U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB
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. The Washington corporation was administratively dissolved on September
19, 1997.
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. See Part I, Item 1. "Description of the Business - (b)
Business of Issuer."
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."
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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 ($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.
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"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
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
pay a one time fee in the amount of two hundred thousand dollars ($200,000) in
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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
demolish 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.
"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."
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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."
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."
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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 Transactions."
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 a share exchange. 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.
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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 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.
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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.
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.
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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 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:
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<TABLE>
<S> <C> <C>
Traditional Net Pens SARGO System
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Fish waste and excess food accumulations Controlled removal of food and organic waste for
ENVIRONMENTAL beneath pens are cause for significant treatment or disposal minimizes environmental
STANDARDS environmental concern among regulatory controversies. Provides regulatory agencies with
agencies, environmentalists and public interest viable alternatives for permitting as aquaculture
groups. proliferates.
Danger of 50% to 100% crop losses from toxic Phytoplankton bloom phenomena do not occur at
CONTAMINATION phytoplankton blooms that thrive in surface depths from which water is supplied. Surface
CONTROL waters. No control is currently available. water pollution avoided since source is a clean
deep-water site.
Source of growth environment water is from Nonporous rigid pen reservoir isolates fish from
SURVIVAL surface down to 40 feet. Very limited control surrounding environment. Growth environment
RATES over environment characteristics. Survival rates water controlled by supply from desired depths.
less than ideal. Survival rates expected to consistently reach 95%
or more.
No control over spread of disease to adjacent Independent pen environment provides significant
DISEASE ISOLATION 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.
Very susceptible to predation losses from seals, Impenetrable, opaque, rigid-wall reservoir shields
PREDATION sea lions, dog fish, otters and other predators. fish crops from predators, eliminates predation
LOSS losses.
Stress is caused by all the above factors. It is Growth environment control reduces stress
STRESS the major factor in disease outbreak and factors. Promotes greater fish growth and higher
subsequent mortality. survival rates.
Loading densities per pen volume are limited by Pumped water provides sufficient water exchange
OXYGEN surface water exchange, oxygenation levels and and oxygenation levels to support 3 to 5 times
LEVELS 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.
Susceptible to variable surface water conditions Water pumped from 60 to 200+ feet or other
which stress organisms and slow growth. Water source, provides stable temperature and salinity
TEMPERATURE temperatures and salinity characteristics at near control. Environment is consistent with species
CONTROL surface levels not optimal for many species. requirements that promote optimal growth and
Warmer water promotes disease outbreak. health.
Lack of open water current discourages fish from Controlled current flow promotes schooling and
PRODUCT exercising thus lowering flesh quality. continuous exercise, resulting in more consistent
QUALITY firm flesh characteristics.
Open net pen design contributes to loss of feed Collection and analysis of waste by-products
FEED through the netting and increased feed costs. maximizes feed utilization and helps reduce over-
UTILIZATION feeding waste and excess costs.
Nets require replacement every 3-4 years, Reservoir life estimated at 30 years plus. Reduces
SYSTEM increasing capital costs. Cleaning, repair, long term capital costs. Less maintenance and
MAINTENANCE maintenance and labor costs are high. Frequent cleaning required. Minimizes fish handling and
LIFE cleaning and repair increases fish stress. the resulting stress.
Lengthy and costly permitting process. Many Offers alternatives for speedier regulatory
PERMITTING and sites are not available for permitting due to permitting. Sites are made available that would
LICENSING COSTS environmental issues. not be possible for open net pens.
</TABLE>
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").
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The Company produced and installed a full-scale demonstration unit at
a pilot site in June 1996. Fish were installed in the 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 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>
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.
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.
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
Worldwide the 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
operations 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. 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.
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.
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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.
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
15
<PAGE>
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 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
16
<PAGE>
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 regardless of
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.
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.
17
<PAGE>
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 SARGO (TM) concept and has been awarded United States Patent #
5,762,024 titled "Aquaculture System."
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
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."
Governmental Regulation
There are currently no governmental regulations in any country that
the Company must conform to. In the United States most aquaculture guidelines
have been developed by the United States Federal government and are enforced in
varying degrees by the state organizations. The process varies on whether a
permit is needed for salt water, fresh water, navigable waters, and whether the
proposed site is in federal or state waters. The first step in obtaining a
permit usually is to apply to the State Department of Ecology, which controls
and monitors water quality and water
18
<PAGE>
use. The Bureau of Land Management is contacted for any land use requirements.
Both the United States Army Corp of Engineers and the Department of Commerce,
National Oceanic and Atmospheric Administration, & National Marine Fisheries
Service must review all applications for conformance to rules established for
that specific locale. If the site is in navigable waters, permission must be
granted by the United States Coast Guard.
State and Local Licensing Requirements
The regulations that impact SARGO are those licensing provisions by
virtually all jurisdictions where fish farms are placed. Each jurisdiction has
individual licensing provisions. In the United States it takes about two years
to get a license. In Canada, it takes about two months and $5,000. Once past the
State and Federal levels, the applicant must approach the county planning
commission and whatever body is responsible for renting the site for aquaculture
purposes. Currently no site permits are being authorized in the United States
but fallow sites are available for the purchase of existing permits. Purchasing
an existing permit does not require re-licensing.
Effect of Probable Governmental Regulation on the Business
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.
However, management believes that governments desire that current fish farming
methods be converted to the SARGO type of system, and that most governmental
regulations will favor the installation of a SARGO system.
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.
19
<PAGE>
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. 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 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."
20
<PAGE>
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
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 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
demolish 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."
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<PAGE>
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 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
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Officers, Promoters and Control Persons"; Part I, Item 6. "Executive
Compensation"; and Part I, Item 7. "Certain Relationships and Related
Transactions."
Facilities
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, however 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.
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. See Part I, Item 3.
"Description of Property."
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.
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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.
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
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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. Few 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.
8. Fluctuations in Results of Operations. 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 often
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
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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 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
26
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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
will attempt to protect 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.
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.
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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 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.
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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 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
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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 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.
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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 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.
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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. 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.
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.
32
<PAGE>
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
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
33
<PAGE>
technology. In consideration of the grant of license by Mr. Meilahn, the Company
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."
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."
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.
34
<PAGE>
Operating activities used net cash of $17,470 and $4,798 in 1998 and
1999, respectively.
At December 31, 1999, the Company had a working capital deficiency of
approximately $336,482.
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.
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.
Forward-Looking Statements
This Form 10-SB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included or incorporated by reference in
this Form 10-SB which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
demand for the Company's products and services, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results or developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic
market and business conditions; the business opportunities (or lack thereof)
that may be presented to and pursued by the Company; changes in laws or
regulation; and other factors, most of which are beyond the control of the
Company. Consequently, all of the forward-looking
35
<PAGE>
statements made in this Form 10-SB are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequence to or effects on the Company or its
business or operations. The Company assumes no obligations to update any such
forward-looking statements.
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.
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)
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>
36
<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 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
37
<PAGE>
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."
There are no arrangements which may result in the change of control of
the Company.
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.
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.
38
<PAGE>
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 $34,800. 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
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
39
<PAGE>
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 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."
Family Relationships
There are no family relationships between or among the executive
officers and directors of the Company.
40
<PAGE>
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 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.
41
<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)
Richard 1996 $0
Luce, V.P., 1997 $0
Sales & 1998 $0
Marketing 1999 $0
(8) 2000 $0
Robert 1996 $0
Janeczko, 1997 $0
Director (9) 1998 $0
1999 $0
2000 $0
Don Jonas, 1996 $0
Director (10) 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."
42
<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 $34,800. 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.
43
<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."
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.
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.
44
<PAGE>
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 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."
45
<PAGE>
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
demolish 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 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."
46
<PAGE>
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.
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.
47
<PAGE>
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.
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.
48
<PAGE>
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, 9,169,451 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 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.
49
<PAGE>
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").
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").
50
<PAGE>
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 several
transactions. The facts upon which the Company relied in Iowa are as follows:
(i) the purchasers in New Jersey did not exceed thirty-five (35) within a period
of twelve (12) months; (ii) the issuer reasonably believed that all the buyers
in New Jersey were purchasing for investment; (iii) no general solicitation or
general advertising is used in connection with the offer to sell or sale of the
securities; and (iv) no commission or remuneration was paid in connection with a
sale.
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. 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
51
<PAGE>
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.
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
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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 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.
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<PAGE>
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.
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.
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<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.
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
55
<PAGE>
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.
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
demolish 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)
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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.
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.
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
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<PAGE>
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.
(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
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(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.
(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.
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(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;
(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;
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(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 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.
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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
Condensed Balance sheet F-12
Condensed Statement of operations F-13
Condensed Statement of cash flow F-14
Notes to Condensed financial statements F-15
<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, LLP
Everett, Washington
May 10, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS INC.
(A Development Stage Company)
DECEMBER 31, 1998
BALANCE SHEET
DECEMBER 31,
1999 1998
ASSETS
<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
Preferred stock, par value $.001; 1,000,000 shares
authorized; no shares issued or outstanding 0 0
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)
================== ================== ======================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998 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
Common stock issued 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.
STATEMENT OF CASH FLOWS
Increase (Decrease) In Cash
YEAR ENDED DECEMBER 31, 1999
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) $ (262,730)
Interest received 7,191
Interest paid (7,138)
------------------- ------------------ -----------------------
Net cash from operating activities (4,798) (17,470) (262,677)
------------------- ------------------ -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of test facility (2,929) (497,321)
------------------- ------------------ -----------------------
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 period $ 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 441,892
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) $ (262,677)
=================== ================== =======================
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>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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). As a result of that transaction, MSIW
became a wholly-owned subsidiary of the Company. The Washington
corporation was administratively dissolved on September 19, 1997.
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.
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 will be included in revenues when their realization is
reasonably assured.
F-6
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Test facility and equipment, net of salvage value - The direct costs of
materials and labor associated with the test facility and equipment
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.
Note 2 - Test Facility
DECEMBER 31,
1999 1998
-------------- --------------
Barge $ 8,400 $ 8,400
Moorings 4,775 4,775
Generators and pumps 24,445 24,445
Miscellaneous equipment 17,809 14,880
-------------- --------------
$ 55,429 $ 52,500
============== ==============
F-7
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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>
<CAPTION>
DECEMBER 31,
1999 1998
------------- -------------
<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>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Income Taxes
The following are the significant components of deferred tax assets at
December 31:
1999 1998
----------------- --------------
Deferred tax assets
Net operating loss carryforward $ 270,000 $ 270,000
Cash basis of accounting 75,000 67,000
----------------- --------------
345,000 337,000
----------------- --------------
Valuation allowance (345,000) (337,000)
----------------- --------------
$ - $ -
================= ==============
There were no deferred tax liabilities at December 31, 1999 or 1998.
The Company is in the process of calculating the research and
experimental tax credit and as such has not calculated the effect of
this for the deferred tax asset. 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 credits the Company has
not recognized a tax provision.
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>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 will be suspended 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 and therefore the rights
to the technology have been suspended. As the rights to the technology
have 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. From inception through
December 31, 1999 and 1998, there were 158,113 shares so exchanged for
$92,745 of goods and services. 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.
The Company has received funds from interested stockholders who were
not eligible to receive stock. 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, 2000 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.
F-10
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 notes 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
notes payable at December 31, 1999.
F-11
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEET (unaudited)
JUNE 30, DECEMBER 31,
2000 1999
----------------- ----------------
ASSETS
<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
Perferred stock, par value $.001; 1,000,000 shares
authorized; no shares issued or outstanding 0 0
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>
See accompanying notes.
F-12
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF OPERATIONS (unaudited)
FOR THE
PERIOD FROM
THREE MONTHS SIX MONTHS INCEPTION
ENDED JUNE 30, ENDED JUNE 30, (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>
See accompanying notes.
F-13
<PAGE>
<TABLE>
<CAPTION>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF CASH FLOWS (unaudited)
Increase (Decrease) In Cash FOR THE
PERIOD FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (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) $ (272,179)
Interest received 7,191
Interest paid (7,138)
------------ ------------ ----------------------
Net cash from investing activities (9,449) (3,661) (272,126)
------------ ------------ ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of equipment 500 500
Purchase of test facility (497,821)
------------ ------------ ----------------------
Net cash from operating activities 500 (497,321)
------------ ------------ ----------------------
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 period $ 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 441,892
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) $ (272,126)
============ ============ ======================
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Common stock issued for services $ 61,931 $ - $ 154,676
============ ============ ======================
Shares payable exchanged for common stock $ $ - $ 30,000
============ ============ ======================
</TABLE>
See accompanying notes.
F-14
<PAGE>
MARICULTURE SYSTEMS, INC.
(A Development Stage Company)
NOTES TO CONDENSED 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 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.
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.
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.
<PAGE>
<TABLE>
<CAPTION>
PART III
Item 1. Index to Exhibits
----------- -----------------------------
<S> <C> <C>
3.(i).1 * Articles of Incorporation of Mariculture Systems, Inc. filed July 8, 1996.
3.(ii).1 * Bylaws of Mariculture Systems, Inc.
4.1 * Promissory Note in the amount of $18,000 bearing 10% interest in favor of
William Evans dated April 1996.
4.2 * Form of Private Placement Offering of 1,200,000 common shares at $0.01 per
share.
4.3 * Promissory Note in the amount of $10,000 bearing 10% interest in favor of
William Evans dated January 1997.
4.4 * Promissory Note in the amount of $22,000 bearing 10% interest in favor of
William Evans dated April 1997.
4.5 * Form of Private Placement Offering of 985,000 common shares at $1.00 per
share.
4.6 * Promissory Note in the amount of $14,400 bearing 12% interest in favor of Elaine
Meilahn dated March 2000.
4.7 * Promissory Note in the amount of $21,970 bearing 12% interest in favor of David
Meilahn dated March 2000.
4.8 * Promissory Note in the amount of $10,600 bearing 12% interest in favor of Elaine
Meilahn dated August 2000.
10.1 * Share Exchange Agreement dated August 1996.
10.2 * Agreement with Corporate Imaging dated July 1997.
10.3 * Agreement with Stephen Jaeb dated August 1997.
10.4 * Agreement with Reinforced Tank Products, Inc. dated April 1998.
10.5 * License Agreement with David Meilahn dated December 1998.
10.6 * Agreement with Sanford Tager dated September 1999.
10.7 * Employment Agreement with Rich Luce dated September 2000.
27.1 * Financial Data Schedule.
</TABLE>
-----------------------
(* Filed herewith)
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.
Mariculture Systems, Inc.
(Registrant)
Date: September 13, 2000 By:/s/ David E. Meilahn
--------------------------
President, Secretary, Treasurer and Chairman
By:/s/ Richard Luce
--------------------------
Vice President, Sales & Marketing
By:/s/ Robert Janeczko
--------------------------
Director
By:/s/ Don Jonas
---------------------------
Director
