AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1999
REGISTRATION NO. 333-81829
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BIO-AQUA SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
FLORIDA ____ 65-0926223
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NO.)
</TABLE>
------------------------
<TABLE>
<S> <C>
1900 GLADES ROAD, SUITE 351 1900 GLADES ROAD, SUITE 351
BOCA RATON, FLORIDA 33431 BOCA RATON, FLORIDA 33431
(561) 416-8930 (ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR
(ADDRESS AND TELEPHONE NUMBER OF INTENDED PRINCIPAL PLACE OF BUSINESS)
PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------
DAVID MAYER
BIO-AQUA SYSTEMS, INC.
1900 GLADES ROAD, SUITE 351
BOCA RATON, FLORIDA 33431
(561) 416-8930
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
CHARLES B. PEARLMAN, ESQ. NANCY J. VAN SANT, ESQ.
BRIAN A. PEARLMAN, ESQ. SACHER, ZELMAN, PAUL, BEILEY & VAN SANT, P.A.
ATLAS, PEARLMAN, TROP & BORKSON, P.A. 1401 BRICKELL AVENUE, SUITE 700
200 EAST LAS OLAS BOULEVARD, SUITE 1900 MIAMI, FLORIDA 33131
FORT LAUDERDALE, FLORIDA 33301 TELEPHONE (305) 371-8797
TELEPHONE (954) 763-1200 FACSIMILE (305) 374-2605
FACSIMILE (954) 766-7800
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis under Rule 415 under the Securities Act of 1933,
as amended, check the following box: /x/
If this form is filed to register additional securities for an offering
under Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering: / /
If this form is a post-effective amendment filed under Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed under Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made under Rule 434, please
check the following box: /x/
------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED SECURITY OFFERING PRICE(1) REGISTRATION FEE
------------------------------ ---------- -------- ----------------- ----------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock........................................ 1,380,000(2) $5.625 $7,762,500 $2,157.98
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants.................................................... 1,380,000(3) $.125 $172,500 $47.96
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock issuable upon exercise of the
Warrants.................................................... 1,380,000(4) $7.30 $10,074,000 $2,800.57
- ------------------------------------------------------------------------------------------------------------------------------------
Representative's Warrants................................... 120,000(5) $0.001 $120 $.02
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock........................................ 120,000(6) $9.28 $1,113,600 $309.58
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants issuable upon the exercise of the Representative's
Warrants.................................................... 120,000(7) $.206 $24,720 $6.87
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock issuable upon the exercise of the
Representative's Warrants................................... 120,000(8) $12.045 $1,445,400 $401.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total....................................................... $20,592,840 $5,724.81(9)
====================================================================================================================================
(footnotes on next page)
</TABLE>
THE REGISTRANT WILL AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
UNDER SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(footnotes from cover)
(1) Estimated solely for purposes of calculating the amount of the registration
fee under Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 180,000 shares of class A voting common stock issuable under the
underwriter's over-allotment option.
(3) Includes 180,000 redeemable common stock purchase warrants issuable under
the over-allotment option.
(4) Represents shares of class A common stock issuable upon exercise of the
warrants registered together with such additional indeterminate number of
shares as may be issued upon exercise of such warrants by reason of the
anti-dilution provisions contained therein.
(5) Includes 120,000 representative's purchase warrants.
(6) Represents shares of class A common stock issuable upon exercise of the
representative's warrants together with such additional indeterminate number
of shares of class A common stock as may be issued upon exercise of such
representative's warrants by reason of the anti-dilution provisions
contained therein.
(7) Represents warrants issuable upon exercise of the representative's warrants,
together with such additional indeterminate number of warrants as may be
issued by reason of the anti-dilution provisions contained in the
registration statement.
(8) Represents shares of class A common stock issuable upon exercise of the
warrants included within the representative's warrants together with such
additional indeterminate number of shares of class A common stock as may be
issued upon exercise of such warrants by reason of the anti-dilution
provisions contained in the registration statement.
(9) Fee has been paid.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 15, 1999
BIO-AQUA SYSTEMS, INC.
1,200,000 SHARES OF CLASS A COMMON STOCK AND
1,200,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------
We are offering shares of class A common stock and redeemable common stock
purchase warrants. Our class A common stock and our warrants are being offered
separately and not as units, and each is separately transferable. Each warrant
entitles the holder to purchase one share of class A common stock at $7.30 per
share, subject to adjustment, until , 2005.
Prior to this offering, there has been no public market for our class A
common stock or our warrants.
INVESTING IN OUR CLASS A COMMON STOCK AND OUR WARRANTS INVOLVES CERTAIN
RISKS. SEE RISK FACTORS ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE OF CLASS A PER WARRANT OF CLASS A
COMMON STOCK COMMON STOCK TOTAL
-------------------- ---------------------- ------
<S> <C> <C> <C>
Public Offering Price......................... $ 5.6250 $ 0.125 $5.750
Underwriting Discounts and
Commissions................................ $ 0.5625 $ 0.0125 $0.575
Proceeds to Bio-Aqua
Systems, Inc. ............................. $ 5.0625 $ 0.1125 $5.175
</TABLE>
The underwriters may, under some circumstances, for 45 days after the date
of this prospectus, purchase up to an additional 180,000 shares of common stock
and 180,000 warrants from us at the public offering price, less underwriting
discounts and commissions.
------------------------
It is expected that delivery of our class A common stock and our warrants
will be made, in a firm commitment offering, on or about , 2000.
INSTITUTIONAL EQUITY NUTMEG SECURITIES, LTD.
CORPORATION
EMERSON BENNETT
& ASSOCIATES, INC.
------------------------
Prospectus , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 5
Use of Proceeds............................................................................................ 9
Dividend Policy............................................................................................ 10
Dilution................................................................................................... 11
Capitalization............................................................................................. 12
Exchange Rates............................................................................................. 13
Selected Financial Data.................................................................................... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................... 15
Business................................................................................................... 21
Additional Information..................................................................................... 49
Management................................................................................................. 50
Certain Relationships and Related Transactions............................................................. 56
Bridge Financing........................................................................................... 57
Principal Shareholders..................................................................................... 58
Description of Securities.................................................................................. 59
Shares Eligible for Future Sale............................................................................ 62
Underwriting............................................................................................... 63
Legal Matters.............................................................................................. 67
Experts.................................................................................................... 67
Index to Financial Statements.............................................................................. F-1
</TABLE>
Until , 2000 (25 days after the commencement of this offering), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the obligations of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
2
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
OVERVIEW
Bio Aqua is presently an international broker of animal nutrition products,
including fish, feather and krill meal. We currently sell and distribute an
automatic control system for fish meal processing and have developed and sold
poultry vaccines in Peru and Chile.
We are currently developing red tide detection kits and cleansing equipment
to remove toxins from contaminated shell fish. We are also testing immune
stimulants for salmon and shrimp.
OUR STRATEGY
Our strategy is to continue to expand as a niche participant in the
worldwide specialized animal feed and immunology market by capitalizing on the
commercialization of our research and development expertise.
OUR HISTORY AND STRUCTURE
We were incorporated in March 1999 as a holding company to acquire a 99%
interest in Tepual S.A., a Chilean corporation. At closing of this offering we
will purchase our interest in Tepual S.A. from its shareholders. We will acquire
the rights to the Inual(Trademark) and Tepual(Trademark) brands at closing by
acquiring all of the issued and outstanding stock of Profeed, Inc., a Bahamian
company.
Our principal executive offices are located at General Ekdhal 159,
Santiago, Chile, and our telephone number is 011 (562) 777- 0262. Our U.S.
offices are located at 1900 Glades Road, Suite 351, Boca Raton, Florida 33431,
and our telephone number is (561) 416-8930. When we use the terms "Bio-Aqua,"
"Tepual," "we," "our" and similar terms, this includes Bio-Aqua Systems, Inc.
and Tepual S.A., our 99% subsidiary.
THE OFFERING
The share numbers in the information below and elsewhere in this
prospectus, unless otherwise stated, assumes no exercise of the over-allotment
option, our warrants, the representative's warrants, the securities underlying
the representative's warrants, or the issuance of up to 300,000 shares of class
A common stock reserved for issuance under our stock option plan. The share
numbers also assume that we have issued all the shares of our class B common
stock included in the purchase of the 99.9% interest in Tepual S.A. from its
shareholders.
<TABLE>
<S> <C>
Class A common stock offered.................... 1,200,000 shares
Warrants offered................................ 1,200,000 warrants
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Shares of class A common stock
underlying warrants.......................... 1,200,000 shares
Class A common stock outstanding
after the offering........................... 1,286,294
Class B common stock outstanding
after the offering........................... 1,700,000
Warrants outstanding
after the offering........................... 1,200,000
</TABLE>
We may redeem our warrants beginning , 2001 for $.05 per warrant subject to
prior exercise of the warrant, if the closing bid price for our class A common
stock has been at least $9.00 per share for thirty consecutive trading days.
We are presently seeking listing of our securities on the American Stock
Exchange.
<TABLE>
<S> <C>
Proposed Amex symbols are:
Class A common stock......................... SEA
Warrants..................................... SEAW
</TABLE>
4
<PAGE>
RISK FACTORS
BECAUSE WE HAVE CHANGED OUR BUSINESS STRATEGY, WE MAY NOT BE ABLE TO
SUCCESSFULLY MANAGE OUR NEW BUSINESS OPERATIONS. To date, we have engaged in
little or no commercial business outside of brokerage of fish meal, feather meal
and krill meal. Results of operations in the future will be influenced by
numerous factors. We will need significant operating expenditures arising from
technological developments, regulatory impediments, increases in expenses
associated with sales and marketing growth and maintenance of quality control.
Many of our marketing efforts have been untested in the market place, and may
not result in successful sales of our products and services.
OUR COSTS OF OPERATIONS ARE SUBJECT TO WIDE FLUCTUATIONS DEPENDING ON THE
COST OF FISH MEAL AND FEATHER MEAL. The costs of fish meal and feather meal are
subject to wide fluctuations due to factors such as:
1. seasonality;
2. economic conditions; and
3. government restrictions.
Our inability to purchase these products on reasonable commercial terms could
significantly impact our financial results.
FAILURE TO ADAPT OUR POULTRY VACCINES TO SPECIFIC COUNTRIES AND REGIONS
COULD LIMIT OUR BUSINESS SUCCESS. Our current vaccines are limited to use in
specific countries. and regions. Animal pathogens in general are unique to
specific regions. Vaccines for poultry in Peru and Chile that we have produced
are developed to combat specific diseases to the region in which these bacterial
and viral strains are found. We will be required to commit considerable time,
effort and resources to develop vaccines for areas other than Peru and Chile.
Our success will depend upon, in part, the ability of new vaccines to meet
targeted performance.
IF WE ARE UNABLE TO SUCCESSFULLY BRING OUR RED TIDE DETECTION AND CLEANSING
SYSTEM TO MARKET BECAUSE OF OUR INABILITY TO MEET TECHNOLOGICAL AND REGULATORY
COMPLIANCE, WE MAY NOT RECEIVE REVENUE FROM THESE PRODUCTS WHICH WILL ADVERSELY
AFFECT OUR FINANCIAL CONDITION. We anticipate that our paralytic shellfish
poisoning red tide detection kit will be available for sale during the first
quarter of 2000. Our red tide cleansing kit system is still in the preliminary
stages of product development and we anticipate that it will not be ready for
commercial sale for approximately two years. Our red tide detection and
cleansing is expected to be subject to regulation by agencies that administer
laws governing health, safety and the protection of the environment, or any
other government agency in which we may seek to distribute our products. Our
success will depend, in part, upon our ability to comply with regulatory
agencies and make timely and cost-effective developments of this product.
FAILURE TO PROTECT OUR TECHNOLOGY COULD PERMIT OTHERS TO APPROPRIATE OUR
TECHNOLOGY, ADVERSELY AFFECTING OUR FINANCIAL CONDITION. Our current patent and
patent applications are limited in scope to specific areas of application.
Patent protection for our poultry vaccines is limited to Chile and currently
only protects our Chilean vaccine for
5
<PAGE>
bronchitis infection. As of the date of this offering, we have not filed nor
received patent protection for any other Chilean vaccines and we do not have any
patent protection for our immune stimulants.
We have only applied for patent protection for our red tide paralytic
shellfish poisoning detection kit and our red tide paralytic shellfish poisoning
detoxification process in the United States, Chile, Canada and the European
Community. An additional patent application for red tide paralytic shellfish
poisoning detoxification has been filed in Australia. We have not received any
confirmation of our applications as of the date of this offering. Failure to
obtain patent protection could have an adverse effect on our financial
condition. In addition, if the legal and other costs of obtaining patent
protection in any other country or on an international basis exceeds our
financial capabilities, we may have to limit our patent applications.
FAILURE TO TRADEMARK OUR INUAL(TRADEMARK) AND TEPUAL(TRADEMARK) BRANDS MAY
REDUCE THE VALUE OF OUR PRODUCTS AND IMPACT OUR FINANCIAL CONDITION. We
currently only have trademark protection over the Tepual(Trademark) and
Inual(Trademark) brands in Chile, Colombia, Taiwan, China, Ecuador, Mexico (only
for Tepual(Trademark)), Japan, Peru and South Africa. Our brand name is critical
to our success. Failure to obtain trademark protection in countries in which we
presently operate may reduce the value of our branded product and impact our
financial condition.
THE LOSS OF SIGNIFICANT CUSTOMERS IN OUR BROKERAGE OF FISH MEAL COULD
ADVERSELY EFFECT OUR BUSINESS. The loss of Bradwell Business Corp., Agribrand
Purina, Nor Aqua, Alitec and Ecofeed Chile could materially effect our business.
During the first three quarters of 1999, these customers accounted for an
aggregate of approximately 60% of our fish meal sales.
WE MAY NOT BE ABLE TO RECOVER OUR INVESTMENT IN KELOR TRADING, LTD. IF
THEIR HARVESTING EFFORTS ARE NOT SUCCESSFUL, WHICH COULD CAUSE A FINANCIAL LOSS.
To date, we have loaned an aggregate of $887,000 to Kelor Trading, Ltd. for the
preparation of a vessel to operate in Antarctic waters and working capital. This
advance is not evidenced by a promissory note and we have not received a
mortgage on the fishing vessel. Kelor Trading, Ltd. will repay us principally
through profits it receives from our joint venture as it harvests krill. If we
and Kelor are unsuccessful in harvesting krill and selling it at a profit, Kelor
Trading, Ltd. may be unable to repay us funds advanced under our agreement. We
are not the primary beneficiaries of the insurance that has been obtained on the
vessel and equipment used to harvest krill. If there is a catastrophe or damage
to the vessel or its equipment we may not be able to collect any insurance
proceeds.
LIMITS ON KRILL HARVESTING ESTABLISHED BY THE COMMISSION FOR THE
CONSERVATION OF ANTARCTIC MARINE LIVING RESOURCES MAY LIMIT OUR REVENUE. The
commission limits the amount of krill that may be harvested in Antarctic waters
to 1.5 million tons. Presently 70,000 tons are being harvested. The commission
has established limits because increases in krill catches could have a negative
effect on the ecosystem, including other marine life, particularly birds, seals
and fish which mainly depend on krill for food.
WE DO NOT HAVE PRODUCT LIABILITY INSURANCE WHICH IN THE EVENT OF ANY LEGAL
ACTION BY THIRD PARTIES COULD RESULT IN SIGNIFICANT LEGAL DEFENSE FEES AS WELL
AS DAMAGES FOR
6
<PAGE>
LIABILITY ADVERSELY AFFECTING OUR FINANCIAL CONDITION. We do not have product
liability insurance. While we may seek to obtain such insurance in the future,
the cost may exceed our financial capabilities. Therefore, we may have to rely
on unrelated companies to whom we may license our products to provide such
liability insurance. Companies that we license our products may not be able to
obtain product liability insurance.
THE LOSS OF THIRD PARTY MANUFACTURERS FOR THE PRODUCTION OF OUR PERUVIAN
VACCINES AND OUR RED TIDE DETECTION KIT COULD IMPACT ON OUR ABILITY TO MARKET
THESE PRODUCTS AND REDUCE OUR REVENUES. The loss of one of our third party
manufacturers would have a negative effect on our ability to manufacture our
products. Tepual has contracted with Biosur S.A.C., a Peruvian company, to
manufacture and produce our Peruvian poultry vaccines. Tepual has also entered
into a joint venture with R-Biopharm GmbH, a German company, to manufacture a
Paralytic Shellfish Poisoning (PSP) red tide detection kit. These third parties
may not meet or satisfy their contractual obligations. While Tepual has entered
into agreements with these companies, these contracts may not be fulfilled or
internal problems within these third parties may affect production or
productivity in the future.
IF WE ARE UNABLE TO COMPLY WITH GOVERNMENT REGULATION, OUR ABILITY TO
PRODUCE AND DISTRIBUTE OUR VACCINES MAY BE RESTRICTED OR COULD INCREASE OUR
COSTS OF DOING BUSINESS. Our vaccines are subject to regulatory compliance
within the countries in which they are manufactured and distributed. Our poultry
vaccines are currently approved by the Peruvian government, and we received
re-approval from the Chilean government on June 22, 1999. While we are in
compliance with Peruvian regulations and Chilean regulations, the enactment of
stricter laws or regulations, or the implementation of more aggressive
enforcement policies could adversely affect our operations or financial
conditions.
THE LOSS OF MAX RUTMAN'S SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS. Our success is highly dependent upon the continued services of Mr.
Rutman who continues to devote a substantial amount of his time to our business.
Although we currently have a 3 year employment agreement through our subsidiary,
Tepual, with Mr. Rutman for his services, the loss of his services could have a
material adverse effect on our business.
YOU MAY BE LIMITED IN YOUR ABILITY TO ENFORCE CIVIL LIABILITIES AGAINST US
SINCE MOST OF OUR ASSETS AND OPERATIONS ARE ABROAD. Enforcement by investors of
civil liabilities under the U.S. Federal securities laws may adversely be
affected by the fact that while Bio-Aqua is located in the U.S., our principal
subsidiary is located in Chile. While we are a U.S. corporation, our subsidiary,
Tepual is a Chilean corporation. For the foreseeable future, substantially all
of our assets will be held or used outside the United States (primarily in
Chile), and approximately 95% of the net proceeds from this offering will used
in Chile. Our current executive officers, directors (excluding David Mayer) and
management are residents of Chile, and substantially all of our assets and the
assets of our executive officers, directors and management are located outside
the United States.
7
<PAGE>
CONSIDERATIONS RELATING TO CHILE
SINCE WE ARE SUBJECT TO RISKS ASSOCIATED WITH FOREIGN OPERATIONS, WE MAY
INCUR ADDITIONAL COSTS AND DISRUPTIONS TO OUR OPERATIONS. Our business is
currently conducted almost exclusively outside of the United States. We
consequently are subject to a number of significant risks associated with
foreign operations. Our operating profits may be negatively affected by changes
in the value of local currencies in the countries in which operations are
conducted or products are sold, by hyperinflationary conditions, or recession
such as those which have occurred in the past in several of such countries.
Other risks and considerations include:
o the effect of foreign income and withholding taxes and the U.S. tax
implications of foreign source income and losses;
o the possibility of expropriation or confiscatory taxation or price
controls;
o adverse changes in local investment or exchange control regulations;
o difficulties inherent in operating in less developed legal systems;
o political instability, government corruption and civil unrest; and
o potential restrictions on the flow of international capital.
In many developing countries, such as Chile and Peru where our business is
conducted, there has not been significant governmental regulation relating to
the environment, occupational safety, employment practices or other business
matters routinely regulated in the United States. As such economies develop, it
is possible that new regulations may increase the expense and risk of doing
business in such countries. In addition, social legislation in Chile may result
in significantly higher expenses associated with terminating employees or
distributors or closing manufacturing facilities.
IN THE EVENT OF LONG-TERM RESTRICTIONS ON REPATRIATION WITH RESPECT TO
INVESTMENTS, SHAREHOLDERS MAY FIND IT DIFFICULT TO REALIZE VALUE ON THEIR
INVESTMENT THROUGH THE RECEIPT OF DIVIDENDS OR IN THE APPRECIATION OF THE VALUE
OF THEIR EQUITY. Equity investments in Chile by persons who are not Chilean
residents may not be freely repatriated for one year starting after the date the
funds were brought into Chile. After one year, equity investments may be freely
repatriated only if the investment is channeled through the Formal Exchange
Market (Mercado Cambiario Formal) under an investment contract entered into with
the Chilean government under Decree-Law No. 600 of 1974, as amended.
8
<PAGE>
USE OF PROCEEDS
The gross proceeds from the sale of the 1,200,000 shares of class A common
stock and 1,200,000 warrants offered will be approximately $6,900,000, assuming
an initial public offering price of $5.625 per share of class A common stock and
$.125 per warrant. The net proceeds, without giving effect to the exercise of
the over-allotment option, will be approximately $5,650,000 after giving effect
to:
o the representative's discounts of $690,000.
o a 3% non-accountable expense allowance to the representative of $207,000,
and
o offering costs and expenses of approximately $353,000.
Approximately 27% of our proceeds will be used for reduction of a portion
of debt due to Banco Do Brasil, Banco Santander, Banco Sudamericano, Corpbanca
and Hemisphere National Bank which have maturity dates throughout 2005. The
interest rates for these debts range from 9.259% to 13.8%. As of September 30,
1999 $2,311,896 was outstanding under these debt obligations.
Approximately 14% of our proceeds will be used for working capital,
including:
o overhead;
o administrative expenses; and
o general corporate purposes.
The Tepual(Trademark) and Inual(Trademark) brands are held by Profeed,
Inc., which is equally owned and controlled by Max, Paulina and Andrea Rutman.
We will acquire Profeed, Inc. by purchasing all of the issued and outstanding
shares of Profeed, Inc. for an aggregate of $1.3 million. We will pay the
shareholders of Profeed, Inc. $400,000 from the proceeds of this offering. The
balance shall be paid, at the board of directors' option, out of:
o 5% of our gross revenues per quarter, but in no event greater than 20% of
the net income greater, from the sales of products sold under the
Tepual(Trademark) and Inual(Trademark) brands;
o third party financing; or
o proceeds from the offering.
9
<PAGE>
Approximately 95% of our proceeds will be used in Chile. We intend to use
the net proceeds of this offering, during the twelve months following the
effective date, approximately as follows:
<TABLE>
<CAPTION>
ANTICIPATED USE OF NET PROCEEDS APPROXIMATE AMOUNT PERCENTAGE OF PROCEEDS
- --------------------------------------------------------- ------------------ ----------------------
<S> <C> <C>
Reduction of Bank Loans.................................. $1,500,000 27.0%
Initial Payment for the Purchase of Brands............... $ 400,000 7.0%
Contingent Payment for the Purchase of Brands............ $ 900,000 16.0%
Development of Red Tide Kits............................. $ 700,000 12.0%
Development of Immune Stimulants......................... $ 550,000 10.0%
Research and Development of Poultry Vaccines............. $ 450,000 8.0%
Marketing................................................ $ 200,000 3.5%
Repayment of Bridge Loans................................ $ 150,000 2.5%
Working Capital.......................................... $ 800,000 14.0%
---------- ------
Total.............................................. $5,650,000 100.0%
========== ======
</TABLE>
Between April and May 1999 we received bridge loans in the aggregate amount
of $150,000 from third party accredited investors. These loans are evidenced by
promissory notes bearing interest at 8% per year with maturity dates ranging
from March 31, 2000 through January 1, 2001.
Our anticipated use of net proceeds are based upon our current status of
operations and anticipated business plans. It is possible that the application
of funds may vary depending on numerous factors including, but not limited to,
changes in the economic climate or unanticipated complications, delay and
expenses. We currently estimate that the net proceeds from this offering will be
sufficient to meet our liquidity and working capital requirements for the next
12 months. However, there can be no assurance that the net proceeds of this
offering will satisfy our requirements for any particular period of time.
Additional financing may be required to implement our long-term business plan.
There can be no assurance that any such additional financing will be available
when needed on terms acceptable to us, if at all. Pending use of the proceeds of
this offering, we may make temporary investments in bank certificates of
deposit, interest bearing savings accounts, prime commercial paper, U.S.
Government obligations and money market funds. Any income derived from these
short term investments will be used for working capital.
We have wide discretion in the use of our proceeds. We reserve the right to
use the funds obtained from this offering for other purposes not presently
contemplated which we deem to be in our best interest and the best interest of
our shareholders. As a result, our success will be substantially dependent upon
the discretion and judgment of our management. The application and allocation of
the net proceeds of the offering are determined by discretion and judgment of
our management.
DIVIDEND POLICY
While Tepual has previously paid dividends to its shareholders, we do not
anticipate paying dividends in the foreseeable future.
10
<PAGE>
DILUTION
At September 30, 1999, we had a net tangible book value of $468,655 or
approximately $.26 per share of outstanding class A and B common stock after
giving effect to the stock issuances. Net tangible book value per share
represents the amount of our total tangible assets less our total liabilities,
divided by the number of shares of common stock outstanding. After giving effect
to the receipt of the estimated net proceeds from our sale of the 1,200,000
shares of class A common stock we are offering at an assumed initial public
offering price of $5.625 per share of class A common stock (after deducting
underwriting discounts and estimated offering expenses payable by us), the net
tangible book value as of at September 30, 1999, would have been approximately
$6,118,655 or $2.05 per share of common stock. This would represent an immediate
increase in the net tangible book value per share of common stock of $1.79 to
existing shareholders and an immediate dilution of $3.58 per share to new
investors purchasing shares of class A common stock in the offering. Dilution is
determined by subtracting net tangible book value per share after the offering
from the offering price to investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Initial offering price per share of class A common stock................................... $5.625
Net tangible book value per share of Class A and B common stock before the offering........ $ .26
Increase attributable to new investors..................................................... $ 1.79
Proforma net tangible book value after the offering........................................ $ 2.05
Dilution to new investors.................................................................. $ 3.58
Percentage of dilution to new investors.................................................... 64.000%
</TABLE>
The following table summarizes the number of shares of common stock
purchased from Bio-Aqua, the total consideration paid and the average price per
share paid by our existing shareholders at September 30, 1999 and new investors
purchasing shares of class A common stock in this offering, before deducting the
underwriting discounts and our estimated offering expenses. The table excludes
the sale of 1,200,000 warrants we have offered.
The table, with respect to new investors, gives effect to the 51,000 shares
issued on our formation in March 1999 and 35,294 shares of class A common stock
issued in April and May, 1999 in connection with the bridge financing.
<TABLE>
<CAPTION>
SHARES PURCHASED CONSIDERATION PAID AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders...................... 1,786,294 59.82% $ 529,623 7.28% $ 0.30
New Investors.............................. 1,200,000 40.18% $6,750,000 92.72% $ 5.625
---------- ------ ---------- ------ -------
Total................................ 2,986,294 100.00% $7,279,623 100.00% $ 2.44
========== ====== ========== ====== =======
</TABLE>
11
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999, the our actual
capitalization and as adjusted for the issuance and sale of the 1,200,000 shares
of class A common stock (assuming an initial public offering price of $5.625 per
share of class A common stock and the receipt of the net proceeds from the sale
of 1,200,000 warrants) after deducting estimated offering expenses and
underwriting discounts and the initial application of the proceeds.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term Debt................................................................... $ 400,002 $ 400,002
Stockholders' equity:
Class A common stock ($.0001 par value) 20,000,000 shares authorized; 86,294
shares issued
and outstanding (actual) and 1,286,294 (as adjusted)....................... 9 129
Class B common stock ($.0001 par value)
2,000,000 shares authorized; 1,700,000 shares issued
and outstanding (actual) and 1,700,000 (as adjusted)....................... 170 170
Preferred Stock, $.0001 par value; 5,000,000 shares
authorized; no shares issued and outstanding (actual)
and as adjusted............................................................ -0- -0-
Additional paid-in capital....................................................... 529,444 6,179,324 (1)
Retained earnings................................................................ 459,431 459,431
Cumulative translation adjustment
from the Chilean pesos into U.S. dollars...................................... (520,399) (520,399)
---------- -----------
Total stockholders' equity....................................................... $ 468,655 $ 6,118,655
---------- -----------
Total capitalization............................................................. $ 868,657 $ 6,518,657
========== ===========
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C>
(1) Reconciliation: Issuance of 1,200,000 shares at $5.625 ....... $6,750,000
Issuance of 1,200,000 warrants at $.125 ...... 150,000
Less offering costs .......................... (353,000)
representative's discounts ................... (690,000)
3% non-accountable expense to representative . (207,000)
----------
Total Proceeds ........................... 5,650,000
less 1,200,000 shares at $.0001 par value .... 120
----------
$5,649,880
Plus actual additional paid in capital ....... 529,444
----------
Total .................................... 6,179,324
</TABLE>
12
<PAGE>
EXCHANGE RATES
Unless otherwise specified, references to U.S. dollars, dollars, $, or
U.S.$ are to United States dollars and references to pesos or Ch$ are to Chilean
pesos, the legal currency of Chile, and peso-denominated monetary unit. As of
September 30, 1999, the exchange rate was one U.S. dollar to 531.11 pesos. No
representation is made that the peso or U.S. dollar amounts shown in this
prospectus could have been or could be converted into U.S. dollars or pesos, as
the case may be, at such rate or at any other rate.
Chile's Ley Organica Constitucional del Banco Central de Chile No. 18.840,
the Central Bank Act of Chile, enacted in 1989, liberalized the rules that
govern the ability to buy and sell foreign exchange. Prior to 1989, the law
permitted the purchase and sale of foreign exchange only in those cases
explicitly authorized by the Central Bank of Chile. The Central Bank Act now
provides that the Central Bank of Chile may determine that certain purchases and
sales of foreign exchange may be exercised by the banks and other entities so
authorized by the Central Bank of Chile.
The following table sets forth the annual high, low, average and year-end
observed exchange rate for U.S. dollars for each year starting in 1997 as
reported by the Central Bank of Chile. The table reflects the actual high and
low exchange rates on a quarterly basis for each period in 1999 and the average
quarterly rates during the period.
<TABLE>
<CAPTION>
EXCHANGE RATES
OF CH$ PER U.S.$
-------------------------
YEAR LOW HIGH AVERAGE
- --------------------------------- ------ ------ -------
<S> <C> <C> <C>
1997............................. 411.85 439.81 419.31
1998............................. 439.18 465.25 460.33
1999 (first quarter)............. 472.41 501.15 487.30
1999 (second quarter)............ 472.41 518.90 491.26
1999 (third quarter)............. 513.04 531.83 520.79
</TABLE>
Source: Central Bank of Chile
13
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data as set forth below for the years ended
December 31, 1997 and 1998 and the balance sheet data at December 31, 1997 and
1998, have been derived from our combined financial statements and notes, which
have been audited by Spear, Safer, Harmon & Co., P.A., independent auditors,
whose report is included in this prospectus. The statement of operations data
for the nine months ended September 30, 1999 and 1998, and the balance sheet
data at September 30, 1999 are derived from our unaudited financial statements
included elsewhere in this prospectus. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and included all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of our
financial condition and results of operations for such periods. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for any other interim period or the entire
year.
The following financial data should be read in conjunction with the
consolidated financial statements and notes and management's discussion and
analysis of financial condition and results of operations included in this
prospectus. The proforma statement of operations data assumes our president and
chief financial officer received an annual base salary of $200,000 and $100,000,
respectively, for the periods indicated.
<TABLE>
<CAPTION>
PROFORMA
NINE
NINE MONTHS ENDED MONTHS ENDED PROFORMA
YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------ YEAR ENDED
----------------------- ----------------------- SEPTEMBER 30, -----------------
STATEMENT OF OPERATIONS 1997 1998 1998 1999 1999 DECEMBER 31, 1998
- --------------------------------------- ---------- ---------- ---------- ---------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $5,238,299 $6,873,512 $4,648,676 $4,454,395 $4,454,395 $ 6,873,512
Cost of Operations..................... 3,571,678 4,853,553 3,453,168 3,087,682 3,087,682 4,853,553
Selling and Administrative Expenses.... 1,516,974 1,555,661 1,029,043 981,529 1,206,529 1,855,661
Other Income (Expenses)................ (93,220) (224,325) (61,010) (287,854) (287,854) (224,325)
Net Income............................. 56,427 239,973 105,455 97,331 (127,670) (60,027)
Net Income per common share............ 0.03 0.14 .06 .06 (.07) (.04)
Weighted average common shares
outstanding.......................... 1,700,000 1,700,000 1,700,000 1,755,353 1,755,353 1,700,000
</TABLE>
BALANCE SHEET DATA
The as adjusted balance sheet data as of September 30, 1999, reflects the
sale of 1,200,000 shares of class A common stock including receipt of net
proceeds from the sale of 1,200,000 warrants, but excludes the exercise of our
warrants and the exercise of the representative's warrants and the
over-allotment option.
<TABLE>
<CAPTION>
PERIOD ENDED SEPTEMBER 30, 1999
DECEMBER 31, -----------------------------
------------------------ ACTUAL AS ADJUSTED
1997 1998 (UNAUDITED) (UNAUDITED)(2)
---------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Working capital..................................... $ 617,413 $ 984,937 $ (905,676) $ 4,744,324
Total assets........................................ $4,089,157 $5,693,991 $ 6,546,695 $ 10,146,695
Total long-term liabilities......................... $ 355,014 $ 478,813 $ 400,002 $ 400,002
Total liabilities................................... $2,348,531 $3,678,546 $ 6,078,040 $ 4,028,040
Stockholders' equity................................ $1,740,626 $2,015,445 $ 468,655 $ 6,118,655
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate" or "continue" or use of
negative or other variations or comparable terminology.
We caution that these statements are further qualified by important factors
that could cause actual results to differ materially from those contained in the
forward-looking statements, that these forward-looking statements are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
OVERVIEW
We generate substantially all of our revenues from the sale of certain
products such as fish meal, feather meal and krill meal which we purchase from
third parties under our own brand for resale to our customers throughout the
world. As of December 31, 1998, we have sold two of our automatic control
systems for fish meal processing, certain immune stimulants on a testing basis,
as well as vaccines which we have developed. Management anticipates that we will
sell three more automatic control systems, however, as of the date of this
prospectus we have not made any additional sales.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Gross revenues for the nine months ended September 30, 1999 decreased
$194,281 from the nine months ended September 30, 1998 from $4,648,676 to
$4,454,392, a decrease of approximately 4%. This is primarily due to the
translation exchange rate. Sales have remained relatively constant between the
periods.
Cost of operations decreased from $3,453,168 in the nine months ended
September 30, 1998 to $3,087,682 for the nine months ended September 30, 1999.
This decrease of $365,486 (11%) was directly related to management's efforts to
control costs. Further, we sold more fish meal, as opposed to feather meal,
during this period, which requires less costs. Our cost of operations will
continue to fluctuate on a quarterly basis based upon the price of feather or
fish meal.
Selling and administrative expenses for the nine months ended September 30,
1999 decreased $47,514 in comparison to the nine months ended September 30, 1998
from $1,029,043 to $981,529, a decrease of approximately 5%.
15
<PAGE>
Other income (expenses) increased from $(61,010) at September 30, 1998 to
$(287,854) at September 30, 1999, an increase of $226,844 or approximately 372%.
The increase is primarily due to the sale of a minority interest in an
unaffiliated company in 1998. Interest expense increased from $177,570 in the
nine months ended September 30, 1999 to $317,324 for the nine months ended
September 30, 1999, an increase of $139,754, due to amortization of our bridge
loans and an increase in bank interest related to the financing of the Kelor
project.
As a result of the above items, we incurred net income for the nine months
ended September 30, 1999 of $97,331 compared to $105,445 for the nine months
ended September 30, 1998, a decrease of $8,124 or approximately 7%.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR END DECEMBER 31, 1997
RESULTS OF OPERATIONS
Gross revenues for the year ended December 31, 1998 increased $1,635,213
over the year ended December 31, 1997 from $5,238,299 to $6,873,512, an increase
of approximately 31%. The increase in gross revenues may be attributed to our
broader base trading activities during 1998 as compared to 1997, which included
the additional products of feather meal and krill meal. In addition, during
1998, we sold two automatic control systems for approximately $641,000 which
accounted for approximately 39% of the increase in gross revenues.
During 1997 we were unable to purchase fish meal products to trade and
broker due to the effects of El Nino and Chilean laws restricting fishing. Prior
to 1997, we purchased a portion of our krill products from Russian and Polish
fleets, however, due to political situations in those countries in 1997, the
fleets did not travel to Antarctica and thus there was no krill available.
During this time we also began to trade poultry feather meal. In 1997, the
selling price of feather meal was much less than in 1998 because it was a new
product and we offered it at a reduced price to generate demand. In 1998, prices
were increased as demand increased.
Cost of operations increased from $3,571,678 in 1997 to $4,853,553 in 1998.
This increase of $1,281,875 (36%) is attributable to the additional product sold
in our fish, feather and krill meal business. In particular, there were
increased costs associated with the purchase of feather meal from Brazil which
led to increased shipping costs and import tariffs.
Selling and administrative expenses for the year ended December 31, 1998
increased $38,687 in comparison to the year ended December 31, 1997 from
$1,516,974 to $1,555,661, an increase of approximately 3%. During 1998, we began
selling more poultry feather meal which was purchased from Brazil. As a result,
we incurred more selling expenses including cost of travel to and from Brazil.
In addition, we hired a new chief financial officer in 1998, thus increasing
administrative salaries.
Other expenses increased from ($93,220) for the year ended December 31,
1997 to ($224,325) at the year ended December 31, 1998, an increase of $131,105
or approximately 141%. The increase is due to the reduction in royalty income
for use of one
16
<PAGE>
of our products; increase in interest expense and gain on sale of fixed assets.
Interest expense increased as a result of the increase in average outstanding
loan balances.
As a result of the above items, our net income for the year ended December
31, 1998 was $239,973 compared to $56,427 for the year ended December 31, 1997,
an increase of $183,546 or approximately 325%.
LIQUIDITY AND CAPITAL RESOURCES
To date, our liquidity has been principally supplied by bank financings and
internal cash generated from existing operations. In April and May 1999, we
received loans from six third party investors for an aggregate $150,000. These
loans are evidenced by promissory notes bearing interest at 8% per annum. As
additional consideration, the third party investors received an aggregate of 35,
294 shares of our class A common stock. We will incur an expense at such time as
the loans are repaid. Through September 30, 1999, we have incurred an expense of
$36,133 attributable to the loans.
At September 30, 1999, accounts receivable decreased by $212,216 to
$2,769,458 from $2,981,674 at December 31, 1998. This decrease is a result of
certain outstanding invoices being paid during the period. Payment terms and
conditions, which among other factors, are dependent on the customer, credit
histories, economic conditions and country payment standards. In particular,
approximately $90,000 is owed from the sale of the two automatic control
systems. Management anticipates we will receive payment of the balance due for
these two automatic control systems by December 30, 1999. However, under the
terms of sale, each customer was given a period of time beyond installation of
the equipment for testing before final payment was due. Further, management has
provided extended terms up to six months to several of its fish meal and feather
meal customers.
On September 30, 1999, we had outstanding receivables of $2,769,458 of
which $127,000 were in excess of six months old. Half of the amount outstanding
in excess of six months is payable on a yearly term and therefore not
delinquent. We believe that we can collect substantially all these receivables.
We believe that many of the extended receivables are consistent with the payee's
payment policies. From September 30, 1999 to November 15, 1999, we collected
$2,496,000* in period-end receivables.
At September 30, 1999, inventory increased $16,564 to $778,433 as compared
to $761,869 at December 31, 1998. This increase is due to purchases in excess of
sales in the third quarter of 1999.
At September 30, 1999, other assets increased by $371,770 to $896,415 from
$524,645 at December 31, 1998. This increase is due to advances made to Kelor
Trading Ltd., a krill fishing and research operation. Under this agreement with
Kelor, we have agreed to lend them up to $2 million, payable over 18 months at
an interest rate of 13.5% in return for the exclusive rights to sell all of the
vessel's krill products and right to perform certain research and development on
board the vessel located in Antarctic waters. Additionally, Kelor has agreed to
pay us a brokerage commission of 3% over the F.O.B. sales and $20 per ton of
krill meal and 5% for krill oil. In order to make these advances to Kelor, we
borrowed approximately $800,000 from Banco Do Brasil, thus increasing our
current obligations with banks.
17
<PAGE>
Due to maritime regulatory requirements and a delay in receiving certain
equipment, the fishing vessel was delayed and did not depart until August 1999.
The first unloading of the krill catch occurred in mid October and repayment of
the loan should begin in late 1999 or early 2000. No other adverse factors have
occurred which would cause us to believe there is any uncertainty on the
recovery of these advances, especially since the sale of all krill products from
this venture is under our control. We have not advanced Kelor any additional
monies since September 30, 1999.
Accounts payable increased $370,298 from $990,749 at December 31, 1998 to
$1,361,047 at September 30, 1999. This is due to purchases made in the period
which were on extended payment terms of up to four months.
Long term debt has decreased from $478,813 at December 31, 1998 to $400,002
at September 30, 1999, a decrease of $78,811. This decrease is due to timely
payments on our outstanding loans.
Under employment agreements with two of our executive officers we are
required to pay annual salaries of $300,000 plus up to an additional $120,000 in
bonuses. We have a 10 year consulting agreement with one of our directors for an
annual fee of $30,000 and a two year consulting agreement with the
representative of the underwriters of this offering for $60,000 per annum
commencing with the closing of this offering. We will also enter into a two year
lease agreement with Andean Financial Corporation for $30,000 per annum, to use
a portion of Andean Financial Corporation's facilities in Boca Raton, Florida,
for our corporate U.S. offices. The sole shareholder and director of Andean
Financial Corporation is one of our directors. We have facility lease agreement
payments for approximately $220,000 for the next 12 months.
We shall acquire Profeed, Inc. for $1.3 million, as evidenced by the
increase in due to shareholder because of payable due to the related party
nature of the transaction, of which $400,000 will be paid to its shareholders at
closing and the balance, under the discretion of the board of directors, out of:
5% of the gross revenues per quarter, but in no event greater than 20% of the
net income per quarter, of the sale of products sold under the TepualTM and
InualTM brand names, third party financing or working capital.
YEAR 2000 ISSUE
Many currently installed computer systems and software are coded to accept
only two digit entries in the date code fields. These date code fields will need
to accept four-digit entries to distinguish whether "00" means 1900 or 2000.
This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with year 2000
requirements. The potential global impact of the year 2000 problem is not known.
If year 2000 problems are not corrected in a timely manner, they could affect
us.
We have formed a project team to address internal year 2000 issues. Our
internal financial and other computer systems have been reviewed to assess and
remediate year 2000 problems. Our assessment of internal systems includes our
information technology
18
<PAGE>
systems as well as other systems which include embedded technology in equipment
containing microprocessors or other similar circuitry. Our year 2000 compliance
program includes the following phases:
o identifying systems that need to be modified or replaced;
o carrying out remediation work to modify existing systems or convert to
new systems; and
o conducting validation testing of systems and applications to ensure
compliance.
The amount of remediation work required to address internal year 2000
problems is expected to be minimal. Our use of operational systems, personal
computers and software is limited. We installed our personal computers and
hardware in June 1999. We are in the process of implementing a new operational
system and installing new software provided by Softland, a Chilean computer
company. We believe that this equipment and software was designed to address
year 2000 issues and does not have to be modified in order to function properly
in the year 2000.
Our automatic control systems utilize software designed by Advantage, a
U.S. company and software and hardware designed by Opto 22, a U.S. Company. This
software and hardware is certified as year 2000 compatible.
Our present and future costs to address year 2000 issues should be minimal.
However, there can be no assurance that these estimates are correct or that
future costs, if any, will not be materially greater than anticipated.
In addition, we are in the process of surveying our major suppliers
throughout our business lines and evaluating their plans to address potential
year 2000 issues. We will rely primarily on our suppliers' commitments to
accomplish this task but have no contractual commitments from the suppliers
regarding year 2000 issues. It is impossible to fully assess the potential
consequences in the event interruptions from supplier occur or in the event that
there are disruptions in infrastructure areas such as utilities, communications,
transportation, banking or government.
We have also sent questionnaires to our customers requesting that they
notify us of their plans to address year 2000 issues. We have informed all of
our customers that if they did not respond by October 31, 1999, we will take
necessary actions to insure that their possible problems with year 2000 issues
do not effect us. We are prepared to suspend transactions with our customers
that do not respond to our questionnaire.
Based on our assessments to date, we believe we will not experience any
material disruptions as a result of year 2000 problems in internal processes,
information processing, and interfaces with major customers or with processing
orders and billing. However, our ability to timely ship products to our
customers wold be disrupted if suppliers or other third-party providers, such as
those providing electricity, water or telephone services, experience
difficulties in providing product or services to us. These difficulties could
seriously harm our business. In addition, if our information technology systems
are not year 2000 compliant, we would have to devote significant resources to
correct such problems and we may be unable to process customer orders, which
could lead to shipment
19
<PAGE>
delays. Assuming no major disruption in service from suppliers or other third
parties, we believe that we will be able to manage our total year 2000
transition without any material effect on our results of operations or financial
condition.
We have also developed a contingency plan for the following areas as
follows:
o Administration and accounting. We have retained back-up files of all
material information. Softland, provider of our new operational
system and software, has agreed to support and help us if we have any
problems in relation to the year 2000.
o Automatic control. We have retained back-up files for all hardware
and software for our automatic control systems in operation. We also
have commitments from Advantage and Opto 22 to support and help us in
the event of any problems in relation to the year 2000.
20
<PAGE>
BUSINESS
GENERAL
Bio-Aqua Systems, Inc. was organized in March 1999 as a holding company to
acquire a 99.9% interest in Tepual, S.A., a Chilean corporation established in
1982 with its principle offices in Santiago, Chile. Before the effective date,
Tepual, S.A. is owned 90% by Flagship Import Export LLC, a company wholly-owned
by Max Rutman and 10% owned by Atik, S.A., a company owned by Paulina Rutman and
Andrea Rutman.
Since inception, our major source of revenue has been generated through the
branded sale of various products for animal nutrition, including fish meal,
feather meal and krill. These products are sold worldwide as a nutrient additive
for fish, poultry and livestock raised for human consumption with the
recognition that there is a direct correlation between the health of the animals
raised for human consumption and the consumer. We sell these nutrient products
under the TepualTM and InualTM brands. These brands are held by Profeed, Inc., a
Bahamian company, equally owned by Max Rutman, Andrea Rutman and Paulina Rutman.
We will acquire 100% of the issued and outstanding shares of Profeed, Inc. at
the effective date.
Our success in this area has been predicated on our ability to certify to
nutrient levels and ecological standards of fish and feather meals. For our
fish, feather and krill meal business we have more than 100 customers in
approximately 25 countries.
Recently, by virtue of our relationships with our suppliers and customers,
we have identified specific problems relating to farmed fish and poultry.
Together with cooperative relationships with academic, private and government
research institutions, we have engaged in research and development programs to
find commercially viable solutions for feed and food producers as follows:
-- automatic control for fish meal processing
-- salmon and shrimp immune stimulants
-- poultry vaccines
-- red tide detection and cleansing process
Our strategy is to continue to expand as a niche participant in the
worldwide specialized animal feed and immunology market by capitalizing on the
commercialization of our research and development expertise.
Our U.S. offices are located at 1900 Glades Road, Suite 351, Boca Raton,
Florida 33431, and our telephone number is (561) 416-8930. Our offices in Chile
are located at General Ekdhal 159, Santiago, Chile, and our telephone number is
011 (562) 777-0262. Our fiscal year end is December 31.
21
<PAGE>
BACKGROUND
Tepual, organized in 1982 as a Chilean limited partnership, was
incorporated in 1996 when Tepual began commercial operations which capitalized
on research and development projects initiated by Inual, a Chilean company.
Inual, wholly owned by Max Rutman and Paulina Rutman, was organized in 1973.
Inual is currently a non-operating entity, with no assets. Prior to 1985 Tepual
and Inual generated revenues through grants from various government entities and
private foundations. These grants decreased starting in 1985, due in part to
privatization in Chile and an overall decrease in grants from private
foundations. We expanded our brokerage division to replace the revenues lost
from the decrease in the aforementioned grants to aid in the continuous funding
required to support our research and development department.
As our brokerage business began to grow, we developed relationships which
have given us a first hand view of the biological and processing factors that
affect the business of our customers and suppliers. Through years of research
and development we have developed and are developing commercially viable
solutions to these biological and processing factors in automatic control for
fish meal processing, salmon and shrimp immune stimulants, poultry vaccines and
red tide detection and cleansing process. Through our work on nutrient quality,
we have developed a unique automatic control processing system which facilitates
the production of the highest nutrient level fish meal while avoiding toxicity
for the fish meal industry. Through research in animal health we have developed
poultry vaccines and salmon immune stimulants. Through research in marine
toxins, we have developed new and potential methods for detecting and cleansing
toxins found in red tide.
We will consolidate ourselves on the effective date through the following
transactions:
1. A stock exchange agreement shall be effectuated where Bio-Aqua
receives Flagship Import Export LLC's 90% interest in Tepual in return for
1,529,910 shares of class B common stock. Also, two stock purchase
agreements shall be simultaneously effectuated where Atik S.A. shall
purchase 169,990 shares of class B common stock of Bio-Aqua and Bio-Aqua
shall purchase Atik S.A.'s 10% in Tepual. Tepual shall then become our
majority owned (99.9%) subsidiary. Due to Chilean law, which requires that
a Chilean corporation be owned by not less than two shareholders, 15 shares
of Tepual stock will continue to be owned by Max Rutman, through his
ownership interest in Flagship Import Export LLC.
2. We will acquire the rights to the TepualTM and InualTM brands by
purchasing all of the issued and outstanding shares of Profeed, Inc., for
an aggregate of $1,300,000.
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CORPORATE STRUCTURE AND AFFILIATIONS OF BIO-AQUA SYSTEMS, INC. ON THE EFFECTIVE
DATE:
<TABLE>
<CAPTION>
<S> <C> <C>
Flagship Import Export Atik S.A., a Chilean PUBLIC SHAREHOLDERS
LLC, a Nevada LLC (sole corporation (shareholders are
member is Max Rutman) Paulina and Andrew Rutman)
Bio-Aqua Systems, Inc.
100% 99.9%
Profeed, Inc. (previously Tepaul S.A. (previously
owned by Max, Andrea owned by Flagship Import
and Paulina Rutman) Export LLC and Atik S.A.)
</TABLE>
OVERVIEW
As we approach the millennium, our environment is fraught with a myriad of
ecological and health problems which effect the entire world population. These
problems stem from changing weather patterns (El Nino), pollution of the
atmosphere and water, and new and localized strains of viral and bacterial
disease. Together each of these factors has placed an enormous strain on our
ability to produce, by farming or otherwise, a supply of food that is healthy,
nutritional and not exorbitant in cost. It is in the context of this worldwide
problem that companies such as ourselves have and must continue to develop
commercially viable solutions in the areas of animal nutrition and health, as
well as fish meal processing.
The changing weather patterns, among other things, have caused severe
droughts in many areas, which has affected the farming of essential food
products. Overall global warming has had a negative impact on the fishing
industry, reducing the amount and size of fish caught. These problems have
presented a niche market for the sale of our automatic fish meal processing
systems, which automatically produces fish meal with the highest nutrient levels
at the lowest cost. Additionally, as fishing waters have been depleted, we began
seeking viable alternatives and began selling feather meal as a partial
replacement for fish meal. The sale of these products, led to the formation of
relationships with local poultry producers which led us to the development of
vaccines for certain diseases found in Chilean and Peruvian poultry. The
production and sale of these vaccines has a direct impact on the population of
both countries by ensuring that production levels are maintained and disease
free poultry is produced.
The cultivation and farming of fish has become an important element in the
world's food supply. Farmed fish are subject to diseases, which on occasion have
wiped out an entire two years production of farmed salmon. Our immune stimulant,
as it relates to salmon farming, in test results we have conducted, has reduced
the mortality rate from approximately 30% to between 8% and 10%. Since these
tests were conducted by
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ourselves on a limited basis, there cannot be any assurances that such test
results will be indicative of future commercial results.
Red tide has affected the waters of every coastal country in the world and
has intensified over the past two decades. The Chilean coastline has produced
significant amounts of shellfish which on occasion has been effected by red
tide. In 1992 we began an intensive research and development program designed to
provide solutions to certain forms of red tide. As a result of this research and
development we have developed a detection systems to test shellfish for certain
red tide toxins, and a system to cleanse shellfish by lowering certain toxin
levels.
We will continue to utilize research and development skills of our own
scientists and those of various consultants from the world of academia,
government and private industry, as well as the proceeds from this offering to
develop viable solutions to problems relating to the food chain, caused by
today's ever changing world, that one way or another effects all of humanity.
BUSINESS STRATEGY
Our strategy is to continue to expand as a niche participant in the
specialized animal feed and immunology market worldwide. We intend to continue
to turn our research and development in automatic processing controls, immune
stimulants, poultry vaccines and red tide detection and cleansing systems into
commercially viable profit centers. In addition to our internal staff, we will
continue the use of outside consultants, laboratories, universities and
governmental research facilities worldwide to consult on specific projects. In
the majority of bio-technical companies an inordinate amount of funds are
initially expended on research and development, however, we have already
accounted for the majority of our research and development costs. As described
in our use of proceeds, approximately 30% of the proceeds will be used for the
further development of certain immune stimulants, vaccines, and red tide
detection and cleansing systems. Further, as we have done in the past and should
the need arise, we will seek strategic partnerships for the production and
marketing of our products.
OVERVIEW OF OUR OPERATIONS
Principal executive management, financing, marketing and operations support
functions are conducted at the Company's Santiago, Chile headquarters. Upon
closing we will maintain an office in Boca Raton, Florida which will be used for
shareholder relations as well as conducting and assisting with U.S. business
matters.
Our experience within the animal feed industry and the strong linkage
between the animal feed market and nutrition, health and research created an
opportunity and natural transition to commence research and development in areas
such as automatic control, poultry vaccines, immune stimulants and red tide.
Attempting to alleviate the problems that effect our suppliers and customers,
our numerous research and projects have led to the development of automatic
control processing for fish meal, viral vaccines for localized poultry disease,
immune boosters to be applied in the salmon industry (which may be applied to
the farm shrimp industry) and red tide toxin diagnostic and cleansing kits.
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<PAGE>
BROKERAGE BUSINESS
We believe that we may be the only broker/purveyor in the world that
incorporates technical knowledge in the field of fish meal, feather meal and
krill meal. We not only trade these products, but more importantly, have a
selection procedure based on our knowledge and laboratory testing so as to
provide the correct nutrient blended product on a market by market basis. In
addition, we have and will continue to send our technical staff to the producers
of these products in order to assure quality control and to advise them on how
to produce the TepualTM and InualTM branded products.
Fish meal sales
Fish meal is a powder obtained from cooking, drying and grinding raw fish.
Fish meal is a rich protein source and an essential ingredient in feedstuffs in
pet food, animal feed and fish feed. Depending upon the customer and its use,
the nutrient levels of fish meal are extremely important.
Our locations in Chile and Peru place us within close proximity to one of
the largest sources of fish meal in the world. Chile and Peru (which borders
Chile) are responsible for over one-fourth of the fish meal produced worldwide
and for 65% of all fish meal exported. The International Fishmeal and Oil
Manufacturers Association (IFOMA) reported 4,749 thousand tons (TT) or $1.5
billion of fish meal was produced and sold in 1998. We have developed and
maintained long term relationships with Chilean and Peruvian fish meal
processing companies that benefit our brokerage and trading which to date,
account for a substantial amount of our revenues.
Through our TepualTM and InualTM brands we certify that the fish meal we
sell has the highest possible nutrient levels and lowest toxicity levels. Our
TepualTM and InualTM branded products are sold to customers worldwide. There are
many suppliers of fish meal in Chile and Peru. We are only limited by our
certification standards, in our ability to use all of these production sources.
Currently we purchase our fish meal from ten fish meal producers in Chile
and five fish meal producers in Peru. All of these companies adhere to our
certification standards. There are approximately 165 other fish meal producers
in Chile and Peru of whom we could also use to satisfy our fish meal supply
needs, assuming that these producers can meet our high nutrient and low toxicity
standards.
Additional products
Due to El Nino and fishing restrictions, resulting in a lack of fish meal,
we began researching alternative sources of animal feed protein. This research
resulted in the application of chicken feathers and krill as a rich source of
protein.
Feather meal sales
We began selling chicken feather meal in 1997. Feather meal is a rich
source of protein and therefore, we have found that feather meal can be a
partial replacement for fish meal. Today we are selling feather meal to animal
feed producers in Chile and other
25
<PAGE>
countries. We initially researched the potential value of this poultry byproduct
when fish meal prices increased significantly. Since we introduced feather meal
as a source of protein, this product has become an acceptable alternative for
feed producers. In 1997 we began (and continue today) to process and certify
feather meal. Today we sell approximately 600 tons of feather meal per month
with Chile and Brazil providing us with sources for our feather meal. Our
principal customers are: Alitec, Alimentos Technicos Limitada, Biomaster S.A.
and Ecofeed. These customers are farmed salmon feed producers and are all
located in Chile.
Although present feather meal sales are limited, we believe that as this
product gains wider acceptance it may replace up to 5% to 10% of the fish meal
market worldwide. We believe, that regardless of the future price of fish meal,
there will remain a commercially viable market for feather meal due to its
excellent quality and nutritional value.
Our supply of feathers comes from approximately five poultry farms in
Brazil. These feathers are a byproduct of the poultry industry. We believe our
supply of feathers is unlimited.
Krill
Krill are tiny shrimp-like creatures found in the Antarctic waters. We have
found that krill, in addition to being a source of protein, has additional
nutritional values. Krill may be used as an additive to feed to improve taste
and as a color enhancer. Due to its nutritional and other benefits, we believe
that krill will be widely used and in high demand throughout the shrimp and
salmon feed industries.
We have initiated a research and development program to blend krill with
certain agricultural products, mainly as a complement to vegetable proteins, to
produce a cost effective product with nutrient levels similar to or higher than
quality fish meal. Krill meal also provides pigmentation (red coloring) to
salmon. As of September 30, 1999, the cost of producing krill meal is
approximately $700 per metric ton and it is sold for approximately $1,270 per
metric ton. We believe that in the future the cost of producing krill meal will
decrease which will allow krill meal to compete with fish meal. We also believe
that the price of fish meal will increase in the future due to possible
shortages in aquaculture supply (such as mackerel and anchovies). In the future
we may also expect an increase in krill meal production and an improvement in
krill meal processing, which would likely contribute to a drop in the price of
krill meal. Under these scenarios krill meal would become an important
ingredient for the animal feed industry. Accordingly, we believe our present
involvement with krill will provide us with an opportunity to become
significantly involved in the krill meal business.
We have begun to open markets in countries throughout Europe, Asia and
Japan and to insure a consistent supply of krill Tepual has entered into a joint
venture with Kelor Trading, Ltd., an Irish fishing company. Under this agreement
Tepual has provided financing for Kelor Trading's krill fishing operations. This
financing is for the preparation of a Kelor Trading vessel to operate in
Antarctic waters. Tepual has agreed to lend Kelor Trading up to $2 million,
repayable over 18 months at an interest rate of 13.5%, and provide specialized
krill fishing technology, machinery and equipment for a Kelor Trading
26
<PAGE>
vessel in return for the exclusive rights to broker 100% of Kelor Trading's
sales of krill and related products and conduct research and development
projects on Kelor Trading's vessels. As of September 30, 1999, Tepual has lent
Kelor Trading approximately $887,000. Kelor Trading has agreed to pay Tepual a
brokerage commission of 3% over the F.O.B. sales and $20.00 per ton of krill
meal and 5% for krill oil. This agreement gives Tepual the right to utilize
Kelor Trading's krill fishing operations and facilities to perform research and
development relating to krill. The use of Kelor Trading's operations and
facilities enables Tepual, and will enable us, to perform research and
development in this area at a minimal cost.
Competition within the nutrient industry
There are many companies that are larger and have better resources than us
that are producers and sellers of fish meal. We believe that based on our
reputation for selling high nutrient and low toxicity fish meal under the
InualTM and TepualTM brands we are able to retain our market share.
All of our feather meal sales to date have been to animal feed producers in
Chile. We believe we are the premier seller of feather meal in Chile. We believe
that we may face competition from other companies that could have better
resources than us if we expand our feather meal business outside of Chile and
Brazil.
Future of the nutrient industry
The demand for nutrient supply will continue to grow, only limited by the
availability of high quality ingredients. Today's shortage of fish meal drives
the market to look for substitutes. This will require a strong input in research
and development to develop better proteins and more efficient processing.
Furthermore, increased awareness into the components of animal feed and their
impact on human health should have an effect on the quality of ingredients in
demand. We believe that we have a strong position in the market, because of our
long history in research and development, and quality assurance. We believe that
we have an enviable reputation in today's animal nutrition market. Moreover, our
international customer list should provide us with an opportunity to capitalize
on the current strengths and weaknesses in this market. Set forth below is a
substantial list of our past and present customers.
27
<PAGE>
PAST AND PRESENT PARTIAL CUSTOMER LIST
<TABLE>
<CAPTION>
CUSTOMER NAME COUNTRY PRODUCT
- -------------------------------------------------------- ---------------- ------------------------
<S> <C> <C>
Ridley Agriproducts..................................... Australia Fish Meal
Agribrands Purina Do Brazil Ltda........................ Brazil Fish Meal
Ewos Canada Ltd......................................... Canada Fish Meal and Krill Meal
Alitec, Alimentos Tecnicos Limitada..................... Chile Feather Meal
Biomaster S.A........................................... Chile Feather Meal
Cultivos Marinos........................................ Chile Feather Meal
Ecofeed................................................. Chile Feather Meal
Ewos Chile.............................................. Chile Feather Meal
Trouw Chile S.A......................................... Chile Feather Meal
Acondesa (Alimentos Concentrados del Caribe S.A.)....... Columbia Fish Meal
Albatez S.A............................................. Columbia Fish Meal
Concentrados del Norte S.A.............................. Columbia Fish Meal
Concentrados S.A........................................ Columbia Fish Meal
Finca S.A............................................... Columbia Fish Meal
Nutridias............................................... Columbia Fish Meal
Purina Colombiana S.A................................... Columbia Fish Meal
Aller Aqua AS........................................... Denmark Fish Meal
Agrinpaca C.A........................................... Ecuador Fish Meal
Alimentos Balanceados S.A............................... Ecuador Fish Meal
Alimentsa, Dletas y Alimentos S.A....................... Ecuador Fish Meal
Diamante Del Mar S.A. Diamasa........................... Ecuador Fish Meal
El Rosario S.A.......................................... Ecuador Fish Meal
Procesadora Nacional de Aves, Pronaca................... Ecuador Fish Meal
Propellets S.A.......................................... Ecuador Fish Meal
Pan Animal Feed......................................... Egypt Fish Meal
Collvi.................................................. Spain Fish Meal
Sopropeche.............................................. France Krill Meal and Fish Meal
Zootechniki Korinthias S.A.............................. Greece Fish Meal
Provimi B.V............................................. Holland Fish Meal
Tesgofarm Aqua B.V...................................... Holland Fish Meal
Grupo Alcon, S.A., Division Nutricion Animal............ Honduras Fish Meal
Higashimaru Feeds (India) Ltd........................... India Fish Meal
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NAME COUNTRY PRODUCT
- -------------------------------------------------------- ---------------- ------------------------
<S> <C> <C>
Livestock Feed Limited.................................. Moriches Islands Fish Meal
Maruehni Corp........................................... Japan Fish Meal and Krill Meal
Mitsubishi Corporation Tokyo............................ Japan Fish Meal
Nagase Co., Ltd......................................... Japan Fish Meal
Shintoa Corp............................................ Japan Fish Meal and Krill Meal
Transpac Fisheries, Ltd................................. Japan Fish Meal
Easy System, Inc........................................ Korea Fish Meal and Krill Meal
Aceitera La Junta, S.A. de C.V.......................... Mexico Fish Meal
Agribrands Purina Mexico, S.A. de C.V................... Mexico Fish Meal
Proteinas Marinas Y Agropecuarias, S.A. de C.V.......... Mexico Fish Meal
Bio Mar................................................. Norway Krill Meal
Nor Aqua Innovation AS.................................. Norway Fish Meal and Krill Meal
Moulin de St. Vincent................................... New Caladonia Fish Meal
Sica--NC................................................ New Caladonia Fish Meal
Epol Pty Ltd............................................ South Africa Fish Meal
Hochfeld Commodities (Pty) Limited...................... South Africa Fish Meal
Meadow Feed Pietermaritzburg............................ South Africa Fish Meal
C.P..................................................... Thailand Krill Meal
Great Wall Enterprise Co., Ltd.......................... Taiwan Fish Meal
Harinas Co., Ltd........................................ Taiwan Fish Meal
Ye Cherng Industrial Products Co., Ltd.................. Taiwan Fish Meal
Pinar Yem Sanayi ve Pazarlama A.S....................... Turkey Fish Meal
Wilbur Ellis Company.................................... U.S.A. Krill Meal
Bio Products, Inc....................................... U.S.A. Fish Meal
H. J. Baker............................................. U.S.A. Krill Meal
Bocm Pauls Ltd.......................................... U.K. Fish Meal
Dalgety................................................. U.K. Fish Meal
Trouw................................................... U.K. Krill Meal
Chinfon (VN) Livestock Co., Ltd......................... Vietnam Fish Meal
</TABLE>
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<PAGE>
Material Customers
Our principle revenues are generated through our sale of fish meal, feather
meal and krill meal. Our material brokerage customers are the principle source
of our total revenues. Listed below are our material customers for the first
three quarters of 1999 and an approximate percentage of our total revenues that
they each accounted:
<TABLE>
<CAPTION>
CUSTOMER PERCENTAGE OF TOTAL REVENUES
- ------------------------ ----------------------------------
<S> <C>
Bradwell Business
Corp................. 17%
Agribrand Purina........ 12%
Ecofeed Chile........... 10%
Nor Aqua................ 10%
Alitec.................. 10%
</TABLE>
AUTOMATIC CONTROL
The current worldwide market for fish meal, according to IFOMA, is
approximately $1.5 billion. Fish meal plants are principally located in Chile,
Peru and, to a lesser extent, in Equador. We believe there are approximately 180
fish meal plants throughout Chile and Peru.
In the fish meal industry higher nutrient levels have a direct relationship
with higher prices and profits for the producer. Our automatic fish meal
processing control system facilitates the production of the highest nutrient
level fish meal, while avoiding toxicity, and therefore, we believe provides the
highest possible profit margin for the producer.
Through our involvement as a purveyor of fish meal on a worldwide basis, we
have been developing and manufacturing a computerized process for the processing
of fish meal since 1993. Our research for developing an automatic processing
system began with studying the general processing conditions for the fish meal
industry. We developed simple strategies based on normal conditions of a fish
meal processing plant, while taking into account the skilled operator's working
procedures. By developing and manufacturing an automatic control process for
fish meal production we have developed a system that produces quality fish meal
while assuring efficiencies in a production process which has been subject to a
high level of spoilage and has been subject to different variables. These
different variables are largely due to the variety of fish and composition of
raw materials used to produce fish meal, which change daily depending on
availability.
The fish meal industry currently incorporates little automatic control
within its production process. Automatic control has not been a main concern for
the fish meal industry, giving priority to other aspects, such as plant capacity
increases and fleet increases. This common pattern shown by the industry gives
us a vast field of application because the automatic control becomes crucial for
high capacity plant operation in order to maximize efficiencies and maintain or
improve quality. Today most fish meal processors manually control quality
throughout all stages of production, a flawed and inefficient process. Under
normal operating conditions, fish meal must be produced and samples must be
tested prior to any adjustments being made.
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<PAGE>
Our computerized and centralized automatic control system allows fish meal
processors to determine the composition and quality of fish meal before it is
produced, rather than adjusting processing equipment after the final product is
tested. The current process requires constant taking and analyzing of samples
and monitoring of machinery by a processing plant's labor force. Our
computerized and centralized control system reduces the number of employees
needed, and allows for full supervision of the production process from a
centralized location rather than multiple locations throughout the process. We
believe that our automatic control will enable a producer of fish meal to ensure
the quality of its product, increase speed, maximize efficiencies and reduce
labor.
During 1998, we began marketing and selling our automatic control system to
the fish meal industry. These units currently sell for $400,000 to $800,000.
There are two installations in operation today--both in the South of Chile which
were sold during the latter part of 1998. The purchasers of these systems have
not encountered any significant problems. Issues which have arose have been
mostly related to adjustments, such as water and heating levels. Since
completion of the installations, we have expended approximately $9,000 on both
systems relating to adjustments and general merchandise.
We are presently negotiating to install another system in Chile which
should be completed in 12 months and we anticipate an additional two sales in
the near future. Chile has approximately 40 fish meal processing plants and Peru
has approximately 140 fish meal processing plants. We anticipate additional
sales in both of these markets. We are not aware of any other competitive
automatic control system currently being produced in these markets.
IMMUNE STIMULANTS
Salmon farming
As reported by the Aquaculture Magazine in 1999, in its Chile aquaculture
report: A Focus on Salmon, Chile is the second largest salmon producer in the
world, with yearly sales of more than $600,000,000. While salmon are not native
to Chile, today the country accounts for 60% of the U.S. salmon market and over
40% of the world's salmon production, with predictions reaching 50% to 60%
within the next five years. The cultivation of salmon is a two year process. It
has flourished in the south of Chile because of the region's ideal weather and
environmental conditions. Today there are approximately 55 companies, operating
over 300 individual salmon farm projects in Chile.
The Chilean salmon market, as with any aquaculture project, has to contend
with various diseases which are unique to Chilean salmon. The rickettsia
bacteria is one of these unique diseases. We believe that to date there is no
vaccine available to successfully combat this bacteria. Chilean salmon fisheries
have reported losing approximately 15% to 35% of its stock to disease and it is
possible for a farm to lose the majority of its stock to disease. We began
researching and developing immune stimulants in an attempt to reduce these high
mortality rates. We performed our initial tests on 200,000 salmon ranging in age
from 6 to 8 months. These tests were performed at two salmon farms located in
Southern Chile. Based on our internal test results our management believes that
we have developed oral and injectable immune stimulants which reduce the
mortality rates in farmed salmon to
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approximately 8% to 10%. We continue to evaluate our immune stimulant test
results from the salmon farms in Southern Chile.
We believe our immune stimulant will decrease the use of antibiotics on
farmed salmon. In December 1998, "Revista Aqua Noticias," a Chilean salmon
producer trade periodical, reported the use of antibiotics in Chile for disease
control in salmon was over 85,000 kg. This figure, in comparison to Norway, is
very high. Revista Aqua Noticias also reported that Norway, with almost twice
the production of salmon, uses only 300 kg. of antibiotics. The high use of
antibiotics has created serious problems in Chilean salmon farming, such as
higher bacterial resistance, higher doses applied, higher number of treatments
to get similar efficiency, and continuous replacement of antibiotics.
Regulations also forbid farmers to harvest fish when antibiotic treatment is
being applied and growing regulations in this area are being established in the
other major fish farming countries. We believe that immune stimulants can
significantly reduce the use of antibiotics, therefore eliminating the problems
the overuse of antibiotics has created and avoiding government regulation that
controls the use of antibiotics.
Immune stimulants are a recent phenomena and are 100% natural. Therefore,
oral immune stimulants are not presently subject to specific government
regulation. The commercial production of injectable immune stimulants must be
done in Chilean veterinarian laboratories that meet government specifications.
These specifications are established by the Servicio Agricola y Ganadero, the
Chilean department of agriculture. Immune stimulants produced in these labs must
also individually meet specifications. Upon commencement of our commercial
production of injectable immune stimulants we will enter into an agreement with
a qualified veterinary laboratory. We intend to file patent applications for our
immune stimulants.
As of September 30, 1999, there were no sales of our salmon immune
stimulants. During the past three months we have continued to test these immune
stimulants with three salmon farms. These tests will continue. On completion of
these tests we will sell our immune stimulants throughout Chile, however, we
cannot provide any assurances that the test results will be successful.
Depending on the success of the salmon immune stimulants, we will expand our
research and development to other farm aquaculture production industries. We
have already commenced a research and development project for shrimp immune
stimulants.
We believe that we do not face any competition with respect to our
injectable immune stimulants. There is a Norwegian company and a U.S. company
that have developed oral immune stimulants and are attempting to sell immune
stimulants to salmon farmers in Chile.
Shrimp farming
Should the initial immune stimulant testing with salmon prove to be
successful then we will continue to expand our research and development to
shrimp farming. We have observed, through direct contact with our Asian fish
meal customers and other sources, that the mortality rates for farm raised
shrimp are significantly higher than those for salmon. As reported in 1992 by
Dr. Douglas Andersen in his article "Immunostimulants, Ajuvants, and
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Vaccine Carriers in Fish: Applications to Aquaculture," illnesses such as Yellow
Head Virus or Taura Virus, have caused economic disasters throughout the Asian
and South American farmed shrimp market. The first country destroyed by an
epidemic was Taiwan, where the production fell in 1988 from 100,000 tons per
year to only 30,000 tons per year, and eventually disappeared.
Thirty percent of worldwide production of shrimp comes from cultivation and
reaches 700,000 tons yearly. The largest worldwide production (550,000 tons) is
found in Asia, in countries such as: Indonesia, China, India and Vietnam. The
remaining production (150,000 tons) is found in South America (Ecuador and
Colombia) and Central America (Mexico, Honduras and Panama). However over the
last few years there have been strong variations in the production levels due to
bacterial and viral illnesses.
The mortality rate in farmed shrimp, as reported by Dr. Douglas Andersen,
ranges from 30% to 70% and current methods to control disease, such as vaccines
and antibiotics, have not been successful. We believe that current vaccines and
antibiotics available for pathogens of major commercial impact are ineffective.
Therefore, genetic selection in order to obtain a more resistant shrimp to
illness, better cultivation strategies, and immune stimulants seem to be the
future tools for disease prevention and reducing mortality rates.
The immune system in shrimp is less developed than in vertebrates and
research in this area is very recent. Shrimp are primarily dependent on
non-specific immune processes for their resistance to infection. They do not
produce antibodies as in the case of mammals. Therefore, substances like immune
stimulants, might become an important tool to reduce diseases of crustaceans in
aquaculture due to their role as "alarm molecules" that activate the
non-specific immune system in shrimp.
We are working on developing an effective immune stimulant for shrimp.
Research is presently in the preliminary stage. A multiprofessional team in the
field of shrimp and immunology led by our researchers will analyze shrimp immune
responses and will identify the main factors affecting these responses. We have
worked with distinguished professionals in this field. In the area of basic
immunology we have worked with Professor Rolf Seljelid (University of Tromso in
Norway) and with Dr. Elizabeth Cruz (Universidad de Nuevo Leon in Mexico). Dr.
Seljelid and Dr. Cruz have expressed interest of being part of our research
team. It is anticipated that their employment and compensation will be discussed
within the next few months.
POULTRY VACCINES
We have supplied poultry feed manufacturers, mostly located in Peru and
Chile, with certified fish meal since 1989. This ongoing relationship alerted us
to specific diseases that have not been cured by the use of conventional vaccine
products offered in the market.
As a result of our research and laboratory testing, we believe that the
major weakness with conventional vaccines are that they are not specific to the
regions in which a disease is found. We have determined that the specific
strains of diseases affecting poultry are unique to each region and therefore
need specific responses and treatment. We have developed vaccines along with
diagnostic and production laboratories to address the specific needs of Chilean
poultry producers and have become the first Chilean producer of
33
<PAGE>
poultry vaccines. These vaccines have been registered in Chile and in June 1999
we received re-approval (we opened a new laboratory in Santiago, Chile which
required separate approval) by the Chilean government to sell vaccines
throughout Chile.
We began developing poultry vaccines by isolating the viruses and bacteria
in diseased poultry. The isolated strains of virus and bacteria was then
modified through chicken embrio passages. Through this process we developed
non-pathogenic strains that remained immunogenic. These strains are vaccines.
Today we are producing niche vaccines to treat the following diseases:
-- Bronchitis Infection in two presentations for two different
pathologies
-- Hepatitis
-- Coriza infection
-- Salmonella enteritidis and its combinations
-- Combinations of all of the above
In order to market our vaccine sales in Chile, in April 1997 Tepual entered
into a marketing agreement with Biosur S.A., a Chilean corporation 95% owned by
Paulina and Andrea Rutman through their interest in Atik and 5% owned by Max
Rutman. Biosur S.A. is engaged in the distribution of veterinary products
throughout Chile. Under this agreement, Biosur S.A. has agreed to buy and
distribute 100% of the vaccines that Tepual produces in Chile. In consideration
of this exclusive right to buy and distribute, they will purchase from Tepual a
minimum of $40,000 of Chilean vaccines per month. From January 1999 through June
1999, there were not any sales of Chilean vaccines while Tepual was waiting for
re-approval of its new laboratory. Tepual received the requisite approval during
June 1999 and has recently commenced sales of Chilean vaccines. Tepual believes
that the new facility is more than adequate to meet the production demands
anticipated from the sale of these vaccines.
In 1995 we began the production of vaccines specific to the unique strains
of disease found in Peru, utilizing a laboratory similar to their Chilean
counterpart. To accomplish this, Tepual entered into a licensing agreement with
Biosur, S.A.C., a Peruvian company (Biosur S.A.C. is an unaffiliated third
party). Under the terms of this agreement, Biosur, S.A.C. will manufacture and
market all of our poultry vaccines in Peru and will pay Tepual a 13% royalty on
gross sales. As of September 30, 1999, Biosur S.A.C. had sold approximately
$300,000 of Peruvian vaccines. Our vaccines have been approved for sale by the
Peruvian Ministry of Agriculture. There is currently no patent protection for
the Peruvian vaccines. Tepual has also given Biosur S.A.C. the right to
manufacture and market poultry vaccines in Ecuador and Bolivia if and when such
vaccines are developed.
We believe the same pathologies exist in Argentinean, Brazilian, Ecuadorian
and Bolivian poultry, and therefore are studying the production and sales
possibilities of vaccines in these countries. Based upon our preliminary
testing, we plan to expand research within Argentina, Brazil, Ecuador and
Bolivia in the future. The chart below indicates the size of the poultry market
in countries in which we have developed or may develop
34
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vaccines for commercial sales. This information was taken from Empresas Lideras
99, a Chilean business journal.
<TABLE>
<CAPTION>
1998 POULTRY PRODUCTION LEVELS
CHICKENS
- ------------------------------------------------------------
<S> <C>
Argentina................................................... 360,000,000
Bolivia..................................................... 41,000,000
Brazil...................................................... 3,000,000,000
Chile(1).................................................... 156,000,000
Ecuador..................................................... 67,000,000
Peru(1)..................................................... 220,000,000
--------------
Totals...................................................... 3,884,000,000
--------------
</TABLE>
- ------------------
(1) Peru and Chile are currently the only countries in which we have developed
or produced vaccines for commercial use.
RED TIDE DETECTION AND CLEANSING
Blooms of toxic or harmful microalgae blooms, commonly called red tide,
occur when either natural or human factors cause a rapid increase in the
production of one-celled organisms (dinoflagellates and diatomeas), which
ordinarily grow in water rich in nitrogen and phosphorus. Red tide has occurred
in every coastal country in the world. Litoral contamination by man is one of
the major causes for the stimulation of microalgal blooms. Microalgae play an
important role in the marine biological system. With their photosynthetic
ability, they are the major producer of biomass and organic compounds in the
ocean. In most cases, the proliferation of plankton algae is beneficial
aquaculture and wild fisheries. However, some plankton algae have the capacity
to produce potent toxins and in some circumstances these algal blooms produce
negative effects, causing severe economic losses to aquaculture, fisheries and
tourism, with environmental and health impacts.
The term red tide is generally a misnomer because they are not associated
with tides; are not usually harmful; and those algal blooms that are harmful may
never even reach the densities required to discolor the water. Unfortunately,
however, a small number of algal blooms produce potent toxins that can be
transferred through the food web where they can affect and even kill humans.
Humans are principally exposed to the naturally occurring toxins produced by the
harmful algae through the consumption of contaminated shellfish. According to
the U.S. National Office for Marine Biotoxins and Harmful Algal Blooms, the most
significant public health problems caused by harmful algae are:
Paralytic Shellfish Poisoning (PSP)
Diarrhetic Shellfish Poisoning (DSP)
Ciguatera Fish Poisoning (CSP)
Neurotoxic Shellfish Poisoning (NSP)
Amnesic Shellfish Poisoning (ASP)
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<PAGE>
Each of these syndromes are caused by different species of toxic algae
which occur in coastal waters all over the world. Common impact of red tide
includes mass mortalities of wild and farmed fish. However, humans may be
severely effected by red tide illnesses.
Human consumption of PSP toxic shellfish may result in death or paralysis
in extreme cases. Paralytic toxins are responsible for PSP and they comprise a
collection of different toxins. The main toxins found in shellfish can be
classified in three main groups:
-- Saxitoxin group (STX and neoSTX),
-- Gonyautoxin group (GTX1, GTX2, GTX3 and GTX4) and
-- N-sulfocarbamoyl group (C1, C2, C3 and C4).
Human consumption of DSP toxic shellfish may cause severe diarrhea, nausea,
vomiting, cramps and chills. Diarrhetic toxins are responsible for DSP and they
comprise a collection of four different toxins. These toxins are:
-- Okadaic acid (OA),
-- Dinophysis toxin 1 (DTX1),
-- Dinophysis toxin 2 (DTX2) and
-- Dinophysis toxin 3 (DTX3).
36
<PAGE>
COUNTRIES WITH RED TIDE AND THEIR NOMINAL CATCHES OF SHELLFISH*
<TABLE>
<CAPTION>
CATCHES
COUNTRY RED TIDE(1) (METRIC TONS)*(2) % WORLD(2)
- ------------------------------------------------------ ------------------------- ----------------- ----------
<S> <C> <C> <C> <C>
China................................................. PSP 1,041,709 30.86
USA................................................... PSP 660,766 19.57
Japan................................................. PSP DSP 411,413 12.19
Philippines........................................... PSP 150,861 4.47
Canada................................................ PSP DSP 120,497 3.57
Korea Republic........................................ PSP 120,004 3.55
Denmark............................................... PSP DSP 106,864 3.17
Thailand.............................................. PSP 101,916 3.02
Chile................................................. PSP DSP 96,151 2.85
Italy................................................. PSP DSP 65,523 1.94
United Kingdom........................................ PSP 56,954 1.69
Indonesia............................................. PSP DSP 51,766 1.53
Netherlands........................................... DSP 44,423 1.32
Mexico................................................ PSP DSP 36,469 1.08
France................................................ PSP DSP 33,313 0.99
Turkey................................................ 28,618 0.85
Venezuela............................................. PSP 28,496 0.84
Peru.................................................. 24,993 0.74
Australia............................................. PSP DSP 24,529 0.73
Vietnam............................................... PSP DSP 23,110 0.68
Norway................................................ PSP DSP 12,264 0.36
Iceland............................................... DSP 12,080 0.36
Malaysia.............................................. PSP 11,017 0.33
Russian Fed........................................... PSP 10,009 0.30
Portugal.............................................. PSP DSP 8,861 0.26
Greece................................................ 7,801 0.23
New Zealand........................................... PSP DSP 6,810 0.20
Ireland............................................... PSP DSP 6,734 0.20
Spain................................................. PSP DSP 6,279 0.19
--------- ------
TOTAL................................................. 3,310,187 98.05
--------- ------
World Total........................................... 3,375,997 98.05
========= ======
</TABLE>
- ------------------
* average of nominal catches 1987-1996
(1) Source: J.J. Landsberg: Shellfish RES, 1996
(2) Source: Food Agricultural Organization (FAO): 1997 Fishery Statistics
Currently there is not any way to prevent red tide and not any way to clean
or detoxify contaminated shellfish. Today the only acceptable detection method
for PSP and DSP is a mouse bioassay test. PSP mouse bioassay is used as the
official testing method worldwide, however, the DSP mouse bioassay is only used
in a few countries as the official method. These tests consist of injecting a
mouse with shellfish extracts under
37
<PAGE>
laboratory conditions and waiting for a reaction. If the mouse dies, the sample
is considered toxic. While this method is considered the official testing method
for red tide, it has weaknesses. Some countries do not permit testing on animals
and therefor prohibit the mouse bioassay test. In countries that do permit
animal testing for toxin detection, animal regulations require that this test
only be administered under laboratory conditions. Therefor the mouse bioassay
test does not allow on site testing and does not permit immediate results.
Moreover, the DSP mouse bioassay is not a specific nor sensitive assay.
We have been working for seven years in red tide research for the
development of DSP and PSP red tide detection kits with more practical
applications than the mouse bioassay test and a decontaminating/cleansing
technology to remove toxins from contaminated shellfish. The advantages of our
testing methods for detecting PSP and DSP over other current processes are
twofold. Our methods allow for testing without the use of animals. Since our
tests do not require the use animals, the laboratory space our testing methods
require is smaller.
Red tide detection kits
DSP
We have developed, for laboratory use, a diagnostic kit for the detection
of DSP toxins. This kit determines DSP toxicity based on a colorimetric
evaluation. Under this method, toxins are detected though samples extracted from
the shellfish's hepatopancreas.
Our DSP kit is an enzymatic assay of a protein phosphatase. A protein
phosphatase is a macro molecule that is responsible for releasing phosphate
within living cells. It is an enzyme used by a living cell to control
metabolism. An enzyme is a protein produced by living animal cells that enable
chemical reactions. Our DSP kit uses an isolated protein phosphatase for
detecting toxicity. Since DSP toxins inhibit a protein phosphatase at an
extremely low level, we have developed our colorimetric assay to inhibit sample
enzyme extracts in proportion to the levels that toxins are present. Reactions
in the colorimetric assay will produce a color to indicate toxicity.
Our DSP kit can detect all diarrhetic toxins. Our conclusions have recently
been presented by Mario Chong, one of our researchers, at the International
Meeting on Red Tide. This meeting was held in Puerto Varas, Chile, during the
first two weeks of August 1999.
This kit is being introduced in the Chilean market and was presented in
1998 at the Second Convention of Harmful Algae Blooms (Segundo Taller de
Floraciones de Algas Nocivas), an international conference on red tide,
sponsored by the National Oceanographic Committee, a division of the Chilean
Navy. We are preparing our marketing and commercialization of the kit and there
is currently no patent for this technology. While we intend to file for patents,
there can be no assurances that we will obtain patent protection.
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<PAGE>
PSP
We are also developing PSP diagnostic kits. To that effect we have
developed techniques using antibodies to isolate PSP toxins as well as
analytical and toxicological methods using antibodies to quantify and qualify
PSP toxins. These methods involve extracting acid fluids from a shellfish to
detect whether the shellfish contains PSP toxins through the analyzation of the
fluids. These methods will detect PSP toxins from the acid extracts of shellfish
determining whether the specific shellfish actually contains toxins. We have
developed certain procedures to isolate and purify the three main groups of PSP
toxins (saxitoxin, gonyautoxins, and sulfocarbamoyl) as well as analytical and
toxicological methods to quantify and to qualify each PSP toxin.
Our PSP kit consists of an immunoassay. In our immunoassay, toxins are
bound to a biopolimer to make the PSP toxin conjugates. Conjugates are necessary
to generate antibodies. PSP toxin specific antibodies were developed using these
conjugates. These antibodies are used to detect PSP toxins in shellfish,
gastropods and crustacean extracts. This kit also is a colorimetric assay and
the color is correlated to the amount of toxin present in the sample extract. We
have developed antibodies against saxitoxin, gonyaulatoxin and sulfocarbamoyl
toxins that are used in our kit to detect all PSP toxins. Until now, PSP toxins
and correlating conjugates have been impossible to obtain. We believe that
before our technology, no one has developed antibodies which cover the three
major groups of PSP toxins (saxitoxin, gonyaulatoxin and sulfocarbamoyl toxin
groups).
Production of kits
Through a joint venture with Centro de Estudios Cientificos de Santiago
(CECS), a Chilean private non-profit research company, we have produced an
antitoxin test system. This antitoxin test system was developed from the
antitoxin "saxitoxin," of which the intellectual rights to the antitoxin
saxitoxin are exclusively held by CECS. We have acquired a 50% ownership
interest in this antitoxin test system. We believe this antitoxin test system
has enabled us to develop a PSP detection test for specific PSP toxins which can
be used in specialized laboratories. This method, consistent with our
methodology described above, will extract and analyze acid fluids from a
shellfish to detect whether the shellfish contains specific PSP toxins. We are
solely responsible for the commercialization of this antitoxin test system. By
contract with CECS we will receive 60% of all the benefits of any licensing,
royalties or sales limited to this antitoxin test system while the remaining 40%
shall accrue to CECS.
By agreement, dated June 20, 1998, between Tepual/CECS and R-Biopharm GmbH,
a German company, Tepual and CECS have agreed to supply R-Biopharm GmbH with
antibodies necessary to produce PSP ELISA Test Kit. R-Biopharm GmbH will
manufacture and distribute the PSP ELISA Test Kit under the trademark
"RIDASCREEN." This agreement provides that Tepual and CECS will receive
royalties of 12.5% of the net sales of the PSP ELISA Test Kit, of which Tepual
will receive 60% (consistent with our agreement with CECS), for 10 years dated
from the execution of the agreement. We believe that this PSP ELISA Test Kit
will begin to be sold commercially during the first quarter of 2000. R-Biopharm
GmbH will also pay a minimum royalty of $5,000 during
39
<PAGE>
1999 and a minimum of $15,000 for each remaining year under this agreement. This
payment constitutes minimum royalties against the 12.5% of net sales on an
annual basis.
Under a separate agreement, dated June 20, 1998, between Inual and
R-Biopharm GmbH, Inual has agreed to supply R-Biopharm GmbH with all toxins and
conjugates necessary to produce the PSP ELISA Test Kit. This agreement provides
that Inual shall receive royalties of 12.5% of the net sales of the PSP ELISA
Test Kit for 10 years dated from the execution of the agreement. R-Biopharm GmbH
will also pay a minimum royalty of $5,000 during 1999 and a minimum of $15,000
for each remaining year under the agreement. This payment constitutes minimum
royalties against the 12.5% of net sales on an annual basis. In addition to this
12.5% royalty, Inual shall receive $400,000, from R-Biopharm GmbH in
consideration for supplying R-Biopharm GmbH with a customer list for the future
potential sales of the PSP ELISA Test Kit. This payment is due two years from
the date of the agreement. Inual transferred this contract to Tepual in July
1999, and we will receive 100% of its benefits.
Through a separate agreement between R-Biopharm GmbH and Inual dated May
20, 1998, of which Inual also transferred to Tepual in July, 1999, R-Biopharm
GmbH agreed to supply Inual on a continuous demand with commercial PSP ELISA
Test Kits at a price equivalent to those of R-Biopharm GmbH's other future
distributers. This agreement will permit us to sell the PSP ELISA Test Kit in
countries including, but not limited to, Chile, the United States and Japan,
where we have the ability to market this product.
Together with CECS we have jointly applied for patents in Chile, USA,
Canada and the European Community for our antitoxin test kit, under a patent
application titled "immunoassay for the detection and quantitation of toxins
causing paralytic shellfish poisoning." While we may apply for worldwide patents
with CECS there can be no assurances that we will obtain these patents. As of
the date of this offering, we have not received any patent protection for our
antitoxin test kit.
Future developments
on site testing kits
Having developed detection kits that have shown successful results in the
laboratory, we plan to focus our efforts on the development of on site testing
kits for PSP and DSP. We believe that our current research and development may
lead to a commercial testing kit that would enable commercial shell fishers,
recreational fisherman or restaurants to test shellfish for toxicity levels on
location with a fast, economical, reliable and comprehensive kit to perform on
site PSP or DSP detection tests.
cleansing of shellfish
Through continuous research we have also developed and tested at the
laboratory level, an innovative multi-step procedure for decontaminating or
cleansing potentially PSP tainted shellfish, which may be applied in processing
plants or restaurants. We have developed technology which has enabled us in
laboratory testing to chemically remove toxins, without changing the
organolleptic (flavor, texture and color) characteristic of the
40
<PAGE>
shellfish or introducing negative environmental effects. We believe this
process, which involves dipping entire shellfish stocks in a cleansing solution
can be used in pre-cooked or canned shellfish, reducing toxicity to acceptable
consumption levels. We believe that this preventative process may be used to
guarantee safe human consumption of canned or cooked shellfish, regardless of
whether the shellfish has even been tested for PSP toxins. We have applied for
patents in Chile, the United States, Canada, Australia and the European
Community and may apply for worldwide patents.
TRADEMARKS AND PATENTS
We currently have trademark rights over the Tepual(Trademark) and
Inual(Trademark) brands in Chile, Colombia, Taiwan, China, Ecuador, Mexico (only
for Tepual(Trademark)), Japan, Peru and South Africa. As of the date of this
offering we have not applied for further trademark protection.
Patent protection for our poultry vaccines is limited to Chile and
currently only protects our Chilean vaccine for bronchitis infection. We intend
to patent our other Chilean vaccines, however, as of the date of this offering,
we have not filed nor received patent protection for any of our other Chilean
vaccines. As of the date of this offering we do not have any patent protection
for our immune stimulants.
We have applied for patent protection for our red tide paralytic shellfish
poisoning detection kit (antitoxin test kit) and our red tide paralytic
shellfish poisoning detoxification process. These patent applications have been
made in the United States, Chile, Canada, and the European Community. An
additional patent application for red tide paralytic shellfish poisoning
detoxification has been filed in Australia. We have also applied for patent
protection in Chile for a procedure to obtain krill oil.
We have received comments to our patent filings in the United States for
our red tide paralytic shellfish poisoning detection kit (antitoxin test kit)
and our red tide paralytic shellfish poisoning detoxification process and
anticipate filing responses in the U.S. Patent Office. We are unable to predict
the timing of the grants of any patents or if any patent protection can be
obtained.
PRODUCT DISTRIBUTION
Nutrient products
We have our own five person sales staff plus our chief executive officer
located in our offices in Santiago that sells all of our nutrient products
directly to customers. While our sales staff may travel throughout the world to
see clients, today's communications allows our staff to remain in constant
contact with our customers while operating out of our offices in Santiago.
41
<PAGE>
Automatic control systems
Our automatic control systems will be sold through our own internal sales
staff located in our Santiago offices.
Immune stimulants
Our salmon immune stimulants will be sold through our own internal sales
staff located in our Santiago offices. We have not established any distribution
method for our shrimp immune stimulants. Future distribution of shrimp immune
stimulants may be through agents located in the countries in which we sell our
shrimp immune stimulants or through our own internal sales staff.
Poultry vaccines
We have contracted with Biosur S.A. for the distribution of our Chilean
poultry vaccines. Biosur S.A. has the exclusive right to distribute our Chilean
poultry vaccines. We have contracted with Biosur S.A.C. for the distribution of
our Peruvian poultry vaccines.
Red tide
Our DSP kit will be distributed directly through our own internal sales
staff for all products distributed in Chile. Upon the commercial viability of
our DSP kit, we will contract with agents or independent sales forces wherever
we intend to market our DSP kit.
R-Biopharm GmbH has an exclusive option to distribute our PSP detection
kit, with the exception of Chile, the United States and Japan. In these
countries, we will determine our method of distribution at a later date. We
anticipate that we will distribute our PSP detection kit through our own
internal sales staff for PSP kits sold in Chile. Distribution of our PSP kits in
the United States and Japan may be through independent sales agents.
GOVERNMENT REGULATION
Nutrition
Our brokerage business is subject to general import and export regulations
that are not specific to our nutrient products.
Chilean and international fishing laws have and may place restrictions and
limitations on the catching of fish. Future restrictions and limitations can
have an effect on the availability of fish used in fish meal.
Krill catches are limited by the Convention of the Commission for the
Conservation of Antarctic Marine Living Resources. The aim of the convention is
to conserve marine life. This does not exclude harvesting as long as such
harvesting is carried out in a rational manner. This international body limits
the total amount of krill that can be harvested in Antarctic waters to 1.5
million tons. The total amount of krill that is currently being harvested in
Antarctic waters is about 70,000 tons.
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<PAGE>
Although we have developed numerous products, specific government
regulation of which we are subject to, and responsible for obtaining or
maintaining compliance, is limited to the products we manufacture ourselves.
Material government regulation for our self-produced products include:
Immune stimulants
The commercial production of our injectable immune stimulants is subject to
regulatory approval by the Servicio Agricola y Ganadero. The Servicio Agricola y
Ganadero is the Chilean equivalent to the USDA. We will be regulated by Servicio
Agricola y Ganadero in two ways:
1) veterinary laboratory approval; and
2) final product approval.
Once our injectable immune stimulants are ready for commercial sale, we
will seek approval from the Servicio Agricola y Ganadero. There is no regulation
for our oral immune stimulants.
Chilean poultry vaccines
The commercial production of our Chilean poultry vaccines also requires
laboratory and product approval from the Servicio Agricola y Ganadero. We have
received its approval.
Other products
Our other products, such as our Peruvian poultry vaccines and red tide
detection kits are subject to government regulation in the countries in which
they are produced. Receiving government approval and satisfying government
regulation, however, is the responsibility of the companies that are
manufacturing our products.
We also incur government regulation when we sell our products outside of
Chile. We are subject to import and export restrictions in every country that we
sell our nutrient products. No import or export law has had a material effect on
our brokerage business.
RESEARCH AND DEVELOPMENT
Our research and development division includes cooperative efforts with
academic, private and government institutions and our own highly qualified
scientists. Our internal research and development staff includes 36 employees.
Of these employees 33 are full-time employees. We believe we are able to recruit
these highly qualified employees though incentives relating to productivity. We
intend to enter into employment agreements with certain of our researchers.
These researchers will receive a royalty for products they have developed.
During 1998 and 1997, respectively, we spent $426,195 and $232,128 on research
and development (does not include software development costs).
43
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KEY PERSONNEL
Our key personnel include the following:
Nutrition and immune stimulant research
Dr. Jenny Blamey--Dr. Blamey graduated from the University of Georgia with
a bachelor degree in science. She also received a masters degree and Ph.D. in
biochemistry from the University of Georgia. Dr. Blamey has been a research
scientist for Tepual since 1994 and our research manager since 1996. Prior to
her employment with us, Dr. Blamey was a researcher of enzymes at the Center for
Metallo at the University of Georgia from 1984 until 1994. Today Dr. Blamey's
research areas include the study of hyperthermophile enzymes, protein
purification, enzymology and enzyme technology. Dr. Blamey is a member of the
Chilean Society of Biology and the Society of Molecular Biology and
Biochemistry.
Claudia Lopez--Ms. Lopez graduated from the Universidad Catolica de Chile
with a degree in biochemistry. Ms. Lopez has also received post-graduate
training from the Fermentation Research Institute in Tsukuba, Japan and the
University of Washington where she studied aquaculture. Her research areas
within Bio-Aqua include fish nutrition, fish immunology, fish pathology,
immunostimulants, feed formulation and marine pigments.
Maria Teresa Millan--Ms. Millan graduated from the Universidad Catolica de
Valparaso in Chile with a degree in biochemical engineering. She has been
working for us since 1990 and is currently in charge of our product development
division. Her research areas within Bio-Aqua include enzyme technology, feed
formulation and seafood solids.
Vaccine research
Dr. Ricardo Gallardo--Dr. Gallardo is a licensed doctor in animal sciences
and veterinary medicine. He has been involved in poultry vaccine research for
over 25 years. He is a specialist in the fields of poultry production and
poultry pathology. Dr. Gallardo is also a professor of poultry production and
pathology at the Universidad Mayor in Chile and was a professor at the
Universidad de Chile. He is a member of numerous professional organizations,
including, the College of Doctors in Veterinary Medicine, the Society of Doctors
in Veterinary Medicine and the Association of Doctors in Veterinary Medicine.
Dr. Gallardo has been working for us for 12 years where he is our lead
researcher for poultry vaccines.
Automatic control processing
Oscar Cornejo--Mr. Cornejo graduated from the Universidad de Concepcion and
Universidad Catolica Valparaiso with degrees in chemistry and chemical
engineering. Mr. Cornejo is the head of our automatic control division. He is a
member of the International Fishmeal and Oil Association (IFOMA) and an
international consultant for the Food Agricultural Organization (FAO). Prior to
working with us, Mr. Cornejo was the technical director and general manager of
Boher Chile, a leading fructose and corn syrup processor in South America.
Mr. Cornejo also served as the managing director of Compania Pesquera San Pedro,
a fish meal and canning company in Chile, for 14 years.
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<PAGE>
Pedro Sayes--Mr. Sayes graduated from the Universidad de Santiago in
Santiago, Chile with a degree in electronic engineering. He has been working for
us for 10 years in our automatic control division. Mr. Sayes designs and
develops automatic control equipment and systems for us.
Red tide
Dr. Sergio Lavandero--Dr. Lavandero graduated from the Universidad de Chile
with a degree in pharmaceutical chemistry and a Ph.D. in biochemistry. He has
been leading our toxin research projects and is the project manager for our
toxic research division. Dr. Lavandero is a professor of the Universidad de
Chile and his areas of specialty within our research divisions include
polyclonal and monoclonal antibody production, toxin pharmacology and the study
of tissue culture.
Dr. Nestor Lagos--Dr. Lagos graduated from the Universidad de Chile where
he received a degree in biochemistry, a Masters degree in biochemistry and a
Ph.D. in biology. He has also received post-doctoral training at the University
of California, Los Angeles. Dr. Lagos has led Tepual's red tide research
division since 1994. His areas of research also include marine toxins and the
isolation and purification of toxic biomolecules. Dr. Lagos is also a professor
of membrane physiology at the Universidad de Chile.
Mario Chiong--Mr. Chiong graduated from the Universidad de Chile with a
degree in biochemistry and has been a researcher and biochemist for us since
1994. Mr. Chiong's area of research includes red tide and marine toxins.
45
<PAGE>
TECHNICAL NETWORK
We have also developed an international network of scientists who are
called upon from time to time to consult with us. A partial list of our
technical network and their areas of expertise is as follows:
Nutrition
<TABLE>
<S> <C>
Aquaculture
Professor Ron Hardy............................ Idaho University, USA.
Professor Addison Lawrence Texas............... A&M University, USA.
Dr. Dean Akiyama............................... Technical Director of Japfa, Indonesia.
Dr. Lucia Elizabeth Cruz....................... Facility of Biological Sciences, Universidad
Autonoma Nuevo Leon, U.A.N.L., Mexico.
Dr. Heinrich Kossman........................... Former R&D Director of Ewos Fish Feed Company,
Sweden.
Dr. Elinar Watne............................... R&D Director of NorAqua, aquiculture company,
Norway.
Pigs
Professor Froseth.............................. Washington State University, USA.
Dr. Ad van Wessel.............................. Provimi, animal feed producer, Holland.
Poultry
Dr. Barry Hundley.............................. Nutrition Expert; Former Director of Rainbow
Chicken, South Africa.
</TABLE>
Immunology
<TABLE>
<S> <C>
Professor Rolf Sejlelid........................ Head of Pathology Department, Tromso University,
Norway.
Professor Douglas Anderson..................... Former Director National Fish Health Research Lab,
USA.
</TABLE>
Biotechnology & automatic control processing
<TABLE>
<S> <C>
Professor Tung Ching Lee....................... Food Science Department, Rutgers University, USA.
Dr. Alfredo de Ioannes......................... Universidad Catolica de Chile, Centro de Estudios
Cientficos de Santiago, Chile.
Dr. Ralf Dreher................................ R-Biopharm GmbH, development company, Germany.
Dr. Eugene T. Smith............................ Hammline University, USA.
Dr. Mario Perez Won............................ Food Engineering Department, Universidad de la
Serena, Chile.
</TABLE>
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<PAGE>
FOREIGN CORRUPT PRACTICES ACT
Substantially all of our operations are transacted in South America. To the
extent that we conduct operations and sell our products outside the U.S., we are
subject to the Foreign Corrupt Practices Act which makes it unlawful for any
issuer to pay or offer to pay, any money or anything of value to any foreign
official, foreign political party or foreign political party official or any
candidate for foreign political office (foreign official) or any person with
knowledge that all or a portion of such money or thing of value will be offered,
given, or promised, directly or indirectly, to any foreign official.
We have not made any offers, payments, promises to pay, or authorization of
any money or anything of value to any foreign official and have implemented a
policy to be followed by our officers, directors, employees and anyone acting on
its behalf, that no such payments can and will be made. We have made all
employees cognizant of the need for compliance with the Foreign Corrupt
Practices Act and any violation of our policy will result in dismissal. Further,
we conduct periodic reviews of this policy with all employees to ensure full
compliance.
FOREIGN INVESTMENT LAWS AND REGULATIONS
The Chilean Constitution establishes that any Chilean or foreigner may
freely develop any activity in Chile so long as the securities activity in Chile
does not contravene existing laws dealing with public morals, public safety or
national security and follows the laws that regulate such activity. It also
establishes the principle of non-discrimination, thus guaranteeing foreign
investors equal protection under Chilean law. Additionally, Chilean law
prohibits any discretionary acts by the Chilean government or other entities
against the rights of persons or property in derogation of this principle.
Foreign investors may transfer capital and net profits abroad. There are no
exchange control regulations which restrict the repatriation of the investment
or earnings except that the remittance of capital may take place starting a year
after the date the funds were brought into the country, but net profits can be
remitted at any time, after deduction of applicable withholding income taxes.
Therefore, equity investments in Chile by persons who are not Chilean residents
follow the same rules as investments made by Chilean citizens.
These principles are the basis for the DL 600. Based on DL 600, the foreign
investor and the government sign a legally-binding investment contract which may
only be modified by mutual consent. The contract sets forth the current tax and
foreign exchange laws as each relates to the specific investments by that
investor in Chile. Thus, the investor is protected against any subsequent
changes in the law which could adversely affect the investor or his investments
in Chile. Although the Chilean government has been successful in keeping this
principle in place forthe last 23 years, there can be no assurances that a
breach by the Chilean government will not occur in the future or that it would
not adversely affect our rights to do business in Chile. Moreover, while there
has been no precedent that political changes had determined changes in these
rules, no assurances can be made that such changes will not occur in the future.
We intend to enter into an investment contract with the Government of Chile on
or around the closing of this offering.
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<PAGE>
EMPLOYEES
As of September 30, 1999, we employed 67 employees, of which 8 were
full-time salaried employees in administration, 8 were full-time salaried
employees in trading and brokering positions and 36 were involved in research
and development. Substantially all of our management and employees who reside in
Chile speak Spanish and our senior management team in Chile also communicates in
English. None of our employees are covered by a collective bargaining agreement.
We believe that the dedication of its employees is critical to our success, and
that our relations with our employees are good.
PROPERTIES
We own approximately 1,420 square feet of executive office space and
research facilities in Santiago, Chile. This property was purchased by Tepual in
1992 for a purchase price of approximately $110,000.
We also lease four facilities in Santiago, Chile. We lease approximately
1,400 square feet of office space which is used by our trading, quality control,
finance and accounting departments at a rate of $1,439 per month. The lease is
for two years, commencing April 30, 1998, and provides for an automatic renewal
term of one year, unless leasee or leasor terminates in writing. We also hold an
option to buy this facility in the event the leasor decides to sell the
property.
We lease approximately 2,670 square feet of laboratory space for production
and quality control of poultry vaccines at a rate of $5,200 per month. The lease
contract commenced in March 1999, and is for an indefinite term, terminable on
four months notice by either party. We are responsible for obtaining and
maintaining proper government authorization for producing biological products
within the facility.
We lease two buildings containing approximately 2,070 square feet of
laboratory space for bio-toxilogical testing, aquaculture research and
development and a pilot plant for research and development at a total rate of
$1,604 per month. The lease was for an initial term of one and one-half years,
commencing in November 1995, and automatically renews, unless there is a written
request for termination by either party.
We lease approximately 6,000 square feet of warehouse space within two
buildings in Santiago, Chile at a total rate of $7,400 per month. These spaces
are used to store feather meal and for processing and packaging of these
products. The lease contracts do not include a termination date, although either
party must provide thirty days notice to terminate either agreement.
Chilean law provides that a landlord may not evict a tenant without a court
hearing, although the tenant is responsible for all costs related to such a
hearing.
Upon the effective date, we will enter into a two year lease with Andean
Financial Corporation for its corporate U.S. offices in Boca Raton, Florida,
which lease may be renewed for an additional two year term. David Mayer, a
member of our board of directors, is the sole shareholder, officer and director
of Andean Financial Corporation. The annual lease amount will be $30,000
annually, payable semi-annually, which includes all telephone and facsimile,
secretarial and other expenses. These terms were negotiated on an
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<PAGE>
arm's length basis and such terms are competitive with current lease terms for
similar arrangements in the South Florida area.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding the resolution of which,
our management believes, would have a material adverse effect on our results of
operations or financial condition, nor to any other pending legal proceedings
other than ordinary, routine litigation incidental to its business.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement in Washington, D.C., on Form SB-2 under the Securities Act, with
respect to the securities we are offering. This prospectus does not contain all
the information set forth in the registration statement and its exhibits. For
further information about us and the securities we offer, reference is made to
the registration statement and to the exhibits filed. The statements contained
in this prospectus as to the contents of any contract or other document
identified as exhibits in this prospectus are not necessarily complete, and in
each instance, reference is made to a copy of such contract or document filed as
an exhibit to the registration statement, each statement being qualified in any
and all respects by such reference.
The registration statement, including exhibits, may be inspected without
charge at the principal reference facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048; and at its Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of such materials can be obtained from
the Public Reference Section of the Securities and Exchange Commission at its
principal office in Washington, D.C. set forth above or by calling the
Securities and Exchange Commission at 1-800-SEC-0330 upon payment of prescribed
fees. Additionally, the Securities and Exchange Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission and the address of such site is (http://www.sec.gov).
We intend to furnish our shareholders with annual reports containing
audited financial statements and such other periodic reports as we may from time
to time deem appropriate or as may be required by law.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF BIO-AQUA SYSTEMS, INC.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Max Rutman(1).................................. 59 Chief Executive Officer, President, Chairman of
the board of directors
Guillermo Quiroz(2)............................ 49 Chief Financial Officer, Vice President of
Finance and Administration, Director
Nestor Lagos(2)................................ 48 Director
Sergio Vivanco(2).............................. 46 Director
David Mayer(1)................................. 57 Director, Assistant Secretary
</TABLE>
- ------------------
(1) Has served in his position since our inception in March 1999.
(2) Will commence serving as a director upon the effective date.
Max Rutman has served as chief executive officer, president and chairman of
the board of directors of Bio-Aqua since its inception in March 1999 and as the
chief executive officer and Chairman of the board of directors of Tepual since
its incorporation. Mr. Rutman has served as general manager of Tepual since
1989. Mr. Rutman has received a degree in chemical engineering from the
Universidad de Santiago and a masters degree in food science from Massachusetts
Institute of Technology (MIT). Mr. Rutman has served as the head of
bio-engineering division and former director of the Protein Group at I.F.O.P.
(Chilean Institute of Fisheries Development), and visiting professor at the
following Universities: Universidad Catolica, Universidad Catolica de Valparaiso
and Universidad de Santiago, in food science, and biotechnology. Mr. Rutman has
also been consultant to the World Bank, the Interamerican Development Bank, the
Ford Foundation, MIT and Colorado State University's International Development
Agency. Mr. Rutman is a member of the Academy of Science and the Institute of
Food Technology.
Guillermo Quiroz has served as chief financial officer, vice president of
finance and administration of Bio-Aqua since inception and will serve as a
member of the board of directors of Bio-Aqua as of the effective date. Mr.
Quiroz has served as president, chief financial officer and vice president of
finance and administration of Tepual since October 1998 and as member of the
board of directors of Tepual since May 1999. Mr. Quiroz has also been a
financial advisor for Tepual since 1994. From 1985 through 1994 Mr. Quiroz
served as the general manager and legal representative for Salmosur S.A., a fish
farming company. From 1994 through April 1997 Mr. Quiroz was the chief executive
officer for Soalva S.A., a Chilean dairy producer and distributor and also a
financial advisor for Varmontt S.A., a Chilean transportation company. From May
1997 through September 1998 Mr. Quiroz was the chief financial officer for
Empresas Dicsa S.A., a Chilean company engaged in the import, distribution and
service of construction and mining equipment where he was responsible for
financial planning and corporate administration throughout Chile, Peru,
Argentina and Bolivia. Mr. Quiroz is a commercial engineer and auditor.
50
<PAGE>
Nestor Lagos will serve as a member of Bio-Aqua's board of directors as of
the effective date and has been a member of Tepual's board of directors since
April 1999. Dr. Lagos has led Tepual's red tide research department since 1994.
Dr. Lagos is also a professor of membrane physiology at the Universidad de Chile
located in Santiago, Chile. Dr. Lagos is a biochemist with a Ph.D. in biology
and has also received post-doctoral training at the University of California,
Los Angeles (UCLA).
Sergio Vivanco has served as a member of Bio-Aqua's board of directors as
of the effective date. Since November 1997, Mr. Vivanco has served as a member
of the board of directors of Uniservice Corporation (NASDAQ SmallCap: "UNSRA,"
"UNSRW"). Since 1991, Mr. Vivanco has served as a member of the board of
directors of Kentucky Foods Chile, S.A., the Kentucky Fried Chicken franchisee
in Chile. Mr. Vivanco has been an attorney since 1979 and has served as general
counsel to Tepual since 1998. Mr. Vivanco is a partner in the law firm of Abud,
Vivanco and Vergara in Santiago, Chile, which serves as Tepual's and our legal
counsel in Chile.
David Mayer has served as a member of Bio-Aqua's board of directors and
assistant secretary of Bio-Aqua since March 1999 and has entered into a ten year
consulting agreement with the Bio-Aqua. Since July 1997, Mr. Mayer has served as
the president of Andean Financial Corporation. Since November 1997, Mr. Mayer
has also served as a member of the board of directors and assistant secretary of
Uniservice Corporation (NASDAQ SmallCap: "UNSRA," "UNSRW"). From January 1992 to
March 1996, Mr. Mayer was a consultant to various companies where he assisted
with mergers and acquisitions.
DIRECTORS AND EXECUTIVE OFFICERS OF TEPUAL
The directors and executive officers of Tepual are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Max Rutman(1).................................. 59 Chief Executive Officer, Director
Guillermo Quiroz(1)............................ 49 Chief Financial Officer, President, Director
Nestor Lagos(1)................................ 48 Director
</TABLE>
- ------------------
(1) See "Directors and executive officers of Bio-Aqua Systems, Inc."
ELECTION OF DIRECTORS
Each of our directors are elected at our annual meeting of shareholders and
holds office until the next annual meeting of shareholders, or until his or her
successor is elected and qualified. The bylaws permit the board of directors to
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified.
We have agreed that for a period of three years after the effective date,
if requested by the representative, we will use our best efforts to cause one
individual designated by the representative to be elected to our board of
directors, which individual may be a director,
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<PAGE>
officer, employee or affiliate of the representative. The representative has
not, to date, selected a designee to our board of directors. Alternatively, the
representative may designate a person to attend meetings of our board of
directors as an observer for three years following the effective date.
DIRECTORS' COMPENSATION
Upon the effective date, our non-employee Directors, David Mayer and Sergio
Vivanco, will receive $100 plus expenses, for attendance at each meeting of the
board of directors, as well as reimbursement of reasonable out-of-pocket
expenses incurred in connection with their attendance at the meetings. We intend
to purchase directors and officers insurance as soon as practicable to the
extent that it is available and cost effective to do so.
COMMITTEES OF THE BOARD OF DIRECTORS
Our audit committee will be established upon the effective date and will
consist solely of Sergio Vivanco. Our audit committee will review the work of
the audit staff and direct reports covering such work to be prepared. Our audit
committee will oversee our continuous audit program to attempt to protect
against improper and unsound practices and to attempt to furnish adequate
protection for its assets and records. Our audit committee also will act as
liaison to our independent certified public accountants, and will conduct such
work as is necessary and will receive written reports, supplemented by such oral
reports as it deems necessary, from our independent certified public
accountants.
Our compensation and stock option committee will be established upon the
effective date and will consist of Messrs. Rutman, Quiroz and Mayer. The
compensation and stock option committee will make recommendations with respect
to compensation of senior officers and granting of stock options and stock
awards.
Our nominating committee will be established upon the effective date and
will consist of Messrs. Rutman, Vivanco and Quiroz. The nominating committee
will make recommendations with respect to qualified individuals to become
members of our board of directors.
Of the five members of the board of directors, Messrs. Vivanco and Mayer
are non-employee directors. However, we have entered into a consulting agreement
with Mr. Mayer and Mr. Vivanco serves as our Chilean counsel.
APPOINTMENT OF OFFICERS
Officers are elected annually by the our board of directors and their terms
of office are, except to the extent governed by employment contracts, at the
discretion of the board of directors. Our officers devote full time to the
business.
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<PAGE>
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth compensation awarded to, earned by or paid
to our chief executive officer and each executive officer whose compensation
exceeded $100,000 for the year ended December 31, 1998. We did not grant any
stock options, restricted stock awards or stock appreciation rights or make any
long-term incentive plan payments during 1998. This table is based solely upon
compensation received from Tepual. It also includes payments under Chilean
social security provisions.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)
- ---------------------------------------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Max Rutman CEO,
President and Chairman................................. 1998 $48,000 $-0- $ -0-
1997 48,000 -0- -0-
1996 48,000 -0- -0-
</TABLE>
EMPLOYMENT AGREEMENTS
Max Rutman, Chief Executive Officer, President and Chairman. Tepual, our
subsidiary, has entered into a written three-year employment agreement with Mr.
Rutman, which shall commence upon the effective date. Under the terms and
conditions of his employment agreement, Mr. Rutman shall receive an initial
annual base salary of $200,000, annual bonuses of up to $100,000, as determined
by Tepual's board of directors. Mr. Rutman shall be reimbursed for his ordinary
and necessary business expenses including fees for membership in one business or
social club, up to a maximum of $10,000 per year, and in other clubs and
organizations as Tepual and Mr. Rutman shall mutually agree are necessary and
appropriate. In any event Mr. Rutman terminates his employment contract within
12 months after a change in control, he will be entitled, for the remaining term
of his employment contract, to:
1. earned, but unpaid salary;
2. benefits to which he is entitled as a former employee under our
benefit and compensation plans;
3. continued health benefits;
4. monetary payments under severence plans; and
5. all cash and stock payments he would have been entitled to, had his
employment not terminated.
We intend to obtain a $1,000,000 key man life insurance policy, of which we will
be the beneficiary on the life of Mr. Rutman.
Guillermo Quiroz, Chief Financial Officer. Tepual, our subsidiary, has
entered into a written two year employment agreement with Guillermo Quiroz,
which shall commence upon the effective date. Under the terms and conditions of
his employment agreement, Mr. Quiroz shall receive an initial annual base salary
of $100,000, bonuses of up to
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<PAGE>
$20,000 per year, as determined by Tepual's board of directors, as well as
$7,500 for automobile expenses. Prior to the effective date, Mr. Quiroz entered
into a written employment agreement with Tepual. This employment agreement will
terminate upon the effective date of the written employment agreement with
Tepual that we have described.
Chilean Social Security/AFP and ISAPRE. Messrs. Rutman and Quiroz are also
entitled to receive certain social security benefits under Chilean law. The
Social Security laws in Chile were established as a private system that requires
all companies to retain approximately 20% of the gross salaries of its
employees, up to a maximum of $4,408.95 per year, which is used to pay both
Administrators of Pension Funds Companies (AFP) and Institutions of Provisional
Health (ISAPRE).
The allocation of this 20% to each service is approximately as follows:
(a) 10% to the AFP: This amount is deposited in an individual
interest-bearing account of each employee to cover their retirement. In
Chile, the age of retirement is 60 for women and 65 for men.
(b) 3% to the AFP: This amount covers any partial or permanent
disability and, in the case of death, will provide a monthly amount to the
deceased's spouse. The amount paid corresponds to 70% of an employee's
average salary, based upon the last 10 years of the employee's life.
(c) 7% to ISAPRE: This amount covers medical fees, hospitalization and
clinical examinations. This percentage may be voluntarily increased by the
employee according to the employee's contractual agreement with the
employee's ISAPRE. In many instances it may be necessary to pay additional
costs for health care.
Additionally, Chilean law requires the payment of one month salary (up to a
maximum of approximately $2,736.00) for each year (or portion of salary in
excess of six months worked in the last year), worked by the employee when he is
dismissed without cause, subject to a maximum of eleven months (up to a maximum
of $2,736.00 per month, or an aggregate of $30,104.00). When the employee
terminates his or her employment, no compensation is legally required.
Bonuses. Bonuses will be determined by our compensation committee based
on our results of operations and individual performance. Our compensation
committee has not established any specific formula or criteria for determining
bonuses.
STOCK OPTIONS
During fiscal year 1998, there were no option or SAR grants to any persons,
including any of our executive officers or directors.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
On June 1, 1999, the board of directors and a majority of our shareholders
adopted our stock option plan. The purpose of our stock option plan is to
increase our employees', advisors', consultants', and directors' proprietary
interest in Bio-Aqua and Tepual, to align more closely their interests with the
interests of our shareholders, and to enable us to
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<PAGE>
attract and retain the services of experienced and highly qualified employees
and directors. We have reserved an aggregate of 300,000 shares of class A common
stock under the stock option plan.
Our board of directors, or a committee of our board of directors,
administers and interprets the stock option plan and is authorized to grant
options under the stock option plan to all our eligible employees, including our
officers and directors (whether or not employees). The stock option plan
provides for the granting of incentive stock options (as defined in Section 422
of the Internal Revenue Code), non-statutory stock options and reload options.
Options may be granted under the stock option plan on such terms and at such
prices as determined by the board of directors, or a committee, except that in
the case of an incentive stock option granted to a 10% shareholder, the per
share exercise price will not be less than 110% of such fair market value.
The exercise price for any option under the stock option plan may be paid
in cash, in shares of class A common stock or such other consideration that is
acceptable to the board of directors or any committee. If the exercise price is
paid in whole or in part in class A common stock, such exercise may result in
the issuance of additional options, known as reload options, for the same number
of shares of class A common stock surrendered upon the exercise of the
underlying option. The reload option would be generally subject to the same
provisions and restrictions set forth in the stock option plan with respect to
the underlying option except as varied by the board of directors or any
committee. A reload option enables the optionee to ultimately own the same
number of shares as the optionee would have owned if the optionee had exercised
all options for cash.
Options granted under the stock option plan will be exercisable after the
period or periods specified in the option agreement. Options granted under the
stock option plan are not exercisable after the expiration of five years from
the date of grant and are not transferable other than by will or by the laws of
descent and distribution. The stock option plan also authorizes us to make loans
to optionees to enable them to exercise their options.
As of the effective date, no options have been granted under our stock
option plan. Furthermore, to the extent that any options granted within the
first year are exercised, the underlying shares of class A common stock will be
subject to a 24 month lock-up period commencing on the effective date.
OPTION EXERCISES AND HOLDINGS
To date, we have not issued any options or SARs to any persons thus, during
fiscal year 1998, no options or SARs were exercised or unexercised during fiscal
year 1998.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporations. However, the
provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. Our articles of incorporation and
bylaws provide that we shall indemnify our directors and officers to the
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<PAGE>
fullest extent permitted by the Florida Business Corporation Act. To the extent
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to these
provisions, we have been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is unenforceable.
LIMITATION OF LIABILITY
Under Florida law, our directors are protected against personal liability
for monetary damages from breaches of their duty of care. As a result, our
directors will not be liable in an action by us or a shareholder for monetary
damages alleging negligence or gross negligence in the performance of their
duties. In such actions, our directors remain liable for monetary damages for
willful misconduct, conscious disregard of our best interest, and for
transactions from which a director derives an improper personal benefit. Our
directors also remain liable under another provision of Florida law which makes
directors personally liable for unlawful distributions and which expressly sets
forth a negligence standard with respect to such liability. The liability of our
directors under federal or applicable state securities laws is also unaffected.
While our directors have protection from awards of monetary damages for
breaches of fiduciary duty, that does not eliminate their fiduciary duty.
Equitable remedies, such as an injunction or rescission based upon a director's
breach of fiduciary duty, are still available.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the effective date, a stock exchange agreement shall be effectuated
where Bio-Aqua receives Flagship Import Export LLC's 90% interest in Tepual in
return for 1,529,910 shares of class B common stock. Also, two stock purchase
agreements shall be simultaneously effectuated where Atik S.A. shall purchase
169,990 shares of class B common stock of Bio-Aqua and Bio-Aqua shall purchase
Atik S.A.'s 10% in Tepual. Tepual shall then become our majority owned (99.9%)
subsidiary. Due to Chilean law, which requires that a Chilean corporation be
owned by not less than two shareholders, 15 shares of Tepual stock will continue
to be owned by Max Rutman, through his ownership interest in Flagship Import
Export LLC.
The current shareholders of Tepual are Flagship Import Export LLC (8,573
shares) and Atik (952 shares). Mr. Rutman, through his ownership interest in
Flagship Import Export LLC, will retain a .01% interest (15 shares) in Tepual in
order to comply with Chilean law. Flagship Import Export LLC's sole shareholder
is Max Rutman. Atik's shareholders are Paulina and Andrea Rutman, daughters of
Max Rutman.
On the effective date, we will acquire the rights to the brands and patents
Inual(Trademark) and Tepual(Trademark) by acquiring Profeed, Inc., equally owned
and controlled by Max, Andrea and Paulina Rutman, by acquiring all of the issued
and outstanding shares of Profeed, Inc., in consideration of an aggregate of
$1.3 million, of which $400,000 will be paid from the proceeds of this offering
and the balance, under the discretion of the board of directors, out of: 5% of
the gross revenues per quarter, but in no event greater than 20% of the net
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<PAGE>
income per quarter, of the sale of products sold under the Tepual(Trademark) and
Inual(Trademark) brands; third party financing; or working capital. We believe
that the terms of these acquisitions are competitive with the going rates.
Upon the effective date, we will enter into a two year lease, which lease
may be renewed for an additional term of two years, with Andean Financial
Corporation to use a portion of Andean Financial Corporation's facilities in
Boca Raton, Florida, for our corporate U.S. offices. David Mayer, our director,
is the sole shareholder, officer and director of Andean Financial Corporation.
The annual lease amount will be $30,000 payable semi-annually. These terms were
negotiated on an arm's length basis and such terms are competitive with the
going rates.
As of the effective date and unless otherwise agreed upon, we will enter
into a ten year agreement with David Mayer, one of our directors. Under this
agreement, Mr. Mayer shall perform certain services for us, including advising
in the preparation and implementation of our business plan, research, evaluation
and negotiations with strategic partners and alternative sources of credit and
financial opportunities, assisting in conducting market surveys, assisting in
shareholder and investor relations, assisting in the preparation of reports to
shareholders and investors, and acting as our U.S. liaison. In consideration for
these services, Mr. Mayer receives an annual fee of approximately $30,000.00, or
as otherwise agreed upon by the parties, commencing as of the effective date.
We will receive a minimum of $40,000 monthly from Biosur S.A., a Chilean
corporation in consideration for giving Biosur S.A. an exclusive right to buy
and distribute our Chilean poultry vaccines. Biosur S.A. is 95% owned by Atik
and 5% owned by Max Rutman. The shareholders of Atik are Paulina and Andrea
Rutman. Atik is a shareholder of Bio-Aqua.
Sergio Vivanco, a member of our board of directors upon the effective date,
serves as our Chilean legal counsel and has served as legal counsel for Tepual
since 1998.
We believe that all transactions with our officers, shareholders and each
of our affiliated companies have been made on terms no less favorable to our
company than those available from unaffiliated parties. In the future, we intend
to handle transactions of a similar nature on terms no less favorable to
Bio-Aqua than those available from unaffiliated parties.
BRIDGE FINANCING
Between April and May 1999, we received loans in the aggregate amount of
$150,000 from six third party accredited investors. These loans are evidenced by
promissory notes bearing interest at 8% per year. We are obligated to repay five
of these loans on the earlier of the closing of this offering or January 1,
2001. A loan from Inversiones Kau Kau, S.A., a Chilean corporation, for $50,000
is due on the earlier of the closing of this offering or March 31, 2000. As
additional consideration, the investors that loaned us $150,000 received an
aggregate of 35,294 shares of class A common stock.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the common
stock beneficially owned as of the date of this prospectus by each person who we
know by to own beneficially 5% or more of our common stock; by each of our
executive officers and directors; and by all of our executive officers and
directors as a group. After the offering, the shares held by Mr. Rutman,
Flagship Import Export LLC and Atik, directly or indirectly, will represent an
aggregate 58.8% of the outstanding common stock issued and will represent an
aggregate approximately 87% of our voting interest, since Mr. Rutman, Flagship
Import Export LLC and Atik, as holders of class B common stock, are entitled to
5 votes for each share of class B common stock held. Andrea and Paulina Rutman,
daughters of Max Rutman, are the shareholders of Atik S.A. Max Rutman disclaims
any beneficial ownership of these shares. Unless otherwise disclosed, the
mailing addresses for the individuals named below is General Ekdhal 159,
Santiago, Chile.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK OWNERSHIP
BENEFICIALLY PERCENTAGE VOTING PERCENTAGE
OWNED ------------------- -------------------
NAME AND ADDRESS OF BEFORE AND AFTER BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING OFFERING OFFERING OFFERING
- -------------------------------------------- ----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Flagship Import Export LLC.................. 1,529,910 85.7% 53.000% 89.1% 78.2%
Atik, S.A................................... 169,990 9.5% 5.800% 9.9% 8.8%
Max Rutman.................................. 1,530,010(1)(2) 85.7% 53.000% 89.1% 78.2%
Guillermo Quiroz............................ -0- -0- -0- -0- -0-
David Mayer(3).............................. 51,000 2.9% 1.600% .6% .6%
Nestor Lagos................................ -0- -0- -0- -0- -0-
Sergio Vivanco.............................. -0- -0- -0- -0- -0-
All executive officers
and directors as a group
(5 persons).............................. 1,581,010(1)(2) 88.5% 54.600% 89.7% 78.9%
</TABLE>
- ------------------
(1) Includes 1,529,910 shares of class B common stock issued to Flagship Import
Export LLC.
(2) Includes 100 shares of class B common stock issued to Mr. Rutman as founders
shares.
(3) Mr. Mayer's address is 1900 Glades Road, Suite 351, Boca Raton, Florida
33301.
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<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
We are currently authorized to issue up to 22,000,000 shares of common
stock. 20,000,000 shares are designated as class A common stock and 2,000,000
shares are designated as class B common stock. As of the effective date, there
were 86,294 shares of class A common stock outstanding and 1,700,000 shares of
class B common stock outstanding.
We have reserved up to an aggregate of 300,000 shares of class A common
stock under our stock option plan, under which we may issue options subject to
the approval of the representative for a period of twelve months from the
effective date, and to the extent any granted options are exercised, the
underlying shares of class A common stock shall be subject to a 24-month lock-up
period from the effective date.
Upon our liquidation, dissolution or winding up, after payment to our
creditors and holders of any senior securities, including preferred stock, as
applicable, our assets will be divided pro rata on a per share basis among the
holders of the shares of common stock. The common stock has no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All outstanding shares of
common stock are, and the shares of class A common stock we are offering will
be, upon completion of this offering, fully paid and non-assessable.
Subject to the dividend rights of the holders of any other class of common
stock or preferred stock, if applicable, holders of shares of common stock are
entitled to share, on a ratable basis, such dividends as may be declared by the
board of directors out of funds legally available. We have never paid dividends
on any class of common stock since our inception in March 1999.
Class A common stock and class B common stock
Holders of shares of class A common stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Holders of shares of
class B common stock are entitled to five votes per for each share of class B
common stock on all matters to be voted on by the shareholders. Neither holders
of class A common stock nor class B common stock have cumulative voting rights.
The holders of more than 50% of the voting rights for the election of directors
can elect all of the directors if they choose to do so, and in such event, the
holders of the remaining shares will not be able to elect any directors.
Following this offering, management will have the ability to vote directly or
indirectly 1,581,010 shares of our common stock or approximately 79% of our
voting power, without giving effect to the exercise of the over-allotment option
or the representative's warrants. Our bylaws require that only a majority of the
issued and outstanding voting shares of common stock need be represented to
constitute a quorum and to transact business at a shareholders' meeting.
Subject to the approval of the representative, for the first 24 months
following the effective date, holders of class B common stock have the right to
transfer or sell shares of class B common stock and/or convert shares of class B
common stock into shares of
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<PAGE>
class A common stock on a "one share for one share" basis, provided that any
shares so converted, but not sold or transferred, will only be entitled to one
vote per share. Any persons acquiring shares of class B common stock in a
private transaction, either by means of a transfer or sale, shall be entitled to
5 votes for each one share of class B common stock held. Each certificate
representing shares of class B common stock contains a legend setting for the
restrictions imposed by the representative.
PREFERRED STOCK
Our board of directors has the authority to issue up to 5,000,000 shares,
par value $.0001, of our preferred stock and to fix the dividend, liquidation,
conversion, redemption and other rights, preferences and limitations of such
shares without any further vote or action of the shareholders, but subject to
the approval of the representative for a period of one year from the effective
date, but which shares shall be subject to a lock-up period of twenty-four
months from the effective date.
WARRANTS
Our warrants will be issued in registered form pursuant to an agreement
dated as of the effective date, between us and American Stock Transfer & Trust
Company as warrant agent. The following discussion of certain terms and
provisions of our warrants is qualified in its entirety by reference to the
warrant agreement. A form of the certificate representing our warrants which
form a part of the warrant agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
Each of our warrants entitles the registered holder to purchase one share
of class A common stock. Our warrants are exercisable at a price of $7.30
subject to certain adjustments. Our warrants are entitled to the benefit of
adjustments in their exercise prices and in the number of shares of class A
common stock or other securities deliverable upon their exercise in the event of
a stock dividend, stock split, reclassification, reorganization, consolidation
or merger.
Our warrants may be exercised, in whole or in part, for a period of five
years from the effective date, unless we extend such period. After the
expiration date, warrant holders shall have no further rights.
Warrant holders do not have any voting or any other rights as our
shareholders. Our warrants will not be redeemable for a period of twelve months
following the effective date, at which time our warrants may be redeemed by us
for $0.05 per warrant on not less than thirty days prior written notice, subject
to exercise by the warrant holder, if the closing bid price for our class A
common stock has been at least $9.00 per share for thirty consecutive trading
days. If we exercises our right to redeem warrants, such warrants may still be
exercised by the holder until the close of business on the day immediately
before the date fixed for redemption. If any warrant is not exercised by such
time, it will not be exercisable, and the holder will only be entitled to the
redemption price.
We may not redeem our warrants at any time that a current registration
statement under the Securities Act covering the shares of class A common stock
issuable upon exercise of our warrants is not in effect. The issuance of such
shares to the holder must be
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<PAGE>
registered, qualified or exempt under the laws of the state in which the holder
resides. If required, we will file a new registration statement with the
Securities and Exchange Commission with respect to the securities underlying our
warrants prior to the exercise of such warrants and will deliver a prospectus
with respect to such securities to all holders of our warrants as required by
Section 10(a)(3) of the Securities Act.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The provisions of the Florida Control Share Act, relating
to control share acquisitions, provide that shares acquired in excess of certain
specified thresholds will not possess any voting rights unless such voting
rights are approved by a majority of the board of directors or a majority of a
corporation's disinterested shareholders. The provisions of the Florida Control
Share Act apply to us. The provisions of the Florida Affiliated Transaction Act,
relating to affiliated transactions, do not apply to us because we have opted
out of the act.
Our articles of incorporation and bylaws also authorize us to indemnify our
directors, officers, employees and agents. In addition, our articles of
incorporation and Florida law presently limit the personal liability of
corporate directors for monetary damages, except where the directors breach
their fiduciary duties and such breach constitutes or includes certain
violations of criminal law, a transaction from which the directors derived an
improper personal benefit, certain unlawful distributions or certain other
reckless, wanton or willful acts or misconduct.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE OUR ARTICLES OF INCORPORATION
AND BYLAWS.
Certain provisions of our articles of incorporation and bylaws described
below may delay, defer or prevent a tender offer or takeover attempt, including
attempts that might result in a premium being paid over the market price for the
shares held by shareholders. Such provisions could result in us being less
attractive to a potential acquiror or in shareholders receiving less for their
shares in the event of a take-over attempt.
Class B common stock.
Holders of class B common stock are entitled to five votes for each share
of class B common stock held. Upon the effective date, Max Rutman will own or
control, directly or indirectly, approximately 53% of the common stock and will
have the right to cast 78% of the votes. The class B common stock could be
utilized under certain circumstances, as a method of discouraging, delaying or
preventing a change in our control.
Preferred shares
The board of directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or the rights of the holders of
common stock. In the event of issuance, the preferred stock could be utilized
under certain circumstances, as a method of
61
<PAGE>
discouraging, delaying or preventing a change in our control. Although we have
no present intention to issue any shares of our preferred stock, there can be no
assurance that we will not do so in the future.
Special meeting of shareholders.
Our articles of incorporation and bylaws provide that special meetings of
our shareholders may be called only by a majority of the board of directors, our
chief executive officer or holders of not less than ten percent of our
outstanding voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent, warrant agent, and registrar for our class A common
stock and our warrants is American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, we will have 1,286,294 shares of
class A common stock outstanding, 1,466,294 shares if the over-allotment option
is exercised in full but without giving effect to the exercise of our warrants
and 1,700,000 shares of class B common stock outstanding, of which 35,294 shares
of class A common stock and all of the class B common stock outstanding are
restricted securities as the term is defined under the Securities Act. Prior to
the consummation of this offering our class A common stock was held by seven
entities and our class B stock was held by three entities.
The 1,200,000 shares of class A common stock sold in this offering,
1,380,000 shares if the over-allotment option is exercised in full will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by our affiliate in general, a
person who has a control relationship with us, which shares will be subject to
the resale limitations of Rule 144 under the Securities Act. An additional
1,200,000 shares of class A common stock have been registered, 1,380,000 shares
if the over-allotment option is exercised in full, and reserved for issuance
upon exercise of our warrants.
In general, Rule 144 promulgated under the Securities Act permits a
shareholder of ours who has beneficially owned restricted shares of any class of
common stock for at least one year to sell without registration, within a
three-month period, such number of shares not exceeding the greater of one
percent of the then outstanding shares of any class of common stock or,
generally, the average weekly trading volume during the four calendar weeks
preceding the sale, assuming our compliance with certain reporting requirements
of Rule 144. Furthermore, if the restricted shares of any class of common stock
is held for at least two years by a person not affiliated with us (in general, a
person who is not our executive officer, director or principal shareholder
during the three month period prior to resale), such restricted shares can be
sold without any volume limitation. Since we were not organized until March 18,
1999, the 51,000 shares of class A common stock issued on March 18, 1999, will
not be eligible to be resold until March 18, 2000, subject to the
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lock-up provisions described below. Any sales of shares under Rule 144 may have
a depressive effect on the price of our class A common stock.
Also, all of the holders of common stock prior to the closing of this
offering, including Flagship Import Export LLC and Atik, who will acquire
1,699,900 shares of our class B common stock as of the effective date, have
agreed not to, directly or indirectly, offer to sell, contract to sell, sell,
transfer, assign, encumber, grant an option to purchase or otherwise dispose of
any beneficial interest in such securities for a period of 24 months from the
closing of this offering, with the exception of 35,294 shares of class A common
stock issued in connection with the bridge financing, which are subject only to
a six month lock-up period, without the prior written consent of the
representative. Additionally, holders of any securities issued by us for a
period of twelve months from the effective date, other than those securities
offered, the representative's warrants and the underlying securities will also
be subject to a 24-month lock-up period from the date of issuance. An
appropriate legend referring to these restrictions will be marked on the face of
the certificates representing all of these securities.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representative, Institutional Equity
Corporation have severally agreed to purchase from us and we have agreed to sell
to the underwriters, the respective number of shares of class A common stock and
warrants set forth opposite their respective names at the initial public
offering price, less the underwriting discounts set forth on the cover page of
this prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS
- -------------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Institutional Equity Corporation..............................
Nutmeg Securities, Ltd........................................
Emerson Bennett & Associates, Inc.............................
---------- ----------
Total................................................... 1,200,000 1,200,000
========== ==========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the shares of class A common
stock and our warrants are subject to approval of certain legal matters by
counsel to the underwriter and to certain other events. The underwriters are
obligated to purchase all shares of common stock and the warrants we are
offering (other than those covered by the over-allotment option described
below), if any such shares are purchased.
We have been advised by the representative of the underwriters that the
underwriters propose initially to offer the shares of common stock and warrants
to the public at the offering price set forth on the cover page of this
prospectus and through members of the NASD. The representative has also advised
us that the underwriters may allow a concession, not in excess of $ per share of
class A common stock and $ per warrant, in their discretion, to certain domestic
dealers who are members of the NASD and which domestic dealers agree to sell our
securities in conformity with the NASD Conduct Rules. No NASD member will
receive 10% or more of the net proceeds of this offering.
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<PAGE>
The initial public offering price and concessions will not be changed by the
representative until after the offering has been completed.
At the closing of the sale of our securities that we are offering, we will
sell to the representative, the representative's warrants, for nominal
consideration, entitling the representative to purchase an aggregate of 120,000
shares of class A common stock and 120,000 warrants, similar but not identical
to our warrants. The representative's warrants shall be non-exercisable and
non-transferable, other than a transfer to affiliates of the representative or
members of the selling group for a period of twelve months following the
effective date. The representative's warrants and the underlying securities
shall contain anti-dilution provisions and are redeemable. The representative's
warrants will be exercisable for a period of four years commencing one year
following the effective date and, if the representative's warrants are not
exercised during such period, they shall, by their own terms, automatically
expire.
The exercise price of each representative warrant shall be:
o $9.28 per share of class A common stock,
o $.206 per warrant, and
o $12.045 per share of class A common stock for each share underlying the
warrant,
which are 165% of the public offering price of our class A common stock, our
warrants and the shares of class A common stock underlying our warrants.
In addition, we have granted to the representative a single demand
registration right and unlimited piggy back registration rights with respect to
our class A common stock and our warrants underlying the representative's
warrants for a period commencing at the beginning of the second year and
concluding at the end of the fifth year following the effective date.
The warrants will not be redeemable for a period of twelve months following
the effective date, at which time the warrants may be redeemed by us for $0.05
per warrant on not less than thirty days prior written notice, subject to
exercise by the representative, if the closing bid price for our class A common
stock has been at least $9.00 per share for thirty consecutive trading days. If
we exercise our right to redeem warrants, the warrants may still be exercised by
the representative until the close of business on the day immediately before the
date fixed for redemption. If any warrant called for redemption is not exercised
by such time, it will not be exercisable, and the representative will be
entitled only to the redemption price.
We may not redeem the warrants at any time that a current registration
statement under the Securities Act covering the shares of class A common stock
issuable upon exercise of our warrants is not in effect. The issuance of such
shares to the representative must be registered, qualified or exempt under the
laws of the state in which the representative resides. If required, we will file
a new registration statement with the Securities and Exchange Commission with
respect to the securities underlying the warrants prior to the exercise of such
warrants and will deliver a prospectus with respect to such securities to the
representative as required by Section 10(a)(3) of the Securities Act.
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<PAGE>
Under Rule 2710(a)(7)(A) of the NASD Conduct Rules, the warrants acquired
by the representative will be restricted from sale, transfer, assignment or
hypothecation for a period of one year from the effective date of this offering,
except to officers or partners (not directors) of the representative and members
of the selling group and their officers or partners.
In addition to the above, we have granted to the representative an option
exercisable for 45 days from the effective date, to purchase up to an additional
180,000 shares of class A common stock and an additional 180,000 warrants at the
initial public offering price, less the underwriting discount set forth on the
cover page of this prospectus. The underwriters, or the representative
individually at its option, may exercise this option solely to cover
over-allotments in the sale of our securities being offered by this prospectus.
We have agreed to pay the representative a warrant solicitation fee of 4%
of the difference between the initial offering price and the aggregate exercise
price of our warrants. The fee will only be paid upon the representative's
compliance with applicable law and other specified obligations. The warrant
solicitation fee may only be received by brokers we designate in writing to the
representative. The fee will not be paid before 12 months after the effective
date of the offering.
Prior to this offering, there has been no public market for our securities
and there can be no assurances that an active public market for our securities
will be developed or, if developed, sustained after this offering. The initial
public offering price of our class A common stock and the exercise price and
terms of our warrants have been arbitrarily determined by negotiations between
us and the representative and may bear no relationship to our current earnings,
book value, net worth or other established valuation criteria. The factors
considered in determining the initial public offering prices included:
o an evaluation by our management and the representative of the history of
and prospects for the industry in which we compete,
o an assessment of management,
o our prospects,
o our capital structure, and
o certain other factors deemed relevant.
The initial public offering prices do not necessarily bear any relationship
to our assets, book value, earnings or other established criterion of value.
Such prices are subject to change as a result of market conditions and other
factors, and no assurance can be given that a public market for the shares of
class A common stock and/or warrants will develop after the close of the public
offering, or if a public market in fact develops, that such public market will
be sustained, or that the shares of class A common stock and/or warrants can be
resold at any time at the initial public offering prices or any other prices.
We have agreed to pay our underwriters an underwriting discount as a
commission of ten percent of the gross proceeds of this offering, including the
gross proceeds from the sale of the over-allotment option, if exercised. We have
also agreed to reimburse the representative on a non-accountable basis for their
expenses in the amount of three percent
65
<PAGE>
of the gross proceeds of this offering, including proceeds from any securities
purchased under the over-allotment option. The representative's expenses in
excess of the non-accountable expense allowance will be paid by the
representative. To the extent that the expenses of the representative are less
than the amount of the non-accountable expense allowance received, such excess
shall be deemed to be additional compensation to the representative.
We have agreed to engage Institutional Equity Corporation, Nutmeg
Securities, Ltd. and Emerson Bennett & Associates, Inc. as consultants for a
period of two years from the closing of this offering, at a fee of $60,000 per
annum payable to the representative, commencing on the effective date and
continuing for a period of two years. As a consultant, Institutional Equity
Corporation, Nutmeg Securities, Ltd. and Emerson Bennett & Associates, Inc.,
will provide us with:
o general financial consulting services and advice pertaining to our
business affairs;
o assistance in developing, studying and evaluating financing and capital
structure;
o mergers and acquisitions activity and corporate financing proposals;
o prepare reports and studies; and
o assist in negotiations and discussions pertaining to the above.
We have agreed to indemnify the underwriters against any costs or
liabilities incurred by the representative by reasons of misstatements or
omissions to state material facts in connection with statements made in the
registration statement or the prospectus. The representative has, in turn agreed
to indemnify us against any liabilities by reason of misstatements or omissions
to state material facts in connection with the statements made in the
prospectus, based on information relating to the representative and furnished in
writing by the representative. To the extent that this indemnification may
purport to provide exculpation from possible liabilities arising from the
federal securities laws, in the opinion of the Securities and Exchange
Commission, such indemnification is contrary to public policy and therefore
unenforceable.
Shares of common stock held by our existing shareholders immediately prior
to the effective date and any other securities issued for a period of twelve
months from the effective date (other than those offered in this prospectus,
including the underlying securities, the representative's warrants and the
underlying the securities), are subject to a 24-month lock-up period, with the
exception of 35,294 shares of class A common stock issued in connection with
bridge financing in the principal amount of $150,000, which are subject only to
a six month lockup period. The lock-up periods begin on the later of the date of
issuance or the effective date, and are subject to early termination at the sole
discretion of the representative. An appropriate legend referring to these
restrictions will be marked on the face of the certificates representing all
such securities. Moreover, for a period of twelve months from the effective
date, we will not sell or otherwise dispose of any securities without the prior
written consent of the representative.
The representative of the underwriters shall have the right to designate of
a member of the board of directors, or at the representative's option, to
designate one individual to attend the meetings of our board of directors for a
period of five years after the effective date. If Robert Shuey, a principal of
the representative, is designated as a member of our
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<PAGE>
board of directors he will receive a fee of $1,000 per month and 10,000 options
to purchase shares of our class A common stock at an exercise equal to the same
price of our class A common stock in this effering.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to the
underwriting agreement which is filed as an exhibit to the registration
statement.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock and
warrants, including stabilizing transactions in accordance with Rule 104 of
Regulation M. Under Regulation M persons may bid for or purchase of common stock
for the purpose of stabilizing its market price.
LEGAL MATTERS
Legal matters in connection with our class A common stock and our warrants
being offered in this prospectus will be passed upon for us by Atlas, Pearlman,
Trop & Borkson, P.A., Fort Lauderdale, Florida. Affiliates of the firm own 1,176
shares of our class A common stock. We are being represented as to matters of
Chilean law by the law firm of Abud, Vivanco and Vergara, Santiago, Chile.
Certain legal matters will be passed upon for the underwriters by the law firm
of Sacher, Zelman, Paul, Beiley & Van Sant, P.A., Miami, Florida. Atlas,
Pearlman, Trop & Borkson, P.A. has from time to time provided legal
representation to Emerson Bennett & Associates, one of the underwriters.
EXPERTS
Our balance sheets, including our subsidiary, Tepual, as of December 31,
1998 and 1997, and the related statements of income, stockholders' equity and
cash flows for the years then ended, included in this prospectus have been so
included in reliance upon the report of Spear, Safer, Harmon & Co., P.A.,
independent accountants, given on authority of Spear, Safer, Harmon & Co., P.A.
as experts in auditing and accounting.
67
<PAGE>
BIO-AQUA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Combined Balance Sheets................................................................................... F-3
Combined Statements of Income............................................................................. F-4
Combined Statements of Stockholders' Equity............................................................... F-5
Combined Statements of Cash Flows......................................................................... F-6
Notes to Combined Financial Statements.................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bio-Aqua Systems, Inc.
Boca Raton, Florida
We have audited the accompanying combined balance sheets of Bio-Aqua Systems,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related combined
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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.
The combined financial statements give retroactive effect to the tax free
exchange of shares between the Company and Tepual, S.A., which will be
effectuated at the time of the closing of a public offering of the Company's
stock, which has been accounted for as a combination of entities under common
control as described in Note 1 to the combined financial statements. Generally
accepted accounting principles prescribe giving effect to a consummated business
combination in financial statements that do not include the date of consummation
as if the business combination occurred for the periods presented. In addition,
they will become the historical combined financial statements of the Company
after financial statements covering the date of consummation of the business are
issued.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Bio-Aqua Systems,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
SPEAR, SAFER, HARMON & CO.
Miami, Florida
February 26, 1999
F-2
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash................................................................. $ 404,364 $ 136,489 $ 29,168
Accounts Receivable.................................................. 2,769,458 2,981,674 1,583,271
Due from related parties (Note 2).................................... 311 -- 250,672
Other receivables.................................................... -- 69,082 65,646
Inventory............................................................ 778,433 761,869 297,946
Income taxes receivable (Note 3)..................................... 48,323 52,231 134,949
Offering costs....................................................... 297,361 -- --
Other current assets (Note 4)........................................ 474,112 183,325 249,278
----------- ---------- ----------
Total Current Assets.............................................. 4,772,362 4,184,670 2,610,930
----------- ---------- ----------
Property and Equipment, net (Note 5)................................... 877,918 984,676 1,393,603
----------- ---------- ----------
Other assets (Note 6).................................................. 896,415 524,645 84,624
----------- ---------- ----------
$ 6,546,695 $5,693,991 $4,089,157
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 1,361,047 $ 990,749 $ 294,023
Obligations with banks: (Note 7)
Lines-of-credit................................................... 2,311,896 1,525,968 1,193,338
Current portion................................................... 121,609 158,603 106,320
Notes payable (Note 8)............................................... 234,212 124,775 --
Bridge loans payable (Note 14)....................................... 150,000 -- --
Accrued expenses and other current liabilities (Note 9).............. 199,274 399,638 399,836
----------- ---------- ----------
Due to stockholder................................................... 1,300,000 -- --
----------- ---------- ----------
Total Current Liabilities.............................................. 5,678,038 3,199,733 1,993,517
----------- ---------- ----------
Long-Term Liabilities:
Obligations with banks, excluding current portion (Note 7)........... 400,002 478,813 355,014
----------- ---------- ----------
Stockholders' Equity:
Class A common stock, $.0001 par value; 20,000,000 shares authorized,
86,294, 0, and 0 shares issued and outstanding at September 30,
1999, December 31, 1998 and 1997, respectively.................... 9 -- --
Class B common stock, $.0001 par value; 2,000,000 shares authorized;
1,700,000 shares issued and outstanding........................... 170 170 170
Preferred stock, $.0001 par value; 5,000,000 shares authorized; no
shares issued and outstanding..................................... -- -- --
Additional paid-in capital........................................... 529,444 411,331 411,331
----------- ---------- ----------
Retained earnings.................................................... 459,431 1,662,100 1,422,127
Cumulative translation adjustment.................................... (520,399) (58,156) (93,002)
----------- ---------- ----------
Total Stockholders' Equity............................................. 468,655 2,015,445 1,740,626
----------- ---------- ----------
$ 6,546,695 $5,693,991 $4,089,157
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-3
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................. $ 4,454,395 $ 4,648,676 $6,873,512 $5,238,299
Cost of Operations....................................... 3,087,682 3,453,168 4,853,553 3,571,678
----------- ----------- ---------- ----------
Gross Profit............................................. 1,366,714 1,195,508 2,019,959 1,666,621
General and Administrative Expenses...................... 981,529 1,029,043 1,555,661 1,516,974
----------- ----------- ---------- ----------
Income from Operations................................... 385,185 166,465 464,298 149,647
----------- ----------- ---------- ----------
Other Income (Expenses):
Other, net............................................. 29,470 116,560 24,060 203,353
Interest expense....................................... (317,324) (177,570) (280,266) (231,805)
Loss on investment in related parties.................. -- -- (23,082) (64,768)
Gain on sale of property and equipment................. -- -- 54,963 --
----------- ----------- ---------- ----------
(287,854) (61,010) (224,325) (93,220)
----------- ----------- ---------- ----------
Net Income............................................... $ 97,331 $ 105,455 $ 239,973 $ 56,427
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net Income Per Common Share............................ $ .06 $ .06 $ 0.14 $ 0.03
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted Average Common Shares
Outstanding......................................... 1,755,353 1,700,000 1,700,000 1,700,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-4
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL CUMULATIVE TOTAL
COMMON COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
------ ------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... $ -- $170 $411,331 $1,365,700 $(403,628) $ 1,373,573
Net income............................... -- -- -- 56,427 -- 56,427
Translation adjustment................... -- -- -- -- 310,626 310,626
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1997............... -- 170 411,331 1,422,127 (93,002) 1,740,626
Net income............................... -- -- -- 239,973 -- 239,973
Translation adjustment................... -- -- -- -- 34,846 34,846
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1998............... -- 170 411,331 1,662,100 (58,156) 2,015,445
Issuance of common stock................. 9 -- 118,113 -- -- 118,122
Net income (unaudited)................... -- -- -- 97,331 -- 97,331
Distribution to stockholder
(unaudited)............................ -- -- -- (1,300,000) -- (1,300,000)
Translation adjustment (unaudited)....... -- -- -- -- (462,243) (462,243)
---- ---- -------- ---------- ---------- ------------
Balance at September 30, 1999 (unaudited).. $ 9 $170 $529,444 $ 459,431 $(520,399) $ 468,655
==== ==== ======== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-5
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 97,331 $ 105,455 $ 239,973 $ 56,427
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization...................... 184,072 198,694 227,732 283,588
Loss on investment in related party................ -- -- 23,082 64,768
Gain on sale of property and equipment............. -- -- (54,963) --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................ 212,216 (672,327) (1,398,403) 1,322,729
Other receivables.................................. 69,082 (216,896) (3,436) 59,354
Inventory.......................................... (16,564) (263,272) (463,923) 749,054
Income taxes receivable............................ 3,908 74,031 82,718 4,051
Other current assets............................... (184,905) 237,226 65,953 (62,278)
Other assets....................................... (371,770) 75,602 (463,103) (6,392)
Increase (decrease) in:
Accounts payable................................... 370,298 373,591 696,726 (502,977)
Accrued expenses and other current liabilities..... (90,927) (98,577) 90,218 (1,868,164)
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Operating Activities..... 272,741 (186,473) (957,426) 100,160
--------- --------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property and equipment................ (77,314) (162,455) (195,761) (28,618)
Proceeds from sale of property and equipment......... -- 431,919 431,919 --
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Investing Activities..... (77,314) 269,464 236,158 (28,618)
--------- --------- ----------- -----------
Cash Flows from Financing Activities:
Net proceeds (payments) of lines-of-credit........... $ 785,928 $ (64,872) $ 332,630 $ 90,338
Net proceeds from related parties.................... (311) 239,848 250,672 54,328
Proceeds from bridge loan............................ 150,000 -- -- --
Costs of public offering............................. (285,121) -- -- --
Proceeds of long-term debt........................... -- -- 236,161 --
Payments of long-term debt........................... (115,805) (159,835) (25,720) (500,666)
--------- --------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities..... 534,691 15,141 793,743 (356,000)
--------- --------- ----------- -----------
Effect of Exchange Rate Changes on Cash................. (462,243) (73,044) 34,846 310,626
--------- --------- ----------- -----------
Increase in Cash........................................ 267,875 25,088 107,321 26,168
Cash--Beginning of Period............................... 136,489 29,168 29,168 3,000
--------- --------- ----------- -----------
Cash--End of Period..................................... $ 404,364 $ 54,256 $ 136,489 $ 29,168
========= ========= =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest............... $ 266,914 $ 177,568 $ 280,266 $ 231,805
Supplemental Disclosure of Non-Cash Financing
Activities:
Issuance of Class A common stock in connection with
offering........................................... 118,122 -- -- --
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-6
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization--Bio-Aqua Systems, Inc., (the "Company"), is a Florida
corporation incorporated in March 1999 as a holding company to acquire Tepual,
S.A., a Chilean corporation. Tepual, S.A. is in the business of researching and
developing of production and control systems related to animal nutrition. The
Company provides brokerage services and technical advice in the production of
meals for feed for aquaculture, poultry and cattle farming. In addition, the
Company researches poultry vaccines.
Basis of Presentation--Subsequent to December 31, 1998, the Company entered
into an agreement to acquire 99.9% of the issued and outstanding common stock of
Tepual, S.A., in exchange for 1,700,000 shares of Class B common stock which
will be effective as of the closing of the initial public offering of the
Company's stock. (See Note 11 for more details.) In order to comply with Chilean
law and the requirements of the Central Bank of Chile for foreign investments,
two stock purchase agreements will be effectuated at the time of the closing of
the initial public offering of the Company's stock whereby (i) Atik, S.A.
("Atik"), a Chilean corporation and Flagship Import Export LLC ("Flagship"), a
Nevada limited liability company, shall purchase 1,699,900 shares of Class B
common stock and, (ii) the Company shall purchase Atik and Flagship's 99.9%
interest in Tepual, S.A. and Tepual, S.A. shall then become a majority owned
(99.9%) subsidiary of the Company. The substance of this transaction is an
exchange of shares between the Company and Atik and Flagship which is accounted
for as a combination of entities under common control. Generally accepted
accounting principles prescribe giving effect to a consummated business
combination in financial statements that do not include the date of consummation
as if the business combination occurred at the beginning of the first period
presented. Accordingly, the combined financial statements for all periods
presented have been prepared assuming the acquisition by the Company took place
on January 1, 1997, that the Company was incorporated on that date, and the
exchange of shares was effectuated at that time. Because the Company was not
formed until March 1999, historical and proforma financial statements are not
included herein because the assets, liabilities, revenues and expenses and net
income of Bio-Aqua Systems, Inc. are not material to the information presented.
These financial statements will become the historical combined financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
Functional Currency--The financial statements have been translated in
accordance with the provisions set forth in Statement of Financial Accounting
Standards No. 52, from Chilean pesos (the functional currency) into US dollars
(the reporting currency). The exchange rate used at September 30, 1999, December
31, 1998 and 1997, respectively, was 531.11 pesos to U.S. $1,473.77 pesos to
U.S. $1 and 439.18 pesos to U.S. $1. The weighted average exchange rate used in
September 30, 1999 and 1998, December 31, 1998
F-7
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
and 1997 was 503.15 pesos to U.S. $1,465.98 pesos to U.S. $1, 465.98 pesos to
U.S. $1 and 420.69 pesos to U.S. $1, respectively.
Revenue Recognition--The Company earns revenues principally from the sale
of different types of meals (fish, feather, and krill) used in the production of
animal feed as well as its automatic fish meal processing control system. The
Company also researches vaccines and other types of meals for its customers. In
the case of meal sales, revenue is recognized at the point of sale of goods to
its customers. Revenue associated with research services are recognized when the
services are performed.
Revenue from contracts to install automatic control devices are recognized
upon completion of the installation.
Royalty income in included in other income and is recognized on the basis
of terms specified in contractual agreements, normally as earned.
Concentrations of Credit Risk--Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and trade receivables. The Company places its cash with high credit quality
financial institutions. A significant portion of the Company's sales are to
several large customers and, as such, the Company is directly affected by the
well-being of those customers. However, the credit risk associated with trade
receivables is mitigated due to the Company's customer base and ongoing control
procedures which monitor the credit worthiness of customers. Historically, the
Company has not experienced losses on trade receivables. Therefore, no allowance
for bad debts is deemed necessary. At September 30, 1999, December 31, 1998 and
1997, approximately 13%, 20% and 20%, respectively, of the Company's
consolidated accounts receivable was attributable to one customer.
Inventory--Inventory consists primarily of fish, feather, and krill meal
and are stated at the lower of cost or market. Cost is determined using the
weighted average method.
Property and Equipment--Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method based on the estimated
useful life of the asset ranging from three to ten years.
Software Development Cost--The Company develops and manufacturers a
computerized process to facilitate the production of the highest nutrient level
in fish meal. In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company expensed all research and development costs
associated with the development of software products used in the processing of
fish meal. Initial costs were charged to operations as research prior to the
development of a detailed program design or a working model. Costs incurred
subsequent to the development of a working model were immaterial and thus not
capitalized. Research and development costs of approximately $399,000, $581,000
and
F-8
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
$564,000 for the nine months ending September 30, 1999 and the years ending
December 31, 1998 and 1997, respectively, are charged to operations and included
in general and administrative expenses.
Income Taxes--In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
Accounting for Income Taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Foreign Operations--As the Company operates almost exclusively outside of
the United States, one must be aware of the potential for both economic and
political change in the business environment, different than that of the United
States. The success of the Company depends on the success of its foreign
operations and a stable economic and political environment of those countries.
Earnings Per Common Share--Earnings per common share are based on the
weighted average number of shares outstanding of 1,739,882 and 1,700,000 for the
periods ended September 30, 1999 and 1998 and 1,700,000 for the years ended
December 31, 1998 and 1997, giving effect to common stock equivalents, none of
which existed in the aforementioned periods.
Recent Pronouncements--In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 "Earnings per
Share" and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information About Capital Structure" which are both effective for fiscal years
beginning after December 15, 1997. SFAS No. 128 simplifies the current required
calculation of earnings per share ("EPS") under APB No. 15, "Earnings per
Share", by replacing the existing calculation of primary EPS with a basic EPS
calculation. It requires a dual presentation for complex capital structures of
basic and diluted EPS on the face of the income statement and requires a
reconciliation of basic EPS factors to diluted EPS factors. SFAS No. 129
requires disclosure of the Company's capital structure. There was no material
impact to the Company's EPS calculation or financial statement presentation and
disclosure due to the adoption of SFAS No. 128 and SFAS No. 129.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" which is
effective for
F-9
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements which requires
the Company to (i) classify items of other comprehensive income by their nature
in a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. There was no
material impact to the Company's financial reporting or presentation due to the
adoption of SFAS No. 130.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", and amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries". SFAS No. 131 requires
annual financial statements to disclose information about products and services,
geographic areas, and major customers based on a management approach, along with
interim reports. The management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the segments for
making business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that were not
consolidated. This new management approach may result in more information being
disclosed than presently practiced and require new interim information not
previously presented. There was no material impact to the Company's financial
reporting or presentation due to the adoption of SFAS No. 131.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 "Employers' Disclosures About Pensions
and Other Postretirement Benefits--An Amendment of FASB Statements No. 87, 88,
and 106" which is effective for fiscal years beginning after December 15, 1 997.
SFAS No. 132 revises only the employers' disclosures about pension and other
postretirement benefit plans; it does not change the measurement or recognition
of such plans. Since the Company does not have such plans, there is no impact to
the Company's financial reporting or presentation due to the adoption of SFAS
No. 132.
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 of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Interim Financial Statements--The accompanying interim unaudited combined
financial information has been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments and eliminations consisting only of
normal recurring adjustments, necessary to present fairly the combined financial
position of the Company as of September 30, 1999 and the combined results of its
operations and cash flows for the nine months ended September 30, 1999 and 1998,
have been included. The results of operations for such interim period are not
necessarily indicative of the results for the full year.
NOTE 2--RELATED PARTY TRANSACTIONS
During 1998 and 1997, the Company earned royalty income of approximately
$9,000 and $57,000, respectively from an affiliated company. As of December 31,
1997, $123,186 was due from this affiliate. No amounts were due as of September
30, 1999 and 1998 and December 31, 1998.
Also during 1998 and 1997, the Company made advances to other affiliated
companies. As of September 30, 1999, December 31, 1998 and 1997, $311, $-0- and
$250,672, respectively, were due from these affiliates.
NOTE 3--INCOME TAXES
In Chile, the Company is subject to income taxes at a statutory rate of 15%
of taxable income, as defined. For the period ended September 30, 1999 and the
years ended December 31, 1998 and 1997, the Company had no taxable income due to
various credits and incentives provided by the government of Chile. In addition,
the Company made estimated income tax payments during those years and is due a
refund.
F-11
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 3--INCOME TAXES--(CONTINUED)
The following is a reconciliation of the statutory tax rates:
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD ENDED DECEMBER 31,
JUNE 30, --------------
1999 1998 1997
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Statutory tax rate................................................... 15% 15% 15%
Credits and incentives from government............................... (15) (15) (15)
---- ---- ----
Effective tax rate................................................... 0% 0% 0%
==== ==== ====
</TABLE>
As mentioned above, while the Company has incurred no income taxes for the
period ended September 30, 1999 and the years ended December 31, 1998 and 1997,
it has made monthly estimated tax payments in excess of the tax due which
coupled with the aforementioned credits has yielded income tax recoverables.
The Company was not liable for U.S. income taxes for the years ended
December 31, 1998 and December 31, 1997, because all earnings were generated by
the Chilean subsidiary and no earnings were repatriated to the Company for these
reporting periods. Therefore, no deferred tax assets or liabilities are
attributable to these years other than those reported by the subsidiary in its
regional operations. A deferred tax liability was recognized at September 30,
1999, December 31, 1998 and 1997 for approximately $74,000, $74,000 and $80,000,
respectively and is included in accrued expenses and other current liabilities.
NOTE 4--OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses........................................... $ 414,506 $183,325 $243,877
Bridge loan financing...................................... 59,606 -- --
Other...................................................... -- -- 5,401
--------- -------- --------
$ 474,112 $183,325 $249,278
========= ======== ========
</TABLE>
Prepaid expenses include deposits on orders placed with vendors of
approximately $393,000, $175,000 and $234,000 as of September 30, 1999, December
31, 1998 and 1997, respectively.
F-12
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1999 1998 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures............................ $ 154,928 $ 154,928 $ 154,701
Machinery and equipment........................... 1,585,826 1,508,512 1,503,316
Buildings and improvements........................ 238,053 238,053 238,053
Land.............................................. 39,511 39,511 317,523
Other............................................. 95,531 95,531 91,605
Vehicles.......................................... 94,446 94,446 94,446
----------- ----------- -----------
2,208,295 2,130,981 2,399,644
Less accumulated depreciation..................... (1,330,377) (1,146,305) (1,006,041)
----------- ----------- -----------
$ 877,918 $ 984,676 $ 1,393,603
=========== =========== ===========
</TABLE>
Depreciation expense was $184,072, $198,694, $227,732 and $283,588 for the
nine months ended September 30, 1999 and 1998 and the years ended December 31,
1998 and 1997, respectively.
During 1998, the Company sold land with a cost basis of approximately
$278,000.
NOTE 6--OTHER ASSETS
The Company has advanced approximately $887,000 and $500,000 to a fishing
vessel company as of September 30, 1999 and December 31, 1998, respectively,
(see Note 10).
NOTE 7--OBLIGATIONS WITH BANKS
Obligations with banks consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER -----------------------
30,
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Lines-of-credit with monthly, semi-annual and annual
maturity dates and interest rates ranging from 9%
to 13.8% APR.; fully collateralized by a personal
guarantee from a stockholder and certain assets of
the Company. Currency: Chilean Pesos and UF.......
$ 2,311,896 $1,525,968 $1,193,338
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-13
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 7--OBLIGATIONS WITH BANKS--(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank with maturity date in January 2005 and
fully collateralized by a personal guarantee from a
stockholder and certain assets of the Company, bearing
interest at 13.7%. Currency: Chilean Pesos and UF.......
$ 521,611 $637,416 $461,334
Less: Current portion...................................... (121,609) (158,603) (106,320)
--------- -------- --------
$ 400,002 $478,813 $355,014
========= ======== ========
</TABLE>
The note payable was refinanced in October 1998 increasing the debt by
approximately $236,000.
Interest rates on all of these loans are based on the Asociacion de Bancos
y Entidades Financieras, (T.A.B.) rate, which represents a daily average of the
interest paid by banks on its deposits. The rate is then adjusted upwards
approximately 1.5% for the banks profit, and then an additional 1.0%-1.7%
reflecting the individual risk of the bank on the individual loan. There are no
covenants or restrictions imposed on the aforementioned obligations with any of
the banks involved.
The UF is an indexed unit of account expressed in pesos and adjusted
according to inflation (CPI).
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------
<S> <C>
1999............................................................ $ 158,603
2000............................................................ 81,521
2001............................................................ 88,594
2002............................................................ 97,670
2003............................................................ 102,947
2004 and thereafter............................................. 108,081
------------
$ 637,416
============
</TABLE>
NOTE 8--NOTES PAYABLE
Notes payable consist of various short-term loans bearing interest at rates
ranging from 12% to 14% per annum. The notes are secured by approximately
$274,000 of accounts receivable.
F-14
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 9--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and employee related payables...................... $ 44,167 $120,925 $105,155
Sales and other taxes payable............................... 1,467 87,367 195,248
Deferred taxes.............................................. 73,932 73,932 79,755
========= ======== ========
Other....................................................... 79,708 117,414 19,678
========= ======== ========
$ 199,274 $399,638 $399,836
========= ======== ========
</TABLE>
NOTE 10--COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases various offices in Santiago, Chile
pursuant to operating leases. Monthly rental payments were approximately $3,000
during 1998 and 1997. Rent expense for the nine months ended September 30, 1999
and 1998 and the years ended December 31, 1998 and 1997 totaled approximately
$117,000, $63,000, $119,000 and $73,000, respectively.
Future minimum rental payments under the lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING ANNUAL
DECEMBER 31, PAYMENTS
- ---------------------------------------------------------------- ------------
<S> <C>
1999............................................................ $ 144,648
2000............................................................ 17,484
------------
$ 162,132
============
</TABLE>
Commercial Agreement--During 1998, the Company entered into an agreement
with Kelor Trading Ltd. ("Kelor") a fishing vessel company, for the exclusive
rights to Kelor's krill products. Pursuant to the agreement, the Company has
committed to advance Kelor up to $2,000,000 for its exploration. In return,
Kelor agrees to pay the Company the following; (i) a 3% commission of sales,
(ii) $20 per ton of krill meal sold and (iii) 5% of krill oil produced on board
by the Company's technological package.
As of September 30, 1999 and December 31, 1998, the Company advanced
approximately $887,000 and $500,000, respectively, to Kelor which is included in
other assets on the accompanying 1999 and 1998 combined balance sheets. This
agreement is due within 18 months with interest at a rate of 13.5%.
NOTE 11--OTHER MATTERS
Initial Public Offering--The Company signed a letter of intent with an
underwriter to offer 1,200,000 shares of Class A common stock and 1,200,000
redeemable common stock purchase warrants to the public in an initial public
offering, being made on a firm commitment basis. Each of the warrants entitles
the registered holder to purchase one share
F-15
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 11--OTHER MATTERS--(CONTINUED)
of Class A common stock. Total anticipated funds being raised will be
approximately $6,900,000. The net proceeds will be used for the continued
development of the Company.
Royalty Agreements--In June 1998, the Company and a non-profit corporation
(CECS) entered into a 10-year agreement with R-Biopharm GMBH (Biopharm), a
German company, in which the Company and CECS has agreed to provide technology
it possesses with respect to a red-tide detection kit. In exchange for this
technology, the Company and CECS will receive 12.5% royalties of net sales of
the detection kit. Biopharm will pay a minimum of $5,000 in 1999 and a minimum
of $15,000 for each remaining year under the agreement. Sales of this red tide
detection kit are expected to begin in the first quarter of 2000. The royalties,
including the minimum payments, will be shared 60% by the Company and 40% by
CECS.
Under a separate agreement, dated June 20, 1998, between Inual (a company
related through common ownership) and Biopharm, Inual has agreed to supply
Biopharm with all toxins and conjugates necessary to produce the red-tide
detection test kit. This agreement provides that Inual shall receive royalties
of 12.5% of the net sales of the test kit for 10 years dated from the execution
of the agreement. Biopharm will pay a minimum royalty of $5,000 during 1999 and
a minimum of $15,000 for each remaining year under the agreement. This payment
constitutes minimum royalties against the 12.5% of net sales on an annual basis.
In addition to this 12.5% royalty, Inual shall receive $400,000 from Biopharm in
consideration for supplying Biopharm with a customer list for the future
potential sales of the test kit. This payment is due two years from the date of
the agreement. Inual transferred this contract to the Company in July 1999 and
the Company shall receive 100% of its benefits.
NOTE 12--YEAR 2000 ISSUE
Computer programs used by businesses worldwide were written using two
digits rather than four digits to define the applicable year. Accordingly, these
programs recognize the dates "00" and "01" as the years 1900 and 1901 rather
than the years 2000 and 2001. The Company recognizes the need to ensure its
operations will not be adversely impacted by year 2000 computer program failures
arising from program processes and calculations misinterpreting the year 2000
date. The Company has evaluated its financial and operational systems to
determine the impact the year 2000 issue will have on its operations. The
Company also plans to communicate with its significant suppliers, dealers,
financial institutions, and others with which it conducts business to determine
the extent the Company may be impacted by third parties' failure to address the
year 2000 issue. Although the Company plans to be year 2000 compliant prior to
December 31, 1999 and expects no material impact to the Company's operations,
there can be no assurance that the failure of the Company or such third parties
to successfully address their respective year
F-16
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 12--YEAR 2000 ISSUE--(CONTINUED)
2000 issues will not have a material adverse effect on the Company's business,
financial condition, cash flows, and result of operations.
NOTE 13-- INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
The Company operates predominantly in one industry segment--that being the
production, research, and development of animal nutrition and related products.
During 1998 and 1997, sales to the top five customers amounted to approximately
65% and 52%, respectively, of total sales.
Customers outside Chile are worldwide, but primarily in South America,
United States, Asia, Europe and Australia. No single country or geographic
region is significant to the overall operations of the Company. All the
Company's assets are located within Chile.
NOTE 14--SUBSEQUENT EVENT
Bridge Loans--In April and May 1999, the Company entered into several
bridge loans totaling $150,000 with investors which were used for short-term
operations. These loans are evidenced by promissory notes bearing interest at 8%
per year. The Company is obligated to repay these notes the earlier of (i) the
closing date of the aforementioned initial public offering, or (ii) ranging from
March 30, 2,000 to January 15, 2001. As additional consideration, the investors
received 35,294 shares of Class A common stock valued at $3 per share. The
Company has capitalized these costs and are included in other current assets and
are being amortized over the term of the loans. Interest expense relating to
these loans amounted to approximately $50,000 for the nine months ending
September 30, 1999.
Trademarks--In June 1999, the Company entered into an agreement to purchase
the outstanding common stock of Profeed, Inc., an entity related through common
control, upon completion of the initial public offering ("IPO"). Profeed's sole
assets consist of the Tepual and Inual trademarks and has had no other activity
since its inception. The Company will purchase Profeed for $1,300,000, of which
$400,000 will be paid out of the proceeds of the IPO. The balance will be paid
either from sales of products sold under the Tepual and Inual brands, third
party financing, or other working capital.
Through September 30, 1999, Profeed has not received any royalties or
commissions for its ownership of these trademarks. Additionally, no material
changes in the Company's revenues and expenses are expected through its
ownership of these trademarks.
As the above transaction is between related parties under common control,
the above mentioned assets must be accounted for at historical cost. Such amount
is immaterial and therefore, not reflected in the financial statements. Due to
the related party nature of this transaction, the purchase price of $1,300,000
is recorded as a distribution and a liability,
F-17
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 14--SUBSEQUENT EVENT--(CONTINUED)
due to stockholder, in the accompanying September 30, 1999 (unaudited) combined
financial statements.
Rental and Consulting Agreement--In 1999, the Company entered into an
agreement with an affiliate of one of the Company's directors to perform certain
services including acting as the U.S. liaison, rental of office space and
certain financial, advisory and consulting services, at an annual payment of
$30,000.
Employment Agreements--In 1999, the Company entered into a three year
employment agreement with the Company's President and Chief Financial Officer.
Pursuant to the terms and conditions of the employment agreements, the President
shall receive an initial annual base salary of $200,000 and the Chief Financial
Officer shall receive an initial annual base salary of $100,000. In addition to
the base salaries, they are entitled to receive various incentives and other
compensation amounting up to $100,000 and $20,000 as President and Chief
Financial Officer, respectively.
Stock Option Plan--Subsequent to year end, the Board of Directors of the
Company and a majority of the Company's shareholders adopted a Stock Option Plan
(the "Plan"). The Company will reserve a small amount of shares (not yet
determined) of Class A common stock for issuance under this Plan. No options
have been issued under the Plan.
F-18
<PAGE>
1,200,000 SHARES OF
CLASS A COMMON STOCK
1,200,000 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
BIO-AQUA SYSTEMS, INC.
------------------------
PROSPECTUS
------------------------
INSTITUTIONAL EQUITY CORPORATION
NUTMEG SECURITIES, LTD.
EMERSON BENNETT &
ASSOCIATES, INC.
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporation. Our articles
of incorporation and bylaws provides that we shall indemnify to the fullest
extent permitted by the Florida Business Corporation Act any person whom it may
indemnify thereunder.
The provisions of Florida law that authorize indemnification do not
eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available. In addition, each director will continue to be subject to
liability for (a) violations of criminal laws, unless the director has
reasonable cause to believe that his or her conduct was lawful or had no
reasonable cause to believe his conduct was unlawful, (b) deriving an improper
personal benefit from a transaction, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or conscious disregard for our best
interests in a proceeding by or in our right to procure a judgment in its favor
or in a proceeding by or in the right of a shareholder. The statute does not
affect a director's responsibilities under any other law, such as the federal
securities laws.
The effect of Florida law, our articles of incorporation and our bylaws is
to require us to indemnify our officers and directors for any claim arising
against such persons in their official capacities if such person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Under the terms of the underwriting agreement, our directors and officers
also are indemnified against certain civil liabilities that they may incur under
the Securities Act.
To the limit indemnification for liabilities arising under the Securities
Act, may be permitted to our directors, officers or control persons control, we
have been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts expected to be incurred in connection with the offering described in
this registration statement). All amounts are estimated except the registration
fee, NASD Fee and the underwriters' non-accountable expense allowance.
<TABLE>
<S> <C>
Securities and Exchange Commission/Registration fee
and other documents*................................................................. $ 5,700
NASD filing fee*........................................................................ 2,500
AMEX filing fee*........................................................................ 20,000
Printing and engraving expenses*........................................................ 65,000
Accounting fees and expenses*........................................................... 50,000
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
Legal fees and expenses*................................................................ 200,000
Blue Sky fees and expenses*............................................................. 9,000
Transfer Agent fees and expenses*....................................................... 800
--------
Total*............................................................................ $353,000
========
</TABLE>
- ------------------
* Estimated
We will pay all of the above expenses of this offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On March 18, 1999, we issued 100 shares of class B common stock to Mr.
Rutman, our president, chief executive officer and chairman of the board for par
value, as promotional shares. The issuance of the shares of class B common stock
were exempt from registration under Section 4(2) of the Securities Act.
Between April and May 1999, six accredited investors loaned us $150,000 at
an interest rate of 8% per year. As consideration for this loan, the investors
received an aggregate of 35,294 shares of class A common stock. These investors
had access to, or were otherwise provided with, our information, including
financial. On March 18, 1999, we issued 51,000 shares of class A common stock to
David Mayer at our formation. Accordingly, the issuance of the shares of class A
common stock were exempt from registration under Section 4(2) of the Securities
Act.
As of the effective date, Flagship Import Export LLC, wholly-owned and
controlled by Mr. Rutman and Atik, owned and controlled by Paulina and Andrea
Rutman, will acquire 1,699,900 shares of class B common stock. The shareholders
of Flagship Import Export LLC and Atik were provided with, or otherwise had
access to, our information, including financial. Accordingly, the issuances of
the shares of class B common stock to Flagship Import Export LLC and Atik will
be exempt from registration under Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement(1)
1.2 -- Form of Agreement Among Underwriters(1)
1.3 -- Form of Selected Dealers Agreement(1)
1.4 -- Lock-Up Agreement (1)
2.1 -- Stock Exchange Agreement between Flagship Import Export LLC and Bio-Aqua for the exchange of
class B common stock of Bio-Aqua for shares of Tepual S.A.(1)
2.3 -- Stock Purchase Agreement between Atik, S.A. and Bio-Aqua for the purchase of class B common
stock (1)
2.4 -- Stock Purchase Agreement between Bio-Aqua and Atik, S.A. for the purchase of shares of Tepual
S.A.(1)
2.5 -- Stock Purchase Agreement between Profeed, Inc. and Bio-Aqua for the acquisition of Profeed,
Inc. and the rights to the Tepual(Trademark) and Inual(Trademark) brands and trademarks(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Bio-Aqua's Articles of Incorporation(1)
3.1(a) -- Articles of Amendment to the Articles of Incorporation of Bio-Aqua(1)
3.2 -- Bio-Aqua's Bylaws(1)
4.1 -- Form of warrant agreement together with the form of warrant certificate(1)
4.2 -- Form of representative's warrant agreement together with the form of representative's purchase
warrant certificate(1)
4.3 -- Form of class A common stock certificate (1)
5.1 -- Opinion of Atlas, Pearlman, Trop & Borkson, P.A.(1)
10.1 -- Stock Option Plan(1)
10.2 -- Association Agreement between Tepual S.A. and Centro de Estudios Cientificos de Santiago and
Implementation Agreement (1)
10.3 -- Agreement between Tepual S.A., Centro de Estudios Cientificos de Santiago and R-Biopharm (1)
10.4 -- Agreement Between Inual S.A. and R-Biopharm (1)
10.5 -- Distribution Agreement between Inual S.A. and R-Biopharm (1)
10.6 -- License Agreement between Tepual S.A. and Biosur S.A.C. (1)
10.7 -- Marketing Agreement between Tepual S.A. and Biosur S.A. (1)
10.8 -- Commercial Agreement between Tepual S.A. and Kelor Trading Ltd. (1)
10.9 -- Form of Bridge Loan Documents(1)
10.10 -- Employment Agreement between Tepual S.A. and Max Rutman(1)
10.11 -- Employment Agreement between Tepual S.A. and Guillermo Quiroz(1)
10.12 -- Consulting Agreement between Bio-Aqua and David Mayer(1)
10.13 -- Recognition of Bank Note with Hemisphere National Bank(1)
10.14 -- Recognition of Bank Note with Corpbanca(1)
10.15 -- Recognition of Bank Note with Banco Sud Americano(1)
10.16 -- Recognition of Bank Note with Banco Santander(1)
10.17 -- Recognition of Bank Note with Banco do Brasil(1)
10.18 -- Lease Agreement between Bio-Aqua and Andean Financial Corporation(1)
10.19 -- Lease Agreement between Tepual and Kaman Construcciones Limitada(1)
10.20 -- Lease Agreement between Tepual and Don Lindor Ltda.(1)
10.21 -- Lease Agreement between Tepual and Centrovet Ltda.(1)
10.22 -- Lease Agreement between Tepual and Turteltaub(1)
21 -- Subsidiaries of Registrant(1)
23.1 -- Consent of Atlas, Pearlman, Trop & Borkson, P.A. (to be included in its opinion filed as
Exhibit 5.1)(1)
23.2 -- Consent of Spear, Safer, Harmon & Co. P.C.(2)
27 -- Financial Data Schedule(2)
99.3 -- U.S. Patent Application for PSP Red Tide Detection Kit(1)
99.4 -- U.S. Patent Application for Red Tide Cleansing System(1)
99.5 -- Consent of Guillermo Quiroz(1)
99.6 -- Consent of Nestor Lagos(1)
99.7 -- Consent of Sergio Vivanco(1)
</TABLE>
- ------------------
(1) Previously filed
(2) Filed herewith
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
We undertake that:
(a) we will file, during any period in which we offer or sell our
securities, a post-effective amendment to this registration statement to:
(1) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(3) include any additional or changed material information on the
plan of distribution;
(4) for determining liability under the Securities Act, we will
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering.
(5) we will file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(6) we will provide to the underwriter at the closing of this
offering certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) As indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the above provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is unenforceable. In the event that a claim for indemnification against
such liabilities (other than our the payment of expenses incurred or paid
by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) We undertake that:
(1) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered in the prospectus and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering of the securities.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT
IT MEETS ALL OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZES THIS
AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF FT.
LAUDERDALE, STATE OF FLORIDA, ON THIS 15TH DAY OF DECEMBER, 1999.
BIO-AQUA SYSTEMS, INC.
By: /s/ MAX RUTMAN
-------------------------------
Max Rutman
President and Chief Executive
Officer
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT TO THE REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------- -------------------
<C> <S> <C>
/s/ MAX RUTMAN President and Chief Executive Officer December 15, 1999
- ------------------------------------------ and Director (Principal Executive
Max Rutman Officer)
/s/ GUILLERMO QUIROZ Chief Financial Officer (Principal December 15, 1999
- ------------------------------------------ Financial and Accounting Officer)
Guillermo Quiroz
/s/ DAVID MAYER Director December 15, 1999
- ------------------------------------------
David Mayer
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement(1)
1.2 -- Form of Agreement Among Underwriters(1)
1.3 -- Form of Selected Dealers Agreement(1)
1.4 -- Lock-Up Agreement (1)
2.1 -- Stock Exchange Agreement between Flagship Import Export LLC and Bio-Aqua for the exchange of
class B common stock of Bio-Aqua for shares of Tepual S.A.(1)
2.3 -- Stock Purchase Agreement between Atik, S.A. and Bio-Aqua for the purchase of class B common
stock (1)
2.4 -- Stock Purchase Agreement between Bio-Aqua and Atik, S.A. for the purchase of shares of Tepual
S.A.(1)
2.5 -- Stock Purchase Agreement between Profeed, Inc. and Bio-Aqua for the acquisition of Profeed,
Inc. and the rights to the Tepual(Trademark) and Inual(Trademark) brands and trademarks(1)
3.1 -- Bio-Aqua's Articles of Incorporation(1)
3.1(a) -- Articles of Amendment to the Articles of Incorporation of Bio-Aqua(1)
3.2 -- Bio-Aqua's Bylaws(1)
4.1 -- Form of warrant agreement together with the form of warrant certificate(1)
4.2 -- Form of representative's warrant agreement together with the form of representative's purchase
warrant certificate(1)
4.3 -- Form of class A common stock certificate (1)
5.1 -- Opinion of Atlas, Pearlman, Trop & Borkson, P.A.(1)
10.1 -- Stock Option Plan(1)
10.2 -- Association Agreement between Tepual S.A. and Centro de Estudios Cientificos de Santiago and
Implementation Agreement (1)
10.3 -- Agreement between Tepual S.A., Centro de Estudios Cientificos de Santiago and R-Biopharm (1)
10.4 -- Agreement Between Inual S.A. and R-Biopharm (1)
10.5 -- Distribution Agreement between Inual S.A. and R-Biopharm (1)
10.6 -- License Agreement between Tepual S.A. and Biosur S.A.C. (1)
10.7 -- Marketing Agreement between Tepual S.A. and Biosur S.A. (1)
10.8 -- Commercial Agreement between Tepual S.A. and Kelor Trading Ltd. (1)
10.9 -- Form of Bridge Loan Documents(1)
10.10 -- Employment Agreement between Tepual S.A. and Max Rutman(1)
10.11 -- Employment Agreement between Tepual S.A. and Guillermo Quiroz(1)
10.12 -- Consulting Agreement between Bio-Aqua and David Mayer(1)
10.13 -- Recognition of Bank Note with Hemisphere National Bank(1)
10.14 -- Recognition of Bank Note with Corpbanca(1)
10.15 -- Recognition of Bank Note with Banco Sud Americano(1)
10.16 -- Recognition of Bank Note with Banco Santander(1)
10.17 -- Recognition of Bank Note with Banco do Brasil(1)
10.18 -- Lease Agreement between Bio-Aqua and Andean Financial Corporation(1)
10.19 -- Lease Agreement between Tepual and Kaman Construcciones Limitada(1)
10.20 -- Lease Agreement between Tepual and Don Lindor Ltda.(1)
10.21 -- Lease Agreement between Tepual and Centrovet Ltda.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.22 -- Lease Agreement between Tepual and Turteltaub(1)
21 -- Subsidiaries of Registrant(1)
23.1 -- Consent of Atlas, Pearlman, Trop & Borkson, P.A. (to be included in its opinion filed as
Exhibit 5.1)(1)
23.2 -- Consent of Spear, Safer, Harmon & Co. P.C.(2)
27 -- Financial Data Schedule(2)
99.3 -- U.S. Patent Application for PSP Red Tide Detection Kit(1)
99.4 -- U.S. Patent Application for Red Tide Cleansing System(1)
99.5 -- Consent of Guillermo Quiroz(1)
99.6 -- Consent of Nestor Lagos(1)
99.7 -- Consent of Sergio Vivanco(1)
</TABLE>
- ------------------
(1) Previously filed
(2) Filed herewith
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Amendment 4 to Form SB-2 being filed under the
Securities Exchange Act of 1933 by Bio-Aqua Systems, Inc. of our report dated
February 26, 1999, relating to our audits of the combined financial statements
of Bio-Aqua Systems, Inc. as of December 31, 1998 and 1997 and appearing in the
aforementioned Amendment 4 to Form SB-2.
SPEAR, SAFER, HARMON & CO.
Certified Public Accountants
Miami, Florida
December 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 404,364
<SECURITIES> 0
<RECEIVABLES> 2,769,458
<ALLOWANCES> 0
<INVENTORY> 788,433
<CURRENT-ASSETS> 4,772,362
<PP&E> 877,918
<DEPRECIATION> (184,072)
<TOTAL-ASSETS> 6,546,695
<CURRENT-LIABILITIES> 5,678,038
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 468,655
<TOTAL-LIABILITY-AND-EQUITY> 6,546,695
<SALES> 4,454,395
<TOTAL-REVENUES> 4,454,395
<CGS> 3,087,682
<TOTAL-COSTS> 981,529
<OTHER-EXPENSES> 29,470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (317,324)
<INCOME-PRETAX> (97,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,331)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
