<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1999
REGISTRATION NO. 333-81829
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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. WALTER J. STANTON III, ESQ.
BRIAN A. PEARLMAN, ESQ. NANCY J. VAN SANT, ESQ.
ATLAS, PEARLMAN, TROP & BORKSON, P.A. SACHER, ZELMAN, STANTON, PAUL, BEILEY & VAN SANT, P.A.
200 EAST LAS OLAS BOULEVARD, SUITE 1900 1401 BRICKELL AVENUE, SUITE 700
FORT LAUDERDALE, FLORIDA 33301 MIAMI, FLORIDA 33131
TELEPHONE (954) 763-1200 TELEPHONE (305) 371-8797
FACSIMILE (954) 766-7800 FACSIMILE (305) 374-2605
</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 pursuant to 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
pursuant to 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 pursuant to
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 pursuant to
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 pursuant to 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)
</TABLE>
(footnotes on next page)
THE REGISTRANT HEREBY AMENDS 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 PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(footnotes from cover)
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 180,000 shares of class A voting common stock issuable pursuant to
the underwriter's over-allotment option.
(3) Includes 180,000 redeemable common stock purchase warrants issuable pursuant
to the over-allotment option.
(4) Represents shares of class A common stock issuable upon exercise of the
warrants registered hereby 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 therein.
(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 therein.
(9) Fee has been partially paid.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 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 , 2004.
Prior to this offering, there has been no public market for our class A
common stock or our warrants. We have applied for the listing of our class A
common stock and our warrants on the American Stock Exchange under the symbols
"SEA," and "SEAW," respectively.
INVESTING IN OUR CLASS A COMMON STOCK AND OUR WARRANTS INVOLVES CERTAIN
RISKS. SEE RISK FACTORS ON PAGE 6.
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, against payment at the offices of
Nutmeg Securities, Ltd. on or about , 1999.
NUTMEG SECURITIES, LTD. EMERSON BENNETT &
ASSOCIATES, INC.
------------------------
Prospectus , 1999
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 5
Use of Proceeds............................................................................................ 9
Dividend Policy............................................................................................ 10
Dilution................................................................................................... 10
Capitalization............................................................................................. 11
Exchange Rates............................................................................................. 12
Selected Financial Data.................................................................................... 13
Management's Discussion and Analysis of Financial Condition Results of Operations.......................... 14
Business................................................................................................... 18
Additional Information..................................................................................... 38
Management................................................................................................. 39
Certain Relationships and Related Transactions............................................................. 43
Bridge Financing........................................................................................... 44
Principal Shareholders..................................................................................... 45
Description of Securities.................................................................................. 46
Shares Eligible for Future Sale............................................................................ 48
Underwriting............................................................................................... 49
Legal Matters.............................................................................................. 51
Experts.................................................................................................... 52
Index to Financial Statements.............................................................................. F-1
</TABLE>
Until , 1999 (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 Florida 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 from its shareholders, Flagship
Import Export LLC, a Nevada company, and Atik, S.A., a Chilean company. Flagship
is wholly owned by Max Rutman, our chief executive officer and president. Atik
is equally owned by Paulina and Andrea Rutman, daughters of Max Rutman. We will
acquire the rights to the Inual(Trademark) and Tepual(Trademark) brands at
closing by acquiring 100% of the issued and outstanding stock of Profeed, Inc.,
a Bahamian company, which is owned equally by Max Rutman, Paulina Rutman and
Andrea Rutman. 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. Our fiscal year end is December 31.
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
Shares of class A common stock
underlying warrants..................... 1,200,000 shares
Class A common stock outstanding:
before the offering..................... 86,294
after the offering...................... 1,286,294
Class B common stock outstanding
before the offering..................... 1,700,000
after the offering...................... 1,700,000
</TABLE>
Our class B common stock is identical to our class A common stock, except that
holders of class B common stock are entitled to five (5) votes for each share of
class B common stock held. Upon sale or other
3
<PAGE>
disposition, the shares of class B common stock may be converted, at the option
of the holders into shares of class A common stock on a one-share for one share
basis. Upon such conversion, the super-voting rights with respect to such shares
will terminate.
<TABLE>
<S> <C>
Warrants outstanding:
Before the offering..................... None
After the offering...................... 1,200,000
</TABLE>
We may redeem our warrants beginning , 2000 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.
<TABLE>
<S> <C>
Use of proceeds........................... The net proceeds of this offering will be approximately $5,650,000,
which will be used as follows:
o $1,500,000 for reduction in bank loans
o $400,000 for the acquisition of Inual(Trademark) and
Tepual(Trademark) brands
o $700,000 for development of red tide consumer detection and testing
kits
o $550,000 for development of shrimp immune stimulants and additional
research and development of salmon immune stimulants
o $450,000 for additional research and development of poultry
vaccines
o $150,000 for repayment of bridge loans
o $1,900,000 for working capital.
</TABLE>
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 INCREASED REVENUE. 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 (2) 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 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.
WE FACE RISKS THAT OUR INUAL(TRADEMARK) AND TEPUAL(TRADEMARK) BRANDS
TRADEMARKS ARE NOT ADEQUATELY PROTECTED. 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.
5
<PAGE>
THE LOSS OF SIGNIFICANT CUSTOMERS IN OUR BROKERAGE OF FISH MEAL COULD
ADVERSELY EFFECT OUR BUSINESS. The loss of Bradwell Business Corp., Agribrand
Purina, Bio Mar, Nor Aqua, Pinar Yem Sanayi ve Pazarlama A.S., Alitec and Enos
Canada could materially effect our business. During the first two quarters of
1999, these customers accounted for an aggregate of approximately 80% 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 $860,000 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 pursuant to 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 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.
BECAUSE OUR MANAGEMENT OWNS A MAJORITY OF OUR VOTING STOCK, THEY WILL HAVE
THE ABILITY TO CONTROL ALL MATTERS SUBMITTED TO SHAREHOLDERS FOR APPROVAL, WHICH
WILL LIMIT YOUR ABILITY TO CONTROL TO BIO-AQUA. Mr. Rutman will control the
election of directors as well as our other affairs for the foreseeable future.
Prior to this offering, Max Rutman, our Chief Executive Officer, President, and
Chairman of the Board of Directors owned, directly or indirectly, approximately
86% and held the right to vote 89% of our outstanding capital stock. After this
offering, Mr. Rutman will, directly or indirectly, own approximately 53% of the
outstanding capital stock, which represents the right to vote 89% of our
outstanding capital stock. Holders of class B common stock (of which Mr. Rutman
currently owns or controls approximately 90% of all outstanding shares) are
entitled to five (5) votes for each share of class B common stock held, and
directors are elected by plurality vote.
6
<PAGE>
WE DEPEND ON MAX RUTMAN AND THE LOSS OF MR. RUTMAN'S SERVICES COULD INHIBIT
OUR SUCCESS. 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.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE
BOOK VALUE PER SHARE OF YOUR CLASS A COMMON STOCK UPON COMPLETION OF THIS PUBLIC
OFFERING. The initial public offering price of the class A common stock held by
you is substantially higher than the net book value per outstanding share of our
class A common stock. You will suffer an immediate and substantial dilution of
approximately $3.51 per share. You will experience additional dilution upon
exercise of outstanding warrants.
WITHOUT A CURRENT PROSPECTUS YOU WILL HAVE NO ABILITY TO EXERCISE WARRANTS
AND THEY MAY BECOME VALUELESS. Holders of our warrants will have the right to
exercise our warrants to purchase shares of class A common stock only if a
current prospectus relating to our shares is then in effect. Our warrants may
lose, or be of no value, if a prospectus covering the shares issuable upon the
exercise of the warrants is not kept current.
IF WE REDEEM THE WARRANTS, YOU MAY BE FORCED TO EXERCISE OR SELL YOUR
WARRANTS WHEN YOU WOULD RATHER HOLD THEM FOR APPRECIATION. Our warrants are
subject to redemption in certain circumstances. The exercise of this right
would:
1. force a holder of our warrants to exercise our warrants and pay the
exercise price at a time when it may be disadvantageous for the holder to
do so;
2. to sell our warrants at the then current market price when the
holder might otherwise wish to hold our warrants for possible additional
appreciation; or
3. to accept the redemption price, which is likely to be substantially
less than the market value of our warrants in the event of a call for
redemption.
Holders who do not exercise their warrants prior to redemption by us will
forfeit their right to purchase the shares of class A common stock underlying
our warrants.
THE PRICES AND LIQUIDITY OF OUR SECURITIES MAY BE SIGNIFICANTLY AFFECTED BY
THE MARKET ACTIVITIES OF THE REPRESENTATIVE. It is anticipated that a
significant amount of our class A common stock and warrants will be sold to
customers of the representative. Although the representative has advised us that
it intends to make a market in our class A common stock and our warrants, it
will have no legal obligation to do so. The prices and the liquidity of our
class A common stock and our warrants may be significantly affected by the
degree, if any, of the representative's participation in the market. If it
participates in the market, the representative may influence the market, if one
develops, for the securities. This market-making activity may be discontinued at
any time. Also, if the representative sells our securities issuable upon the
exercise of the representative's warrants or acts as a warrant solicitation
agent for our warrants, it may be required under the Securities Exchange Act of
1934, as amended, to temporarily suspend its market-making activities. The
prices and liquidity of our securities may be significantly affected by the
degree, if any, of the representative's participation in the market.
REPRESENTATIVE'S WARRANTS MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN
ADDITIONAL CAPITAL OR INVOLVE SUBSTANTIAL EXPENSES. As long as the
representative's warrants remain unexercised, our ability to obtain additional
capital might be adversely affected. Moreover, the representative may be
expected to exercise the
7
<PAGE>
representative's warrants at any time when we would, in all likelihood, be able
to obtain any needed capital through a new offering of its securities on terms
more favorable than those provided in the representative's warrants. Exercise of
these registration rights could involve substantial expense to us at a time when
we could not afford cash expenditures and may adversely affect the terms upon
which we may obtain additional funding and may adversely affect the price of our
class A common stock and our warrants.
INITIAL PUBLIC OFFERINGS OF EMERGING COMPANIES HAVE BEEN SUSCEPTIBLE TO
FLUCTUATIONS IN STOCK MARKET PRICES. The stock market in general has recently
experienced significant extreme price and volume fluctuations that may be
unrelated to the operating performance of specific companies. The trading prices
of emerging companies like ours have experienced fluctuations unrelated or
disproportionate to the operating performance of those companies. These broad
market fluctuations could depress the market price of our securities.
WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD MAKE A THIRD PARTY ACQUISITION
DIFFICULT, DEPRIVING SHAREHOLDERS OF THE ABILITY TO TAKE ADVANTAGE OF AN
ATTRACTIVE BID. Certain provisions of our amended and restated articles of
incorporation and bylaws, including the super voting rights of our class B
common stock and the authority of our board of directors to issue up to
5,000,000 shares of our preferred stock without shareholder approval, may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Florida Business Corporation Act
also may have certain anti-takeover effects, including the provision that shares
acquired in excess of certain specified thresholds will not possess any voting
rights unless the voting rights are approved by a majority of a corporation's
disinterested shareholders.
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:
1. the effect of foreign income and withholding taxes and the U.S. tax
implications of foreign source income and losses;
2. the possibility of expropriation or confiscatory taxation or price
controls;
3. adverse changes in local investment or exchange control
regulations;
4. difficulties inherent in operating in less developed legal systems;
5. political instability, government corruption and civil unrest; and
6. 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) pursuant to 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 will be approximately $5,650,000 after
giving effect to the representative's discounts of $690,000, a 3%
non-accountable expense allowance to the representative of $207,000, and
offering costs and expenses of approximately $353,000, but without giving effect
to the exercise of the over-allotment option.
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 2006. The
interest rates for these debts range from 9.259% to 13.8%. As of June 30, 1999
$2,151,509 was outstanding under these debt obligations. Approximately 34% of
our proceeds will be used for working capital, including marketing; overhead;
administrative expenses; general corporate purposes; and possible payment to the
shareholders of Profeed, Inc., for the acquisition of the Tepual(Trademark) and
Inual(Trademark) brands. 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:
5% of our gross revenues per quarter, but in no event greater than 20% of our
net income per quarter, from the sale of products sold under the
Tepual(Trademark) and Inual(Trademark) brands; third party financing or working
capital. 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%
Purchase of Brands......................................... $ 400,000 7.0%
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%
Repayment of Bridge Loans.................................. $ 150,000 2.0%
Working Capital............................................ $1,900,000 34.0%
---------- ------
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 October 31, 1999 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
9
<PAGE>
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.
DILUTION
At June 30, 1999, we had a net tangible book value of $667,800 or
approximately $.37 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 offered hereby, 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 of us at June 30, 1999, would have been approximately
$6,317,800 or $2.12 per share of common stock. This would represent an immediate
increase in the net tangible book value per share of common stock of $1.75 to
existing shareholders and an immediate dilution of $3.51 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............ $ .370
Increase attributable to new investors......................................................... $1.750
Proforma net tangible book value after the offering............................................ $2.120
Dilution to new investors...................................................................... $3.510
Percentage of dilution to new investors........................................................ 62.000%
</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 June 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>
10
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1999, the our actual
capitalization of 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>
AS
ACTUAL ADJUSTED
---------- ---------
<S> <C> <C>
Long-term Debt........................................................................ $ 408,642 $ 408,642
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..................................................................... 1,667,904 1,667,904
Cumulative translation adjustment
from the Chilean pesos into U.S. dollars............................................ (211,364) (211,364)
---------- -----------
Total stockholders' equity............................................................ $1,986,163 $ 7,636,163
---------- -----------
Total capitalization.................................................................. $2,394,805 $ 8,044,805
---------- -----------
---------- -----------
</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>
11
<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
June 30, 1999, the exchange rate was one U.S. dollar to 518.90 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 month-to-month basis for each period and the average
monthly 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......................................... 439.18 460.33 465.25
1999 (first quarter)......................... 472.41 501.15 487.30
1999 (second quarter)........................ 472.41 518.90 491.26
</TABLE>
Source: Central Bank of Chile
12
<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 six months ended June 30, 1999 and 1998, and the balance sheet data at
June 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 six months ended June 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 SIX
SIX MONTHS ENDED JUNE MONTHS ENDED PROFORMA
YEARS ENDED DECEMBER 31, 30, ------------ YEAR ENDED
------------------------ ------------------------ JUNE 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 $3,201,998 $2,963,040 $2,963,040 $ 6,873,512
Cost of Operations................ 3,571,678 4,853,553 2,393,983 1,968,756 1,968,756 4,853,553
Selling and Administrative
Expenses........................ 1,185,000 1,429,049 707,264 846,170 996,170 1,729,049
Other Income (Expenses)........... (93,220) (224,325) (89,133) (60,069) (60,069) (224,325)
Net Income........................ 388,401 366,585 11,618 88,045 (61,955) 66,585
Net Income per common share....... 0.23 0.22 .01 .05 (.04) .04
Weighted average common shares
outstanding..................... 1,700,000 1,700,000 1,700,000 1,739,882 1,739,882 1,700,000
</TABLE>
BALANCE SHEET DATA
The as adjusted balance sheet data as of June 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 JUNE 30, 1999
DECEMBER 31, -----------------------------
------------------------ ACTUAL AS ADJUSTED
1997 1998 (UNAUDITED) (UNAUDITED)(2)
---------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Working capital..................................................... $ 617,413 $ 984,937 $ (666,538) $ 4,983,462
Total assets........................................................ $5,180,304 $6,911,750 $ 7,784,642 $ 11,384,642
Total long-term liabilities......................................... $ 355,014 $ 478,813 $ 408,642 $ 408,642
Total liabilities................................................... $2,348,531 $3,678,546 $ 5,798,479 $ 3,748,479
Stockholders' equity................................................ $2,831,773 $3,233,204 $ 1,986,163 $ 7,636,163
</TABLE>
13
<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, we cannot provide any
assurances that such sales will take place.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Gross revenues for the six months ended June 30, 1999 decreased $238,458
from the six months ended June 30, 1998 from $3,201,998 to $2,963,040, a
decrease of approximately 7%. This is primarily due to the translation exchange
rate. Sales have remained relatively constant between the periods.
Cost of operations decreased from $2,393,983 in the six months ended
June 30, 1998 to $1,968,756 for the six months ended June 30, 1999. This
decrease of $425,227 (18%) 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 six months ended June 30, 1999
increased $138,906 in comparison to the six months ended June 30, 1998 from
$707,264 to $846,170, an increase of approximately 20%. This increase is
principally attributed to an increase in staff relating to the production of
poultry vaccines in Chile. For the immediate future, we will continue to incur
costs in excess of revenues associated with the expansion of our poultry vaccine
business.
Other income (expenses) decreased from $(89,133) at June 30, 1998 to
$(60,069) at June 30, 1999, a decrease of $29,064 or approximately 33%. The
decrease is due to an increase in tax credits based on the export of certain
commodities.
Net income for the six months ended June 30, 1999 was $88,045 compared to
$11,618 for the six months ended June 30, 1998, an increase of $76,427 or
approximately 658%, as a result of the above.
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 $800,000 which
accounted for approximately 50% of the
14
<PAGE>
increase in gross revenues. In particular, 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 $244,049 in comparison to the year ended December 31, 1997 from
$1,185,000 to $1,429,049, an increase of approximately 21%. 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 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.
Net income for the year ended December 31, 1998 was $366,585 compared to
$388,401 for the year ended December 31, 1997, a decrease of $21,816 or
approximately 6%, as a result of the above.
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 (6) 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 June 30, 1999, accounts receivable decreased by $95,560 to $2,886,114
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
$120,000 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 September 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 June 30, 1999, we had outstanding receivables of $2,886,114 of which
$111,782 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 June 30, 1999 to September 15, 1999, we collected $2,517,000 in
period-end receivables.
At June 30, 1999, inventory increased $31,217 to $793,086 as compared to
$761,869 at December 31, 1998. This increase is due to purchases in excess of
sales in the second quarter of 1999.
Software Development Costs increased from $1,217,759 at December 31, 1998
to $1,318,363 at June 30, 1999. This increase is due to capitalized costs
relating to our animal rendering automatic control process, which is still under
development. Our software costs relate to two products; a fish meal automatic
control system and an animal rendering automatic control system. The
technological feasibility of the fish meal
15
<PAGE>
system was established December 1995, at which point all research and
development was completed. The costs incurred through November 1998 approximated
$1,200,000, consisting mostly of salaries and consulting fees, at which point
the product became available for general release to our customers. We have sold
two units at a price of $400,000 each through June 1999.
The technological feasibility of the animal rendering automatic control
system was established in January 1999, at which point all research and
development relating to this system was completed. The costs incurred since the
technological feasibility was established approximated $100,000. This product is
not yet available for sale to the public. We believe that in addition to
automatic control for fish meal and animal rendering, this process may have
other future applications in various industries.
At June 30, 1999, other assets increased by $342,387 to $867,032 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. 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 is expected in
mid October and thus repayment of the loan will begin soon after. 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.
Accounts payable increased $309,696 from $990,749 at December 31, 1998 to
$1,300,445 at June 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 $408,642
at June 30, 1999, a decrease of $70,171. 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.
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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 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 anticipate that this evaluation will be completed by
December 31, 1999. 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 do 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 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:
(1) 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.
(2) 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.
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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.
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
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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.
CORPORATE STRUCTURE AND AFFILIATIONS OF BIO-AQUA SYSTEMS, INC. ON THE EFFECTIVE
DATE:
[chart omitted]
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.
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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 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. Pursuant to
the use of proceeds from this offering approximately 35% 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.
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.
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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 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
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to or higher than quality fish meal. Krill meal also provides pigmentation (red
coloring) to salmon. As of June 30, 1999, the cost of producing krill meal is
approximately $700 per metric ton and it is sold for approximately $1,300 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 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 June 30, 1999, Tepual has lent Kelor Trading
approximately $860,000. 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 prod ucers
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.
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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
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
</TABLE>
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<TABLE>
<CAPTION>
CUSTOMER NAME COUNTRY PRODUCT
- ----------------------------------------------------------------- ---------------- ------------------------
<S> <C> <C>
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>
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 two
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............ 20%
Agribrand Purina.................. 10%
Bio Mar........................... 10%
Nor Aqua.......................... 10%
Pinar Yem Sanayi ve Pazarlama
A.S............................. 10%
Alitec............................ 10%
Ewos Canada....................... 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.
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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.
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. 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 1999. 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.
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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 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 June 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 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
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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 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 Tepual intends to commence sales September 1999. Tepual believes
that the new facility is more than adequate to meet the sales anticipated from
the sale of these vaccines.
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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 June 30, 1999, Biosur S.A.C. had sold approximately $200,000
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 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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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).
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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>
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 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
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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.
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
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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 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 shall 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
June 22, 1999 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
32
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to chemically remove toxins, without changing the organolleptic (flavor, texture
and color) characteristic of the 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 and Inual 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 later this year. 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.
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.
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<PAGE>
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.
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.
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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.
Therefore, we intend to enter into employment agreements with certain of our
researchers whereby these employees 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).
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 Cathlica 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.
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.
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<PAGE>
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.
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:
<TABLE>
Nutrition
<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.
Immunology
Professor Rolf Sejlelid.......................... Head of Pathology Department, Tromso University,
Norway.
Professor Douglas Anderson....................... Former Director National Fish Health Research Lab,
USA.
Biotechnology & automatic control processing
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 official thereof 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.
EMPLOYEES
As of January 31, 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 (4) 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
37
<PAGE>
per month. The lease is for two (2) years, commencing April 30, 1998, and
provides for an automatic renewal term of one (1) 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 (1 1/2)
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 (30) 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 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 being offered hereby. 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 sit
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 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.
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.
39
<PAGE>
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
(10) 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, 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 of Guillermo Quiroz, Sergio Vivanco and David Mayer. 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.
40
<PAGE>
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.
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. Pursuant to 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. Pursuant to the terms and
conditions of his employment agreement, Mr. Quiroz shall receive an initial
annual base salary
41
<PAGE>
of $100,000, bonuses of up to $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 pursuant to 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 thereof 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 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 thereof, 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
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<PAGE>
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 pursuant to the
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 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 therefore 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
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<PAGE>
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
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, whereby
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 the
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 October 31, 1999. As
additional consideration, the investors that loaned us $150,000 received an
aggregate of 35,294 shares of class A common stock.
44
<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 set forth, the
mailing addresses for the individuals named below is General Ekdhal 159,
Santiago, Chile.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK OWNERSHIP PERCENTAGE
BENEFICIALLY 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.
45
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
We are currently authorized to issue up to 22,000,000 shares of common
stock, of which 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 also reserved up to an
aggregate of 300,000 shares of class A common stock pursuant to 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 offered hereby 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.
Accordingly, 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 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.
46
<PAGE>
WARRANTS
Our warrants will be issued in registered form pursuant to an agreement
dated as of the effective date, between us and Florida Atlantic Stock Transfer,
Inc., 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 the exercise thereof 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 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
thereof 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 has opted out
of such 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.
47
<PAGE>
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 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 and 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 lock-up
provisions described below. Any sales of shares pursuant to Rule 144 may have a
depressive effect on the price of our class A common stock.
48
<PAGE>
Notwithstanding the foregoing, 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 date hereof, 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 such securities.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representative, Nutmeg Securities, Ltd.
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>
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 conditions precedent. The
underwriters are obligated to purchase all shares of common stock and our
warrants hereby (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, and 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. 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 $9.28 per
share of class A common stock, $.206 per warrant, and $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.
49
<PAGE>
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.
Pursuant to 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 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 offered hereby and the
exercise price and terms of our warrants has 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 an evaluation by our management and the representative of the
history of and prospects for the industry in which we compete, an assessment of
management, our prospects, our capital structure, and 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 of the gross proceeds of this offering,
including proceeds from any securities purchased pursuant to 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.
50
<PAGE>
We have agreed to engage 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, Nutmeg Securities, Ltd. and Emerson Bennett & Associates, Inc., will
provide us with:
1. general financial consulting services and advice pertaining to our
business affairs;
2. assistance in developing, studying and evaluating financing and capital
structure;
3. mergers and acquisitions activity and corporate financing proposals;
4. prepare reports and studies; and
5. 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 three years after the effective date.
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.
In connection with this offering, certain underwriters and selling group
members may engage in passive marketing transactions in class A common stock and
warrants on the American Stock Exchange in accordance with Rule 103 of
Regulation M.
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, Stanton, 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.
51
<PAGE>
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.
52
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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>
DECEMBER 31,
JUNE 30, ------------------------
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................................. $ 131,695 $ 136,489 $ 29,168
Accounts.............................................................. 2,886,114 2,981,674 1,583,271
Due from related parties (Note 2)..................................... 5,865 -- 250,672
Other receivables..................................................... -- 69,082 65,646
Inventory............................................................. 793,086 761,869 297,946
Income taxes receivable (Note 3)...................................... 37,192 52,231 134,949
Offering costs........................................................ 205,127 -- --
Other current assets (Note 4)......................................... 664,220 183,325 249,278
----------- ---------- ----------
Total Current Assets 4............................................. 4,723,299 4,184,670 2,610,930
----------- ---------- ----------
Property and Equipment, net (Note 5).................................... 875,948 984,676 1,393,603
----------- ---------- ----------
Other Assets:
Software development costs, net (Note 6).............................. 1,318,363 1,217,759 1,091,147
Other assets (Note 7)................................................. 867,032 524,645 84,624
----------- ---------- ----------
2,185,395 1,742,404 1,175,771
----------- ---------- ----------
$ 7,784,642 $6,911,750 $5,180,304
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................................... $ 1,300,445 $ 990,749 $ 294,023
Obligations with banks: (Note 8)
Lines-of-credit.................................................... 2,151,509 1,525,968 1,193,338
Current portion.................................................... 135,547 158,603 106,320
Notes payable (Note 9)................................................ 100,864 124,775 --
Bridge loan payable................................................... 150,000 -- --
Accrued expenses and other current liabilities (Note 10).............. 251,472 399,638 399,836
----------- ---------- ----------
Due to stockholder.................................................... 1,300,000 -- --
----------- ---------- ----------
Total Current Liabilities............................................... 5,389,837 3,199,733 1,993,517
----------- ---------- ----------
Long-Term Liabilities:
Obligations with banks, excluding current portion (Note 8)............ 408,642 478,813 355,014
----------- ---------- ----------
Stockholders' Equity:
Class A common stock, $.0001 par value; 20,000,000 shares authorized,
86,294, 0, and 0 shares issued and outstanding at June 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..................................................... 1,667,904 2,879,859 2,513,274
Cumulative translation adjustment..................................... (211,364) (58,156) (93,002)
----------- ---------- ----------
Total Stockholders' Equity.............................................. 1,986,163 3,233,204 2,831,773
----------- ---------- ----------
$ 7,784,642 $6,911,750 $5,180,304
----------- ---------- ----------
----------- ---------- ----------
</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>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................. $ 2,963,040 $ 3,201,998 $6,873,512 $5,238,299
Cost of Operations....................................... 1,968,756 2,393,983 4,853,553 3,571,678
----------- ----------- ---------- ----------
Gross Profit............................................. 994,284 808,015 2,019,959 1,666,621
General and Administrative Expenses...................... 846,170 707,264 1,429,049 1,185,000
----------- ----------- ---------- ----------
Income from Operations................................... 148,114 100,751 590,910 481,621
----------- ----------- ---------- ----------
Other Income (Expenses):
Other, net............................................. 153,618 33,312 24,060 203,353
Interest expense....................................... (213,687) (122,445) (280,266) (231,805)
Loss on investment in related parties.................. -- -- (23,082) (64,768)
Gain on sale of property and equipment................. -- -- 54,963 --
----------- ----------- ---------- ----------
(60,069) (89,133) (224,325) (93,220)
----------- ----------- ---------- ----------
Net Income............................................... $ 88,045 $ 11,618 $ 366,585 $ 388,401
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net Income Per Common Share............................ $ .05 $ .01 $ 0.22 $ 0.23
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted Average Common Shares
Outstanding......................................... 1,739,882 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 $2,124,873 $(403,628) $ 2,132,746
Net income............................... -- -- -- 388,401 -- 388,401
Translation adjustment................... -- -- -- -- 310,626 310,626
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1997............... -- 170 411,331 2,513,274 (93,002) 2,831,773
Net income............................... -- -- -- 366,585 -- 366,585
Translation adjustment................... -- -- -- -- 34,846 34,846
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1998............... -- 170 411,331 2,879,859 (58,156) 3,233,204
Issuance of common stock................. 9 -- 118,113 -- -- 118,122
Net income (unaudited)................... -- -- -- 88,045 -- 88,045
Distribution to stockholder
(unaudited)............................ -- -- -- (1,300,000) -- (1,300,000)
Translation adjustment (unaudited)....... -- -- -- -- (153,208) (153,208)
---- ---- -------- ---------- ---------- ------------
Balance at June 30, 1999 (unaudited)....... $ 9 $170 $529,444 $1,667,904 $(211,364) $ 1,986,163
---- ---- -------- ---------- ---------- ------------
---- ---- -------- ---------- ---------- ------------
</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>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 98,864 $ 11,618 $ 366,585 $ 388,401
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization...................... 117,777 132,460 255,732 283,588
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................................ 310,440 (359,496) (1,398,403) 1,322,729
Other receivables.................................. 69,082 (196,987) (3,436) 59,354
Inventory.......................................... (31,217) (167,913) (463,923) 749,054
Income taxes receivable............................ 15,039 71,109 82,718 4,051
Other current assets............................... (386,699) 242,640 65,953 (62,278)
Software development costs......................... (100,604) (34,683) (154,612) (331,974)
Other assets....................................... (342,387) (42,692) (463,103) (6,392)
Increase (decrease) in:
Accounts payable................................... 309,696 50,973 696,726 (502,977)
Accrued expenses and other current liabilities..... (147,299) 106,864 90,218 (1,868,164)
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Operating Activities..... (87,308) (186,107) (957,426) 100,160
--------- --------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property and equipment................ (9,049) (8,519) (195,761) (28,618)
Proceeds from sale of property and equipment......... -- -- 431,919 --
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Investing Activities..... (9,049) (8,519) 236,158 (28,618)
--------- --------- ----------- -----------
Cash Flows from Financing Activities:
Net proceeds (payments) of lines-of-credit........... $ 625,541 $ (61,269) $ 332,630 $ 90,338
Net proceeds from related parties.................... (220,745) 95,679 250,672 54,328
Proceeds from bridge loan............................ 150,000 -- -- --
Costs of public offering............................. (192,887) -- -- --
Proceeds of long-term debt........................... -- -- 236,161 --
Payments of long-term debt........................... (117,138) (116,303) (25,720) (500,666)
--------- --------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities..... 244,771 (81,893) 793,743 (356,000)
--------- --------- ----------- -----------
Effect of Exchange Rate Changes on Cash................. (153,208) 277,236 34,846 310,626
--------- --------- ----------- -----------
(Decrease) Increase in Cash............................. (4,794) 717 107,321 26,168
Cash--Beginning of Period............................... 136,489 29,168 29,168 3,000
--------- --------- ----------- -----------
Cash--End of Period..................................... $ 131,695 $ 29,885 $ 136,489 $ 29,168
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest............... $ 202,868 $ 122,445 $ 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 JUNE 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 12 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 June 30, 1999, December 31,
1998 and 1997, respectively, was 518.90 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
June 30, 1999 and 1998, December 31, 1998 and 1997 was 485.72 pesos to U.S. $1,
443.26 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.
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
F-7
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
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 June 30, 1999,
December 31, 1998 and 1997, approximately 22%, 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 capitalizes the direct costs and allocated
overhead associated with the development of software products used in the
processing of fish meal. Initial costs are charged to operations as research
prior to the development of a detailed program design or a working model. Costs
incurred subsequent to the product release, and research and development
performed under contract are charged to operations.
Capitalized costs are amortized over the estimated total number of units to
be sold on the straight-line basis. Unamortized costs are carried at the lower
of book value or net realizable value.
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 June 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
F-8
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
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 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.
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 June 30, 1999 and the combined results of its
operations and cash flows for the six months ended June 30,
F-9
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
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 June 30,
1999 and 1998 and December 31, 1998.
Also during 1998 and 1997, the Company made advances to other affiliated
companies. As of June 30, 1999, December 31, 1998 and 1997, $5,865, $-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 June 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.
The following is a reconciliation of the statutory tax rates:
<TABLE>
<CAPTION>
PERIOD YEARS ENDED
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 June 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 June 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.
F-10
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 4--OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses.................................................. $ 568,024 $183,325 $243,877
Bridge loan financing............................................. 96,196 -- --
Other............................................................. -- -- 5,401
--------- -------- --------
$ 664,220 $183,325 $249,278
--------- -------- --------
--------- -------- --------
</TABLE>
Prepaid expenses include deposits on orders placed with vendors of
approximately $551,000, $175,000 and $234,000 as of June 30, 1999, December 31,
1998 and 1997, respectively.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures..................................... $ 154,928 $ 154,928 $ 154,701
Machinery and equipment.................................... 1,517,561 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
----------- ----------- -----------
2,140,030 2,130,981 2,399,644
Less accumulated depreciation.............................. (1,264,082) (1,146,305) (1,006,041)
----------- ----------- -----------
$ 875,948 $ 984,676 $ 1,393,603
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Depreciation expense was $117,777, $132,460, $227,732 and $283,588 for the
six months ended June 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--SOFTWARE DEVELOPMENT COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period.................................. $ 1,217,759 $1,091,147 $ 759,173
Current period:
Total expenditures.......................................... 358,574 580,807 564,102
Less research and development expenses...................... (257,970) (426,195) (232,128)
----------- ---------- ----------
Net capitalized costs......................................... 100,604 154,612 331,974
----------- ---------- ----------
Total amortizable costs....................................... 1,318,363 1,245,759 1,091,147
Less current period's amortization............................ -- (28,000) --
----------- ---------- ----------
Net capitalized software development costs.................... $ 1,318,363 $1,217,759 $1,091,147
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-11
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 6--SOFTWARE DEVELOPMENT COSTS--(CONTINUED)
In management's opinion, the net realizable value of future sales will
exceed the carrying value of unamortized software development costs; therefore,
no adjustment to carrying value is required.
Software development costs are being amortized over the number of units
sold. There were no units sold during the six months ending June 30, 1999.
Research and development expenses are included in general and
administrative expenses.
NOTE 7--OTHER ASSETS
The Company has advanced approximately $860,000 and $500,000 to a fishing
vessel company as of June 30, 1999 and December 31, 1998, respectively, (see
Note 11).
NOTE 8--OBLIGATIONS WITH BANKS
Obligations with banks consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 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........................................ $ 2,151,509 $1,525,968 $1,193,338
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 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.................................. $ 544,189 $637,416 $461,334
Less: Current portion............................................. (135,547) (158,603) (106,320)
--------- -------- --------
$ 408,642 $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).
F-12
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 8--OBLIGATIONS WITH BANKS--(CONTINUED)
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 9--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.
NOTE 10--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............................ $ 90,697 $120,925 $105,155
Sales and other taxes payable..................................... 16,527 87,367 195,248
Deferred taxes.................................................... 73,932 73,932 79,755
--------- -------- --------
--------- -------- --------
Other............................................................. 70,316 117,414 19,678
--------- -------- --------
--------- -------- --------
$ 251,472 $399,638 $399,836
--------- -------- --------
--------- -------- --------
</TABLE>
NOTE 11--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 six months ended June 30, 1999 and
1998 and the years ended December 31, 1998 and 1997 totaled approximately
$73,000, $48,000, $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,
F-13
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 June 30, 1999 and December 31, 1998, the Company advanced
approximately $860,000 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 12--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 of Class A common stock. Total
anticipated funds being raised will be approximately $6,100,000. 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 13--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 2000 issues will not have a
material adverse effect on the Company's business, financial condition, cash
flows, and result of operations.
F-14
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO JUNE 30, 1999 AND 1998
NOTE 14--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 15--SUBSEQUENT EVENT
Bridge Loan--In April and May 1999, the Company entered into several bridge
loans totaling $150,000 with investors which was 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
October 30, 1999 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 $13,000 for the six months ending
June 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 June 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, due to stockholder, in the
accompanying June 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-15
<PAGE>
1,200,000 SHARES OF
CLASS A COMMON STOCK
1,200,000 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
BIO-AQUA SYSTEMS, INC.
------------------------
PROSPECTUS
------------------------
NUTMEG SECURITIES, LTD.
EMERSON BENNETT &
ASSOCIATES, INC.
, 1999
<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.
Pursuant to 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
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.
II-1
<PAGE>
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 pursuant to Section 4(2) of the Securities
Act.
Between April and May 1999, six (6) 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 pursuant to 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 pursuant to 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(3)
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.(3)
2.3 -- Stock Purchase Agreement between Atik, S.A. and Bio-Aqua for the purchase of class B common stock
(2)
2.4 -- Stock Purchase Agreement between Bio-Aqua and Atik, S.A. for the purchase of shares of Tepual
S.A.(2)
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(3)
3.1 -- Bio-Aqua's Articles of Incorporation(2)
3.1(a) -- Articles of Amendment to the Articles of Incorporation of Bio-Aqua(1)
3.2 -- Bio-Aqua's Bylaws(2)
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(2)
10.2 -- Association Agreement between Tepual S.A. and Centro de Estudios Cientificos de Santiago and
Implementation Agreement (2)
10.3 -- Agreement between Tepual S.A., Centro de Estudios Cientificos de Santiago and
R-Biopharm (2)
10.4 -- Agreement Between Inual S.A. and R-Biopharm (2)
10.5 -- Distribution Agreement between Inual S.A. and R-Biopharm (2)
10.6 -- License Agreement between Tepual S.A. and Biosur S.A.C. (2)
10.7 -- Marketing Agreement between Tepual S.A. and Biosur S.A. (2)
10.8 -- Commercial Agreement between Tepual S.A. and Kelor Trading Ltd. (2)
10.9 -- Form of Bridge Loan Documents(2)
10.10 -- Employment Agreement between Tepual S.A. and Max Rutman(1)
10.11 -- Employment Agreement between Tepual S.A. and Guillermo Quiroz(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
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(2)
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.(1)
27 -- Financial Data Schedule(1)
99.3 -- U.S. Patent Application for PSP Red Tide Detection Kit(2)
99.4 -- U.S. Patent Application for Red Tide Cleansing System(2)
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 on August 27, 1999
(2) Previously filed on July 29, 1999
(3) Filed herewith
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 pursuant to the foregoing 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
II-3
<PAGE>
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 hereby 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 pursuant to 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 therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
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 30TH DAY OF SEPTEMBER, 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
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ MAX RUTMAN President and Chief Executive Officer and September 30, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Max Rutman
/s/ GUILLERMO QUIROZ Chief Financial Officer (Principal September 30, 1999
- ------------------------------------------ Financial and Accounting Officer)
Guillermo Quiroz
/s/ DAVID MAYER Director September 30, 1999
- ------------------------------------------
David Mayer
</TABLE>
II-5
UNDERWRITING AGREEMENT
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
Underwriting Agreement............................................................................................2
SECTION 1.........................................................................................................2
Description of Securities.........................................................................................2
SECTION 2.........................................................................................................2
Representations and Warranties of the Company.....................................................................2
2.01. Registration Statement and Prospectus.............................................................3
2.02. Accuracy of Registration Statement and Prospectus.................................................3
2.03. Financial Statements..............................................................................4
2.04. Independent Public Accountant.....................................................................4
2.05. No Material Adverse Change........................................................................4
2.06. No Defaults.......................................................................................4
2.07. Incorporation and Standing........................................................................5
2.08. Legality of Outstanding Stock.....................................................................5
2.09. Legality of Stock, Warrants and Representative's Warrants.........................................5
2.10. Prior Sales.......................................................................................5
2.11. Litigation........................................................................................5
2.12. Warrants and Representative's Warrants............................................................6
2.13. Finder............................................................................................6
2.14. Exhibits..........................................................................................6
2.15. Tax Returns.......................................................................................6
2.16. Property..........................................................................................7
2.17. Patents & Trademarks..............................................................................7
2.18. Authority.........................................................................................7
2.19. Environmental Laws................................................................................7
2.20. ERISA.............................................................................................7
2.21. No NASD Affiliation...............................................................................8
2.22. Foreign Corrupt Practices Act.....................................................................8
SECTION 3.........................................................................................................8
Purchase and Sale of the Stock....................................................................................8
3.01. Purchase of Stock and Over-Allotment Option.......................................................8
3.01.01. Default by an Underwriter......................................................................9
3.01.02. Liability of Defaulting Underwriter............................................................9
3.01.03. Right of Remaining Underwriters................................................................9
3.02. Public Offering Price.............................................................................9
-i-
<PAGE>
3.02.01. Payment For Stock..............................................................................9
3.02.02. Closing.......................................................................................10
3.02.03. Inspection of Certificates....................................................................10
3.03. Sale of Warrants.................................................................................10
3.04. Representative's Expense Allowance...............................................................11
3.05. Representations of the Parties...................................................................11
3.06. Post-Closing Information.........................................................................11
3.07. Re-Offers By Selected Dealers....................................................................11
SECTION 4........................................................................................................11
Registration Statement and Prospectus............................................................................11
4.01. Delivery of Registration Statements.......................................................................11
4.02. Delivery of Preliminary Prospectus...............................................................12
4.03. Delivery of Prospectus...........................................................................12
4.04. Further Amendments and Supplements...............................................................12
4.05. Use of Prospectus................................................................................13
SECTION 5........................................................................................................13
Covenants of the Company.........................................................................................13
5.01. Objection of Representative to Amendments or Supplements........................................13
5.02. Company's Best-Efforts to Cause Registration Statement to Become
Effective......................................................................................13
5.03. Preparation and Filing of Amendments and Supplements.............................................14
5.04. Blue-Sky Qualification...........................................................................14
5.05. Financial Statements.............................................................................14
5.06. Reports and Financial Statements to the Representative and Co-Manager
..............................................................................................14
5.07. Expenses Paid by the Company.....................................................................15
5.08. Reports to Shareholders..........................................................................15
5.09. Section 11(a) Financials.........................................................................15
5.10. Post-Effective Availability of Prospectus........................................................15
5.11. Application of Proceeds..........................................................................16
5.12. Undertakings of Certain Shareholders.............................................................16
5.13. Delivery of Documents............................................................................16
5.14. Cooperation With Representative's Due Diligence.................................................16
5.15. No Sale Period...................................................................................16
5.16. Appointment of Transfer Agent....................................................................16
5.17. Compliance With Conditions Precedent.............................................................17
5.18. Filings of Form SR...............................................................................17
5.19. Registration Under the Exchange Act..............................................................17
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5.20. Designation of Member of Company's Board of Directors............................................17
5.21. Key Man Insurance................................................................................17
5.22. Application to Moody's or Standard & Poors.......................................................17
5.23. AMEX Listing.....................................................................................17
5.24. Consulting.....................................................................................18
SECTION 6........................................................................................................18
Indemnification..................................................................................................18
6.01. Indemnification By Company.......................................................................18
6.02. Indemnification By Underwriters..................................................................19
SECTION 7........................................................................................................20
Effectiveness of Agreement.......................................................................................20
SECTION 8........................................................................................................20
Conditions of the Underwriters' Obligations......................................................................20
8.01. Effectiveness of Registration Statement..........................................................20
8.02. Accuracy of Registration Statement...............................................................21
8.03. Casualty and Other Calamity......................................................................21
8.04. Litigation and Other Proceedings.................................................................21
8.05. Lack of Material Change and Other Conditions.....................................................21
8.06. AMEX Listing Approval............................................................................22
8.07. Accountant's Comfort Letter and Update...........................................................22
8.08. Review By and Opinion of Underwriter's Counsel...................................................22
8.09. Opinion of Counsel...............................................................................22
8.10.01. Accountant's Letter...........................................................................24
8.10.02. Conformed Copies of Accountant's Letter.......................................................25
8.11. Officer's Certificate............................................................................25
8.12. Tender of Delivery of Stock......................................................................26
8.13. Blue-Sky Qualification...........................................................................26
8.14. Approval of Representative's Counsel.............................................................26
8.15. Officers' Certificate As a Company Representative................................................27
SECTION 9........................................................................................................27
Termination......................................................................................................27
9.01. Termination Because of Non-Compliance............................................................27
9.02. Market Out Termination...........................................................................27
9.03. Company's Right to Terminate.....................................................................27
9.04. Effect of Termination Hereunder..................................................................28
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SECTION 10.......................................................................................................28
Underwriter's Representations and Warranties.....................................................................28
10.01. Registration as Broker-Dealer and Member of NASD................................................28
10.02. No Pending Proceedings..........................................................................28
SECTION 11.......................................................................................................28
Rights and Obligations...........................................................................................28
11.01. Consultation With Representative................................................................28
11.02. Exercise of Warrants............................................................................28
SECTION 12.......................................................................................................29
Notice ........................................................................................................29
12.01. Notice to the Company...........................................................................29
12.02. Notice to the Underwriters......................................................................30
SECTION 13.......................................................................................................30
Miscellaneous....................................................................................................30
13.01. Benefit.........................................................................................30
13.02. Survival........................................................................................30
13.03. Governing Law...................................................................................31
13.04. Underwriters' Information.......................................................................31
13.05. Counterparts....................................................................................31
ANNEX A .................................................................................................1
CONSULTING AGREEMENT.....................................................................................1
</TABLE>
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Underwriting Agreement
Nutmeg Securities, Ltd.
495 Post Road East
Westport, CT 06880
Emerson Bennett & Associates, Inc.
6261 Northwest 6th Way, Suite 207
Fort Lauderdale, FL 33309
Ladies and Gentlemen:
Bio-Aqua Systems, Inc. and its subsidiaries (the "Company'), a Florida
company, of 1900 Glades Road, Suite 351, Boca Raton, Florida, hereby confirms
its agreement with the representative of the Underwriters, Nutmeg Securities
Ltd. ("Representative"), Emerson Bennett & Associates, Inc. ("Co-Manager") and
other members of the Underwriting Group (hereinafter the "Underwriting Group" or
"Underwriters") as follows:
SECTION 1
Description of Securities
The Company's authorized and outstanding capitalization when the
offering of the securities contemplated hereby is permitted to commence and at
the Closing Date (hereinafter defined), will be as set forth in the Registration
Statement and Prospectus included therein (hereinafter defined). The Company
proposes to issue and sell to the Underwriting Group an aggregate of 1,200,000
Class A Voting Stock par value $.0001 at $5.625 per share ("Stock") and
1,200,000 Redeemable Common Stock Purchase Warrants at $.125 per Warrant
("Warrants") and Redeemable Representative's Warrants entitling Representative
to 120,000 shares of Stock at $9.28 and 120,000 warrants at $.206 exercisable
for Stock at $12.045 ("Representative's Warrants").The Underwriting Group shall
also have an over-allotment option to purchase up to an additional 180,000
shares of Class A Common Stock and 180,000 Warrants at initial public offering
minus the Underwriter's discount as provided in Section 3.01 hereof.
SECTION 2
Representations and Warranties of the Company
In order to induce the Underwriting Group to enter into this Agreement
the Company hereby represents and warrants to and agrees with the Underwriting
Group as follows:
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2.01. Registration Statement and Prospectus. A registration statement
on Form SB-2 (File No. 33-81829) (the "Registration Statement") with respect to
the Stock and Warrants, including the related Prospectus, copies of which have
heretofore been delivered by the Company to the Underwriter, has been prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations ("Rules and
Regulations") of the Securities and Exchange Commission (the "'Commission")
thereunder, and said Registration Statement has been filed with the Commission
under the Act; one or more amendments to said Registration Statement, copies of
which have heretofore been delivered to the Representative, has or have
heretofore been filed; and the Company may file on or prior to the effective
date additional amendments to said Registration Statement, including the final
Prospectus. Included in such Registration Statement of the Company's Common
Stock, are which shares are reserved against exercise of the Underwriter's
Warrants to be granted by the Company, as more particularly described
hereinafter.
As used in this Agreement: the term "Registration Statement" refers to
and means said Registration Statement on Form SB-2 and all amendments thereto,
including the Prospectus, all exhibits and financial statements, as it becomes
effective; the term "Prospectus" refers to and means the Prospectus included in
the Registration Statement when it becomes effective; and the term "Preliminary
Prospectus" refers to and means any prospectus included in said Registration
Statement before it becomes effective. The terms "Effective Date" and
"Effective" refer to the date the Commission declares the Registration Statement
filed with the Electronic Data Gathering, Analysis and Retrieval system
("EDGAR") effective pursuant to Section 8 of the Act.
2.02. Accuracy of Registration Statement and Prospectus. The Commission
has not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the Stock and Warrants, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and the applicable Rules and Regulations of the Commission thereunder, and
to the best of the Company's knowledge, has not included at the time of filing
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading. When the Registration
Statement becomes Effective and on the Closing Date (as hereinafter defined),
the Registration Statement and Prospectus, and any further amendments or
supplements thereto, will contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations for the
purposes of the proposed public offering of the Stock and Warrants, and all
statements of material fact contained in the Registration Statement and
Prospectus will be true and correct, and neither the Registration Statement nor
the Prospectus will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein necessary to make the
statements therein not misleading; provided, however, the Company does not make
any representations or warranties as to information contained in or omitted from
the
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Registration Statement or the Prospectus in reliance upon written information
furnished by the Representative on behalf of the Underwriters specifically for
use therein.
2.03. Financial Statements. The financial statements of the Company
together with related schedules and notes as set forth in the Registration
Statement and Prospectus will present fairly the financial position of the
Company and the results of its operations and the changes in its financial
position at the respective dates and for the respective periods for which they
apply; such financial statements have been prepared in accordance with generally
accepted principles of accounting consistently applied throughout the periods
concerned except as otherwise stated therein.
2.04. Independent Public Accountant. Spear, Safer, Harmon & Co., P.A. ,
which has certified, or shall certify, certain of the financial statements
filed, or to be filed, with the Commission as part of the Registration Statement
and Prospectus, are independent certified public accountants within the meaning
of the Act and the Rules and Regulations.
2.05. No Material Adverse Change. Except as may be reflected in or
contemplated by the Registration Statement or the Prospectus, subsequent to the
dates as of which information is given in the Registration Statement and
Prospectus, and prior to the Closing Date, (i) there shall not be any material
adverse change in the condition, financial or otherwise, of the Company or in
its business taken as a whole; (ii) there shall not have been any material
transaction entered into by the Company or its subsidiaries other than
transactions in the ordinary course of business; (iii) neither the Company nor
any of its subsidiaries shall have incurred any material obligations, contingent
or otherwise, which are not disclosed in the Prospectus; (iv) there shall not
have been, nor will there be, any change in the capital stock or long-term debt
(except current payments) of the Company; (v) the Company has not, and will not,
have paid or declared any dividends or other distributions on its common stock;
and (vi) there are no currency exchange control laws or withholding taxes of any
applicable country which govern the payment of dividends on the stock of the
Company or the stock of any of the subsidiaries of the Company except as set
forth in the Prospectus and Registration Statement.
2.06. No Defaults. Neither the Company nor any of its subsidiaries is
in any default which has not been waived in the performance of any obligation,
agreement or condition contained in any debenture, note or other evidence of
indebtedness or any indenture or loan agreement of the Company. The execution
and delivery of this Agreement and the consummation of the transactions herein
contemplated, and compliance with the terms of this Agreement will not conflict
with or result in a breach of any of the terms, conditions or provisions of, or
constitute a default under, the articles of incorporation, as amended, or bylaws
of the Company, any note, indenture, mortgage, deed of trust or other agreement
or instrument to which the Company is a party or by which it or any of its
property is bound, or any existing law, order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality, agency or
body, arbitration
4
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tribunal or court, domestic or foreign, having jurisdiction over the Company or
its property. The consent, approval, authorization, or order of any court or
governmental instrumentality, agency or body is not required for the
consummation of the transactions herein contemplated except such as may be
required under the Act or under the blue sky or securities laws of any state or
jurisdiction.
2.07. Incorporation and Standing. The Company is, and at the Closing
Date will be, duly incorporated and validly existing in good standing as a
corporation under the laws of the State of Florida and the Company and/or its
subsidiaries is duly is authorized to do business in all other states and
applicable foreign jurisdictions, including Chile and Peru, with authorized and
outstanding capital stock as set forth in the Registration Statement and the
Prospectus, and with full power and authority (corporate and other) to own its
property and conduct its business, present and proposed, as described in the
Registration Statement and Prospectus; the Company has full power and authority
to enter into this Agreement; and the Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which it owns or
leases real property or transacts business requiring such qualification. The
Company has no subsidiaries other than as shown in Exhibit 21 to the
Registration Statement.
2.08. Legality of Outstanding Stock. The outstanding common stock of
the Company has been duly and validly authorized, issued and is fully paid and
non-assessable and will conform to all statements with regard thereto contained
in the Registration Statement and Prospectus. No sales of securities have been
made by the Company in violation of the registration provisions of the
Securities Act of 1933.
2.09. Legality of Stock, Warrants and Representative's Warrants. The
Stock, Warrants, and Representative's Warrants have been duly and validly
authorized and, when issued and delivered against payment therefor as provided
in this Agreement, will be validly issued, fully paid and non-assessable. The
Stock, Warrants, and Representative's Warrants upon issuance will not be subject
to the preemptive rights of any shareholders of the Company. The Warrants and
Representative's Warrants when sold and delivered, will constitute valid and
binding obligations of the Company enforceable in accordance with the terms
thereof. A sufficient number of shares of Common Stock and Warrants have been
reserved for issuance upon exercise of the Warrants and Representative's
Warrants. The Stock, Warrants, and Representative's Warrants will conform to all
statements with regard thereto in the Registration Statement and Prospectus.
2.10. Prior Sales. No securities of the Company, of an affiliate or of
a predecessor of the Company have been sold within one year prior to the date
hereof, except as set out in the Registration Statement.
2.11. Litigation. Except as set forth in the Registration Statement and
Prospectus, there is, and at the Closing Date there will be, no action, suit or
proceeding before any
5
<PAGE>
court or governmental agency, authority or body pending or to the knowledge of
the Company threatened which might result in judgments against the Company not
adequately covered by insurance or which collectively might result in any
material adverse change in the condition (financial or otherwise), the business
or the prospects of the Company, or would materially affect the properties or
assets of the Company.
2.12. Warrants and Representative's Warrants. Upon delivery of and
payment for the Warrants and Representative's Warrants to be sold by and to the
Company as set forth in Section 3.03 of this Agreement, the Underwriter and the
Underwriter's designees will receive good and marketable title thereto, free and
clear of all liens, encumbrances, charges and claims whatsoever; and the Company
will have on the Effective Date of the Registration Statement and at the time of
delivery of such Warrants or Representative's Warrants full legal right and
power and all authorization and approval required by law to sell, transfer and
deliver such Warrants or Representative's Warrants in the manner provided
hereunder subject to certain "lock up" provisions set forth in the Registration
Statement and Prospectus.
2.13. Finder. The Company knows of no outstanding claims for services
in the nature of a finder's fee or origination fee with respect to the sale of
the Stock and Warrants hereunder resulting from its acts for which the
Representative may be responsible.
2.14. Exhibits. There are no contracts or other documents which are
required to be filed as exhibits to the Registration Statement by the Act or by
the Rules and Regulations which have not been so filed and each contract to
which the Company or any of its subsidiaries is a party and to which reference
is made in the Prospectus has been duly and validly executed, is in full force
and effect in all material respects in accordance with their respective terms,
including but not limited to the Employment Agreement between the Company and
Max Rutman, Exhibit No. 10.10, the Employment Agreement between Guillermo Quiroz
and the Company, Exhibit No. 10.11, and the various distribution and licensing
agreements in Exhibits 10.2-10.8, and none of such contracts have been assigned
by the Company; and the Company knows of no present situation or condition or
fact which would prevent compliance with the terms of such contracts, as amended
to date. Except for amendments or modifications of such contracts in the
ordinary course of business, the Company has no intention of exercising any
right which it may have to cancel any of its obligations under any of such
contracts, and has no knowledge that any other party to any of such contracts
has any intention not to render full performance under such contracts.
2.15. Tax Returns. The Company has filed all federal and state tax
returns which are required to be filed by it and has paid all taxes shown on
such returns and on all assessments received by it to the extent such taxes have
become due. The Company has filed all tax returns required by it in any foreign
jurisdictions. All taxes with respect to which
6
<PAGE>
the Company is obligated have been paid or adequate accruals have been set up to
cover any such unpaid taxes.
2.16. Property. Except as otherwise set forth in or contemplated by the
Registration Statement and Prospectus, the Company has good title, free and
clear of all liens, encumbrances and defects, except liens for current taxes not
due and payable, to all property and assets which are described in the
Registration Statement and the Prospectus as being owned by the Company, subject
only to such exceptions as are not material and do not adversely affect the
present or prospective business of the Company.
2.17. Patents & Trademarks. Except as disclosed in the Registration
Statement or Prospectus, the Company has sufficient licenses, permits and other
governmental authorizations currently necessary for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and had not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
are in violation of, or cause the Company to violate, any law, rule, regulation
or order of the United States, any state, county or locality, or of any agency
or body of the United States or of any state, county or locality, the violation
of which would have a Material Adverse Effect.
2.18. Authority. The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and this
Agreement is the valid, binding and legally enforceable obligation of the
Company.
2.19. Environmental Laws. Neither the Company nor any of its
subsidiaries has violated any foreign, federal, state or local law relating to
the protection of human health and safety, the environmental or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental Laws"),
or incurred costs or liabilities associated with these Environmental Laws,
except for such violations which singly or in the aggregate would not have a
material adverse effect on the business, prospects, financial condition or
results of the Company and its subsidiaries taken as a whole.
2.20. ERISA. Neither the Company nor any of its subsidiaries has
violated any provisions or the Employee Retirement Income Security Act of 1974,
as amended, or the rules and regulations promulgated thereunder, in each case
that is applicable to the Company or such subsidiary, except for such violations
which singly or in the aggregate would not have a material adverse effect on the
business, prospects, financial condition or results of the Company and its
subsidiaries taken as a whole.
7
<PAGE>
2.21. No NASD Affiliation. Except as previously disclosed in writing by
the Company to the Representative, no officer, director or 10% stockholder of
the company has any National Association of Securities Dealers, Inc. (the
"NASD") affiliation.
2.22. Foreign Corrupt Practices Act. The Company has not, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
SECTION 3
Purchase and Sale of the Stock
3.01. Purchase of Stock and Over-Allotment Option. The Company hereby
agrees to sell to members of the Underwriting Group named in Schedule I hereto
(for all of whom the Representative is acting), severally and not jointly, and
each member of the Underwriting Group, upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees to purchase from the Company, severally and not jointly, the number of
shares of Stock set forth opposite their respective names in Schedule I hereto
at a purchase price of $5.625 per share, less the underwriting discounts, and
the number of Warrants set forth opposite their respective names in Schedule I
hereto at a purchase price of $.125 per Warrant, less the underwriting
discounts. The Representative is also granted Representative's Warrants
entitling them to purchase 120,000 Warrants exercisable at a purchase price of
$.001, 120,000 shares of Stock at $9.28 per share of Stock, and 120,000 warrants
exercisable at a price of $.206 per Warrant. These warrants are exercisable for
Stock at $12.045 per share for five years following the Effective Date subject
to a twelve month lock-up. Pursuant to NASD Rule 2710(c)(7)(A) the
Representative Warrants and warrants acquired by the Representative and
Co-Manager will be restricted from sale, transfer, assignment, or hypothecation
for a period of one year from the Effective Date of the Registration Statement
except to officers or members of the Representative or Co-Manager and members of
the selling group and/or their officers or partners.
The Company hereby grants to the Representative an over allotment
option (the "Over- allotment Option") for a period of forty-five days after the
Effective Date to purchase at the initial public offering price of $5.625 per
share up to 180,000 additional shares of Stock and 180,000 Warrants at $.125 per
Warrant, less the underwriting discounts, in order to cover over-allotments.
8
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3.01.01. Default by an Underwriter. If any of the Underwriters shall
fail to purchase the entire number of shares of Stock and Warrants set opposite
its name in Schedule I hereto, and such failure to purchase shall constitute a
default by such Underwriter in the performance of its obligations under this
Agreement, the remaining Underwriters shall have the right and shall be
obligated to take up and pay for (in the respective proportions which the number
of shares of Stock and Warrants set opposite the names of the several remaining
Underwriters bears to the aggregate number of shares of Stock and Warrants set
opposite the names of all the remaining Underwriters) the entire amount of
shares of Stock and Warrants which the defaulting Underwriter agreed but failed
to purchase, provided, however, that the aggregate amount of all such increases
for all non-defaulting Underwriters shall not exceed 120,000 shares of Stock or
120,000 Warrants and provided, further, that in the event that such additional
shares of Stock or Warrants shall exceed the foregoing maximum, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the entire amount
(but not less than all) of remaining shares of Stock or Warrants which all
defaulting Underwriters agreed but failed to purchase.
3.01.02. Liability of Defaulting Underwriter. Nothing contained in this
Section 3.01 shall relieve any defaulting Underwriter of its liability, if any,
to the Company or to the remaining Underwriters for damages occasioned by its
default hereunder.
3.01.03. Right of Remaining Underwriters. If any of the Underwriters
shall fail to purchase the entire number of shares of Stock and Warrants set
opposite its name and such failure to purchase shall not constitute a default by
such Underwriter in the performance of its obligations under this Agreement, the
remaining Underwriters shall have the right, but shall not be obligated, to take
up and pay for (in such proportions as in be agreed upon among them) the entire
amount (but not less than all) of the shares of Stock and Warrants which all
withdrawing Underwriters agreed but failed to purchase.
3.02. Public Offering Price. After the Commission notifies the Company
that the Registration Statement has become Effective, the Underwriters propose
to offer the Stock to the public at a public offering price of $5.625 per share,
and the Warrants at $.125 per Warrant, as set forth in the Prospectus. The
Underwriters may allow a discount of $.5625 upon sales of Stock and $.0125 upon
sales of Warrants to selected dealers as may be determined from time to time by
the Representative.
3.02.01. Payment For Stock. Payment for the Stock and Warrants
(including the Over-allotment Option Stock and Warrants) which the Underwriters
agree to purchase shall be made to the Company or its order by certified or
official bank check or checks, in the amount of the purchase price by or on
behalf of the Representative at the offices of the Representative in Westport,
Connecticut, upon delivery to the Representative of certificates for shares and
Warrants in definitive form in such numbers and registered in such names
9
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as the Representative requests in writing at least one full business day prior
to such delivery.
3.02.02. Closing. The time and date of delivery and payment hereunder
is herein called the "Closing Date" and shall take place at the office of the
Representative at 495 Post Road East, Westport, Connecticut 06880, or at such
other place that shall be agreed upon by the Company and the Underwriters, on
the third business day following the effective date of this Agreement(unless
postponed in accordance with Section 9) or such other time not later than ten
business days after such date as shall be agreed upon by the Representative and
the Company. Should the Representative elect to exercise any part of the
Over-allotment Option pursuant to Section 3.01 herein above, the time and date
of delivery and payment for said over-allotment Stock and Warrants shall be as
mutually agreed, but not later than the 45th calendar day after the Effective
Date. Said date is hereinafter referred to, as the "Over-Allotment Closing
Date."
3.02.03. Inspection of Certificates. For the purpose of expediting the
checking and packaging of the certificates for Stocks and Warrants, the Company
agrees to make the certificates available for inspection by the Representative
at the office of the Representative, set forth above in Westport, Connecticut at
least one full business day prior to the proposed delivery date.
3.03. Sale of Warrants. The Company will sell and deliver to the
Representative, at a purchase price of $0.125 per Warrant less the underwriting
discounts, 1,200,000 Warrants, dated on the Closing Date, substantially in the
form of Exhibit A, attached hereto and by this reference incorporated herein,
evidencing the right of the Representative to purchase 1,200,000 shares of Stock
at the price of $5.625 per share and upon the terms and conditions provided in
the Warrants. The Company shall not be obligated to sell and deliver the
Warrants, and the Underwriter will not be obligated to purchase and pay for the
Warrants, except upon payment for the shares pursuant to Subsection 3.02.01
hereof.
The Representative may purchase for nominal consideration, at the
closing of the sale of all the Stock and Warrants contemplated by this
Underwriting Agreement, Representative's Warrants entitling Representative to
120,000 shares of Stock and 120,000 Warrants, which shall not be exercisable or
transferable for a twelve month period following the Effective Date. The
Representative's Warrants shall be exercisable for a period of five years at
$9.28 per share of Stock and $.206 per Warrant exercisable for Stock at $12.045,
upon the terms and conditions provided in the Representative's Warrants. The
Company shall not be obligated to sell and deliver the Representative's
Warrants, and the Representative will not be obligated to purchase and pay for
the Representative's Warrants, except upon payment for the shares pursuant to
Subsection 3.02.01 hereof.
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3.04. Representative's Expense Allowance. It is understood that the
Company shall reimburse the Representative and Co-Manager for its expenses on a
non-accountable basis in the total amount of 3% of the gross proceeds from the
offering, including proceeds from the sale of the over-allotment shares, if
exercised. At the Closing and, if applicable, on the Over-Allotment Closing
Date, the Company shall pay to the Representative and Co-Manager the unpaid
balance of such allowance to defray the expenses incurred by the Representative
and Co-Manager in connection with the offering. The Representative shall be
solely responsible for all expenses incurred by it in connection with the
offering including, but not limited to, the expenses of its own counsel except
as set forth in subsection 5.07 hereof.
3.05. Representations of the Parties. The parties hereto respectively
represent that as of the Closing Date the representations herein contained and
the statements contained in all the certificates theretofore or simultaneously
delivered by any party to another, pursuant to this Agreement, shall in all
material respects be true and correct.
3.06. Post-Closing Information. The Representative covenants that
reasonably promptly after the Closing Date, it will supply the Company with all
information required from the Underwriters for the completion of any applicable
forms and such additional information as the Company may reasonably request to
be supplied to the securities commissions of such states in which the Stock and
Warrants have been qualified for sale.
3.07. Re-Offers By Selected Dealers. On each sale by the Underwriters
of any of the Stock to selected dealers, the Representative shall require the
selected dealer purchasing any such Stock to agree to re-offer the same on the
terms and conditions of the offering set forth in the Registration Statement and
Prospectus.
SECTION 4
Registration Statement and Prospectus
4.01. Delivery of Registration Statements. The Company shall deliver to
the Representative without charge two signed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative five conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements and
exhibits. The signed copies of the Registration Statement so furnished to the
Representative will include signed copies of any and all consents and
certificates of the independent public accountant certifying to the financial
statements included in the Registration Statement and Prospectus and signed
copies of any and all consents and certificates of any other persons whose
profession gives authority to statements made by them and who are named in the
Registration Statement or Prospectus as having prepared, certified, or reviewed
any part thereof.
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4.02. Delivery of Preliminary Prospectus. The Company will deliver to
the Representative, without charge, as many copies of each Preliminary
Prospectus filed with the Commission bearing in red ink the statement required
by Regulation S-B Item 501(6) and (7) as may be required by the Underwriters.
The Company consents to the use of such documents by the Underwriters and by
dealers prior to the Effective Date of the Registration Statement. The Company
will deliver at its expense such copies of the Preliminary Prospectus as the
Representative may deem necessary in order to recirculate the Preliminary
Prospectus and/or to permit compliance with the provisions of Rule 15c2- 11. For
purposes of the paragraph, the term "Preliminary Prospectus" shall be deemed to
include after the Effective Date of the Registration Statement a Rule 430A
subject to completion prospectus and the Company will deliver to the
Representative, after the effective date at its expense such copies of the Rule
430A prospectus subject to completion as the Representative deems necessary in
connection with the offering.
4.03. Delivery of Prospectus. The Company will deliver, at its expense,
as many printed copies of the Prospectus as the Underwriter may require for the
purposes contemplated by this Agreement and shall deliver said printed copies of
the Prospectus to the Representative as soon as practicable on effectiveness of
this Agreement, but in no event more than one business day after the effective
date of this Agreement. The Company will deliver such additional copies at its
expense as may be necessary to permit dealers to comply with the requirements of
Rule 174. If the Representative determines to use a Term Sheet together with a
prospectus subject to completion in accordance with Rule 434 to satisfy the
delivery of prospectus requirement, the Company shall furnish the Representative
with such number of copies of the Term Sheet meeting the requirements of Rule
434 and will file such number of copies with the Commission as required by Rule
424(b) to permit the Representative to deliver the final prospectus to
purchasers in the offering in this manner.
4.04. Further Amendments and Supplements. If, during such period of
time as in the opinion of the Representative or its counsel a Prospectus
relating to this financing is required to be delivered under the Act, any event
occurs or any event known to the Company relating to or affecting the Company
shall occur as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made not misleading, or if it is necessary
at any time after the Effective Date of the Registration Statement to amend or
supplement the Prospectus to comply with the Act, the Company will forthwith
notify the Representative thereof and prepare and file with the Commission such
further amendment to the Registration Statement or supplemental or amended
Prospectus as may be required and furnish and deliver to the Representative and
to others whose names and addresses are designated by the Representative, all at
the cost of the Company, the number of copies of the amended or supplemented
Prospectus designated by the Representative, which is so amended or supplemented
to not contain any untrue statement of a material fact or omit
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to state any material fact necessary in order to make the Prospectus not
misleading in the light of the circumstances when it is delivered to a purchaser
or prospective purchaser, and which will comply in all respects with the Act.
4.05. Use of Prospectus. The Company authorizes the Underwriters in
connection with the distribution of the Stock and Warrants and all dealers to
whom any of the Stock and Warrants may be sold by the Underwriters to use the
Prospectus as from time to time amended or supplemented, in connection with the
offering and sale of the Stock and Warrants, and in accordance with the
applicable provisions of the Act and the applicable Rules and Regulations and
applicable state blue sky or securities laws.
SECTION 5
Covenants of the Company
The Company covenants and agrees with the Underwriters that:
5.01. Objection of Representative to Amendments or Supplements. After
the date hereof, the Company will not at any time, whether before or after the
Effective Date of the Registration Statement, file any amendment or supplement
to the Registration Statement or Prospectus, unless and until a copy of such
amendment or supplement has been previously furnished to the Representative
within a reasonable time period prior to the proposed filing thereof, or of
which the Representative or counsel for the Representative has reasonably
objected to, in writing, on the ground that such amendment or supplement is not
in compliance with the Act or the Rules and Regulations.
5.02. Company's Best-Efforts to Cause Registration Statement to Become
Effective. The Company will use its best efforts to cause the Registration
Statement and any post-effective amendment subsequently filed, to become
effective as promptly as reasonably practicable and will promptly advise the
Representative, and will confirm such advice in writing (i) when the
Registration Statement shall have become effective and when any amendment
thereto shall have become Effective and when any amendment of or supplement to
the Prospectus shall be filed with the Commission; (ii) when the Commission
shall make a request or suggestion for any amendment to the Registration
Statement or the Prospectus or for additional information and the nature and
substance thereof; and (iii) of the issuance by the Commission of an order
suspending the effectiveness of the Registration Statement pursuant to Section 8
of the Act or of the initiation of any proceedings for that purpose; (iv) of the
happening of any event which in the judgment of the Company makes any material
statement in the Registration Statement or Prospectus untrue or which requires
the making of any changes in the Registration Statement or Prospectus in order
to make the statements therein not misleading; and (v) of the refusal to qualify
or the suspension of the qualification of the Stock and Warrants for offering or
sale in any jurisdiction, or of the institution of any proceedings for any of
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such order
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or of any order preventing or suspending such use, to prevent any such refusal
to qualify or any such suspension, and to obtain as soon as possible a lifting
of any such order, the reversal of any such refusal and the termination of any
such suspension.
5.03. Preparation and Filing of Amendments and Supplements. The Company
will prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement or
Prospectus, in form satisfactory to counsel to the Company, as in the opinion of
counsel to the Representative and of counsel to the Company, may be necessary in
connection with the offering or distribution of the Stock and Warrants and will
use its best efforts to cause the same to become effective as promptly as
possible.
5.04. Blue-Sky Qualification. The Company will, when and as requested
by the Representative and Co-Manager, use reasonable efforts to qualify the
Stock and Warrants or such part thereof as the Representative and Co-Manager may
determine for sale under the so-called blue sky laws of the State of Florida,
and of so many other states as the Representative may reasonably request, and to
continue such qualification in effect so long as required for the purposes of
the distribution of the Stock and Warrants.
5.05. Financial Statements. The Company at its own expense will prepare
and give and will continue to give such financial statements and other
information to and as may be required by the Commission, or the proper public
bodies of the states in which the Stock and Warrants may be qualified.
5.06. Reports and Financial Statements to the Representative and Co-
Manager. During the period of five years from the Closing Date, the Company will
deliver to the Representative and Co-Manager, copies of each annual report of
the Company and (i) within 90 days after the close of each fiscal year of the
Company, a financial report of the Company and its subsidiaries, if any, on a
consolidated basis, and a similar financial report of all unconsolidated
subsidiaries, if any, all such reports to include a balance sheet as of the end
of the preceding fiscal year, an income statement, a statement of changes in
financial condition and an analysis of shareholders' equity covering such fiscal
year, and all to be in reasonable detail and certified by independent public
accountants for the Company; (ii) within 45 days after the end of each quarterly
fiscal period of the Company other than the last quarterly fiscal period in any
fiscal year, copies of the consolidated income statement and statement of
changes in financial condition for that period, and the balance sheet as of the
end of that period of the Company and its subsidiaries, if any, and the income
statement, statement of changes in financial condition and the balance sheet of
each unconsolidated subsidiary, if any, of the Company for that period, all
subject to year-end adjustment, certified by the principal financial or
accounting officer of the Company; (iii) copies of all other statements,
documents, or other information which the Company shall mail or otherwise make
available to any class of its security holders, or shall file with the
Commission; and (iv) upon request in writing from the Underwriter, furnish to
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the Underwriter such other information as may reasonably be requested and which
may be properly disclosed to the Representative with reference to the property,
business and affairs of the Company and its subsidiaries, if any.
5.07. Expenses Paid by the Company. The Company will pay, whether or
not the transactions contemplated hereunder are consummated or this Agreement is
prevented from becoming effective or is terminated, all costs and expenses
incident to the performance of its obligations under this Agreement including:
all expenses incident to the authorization of the Stock and Warrants and their
issue and delivery to the Representative; any original issue taxes in connection
therewith; all transfer taxes, if any, incident to the initial sale of the Stock
and Warrants to the public; the Blue Sky fees and expenses of the
Representative's and Co-Manager's counsel and accountants; the costs and
expenses incident to the preparation, printing and filing under the Act and with
the National Association of Securities Dealers, Inc. of the Registration
Statement, any Preliminary Prospectus and the Prospectus and any amendments or
supplements thereto; the cost of printing, reproducing and filing all exhibits
to the Registration Statement, the underwriting documents and the Selected
Dealers Agreement, the cost of printing and furnishing to the Representative
copies of the Registration Statement and copies of the Prospectus as herein
provided; and, the cost of qualifying the Stock and Warrants under the state
securities or Blue Sky laws as provided in Section 5.04 herein, including
expenses and disbursements of the Representative and the Co-Manager incurred in
connection with such qualification.
5.08. Reports to Shareholders. During the period of five years from the
Closing Date, the Company will, as promptly as possible, not to exceed 120 days,
after each annual fiscal period render and distribute reports to its
shareholders which will include audited statements of its operations and changes
of financial position during such period and its balance sheet as of the end of
such period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion.
5.09. Section 11(a) Financials. The Company will make generally
available to its security holders and will deliver to the Representative and the
Co-Manager, as soon as practicable, but in no event later than the first day of
the sixteenth full calendar month following the Effective Date of the
Registration Statement, an earnings statement (as to which no opinion need be
rendered but which will satisfy the provisions of Section 11(a) of the Act)
covering a period of at least 12 months beginning after the Effective Date of
the Registration Statement.
5.10. Post-Effective Availability of Prospectus. Within the time during
which the Prospectus is required to be delivered under the Act, the Company will
comply, at its own expense, with all requirements imposed upon it by the Act, as
now or hereafter amended, by the Rules and Regulations, as from time to time may
be in force, and by any order of
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the Commission, so far as necessary to permit the continuance of sales or
dealings in the Stock and Warrants.
5.11. Application of Proceeds. The Company will apply the net proceeds
from the sale of the Stock and Warrants substantially in the manner set forth in
the Registration Statement and Prospectus.
5.12. Undertakings of Certain Shareholders. The Company will deliver to
the Representative, prior to or simultaneously with the execution of this
Agreement, the undertaking of each officer, director, and each employee of the
Company who owns 5% or more of shares of the Company (based on the number of
shares to be outstanding prior to the completion of the offering) that such
person shall not directly or indirectly offer or sell to the public any portion
of the shares of common stock owned prior to the effective date of this
Agreement or hereafter acquired by exercise of an option for a period of
twenty-four months or privately for a period of twelve months from the Effective
Date of the Registration Statement without the Representative's prior written
consent.
5.13. Delivery of Documents. At the Closing, the Company will deliver
to the Representative true and correct copies of the articles of incorporation
and certificate of incorporation of the Company and all amendments thereto, all
such copies to be certified by the Secretary of State of the State of Florida;
true and correct copies of the bylaws of the Company and of the minutes of all
meetings of the directors and shareholders of the Company held prior to the
Closing Date which in any way relate to the subject matter of this Agreement;
and true and correct copies of all material contracts to which the Company is a
part, other than contracts for the sale of products or services in the normal
course of business.
5.14. Cooperation With Representative's Due Diligence. At all times
prior to the Closing Date, the Company will cooperate with the Representative
and the Co- Manager in such investigation as the Representative may make, or
cause to be, made of all the properties, business and operations of the Company
in connection with the purchase and public offering of the Stock and Warrants,
and the Company will make available to the Representative in connection
therewith such information in its possession as the Representative and the
Co-Manager may reasonably request.
5.15. No Sale Period. No offering, sale or other disposition of any
common stock, equity or long-term debt will be made within one year after the
Effective Date of the Prospectus, directly or indirectly, by the Company,
otherwise than hereunder or with the Representative's consent.
5.16. Appointment of Transfer Agent. The Company has appointed American
Stock Transfer Trust Company as Transfer Agent for the Stock and Warrants
subject to the Closing. The Company will not change or terminate such
appointment for a period of three
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years from the Effective Date without first obtaining the written consent of the
Representative, which consent shall not be unreasonably withheld.
5.17. Compliance With Conditions Precedent. The Company will use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Underwriters in Section 8 hereof.
5.18. Filings of Form SR. ^Intentionally left blank.
5.19. Registration Under the Exchange Act. The Company shall, within 90
days after the Effective Date, register the class of equity securities which
constitutes the Stock and Warrants by filing with the Securities and Exchange
Commission a Registration Statement (and such copies thereof as the Commission
may require) with respect to such securities, containing such information and
documents as the Commission may specify comparable to that which is required in
an application to register a security pursuant to subsection (g) of Section 12
of the Act, as amended.
5.20. Designation of Member of Company's Board of Directors. The
Representative and the Co-Manager shall have the right to designate as a member
of the Board of Directors or at the Representative's option, an individual to
attend the meetings of the Board of Directors of the Company for a period of
three years after the Effective Date. The attending individual shall not be
compensated for attendance in excess of any fee paid to any other members of the
Board of Directors.
5.21. Key Man Insurance. The Company as of the Effective Date, shall
use its best efforts and in good faith attempt to obtain one million dollar
($1,000,000) key man life insurance policy, from a qualified insurance company,
on Max Rutman the Chief Executive Officer, President and Chairman of the Board
of the Company , for which the Company will be the beneficiary. The Company will
use its best efforts to maintain such insurance for 5 years from Effective Date.
5.22. Application to Moody's or Standard & Poors. The Company shall,
within 120 days after the Effective Date, apply for listing in either Moody's
Over-the-Counter Manual or Standard & Poors and shall use its best efforts to
have the Company listed in such manual.
5.23. AMEX Listing. For a period of five years from the Effective Date
of the Registration Statement, the Company will use its best efforts at its cost
and expense to effect and maintain the quotation of the Stock and Warrants on
the American Stock Exchange and will file with the American Stock Exchange all
documents and notices required by the American Stock Exchange for companies that
have securities that are traded in the over the counter market and quotations
for which are reported by the American Stock Exchange.
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**** 5.24. Consulting. The Company has agreed to engage the Representative and
the Co-Manager as a consultant for a period of two (2) years from the closing of
the offering at a fee of $60,000 per annum payable to each of the Representative
and the Co- Manager commencing on the Effective Date and continuing for a period
of twenty-four consecutive months. The Representative and the Co-Manager agree
to provide (1) general financial consulting services and advice pertaining to
the Company's business affairs, (2) assistance in developing, studying and
evaluating financing and capital structure, (3) Merger and acquisition activity,
(4) reports and studies, and (5) negotiations pertaining to the above. The
Company shall execute and deliver to the Representative and Co-Manager a
Financial Consulting Agreement, in Form attached as Annex A.
SECTION 6
Indemnification
6.01. Indemnification By Company. The Company agrees to indemnify and
hold harmless the Underwriters and each person who controls any underwriter
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act or any other statute
or at common law and to reimburse persons indemnified as above for any legal or
other expenses (including the cost of any investigation and preparation)
incurred by them in connection with any litigation, whether or not resulting in
any liability, but only insofar as such losses, claims, damages, liabilities and
litigation arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereto or any application or other document filed in order to qualify
the Stock and Warrants under the blue sky or securities laws of the states where
filings were made, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, all as of the date when the Registration Statement or
such amendment, as the case may be, becomes effective, or any untrue statement
or alleged untrue statement of a material fact contained in the Prospectus (as
amended or supplemented if the Company shall have filed with the Commission any
amendments thereof or supplements thereto), or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the indemnity agreement contained in this
subsection 6.01 shall not apply to amounts paid in settlement of any such
litigation if such settlements are effected without the consent of the Company,
nor shall it apply to the Underwriter or any person controlling the Underwriters
in respect of any such losses, claims, damages, liabilities or actions arising
out of or based upon any such untrue statements or alleged untrue statement, or
any such omission or alleged omission, if such statement or omission was made in
reliance upon information peculiarly within the knowledge of the Underwriter and
furnished in writing to the Company by the Underwriter specifically for use in
connection with the preparation of the Registration Statement and Prospectus or
any such amendment or supplement thereto. This indemnity agreement is in
addition to any other liability which the Company may otherwise have to the
Underwriters. The Underwriters agree within ten days after the receipt by them
of written notice of the commencement of any action against them or against any
person controlling them as aforesaid, in respect of which indemnity may be
sought from the Company on account of the indemnity agreement contained in this
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subsection 6.01 to notify the Company in writing of the commencement thereof.
The failure of the Underwriters so to notify the Company of any such action
shall relieve the Company from any liability which it may have to the
Underwriters or any person controlling them as aforesaid on account of the
indemnity agreement contained in this subsection 6.01, but shall not relieve the
Company from any other liability which it may have to the Underwriters or such
controlling person. In case any such action shall be brought against the
Underwriters or any such controlling person and the Underwriters shall notify
the Company of the commencement thereof, the Company shall be entitled to
participate in (and, to the extent that it shall wish, to direct) the defense
thereof at its own expense, but such defense shall be conducted by counsel of
recognized standing and reasonably satisfactory to the Representative or such
controlling person or persons, defendant or defendants in such litigation. The
Company agrees to notify the Representative and the Co-Manager promptly of
commencement of any litigation or proceedings against it or any of its officers
or directors, of which it may be advised, in connection with the issue and sale
of any of its securities and to furnish to the Representative and the
Co-Manager, at its request, copies of all pleadings therein and permit the
Representative and the Co-Manager to be an observer therein and appraise the
Representative and the Co-Manager of all developments therein, all at the
Company's expense. Provided, however, that in no event shall the indemnification
agreement contained in this Section 6.01 inure to the benefit of the
Representative (or any person controlling the Representative) on account of any
losses, claims, damages, liabilities or actions arising from the sale of the
Stock and Warrants upon the public offering to any person by such Representative
if such losses, claims, damages, liabilities or actions arise out of, or are
based upon, an untrue statement or omission or alleged untrue statement or
omission in a Preliminary Prospectus and if the Prospectus shall correct the
untrue statement or omission or the alleged untrue statement or omission which
is the basis of the loss, claim, damage, liability or action for which
indemnification is sought and a copy of the Prospectus had not been sent or
given to such person at or prior to the confirmation of such sale to him in any
case where such delivery is required by the Securities Act, unless such failure
to deliver the Prospectus was a result of non-compliance by the Company with
Section 4.03 hereof.
6.02. Indemnification By Underwriters. The Underwriters severally
agree, to the extent of and only to the extent of their commitment pursuant to
Schedule I, in the same manner as set forth in subsection 6.01 above, to
indemnify and hold harmless the Company, the directors of the Company and each
person, if any, who controls the Company with respect to any statement in or
omission from the Registration Statement or any amendment thereto, or the
Prospectus (as amended or as supplemented, if amended or supplemented as
aforesaid) or any application or other document filed in any state or
jurisdiction in order to qualify the Stock and Warrants under the blue sky or
securities laws thereof, or any information furnished pursuant to Section 3.05
hereof, if such statement or omission was made in reliance upon information
peculiarly within its knowledge and furnished in writing to the Company by the
Representative on its behalf specifically for use in connection with the
preparation thereof or supplement thereto. The Underwriters shall
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not be liable for amounts paid in settlement of any such litigation if such
settlement was effected without the consent of the Representative. In case of
commencement of any action in respect of which indemnity may be sought from the
Underwriters on account of the indemnity agreement contained in this subsection
6.02, each person agreed to be indemnified by the Underwriters shall have the
same obligation to notify the Underwriters as the Underwriters have toward the
Company in subsection 6.01 above, subject to the same loss of indemnity in the
event such notice is not given, and the Underwriters shall have the same right
to participate in (and, to the extent that they shall wish, to direct) the
defense of such action at their own expense, but such defense shall be conducted
by counsel of recognized standing and satisfactory to the Company. The
Underwriters agree to notify the Company promptly of the commencement of any
litigation or proceeding against the Underwriters or against any such
controlling person, of which it may be advised, in connection with the issue and
sale of any of the securities of the Company, and furnish to the Company at its
request copies of all pleadings therein and apprize it of all the developments
therein, all at the Company's expense, and permit the Company to be an observer
therein.
SECTION 7
Effectiveness of Agreement
This Agreement shall become effective upon release by the
Representative of the Stock and Warrants for offering after the Effective Date.
The time of the release by the Representative of the Stock and Warrants for
offering, for the purposes of this Section 7, shall mean the time of the release
by the Representative of the Stock and Warrants for public sale pursuant to the
Registration Statement. The Representative agrees to notify the Company
immediately after the Representative shall have released the Stock and Warrants,
that this Agreement has become effective. This Agreement shall nevertheless,
become effective at such time earlier than the time specified above, after the
Effective Date, as the Representative may determine by notice to the Company.
SECTION 8
Conditions of the Underwriters' Obligations
The Underwriters' obligations hereunder to purchase the Stock and
Warrants and to make payment to the Company hereunder on the Closing Date shall
be subject to the accuracy, as of the Closing Date, of the representations and
warranties on the part of the Company herein contained, to the performance by
the Company of all its agreements herein contained, to the fulfillment of or
compliance by the Company with all covenants and conditions hereof, and to the
following additional conditions:
8.01. Effectiveness of Registration Statement. The Registration
Statement shall have become effective on or prior to 12:00 Noon EST time, on the
Effective Date hereof, or such later date as the Underwriter may agree to. On or
prior to the Closing Date, no order suspending the effectiveness of the
Registration Statement shall have been issued
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and no proceeding for that purpose shall have been initiated or threatened by
the Commission or be pending; any request for additional information on the part
of the Commission (to be included in the Registration Statement or Prospectus or
otherwise) shall have been complied with to the satisfaction of the Commission;
and neither the Registration Statement or the Prospectus nor any amendment
thereto shall have been filed to which counsel to the Representative shall have
reasonably objected in writing or have not given their consent.
8.02. Accuracy of Registration Statement. The Representative shall not
have disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of counsel to the Representative, is
material, or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein, or is necessary to make the
statements therein not misleading.
8.03. Casualty and Other Calamity. Between the date hereof and the
Closing Date, the Company shall not have sustained any loss on account of fire,
explosion, flood, accident, calamity or any other cause, of such character as
materially adversely affects its business or property considered as an entire
entity, whether or not such loss is covered by insurance and neither the
President of the Company nor the Chief Financial Officer of the Company shall
have suffered any injury or disability of a nature which would materially
adversely affect his ability to properly function as an officer and director of
the Company.
8.04. Litigation and Other Proceedings. Between the date hereof and the
Closing Date, there shall be no litigation instituted or threatened against the
Company and there shall be no proceeding instituted or threatened against the
Company before or by any federal or state commission, regulatory body or
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding would materially adversely affect the
business, franchises, licenses, patents, operations or financial condition or
income of the Company considered as an entity.
8.05. Lack of Material Change and Other Conditions. Except as
contemplated herein or as set forth in the Registration Statement and
Prospectus, during the period subsequent to the date of the last audited balance
sheet included in the Registration Statement and prior to the Closing Date, the
Company (A) shall have conducted its business in the usual and ordinary manner
as the same was being conducted on the date of the last audited balance sheet
included in the Registration Statement, (B) except in the ordinary course of its
business, the Company shall not have incurred any liabilities or obligations
(direct or contingent) or disposed of any of its assets, or entered into any
material transaction or suffered or experienced any substantially adverse change
in its condition, financial or otherwise.
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8.06. AMEX Listing Approval. The American Stock Exchange shall have
approved the Company's listing application under the symbols "BIO" for the Stock
and "BIOW" for the Warrants.
8.07. Accountant's Comfort Letter and Update. At the Closing the
Representative shall have received from Spear, Safer, Harmon & Co. a letter
dated such date, in form and substance satisfactory to the representative
containing statements and information of the type ordinarily included in
accountants' "comfort letter" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and Prospectus; and, at the Closing, the Representative shall also
have received from Spear, Safer Harmon & Co. a letter, dated at the Closing
Date, to the effect that they reaffirm the statements made in the letter
furnished pursuant to the previous clause, except that the specified date
referred to shall be a date not more than three days prior to the Closing Date.
At the Closing Date, the capital stock and surplus accounts of the Company shall
be substantially the same as at the date of the last audited balance sheet
included in the Registration Statement, without considering the proceeds from
the sale of the Stock, other than as may be set forth in the Prospectus.
8.08. Review By and Opinion of Underwriter's Counsel. The authorization
of the Stock, the Warrants, the Warrant Stock, the Representative's Warrants,
the Registration Statement, the Prospectus and all corporate proceedings and
other legal matters incident thereto and to this Agreement shall be reasonably
satisfactory in all respects to counsel to the Representative and the
Co-Manager. The Representative and the Co-Manager shall have received an opinion
dated as of the Closing Date from its counsel, substantially in the form of the
opinion called for by Section 8.07(viii), qualified in such manner as the
Representative may deem acceptable.
8.09. Opinion of Counsel. The Company (which term shall include any
subsidiaries of the Company) shall have furnished to the Representative the
opinion, dated the Closing Date, addressed to the Representative, from Atlas,
Pearlman, Trop & Borkson, counsel to the Company, to the effect that based upon
a review by them of the Registration Statement, Prospectus, the Company's
certificate of incorporation, bylaws, and relevant corporate proceedings, an
examination of such statutes they deem necessary and such other investigation by
such counsel as they deem necessary to express such opinion:
(i) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of Florida, with full
corporate power and authority to own and operate its properties and to carry on
its business as set forth in the Registration Statement and Prospectus.
(ii) The Company is duly qualified or registered as a foreign
corporation in any applicable state or foreign jurisdiction cognizant that the
Company's ownership of
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property and its conduct of business requires such qualification or registration
and that the failure to so qualify would have a material adverse effect on its
operations.
(iii) The Company has authorized an outstanding capital stock
as set forth in the Registration Statement and Prospectus; the outstanding
common stock of the Company, the Stock, and the Warrants conform to the
statements concerning them in the Registration Statement and Prospectus; the
outstanding common stock of the Company has been duly and validly issued and is
fully-paid and nonassessable and contains no preemptive rights; the Stock has
been, and the shares of Warrant Stock issuable upon exercise of the Warrants
will be, duly and validly authorized and, upon issuance thereof and payment
therefor in accordance with this Agreement and the Warrants, will be duly and
validly issued, fully paid and nonassessable, and will not be subject to the
preemptive rights of any shareholder of the Company.
(iv) The Warrants and Representative's Warrants have been duly
and validly authorized and issued and are valid and binding instruments
enforceable in accordance with their terms.
(v) A sufficient number of shares of Stock and Warrants have
been duly reserved for issuance upon exercise of the Warrants and the
Representative's Warrants.
(vi) No consents, approvals, authorizations or orders of
agencies, officers or other regulatory authorities are known to such counsel
which are necessary for the valid authorization, issue or sale of the Stock and
Warrants hereunder, except as required under the Act or blue sky or state
securities laws.
(vii) The issuance and sale of the Stock, the Warrants,
Representative's Warrants and the consummation of the transactions herein
contemplated and compliance with the terms of this Agreement will not conflict
with or result in a breach of any of the terms, conditions, or provisions of or
constitute a default under the certificate of incorporation, or bylaws of the
Company, or any note, indenture, mortgage, deed of trust, or other agreement or
instrument known to such counsel to which the Company is a party or by which the
Company or any of its property is bound or any existing law (provided this
paragraph shall not relate to federal or state securities laws), order, rule,
regulation, writ, injunction, or decree known to such counsel of any government,
governmental instrumentality, agency, body, arbitration tribunal, or court
domestic or foreign, having jurisdiction over the Company or its property.
(viii) The Registration Statement has become effective under
the Act and, to the best of the knowledge of such counsel after such counsel has
conducted a reasonable investigation, no order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated by the Commission under the
Act; and the Registration
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Statement and Prospectus, and each amendment and supplement thereto, comply as
to form in all material respects with the requirements of the Act and the Rules
and Regulations thereunder, and after a reasonable investigation such counsel
has no reason to believe that either the Registration Statement or the
Prospectus or any such amendment or supplement contains any untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which made (except that no opinion need be expressed as to
financial statements contained in the Registration Statement or Prospectus); and
such counsel is familiar with all contracts referred to in the Registration
Statement or Prospectus and such contracts are sufficiently summarized or
disclosed therein or filed as exhibits thereto as required, and such counsel,
after a reasonable investigation, does not know of any contracts required to be
summarized or disclosed or filed, and such counsel, after a reasonable
investigation, does not know of any legal or governmental proceedings pending or
threatened to which the Company is the subject of such a character required to
be disclosed in the Registration Statement or the Prospectus which are not
disclosed and properly described therein.
(ix) This Agreement has been duly authorized and executed by
the Company and is a valid and binding agreement of the Company.
As to routine factual matters such as the issuance of stock
certificates and receipt of payment therefor, the states and countries in which
the Company transacts business, the adoption of resolutions reflected by the
Company's minute book and the like, such counsel may rely on the certificate of
an appropriate officer of the Company. Such opinion shall also cover such other
matters incident to the transactions contemplated by this Agreement as the
Underwriter or their Counsel shall reasonably request.
8.10.01. Accountant's Letter. The Underwriter shall have received a
letter addressed to it and dated the date of this Agreement and the Closing
Date, respectively, from Spear, Safer, Harmon & Co. independent public
accountants for the Company, stating that (i) with respect to the Company they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and the response to Item
509 of Regulation S-K as reflected by the Registration Statement is correct
insofar as it relates to them; (ii) in their opinion, the financial statements
examined by them of the Company at all dates and for all periods referred to in
their opinion and included in the Registration Statement and Prospectus, comply
in all material respects with the applicable accounting requirements of the Act
and the published Rules and Regulations thereunder with respect to registration
statements on Form S-B2; (iii) on the basis of certain indicated procedures (but
not an examination in accordance with generally accepted accounting principles),
including examinations of the instruments of the Company set forth under
"Capitalization" in the Prospectus, a reading of the latest available interim
unaudited financial statements of the Company, whether or not appearing in the
Prospectus, inquiries of the officers of the Company or other persons
responsible for its
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financial and accounting matters regarding the specific items for which
representations are requested below and a reading of the minute books of the
Company, nothing has come to their attention which would cause them to believe
that during the period from the last audited balance sheet included in the
Registration Statement to a specified date not more than five days prior to the
date of such letter (a) there has been any change in the capital stock or other
securities of the Company or any payment or declaration of any dividend or other
distribution in respect thereof or exchange therefor from that shown on its
audited balance sheets or in the debt of the Company from that shown or
contemplated under "Capitalization" in the Registration Statement or Prospectus
other than as set forth in or contemplated by the Registration Statement or
Prospectus; (b) there have been any material decreases in net current assets or
net assets as compared with amounts shown in the last audited balance sheet
included in the Prospectus so as to make said financial statements misleading;
and (c) on the basis of the indicated procedures and discussions referred to in
clause (iii) above, nothing has come to their attention which, in their
judgment, would cause them to believe or indicate that (1) the unaudited
financial statements and schedules set forth in the Registration Statement and
Prospectus do not present fairly the financial position and results of the
Company, for the periods indicated, in conformity with the generally accepted
accounting principles applied on a consistent basis with the audited financial
statements, and (2) the dollar amounts, percentages and other financial
information set forth in the Registration Statement and Prospectus under the
captions "Prospectus Summary," "Risk Factors," "Dilution," "Capitalization,"
"Exchange Rates", "Remuneration," "Bridge Financing", "Business", "Principal
Shareholders," and Certain Relationships and Related Transactions are not in
agreement with the Company's general ledger, financial records or computations
made by the Company therefrom.
8.10.02. Conformed Copies of Accountant's Letter. The Representative
shall be furnished without charge, in addition to the original signed copies,
such number of signed or photostatic or conformed copies of such letters as the
Representative shall reasonably request.
8.11. Officer's Certificate. The Company shall have furnished to the
Representative and to the Co-Manager its certificate by the Chief Executive
Officer and the Chief Financial Officer, dated as of the Closing Date, to the
effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Date, and the Company
has complied with all the agreements and has satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date.
(ii) The Registration Statement has become effective and no
order suspending the effectiveness of the Registration Statement has been issued
and to the best of the knowledge of the respective signers, no proceeding for
that purpose has been initiated or is threatened by the Commission.
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<PAGE>
(iii) The respective signers have each carefully examined the
Registration Statement and Prospectus and any amendments and supplements
thereto, and to the best of their knowledge the Registration Statement and the
Prospectus and any amendments and supplements thereto contain all statements
required to be stated therein, and all statements contained therein are true and
correct, and neither the Registration Statement nor Prospectus nor any amendment
or supplement thereto includes any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or a supplemented Prospectus which has not been so set forth.
(iv) Except as set forth in the Registration Statement and
Prospectus since the respective dates as of which the periods for which
information is given in the Registration Statement and Prospectus and prior to
the date of such certificate, (A) there has not been any substantially adverse
change, financial or otherwise, in the affairs or condition of the Company, and
(B) the Company has not incurred any liabilities, direct or contingent, or
entered into any transactions, otherwise than in the ordinary course of
business.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, no dividends or
distribution whatever have been declared and/or paid on or with respect to the
common stock of the Company.
8.12. Tender of Delivery of Stock. All of the Stock being offered by
the Company and the Warrants being purchased from the Company by the
Representative shall be tendered for delivery in accordance with the terms and
provisions of this Agreement.
8.13. Blue-Sky Qualification. The Stock shall be qualified in such
states as the Underwriters through their Representative may reasonably request
pursuant to Section 5.04, and each such qualification shall be in effect and not
subject to any stop order or other proceeding on the Closing Date.
8.14. Approval of Representative's Counsel. All opinions, letters,
certificates and evidence mentioned above or elsewhere in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in
form and substance satisfactory to counsel to the Representative and to the
Co-Manager, whose approval shall not be unreasonably withheld. The suggested
form of such documents shall be provided to the counsel for the Representative
and to the Co-Manager, at least one business day before the Closing Date. The
Representative's and to the Co-Manager's counsel will provide a written
memorandum stating such closing documents which they deem necessary for their
review. Such memorandum shall be delivered at least three business days before
the Closing Date to counsel for the Company.
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8.15. Officers' Certificate As a Company Representative. Any
certificate signed by an officer of the Company and delivered to the
Representative or to counsel for the Representative will be deemed a
representation and warranty by the Company to the Representative as to the
statements made therein.
SECTION 9
Termination
9.01. Termination Because of Non-Compliance. This Agreement may be
terminated by the Representative by notice to the Company in the event that
there has been, since the time of execution of this Agreement or since the
respective dates as of which the information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings or business affairs of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, or
if, the Company shall have failed or been unable to comply with any of the
terms, conditions or provisions of this Agreement on the part of the Company to
be performed, complied with or fulfilled (including but not limited to those
specified in Sections 2, 3, 4, 5, and 8 hereof) within the respective times
herein provided for, unless compliance therewith or performance or satisfaction
thereof shall have been expressly waived by the Representative in writing.
9.02. Market Out Termination. This Agreement may be terminated by the
Representative by notice to the Company at any time if payment for and delivery
of the Stock and Warrants is rendered impracticable or inadvisable because (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange, or NASDAQ (including NASDAQ SmallCap) shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York or Florida shall have been declared by either federal or state
authorities, or (iii) there has occurred a material adverse change in the
financial markets in the United States or elsewhere including, but not limited
to: a war, outbreak of hostilities or escalation thereof, or any other national
calamity shall have occurred, or any development involving a crisis or change in
political, financial, or economic conditions, the effect of which on the
financial markets of the United States or overseas is such as it would be
undesirable, impracticable or inadvisable for the Representative to proceed or
continue with this Agreement or with the public offering. Notice of such
termination may be given to the Company by telegram, telecopy or telephone and
shall subsequently be confirmed by letter.
9.03. Company's Right to Terminate. In the event any action or
proceeding of the type referred to in subparagraph 9.02 above shall be
instituted or threatened against the Underwriters at any time prior to the
effective date hereunder, or in the event there shall be filed by or against it
in any court pursuant to any federal, state, local or municipal statute, a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of its assets or if it makes an assignment
for the benefit of creditors,
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the Company shall have the right on three days' written notice to the
Representative to terminate this Agreement without any liability to the
Underwriters of any kind except for the payment of all expenses as provided
herein.
9.04. Effect of Termination Hereunder. Any termination of this
Agreement pursuant to this Section 9 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party thereto; except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Section 5.07; and the Company and the Representative shall be obligated to pay,
respectively, all losses, claims, damages or liabilities, joint or several,
under Section 6.01 in the case of the Company and Section 6.02 in the case of
the Representative.
SECTION 10
Underwriter's Representations and Warranties
The Underwriters represent and warrant to and agree with the Company
that:
10.01. Registration as Broker-Dealer and Member of NASD. Each
underwriter is registered as a broker-dealer with the Securities and Exchange
Commission and is registered as a broker-dealer in all states in which it
conducts business and is a member in good standing of the National Association
of Securities Dealers, Inc.
10.02. No Pending Proceedings. There is not now pending or threatened
against the Underwriters any action or proceeding of which it has been advised,
either in any court of competent jurisdiction, before the Securities and
Exchange Commission or any state securities commission concerning its activities
as a broker or dealer, nor have any of the Underwriters been named as a "cause"
in any such action or proceeding.
SECTION 11
Rights and Obligations
11.01. Consultation With Representative. ^See Section 5.24. Consulting.
In reference to the rights and obligations of the Representative provided in the
Consulting Agreement, the Company shall not be required to consult with the
Underwriter concerning any borrowings from banks and institutional lenders or
concerning financing under any equipment leasing or similar arrangements.
11.02. Exercise of Warrants. Upon the exercise of any Warrants after
the Effective Date, the Company will pay the Representative, as principal and
not in its representative capacity, a fee of four percent (4%) of the difference
between the initial offering price and the aggregate exercise price of the
Warrants if: (i) the market price of the Company's Stock is greater than the
exercise price of the Warrants on the date of exercise;
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(ii) the exercise of the Warrants was solicited by a member of the NASD; (iii)
the Warrants are not held in a discretionary account; (iv) the disclosure of
compensation arrangements has been made in documents provided to customers, both
as part of the original offering and at the time of the exercise; (v) the
solicitation of the exercise of the Warrants was not in violation of Regulation
M promulgated under the Exchange Act; and (vi) the solicitation of the exercise
of the Warrants is in compliance with NASD Notice to Members 81-38. The Company
agrees not to solicit the exercise of any Warrants through brokers or dealers
other than through the Representative and the Co-Manager provided that the
Company shall not be required to pay the Representative and Co-Manager any
solicitation fee as to any Warrants solicited solely by the Company without any
action on the part of the Representative and the Co-Manager and provided the
Company is permitted by applicable laws to so solicit the exercise of the
Warrants. The Company will not authorize any other dealer to engage in such
solicitation without the prior written consent of the Representative and the
Co-Manager. The exercise of the Warrants other than through the Representative
and the Co-Manager will be presumed to be unsolicited unless the customer has
indicated in writing that the transaction was not unsolicited and has designated
the broker/dealer which is to receive compensation for the exercise. The warrant
solicitation fee to be paid upon the exercise of the warrants will not be paid
before (12) twelve months after the effective date of the offering.
SECTION 12
Notice
Except as otherwise expressly provided in this Agreement:
12.01. Notice to the Company. Whenever notice is required by the
provisions of this Underwriting Agreement to be given to the Company, such
notice shall be in writing addressed to the Company as follows:
BIO-AQUA SYSTEMS, INC.
1900 Glades Road, Suite 351
Boca Raton, FL 33431
Telephone: (561) 416-8930
Attention: David Mayer
With a copy to:
Charles B. Pearlman, Esq.
Brian Pearlman, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Blvd., Suite 1900
Fort Lauderdale, FL 33301
Telephone: (954) 763-1200
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Telefax: (954) 766-7800
12.02. Notice to the Underwriters. Whenever notice is required by the
provisions of this Agreement to be given to the Underwriters, such notice shall
be given in writing addressed to the Representative at the address set out at
the beginning of this Agreement, with a copy to:
Nutmeg Securities, Ltd.
495 Post Road East
Westport, CT 06880
Attention: Dan Guilfoile
Emerson Bennett & Associates, Inc.
6261 Northwest 6th Way, Suite 207
Fort Lauderdale, FL 33309
Attention: Brentley Martin
With a copy to:
Walter J. Stanton III, Esq. and Nancy Van
Sant, Attorney
Sacher, Zelman, Stanton, Paul, Beiley &
Van Sant P.A.
1401 Brickell, Suite 700
Miami, FL 33133
Telephone: (305) 371-8797
Telefax: (305) 374-2605
SECTION 13
Miscellaneous
13.01. Benefit. This Agreement is made solely for the benefit of the
Underwriters, the Company, their respective officers and directors and any
controlling person, and their respective successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successor" or the term "successors and assigns" as used in this Agreement
shall not include any purchasers, as such, of any of the Stock or Warrants.
13.02. Survival. The respective indemnities, agreements,
representations, warranties, covenants and other statements of the Company or
its officers as set forth in or made pursuant to this Agreement and the
indemnity agreements of the Company and the Underwriters contained in Section 6
hereof shall survive and remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or the Underwriters or any
such officer or director thereof or any controlling person of the
30
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Company or of the Underwriters, (ii) delivery of or payment for the Stock, (iii)
the Closing Date, and (iv) any successor of the Company and the Underwriters or
any controlling person, officer or director thereof, as the case may be, shall
be entitled to the benefits hereof.
13.03. Governing Law. The validity, interpretation and construction of
this Agreement and of each part hereof will be governed by the laws of the State
of Florida.
13.04. Underwriters' Information. The statements with respect to the
public offering of the Stock on the cover page of the Prospectus and under the
caption "Underwriting"' in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in subsection 2.02
hereof, in subsection 6.01 hereof and subsection 6.02 hereof.
13.05. Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
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Please confirm that the foregoing correctly sets forth our Agreement.
Very truly yours,
Bio-Aqua Systems, Inc.
By:________________________
ATTEST:
______________________________
Secretary
WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE LETTER SETS FORTH THE
AGREEMENT BETWEEN THE COMPANY AND US.
NUTMEG SECURITIES, LTD.
By:________________________
EMERSON BENNETT &
ASSOCIATES, INC.
By:________________________
BIO-AQUA SYSTEMS, INC.
By:________________________
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ANNEX A
-------
NUTMEG SECURITIES, LTD.
495 Post Road East
Westport, Connecticut 06880
CONSULTING AGREEMENT
--------------------
_____________, 1999
Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, Florida 33431
Attention: Mr. Max Rutman
Chairman of the Board, President and Chief Executive Officer
Dear Sirs:
This will confirm the arrangements, terms and conditions pursuant to
which Nutmeg Securities, Ltd. (the "Representative") and Emerson Bennett &
Associates, Inc. (collectively the "Consultant") have been retained to serve as
consultants and advisors to Bio-Aqua Systems, Inc., a Florida corporation (the
"Company"), for the term set forth in Section 3 below. The undersigned hereby
agree to the following terms and conditions:
1. Engagement. The Company hereby retains the Consultant to perform
consulting and advisory services, and the Consultant hereby accepts such
retention and agrees to do and perform consulting and advisory services, upon
the terms and conditions set forth herein.
2. Duties of the Consultant.
(a) Consulting Services. The Consultant will provide such
general financial consulting services and advice pertaining to the Company's
business affairs (as further set forth below), as and when the Company may from
time to time reasonably request upon reasonable notice. Without limiting the
generality of the foregoing, the Consultant will assist the Company in
developing, studying and evaluating financing and capital structure, mergers and
acquisitions activity and corporate financing proposals, prepare reports and
studies thereon when advisable, and assist in negotiations and discussions
pertaining thereto.
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(b) Financing. The Consultant will assist and represent the
Company in obtaining both short and long-term financing, when so requested by
the Company in the Company's sole discretion. The Consultant will be entitled to
additional compensation under such terms as may be agreed to by the parties in
connection therewith.
(c) Wall Street Liaison. The Consultant will, when
appropriate, arrange meetings between representatives of the Company and
individuals and financial institutions in the investment community, such as
security analysts, portfolio managers and market makers.
The services described in this Section 2 shall be rendered by the
Consultant in consultation with the Company at such time and place and in such
manner (whether by conference, telephone, letter or otherwise) as the Consultant
and the Company may reasonably determine.
3. Term. The term of this Agreement shall commence on the date hereof
and continue for a period of two years from the date hereof (the "Term").
4. Compensation. As compensation in full for the Consultant's services
hereunder during the Term, the Company shall pay to the Consultant $60,000 per
annum, payable to the Representative, commencing on the effective date.
5. Expenses. The Company shall pay and reimburse the Consultant for all
reasonable out-of-pocket expenses incurred by the Consultant and approved in
advance in writing by the Company in the performance of its services under this
Agreement.
6. Relationship. Nothing herein shall constitute the Consultant as an
employee or agent of the Company. Except as might hereinafter be expressly
agreed, the Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever. Nothing herein shall preclude the Company from
enjoying the services of any other investment banking firm during the term of
this Agreement or any entity providing similar services as the consultant.
7. Confidentiality. Except in the course of the performance of its
duties hereunder, and in such case, only upon express written consent of the
Company, the Consultant agrees that it shall not disclose any trade secrets,
know-how, or other proprietary information not in the public domain learned as a
result of this Agreement unless and until such information becomes generally
known or is in the public domain.
8. Finder's or Broker's Fees. The Company acknowledges and agrees that,
with the written agreement and at the request of the Company, the Consultant may
act as a finder or financial consultant in various business transactions in
which the Company or any of its subsidiaries may be involved, such as mergers,
acquisitions, joint ventures or investments and that the Consultant may be
entitled to receive a finder's fee or brokerage
2
<PAGE>
commission or other rights, profits or payments in connection with such
transactions provided, however, that the Company and the Consultant have entered
into an agreement prior thereto regarding the services to be performed by and
the fee to be paid to the Consultant.
9. Permitted Activities. Nothing contained in this Agreement shall
limit or restrict the right of the Consultant or of any officer, director,
shareholder, employee, agent or representative of the Consultant to be a
partner, owner, director, officer, employee, agent or representative of, or
engage in, any other business, whether of a similar nature or not, or limit or
restrict the right of the Consultant to render services of any kind to any other
corporation, firm, individual or other entity. Nothing contained in this
Agreement shall limit or restrict the right of the Company to retain the
services of other investment bankers or financial consultants.
10. Assignment and Termination. This Agreement shall not be assignable
by any party except to a successor to all or substantially all of the business
of either party without the prior written consent of the other party, which
consent may be arbitrarily withheld by the party whose consent is required.
11. Notices. All notices hereunder shall be in writing and shall be
validly given, made or served if in writing and delivered in person or when
received by facsimile transmission, or five days after being sent first class
certified or registered mail, postage prepaid or one day after being sent by
nationally recognized overnight courier to the party for whom intended at the
addresses as set forth above or at such other address as may be provided.
12. Governing Law; Submission to Jurisdiction. This agreement shall be
interpreted, construed, governed and enforced according to the laws of the State
of Florida without giving effect to the conflicts of law rules thereof. The
Company and the Consultant hereby agree that any action, proceeding or claim
against it arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of Florida or of the United
States of America in Florida, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company and the Consultant hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum and also hereby irrevocably waive any right or claim to trial by jury in
connection with any such action, proceeding or claim.
13. Amendments. No amendment or modification of the terms or conditions
of this Agreement shall be valid unless in writing and signed by the parties
hereto.
14. Indemnification. As a consultant for the Company, the Consultant
must at times rely upon the information supplied to the Consultant by the
Company's officers, directors, agents and employees as to accuracy and
completeness. Therefore, the Company agrees to indemnify, hold harmless and
defend the Consultant, its directors,
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officers, employees and agents from and against any and all claims, actions,
proceedings, losses, liabilities, costs and expenses (including without
limitation, reasonable attorneys' fees) incurred by any of them in connection
with or as a result of any inaccuracy, incompleteness or omission of information
given to the Consultant in writing by the Company's officers, directors, agents
or employees in connection with the rendering of services by the Consultant
requested by the Company hereunder.
15. Counterparts. This Agreement may be executed in one or more
counterparts which, taken together, shall constitute one and the same
instrument, and this Agreement shall become effective when one or more
counterparts have been signed by each of the parties. It shall not be necessary
in making proof of this Agreement or any counterpart hereof to account for more
than one such counterpart.
Very truly yours,
NUTMEG SECURITIES, LTD.
By: _______________________
Name:
Title:
EMERSON BENNETT & ASSOCIATES, INC.
By:________________________
Name:
Title:
AGREED AND ACCEPTED:
BIO-AQUA SYSTEMS, INC.
By:_______________________________________
Max Rutman
Chairman of the Board, President and
Chief Executive Officer
4
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (the "Exchange Agreement") is entered
into by and among BIO-AQUA SYSTEMS, INC., a Florida corporation ("Bio-Aqua") and
FLAGSHIP IMPORT EXPORT LLC, a Nevada limited liability company, whose sole
member is Max Rutman, an individual currently residing in Santiago, Chile
(collectively "Flagship") and which owns 8,573 shares of TEPUAL, S.A., a Chilean
corporation ("Tepual"), as of the 28th day of September, 1999, but which
Exchange Agreement shall be effective as of the effective date of the
Registration Statement on Form SB-2 ("Registration Statement"), as filed by
Bio-Aqua with the Securities and Exchange Commission ("Effective Date").
(Bio-Aqua, Flagship, and Tepual sometimes individually referred to as "Party"
and collectively as "Parties").
RECITALS
A. Bio-Aqua is a corporation duly organized and existing under the laws
of the State of Florida and located in Palm Beach County, Florida, having been
incorporated March 18, 1999 and having authorized capital stock consisting of
twenty-two million (22,000,000) shares of Common Stock par value $.0001, of
which Twenty Million (20,000,000) shares are designated as Class A Voting Common
Stock and Two Million (2,000,000) shares are designated as Class B Voting Common
Stock ("Class B Common Stock").
B. Bio-Aqua wishes to acquire 8,558 shares of Tepual ("Tepual Shares"),
out of 9,525 issued shares in Tepual in exchange for 1,529,910 shares of class B
Common Stock of Bio-Aqua ("Bio-Aqua Shares").
C. The laws of the States of Florida and Nevada and the Country of
Chile permit Bio-Aqua to acquire the 8,558 Tepual Shares for 1,529,910 Bio-Aqua
Shares, subject to the terms and conditions set forth in this Exchange
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants herein contained, as of the "Effective Date," as
hereinafter defined, it is agreed that Bio-Aqua shall acquire the Tepual Shares
inj exchange for the Bio-Aqua Shares, subject to the terms and conditions set
forth and the mode of carrying it into effect are and shall be as follows:
1. Recitals. The above recitals are true, correct and are herein
incorporated by reference.
2. Purchase of Shares. Flagship hereby agrees to transfer to Bio-Aqua
at the closing referred to in Section 3 below the Tepual Shares, which
represents an interest in
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Tepual, for the Bio-Aqua Shares, and Flagship agrees to deliver to Bio-Aqua a
certificate representing the Tepual Shares. All certificates to be delivered at
the closing by the parties hereto shall be in negotiable form, subject to any
lock-up agreements and other restrictions pursuant to Federal and state
securities laws and contractual agreements with certain persons and Bio-Aqua's
representative of the underwriters, including but not limited to, Rule 144 of
the Securities Act of 1933, as amended or as applicable.
3. Closing Date. The "Closing Date" shall be the effective date of
Bio-Aqua's registration statement on Form SB-2 filed with the Securities and
Exchange Commission.
4. Representations of Flagship. Flagship hereby represents and
warrants that:
(a) Tepual is validly organized, existing and in good standing
under the laws of the Country of Chile. Upon information and belief, there are
no outstanding options, contracts, calls, commitments or demands of any
character relating to the authorized but unissued stock of Tepual.
(b) The Tepual Shares to be sold at the closing are validly
issued, fully paid and non-assessable.
(c) Except as otherwise previously disclosed to Bio-Aqua by
Flagship, there has been no material adverse change in the condition of Tepual
since the date of the financial statements previously provided to Bio-Aqua. To
the best of Flagship's knowledge, the only changes in the financial condition of
Tepual since said date are those arising from the normal and regular conduct of
the business of Tepual.
(d) Except as otherwise previously disclosed to Bio-Aqua by
Flagship, to the best of Flagship's knowledge, there is no litigation,
governmental proceeding or investigation threatened or in prospect against
Tepual or relating to any of the interest to be transferred hereunder which
could materially affect Bio-Aqua.
(e) Except as otherwise previously disclosed to Bio-Aqua by
Flagship, to the best of Flagship's knowledge, Tepual has no bonus, deferred
compensation, profit-sharing, pension or retirement arrangements, whether or not
legally binding, nor is it presently paying any pension, deferred compensation
or retirement allowance which has not otherwise been disclosed to Bio-Aqua.
(f) The statements made and information given to Bio-Aqua
concerning Tepual and the transactions covered by this Agreement are true and
accurate and no material fact has been withheld from Bio-Aqua.
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(g) Flagship has no knowledge of any developments or
threatened developments of a nature that would be materially adverse to the
business of Tepual.
(h) The Tepual Shares to be transferred by Flagship to
Bio-Aqua hereunder are free and clear of all voting trusts, agreements,
arrangements, encumbrances, liens, claims, equities and liabilities of every
nature and Flagship is conveying clear and unencumbered title thereto to
Bio-Aqua.
(i) There are no agreements to which Tepual is a party nor
does Flagship know of any other agreements that in any way materially restrict
or impinge upon the business of Tepual or the benefit of which Tepual requires
or presently has in its business.
(j) Flagship has full power and authority to enter into this
Flagship Agreement, is able to bear the risks of its investment in Bio-Aqua and
is holding the security it receives to investment and not with a view towards
distribution. Flagship is either a sophisticated or accredited investor.
5. Representations of Bio-Aqua. Bio-Aqua hereby makes the following
representations and warranties to Flagship, each of which is true as of the date
hereof and will be true as of the Closing Date with the same effect as though
such representations and warranties had been made on the Closing Date:
(a) Bio-Aqua is a corporation duly organized and existing
under and by virtue of the laws of the State of Florida, and is in good standing
under the laws thereof.
(b) The execution and delivery of this Agreement by Bio-Aqua
and the performance by Bio-Aqua of its covenants and undertakings hereunder have
been duly authorized by all requisite corporate action, and Bio-Aqua has the
corporate power and authority to enter into this Agreement and to perform the
covenants and undertakings to be performed by it hereunder.
(c) Neither the execution nor the delivery of this Agreement,
nor the consummation of the transaction herein contemplated, nor compliance with
the terms hereof, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Articles of Incorporation or the Bylaws of
Bio-Aqua as amended, or any agreement or instrument to which Bio-Aqua is now a
party.
(d) Bio-Aqua is acquiring Flagship's stock for its own account
and for investment and not with the view to the distribution or resale of any
thereof.
6. Investment Purpose. Bio-Aqua represents that it is acquiring the
Tepual Shares to be delivered at the closing solely for investment and not for
distribution or resale.
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7. Notices. Any notice or communication necessary or desirable
hereunder shall be considered sufficient and delivery thereof shall be deemed
complete if delivered in person or mailed by registered mail on the part of:
Bio-Aqua to:
Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, Florida 33431
and to Flagship and Max Rutman, as follows:
Flagship Import Export LLC
200 East Las Olas Boulevard, Suite 1900
Fort Lauderdale, Florida 33301
Attn: Max Rutman
and to Tepual as follows:
Tepual S.A.
General Ekdhal 159
Santiago, Chile
Attn: Max Rutman
or to such other address as either party may hereafter specify in writing as his
or its own address to the other party.
8. Entire Agreement. This Agreement constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements and understandings of the parties in
connection herewith.
9. Severability. Flagship and Bio-Aqua hereby agree and affirm that
none of the above provisions is dependent on the validity of any other provision
and invalidity as to any provision or any part thereof shall not affect any
other provision.
10. Governing Law. This Agreement shall be governed by the laws of the
State of Florida. Venue shall be Broward County, Florida.
11. Counterpart. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
BIO-AQUA SYSTEMS, INC.
By: /s/ Max Rutman
-------------------
Name: Max Rutman
-------------------
Its: CEO
-------------------
FLAGSHIP IMPORT EXPORT LLC
By: /s/ Max Rutman
-------------------
Name: Max Rutman
-------------------
Its: Sole Member
-------------------
5
STOCK PURCHASE AGREEMENT
------------------------
AGREEMENT made as of this 15th day of June 1999 but effective as of the
Closing, by and between Max Rutman, Andrea Rutman and Paulina Rutman
(collectively the ASellers@), and Bio-Aqua Systems, Inc., a Florida corporation
("Purchaser").
W I T N E S S E T H:
--------------------
WHEREAS, Sellers are the owners of all of the issued and outstanding
stock (the AShares@), of Profeed, Inc. (AProfeed@), a Bahamian corporation; and
WHEREAS, Purchaser desires to purchase from Sellers and Sellers desire
to sell to Purchaser, the Shares upon the terms and conditions hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants and promises
herein contained and upon the terms and conditions hereinafter set forth, the
parties hereto, intending to be legally bound, agree as follows:
1. PURCHASE AND SALE OF THE SHARES.
(ii Purchase and Sale. Upon the terms and conditions herein
contained, at the Closing (as hereinafter defined), Sellers agree to sell the
Shares to Purchaser and Purchaser agrees to purchase the Shares from Sellers,
free and clear of all liens, claims, pledges, mortgages, restrictions,
obligations, security interests and encumbrances of any kind, nature and
description.
2. CONSIDERATION.
(ii Purchase Price. The purchase price for the Shares (the
APurchase Price@) shall be an aggregate of One Million Three Hundred Thousand
Dollars ($1,300,000) to Sellers, of which $400,000 will be paid from the
proceeds of Purchaser=s initial public offering and the balance will be paid,
under the discretion of the directors of the Purchaser, out of: (1) 5% of
Purchaser=s gross revenues per quarter, but in no event greater than 20% of
Purchaser=s gross income per quarter, from the sale of products sold under the
TepualTM and Inual TM brands; (2) third party financing; or (3) working capital.
3. CLOSING.
(ii Time and Place of Closing. The closing of the transactions
contemplated by this Agreement (the AClosing@) shall take place simultaneously
with the effective date of the Registration Statement on Form SB-2 as filed by
Purchaser with the Securities and Exchange Commission.
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4. REPRESENTATIONS AND WARRANTIES OF SELLERS. Sellers hereby represent
and warrant to Purchaser as follows:
a. Status of Sellers and Shares. Sellers are the sole
beneficial owners of the respective Shares, and own the Shares, free and clear
of all mortgages, pledges, restrictions, liens, charges, encumbrances, security
interests, obligations or other claims.
b. Organization. To Sellers knowledge, Profeed is a
corporation duly organized, validly existing and in good standing under the laws
of the Bahamas, has all necessary corporate powers to own its properties and to
carry on its business as now owned and operated by it, is duly qualified to do
business and is in good standing in any jurisdiction its business requires
qualification.
c. Inual TM and Tepual TM Brands, Trademarks and Marks.
(i) All Inual TM and Tepual TM Brands, Trademarks and
Marks that have been registered with the appropriate authorities are currently
in compliance with all formal legal requirements (including the timely
post-registration filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety (90) days after the Closing
Date.
(ii) No Brands, Trademarks or Marks have been or are
now involved in any opposition, invalidation, or cancellation and, to Sellers'
knowledge, no such action is threatened with the respect to any of the Brands,
Trademarks or Marks.
(iii) To Sellers' knowledge, there is no potentially
interfering trademark or trademark application of any third party. Profeed is
the owner of all right, title and interest in all of the Inual TM and Tepual TM
Brands, Trademarks and Marks free and clear of all liens, security interests,
charges, encumbrances and all other adverse claims.
(iv) No Brands, Trademarks or Marks are infringed or,
to Sellers' knowledge, have been challenged or threatened in any way. None of
the Brands, Trademarks or Marks used by Sellers infringe or are alleged to
infringe any trade name, trademark, or service mark of any third party.
(v) All products and materials containing Brands,
Trademarks and Marks bear the proper registration notice where permitted by law.
(vi) The transfer of the shares will not result in
the loss of any brands, trademarks or marks held by the Purchaser.
d. Due Authorization. This Agreement has been duly authorized
by Sellers and is a validly binding and legally enforceable obligation of
Sellers enforceable in accordance with its terms.
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e. Financial Condition. Except as otherwise previously
disclosed to Purchaser by the Sellers, there has been no material adverse change
in the financial condition of Profeed. To the best of the Sellers= knowledge,
the only changes in the financial condition of Profeed are those arising from
the normal and regular conduct of the business of Profeed and the acquisition of
the Inual TM and Tepual TM brands.
f. No Litigation. Except as otherwise previously disclosed to
Purchaser by the Sellers, to the best of Sellers= knowledge, there is no
litigation, governmental proceeding or investigation threatened or in prospect
against Profeed or relating to any of the interest to be transferred hereunder
which could materially affect Purchaser.
g. Statements. The statements made and information given to
Purchaser concerning Profeed and the transactions covered by this Agreement are
true and accurate and no material fact has been withheld from Purchaser.
h. No Consents. No governmental filings, authorizations,
approvals or consents are required to permit Sellers to fulfill all of its
obligations under this Agreement.
i. No Breach. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
(i) violate any provision of the Articles of Incorporation or By-Laws of
Sellers; (ii) violate, conflict with or result in the breach of any of the terms
of, result in a material modification of, otherwise give any other contracting
party the right to terminate, or constitute (or with notice or lapse of time or
both) a default under any contract or other agreement to which Sellers are a
party; (iii) violate any order, judgment, injunction, award or decree of any
court, arbitrator or governmental or regulatory body against, or binding upon
Sellers, or upon the properties or business of Sellers; or (iv) violate any
statute, law or regulation of any jurisdiction applicable to Sellers.
j. Compliance with Laws. Sellers have complied in all material
respects with all laws, ordinances, regulations, inspections, orders, judgments,
injunctions, awards or decrees applicable to Sellers' business.
5. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF PURCHASER.
Purchaser hereby represents, warrants and acknowledges to Sellers as follows:
a. Due Incorporation. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida.
b. Corporate Power of Purchaser. Purchaser has the full legal
right and power and all authority and approval required to enter into, execute
and deliver this Agreement and to perform fully its obligations hereunder.
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c. Due Authority. Purchaser has all power and authority
necessary to enable it to carry out the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by it have been authorized by all necessary
corporate action on the part of Purchaser, including shareholder approval, if
required. This Agreement is a valid and binding agreement of Purchaser,
enforceable against Purchaser in accordance with its terms. Neither the
execution and delivery of this Agreement by Purchaser nor the consummation of
the transactions contemplated by this Agreement will violate, result in a breach
of, or constitute a default under, any agreement or instrument to which
Purchaser is a party or by which Purchaser is bound, or any order, rule or
regulation of any court or governmental agency having jurisdiction over
Purchaser.
d. No Breach. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
(i) violate any provision of the Articles of Incorporation or By-Laws of
Purchaser; (ii) violate, conflict with or result in the breach of any of the
terms of, result in a material modification of, otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both) a default under any contract or other agreement to which
Purchaser is a party; (iii) violate any order, judgment, injunction, award or
decree of any court, arbitrator or governmental or regulatory body against, or
binding upon Purchaser, or upon the properties or business of Purchaser; or (iv)
violate any statute, law or regulation of any jurisdiction applicable to
Purchaser.
6. CLOSING ITEMS.
a. Purchaser's Deliveries. At Effective Date, Purchaser shall
deliver to Sellers the following monies and documents:
(i) a certified copy of a resolution of Purchaser=s
Board of Directors authorizing the execution and delivery of this Agreement and
the purchase of the Shares.
(ii) other purchase documents: all such documents and
instruments as Sellers and their counsel may reasonably request in connection
with the consummation of the transaction contemplated by this Agreement.
b. Sellers= Deliveries. At Effective Date, Sellers shall
deliver to Purchaser the following rights and documents for the following:
(i) certificates representing the Shares, free and
clear of all liens, claims, pledges, mortgages, restrictions, obligations,
security interests and encumbrances of any kind, nature and description.
(ii) all the rights to the brands, trademarks and
patents "Inual J;"
(iii) all the rights to the brands, trademarks and
patents "Tepual J;"
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(iv) assignment and assumption of all future rights
to the brands, trademarks and patents "Inual J" and "Tepual J executed by Max
Rutman;"
(v) agreements and assignments of trade names and
trademarks between Max Rutman and Profeed, Inc.; and
(vi) assignment and assumption agreements.
7. MISCELLANEOUS.
a. Binding Effect; Benefits. This Agreement shall inure to the
benefit of, and shall be binding upon, the parties hereto and their respective
successors and permitted assigns. Except as otherwise set forth herein, this
Agreement may not be assigned by any party hereto without the prior written
consent of the other party hereto. Except as otherwise set forth herein, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and permitted
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
b. Notices. All notices, requests, demands and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given when delivered
in person, or transmitted by telecopy or telex, or upon receipt after dispatch
by certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made, at the following
addresses (or such others as shall be provided in writing hereinafter):
(i) If to Sellers, to:
Tepual S.A.
159 General Ekdhal 159
Santiago, Chile
(ii) If to the Purchaser, to:
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard, Suite 1900
Fort Lauderdale, Florida 33301
Attention: Brian Pearlman, Esq.
c. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
d. Headings. The section and other headings contained in this
Agreement are for reference purposes only and shall not be deemed to be a part
of this Agreement or to affect the meaning or interpretation of this Agreement.
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e. Counterparts. This Agreement may be executed in any number
of counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall be deemed to be one and the same instrument.
f. Governing Law. This Agreement shall be construed as to both
validity and performance and enforced in accordance with and governed by the
laws of the State of Florida, without giving effect to the conflicts of law
principles thereof.
g. Severability. If any term or provision of this Agreement
shall to any extent be invalid or unenforceable, the remainder of this Agreement
shall not be affected thereby, and each term and provision of the Agreement
shall be valid and enforced to the fullest extent permitted by law.
h. Arbitration. Any controversy or dispute arising out of or
in connection with this Agreement, its interpretation, performance or
termination, which the parties hereto are unable to resolve within a reasonable
time after written notice from one (1) party to the other of the existence of
such controversy or dispute shall be determined by arbitration. Such arbitration
shall be in accordance with the rules and procedures then in effect of the
American Arbitration Association. The costs and expenses of such arbitration,
including attorney's fees and expenses, shall be awarded as determined by the
arbitrators.
i. Amendments. This Agreement may not be modified or changed
except by an instrument or instruments in writing executed by the parties
hereto.
8. INDEMNIFICATION.
a. Indemnification by Sellers. Sellers shall indemnify,
defend, and hold Purchaser and its representatives, successor, and assigns,
harmless from and against any and all damage, loss, judgments, or liability and
all expenses (including reasonable attorneys' fees) incurred by any of the
above-named persons, resulting from or in connection with:
(i) the Assets prior to the Effective Date, or
(ii) any material breach by Sellers or any
representation or covenant made by Sellers in, or any obligation of Sellers
under this Agreement.
b. Indemnification by Purchaser. Purchaser shall indemnify,
defend, and hold Sellers and its representatives, successor, and assigns,
harmless from and against any and all damage, loss, judgments, or liability and
all expense (including reasonable attorneys' fees) incurred by any of the
above-named persons, resulting from or in connection with:
(i) the Assets or the business prior to the Effective
Date, or
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(ii) any material breach by Purchaser or any
representation or covenant made by Purchaser in, or any obligation of Purchaser
under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SELLERS:
/s/ Max Rutman
---------------------------------------
Max Rutman
/s/ Andrea Rutman
---------------------------------------
Andrea Rutman
/s/ Paulina Rutman
---------------------------------------
Paulina Rutman
PURCHASER:
BIO-AQUA SYSTEMS, INC.
By: /s/ David Mayer
---------------------------------------
David Mayer
Director, Assistant Secretary
By: /s/ Guillermo Quiroz
---------------------------------------
Guillermo Quiroz
Director, Chief Financial Officer
7
