent of holding such securities for investment for their own accounts
and without the intent of participating directly or indirectly in a distribution
of such securities.
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The Company relied upon Texas Code Section 5[581-5]I(c) for several
transactions. The facts upon which the Company relied in Texas are as follows:
The sale during the period of twelve (12) months ending with the date of the
sale in question was to not more than fifteen (15) persons and such persons
purchased such securities for their own account and not for distribution.
The Company relied upon Wisconsin Code Section 551.23 (11) for
several transactions. The facts upon which the Company relied in Wisconsin are
as follows: (1) (a) no person made more than ten (10) sales of securities of the
same issuer during any period of twelve (12) consecutive months within
Wisconsin; (b) the seller reasonably believed that all buyers were purchasing
for investment; (c) there was no filing requirement; and (d) no commission or
remuneration was paid in connection with a sale.
In August 1996, the Company entered into a share exchange agreement
with MSIW, which had been formed on August 25, 1994, and its shareholders. The
exchange was made whereby the Company issued 8,800,000 shares of its restricted
Common Stock to the shareholders of MSIW for all of the issued and outstanding
stock of MSIW. As part of the transaction, David Meilahn received 2,226,421
shares of the Company's Common Stock. This offering was conducted pursuant to
Section 4(2) of the Act, Rule 506, the Florida Exemption, the Georgia Exemption,
Rule ###-##-#### of the Oregon Code and the Washington Exemption.
The Company relied upon Rule ###-##-#### of the Oregon Code for
several transactions. The facts relied upon to make the Oregon Exemption include
the following: (i) the Company filed a completed SEC Form D with the Oregon
Department of Consumer & Business Services, Division or Finance and Corporate
Securities; (ii) the Form was filed not later than 15 days after the first sale;
and (iii) the Company paid an appropriate filing fee based on the amount of the
offering.
In January 1997, the Company executed a second Promissory Note in
favor of William Evans, the Company's then present Vice President of Sales, in
the amount of ten thousand dollars ($10,000) at an interest rate of ten percent
(10%) per annum. The Note was in exchange for monies lent by Mr. Evans to the
Company for working capital. The Note was payable in full by April 30, 1997.
In April 1997, the Company executed a third Promissory Note in favor
of William Evans, the Company's then current Vice President of Sales, in the
amount of twenty two thousand dollars ($22,000) at an interest rate of ten
percent (10%) per annum. The Note was in exchange for monies lent by Mr. Evans
to the Company for working capital. The Note was payable in full by December 15,
1997.
In July 1997, the Company issued 31,000 shares of its restricted
Common Stock to Corporate Imaging in connection with their production of a
corporate profile. The shares were issued pursuant to Section 4(2) of the Act,
Rule 506 and Section R14-4-126 of the Arizona Code.
The Company relied upon Section R14-4-126 of the Arizona Revised
Statutes for several transactions. The facts relied upon to make the Arizona
Exemption include the following: (i) units
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were sold to less than thirty-five (35) persons; (ii) each purchaser who was not
an accredited investor either alone or with purchaser representative had such
knowledge and experience in financial and business matters sufficient to
evaluate the merits and risks of the prospective investment; (iii) the bad boy
provisions of the rule apply to neither the Company nor its predecessors or
affiliates; and (iv) neither the issuer nor any person acting on its behalf
offered or sold the securities by any form of general solicitation or general
advertising; (v) the Company filed a completed SEC Form D with the Arizona
Corporation Commission signed by a person duly authorized by the issuer; (vi)
the Forms were filed not later than 15 days after the first sale of the
securities in Arizona; (vii) the Company paid an appropriate filing fee of
$250.00 to the Arizona Corporation Commission.
In July 1997, the Company issued 10,766 shares of its restricted
Common Stock valued at $3,122 to Jeff & Jill Caven in connection with their
photography services on behalf of the Company. The shares were issued pursuant
to Section 4(2) of the Act, Rule 506, Section 58-13B-24(R) of the New Mexico
Code and New Mexico Rule 12NMAC11.4.11.2.
The Company relied upon Section 58-13B-24(R) of the New Mexico Code,
New Mexico Rule 12NMAC11.4.11.2 for several transactions. The facts relied upon
to make the New Mexico Exemption include the following: (i) the Company filed a
completed SEC Form D with the New Mexico Securities Division; (ii) the Company
executed a Form U-2 consent to service of process in the state of New Mexico;
(iii) the Forms were filed not later than 15 days after the first sale of the
securities in New Mexico; and (iv) the Company paid an appropriate filing fee of
$350.00.
In July 1997, the Company issued 14,946 shares of its restricted
Common Stock valued at $9,715 to John Sabella as payment for producing brochures
on behalf of the company. The shares were issued pursuant to Section 4(2) of the
Act, Rule 506 and the Washington Exemption.
In August 1997, an agreement was entered into whereby the Company
issued 54,027 shares of its Common Stock to Stephen Jaeb in exchange for the
cancellation of a debt by the Company to Mr. Jaeb in the amount of $54,027. The
shares were issued pursuant to Section 3(b) of the Act, Rule 504 and the Florida
Exemption.
In April 1998, an agreement was entered into, whereby the Company
issued 20,600 shares of its unrestricted Common Stock to Reinforced Tank
Products, Inc. in connection with their agreement to provide engineering
services at the University of California in Long Beach, California. The services
were valued at $20,600. The shares were issued pursuant to Section 3(b) of the
Act, Rule 504 and Section 59.035(12) of the Oregon Code.
The Company relied upon Section 59.035(12) of the Oregon Code for
this transaction. The facts upon which the Company relied in Oregon are as
follows: (A) The transaction resulted in not more than ten (10) purchasers in
Oregon of securities of the Company during any twelve (12) consecutive months;
(B) No commission or other remuneration was paid or given directly or indirectly
in connection with the offer or sale of the securities; (C) No public
advertising or general solicitation was used in connection with the offer or
sale of the securities; (D) At the time of the transaction, the Company did not
have under the Oregon Securities Law, an application for registration or an
effective registration of securities which were part of the same offering.
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In October 1998, the Company agreed to issue 17,400 shares of its
restricted Common Stock to Elaine Meilahn, the wife of David Meilahn, in
connection with her bookkeeping services on behalf of the Company. Her services
were valued at $8,700. The shares were actually issued in January 2000. The
shares were issued pursuant to Section 4(2) of the Act, Rule 506 and the
Washington Exemption.
In December 1998, the Company sold 1,409 shares of its restricted
Common Stock to three (3) investors. No offering memorandum was used in
connection with these sales. This offering was conducted pursuant to Section
4(2) of the Act, Rule 506 and Section 109.13 of the Texas Code.
The Company relied upon Section 109.13 Limited Offering Exemption of
the Texas Code for several transactions. The facts relied upon to make the Texas
Exemption include the following: (i) the Company filed a completed SEC Form D
with the Texas State Securities Board; (ii) the Form was filed not later than 15
days after the first sale; (iii) the Company provided the State Securities Board
a copy of the information furnished by the Company to the offerees, (iv) the
Company executed a Form U-2 consent to service of process; and (v) the Company
paid an appropriate filing fee to the State Securities Administrator.
From December 1998 through April 1999, the Company sold 93,069 shares
of its unrestricted Common Stock to twenty two (22) investors. For such
offering, the Company relied upon Section 3(b) of the Act, Rule 504, Section
11-51-308(1)(j) of the Colorado Code, the Florida Exemption, the Georgia
Exemption, Section 59.035(12) of the Oregon Code, Section 48-2-103(b)(4) of the
Tennessee Code and Section 551.23 (11) of the Wisconsin Code.
The Company relied upon Section 11-51-308(1)(j) of the Colorado Code
for several transactions. The facts upon which the Company relied are: (i) the
offering was directed to not more than twenty (20) persons in Colorado; (ii) the
securities were sold to not more than ten (10) buyers in Colorado; (iii) all
purchasers represented that they purchased for investment; (iv) no commission or
other remuneration was paid or given for soliciting any prospective buyer in
Colorado.
The Company relied upon Section 59.035(12) of the Oregon Code for
several transactions. The facts upon which the Company relied in Oregon are as
follows: (A) The transaction resulted in not more than ten (10) purchasers in
Oregon of securities of the Company during any twelve (12) consecutive months;
(B) No commission or other remuneration was paid or given directly or indirectly
in connection with the offer or sale of the securities; (C) No public
advertising or general solicitation was used in connection with the offer or
sale of the securities; (D) At the time of the transaction, the Company did not
have under the Oregon Securities Law, an application for registration or an
effective registration of securities which were part of the same offering.
The Company relied upon Tennessee Code Section 48-2-103(b)(4) for
several transactions. The facts upon which the Company relied in Tennessee are
as follows: (A) The aggregate number of persons in Tennessee purchasing the
securities from the Company and all affiliates of the Company pursuant to this
exemption during the twelve month period ending on the date of such sale did not
exceed fifteen (15) persons, exclusive of persons who acquired the securities in
transactions which were not subject to this exemption or which were otherwise
exempt from registration under the provisions of this exemption or which have
been registered pursuant to Sec. 48-2-105 or Sec. 48- 2-106. (B) The securities
were not offered for sale by means of publicly disseminated advertisements or
sales literature; and (C) All purchasers in Tennessee purchased such securities
with the intent of holding such securities for investment for their own accounts
and without the intent of participating directly or indirectly in a distribution
of such securities.
The Company relied upon Wisconsin Code Section 551.23 (11) for
several transactions. The facts upon which the Company relied in Wisconsin are
as follows: (1) (a) no person made more than ten (10) sales of securities of the
same issuer during any period of twelve (12) consecutive months within
Wisconsin; (b) the seller reasonably believed that all buyers were purchasing
for investment; (c) there was no filing requirement; and (d) no commission or
remuneration was paid in connection with a sale.
In April 1999, the Company issued 27,000 shares of its unrestricted
Common Stock to Neil Rand in connection with his production of a corporate
profile. The shares were issued pursuant to Section 3(b) of the Act, Rule 504
and the Florida Exemption.
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In April 1999, an agreement was entered into, whereby the Company
issued 11,930 shares of its restricted Common Stock to Sanford Tager, President
of Methow Valley Excavating, Inc., in connection with their agreement to
dismantle and remove the Company's pilot test site. The services were valued at
$11,929.54. The shares were issued pursuant to Section 4(2) of the Act, Rule 506
and the Washington Exemption.
In March 2000, the Company issued 250,000 shares of its restricted
Common Stock to Donald Mintmire in connection with his legal services on behalf
of the Company. The shares were issued pursuant to Section 3(b), Rule 701 and
the Florida Exemption.
For purposes of Rule 701, the facts upon which the Company relied
are: (i) The offer was under a written compensatory benefit plan or contract
established by the issuer for the participation of its consultants and advisors;
(ii) the consultants and advisors were providing services to the issuer at the
time the securities were offered; (iii) the consultants and advisors were
natural persons; (iv) the consultants and advisors provided bona fide services
to the issuer; (v) the services were not in connection with the offer or sale of
securities in a capital-raising transaction; (vi) the consultants and advisors
did not directly or indirectly promote or maintain a market for the issuer's
securities; and (vii) the aggregate sales price during a consecutive twelve (12)
month period did not exceed the greater of: (a) $1,000,000; (b) fifteen percent
(15%) of the total assets of the issuer; or (c) fifteen percent (15%) of the
outstanding amount of the class of securities being sold.
In March 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn, in the amount of fourteen thousand four hundred dollars
($14,400) at an interest rate of twelve percent (12%) per annum. The Note was in
exchange for monies lent by Ms. Meilahn to the Company for working capital. The
Note is payable on demand.
In March 2000, the Company executed a Promissory Note in favor of
David Meilahn in the amount of twenty one thousand nine hundred seventy dollars
($21,970.00) at an interest rate of twelve percent (12%) per annum. The Note was
in exchange for monies lent by Mr. Meilahn to the Company for working capital.
The Note is payable on demand.
In March 2000, the Board of Directors authorized the issuance of one
hundred (100) shares of restricted Common Stock of the Company for each member
of the Board of Directors when in attendance at quarterly board meetings. The
Company will also reimburse direct travel expenses presented by each member of
the board.
January 2000 through April 2000, the Company sold 32,000 shares of
its Restricted Common Stock to seven (7) investors for a total of thirty two
thousand dollars ($32,000). The offering was conducted pursuant to Section 4(2)
of the Act, Rule 506, Section 25102.1 of the California Code, Section 80 A.15
Subd. 2(h) of the Minnesota Code, Section 109.13 of the Texas Code, and the
Washington Exemption.
The Company relied upon Section 25102.1 of the California Code for
several transactions. The facts relied upon to make the California Exemption
include the following: (i) the Company filed a completed SEC Form D with the
California Department of Corporations; (ii) the Company executed a Form U-2
consent to service of process in the state of California; (iii) the Forms were
filed not later than 15 days after the first sale of the securities in
California; and (v) the Company paid an appropriate filing fee.
The Company relied upon Section 80 A.15 Subd. 2(h) of the Minnesota
Statutes, 1986, as amended, for several transactions. The facts relied upon to
make the Minnesota Exemption include the following: (i) bad boy provisions of
the rule apply to the Company; (ii) no commission or other remuneration was paid
for soliciting any prospective buyer; (iii) the Company filed a completed SEC
Form D with the Minnesota Department of Commerce signed by a person duly
authorized by the issuer; (iv) the Company executed a Form U-2 consent to
service of process in the state of Minnesota; (v) the Forms were filed not later
than 15 days after the first sale of the securities in Minnesota; (vi) the
Company paid an appropriate filing fee of $50.00 to the Minnesota Department of
Commerce.
62
<PAGE>
The Company relied upon Section 109.13 Limited Offering Exemption of
the Texas Code for several transactions. The facts relied upon to make the Texas
Exemption include the following: (i) the Company filed a completed SEC Form D
with the Texas State Securities Board; (ii) the Form was filed not later than 15
days after the first sale; (iii) the Company provided the State Securities Board
a copy of the information furnished by the Company to the offerees, (iv) the
Company executed a Form U-2 consent to service of process; and (v) the Company
paid an appropriate filing fee to the State Securities Administrator.
In August 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable in demand.
In November 2000, the Company executed a Promissory Note in favor of
Elaine Meilahn in the amount of five thousand dollars ($5,000) at an interest
rate of twelve percent (12%) per annum. The Note was in exchange for monies lent
by Ms. Meilahn to the Company for working capital. The Note is payable in
demand.
In November 2000, the Company entered into a Consulting Agreement
with Websters' Inc. The Consulting Agreement provides that the Company is to
engage Websters' Inc. as a registered professional engineering firm for the
purposes of performing the comprehensive design, development and production of a
functional integrated commercial SARGO system, and to provide technical support
to the installation of the resulting device into SARGO commercial fish rearing
vessels. Websters' Inc. agrees to provide approximately two hundred fifty (250)
hours of service to the Company, and to accept restricted Common Stock of the
Company in lieu of cash payment at a rate of one hundred (100) shares for every
one (1) hour of services, or a pro-rata amount thereof, or, upon the approval of
the Company's Board of Directors, in a cash amount of one hundred fifty dollars
($150) per hour of service. Websters' Inc. is to receive an initial deposit in
advance against the Consulting Agreement of one thousand (1,000) shares of
restricted Common Stock of the Company. Payments for services in shares will be
presented as a certificate of the restricted Common Stock on a quarterly basis
upon approval of the Company's Board of Directors. The agreement also provides
that the Company agrees to exchange for cash, at the same rate of value as at
original issue, any designated part or the total of all stock issued to
Websters' Inc. as a fee from the Consulting Agreement. The exchange for cash
will only be in the event that the stock tendered to Websters' Inc. is unable to
be sold in a brokers' transaction after a period of one year from the date of
issue of the certificate. The agreement expires December 1, 2002. The offering
was conducted pursuant to Section 4(2) of the Act, Rule 506 and the Washington
Exemption.
Item 5. Indemnification of Directors and Officers
The Company's Articles of Incorporation provide that: The directors
shall be protected from personal liability to the fullest extent permitted by
law.
The Florida Statutes ("FS") provide that: (1) A corporation shall
have the power to indemnify any person who was or is a party to any proceeding
(other than an action by, or in the right of, the corporation), by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against liability incurred in connection
with such proceeding, including any appeal thereof, if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
The termination of any contender or its equivalent shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
corporation or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
63
<PAGE>
(2) A corporation shall have the power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of fact that he is or was a director, officer,
employee, or agent of another corporation, or is or was serving at the request
of the corporation as a director, director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceed, in the judgment of
the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized is such person acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation, except that no indemnification shall be made under this
subsection in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable unless, and only to the extent that, the
court in which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which such court shall
deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in subsection (1) or subsection (2), or in defense of any
claim, issue, or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith.
(4) Any indemnification under subsection (1) or subsection (2),
unless pursuant to a determination by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsection (1) or subsection (2). Such determination shall be made:
(a) By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if
obtainable, by majority vote of a committee duly designated by the board of
directors (in which directors who are parties may participate) consisting solely
of two or more directors not at the time parties to the proceeding;
(c) By independent legal counsel:
1. Selected by the board of directors prescribed
in paragraph (a) or the committee prescribed in paragraph (b); or
2. If a quorum of the directors cannot be
obtained for paragraph (a) and the committee cannot designate under paragraph
(b), selected by majority vote of the full board of directors (in which
directors who are parties may participate); or
(d) By the shareholders by a majority vote of a quorum
consisting of shareholders who were not parties to such proceeding or, if no
such quorum is obtainable, by a majority vote of shareholders who were not
parties to such proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of permissibility
is made by independent legal counsel, persons specified by paragraph (4)(c)
shall evaluate the reasonableness of expenses and may authorize indemnification.
64
<PAGE>
(6) Expenses incurred by an officer or director in defending a civil
or criminal proceeding may be paid by the corporation in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if he is ultimately found not to
be entitled to indemnification by the corporation pursuant to this section.
Expenses incurred by other employees and agents may be paid in advance upon such
terms or conditions that the board of directors deems appropriate.
(7) The indemnification and advancement of expenses provided pursuant
to this section are not exclusive, and a corporation may make any other or
further indemnification or advancement of expenses of any of its directors,
officers, employees, or agents, under any bylaw, agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in another capacity
while holding such office. However, indemnification or advancement of expenses
shall not be made to or on behalf of any director, officer, employee, or agent
if a judgment or other final adjudication establishes that his actions, or
omissions to act, were material to the cause of action so adjudicated and
constitute:
(a) A violation of the criminal law, unless the director,
officer, employee, or agent had reasonable cause to believe his conduct was
lawful or had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer,
employee, or agent derived an improper personal benefit;
(c) In the case of a director, a circumstance under which
the liability provisions of ss. 607.0834 are applicable; or
(d) Willful misconduct or a conscious disregard for the
best interests of the corporation in a proceeding by or in the right of the
corporation to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder.
(8) Indemnification and advancement of expenses as provided in this
section shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such a person, unless otherwise provided when authorized or ratified.
(9) Unless the corporation's articles of incorporation provide
otherwise, notwithstanding the failure of a corporation to provide
indemnification, and despite any contrary determination of the board of or of
the shareholders in the specific case, a director, officer, employee, or agent
of the corporation who is or was a party to a proceeding may apply for
indemnification or advancement of expenses, or both, to the court conducting the
proceeding, to the circuit court, or to another court of competent jurisdiction.
On receipt of an application, the court, after giving any notice that it
considers necessary, may order indemnification and advancement of expenses
incurred in seeking court ordered indemnification or advancement of expenses, if
it determines that:
(a) The director, officer, employee, or agent is entitled
to mandatory indemnification under subsection (3), in which case the court shall
also order the corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement of expenses;
65
<PAGE>
(b) The director, officer, employee, or agent is entitled
to indemnification or advancement of expenses, or both, by virtue of the
exercise by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, or agent is fairly and
reasonably entitled to indemnification or advancement of expenses, regardless of
whether such person met the standard of conduct set forth in subsection (1),
subsection (2), or subsection (7).
(10) For purposes of this section, the term "corporation" includes,
in addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger, so that
any person who is or was a director, officer, or agent of a constituent
corporation, or is or was serving at the request of a constituent corporation as
a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, is in the same position under this
section with respect to such constituent corporation of its separate existence
had continued.
(11) For purposes of this section:
(a) The term "other enterprises" includes employee benefit
plans;
(b) The term "expenses" includes counsel fees, including
those for appeal;
(c) The term "liability" includes obligations to pay a
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to any employee benefit plan), and expenses actually and reasonably
incurred with respect to a proceeding;
(d) The term "proceeding" includes any threatened, pending,
or completed action, suit, or other type of proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation"
includes any service as a director, officer, employee, or agent of the
corporation that imposes duties on such persons, including duties relating to an
employee benefit plan and its participants or beneficiaries; and
(g) The term "not opposed to the best interest of the
corporation" describes the actions of a person who acts in good faith and in a
manner he reasonably believes to be in the best interests of the participants
and beneficiaries of an employee benefit plan.
(12) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and
66
<PAGE>
incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this section.
PART F/S
The Financial Statements of Mariculture required by Regulation S-X
commence on page F-1 hereof in response to Part F/S of this Registration
Statement on Form 10-SB and are incorporated herein by this reference.
[Balance of this page intentionally left blank]
67
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
INDEPENDENT AUDITOR'S REPORT
and
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Balance sheet F-2
Statement of operations F-3
Statement of stockholders' deficit F-4
Statement of cash flow F-5
Notes to financial statements F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Mariculture Systems, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheet of Mariculture Systems, Inc., a
development stage company, as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' deficit, and cash flows for the years
then ended, and for the period from inception (August 25, 1994) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Mariculture Systems, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, and for the period from inception (August 25, 1994) to
December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 5 to the
financial statements, the Company has a working capital deficiency and faces
uncertain conditions regarding its ability to transition from a development
stage company to an operating entity that raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 5. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Moss Adams
Everett, Washington
May 10, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEET
ASSETS
DECEMBER 31,
------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
CASH $ 2,373 $ 150
TEST FACILITY 55,429 52,500
--------------------- --------------------
Total assets $ 57,802 $ 52,650
===================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable - related party $ 78,765 $ 79,515
Notes payable - other 14,017 14,017
Accounts payable - related party 18,016 9,146
Trade accounts payable 154,857 154,854
Unissued shares payable 26,200 47,500
Accrued interest 47,000 34,000
------------------- -------------------
Total current liabilities 338,855 339,032
------------------- -------------------
STOCKHOLDERS' DEFICIT
Common stock, par value $.001; 20,000,000 shares
authorized; 10,284,817 and 10,252,817 issued and
outstanding in 1999 and 1998, respectively 10,285 10,253
Capital surplus 725,849 693,881
Deficit accumulated during the development stage (1,017,187) (990,516)
------------------- -------------------
Total stockholders' deficit (281,053) (286,382)
------------------- -------------------
Total liabilities and stockholders' deficit $ 57,802 $ 52,650
=================== ===================
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
FOR THE
PERIOD FROM
INCEPTION
YEAR YEAR (AUGUST 25, 1994)
ENDED ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------------- ---------------- -------------------
<S> <C> <C> <C>
OPERATING EXPENSES
General and administrative expenses $ 9,820 $ 24,865 $ 340,951
Research and experimentation
expenses 3,851 23,277 629,289
------------------- ---------------- -------------------
Total operating expenses 13,671 48,142 970,240
------------------- ---------------- -------------------
NET LOSS FROM OPERATIONS (13,671) (48,142) (970,240)
INTEREST INCOME 7,191
INTEREST EXPENSE (13,000) (14,000) (54,138)
------------------- ---------------- -------------------
NET LOSS $ (26,671) $ (62,142) $ (1,017,187)
=================== ================ ===================
BASIC LOSS PER COMMON
SHARE $ (0.00) $ (0.01) $ (0.10)
=================== ================ ===================
DILUTED LOSS PER COMMON
SHARE $ (0.00) $ (0.01) $ (0.10)
=================== ================ ===================
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 10,268,817 10,242,517 10,108,285
=================== ================ ===================
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 10,268,817 10,242,517 10,108,285
=================== ================ ===================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM
INCEPTION (AUGUST 25, 1994) TO DECEMBER 31, 1999
Deficit
Accumulated
Common Stock During
--------------------------------- Capital Development
Shares Amount Surplus Stage Total
----------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
ISSUANCE OF STOCK
1995
For cash 1,640,000 $ 1,640 $ 431,321 $ 432,961
For founders 8,213,080 8,212 (8,212)
1996
For cash 130,000 130 32,370 32,500
For founders 1,200,000 1,200 (1,200)
For services 10,766 11 3,074 3,085
Share exchange (10,075,354) (10,075) 10,075
Share exchange 8,800,000 8,800 (8,800)
1997
For cash 186,978 187 145,741 145,928
For services 126,747 127 68,933 69,060
NET LOSS THROUGH 1997 $ (928,374) (928,374)
----------------- -------------- -------------- ---------------- ----------------
BALANCE, December 31, 1997 10,232,217 10,232 673,302 (928,374) (244,840)
1998
For services 20,600 21 20,579 20,600
NET LOSS (62,142) (62,142)
----------------- -------------- -------------- ---------------- ----------------
BALANCE, December 31, 1998 10,252,817 10,253 693,881 (990,516) (286,382)
ISSUANCE OF STOCK
For cash 2,000 2 1,998 2,000
From unissued shares payable
(Note 7) 30,000 30 29,970 30,000
NET LOSS (26,671) (26,671)
----------------- -------------- -------------- ---------------- ----------------
BALANCE, December 31, 1999 10,284,817 $ 10,285 $ 725,849 $ (1,017,187) $ (281,053)
================= ============== ============== ================ ================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
Increase (Decrease) In Cash
FOR THE
PERIOD FROM
INCEPTION
YEAR YEAR (AUGUST 25, 1994)
ENDED ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
-------------------- -------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash paid to suppliers, subcontractors
and employees $ (4,798) $ (17,470) $ (594,928)
Interest received 7,191
Interest paid (7,138)
-------------------- -------------------- ------------------
Net cash from operating activities (4,798) (17,470) (594,875)
-------------------- -------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of test facility (2,929) (165,123)
-------------------- -------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 7,950 4,136 92,782
Proceeds from sale of common stock 2,000 643,389
Cash received for unissued shares 10,000 26,200
-------------------- -------------------- ------------------
Net cash from financing activities 9,950 14,136 762,371
-------------------- -------------------- ------------------
NET CHANGE IN CASH 2,223 (3,334) 2,373
CASH, beginning of period 150 3,484
-------------------- -------------------- ------------------
CASH, end of year $ 2,373 $ 150 $ 2,373
==================== ==================== ==================
RECONCILIATION OF NET LOSS TO NET
CASH FROM OPERATING ACTIVITIES
Net loss $ (26,671) $ (62,142) $ (1,017,187)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and write-down of test
facility to net salvage value 109,694
Services received in exchange for
common stock 20,600 92,745
Changes in operating assets and liabilities
Trade accounts payable 8,873 10,072 172,873
Accrued interest 13,000 14,000 47,000
-------------------- -------------------- ------------------
NET CASH FROM OPERATING ACTIVITIES $ (4,798) $ (17,470) $ (594,875)
==================== ==================== ==================
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITIES
Common stock issued for services $ 8,700 $ 92,745
==================== ==================== ==================
Shares payable exchanged for common stock $ 30,000 $ 30,000
==================== ==================== ==================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Note 1 - Summary of Significant Accounting Policies
Description of business and nature of operations - Mariculture Systems, Inc.
(the Company) is a development stage company which has undertaken the
development, manufacturing and marketing of products for the aquaculture
industry. The Company was incorporated in the State of Florida on July 8, 1996.
On August 22, 1996, the Company entered into a Share Exchange Agreement whereby
the Company issued and exchanged 8,800,000 shares of its common stock for one
hundred percent (100%) of the issued and outstanding stock of Mariculture
Systems, Inc., a Washington corporation (MSIW). MSIW was incorporated in the
State of Washington in 1994 under the name Aquatech International, Ltd. Aquatech
was renamed Mariculture Systems, Inc. in 1994. As a result of the share exchange
transaction, MSIW became a wholly-owned subsidiary of the Company. The
Washington corporation was administratively dissolved on September 19, 1997.
The Company accounted for the MSIW share conversion as a reorganization. 100% of
MSIW's shares were exchanged at the rate of .87242 shares of the Florida Company
for each share of MSIW. During this transaction, 10,075,354 shares of MSIW were
exchanged for 8,800,000 shares of the Florida Corporation. Total stockholder
ownership percentages did not change from the share conversion from MSIW to
Mariculture Systems, Inc. The financial statements reflect the operations of
MSIW, which was incorporated on August 25, 1994 and administratively dissolved
on September 19, 1997, and the Florida parent company. The products are
primarily new technology in fish farming through the use of a rigid wall fish
rearing system. The Company developed and constructed a test facility in June
1996. Fish were installed by a third party in October 1996, with harvest of the
crop accomplished in August 1997. The test facility performed effectively. The
Company has elected to expense all costs associated with the development,
engineering, startup and operations that have been incurred. The financial
statements and notes are representations of the Company's management, who is
responsible for their integrity and objectivity.
Revenue recognition - Revenues from the sale of the rigid wall fish rearing
system will be recognized on the percentage-of-completion method, measured by
the percentage of costs incurred to date to management's estimate of total
costs. This method will be used because management considers expended costs to
be the best available measure of progress on these contracts.
Cost of revenues earned will include all direct labor and benefits, materials
unique to or installed in the project, subcontract costs and equipment costs.
Equipment costs will be allocated to jobs based on a method to be determined.
Equipment costs not allocated specifically to a contract will remain as
unallocated indirect costs.
F-6
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
General and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts will be made in the period in
which such losses are determined. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs and
income and will be recognized in the period in which the revisions are
determined. Profit incentives received by meeting or exceeding stipulated
contractual deadlines will be included in revenue when realized and payment is
reasonably assured.
Test facility and equipment, net of salvage value - The direct costs of
materials and equipment associated with the test facility that have alternative
uses used in the test facility have been capitalized through June 1996. Upon
completion of the test in August 1997, the facility was dismantled and all
assets were recorded at the lower of cost or net salvage value and are evaluated
for impairment. The accounting policies are in accordance with generally
accepted accounting principles and conform to the standards applicable to
development stage companies. Advertising and marketing - The Company expenses
advertising and marketing costs as they are incurred. There were no advertising
and marketing costs for the years ended December 31, 1999 and 1998.
Income taxes - Deferred tax assets and liabilities are reflected at currently
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. Deferred taxes result from temporary
differences in the recognition of certain income and expense amounts between the
Company's financial statements and its tax returns.
Cash equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and amounts due from banks. Cash and cash
equivalents have an original maturity of three months or less.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these results.
F-7
<PAGE>
Note 2 - Test Facility
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998
-------------------- ---------------
<S> <C> <C>
Barge $ 16,500 $ 16,500
Moorings 6,957 6,957
Generators and pumps 107,468 107,468
Miscellaneous equipment 34,198 31,269
-------------------- ---------------
165,123 162,194
Less accumulated depreciation and write-down (109,694) (109,694)
-------------------- ---------------
$ 55,429 $ 52,500
==================== ===============
</TABLE>
Note 3 - Notes Payable
The Company is obligated on several unsecured notes for funds borrowed from
private parties. All of these notes are past due and the Company is in default
under the original terms and conditions.
<TABLE>
<S> <C> <C>
Note payable to Elaine Meilahn, payable upon demand,
interest accruing at 12% per annum, related party note. $ 9,401 $ 9,401
Note payable to Elaine Meilahn, payable upon demand, interest
accruing at 12% per annum, right to convert to 17,400 shares of
restricted common stock in lieu of principal and interest,
related party note. The note
was converted to stock in 1999. 8,700
Note payable to Dave Meilahn, payable upon demand,
interest accruing at 12% per annum, related party note. 21,970 14,020
Notes payable to Bill Evans, in default and payable
upon demand, interest accruing at 10% per
annum, related party note. 47,394 47,394
------------ -------------
Notes payable - related party $ 78,765 $ 79,515
------------ -------------
Miscellaneous notes payable, payable upon demand. $ 4,017 $ 4,017
Note payable to unrelated individual, in default and payable upon
demand, interest accruing at 500 shares of common stock per
month, accrued shares included in accrued interest was 17,750
and 11,750 for the years ended
December 31, 1999 and 1998, respectively. 10,000 10,000
------------ -------------
Notes payable - other $ 14,017 $ 14,017
------------ -------------
</TABLE>
F-8
<PAGE>
Note 4 - Income Taxes
The following are the significant components of deferred tax assets at December
31:
<TABLE>
<S> <C> <C>
1999 1998
------------------- -------------------
Deferred tax assets
Net operating loss carryforward $ 270,000 $ 270,000
Cash basis of accounting 75,000 67,000
Research and experimentation tax credit 82,000 82,000
------------------- -------------------
427,000 419,000
------------------- -------------------
Valuation allowance (427,000) (419,000)
------------------- -------------------
$ - $ -
=================== ===================
</TABLE>
There were no deferred tax liabilities at December 31, 1999 or 1998. The Company
has not recognized a net tax asset for the operating loss carryforwards and
research and experimental credit due to the uncertainty surrounding their
ultimate value to the Company. The Company has a net operating loss (NOL)
carryforward of approximately $802,000 expiring from 2009 to 2019. These NOLs
are generally available to offset future taxable income. Because the Company
does not have taxable income, and has unused net operating losses and research
and experimental credit the Company has not recognized a tax provision.
The Corporation uses the cash basis of accounting for income tax and the accrual
basis for financial reporting. The cash basis of accounting deferred tax asset
was created due to the differences in the net loss shown on the accrual method
and that shown on the federal income tax cash basis method. The primary
differences from the book accrued loss and the federal cash basis loss is
derived by payables and accruals on the balance sheet not being deductible for
federal income tax purposes until they are paid.
Note 5 - Going Concern
As shown in the accompanying balance sheet, the Company has incurred a deficit
of $1,017,187 during the development stage through December 31, 1999, and as of
that date, the Company's current liabilities exceed its current assets by
$336,482. Those factors, as well as the uncertain conditions that the Company
faces regarding its ability to transition from a development stage company to an
operating entity, raises substantial doubt about the Company's ability to
continue as a going concern. Management of the Company is in the process of
obtaining additional equity through the issuance of stock. Without a sufficient
source of revenue and capital funding, the Company will not be able to continue
as a going concern. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
F-9
<PAGE>
Note 6 - License Agreement
The Company has obtained the exclusive rights to the technology and patents that
will be marketed. This agreement stipulates that the Company is to pay to Dave
Meilahn, President, Mariculture Systems, Inc., a non-refundable up-front fee in
the amount of $200,000. The agreement further states if the non-refundable
up-front fee is not made to Mr. Meilahn, the rights to the technology may be
suspended, at his option, for a period not to exceed two years from December 21,
1998, until such payments are made. The agreement also stipulates that Mr.
Meilahn is to receive quarterly royalty payments in the amount of 3.0% of the
total gross sales of systems sold by the Company, affiliates, sublicenses, and
associates. At December 31, 1999 the Company had not made the required $200,000
non-refundable up-front fee. The rights to the technology have not been
suspended and the payments have not been made. The Company has not recorded an
asset or liability relating to this agreement.
Note 7 - Common Stock
The Company from time to time enters into agreements with vendors and
individuals to obtain goods and services for common stock based on the value of
the goods and services received. These services varied from bookkeeping,
photocopy, printing, engineering, computer analysis and other work. The Company
has used the fair market value of the goods and services received by obtaining
cash quotes from the vendor or outside parties. Total shares exchanged is then
negotiated based on the fair market value of the goods or services provided.
From inception through December 31, 1999 and 1998, there were 158,113 shares so
exchanged for $92,745 of goods and services expenses. As described in Notes 3
and 8, the Company has certain agreements outstanding that allow the conversion
of notes payable and accrued interest to common stock. From inception through
December 31, 1999 and 1998 there were 54,027 shares exchanged for satisfaction
of a $50,000 note payable and interest of $4,027. The Company has received funds
from interested stockholders who were not eligible to receive stock due to the
stockholders not completing the required security documents. The Company has
accounted for these unissued shares by recording them as unissued shares
payable. There were 65,621 and 78,621 shares unissued at December 31, 1999 and
1998, respectively. It is the intention of the Company to issue these shares
when the individuals become eligible during the next issuance of stock or to
refund the funds back to the interested stockholders. In 1999, 2,000 shares were
issued for $2,000 paid in cash. In addition, 30,000 shares were issued from the
unissued shares payable account in 1999. During 1998, the Company issued 20,600
shares for services valued at $20,600.
There are no stock options outstanding for the periods presented through
December 31, 1999.
F-10
<PAGE>
Note 8 - Related Party Transactions
As discussed in Note 3, the Company has various notes with related parties. As
discussed in Note 6, the Company has obtained the licensing rights to the
technology used in manufacturing the rigid wall fish rearing systems that the
Company intends to sell. Included in accounts payable are balances due to
related parties for expenses that have been paid through personal funds that
have not been reimbursed by the Company. These are payable on demand and bear no
interest rates.
Included in the loans payable is a loan to a related party for the amount of
$8,700 for accounting services provided through December 31, 1998. The agreement
in place allowed the loan to be paid in cash or converted to two restricted
shares for each dollar listed on the books. During 1999 this related party
elected to convert the loan to 17,400 shares of restricted stock. This balance
is included in the unissued shares payable at December 31, 1999.
Note 9 - Loss Per Share
Basic loss per share amounts are computed based on the weighted average number
of shares outstanding during the period after giving retroactive effect to stock
dividends and stock splits. Diluted loss per share amounts are computed by
determining the number of additional shares that are deemed outstanding due to
stock options under the treasury stock method. The Company has no stock options
outstanding during the periods presented through December 31, 1999.
F-11
<PAGE>
Note 9 - Loss Per Share (continued)
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
YEAR YEAR (AUGUST 25, 1994)
ENDED ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
---------------- ----------------- --------------------
<S> <C> <C> <C>
NUMERATOR
Net loss $ (26,671) $ (62,142) $ (1,017,187)
DENOMINATOR
Denominator for basic loss per share
Weighted average shares 10,268,817 10,242,517 10,108,285
Effect of Diluted securities -
stock options - - -
Denominator for diluted earnings per share
Weighted average shares and
assumed conversion of Diluted
stock options 10,268,817 10,242,517 10,108,285
Basic loss per share $ (0.00) $ (0.01) $ (0.10)
Diluted loss per share $ (0.00) $ (0.01) $ (0.10)
</TABLE>
F-12
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
(unaudited)
June 30, 2000
<PAGE>
CONTENTS
PAGE
FINANCIAL STATEMENTS
Balance sheet F-15
Statement of operations F-16
Statement of cash flow F-17
Notes to financial statements F-18
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEET (unaudited)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------------- --------------------
<S> <C> <C>
CASH $ 1,524 $ 2,373
TEST FACILITY 55,429 55,429
------------------- --------------------
Total assets $ 56,953 $ 57,802
=================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable related party $ 87,365 $ 78,765
Notes payable other 14,017 14,017
Accounts payable related party 19,080 18,016
Trade accounts payable 166,777 154,857
Unissued shares payable 17,500 26,200
Accrued interest 53,000 47,000
------------------- --------------------
Total current liabilities 357,739 338,855
------------------- --------------------
STOCKHOLDERS' DEFICIT
Common stock, par value $.001; 20,000,000 shares authorized;
10,564,147 and 10,284,817 issued and outstanding at June 30,
2000 and December 31, 1999, respectively 10,565 10,285
Capital surplus 796,200 725,849
Deficit accumulated during the
development stage (1,107,551) (1,017,187)
------------------- --------------------
Total stockholders' deficit (300,786) (281,053)
------------------- --------------------
Total liabilities and stockholders'
deficit $ 56,953 $ 57,802
=================== ====================
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF OPERATIONS (unaudited)
FOR THE
THREE MONTHS SIX MONTHS PERIOD FROM
ENDED JUNE 30, ENDED JUNE 30, INCEPTION
------------------------------ ------------------------------ (August 25, 1994)
2000 1999 2000 1999 TO JUNE 30, 2000
-------------- ------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
General and administrative
expenses $ 4,491 $ 1,666 $ 60,501 $ 3,371 $ 401,452
Research and experimentation
expenses 11,929 1,161 23,863 3,035 653,152
-------------- ------------- -------------- -------------- ---------------------
Total operating expenses 16,420 2,827 84,364 6,406 1,054,604
-------------- ------------- -------------- -------------- ---------------------
NET LOSS FROM OPERATIONS (16,420) (2,827) (84,364) (6,406) (1,054,604)
INTEREST INCOME 7,191
INTEREST EXPENSE (3,000) (3,000) (6,000) (6,000) (60,138)
-------------- ------------- -------------- -------------- ---------------------
NET LOSS $ (19,420) $ (5,827) $ (90,364) $ (12,406) $ (1,107,551)
============== ============= ============== ============== =====================
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF CASH FLOWS (unaudited)
Increase (Decrease) In Cash
FOR THE
SIX MONTHS ENDED PERIOD FROM
JUNE 30, INCEPTION
------------------------------- (AUGUST 25, 1994)
2000 1999 TO JUNE 30, 2000
-------------- -------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash paid to suppliers, subcontractors and employees $ (9,449) $ (3,661) $ (604,377)
Interest received 7,191
Interest paid (7,138)
-------------- -------------- ------------------
Net cash from operating activities (9,449) (3,661) (604,324)
-------------- -------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of equipment 500 500
Purchase of test facility (165,623)
-------------- -------------- ------------------
Net cash from operating activities 500 (165,123)
-------------- -------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 8,600 1,500 101,382
Proceeds from sale of common stock 2,000 643,389
Cash received for unissued shares 26,200
-------------- -------------- ------------------
Net cash from financing activities 8,600 3,500 770,971
-------------- -------------- ------------------
NET CHANGE IN CASH (849) 339 1,524
CASH, beginning of period 2,373 150
-------------- -------------- ------------------
CASH, end of year $ 1,524 $ 489 $ 1,524
============== ============== ==================
RECONCILIATION OF NET LOSS TO NET
CASH FROM OPERATING ACTIVITIES
Net loss $ (90,364) $ (12,406) $ (1,107,551)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and write-down of test
facility to net salvage value 109,694
Services received in exchange for common stock 61,931 154,676
Changes in operating assets and liabilities
Trade accounts payable 12,984 2,745 185,857
Accrued interest 6,000 6,000 53,000
-------------- -------------- ------------------
NET CASH FROM OPERATING ACTIVITIES $ (9,449) $ (3,661) $ (604,324)
============== ============== ==================
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITIES
Common stock issued for services $ 61,931 $ - $ 154,676
============== ============== ==================
Shares payable exchanged for common stock $ - $ - $ 30,000
============== ============== ===================
</TABLE>
F-17
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Mariculture Systems, Inc. (the Company) is a development stage company which has
undertaken the development, manufacturing and marketing of products for the
aquaculture industry. The products are primarily new technology in fish farming
through the use of a rigid wall fish rearing system. The Company developed and
constructed a test facility in June 1996. Fish were installed in October 1996
with harvest of the crop accomplished in August 1997. The test facility
performed effectively. The crop that was harvested in August 1997 was sold to
offset the costs associated with constructing the test facility. The Company has
elected to expense all costs associated with the development, engineering,
startup and operations that have been incurred. The financial statements and
notes are representations of the Company's management, who is responsible for
their integrity and objectivity.
Note 1 - Basis of Presentation
The interim unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
consisting only of normal recurring accruals necessary for a fair presentation
of the financial condition and the results of operations for the interim periods
included herein have been made. Operating results for the six months ended June
30, 2000 are not necessarily indicative of the results to be anticipated for the
year ending December 31, 2000. For additional information, refer to the audited
financial statements and notes thereto, for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, as of the date of the
balance sheet, and revenues and expenses for the period. Actual results could
differ from estimated amounts.
Note 2 - Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137 entitled Accounting for
Derivative Instruments and Hedging Activities -Deferral of the Effective Date of
SFAS Statement No. 133. The statement amends SFAS No. 133 to defer its effective
date to all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company currently has no activity in derivative instruments and hedging
activities, and does not expect that the adoption of this statement will have a
material effect on its financial condition or results of operation.
F-18
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Developmental State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 3 - Common Stock
The Company from time to time enters into agreements with vendors and
individuals to obtain goods and services for common stock. For the six months
ended June 30, 2000, there were 261,900 shares so exchanged for $61,931 of legal
and professional services.
Note 4 - Subsequent Events
In August 2000, the Company executed a promissory note in favor of Elaine
Meilahn in the amount of ten thousand six hundred dollars ($10,600) at an
interest rate of twelve percent (12%) per annum. The Note was in exchange for
monies lent by Ms. Meilahn to the Company for working capital. The Note is
payable on demand. Pursuant to the promissory note, the final disbursement from
Elaine Meilahn to the Company was made in August 2000 in the amount of five
thousand dollars ($5,000).
In September 2000, the Company entered into an Employment Agreement with Richard
J. Luce (Luce), to employ Luce as Vice President of Sales and Marketing. The
term of the agreement is for a period of four (4) years and is automatically
renewable for one (1) year. Mr. Luce's annual base salary is ninety three
thousand five hundred dollars ($93,500.00) for the first year, one hundred
thousand forty five dollars ($100,045) for the second year, one hundred seven
thousand forty eight dollars ($107,048) for the third year, and one hundred
fourteen thousand five hundred forty one dollars ($114,541) for the fourth year.
However, no salary will be accrued during the first four (4) months of
employment. Luce will also receive commission payments of one half percent
(0.5%) based on gross sales of the Company products and an additional one half
percent (0.5%) for all direct sales by Luce. Luce is also granted the right to
purchase up to one hundred thousand (100,000) shares of the Company's restricted
Common Stock at a price of four dollars ($4.00) per share. Twenty-five percent
(25%) of the options shall become vested on January 1, 2001, and the remaining
seventy-five percent (75%) of the options shall become vested at the equal rate
of twenty-five percent (25%) upon each successive one (1) year anniversary date
of employment. All vested options shall expire with three (3) years from the
date of vesting.
F-19
<PAGE>
PART III
<TABLE>
<CAPTION>
Item 1. Index to Exhibits
--------- ---------------------------
<S> <C> <C>
3.(i).1 (1) Articles of Incorporation of Mariculture Systems, Inc. filed July 8, 1996.
3.(ii).1 (1) Bylaws of Mariculture Systems, Inc.
4.1 (1) Promissory Note in the amount of $18,000 bearing 10% interest in favor of
William Evans dated April 1996.
4.2 (1) Form of Private Placement Offering of 1,200,000 common shares at $0.01 per share.
4.3 (1) Promissory Note in the amount of $10,000 bearing 10% interest in favor of William
Evans dated January 1997.
4.4 (1) Promissory Note in the amount of $22,000 bearing 10% interest in favor of William
Evans dated April 1997.
4.5 (1) Form of Private Placement Offering of 985,000 common shares at $1.00 per share.
4.6 (1) Promissory Note in the amount of $14,400 bearing 12% interest in favor of Elaine
Meilahn dated March 2000.
4.7 (1) Promissory Note in the amount of $21,970 bearing 12% interest in favor of David
Meilahn dated March 2000.
4.8 (1) Promissory Note in the amount of $10,600 bearing 12% interest in favor of Elaine
Meilahn dated August 2000.
4.9 * Promissory Note in the amount of $5,000 bearing 12% interest in favor of
Elaine Meilahn dated December 1, 2000.
10.1 (1) Share Exchange Agreement dated August 1996.
10.2 (1) Agreement with Corporate Imaging dated July 1997.
10.3 (1) Agreement with Stephen Jaeb dated August 1997.
10.4 (1) Agreement with Reinforced Tank Products, Inc. dated April 1998.
10.5 (1) License Agreement with David Meilahn dated December 1998.
10.6 (1) Agreement with Sanford Tager dated September 1999.
10.7 (1) Employment Agreement with Rich Luce dated September 2000.
10.8 * Consulting Agreement with Websters' Inc. Dated December 1, 2000.
27.1 * Financial Data Schedule.
-----------------------
</TABLE>
(1) Incorporated herein by reference to the Company's Registration Statement on
Form 10-SB.
(* Filed herewith)
<PAGE>
Item 2. Description of Exhibits
The documents required to be filed as Exhibits Number 2 and 6 and in Part
III of Form 1-A filed as part of this Registration Statement on Form 10-SB are
listed in Item 1 of this Part III above. No documents are required to be filed
as Exhibit Numbers 3 , 5 or 7 in Part III of Form 1-A and the reference to such
Exhibit Numbers is therefore omitted. The following additional exhibits are
filed hereto:
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: 12/19/00
By: /s/ David E. Meilahn
-------------------------------------------------------
President, Secretary, Treasurer and Chairman
By: /s/ Richard Luce
-------------------------------------------------------
Vice President, Sales & Marketing
By: /s/ Don N. Jonas
-------------------------------------------------------
Director
By: /s/ Robert Janeczko
-------------------------------------------------------
Director
