<TABLE>
<CAPTION>
BIO-AQUA SYSTEMS, INC.
425,000 UNITS
<S> <C>
Bio-Aqua Systems, Inc. We are offering 425,000 units. Each unit
1900 Glades Road, Suite 351 consists of two shares of class A common
Boca Raton, FL 33431 stock and two redeemable common stock
purchase warrants. Our shares and warrants
included in our units will automatically
The Offering separate 30 days from the effective date
of this offering, after which our class A
Public Offering Price $ 10.00 $4,250,000 common stock and warrants will trade separately.
Prior to this offering, there has been no
Underwriting Discounts and public market for our units, class A common
Commissions $ 1.00 $ 425,000 stock or warrants. Our units, class A common
stock and warrants have been approved for
Proceeds to Bio-Aqua Systems, Inc. $ 9.00 $3,825,000 listing on the American Stock Exchange under
the symbol SEA.U for our units, SEA for our
common stock and SEA.WS for our warrants. Our
initial public offering price is $10 per unit.
The underwriters may, under some
circumstances, for 45 days after the date of
this prospectus, purchase up to an
additional 63,750 units consisting of an
aggregate of 127,500 shares of class A
common stock and 127,500 warrants from us at
the public offering price, less underwriting
discounts and commissions.
</TABLE>
INVESTING IN OUR UNITS CLASS A COMMON STOCK AND WARRANTS INVOLVES
CERTAIN RISKS. SEE RISK FACTORS ON PAGE 7.
It is expected that delivery of our units will be made, in a firm
commitment offering, against payment on or about April 3, 2000.
INSTITUTIONAL EQUITY CORPORATION CAPITAL WEST SECURITIES, INC.
Prospectus March 29, 2000
2
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 4
Selected Financial Data................................................... 6
Risk Factors.............................................................. 7
Use of Proceeds .......................................................... 11
Dividend Policy........................................................... 13
Dilution.................................................................. 13
Capitalization............................................................ 14
Exchange Rates............................................................ 15
Management's Discussion and Analysis of Financial Condition
Results of Operations............................................... 16
Business.................................................................. 21
Additional Information.................................................... 48
Management................................................................ 50
Certain Relationships and Related Transactions............................ 57
Bridge Financing.......................................................... 58
Principal Shareholders.................................................... 59
Description of Securities................................................. 60
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 65
Legal Matters............................................................. 69
Experts................................................................... 69
Index to Financial Statements............................................. F-1
3
<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 as a holding company to acquire a 99% interest in
Tepual S.A., a Chilean corporation. At closing of this offering we will purchase
our interest in Tepual S.A. from its shareholders. We will acquire the rights to
the Inual(TM) and Tepual(TM) brands at closing by acquiring all of the issued
and outstanding stock of Profeed, Inc., a Bahamian company.
Our principal executive offices are located at General Ekdhal 159,
Santiago, Chile, and our telephone number is 011 (562) 777-0262. Our U.S.
offices are located at 1900 Glades Road, Suite 351, Boca Raton, Florida 33431,
and our telephone number is (561) 416-8930. When we use the terms "Bio-Aqua,"
"Tepual," "we," "our" and similar terms, this includes Bio-Aqua Systems, Inc.
and Tepual S.A., our 99% subsidiary.
4
<PAGE>
THE OFFERING
The information below and elsewhere in this prospectus, unless
otherwise stated, assumes no exercise of the over-allotment option, our
warrants, the representative's units, the securities underlying the
representative's units, 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.
Securities offered....................... 425,000 units. Each unit consists of
two shares of class A common stock
and two warrants. Each warrant is for
the purchase of an additional share
of class A common stock. The common
stock and the warrants included in
the units will automatically separate
30 days from our effective date of
this offering, after which, the
common stock and warrants in the
units will trade separately.
Warrants................................. Our warrants included in our units
will be exercisable commencing 30
days from our effective date. The
exercise price of each warrant is
$6.00 or 120% of the initial offering
price of our class A common stock.
The warrants expire 5 years from the
effective date of this prospectus,
but we have the option to extend the
exercise period. We may redeem some
or all of our outstanding warrants
beginning March 27, 2001 for $.05 per
warrant at any time on 30 days prior
written notice if the closing price
of our class A common stock is at
least $10.00 per share for 30
consecutive trading days.
Class A common stock outstanding
after the offering:.................................. 936,294
Class B common stock outstanding
after the offering................................... 1,700,000
Warrants outstanding
after the offering................................... 850,000
Our securities are listed on the American Stock Exchange under the following
symbols:
Units.........................................SEA.U
Class A common stock..........................SEA
Warrants .....................................SEA.WS
5
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data as set forth below for the years ended
December 31, 1997 and 1998 and the balance sheet data at December 31, 1997 and
1998, have been derived from our combined financial statements and notes, which
have been audited by Spear, Safer, Harmon & Co., P.A., independent auditors,
whose report is included in this prospectus. The statement of operations data
for the nine months ended September 30, 1999 and 1998, and the balance sheet
data at September 30, 1999 are derived from our unaudited financial statements
included elsewhere in this prospectus. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and included all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of our
financial condition and results of operations for such periods. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for any other interim period or the entire
year.
The following financial data should be read in conjunction with the
consolidated financial statements and notes and management's discussion and
analysis of financial condition and results of operations included in this
prospectus. The proforma statement of operations data assumes our president and
chief financial officer received an annual base salary of $200,000 and $100,000,
respectively, for the periods indicated.
<TABLE>
<CAPTION>
Proforma Nine Proforma
Years Ended December 31, Nine Months Ended September 30, Months Ended Year Ended
1997 1998 1998 (Unaudited) 1999 September 30, 1999 December 31, 1998
---- ---- ----------------------------- ------------------ -----------------
STATEMENT OF OPERATIONS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 5,238,299 $ 6,873,512 $ 4,648,676 $ 4,454,395 $ 4,454,395 $ 6,873,512
Cost of Operations $ 3,571,678 $ 4,853,553 $ 3,453,168 $ 3,087,682 $ 3,087,682 $ 4,853,553
Selling and Administrative
Expenses $ 1,516,974 $ 1,555,661 $ 1,029,043 $ 981,529 $ 1,206,529 $ 1,855,661
Other Income (Expenses) $ (93,220) $ (224,325) $ (61,010) $ (287,854) $ (287,854) $ (224,325)
Net Income $ 56,427 $ 239,973 $ (105,455) $ (97,331) $ (127,670) $ (60,027)
Net Income per common share $ 0.03 $ 0.14 $ (.06) $ (.06) $ (.07) $ (.04)
Weighted average common
shares outstanding 1,700,000 1,700,000 1,700,000 1,755,353 1,755,353 1,700,000
</TABLE>
BALANCE SHEET DATA
- ------------------
The as adjusted balance sheet data as of September 30, 1999, reflects
the sale of 425,000 units containing two shares of class A common stock and two
warrants, but excludes the exercise of our warrants, the exercise of the
representative's units and the underlying warrants and the over-allotment
option.
<TABLE>
<CAPTION>
September 30, 1999
Period Ended Actual As Adjusted
December 31, (Unaudited) (Unaudited)
------------------------------- ----------- -----------
1997 1998
<S> <C> <C> <C> <C>
Working capital $ 617,413 $ 984,937 $ (905,676) $ 2,441,824
Total assets $ 4,089,157 $ 5,693,991 $ 6,546,695 $ 8,744,195
Total long-term liabilities $ 355,014 $ 478,813 $ 400,002 $ 400,002
Total liabilities $ 2,348,531 $ 3,678,546 $ 6,078,040 $ 4,928,090
Stockholders' equity $ 1,740,626 $ 2,015,445 $ 468,655 $ 3,816,155
</TABLE>
6
<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:
o seasonality;
o economic conditions; and
o 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, in part, will depend upon the ability of new vaccines to meet
targeted performance.
IF WE ARE UNABLE TO SUCCESSFULLY BRING OUR RED TIDE DETECTION AND
CLEANSING SYSTEM TO MARKET BECAUSE OF OUR INABILITY TO MEET TECHNOLOGICAL AND
REGULATORY COMPLIANCE, WE MAY NOT RECEIVE REVENUE FROM THESE PRODUCTS WHICH WILL
ADVERSELY AFFECT OUR FINANCIAL CONDITION. We anticipate that our paralytic
shellfish poisoning red tide detection kit will be available for sale during the
first quarter of 2000. Our red tide cleansing kit system is still in the
preliminary stages of product development and we anticipate that it will not be
ready for commercial sale for approximately two years. Our red tide detection
and cleansing is expected to be subject to regulation by agencies that
administer laws governing health, safety and the protection of the environment,
or any other government agency in areas 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.
7
<PAGE>
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.
FAILURE TO TRADEMARK OUR INUAL(TM) AND TEPUAL(TM) BRANDS MAY REDUCE THE
VALUE of our PRODUCTS AND IMPACT OUR FINANCIAL CONDITION. We currently only have
trademark protection over the Tepual(TM) and Inual(TM) brands in Chile,
Colombia, Taiwan, China, Ecuador, Mexico (only for Tepual(TM)), Japan, Peru and
South Africa. Our brand name is critical to our success. Failure to obtain
trademark protection in countries in which we presently operate may reduce the
value of our branded product and impact our financial condition.
THE LOSS OF SIGNIFICANT CUSTOMERS IN OUR BROKERAGE OF FISH MEAL COULD
ADVERSELY EFFECT OUR BUSINESS. The loss of Bradwell Business Corp., Agribrand
Purina, Nor Aqua, Alitec or Ecofeed Chile could materially effect our business.
During the first three quarters of 1999, these customers accounted for an
aggregate of approximately 60% of our fish meal sales.
WE MAY NOT BE ABLE TO RECOVER OUR INVESTMENT IN KELOR TRADING, LTD. IF
THEIR HARVESTING EFFORTS ARE NOT SUCCESSFUL, WHICH COULD CAUSE A FINANCIAL LOSS.
To date, we have loaned an aggregate of $877,000 to Kelor Trading, Ltd. for the
preparation of a vessel to operate in Antarctic waters and working capital. This
advance is not evidenced by a promissory note and we have not received a
mortgage on the fishing vessel. Kelor Trading, Ltd. will repay us principally
through profits it receives from our joint venture as it harvests krill. If we
and Kelor are unsuccessful in harvesting krill and selling it at a profit, Kelor
Trading, Ltd. may be unable to repay us funds advanced under our agreement. We
are not the primary beneficiaries of the insurance that has been obtained on the
vessel and equipment used to harvest krill. If there is a catastrophe or damage
to the vessel or its equipment we may not be able to collect any insurance
proceeds.
LIMITS ON KRILL HARVESTING ESTABLISHED BY THE COMMISSION FOR THE
CONSERVATION OF ANTARCTIC MARINE LIVING RESOURCES MAY LIMIT OUR REVENUE. The
commission limits the amount of krill that may be harvested in Antarctic waters
to 1.5 million tons. Presently 70,000
8
<PAGE>
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. We may have to
rely on unrelated companies to whom we may license our products to provide such
liability insurance. Companies that we license our products may not be able to
obtain product liability insurance.
THE LOSS OF THIRD PARTY MANUFACTURERS FOR THE PRODUCTION OF OUR
PERUVIAN VACCINES AND OUR RED TIDE DETECTION KIT COULD IMPACT ON OUR ABILITY TO
MARKET THESE PRODUCTS AND REDUCE OUR REVENUES. The loss of one of our third
party manufacturers would have a negative effect on our ability to manufacture
our products. Tepual has contracted with Biosur S.A.C., a Peruvian company, to
manufacture and produce our Peruvian poultry vaccines. Tepual has also entered
into a joint venture with R-Biopharm GmbH, a German company, to manufacture a
paralytic shellfish poisoning (PSP) red tide detection kit. These third parties
may not meet or satisfy their contractual obligations. While Tepual has entered
into agreements with these companies, these contracts may not be fulfilled or
internal problems within these third parties may affect production or
productivity in the future.
IF WE ARE UNABLE TO COMPLY WITH GOVERNMENT REGULATION, OUR ABILITY TO
PRODUCE AND DISTRIBUTE OUR VACCINES MAY BE RESTRICTED OR COULD INCREASE OUR
COSTS OF DOING BUSINESS. Our vaccines are subject to regulatory compliance
within the countries in which they are manufactured and distributed. Our poultry
vaccines are currently approved by the Peruvian government, and we received
re-approval from the Chilean government on June 22, 1999. While we are in
compliance with Peruvian regulations and Chilean regulations, the enactment of
stricter laws or regulations, or the implementation of more aggressive
enforcement policies could adversely affect our operations or financial
conditions.
THE LOSS OF MAX RUTMAN'S SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS. Our success is highly dependent upon the continued services of
Mr. Rutman who continues to devote a substantial amount of his time to our
business. Although we currently have a 3 year employment agreement through our
subsidiary, Tepual, with Mr. Rutman for his services, the loss of his services
could have a material adverse effect on our business.
YOU MAY BE LIMITED IN YOUR ABILITY TO ENFORCE CIVIL LIABILITIES AGAINST
US SINCE MOST OF OUR ASSETS AND OPERATIONS ARE ABROAD. Enforcement by investors
of civil liabilities under the U.S. Federal securities laws may adversely be
affected by the fact that while Bio-Aqua is located in the U.S., our principal
subsidiary is located in Chile. While we are a U.S. corporation, our subsidiary,
Tepual is a Chilean corporation. For the foreseeable future, substantially all
of our
9
<PAGE>
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.
CONSIDERATIONS RELATING TO CHILE
- --------------------------------
SINCE WE ARE SUBJECT TO RISKS ASSOCIATED WITH FOREIGN OPERATIONS, WE
MAY INCUR ADDITIONAL COSTS AND DISRUPTIONS TO OUR OPERATIONS. Our business is
currently conducted almost exclusively outside of the United States. We
consequently are subject to a number of significant risks associated with
foreign operations. Our operating profits may be negatively affected by changes
in the value of local currencies in the countries in which operations are
conducted or products are sold, by hyperinflationary conditions, or recession
such as those which have occurred in the past in several of such countries.
Other risks and considerations include:
o the effect of foreign income and withholding taxes and the
U.S. tax implications of foreign source income and losses;
o the possibility of expropriation or confiscatory taxation or
price controls;
o adverse changes in local investment or exchange control
regulations;
o difficulties inherent in operating in less developed legal
systems;
o political instability, government corruption and civil unrest;
and
o potential restrictions on the flow of international capital.
In many developing countries, such as Chile and Peru where our business is
conducted, there has not been significant governmental regulation relating to
the environment, occupational safety, employment practices or other business
matters routinely regulated in the United States. As these economies develop, it
is possible that new regulations may increase the expense and risk of doing
business in these 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 INVESTMENT. Equity investments in Chile by persons who are not Chilean
residents may not be freely repatriated for one year starting after the date the
funds were brought into Chile. After one year, equity investments may be freely
repatriated only if the investment is channeled through the Formal Exchange
Market (Mercado Cambiario Formal) under an investment contract entered into with
the Chilean government under Decree-Law No. 600 of 1974, as amended.
10
<PAGE>
USE OF PROCEEDS
The gross proceeds from the sale of the 425,000 units offered will be
approximately $4,250,000, assuming an initial public offering price of $10.00
per unit. The net proceeds, without giving effect to the exercise of the
over-allotment option, will be approximately $3,347,500 after giving effect to:
o the representative's discounts of $425,000,
o a 3% non-accountable expense allowance to the representative
of $127,500, and
o offering costs and expenses of approximately $350,000.
Approximately 34% 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 through 2005.
The interest rates for these debts range from 9.259% to 13.8%. As of September
30, 1999, $2,311,896 was outstanding under these debt obligations.
Approximately 9% of our proceeds will be used for working capital,
including:
o overhead;
o administrative expenses; and
o general corporate purposes.
The Tepual(TM) and Inual(TM) brands are held by Profeed, Inc., which is
equally owned and controlled by Max, Paulina and Andrea Rutman. We will acquire
Profeed, Inc. by purchasing all of the issued and outstanding shares of Profeed,
Inc. for an aggregate of $1.3 million. We will pay the shareholders of Profeed,
Inc. $400,000 from the proceeds of this offering. The balance shall be paid, at
the board of directors' option, out of:
o 5% of our gross revenues per quarter, but in no event greater
than 20% of our net income per quarter, from the sale of
products sold under the Tepual(TM) and Inual(TM) brands; or
o third party financing.
11
<PAGE>
Approximately 95% of our proceeds will be used in Chile. We intend to
use the net proceeds of this offering, during the twelve months following the
effective date, approximately as follows:
<TABLE>
<CAPTION>
Anticipated Use of Net Proceeds Approximate Amount Percentage of Proceeds
- ------------------------------- ------------------ ----------------------
<S> <C> <C>
Reduction of Bank Loans $1,150,000 34.3%
Initial Payment for the Purchase of Brands $400,000 11.9%
Development of Red Tide Kits $500,000 14.9%
Development of Immune
Stimulants $350,000 10.6%
Research and Development of Poultry
Vaccines $300,000 9.0%
Marketing $200,000 5.9%
Repayment of Bridge Loans $150,000 4.5%
Working Capital $297,500 8.9%
-------- ---
TOTAL $3,347,500 100.0%
========== =====
</TABLE>
Between April and May 1999 we received bridge loans in the
aggregate amount of $150,000 from third party accredited investors. These
loans are evidenced by promissory notes bearing interest at 8% per year
with maturity dates ranging from March 31, 2000 through January 1, 2001.
Our anticipated use of net proceeds are based upon our current
status of operations and anticipated business plans. It is possible that
the application of funds may vary depending on numerous factors including,
but not limited to, changes in the economic climate or unanticipated
complications, delay and expenses. We currently estimate that the net
proceeds from this offering will be sufficient to meet our liquidity and
working capital requirements for the next 12 months. However, there can be
no assurance that the net proceeds of this offering will satisfy our
requirements for any particular period of time. Additional financing may be
required to implement our long-term business plan. There can be no
assurance that any such additional financing will be available when needed
on terms acceptable to us, if at all. Pending use of the proceeds of this
offering, we may make temporary investments in bank certificates of
deposit, interest bearing savings accounts, prime commercial paper, U.S.
Government obligations and money market funds. Any income derived from
these short term investments will be used for working capital.
We have wide discretion in the use of our proceeds. We reserve the
right to use the funds obtained from this offering for other purposes not
presently contemplated which we deem to be in our best interest and the
best interest of our shareholders. As a result, our success will be
substantially dependent upon the discretion and judgment of our management.
The applicationand allocation of the net proceeds of the offering are
determined by discretion and judgment of our management.
12
<PAGE>
DIVIDEND POLICY
While Tepual has previously paid dividends to its shareholders, we do
not anticipate paying dividends in the foreseeable future.
DILUTION
At September 30, 1999, we had a net tangible book value of
$468,655 or approximately $.26 per share of common stock. 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 425,000 units containing 850,000 shares of
class A common stock, at an initial public offering price of $10.00 per
unit (after deducting underwriting discounts and estimated offering
expenses payable by us), the net tangible book value as of September 30,
1999, would have been approximately $3,815,655 or $1.45 per share of common
stock. This would represent an immediate increase in the net tangible book
value per share of common stock of $1.19 to existing shareholders and an
immediate dilution of $3.55 per share to new investors purchasing our units
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>
<CAPTION>
<S> <C>
Initial offering price per share of class A common stock contained in our unit $5.00
Net tangible book value per share of
class A and B common stock before the offering $ .26
Increase attributable to new investors $ 1.19
Proforma net tangible book value after the offering $ 1.45
Dilution to new investors $ 3.55
Percentage of dilution to new investors 71.00%
</TABLE>
The following table summarizes the number of shares of common stock
purchased from Bio-Aqua, the total consideration paid and the average price per
share paid by our existing shareholders at September 30, 1999 and new investors
purchasing shares of class A common stock in this offering, before deducting the
underwriting discounts and our estimated offering expenses. The table excludes
the exercise of the 850,000 warrants contained in our units.
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
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 1,786,294 67.76% $ 529,623 11.08% $0.30
New Investors 850,000 32.24% $4,250,000 88.92% $5.00
Total 2,636,294 100.00% $4,779,623 100.00% $1.81
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999, our actual and
as adjusted capitalization for the issuance and sale of the 425,000 units, at an
initial public offering price of $10.00 per unit or $5.00 per share, after
deducting estimated offering expenses and underwriting discounts and the initial
application of the proceeds.
<TABLE>
<CAPTION>
Actual As Adjusted
------ -----------
<S> <C> <C>
Long-term Debt $ 400,002 $ 400,002
Stockholders' equity:
Class A common stock ($.0001 par value) 20,000,000 shares authorized; 86,294
shares issued and outstanding (actual) and 936,294 (as adjusted) 9 94
Class B common stock ($.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 3,876,859(1)
Retained earnings 459,431 459,431
Cumulative translation adjustment
from the Chilean pesos into U.S. dollars (520,399) (520,399)
Total stockholders' equity $ 468,655 $ 3,816,158
Total capitalization $ 868,657 $ 4,216,157
- -------------------
(1) Reconciliation: Issuance of 425,000 units at $10.00 $ 4,250,000
Less offering costs (350,000)
representative's discounts (425,000)
3% non-accountable expense to representative (127,500)
------------
Total Proceeds $ 3,347,500
less 850,000 shares at $.0001 par value 85
------------
$ 3,347,415
Plus actual additional paid in capital 529,444
------------
Total: $ 3,876,859
============
</TABLE>
14
<PAGE>
EXCHANGE RATES
Unless otherwise specified, references to U.S. dollars, dollars, $, or
U.S.$ are to United States dollars and references to pesos or Ch$ are to Chilean
pesos, the legal currency of Chile, and peso-denominated monetary unit. As of
September 30, 1999, the exchange rate was one U.S. dollar to 531.11 pesos. No
representation is made that the peso or U.S. dollar amounts shown in this
prospectus could have been or could be converted into U.S. dollars or pesos, as
the case may be, at such rate or at any other rate.
Chile's Ley Organica Constitucional del Banco Central de Chile No.
18.840, the Central Bank Act of Chile, enacted in 1989, liberalized the rules
that govern the ability to buy and sell foreign exchange. Prior to 1989, the law
permitted the purchase and sale of foreign exchange only in those cases
explicitly authorized by the Central Bank of Chile. The Central Bank Act now
provides that the Central Bank of Chile may determine that certain purchases and
sales of foreign exchange may be exercised by the banks and other entities so
authorized by the Central Bank of Chile.
The following table sets forth the annual high, low, average and
year-end observed exchange rate for U.S. dollars for each year starting in 1997
as reported by the Central Bank of Chile. The table reflects the actual high and
low exchange rates on a quarterly basis for each period in 1999 and the average
quarterly rates during the period.
Exchange Rates of Ch$ per U.S.$
-------------------------------
Year Low High Average
---- --- ---- -------
1997 411.85 439.81 419.31
1998 439.18 465.25 460.33
1999 (first quarter) 472.41 501.15 487.30
1999 (second quarter) 472.41 518.90 491.26
1999 (third quarter) 513.04 531.83 520.79
1999 (fourth quarter) 527.00 550.70 539.32
Source: Central Bank of Chile
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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 September 30, 1999, we have sold two of our automatic control
systems for fish meal processing, certain immune stimulants on a testing basis,
as well as vaccines which we have developed. Management anticipates that we will
sell three more automatic control systems, however, as of the date of this
prospectus, we have not made any additional sales.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
RESULTS OF OPERATIONS
Gross revenues for the nine months ended September 30, 1999 decreased
$194,281 from the nine months ended September 30, 1998 from $4,648,676 to
$4,454,395, a decrease of approximately 4%. This is primarily due to the
translation exchange rate. Sales have remained relatively constant between the
periods.
Cost of operations decreased from $3,453,168 in the nine months ended
September 30, 1998 to $3,087,682 for the nine months ended September 30, 1999.
This decrease of $365,486 (11%) was directly related to management's efforts to
control costs. Further, we sold more fish meal, as opposed to feather meal,
during this period, which requires less costs. Our cost of operations will
continue to fluctuate on a quarterly basis based upon the price of feather or
fish meal.
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Selling and administrative expenses for the nine months ended September
30, 1999 decreased $47,514 in comparison to the nine months ended September 30,
1998 from $1,029,043 to $981,529, an increase of approximately 5%.
Other income (expenses) increased from $(61,010) at September 30, 1998
to $(287,854) at September 30, 1999, an increase of $226,844 or approximately
372%. The increase is primarily due to the sale of a minority interest in an
unaffiliated company in 1998. Interest expense increased from $177,570 in the
nine months ended September 30, 1998 to $317,324 for the nine months ended
September 30, 1999, an increase of $139,754, due to amortization of our bridge
loan and an increase in bank interest related to the financing of the Kelor
project.
As a result of the above items, we incurred net income for the nine
months ended September 30, 1999 of $97,331 compared to $105,445 for the nine
months ended September 30, 1998, a decrease of $8,124 or approximately 7%.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR END DECEMBER 31, 1997
RESULTS OF OPERATIONS
Gross revenues for the year ended December 31, 1998 increased
$1,635,213 over the year ended December 31, 1997 from $5,238,299 to $6,873,512,
an increase of approximately 31%. The increase in gross revenues may be
attributed to our broader base trading activities during 1998 as compared to
1997, which included the additional products of feather meal and krill meal. In
addition, during 1998, we sold two automatic control systems for approximately
$641,000 which accounted for approximately 39% of the increase in gross
revenues.
During 1997 we were unable to purchase fish meal products to trade and
broker due to the effects of El Nino and Chilean laws restricting fishing. Prior
to 1997, we purchased a portion of our krill products from Russian and Polish
fleets, however, due to political situations in those countries in 1997, the
fleets did not travel to Antarctica and thus there was no krill available.
During this time we also began to trade poultry feather meal. In 1997, the
selling price of feather meal was much less than in 1998 because it was a new
product and we offered it at a reduced price to generate demand. In 1998, prices
were increased as demand increased.
Cost of operations increased from $3,571,678 in 1997 to $4,853,553 in
1998. This increase of $1,281,875 (36%) is attributable to the additional
product sold in our fish, feather and krill meal business. In particular, there
were increased costs associated with the purchase of feather meal from Brazil
which led to increased shipping costs and import tariffs.
Selling and administrative expenses for the year ended December 31,
1998 increased $38,687 in comparison to the year ended December 31, 1997 from
$1,516,974 to $1,555,661, an increase of approximately 3%. During 1998, we began
selling more poultry feather meal which was purchased from Brazil. As a result,
we incurred more selling expenses including cost of travel to and from Brazil.
In addition, we hired a new chief financial officer in 1998, thus increasing
administrative salaries.
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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.
As a result of the above items, our net income for the year ended
December 31, 1998 was $239,973 compared to $56,427 for the year ended December
31, 1997, an increase of $183,546 or approximately 325%.
LIQUIDITY AND CAPITAL RESOURCES
To date, our liquidity has been principally supplied by bank financings
and internal cash generated from existing operations. In April and May 1999, we
received loans from six third party investors for an aggregate $150,000. These
loans are evidenced by promissory notes bearing interest at 8% per annum. As
additional consideration, the third party investors received an aggregate of 35,
294 shares of our class A common stock. We will incur an expense at such time as
the loans are repaid. Through September 30, 1999, we have incurred an expense of
$36,133 attributable to the loans.
At September 30, 1999, accounts receivable decreased by $212,216 to
$2,769,458 from $2,981,674 at December 31, 1998. This decrease is a result of
certain outstanding invoices being paid during the period. Payment terms and
conditions, which among other factors, are dependent on the customer, credit
histories, economic conditions and country payment standards. In particular,
approximately $90,000 is owed from the sale of the two automatic control
systems. Management anticipates we will receive payment of the balance due for
these two automatic control systems by December 30, 1999. However, under the
terms of sale, each customer was given a period of time beyond installation of
the equipment for testing before final payment was due. Further, management has
provided extended terms up to six months to several of its fish meal and feather
meal customers.
On September 30, 1999, we had outstanding receivables of $2,769,458 of
which $127,000 were in excess of six months old. Half of the amount outstanding
in excess of six months is payable on a yearly term and therefore not
delinquent. We believe that we can collect substantially all these receivables.
We believe that many of the extended receivables are consistent with the payee's
payment policies. From September 30, 1999, 1999 to November 15, 1999, we
collected $2,496,000 in period-end receivables.
At September 30, 1999, inventory increased $16,564 to $778,433 as
compared to $761,869 at December 31, 1998. This increase is due to purchases in
excess of sales in the third quarter of 1999.
At September 30, 1999, other assets increased by $371,770 to $896,415
from $524,645 at December 31, 1998. This increase is due to advances made to
Kelor Trading Ltd., a krill fishing and research operation. Under this agreement
with Kelor, we have agreed to lend them up to $2
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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 occurred in mid October and
repayment of the loan should begin in late 1999 or early 2000. No other adverse
factors have occurred which would cause us to believe there is any uncertainty
on the recovery of these advances, especially since the sale of all krill
products from this venture is under our control. We have not advanced Kelor any
additional monies since September 30, 1999.
Accounts payable increased $370,298 from $990,749 at December 31, 1998
to $1,361,047 at September 30, 1999. This is due to purchases made in the period
which were on extended payment terms of up to four months.
Long term debt has decreased from $478,813 at December 31, 1998 to
$400,002 at September 30, 1999, a decrease of $78,811. This decrease is due to
timely payments on our outstanding loans.
Under employment agreements with two of our executive officers we are
required to pay annual salaries of $300,000 plus up to an additional $120,000 in
bonuses. We have a 10 year consulting agreement with one of our directors for an
annual fee of $30,000 and a two year consulting agreement with the
representative of the underwriters of this offering for $60,000 per annum
commencing with the closing of this offering. We will also enter into a two year
lease agreement with Andean Financial Corporation for $30,000 per annum, to use
a portion of Andean Financial Corporation's facilities in Boca Raton, Florida,
for our corporate U.S. offices. The sole shareholder and director of Andean
Financial Corporation is one of our directors. We have facility lease agreement
payments for approximately $220,000 for the next 12 months.
We shall acquire Profeed, Inc. for $1.3 million, as evidenced by the
increase in due to shareholder because of payable due to the related party
nature of the transaction, of which $400,000 will be paid to its shareholders at
closing and the balance, under the discretion of the board of directors, out of:
5% of the gross revenues per quarter, but in no event greater than 20% of the
net income per quarter, of the sale of products sold under the Tepual(TM) and
Inual(TM) brand names, third party financing or working capital.
YEAR 2000 ISSUE
Many installed computer systems and software are coded to accept only
two digit entries in the date code fields. These date code fields need to accept
four-digit entries to distinguish whether "00" means 1900 or 2000. This problem
could result in system failures or
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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 needed to be upgraded or replaced in order to
comply with year 2000 requirements.
We formed a project team to address internal year 2000 issues. Our
internal financial and other computer systems were reviewed to assess and
remediate year 2000 problems. Our assessment of internal systems included our
information technology systems as well as other systems which included embedded
technology in equipment containing microprocessors or other similar circuitry.
Our year 2000 compliance program included the following phases:
o identifying systems that needed 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 was minimal. Our use of operational systems, personal computers and
software is limited. We installed our personal computers and hardware in June
1999. We implemented a new operational system and installed 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 are minimal.
However, there can be no assurance that these estimates are correct or that
future costs, if any, will not be higher.
We surveyed our major suppliers throughout our business lines and
evaluated their plans to address potential year 2000 issues. We relied primarily
on our suppliers' commitments to accomplish this task but had no contractual
commitments from the suppliers regarding year 2000 issues.
We also sent questionnaires to our customers requesting that they
notify us of their plans to address year 2000 issues. We informed all of our
customers that if they did not respond by October 31, 1999, we would take
necessary actions to insure that their possible problems with year 2000 issues
did not effect us.
Based on our assessments to date, we did 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. To date, we have managed our total year 2000 transition without any
effect on our results of operations or financial condition.
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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 Tepual(TM) and Inual(TM) 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:
o automatic control for fish meal processing
o salmon and shrimp immune stimulants
o poultry vaccines
o 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.
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BACKGROUND
Tepual, organized in 1982 as a Chilean limited partnership, was
incorporated in 1996 when Tepual began commercial operations which capitalized
on research and development projects initiated by Inual, a Chilean company.
Inual, wholly owned by Max Rutman and Paulina Rutman, was organized in 1973.
Inual is currently a non-operating entity, with no assets. Prior to 1985 Tepual
and Inual generated revenues through grants from various government entities and
private foundations. These grants decreased starting in 1985, due in part to
privatization in Chile and an overall decrease in grants from private
foundations. We expanded our brokerage division to replace the revenues lost
from the decrease in the aforementioned grants to aid in the continuous funding
required to support our research and development department.
As our brokerage business began to grow, we developed relationships
which have given us a first hand view of the biological and processing factors
that affect the business of our customers and suppliers. Through years of
research and development we have developed and are developing commercially
viable solutions to these biological and processing factors in automatic control
for fish meal processing, salmon and shrimp immune stimulants, poultry vaccines
and red tide detection and cleansing process. Through our work on nutrient
quality, we have developed a unique automatic control processing system which
facilitates the production of the highest nutrient level fish meal while
avoiding toxicity for the fish meal industry. Through research in animal health
we have developed poultry vaccines and salmon immune stimulants. Through
research in marine toxins, we have developed new and potential methods for
detecting and cleansing toxins found in red tide.
We will consolidate ourselves on the effective date through the
following transactions:
1. A stock exchange agreement shall be effectuated where Bio-Aqua
receives Flagship Import Export LLC's 90% interest in Tepual in return for
1,529,910 shares of class B common stock. Also, two stock purchase agreements
shall be simultaneously effectuated where Atik S.A. shall purchase 169,990
shares of class B common stock of Bio-Aqua and Bio-Aqua shall purchase Atik
S.A.'s 10% in Tepual. Tepual shall then become our majority owned (99.9%)
subsidiary. Due to Chilean law, which requires that a Chilean corporation be
owned by not less than two shareholders, 15 shares of Tepual stock will continue
to be owned by Max Rutman, through his ownership interest in Flagship Import
Export LLC.
2. We will acquire the rights to the Tepual(TM) and Inual(TM) brands by
purchasing all of the issued and outstanding shares of Profeed, Inc., for an
aggregate of $1,300,000.
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Corporate structure and affiliations of Bio-Aqua Systems, Inc. on the
effective date:
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
Flagship Import Export Atik S.A., a Chilean PUBLIC SHAREHOLDERS
LLC, a Nevada LLC (sole corporation (shareholders are
member is Max Rutman) Paulina and Andrea Rutman)
[GRAPHIC OMITTED]
Bio-Aqua Systems, Inc.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
100% 99.9%
Profeed, Inc. (previously Tepual S.A. (previously
owned by Max, Andrea owned by Flagship Import
and Paulina Rutman) Export LLC and Atik S.A.)
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. As described
in our use of proceeds, approximately 30% of the proceeds from this offering
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 our 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.
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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 Tepual(TM) and Inual(TM) branded products.
Fish meal sales
Fish meal is a powder obtained from cooking, drying and grinding raw
fish. Fish meal is a rich protein source and an essential ingredient in
feedstuffs in pet food, animal feed and fish feed. Depending upon the customer
and its use, the nutrient levels of fish meal are extremely important.
Our locations in Chile and Peru place us within close proximity to one
of the largest sources of fish meal in the world. Chile and Peru (which borders
Chile) are responsible for over one-fourth of the fish meal produced worldwide
and for 65% of all fish meal exported. The International Fishmeal and Oil
Manufacturers Association (IFOMA) reported 4,749 thousand tons (TT) or $1.5
billion of fish meal was produced and sold in 1998. We have developed and
maintained long term relationships with Chilean and Peruvian fish meal
processing companies that benefit our brokerage and trading which to date,
account for a substantial amount of our revenues.
Through our Tepual(TM) and Inual(TM) brands we certify that the fish
meal we sell has the highest possible nutrient levels and lowest toxicity
levels. Our Tepual(TM) and Inual(TM) 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.
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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 to or
higher than quality fish meal. Krill meal also provides pigmentation (red
coloring) to salmon. As of September 30, 1999, the cost of producing krill meal
is approximately $700 per metric ton and it is sold for approximately $1,270 per
metric ton. We believe that in the future the cost of producing krill meal will
decrease, which will allow krill
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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 September 30, 1999, Tepual has lent Kelor Trading
approximately $887,000. Kelor Trading has agreed to pay Tepual a brokerage
commission of 3% over the F.O.B. sales and $20.00 per ton of krill meal and 5%
for krill oil. This agreement gives Tepual the right to utilize Kelor Trading's
krill fishing operations and facilities to perform research and development
relating to krill. The use of Kelor Trading's operations and facilities enables
Tepual, and will enable us, to perform research and development in this area at
a minimal cost.
Competition within the nutrient industry
There are many companies that are larger and have better resources than
us that are producers and sellers of fish meal. We believe that based on our
reputation for selling high nutrient and low toxicity fish meal under the
Inual(TM) and Tepual(TM) brands we are able to retain our market share.
All of our feather meal sales to date have been to animal feed
producers in Chile. We believe we are the premier seller of feather meal in
Chile. We believe that we may face competition from other companies that could
have better resources than us if we expand our feather meal business outside of
Chile and Brazil.
Future of the nutrient industry
The demand for nutrient supply will continue to grow, only limited by
the availability of high quality ingredients. Today's shortage of fish meal
drives the market to look for substitutes. This will require a strong input in
research and development to develop better proteins and more efficient
processing. Furthermore, increased awareness into the components of animal feed
and their impact on human health should have an effect on the quality of
ingredients in demand. We believe that we have a strong position in the market,
because of our long history in research and
27
<PAGE>
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.
<TABLE>
<CAPTION>
PAST AND PRESENT PARTIAL CUSTOMER LIST
--------------------------------------
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 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
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>
28
<PAGE>
Material Customers
Our principle revenues are generated through our sale of fish meal,
feather meal and krill meal. Our material brokerage customers are the principle
source of our total revenues. Listed below are our material customers for the
first three quarters of 1999 and an approximate percentage of our total revenues
that they each accounted:
Customer Percentage of Total Revenues
-------- ----------------------------
Bradwell Business Corp. 17%
Agribrand Purina 12%
Ecofeed Chile 10%
Nor Aqua 10%
Alitec 10%
AUTOMATIC CONTROL
The current worldwide market for fish meal, according to IFOMA, is
approximately $1.5 billion. Fish meal plants are principally located in Chile,
Peru and, to a lesser extent, in Equador. We believe there are approximately 180
fish meal plants throughout Chile and Peru.
In the fish meal industry higher nutrient levels have a direct
relationship with higher prices and profits for the producer. Our automatic fish
meal processing control system facilitates the production of the highest
nutrient level fish meal, while avoiding toxicity, and therefore, we believe
provides the highest possible profit margin for the producer.
Through our involvement as a purveyor of fish meal on a worldwide
basis, we have been developing and manufacturing a computerized process for the
processing of fish meal since 1993. Our research for developing an automatic
processing system began with studying the general processing conditions for the
fish meal industry. We developed simple strategies based on normal conditions of
a fish meal processing plant, while taking into account the skilled operator's
working procedures. By developing and manufacturing an automatic control process
29
<PAGE>
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 Chile, which
were sold during the latter part of 1998. The purchasers of these systems have
not encountered any significant problems. Issues which have arose have been
mostly related to adjustments, such as water and heating levels. Since
completion of the installations, we have expended approximately $9,000 on both
systems relating to adjustments and general maintenance.
We are presently negotiating to install another system in Chile which
should be completed in 12 months and we anticipate an additional two sales in
the near future. Chile has approximately 40 fish meal processing plants and Peru
has approximately 140 fish meal processing plants. We anticipate additional
sales in both of these markets. We are not aware of any other competitive
automatic control system currently being produced in these markets.
30
<PAGE>
IMMUNE STIMULANTS
Salmon farming
As reported by the Aquaculture Magazine in 1999, in its Chile
aquaculture report: A Focus on Salmon, Chile is the second largest salmon
producer in the world, with yearly sales of more than $600,000,000. While salmon
are not native to Chile, today the country accounts for 60% of the U.S. salmon
market and over 40% of the world's salmon production, with predictions reaching
50% to 60% within the next five years. The cultivation of salmon is a two year
process. It has flourished in the south of Chile because of the region's ideal
weather and environmental conditions. Today there are approximately 55 companies
operating over 300 individual salmon farm projects in Chile.
The Chilean salmon market, as with any aquaculture project, has to
contend with various diseases which are unique to Chilean salmon. The rickettsia
bacteria is one of these unique diseases. We believe that to date there is no
vaccine available to successfully combat this bacteria. Chilean salmon fisheries
have reported losing approximately 15% to 35% of its stock to disease and it is
possible for a farm to lose the majority of its stock to disease. We began
researching and developing immune stimulants in an attempt to reduce these high
mortality rates. We performed our initial tests on 200,000 salmon ranging in age
from 6 to 8 months. These tests were performed at two salmon farms located in
Southern Chile. Based on our internal test results our management believes that
we have developed oral and injectable immune stimulants which reduce the
mortality rates in farmed salmon to 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
31
<PAGE>
production of injectable immune stimulants we will enter into an agreement with
a qualified veterinary laboratory. We intend to file patent applications for our
immune stimulants.
As of September 30, 1999, there were no sales of our salmon immune
stimulants. We continue to test these immune stimulants with three salmon farms
in Southern Chile. 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 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,
32
<PAGE>
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:
o bronchitis infection in two presentations for two
different pathologies
o hepatitis
o coriza infection
o salmonella enteritidis and its combinations
o combinations of all of the above
33
<PAGE>
In order to market our vaccine sales in Chile, in April 1997 Tepual
entered into a marketing agreement with Biosur S.A., a Chilean corporation 95%
owned by Paulina and Andrea Rutman through their interest in Atik and 5% owned
by Max Rutman. Biosur S.A. is engaged in the distribution of veterinary products
throughout Chile. Under this agreement, Biosur S.A. has agreed to buy and
distribute 100% of the vaccines that Tepual produces in Chile. In consideration
of this exclusive right to buy and distribute, they will purchase from Tepual a
minimum of $40,000 of Chilean vaccines per month. From January 1999 through June
1999, there were not any sales of Chilean vaccines while Tepual was waiting for
re-approval of its new laboratory. Tepual received the requisite approval during
June 1999 and has recently commenced sales of Chilean vaccines. Tepual believes
that the new facility is more than adequate to meet the production demands
anticipated from the sale of these vaccines.
In 1995 we began the production of vaccines specific to the unique
strains of disease found in Peru, utilizing a laboratory similar to their
Chilean counterpart. To accomplish this, Tepual entered into a licensing
agreement with Biosur, S.A.C., a Peruvian company (Biosur S.A.C. is an
unaffiliated third party). Under the terms of this agreement, Biosur, S.A.C.
will manufacture and market all of our poultry vaccines in Peru and will pay
Tepual a 13% royalty on gross sales. As of September 30, 1999, Biosur S.A.C. had
sold approximately $300,000 of Peruvian vaccines. Our vaccines have been
approved for sale by the Peruvian Ministry of Agriculture. There is currently no
patent protection for the Peruvian vaccines. Tepual has also given Biosur S.A.C.
the right to manufacture and market poultry vaccines in Ecuador and Bolivia if
and when such vaccines are developed.
We believe the same pathologies exist in Argentinean, Brazilian,
Ecuadorian and Bolivian poultry, and therefore are studying the production and
sales possibilities of vaccines in these countries. Based upon our preliminary
testing, we plan to expand research within Argentina, Brazil, Ecuador and
Bolivia in the future. The chart below indicates the size of the poultry market
in countries in which we have developed or may develop vaccines for commercial
sales. This information was taken from Empresas Lideras 99, a Chilean business
journal.
1998 Poultry Production Levels
------------------------------
Chickens
--------
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
- ---------------
(1) Peru and Chile are currently the only countries in which we have
developed or produced vaccines for commercial use.
34
<PAGE>
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 it is not associated
with tides, 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)
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:
o Saxitoxin group (STX and neoSTX),
o Gonyautoxin group (GTX1, GTX2, GTX3 and GTX4) and
o 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:
o Okadaic acid (OA),
o Dinophysis toxin 1 (DTX1),
o Dinophysis toxin 2 (DTX2) and
o Dinophysis toxin 3 (DTX3).
35
<PAGE>
<TABLE>
<CAPTION>
COUNTRIES WITH RED TIDE AND THEIR NOMINAL CATCHES OF SHELLFISH*
====================================================================================================================================
COUNTRY RED TIDE(1) CATCHES (METRIC TONS)(2) % WORLD(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
China PSP 1,041,709 30.86
- ------------------------------------------------------------------------------------------------------------------------------------
USA PSP 660,766 19.57
- ------------------------------------------------------------------------------------------------------------------------------------
Japan PSP DSP 411,413 12.19
- ------------------------------------------------------------------------------------------------------------------------------------
Philippines PSP 150,861 4.47
- ------------------------------------------------------------------------------------------------------------------------------------
Canada PSP DSP 120,497 3.57
- ------------------------------------------------------------------------------------------------------------------------------------
Korea Republic PSP 120,004 3.55
- ------------------------------------------------------------------------------------------------------------------------------------
Denmark PSP DSP 106,864 3.17
- ------------------------------------------------------------------------------------------------------------------------------------
Thailand PSP 101,916 3.02
- ------------------------------------------------------------------------------------------------------------------------------------
Chile PSP DSP 96,151 2.85
- ------------------------------------------------------------------------------------------------------------------------------------
Italy PSP DSP 65,523 1.94
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom PSP 56,954 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Indonesia PSP DSP 51,766 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Netherlands DSP 44,423 1.32
- ------------------------------------------------------------------------------------------------------------------------------------
Mexico PSP DSP 36,469 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
France PSP DSP 33,313 0.99
- ------------------------------------------------------------------------------------------------------------------------------------
Turkey 28,618 0.85
- ------------------------------------------------------------------------------------------------------------------------------------
Venezuela PSP 28,496 0.84
- ------------------------------------------------------------------------------------------------------------------------------------
Peru 24,993 0.74
- ------------------------------------------------------------------------------------------------------------------------------------
Australia PSP DSP 24,529 0.73
- ------------------------------------------------------------------------------------------------------------------------------------
Vietnam PSP DSP 23,110 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Norway PSP DSP 12,264 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
Iceland DSP 12,080 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
Malaysia PSP 11,017 0.33
- ------------------------------------------------------------------------------------------------------------------------------------
Russian Fed. PSP 10,009 0.30
- ------------------------------------------------------------------------------------------------------------------------------------
Portugal PSP DSP 8,861 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Greece 7,801 0.23
- ------------------------------------------------------------------------------------------------------------------------------------
New Zealand PSP DSP 6,810 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Ireland PSP DSP 6,734 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Spain PSP DSP 6,279 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 3,310,187 98.05
- ------------------------------------------------------------------------------------------------------------------------------------
World Total 3,375,997 98.05
====================================================================================================================================
*average of nominal catches 1987-1996
(1) Source: J.J. Landsberg: Shellfish RES, 1996
(2) Source: Food Agricultural Organization (FAO): 1997 Fishery Statistics
</TABLE>
36
<PAGE>
Currently there is no way to prevent red tide nor 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 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 Chiong, 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
37
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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. We have developed
techniques using antibodies to isolate PSP toxins as well as analytical and
toxicological methods using antibodies to quantify and qualify PSP toxins. These
methods involve extracting acid fluids from a shellfish to detect whether the
shellfish contains PSP toxins through the analyzation of the fluids. These
methods will detect PSP toxins from the acid extracts of shellfish determining
whether the specific shellfish actually contains toxins. We have developed
certain procedures to isolate and purify the three main groups of PSP toxins
(saxitoxin, gonyautoxins, and sulfocarbamoyl) as well as analytical and
toxicological methods to quantify and to qualify each PSP toxin.
Our PSP kit consists of an immunoassay. In our immunoassay, toxins are
bound to a biopolimer to make the PSP toxin conjugates. Conjugates are necessary
to generate antibodies. PSP toxin specific antibodies were developed using these
conjugates. These antibodies are used to detect PSP toxins in shellfish,
gastropods and crustacean extracts. This kit also is a colorimetric assay and
the color is correlated to the amount of toxin present in the sample extract. We
have developed antibodies against saxitoxin, gonyaulatoxin and sulfocarbamoyl
toxins that are used in our kit to detect all PSP toxins. Until now, PSP toxins
and correlating conjugates have been impossible to obtain. We believe that
before our technology, no one has developed antibodies which cover the three
major groups of PSP toxins (saxitoxin, gonyaulatoxin and sulfocarbamoyl toxin
groups).
Production of kits
Through a joint venture with Centro de Estudios Cientificos de Santiago
(CECS), a Chilean private non-profit research company, we have produced an
antitoxin test system. This antitoxin test system was developed from the
antitoxin "saxitoxin," of which the intellectual rights to the antitoxin
saxitoxin are exclusively held by CECS. We have acquired a 50% ownership
interest in this antitoxin test system. We believe this antitoxin test system
has enabled us to develop a PSP detection test for specific PSP toxins which can
be used in specialized laboratories. This method, consistent with our
methodology described above, will extract and analyze acid fluids from a
shellfish to detect whether the shellfish contains specific PSP toxins. We are
solely responsible for the commercialization of this antitoxin test system. By
contract with CECS we will receive 60% of all the benefits of any licensing,
royalties or sales limited to this antitoxin test system while the remaining 40%
shall accrue to CECS.
By agreement, dated June 20, 1998, between Tepual, CECS and R-Biopharm
GmbH, a German company, Tepual and CECS have agreed to supply R-Biopharm GmbH
with antibodies
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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 has paid a
royalty of $5,000 during 1999 and will pay a minimum of $15,000 for each
remaining year under this agreement. This payment constitutes minimum royalties
against the 12.5% of net sales on an annual basis.
Under a separate agreement, dated June 20, 1998, between Inual and
R-Biopharm GmbH, Inual has agreed to supply R-Biopharm GmbH with all toxins and
conjugates necessary to produce the PSP ELISA Test Kit. This agreement provides
that Inual shall receive royalties of 12.5% of the net sales of the PSP ELISA
Test Kit for 10 years dated from the execution of the agreement. R-Biopharm GmbH
will also pay a minimum royalty of $5,000 during 1999 and a minimum of $15,000
for each remaining year under the agreement. This payment constitutes minimum
royalties against the 12.5% of net sales on an annual basis. In addition to this
12.5% royalty, Inual shall receive $400,000, from R-Biopharm GmbH in
consideration for supplying R-Biopharm GmbH with a customer list for the future
potential sales of the PSP ELISA Test Kit. This payment is due two years from
the date of the agreement. Inual transferred this contract to Tepual in July
1999, and we will receive 100% of its benefits.
Through a separate agreement between R-Biopharm GmbH and Inual dated
May 20, 1998, of which Inual also transferred to Tepual in July, 1999,
R-Biopharm GmbH agreed to supply Inual on a continuous demand with commercial
PSP ELISA Test Kits at a price equivalent to those of R-Biopharm GmbH's other
future distributers. This agreement will permit us to sell the PSP ELISA Test
Kit in countries including, but not limited to, Chile, the United States and
Japan, where we have the ability to market this product.
Together with CECS we have jointly applied for patents in Chile, USA,
Canada and the European Community for our antitoxin test kit, under a patent
application titled "immunoassay forthe detection and quantitation of toxins
causing paralytic shellfish poisoning." While we may apply for worldwide patents
with CECS there can be no assurances that we will obtain these patents. As of
the date of this offering we have not received any patent protection for our
antitoxin test kit.
Future developments
on site testing kits
Having developed detection kits that have shown successful results in
the laboratory, we plan to focus our efforts on the development of on site
testing kits for PSP and DSP. We believe that our current research and
development may lead to a commercial testing kit that would enable
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commercial shell fishers, recreational fisherman or restaurants to test
shellfish for toxicity levels on location with a fast, economical, reliable and
comprehensive kit to perform on site PSP or DSP detection tests.
cleansing of shellfish
Through continuous research we have also developed and tested at the
laboratory level, an innovative multi-step procedure for decontaminating or
cleansing potentially PSP tainted shellfish, which may be applied in processing
plants or restaurants. We have developed technology which has enabled us in
laboratory testing to chemically remove toxins, without changing the
organolleptic (flavor, texture and color) characteristic of the 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, Columbia, Taiwan, China, Ecuador, Mexico (only for Tepual(TM)), Japan,
Peru and South Africa. As of the date of this offering we have not applied for
further trademark protection.
Patent protection for our poultry vaccines is limited to Chile and
currently only protects our Chilean vaccine for bronchitis infection. We intend
to patent our other Chilean vaccines, however, as of the date of this offering,
we have not filed nor received patent protection for any of our other Chilean
vaccines. As of the date of this offering we do not have any patent protection
for our immune stimulants.
We have applied for patent protection for our red tide paralytic
shellfish poisoning detection kit (antitoxin test kit) and our red tide
paralytic shellfish poisoning detoxification process. These patent applications
have been made in the United States, Chile, Canada, and the European Community.
An additional patent application for red tide paralytic shellfish poisoning
detoxification has been filed in Australia. We have also applied for patent
protection in Chile for a procedure to obtain krill oil.
We have received comments to our patent filings in the United States
for our red tide paralytic shellfish poisoning detection kit (antitoxin test
kit) and our red tide paralytic shellfish poisoning detoxification process and
anticipate filing responses in the U.S. Patent Office. We are unable to predict
the timing of the grants of any patents or if any patent protection can be
obtained.
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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.
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.
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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:
o veterinary laboratory approval; and
o 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.
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Other products
Our other products, such as our Peruvian poultry vaccines and red tide
detection kits are subject to government regulation in the countries in which
they are produced. Receiving government approval and satisfying government
regulation, however, is the responsibility of the companies that are
manufacturing our products.
We also incur government regulation when we sell our products outside
of Chile. We are subject to import and export restrictions in every country that
we sell our nutrient products. No import or export law has had a material effect
on our brokerage business.
RESEARCH AND DEVELOPMENT
Our research and development division includes cooperative efforts with
academic, private and government institutions and our own highly qualified
scientists. Our internal research and development staff includes 36 employees.
Of these employees 33 are full-time employees. We believe we are able to recruit
these highly qualified employees though incentives relating to productivity. We
intend to enter into employment agreements with certain of our researchers.
These researchers will receive a royalty for products they have developed.
During 1998 and 1997, respectively, we spent $426,195 and $232,128 on research
and development (does not include software development costs).
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.
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Maria Teresa Millan - Ms. Millan graduated from the Universidad
Catolica de Valparaiso in Chile with a degree in biochemical engineering. She
has been working for us since 1990 and is currently in charge of our product
development division. Her research areas within Bio-Aqua include enzyme
technology, feed formulation and seafood solids.
Vaccine research
Dr. Ricardo Gallardo - Dr. Gallardo is a licensed doctor in animal
sciences and veterinary medicine. He has been involved in poultry vaccine
research for over 25 years. He is a specialist in the fields of poultry
production and poultry pathology. Dr. Gallardo is also a professor of poultry
production and pathology at the Universidad Mayor in Chile and was a professor
at the Universidad de Chile. He is a member of numerous professional
organizations, including the College of Doctors in Veterinary Medicine, the
Society of Doctors in Veterinary Medicine and the Association of Doctors in
Veterinary Medicine. Dr. Gallardo has been working for us for 12 years where he
is our lead researcher for poultry vaccines.
Automatic control processing
Oscar Cornejo - Mr. Cornejo graduated from the Universidad de
Concepcion and Universidad Catolica de 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.
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 at 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
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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:
Nutrition
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.
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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 Cientificos 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.
FOREIGN CORRUPT PRACTICES ACT
Substantially all of our operations are transacted in South America. To
the extent that we conduct operations and sell our products outside the U.S., we
are subject to the Foreign Corrupt Practices Act which makes it unlawful for any
issuer to pay or offer to pay, any money or anything of value to any foreign
official, foreign political party or foreign political party official or any
candidate for foreign political office (foreign official) or any person with
knowledge that all or a portion of such money or thing of value will be offered,
given, or promised, directly or indirectly, to any foreign official.
We have not made any offers, payments, promises to pay, or
authorization of any money or anything of value to any foreign official and have
implemented a policy to be followed by our officers, directors, employees and
anyone acting on its behalf, that no such payments can and will be made. We have
made all employees cognizant of the need for compliance with the Foreign Corrupt
Practices Act and any violation of our policy will result in dismissal. Further,
we conduct periodic reviews of this policy with all employees to ensure full
compliance.
FOREIGN INVESTMENT LAWS AND REGULATIONS
The Chilean Constitution establishes that any Chilean or foreigner may
freely develop any activity in Chile so long as the securities activity in Chile
does not contravene existing laws dealing with public morals, public safety or
national security and follows the laws that regulate such activity. It also
establishes the principle of non-discrimination, thus guaranteeing foreign
investors equal protection under Chilean law. Additionally, Chilean law
prohibits any discretionary acts by the Chilean government or other entities
against the rights of persons or property in derogation of this principle.
Foreign investors may transfer capital and net profits abroad. There are no
exchange control regulations which restrict the repatriation of the investment
or earnings except that the remittance of capital may take place starting a year
after the date the funds were brought into the country, but net profits can be
remitted at any time, after deduction of applicable withholding income taxes.
Therefore, equity investments in Chile by persons who are not Chilean residents
follow the same rules as investments made by Chilean citizens.
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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 September 30, 1999, we employed 67 employees, of which 8 were
full-time salaried employees in administration, 8 were full-time salaried
employees in trading and brokering positions and 36 were involved in research
and development. All of our management and employees who reside in Chile speak
Spanish and our senior management team in Chile also communicates in English.
None of our employees are covered by a collective bargaining agreement. We
believe that the dedication of its employees is critical to our success, and
that our relations with our employees are good.
PROPERTIES
We own approximately 1,420 square feet of executive office space and
research facilities in Santiago, Chile. This property was purchased by Tepual in
1992 for a purchase price of approximately $110,000.
We also lease four facilities in Santiago, Chile. We lease
approximately 1,400 square feet of office space which is used by our trading,
quality control, finance and accounting departments at a rate of $1,439 per
month. The lease is for two years, commencing April 30, 1998, and provides for
an automatic renewal term of one year, unless leasee or leasor terminates in
writing. We also hold an option to buy this facility in the event the leasor
decides to sell the property.
We lease approximately 2,670 square feet of laboratory space for
production and quality control of poultry vaccines at a rate of $5,200 per
month. The lease contract commenced in March 1999, and is for an indefinite
term, terminable on four months notice by either party. We are responsible for
obtaining and maintaining proper government authorization for producing
biological products within the facility.
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We lease two buildings containing approximately 2,070 square feet of
laboratory space for bio-toxilogical testing, aquaculture research and
development and a pilot plant for research and development at a total rate of
$1,604 per month. The lease was for an initial term of one and one-half years,
commencing in November 1995, and automatically renews, unless there is a written
request for termination by either party.
We lease approximately 6,000 square feet of warehouse space within two
buildings in Santiago, Chile at a total rate of $7,400 per month. These spaces
are used to store feather meal and for processing and packaging of these
products. The lease contracts do not include a termination date, although either
party must provide thirty days notice to terminate either agreement.
Chilean law provides that a landlord may not evict a tenant without a
court hearing, although the tenant is responsible for all costs related to such
a hearing.
Upon the effective date, we will enter into a two year lease with
Andean Financial Corporation for its corporate U.S. offices in Boca Raton,
Florida, which lease may be renewed for an additional two year term. David
Mayer, a member of our board of directors, is the sole shareholder, officer and
director of Andean Financial Corporation. The annual lease amount will be
$30,000 annually, payable semi-annually, which includes all telephone and
facsimile, secretarial and other expenses. These terms were negotiated on an
arm's length basis and such terms are competitive with current lease terms for
similar arrangements in the South Florida area.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding the resolution of
which, our management believes, would have a material adverse effect on our
results of operations or financial condition, nor to any other pending legal
proceedings other than ordinary, routine litigation incidental to its business.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement in Washington, D.C., on Form SB-2 under the Securities
Act, with respect to the securities we are offering. This prospectus does not
contain all the information set forth in the registration statement and its
exhibits. For further information about us and the securities we offer,
reference is made to the registration statement and to the exhibits filed. The
statements contained in this prospectus as to the contents of any contract or
other document identified as exhibits in this prospectus are not necessarily
complete, and in each instance, reference is made to a copy of such contract or
document filed as an exhibit to the registration statement, each statement being
qualified in any and all respects by such reference.
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The registration statement, including exhibits, may be inspected
without charge at the principal reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; at its Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and at its Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies of such materials
can be obtained from the Public Reference Section of the Securities and Exchange
Commission at its principal office in Washington, D.C. set forth above or by
calling the Securities and Exchange Commission at 1-800-SEC-0330 upon payment of
prescribed fees. Additionally, the Securities and Exchange Commission maintains
a Web site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Securities and
Exchange Commission and the address of this 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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF BIO-AQUA SYSTEMS, INC.
Name Age Position
- ---- --- --------
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
- -------------
(1) Has served in his position since our inception in March 1999.
(2) Will commence serving as a director upon the effective date.
MAX RUTMAN has served as chief executive officer, president and
chairman of the board of directors of Bio-Aqua since its inception in March 1999
and as the chief executive officer and Chairman of the board of directors of
Tepual since its incorporation. Mr. Rutman has served as general manager of
Tepual since 1989. Mr. Rutman has received a degree in chemical engineering from
the Universidad de Santiago and a masters degree in food science from
Massachusetts Institute of Technology (MIT). Mr. Rutman has served as the head
of bio- engineering division and former director of the Protein Group at
I.F.O.P. (Chilean Institute of Fisheries Development). He has also been a
visiting professor in food science and biotechnology at the following
universities: Universidad Catolica, Universidad Catolica de Valparaiso and
Universidad de Santiago. 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
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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 will serve as a member of Bio-Aqua's board of directors
as of the effective date. Since November 1997, Mr. Vivanco has served as a
member of the board of directors of Uniservice Corporation (NASDAQ SmallCap:
"UNSRA," "UNSRW"). Since 1991, Mr. Vivanco has served as a member of the board
of directors of Kentucky Foods Chile, S.A., the Kentucky Fried Chicken
franchisee in Chile. Mr. Vivanco has been an attorney since 1979 and has served
as general counsel to Tepual since 1998. Mr. Vivanco is a partner in the law
firm of Abud, Vivanco and Vergara in Santiago, Chile, which serves as Tepual's
and our legal counsel in Chile.
DAVID MAYER has served as a member of Bio-Aqua's board of directors and
assistant secretary of Bio-Aqua since March 1999 and has entered into a ten year
consulting agreement with the Bio-Aqua. Since July 1997, Mr. Mayer has served as
the president of Andean Financial Corporation. Since November 1997, Mr. Mayer
has also served as a member of the board of directors and assistant secretary of
Uniservice Corporation (NASDAQ SmallCap: "UNSRA," "UNSRW"). From January 1992 to
March 1996, Mr. Mayer was a consultant to various companies where he assisted
with mergers and acquisitions.
DIRECTORS AND EXECUTIVE OFFICERS OF TEPUAL
The directors and executive officers of Tepual are as follows:
Name Age Position
- ---- --- --------
Max Rutman(1) 59 Chief Executive Officer, Director
Guillermo Quiroz(1) 49 Chief Financial Officer, President, Director
Nestor Lagos (1) 48 Director
(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
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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 solely of Sergio Vivanco. Our audit committee will review the work
of the audit staff and direct reports covering such work to be prepared. Our
audit committee will oversee our continuous audit program to attempt to protect
against improper and unsound practices and to attempt to furnish adequate
protection for its assets and records. Our audit committee also will act as
liaison to our independent certified public accountants, and will conduct such
work as is necessary and will receive written reports, supplemented by such oral
reports as it deems necessary, from our independent certified public
accountants.
Our compensation and stock option committee will be established upon
the effective date and will consist of Messrs. Rutman, Quiroz and Mayer. The
compensation and stock option committee will make recommendations with respect
to compensation of senior officers and granting of stock options and stock
awards.
Our nominating committee will be established upon the effective date
and will consist of Messrs. Rutman, Vivanco and Quiroz. The nominating committee
will make recommendations with respect to qualified individuals to become
members of our board of directors.
Of the five members of the board of directors, Messrs. Vivanco and
Mayer are non- employee directors. However, we have entered into a consulting
agreement with Mr. Mayer and Mr. Vivanco serves as our Chilean counsel.
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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 $100,000 for the year ended December 31, 1998. We did not
grant any stock options, restricted stock awards or stock appreciation rights or
make any long-term incentive plan payments during 1998. This table is based
solely upon compensation received from Tepual. It also includes payments under
Chilean social security provisions.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
Other Annual
Name and Principal Position Year Salary($) Bonus ($) Compensation($)
- --------------------------- ---- --------- --------- ---------------
<S> <C> <C> <C> <C>
Max Rutman CEO, 1998 $ 48,000 $ -0- $ -0-
President and Chairman 1997 48,000 -0- -0-
1996 48,000 -0- -0-
</TABLE>
EMPLOYMENT AGREEMENTS
Max Rutman, Chief Executive Officer, President and Chairman. Tepual,
our subsidiary, has entered into a written three-year employment agreement with
Mr. Rutman, which shall commence upon the effective date. Under the terms and
conditions of his employment agreement, Mr. Rutman shall receive an initial
annual base salary of $200,000, annual bonuses of up to $100,000, as determined
by Tepual's board of directors. Mr. Rutman shall be reimbursed for his ordinary
and necessary business expenses including fees for membership in one business or
social club, up to a maximum of $10,000 per year, and in other clubs and
organizations as Tepual and Mr. Rutman shall mutually agree are necessary and
appropriate. In any event Mr. Rutman terminates his employment contract within
12 months after a change in control, he will be entitled, for the remaining term
of his employment contract, to:
1. earned, but unpaid salary;
2. benefits to which he is entitled as a former employee under
our benefit and compensation plans;
3. continued health benefits;
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4. monetary payments under severence plans; and
5. all cash and stock payments he would have been entitled to,
had his employment not terminated.
We intend to obtain a $1,000,000 key man life insurance policy, of which we will
be the beneficiary on the life of Mr. Rutman.
Guillermo Quiroz, Chief Financial Officer. Tepual, our subsidiary, has
entered into a written two year employment agreement with Guillermo Quiroz,
which shall commence upon the effective date. Under the terms and conditions of
his employment agreement, Mr. Quiroz shall receive an initial annual base salary
of $100,000, bonuses of up to $20,000 per year, as determined by Tepual's board
of directors, as well as $7,500 for automobile expenses. Prior to the effective
date, Mr. Quiroz entered into a written employment agreement with Tepual. This
employment agreement will terminate upon the effective date of the written
employment agreement with Tepual that we have described.
Chilean Social Security/AFP and ISAPRE. Messrs. Rutman and Quiroz are
also entitled to receive certain social security benefits under Chilean law. The
Social Security laws in Chile were established as a private system that requires
all companies to retain approximately 20% of the gross salaries of its
employees, up to a maximum of $4,408.95 per year, which is used to pay both
Administrators of Pension Funds Companies (AFP) and Institutions of Provisional
Health (ISAPRE).
The allocation of this 20% to each service is approximately as follows:
(a) 10% to the AFP: This amount is deposited in an individual
interest-bearing account of each employee to cover their retirement. In
Chile, the age of retirement is 60 for women and 65 for men.
(b) 3% to the AFP: This amount covers any partial or permanent
disability and, in the case of death, will provide a monthly amount to
the deceased's spouse. The amount paid corresponds to 70% of an
employee's average salary, based upon the last 10 years of the
employee's life.
(c) 7% to ISAPRE: This amount covers medical fees, hospitalization and
clinical examinations. This percentage may be voluntarily increased by
the employee according to the employee's contractual agreement with the
employee's ISAPRE. In many instances it may be necessary to pay
additional costs for health care.
Additionally, Chilean law requires the payment of one month salary (up
to a maximum of approximately $2,736.00) for each year (or portion of salary in
excess of six months worked in
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<PAGE>
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 of our board of directors,
administers and interprets the stock option plan and is authorized to grant
options under the stock option plan to all our eligible employees, including our
officers and directors (whether or not employees). The stock option plan
provides for the granting of incentive stock options (as defined in Section 422
of the Internal Revenue Code), non-statutory stock options and reload options.
Options may be granted under the stock option plan on such terms and at such
prices as determined by the board of directors, or a committee, except that in
the case of an incentive stock option granted to a 10% shareholder, the per
share exercise price will not be less than 110% of such fair market value.
The exercise price for any option under the stock option plan may be
paid in cash, in shares of class A common stock or such other consideration that
is acceptable to the board of directors or any committee. If the exercise price
is paid in whole or in part in class A common stock, such exercise may result in
the issuance of additional options, known as reload options, for the same number
of shares of class A common stock surrendered upon the exercise of the
underlying option. The reload option would be generally subject to the same
provisions and restrictions set forth in the stock option plan with respect to
the underlying option except as varied by the board of directors or any
committee. A reload option enables the optionee to ultimately own the same
number of shares as the optionee would have owned if the optionee had exercised
all options for cash.
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<PAGE>
Options granted under the stock option plan will be exercisable after
the period or periods specified in the option agreement. Options granted under
the stock option plan are not exercisable after the expiration of five years
from the date of grant and are not transferable other than by will or by the
laws of descent and distribution. The stock option plan also authorizes us to
make loans to optionees to enable them to exercise their options.
As of the effective date, no options have been granted under our stock
option plan. Furthermore, to the extent that any options granted within the
first year are exercised, the underlying shares of class A common stock will be
subject to a 24 month lock-up period commencing on the effective date.
OPTION EXERCISES AND HOLDINGS
To date, we have not issued any options or SARs to any persons. 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 under these
provisions, we have been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is unenforceable.
LIMITATION OF LIABILITY
Under Florida law, our directors are protected against personal
liability for monetary damages from breaches of their duty of care. As a result,
our directors will not be liable in an action by us or a shareholder for
monetary damages alleging negligence or gross negligence in the performance of
their duties. In such actions, our directors remain liable for monetary damages
for willful misconduct, conscious disregard of our best interest, and for
transactions from which a director derives an improper personal benefit. Our
directors also remain liable under another provision of Florida law which makes
directors personally liable for unlawful distributions and which expressly sets
forth a negligence standard with respect to such liability. The liability of our
directors under federal or applicable state securities laws is also unaffected.
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<PAGE>
While our directors have protection from awards of monetary damages for
breaches of fiduciary duty, that does not eliminate their fiduciary duty.
Equitable remedies, such as an injunction or rescission based upon a director's
breach of fiduciary duty, are still available.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the effective date, a stock exchange agreement shall be
effectuated where Bio-Aqua receives Flagship Import Export LLC's 90% interest in
Tepual in return for 1,529,910 shares of class B common stock. Also, two stock
purchase agreements shall be simultaneously effectuated where Atik S.A. shall
purchase 169,990 shares of class B common stock of Bio-Aqua and Bio- Aqua shall
purchase Atik S.A.'s 10% in Tepual. Tepual shall then become our majority owned
(99.9%) subsidiary. Due to Chilean law, which requires that a Chilean
corporation be owned by not less than two shareholders, 15 shares of Tepual
stock will continue to be owned by Max Rutman, through his ownership interest in
Flagship Import Export LLC.
The current shareholders of Tepual are Flagship Import Export LLC
(8,573 shares) and Atik (952 shares). Mr. Rutman, through his ownership interest
in Flagship Import Export LLC, will retain a .01% interest (15 shares) in Tepual
in order to comply with Chilean law. Flagship Import Export LLC's sole
shareholder is Max Rutman. Atik's shareholders are Paulina and Andrea Rutman,
daughters of Max Rutman.
On the effective date, we will acquire the rights to the brands and
patents Inual(TM) and Tepual(TM) 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(TM) and Inual(TM)
brands; third party financing; or working capital. We believe that the terms of
these acquisitions are competitive with the going rates.
Upon the effective date, we will enter into a two year lease, which
lease may be renewed for an additional term of two years, with Andean Financial
Corporation to use a portion of Andean Financial Corporation's facilities in
Boca Raton, Florida, for our corporate U.S. offices. David Mayer, our director,
is the sole shareholder, officer and director of Andean Financial Corporation.
The annual lease amount will be $30,000 payable semi-annually. These terms were
negotiated on an arm's length basis and such terms are competitive with the
going rates.
As of the effective date and unless otherwise agreed upon, we will
enter into a ten year agreement with David Mayer, one of our directors. Under
this agreement, Mr. Mayer shall perform certain services for us, including
advising in the preparation and implementation of our business plan, research,
evaluation and negotiations with strategic partners and alternative sources of
credit and financial opportunities, assisting in conducting market surveys,
assisting in shareholder and investor relations, assisting in the preparation of
reports to shareholders and
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<PAGE>
investors, and acting as our U.S. liaison. In consideration for these services,
Mr. Mayer receives an annual fee of approximately $30,000, or as otherwise
agreed upon by the parties, commencing as of the effective date.
We will receive a minimum of $40,000 monthly from Biosur S.A., a
Chilean corporation in consideration for giving Biosur S.A. an exclusive right
to buy and distribute our Chilean poultry vaccines. Biosur S.A. is 95% owned by
Atik and 5% owned by Max Rutman. The shareholders of Atik are Paulina and Andrea
Rutman. Atik is a shareholder of Bio-Aqua.
Sergio Vivanco, a member of our board of directors upon the effective
date, serves as our Chilean legal counsel and has served as legal counsel for
Tepual since 1998.
We believe that all transactions with our officers, shareholders and
each of our affiliated companies have been made on terms no less favorable to
our company than those available from unaffiliated parties. In the future, we
intend to handle transactions of a similar nature on terms no less favorable to
our company than those available from unaffiliated parties.
BRIDGE FINANCING
Between April and May 1999, we received loans in the aggregate amount
of $150,000 from six third party accredited investors. These loans are evidenced
by promissory notes bearing interest at 8% per year. We are obligated to repay
five of these loans on the earlier of the closing of this offering or January 1,
2001. A loan from Inversiones Kau Kau, S.A., a Chilean corporation, for $50,000
is due on the earlier of the closing of this offering or March 31, 2000. As
additional consideration, the investors that loaned us $150,000 received an
aggregate of 35,294 shares of class A common stock.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the common
stock beneficially owned as of the date of this prospectus by each person who we
know by to own beneficially 5% or more of our common stock; by each of our
executive officers and directors; and by all of our executive officers and
directors as a group. After the offering, the shares held by Mr. Rutman,
Flagship Import Export LLC and Atik, directly or indirectly, will represent an
aggregate 64.4% of the outstanding common stock issued and will represent an
aggregate approximately 90% of our voting interest, since Mr. Rutman, Flagship
Import Export LLC and Atik, as holders of class B common stock, are entitled to
5 votes for each share of class B common stock held. Andrea and Paulina Rutman,
daughters of Max Rutman, are the shareholders of Atik S.A. Max Rutman disclaims
any beneficial ownership of these shares. Unless otherwise disclosed, the
mailing addresses for the individuals named below is General Ekdhal 159,
Santiago, Chile.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Ownership Voting
Beneficially Owned Percentage Percentage
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% 58.0% 89.1% 81.1%
Atik, S.A 169,990 9.5% 6.4% 9.9% 9.0%
Max Rutman 1,530,010(1)(2) 85.7% 58.0% 89.1% 81.1%
Guillermo Quiroz -0- -0- -0- -0- -0-
David Mayer(3) 51,000 2.9% 1.9% -0- -0-
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% 60.0% 89.7% 81.6%
</TABLE>
- --------------------
(1) Includes 1,529,910 shares of class B common stock issued to Flagship Import
Export LLC.
(2) Includes 100 shares of class B common stock issued to Mr. Rutman as
founders shares.
(3) Mr. Mayer's address is 1900 Glades Road, Suite 351, Boca Raton, Florida
33301.
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<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each unit consists of two shares class A of common stock and two
warrants. The shares and the warrants included in the units will automatically
separate 30 days from the effective date of this offering, after which the
common stock and warrants in the units will trade separately.
COMMON STOCK
We are currently authorized to issue up to 22,000,000 shares of common
stock. 20,000,000 shares are designated as class A common stock and 2,000,000
shares are designated as class B common stock. As of the effective date, there
were 86,294 shares of class A common stock outstanding and 1,700,000 shares of
class B common stock outstanding.
We have reserved up to an aggregate of 300,000 shares of class A common
stock under our stock option plan, under which we may issue options subject to
the approval of the representative for a period of twelve months from the
effective date, and to the extent any granted options are exercised, the
underlying shares of class A common stock shall be subject to a 24-month lock-up
period from the effective date.
Upon our liquidation, dissolution or winding up, after payment to our
creditors and holders of any senior securities, including preferred stock, as
applicable, our assets will be divided pro rata on a per share basis among the
holders of the shares of common stock. The common stock has no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All outstanding shares of
common stock are, and the shares of class A common stock we are offering will
be, upon completion of this offering, fully paid and non-assessable.
Subject to the dividend rights of the holders of any other class of
common stock or preferred stock, if applicable, holders of shares of common
stock are entitled to share, on a ratable basis, such dividends as may be
declared by the board of directors out of funds legally available. We have never
paid dividends on any class of common stock since our inception in March 1999.
Class A common stock and class B common stock
Holders of shares of class A common stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Holders of shares of
class B common stock are entitled to five votes per for each share of class B
common stock on all matters to be voted on by the shareholders. Neither holders
of class A common stock nor class B common stock have cumulative voting rights.
The holders of more than 50% of the voting rights for the election of directors
can elect all of the directors if they choose to do so, and in such event, the
holders of the
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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 82% 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 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. These shares will also be subject to a lock-up
period of twenty-four months from the effective date.
WARRANTS
Our warrants will be issued in registered form in an agreement dated as
of the effective date, between us and American Stock Transfer & Trust Company,
as warrant agent. The following discussion of certain terms and provisions of
our warrants is qualified in its entirety by reference to the warrant agreement.
A form of the certificate representing our warrants which form a part of the
warrant agreement has been filed as an exhibit to the registration statement of
which this prospectus forms a part.
Each of our warrants entitles the registered holder to purchase one
share of class A common stock. Each warrant is exercisable at a price of $6.00,
which is 120% of the offering price of our class A common stock in this
prospectus. The exercise price is subject to certain adjustments. Our warrants
are entitled to the benefit of adjustments in their exercise prices and in the
number of shares of class A common stock or other securities deliverable upon
their exercise in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation or merger.
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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 $10.00 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 of
our warrants as required by Section 10(a)(3) of the Securities Act.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The provisions of the Florida Control Share Act,
relating to control share acquisitions, provide that shares acquired in excess
of certain specified thresholds will not possess any voting rights unless such
voting rights are approved by a majority of the board of directors or a majority
of a corporation's disinterested shareholders. The provisions of the Florida
Control Share Act apply to us. The provisions of the Florida Affiliated
Transaction Act, relating to affiliated transactions, do not apply to us because
we have opted out of the act.
Our articles of incorporation and bylaws also authorize us to indemnify
our directors, officers, employees and agents. In addition, our articles of
incorporation and Florida law presently limit the personal liability of
corporate directors for monetary damages, except where the directors breach
their fiduciary duties and such breach constitutes or includes certain
violations of criminal law, a transaction from which the directors derived an
improper personal benefit, certain unlawful distributions or certain other
reckless, wanton or willful acts or misconduct.
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ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE OUR ARTICLES OF INCORPORATION
AND BYLAWS
Certain provisions of our articles of incorporation and bylaws
described below may delay, defer or prevent a tender offer or takeover attempt,
including attempts that might result in a premium being paid over the market
price for the shares held by shareholders. Such provisions could result in us
being less attractive to a potential acquiror or in shareholders receiving less
for their shares in the event of a take-over attempt.
Class B common stock
Holders of class B common stock are entitled to five votes for each
share of class B common stock held. Upon the effective date, Max Rutman will own
or control, directly or indirectly, approximately 58% of the common stock and
will have the right to cast 81% 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
Our 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 units, class A
common stock and our warrants is American Stock Transfer & Trust Company, 40
Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, we will have 936,294 shares of
class A common stock outstanding, 1,063,794 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. Also, 86,294 shares of
our class A common stock and all of the class B
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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 850,000 shares of class A common stock included in our units,
977,500 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 included in our units purchased by an affiliate in
general, a person who has a control relationship with us. These shares will be
subject to the resale limitations of Rule 144 under the Securities Act. An
additional 850,000 shares of class A common stock have been registered, 977,500
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, were
eligible to be resold until March 18, 2000, and remain subject to the lock-up
provisions described below. Any sales of shares under Rule 144 may have a
depressive effect on the price of our class A common stock.
All of the holders of common stock prior to the closing of this
offering, including Flagship Import Export LLC and Atik, who will acquire
1,699,900 shares of our class B common stock as of the effective date, have
agreed not to, directly or indirectly, offer to sell, contract to sell, sell,
transfer, assign, encumber, grant an option to purchase or otherwise dispose of
any beneficial interest in such securities for a period of 24 months from the
closing of this offering, with the exception of 35,294 shares of class A common
stock issued in connection with the bridge financing, which are subject only to
a six month lock-up period, without the prior written consent of the
representative. Additionally, holders of any securities issued by us for a
period of twelve months from the effective date, other than those securities
offered, the representative's warrants and the underlying securities will also
be subject to a 24-month lock-up period from the date of issuance. An
appropriate legend referring to these restrictions will be marked on the face of
the certificates representing all of these securities.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Institutional Equity
Corporation and Capital West Securities, Inc., have severally agreed to purchase
from us and we have agreed to sell to the underwriters, the respective number of
units 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:
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
Institutional Equity Corporation 25,000
Capital West Securities, Inc. 25,000
Emerson Bennet & Associates 100,000
First Colonial Securities Group, Inc. 50,000
Nutmeg Securities, Ltd. 50,000
Smith, Moore & Co. 30,000
Barron Chase Securities, Inc. 25,000
Fox & Company Investments, Inc. 25,000
EBI Securities Corporation 15,000
Kashner Davidson Securities Corporation 15,000
National Securities Corporation 15,000
Schneider Securities, Inc. 15,000
WestPark Capital, Inc. 15,000
Centex Securities Corporation 10,000
Culver Financial Management, Inc. 10,000
TOTAL 425,000
=======
The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of our units are subject to approval
of certain legal matters by counsel to the underwriter and to certain other
events. The underwriters are obligated to purchase all units we are offering
(other than those covered by the over-allotment option described below), if any
of these units are purchased.
We have been advised by the representatives of the underwriters that
the underwriters propose initially to offer our units to the public at the
offering price set forth on the cover page of this prospectus and through
members of the NASD. The representatives have also advised us that the
underwriters may allow a concession, not in excess of $.50 per unit, in their
discretion, to certain domestic dealers who are members of the NASD and which
domestic dealers agree to sell our securities in conformity with the NASD
Conduct Rules. No NASD member will receive 10% or more of the net proceeds of
this offering. The initial public offering price and concessions will not be
changed by the representatives 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 representatives, the representative's warrants, for nominal
consideration, entitling the representatives to purchase an aggregate of 42,500
units containing 85,000 shares of class A common stock and 85,000 warrants,
similar but not identical to our units. The representative's warrants shall be
non-exercisable and non-transferable, other than a transfer to affiliates of the
representatives 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's warrants shall be:
65
<PAGE>
o $16.50 per unit and
o $8.25 per share of class A common stock underlying the warrant, which
are 165% of the public offering price of our units and the shares of class A
common stock underlying our warrants.
In addition, we have granted to the representatives a single demand
registration right and unlimited piggy back registration rights with respect to
our class A common stock and our warrants underlying the representative's
warrants for a period commencing at the beginning of the second year and
concluding at the end of the fifth year following the effective date.
The warrants will not be redeemable for a period of twelve months
following the effective date, at which time the warrants may be redeemed by us
for $0.05 per warrant on not less than thirty days prior written notice, subject
to exercise by the representatives, if the closing bid price for our class A
common stock has been at least $10.00 per share for thirty consecutive trading
days. If we exercise our right to redeem warrants, the warrants may still be
exercised by the representatives 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
representatives 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 representatives must be registered, qualified or exempt under the
laws of the state in which the representatives reside. 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
representatives as required by Section 10(a)(3) of the Securities Act.
Under Rule 2710(a)(7)(A) of the NASD Conduct Rules, the warrants
acquired by the representatives 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
representatives and members of the selling group and their officers or partners.
In addition to the above, we have granted to the representatives an
option exercisable for 45 days from the effective date, to purchase up to an
additional 63,750 units containing 127,500 shares of class A common stock and
127,500 warrants at the initial public offering price, less the underwriting
discount set forth on the cover page of this prospectus. The underwriters, or
the representatives individually at their 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 representatives 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
representatives' compliance with applicable law and other
66
<PAGE>
specified obligations. The warrant solicitation fee may only be received by
brokers we designate in writing to the representatives. 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 units and the exercise price and terms
of our warrants have been arbitrarily determined by negotiations between us and
the representatives and may bear no relationship to our current earnings, book
value, net worth or other established valuation criteria. The factors considered
in determining the initial public offering prices included:
o an evaluation by our management and the representatives of the
history of and prospects for the industry in which we compete,
o an assessment of management,
o our prospects,
o our capital structure, and
o certain other factors deemed relevant.
The initial public offering prices do not necessarily bear any
relationship to our assets, book value, earnings or other established criterion
of value. Such prices are subject to change as a result of market conditions and
other factors, and no assurance can be given that a public market for the shares
of class A common stock and/or warrants will develop after the close of the
public offering, or if a public market in fact develops, that such public market
will be sustained, or that our units, 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 representatives 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 under the
over-allotment option. The representatives' expenses in excess of the
non-accountable expense allowance will be paid by the representatives. To the
extent that the expenses of the representatives are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the representatives.
We have agreed to engage Institutional Equity Corporation and Capital
West Securities, Inc. as consultants for a period of two years from the closing
of this offering, at a total fee of $60,000 per annum payable to the
representatives, commencing on the effective date and continuing for a period of
two years, payable in monthly installments. The consultant, will provide us
with:
o general financial consulting services and advice pertaining to
our business affairs;
67
<PAGE>
o assistance in developing, studying and evaluating financing and
capital structure;
o mergers and acquisitions activity and corporate
financing proposals;
o prepare reports and studies; and
o assist in negotiations and discussions pertaining to the above.
We have agreed to indemnify the underwriters against any costs or
liabilities incurred by the representatives by reasons of misstatements or
omissions to state material facts in connection with statements made in the
registration statement or the prospectus. The representatives have, 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 representatives and furnished
in writing by the representatives. 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 representatives. 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 representatives.
The representatives of the underwriters shall have the right to
designate of a member of the board of directors, or at the representatives'
option, to designate one individual to attend the meetings of our board of
directors for a period of five years after the effective date. If Robert A.
Shuey III, a principal of Institutional Equity Corporation, is designated as a
member of the board of directors he will receive a fee of $1,000 per month.
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.
68
<PAGE>
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 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 Wolin,
Ridley & Miller, LLP, Dallas, Texas.
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.
69
<PAGE>
BIO-AQUA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Combined Balance Sheets................................................................................... F-3
Combined Statements of Income............................................................................. F-4
Combined Statements of Stockholders' Equity............................................................... F-5
Combined Statements of Cash Flows......................................................................... F-6
Notes to Combined Financial Statements.................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bio-Aqua Systems, Inc.
Boca Raton, Florida
We have audited the accompanying combined balance sheets of Bio-Aqua Systems,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related combined
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The combined financial statements give retroactive effect to the tax free
exchange of shares between the Company and Tepual, S.A., which will be
effectuated at the time of the closing of a public offering of the Company's
stock, which has been accounted for as a combination of entities under common
control as described in Note 1 to the combined financial statements. Generally
accepted accounting principles prescribe giving effect to a consummated business
combination in financial statements that do not include the date of consummation
as if the business combination occurred for the periods presented. In addition,
they will become the historical combined financial statements of the Company
after financial statements covering the date of consummation of the business are
issued.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Bio-Aqua Systems,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
SPEAR, SAFER, HARMON & CO.
Miami, Florida
February 26, 1999
F-2
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash................................................................. $ 404,364 $ 136,489 $ 29,168
Accounts Receivable.................................................. 2,769,458 2,981,674 1,583,271
Due from related parties (Note 2).................................... 311 -- 250,672
Other receivables.................................................... -- 69,082 65,646
Inventory............................................................ 778,433 761,869 297,946
Income taxes receivable (Note 3)..................................... 48,323 52,231 134,949
Offering costs....................................................... 297,361 -- --
Other current assets (Note 4)........................................ 474,112 183,325 249,278
----------- ---------- ----------
Total Current Assets.............................................. 4,772,362 4,184,670 2,610,930
----------- ---------- ----------
Property and Equipment, net (Note 5)................................... 877,918 984,676 1,393,603
----------- ---------- ----------
Other assets (Note 6).................................................. 896,415 524,645 84,624
----------- ---------- ----------
$ 6,546,695 $5,693,991 $4,089,157
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 1,361,047 $ 990,749 $ 294,023
Obligations with banks: (Note 7)
Lines-of-credit................................................... 2,311,896 1,525,968 1,193,338
Current portion................................................... 121,609 158,603 106,320
Notes payable (Note 8)............................................... 234,212 124,775 --
Bridge loans payable (Note 14)....................................... 150,000 -- --
Accrued expenses and other current liabilities (Note 9).............. 199,274 399,638 399,836
----------- ---------- ----------
Due to stockholder................................................... 1,300,000 -- --
----------- ---------- ----------
Total Current Liabilities.............................................. 5,678,038 3,199,733 1,993,517
----------- ---------- ----------
Long-Term Liabilities:
Obligations with banks, excluding current portion (Note 7)........... 400,002 478,813 355,014
----------- ---------- ----------
Stockholders' Equity:
Class A common stock, $.0001 par value; 20,000,000 shares authorized,
86,294, 0, and 0 shares issued and outstanding at September 30,
1999, December 31, 1998 and 1997, respectively.................... 9 -- --
Class B common stock, $.0001 par value; 2,000,000 shares authorized;
1,700,000 shares issued and outstanding........................... 170 170 170
Preferred stock, $.0001 par value; 5,000,000 shares authorized; no
shares issued and outstanding..................................... -- -- --
Additional paid-in capital........................................... 529,444 411,331 411,331
----------- ---------- ----------
Retained earnings.................................................... 459,431 1,662,100 1,422,127
Cumulative translation adjustment.................................... (520,399) (58,156) (93,002)
----------- ---------- ----------
Total Stockholders' Equity............................................. 468,655 2,015,445 1,740,626
----------- ---------- ----------
$ 6,546,695 $5,693,991 $4,089,157
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-3
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................. $ 4,454,395 $ 4,648,676 $6,873,512 $5,238,299
Cost of Operations....................................... 3,087,682 3,453,168 4,853,553 3,571,678
----------- ----------- ---------- ----------
Gross Profit............................................. 1,366,714 1,195,508 2,019,959 1,666,621
General and Administrative Expenses...................... 981,529 1,029,043 1,555,661 1,516,974
----------- ----------- ---------- ----------
Income from Operations................................... 385,185 166,465 464,298 149,647
----------- ----------- ---------- ----------
Other Income (Expenses):
Other, net............................................. 29,470 116,560 24,060 203,353
Interest expense....................................... (317,324) (177,570) (280,266) (231,805)
Loss on investment in related parties.................. -- -- (23,082) (64,768)
Gain on sale of property and equipment................. -- -- 54,963 --
----------- ----------- ---------- ----------
(287,854) (61,010) (224,325) (93,220)
----------- ----------- ---------- ----------
Net Income............................................... $ 97,331 $ 105,455 $ 239,973 $ 56,427
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net Income Per Common Share............................ $ .06 $ .06 $ 0.14 $ 0.03
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted Average Common Shares
Outstanding......................................... 1,755,353 1,700,000 1,700,000 1,700,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-4
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL CUMULATIVE TOTAL
COMMON COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
------ ------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... $ -- $170 $411,331 $1,365,700 $(403,628) $ 1,373,573
Net income............................... -- -- -- 56,427 -- 56,427
Translation adjustment................... -- -- -- -- 310,626 310,626
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1997............... -- 170 411,331 1,422,127 (93,002) 1,740,626
Net income............................... -- -- -- 239,973 -- 239,973
Translation adjustment................... -- -- -- -- 34,846 34,846
---- ---- -------- ---------- ---------- ------------
Balance at December 31, 1998............... -- 170 411,331 1,662,100 (58,156) 2,015,445
Issuance of common stock................. 9 -- 118,113 -- -- 118,122
Net income (unaudited)................... -- -- -- 97,331 -- 97,331
Distribution to stockholder
(unaudited)............................ -- -- -- (1,300,000) -- (1,300,000)
Translation adjustment (unaudited)....... -- -- -- -- (462,243) (462,243)
---- ---- -------- ---------- ---------- ------------
Balance at September 30, 1999 (unaudited).. $ 9 $170 $529,444 $ 459,431 $(520,399) $ 468,655
==== ==== ======== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-5
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 97,331 $ 105,455 $ 239,973 $ 56,427
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization...................... 184,072 198,694 227,732 283,588
Loss on investment in related party................ -- -- 23,082 64,768
Gain on sale of property and equipment............. -- -- (54,963) --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................ 212,216 (672,327) (1,398,403) 1,322,729
Other receivables.................................. 69,082 (216,896) (3,436) 59,354
Inventory.......................................... (16,564) (263,272) (463,923) 749,054
Income taxes receivable............................ 3,908 74,031 82,718 4,051
Other current assets............................... (184,905) 237,226 65,953 (62,278)
Other assets....................................... (371,770) 75,602 (463,103) (6,392)
Increase (decrease) in:
Accounts payable................................... 370,298 373,591 696,726 (502,977)
Accrued expenses and other current liabilities..... (90,927) (98,577) 90,218 (1,868,164)
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Operating Activities..... 272,741 (186,473) (957,426) 100,160
--------- --------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property and equipment................ (77,314) (162,455) (195,761) (28,618)
Proceeds from sale of property and equipment......... -- 431,919 431,919 --
--------- --------- ----------- -----------
Net Cash (Used in) Provided by Investing Activities..... (77,314) 269,464 236,158 (28,618)
--------- --------- ----------- -----------
Cash Flows from Financing Activities:
Net proceeds (payments) of lines-of-credit........... $ 785,928 $ (64,872) $ 332,630 $ 90,338
Net proceeds from related parties.................... (311) 239,848 250,672 54,328
Proceeds from bridge loan............................ 150,000 -- -- --
Costs of public offering............................. (285,121) -- -- --
Proceeds of long-term debt........................... -- -- 236,161 --
Payments of long-term debt........................... (115,805) (159,835) (25,720) (500,666)
--------- --------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities..... 534,691 15,141 793,743 (356,000)
--------- --------- ----------- -----------
Effect of Exchange Rate Changes on Cash................. (462,243) (73,044) 34,846 310,626
--------- --------- ----------- -----------
Increase in Cash........................................ 267,875 25,088 107,321 26,168
Cash--Beginning of Period............................... 136,489 29,168 29,168 3,000
--------- --------- ----------- -----------
Cash--End of Period..................................... $ 404,364 $ 54,256 $ 136,489 $ 29,168
========= ========= =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest............... $ 266,914 $ 177,568 $ 280,266 $ 231,805
Supplemental Disclosure of Non-Cash Financing
Activities:
Issuance of Class A common stock in connection with
offering........................................... 118,122 -- -- --
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-6
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization--Bio-Aqua Systems, Inc., (the "Company"), is a Florida
corporation incorporated in March 1999 as a holding company to acquire Tepual,
S.A., a Chilean corporation. Tepual, S.A. is in the business of researching and
developing of production and control systems related to animal nutrition. The
Company provides brokerage services and technical advice in the production of
meals for feed for aquaculture, poultry and cattle farming. In addition, the
Company researches poultry vaccines.
Basis of Presentation--Subsequent to December 31, 1998, the Company entered
into an agreement to acquire 99.9% of the issued and outstanding common stock of
Tepual, S.A., in exchange for 1,700,000 shares of Class B common stock which
will be effective as of the closing of the initial public offering of the
Company's stock. (See Note 11 for more details.) In order to comply with Chilean
law and the requirements of the Central Bank of Chile for foreign investments,
two stock purchase agreements will be effectuated at the time of the closing of
the initial public offering of the Company's stock whereby (i) Atik, S.A.
("Atik"), a Chilean corporation and Flagship Import Export LLC ("Flagship"), a
Nevada limited liability company, shall purchase 1,699,900 shares of Class B
common stock and, (ii) the Company shall purchase Atik and Flagship's 99.9%
interest in Tepual, S.A. and Tepual, S.A. shall then become a majority owned
(99.9%) subsidiary of the Company. The substance of this transaction is an
exchange of shares between the Company and Atik and Flagship which is accounted
for as a combination of entities under common control. Generally accepted
accounting principles prescribe giving effect to a consummated business
combination in financial statements that do not include the date of consummation
as if the business combination occurred at the beginning of the first period
presented. Accordingly, the combined financial statements for all periods
presented have been prepared assuming the acquisition by the Company took place
on January 1, 1997, that the Company was incorporated on that date, and the
exchange of shares was effectuated at that time. Because the Company was not
formed until March 1999, historical and proforma financial statements are not
included herein because the assets, liabilities, revenues and expenses and net
income of Bio-Aqua Systems, Inc. are not material to the information presented.
These financial statements will become the historical combined financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
Functional Currency--The financial statements have been translated in
accordance with the provisions set forth in Statement of Financial Accounting
Standards No. 52, from Chilean pesos (the functional currency) into US dollars
(the reporting currency). The exchange rate used at September 30, 1999, December
31, 1998 and 1997, respectively, was 531.11 pesos to U.S. $1,473.77 pesos to
U.S. $1 and 439.18 pesos to U.S. $1. The weighted average exchange rate used in
September 30, 1999 and 1998, December 31, 1998
F-7
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
and 1997 was 503.15 pesos to U.S. $1,465.98 pesos to U.S. $1, 465.98 pesos to
U.S. $1 and 420.69 pesos to U.S. $1, respectively.
Revenue Recognition--The Company earns revenues principally from the sale
of different types of meals (fish, feather, and krill) used in the production of
animal feed as well as its automatic fish meal processing control system. The
Company also researches vaccines and other types of meals for its customers. In
the case of meal sales, revenue is recognized at the point of sale of goods to
its customers. Revenue associated with research services are recognized when the
services are performed.
Revenue from contracts to install automatic control devices are recognized
upon completion of the installation.
Royalty income in included in other income and is recognized on the basis
of terms specified in contractual agreements, normally as earned.
Concentrations of Credit Risk--Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and trade receivables. The Company places its cash with high credit quality
financial institutions. A significant portion of the Company's sales are to
several large customers and, as such, the Company is directly affected by the
well-being of those customers. However, the credit risk associated with trade
receivables is mitigated due to the Company's customer base and ongoing control
procedures which monitor the credit worthiness of customers. Historically, the
Company has not experienced losses on trade receivables. Therefore, no allowance
for bad debts is deemed necessary. At September 30, 1999, December 31, 1998 and
1997, approximately 13%, 20% and 20%, respectively, of the Company's
consolidated accounts receivable was attributable to one customer.
Inventory--Inventory consists primarily of fish, feather, and krill meal
and are stated at the lower of cost or market. Cost is determined using the
weighted average method.
Property and Equipment--Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method based on the estimated
useful life of the asset ranging from three to ten years.
Software Development Cost--The Company develops and manufacturers a
computerized process to facilitate the production of the highest nutrient level
in fish meal. In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company expensed all research and development costs
associated with the development of software products used in the processing of
fish meal. Initial costs were charged to operations as research prior to the
development of a detailed program design or a working model. Costs incurred
subsequent to the development of a working model were immaterial and thus not
capitalized. Research and development costs of approximately $399,000, $581,000
and
F-8
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
$564,000 for the nine months ending September 30, 1999 and the years ending
December 31, 1998 and 1997, respectively, are charged to operations and included
in general and administrative expenses.
Income Taxes--In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
Accounting for Income Taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Foreign Operations--As the Company operates almost exclusively outside of
the United States, one must be aware of the potential for both economic and
political change in the business environment, different than that of the United
States. The success of the Company depends on the success of its foreign
operations and a stable economic and political environment of those countries.
Earnings Per Common Share--Earnings per common share are based on the
weighted average number of shares outstanding of 1,739,882 and 1,700,000 for the
periods ended September 30, 1999 and 1998 and 1,700,000 for the years ended
December 31, 1998 and 1997, giving effect to common stock equivalents, none of
which existed in the aforementioned periods.
Recent Pronouncements--In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 "Earnings per
Share" and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information About Capital Structure" which are both effective for fiscal years
beginning after December 15, 1997. SFAS No. 128 simplifies the current required
calculation of earnings per share ("EPS") under APB No. 15, "Earnings per
Share", by replacing the existing calculation of primary EPS with a basic EPS
calculation. It requires a dual presentation for complex capital structures of
basic and diluted EPS on the face of the income statement and requires a
reconciliation of basic EPS factors to diluted EPS factors. SFAS No. 129
requires disclosure of the Company's capital structure. There was no material
impact to the Company's EPS calculation or financial statement presentation and
disclosure due to the adoption of SFAS No. 128 and SFAS No. 129.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" which is
effective for
F-9
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements which requires
the Company to (i) classify items of other comprehensive income by their nature
in a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. There was no
material impact to the Company's financial reporting or presentation due to the
adoption of SFAS No. 130.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", and amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries". SFAS No. 131 requires
annual financial statements to disclose information about products and services,
geographic areas, and major customers based on a management approach, along with
interim reports. The management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the segments for
making business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that were not
consolidated. This new management approach may result in more information being
disclosed than presently practiced and require new interim information not
previously presented. There was no material impact to the Company's financial
reporting or presentation due to the adoption of SFAS No. 131.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 "Employers' Disclosures About Pensions
and Other Postretirement Benefits--An Amendment of FASB Statements No. 87, 88,
and 106" which is effective for fiscal years beginning after December 15, 1 997.
SFAS No. 132 revises only the employers' disclosures about pension and other
postretirement benefit plans; it does not change the measurement or recognition
of such plans. Since the Company does not have such plans, there is no impact to
the Company's financial reporting or presentation due to the adoption of SFAS
No. 132.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Interim Financial Statements--The accompanying interim unaudited combined
financial information has been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments and eliminations consisting only of
normal recurring adjustments, necessary to present fairly the combined financial
position of the Company as of September 30, 1999 and the combined results of its
operations and cash flows for the nine months ended September 30, 1999 and 1998,
have been included. The results of operations for such interim period are not
necessarily indicative of the results for the full year.
NOTE 2--RELATED PARTY TRANSACTIONS
During 1998 and 1997, the Company earned royalty income of approximately
$9,000 and $57,000, respectively from an affiliated company. As of December 31,
1997, $123,186 was due from this affiliate. No amounts were due as of September
30, 1999 and 1998 and December 31, 1998.
Also during 1998 and 1997, the Company made advances to other affiliated
companies. As of September 30, 1999, December 31, 1998 and 1997, $311, $-0- and
$250,672, respectively, were due from these affiliates.
NOTE 3--INCOME TAXES
In Chile, the Company is subject to income taxes at a statutory rate of 15%
of taxable income, as defined. For the period ended September 30, 1999 and the
years ended December 31, 1998 and 1997, the Company had no taxable income due to
various credits and incentives provided by the government of Chile. In addition,
the Company made estimated income tax payments during those years and is due a
refund.
F-11
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 3--INCOME TAXES--(CONTINUED)
The following is a reconciliation of the statutory tax rates:
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD ENDED DECEMBER 31,
JUNE 30, --------------
1999 1998 1997
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Statutory tax rate................................................... 15% 15% 15%
Credits and incentives from government............................... (15) (15) (15)
---- ---- ----
Effective tax rate................................................... 0% 0% 0%
==== ==== ====
</TABLE>
As mentioned above, while the Company has incurred no income taxes for the
period ended September 30, 1999 and the years ended December 31, 1998 and 1997,
it has made monthly estimated tax payments in excess of the tax due which
coupled with the aforementioned credits has yielded income tax recoverables.
The Company was not liable for U.S. income taxes for the years ended
December 31, 1998 and December 31, 1997, because all earnings were generated by
the Chilean subsidiary and no earnings were repatriated to the Company for these
reporting periods. Therefore, no deferred tax assets or liabilities are
attributable to these years other than those reported by the subsidiary in its
regional operations. A deferred tax liability was recognized at September 30,
1999, December 31, 1998 and 1997 for approximately $74,000, $74,000 and $80,000,
respectively and is included in accrued expenses and other current liabilities.
NOTE 4--OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses........................................... $ 414,506 $183,325 $243,877
Bridge loan financing...................................... 59,606 -- --
Other...................................................... -- -- 5,401
--------- -------- --------
$ 474,112 $183,325 $249,278
========= ======== ========
</TABLE>
Prepaid expenses include deposits on orders placed with vendors of
approximately $393,000, $175,000 and $234,000 as of September 30, 1999, December
31, 1998 and 1997, respectively.
F-12
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1999 1998 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures............................ $ 154,928 $ 154,928 $ 154,701
Machinery and equipment........................... 1,585,826 1,508,512 1,503,316
Buildings and improvements........................ 238,053 238,053 238,053
Land.............................................. 39,511 39,511 317,523
Other............................................. 95,531 95,531 91,605
Vehicles.......................................... 94,446 94,446 94,446
----------- ----------- -----------
2,208,295 2,130,981 2,399,644
Less accumulated depreciation..................... (1,330,377) (1,146,305) (1,006,041)
----------- ----------- -----------
$ 877,918 $ 984,676 $ 1,393,603
=========== =========== ===========
</TABLE>
Depreciation expense was $184,072, $198,694, $227,732 and $283,588 for the
nine months ended September 30, 1999 and 1998 and the years ended December 31,
1998 and 1997, respectively.
During 1998, the Company sold land with a cost basis of approximately
$278,000.
NOTE 6--OTHER ASSETS
The Company has advanced approximately $887,000 and $500,000 to a fishing
vessel company as of September 30, 1999 and December 31, 1998, respectively,
(see Note 10).
NOTE 7--OBLIGATIONS WITH BANKS
Obligations with banks consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER -----------------------
30,
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Lines-of-credit with monthly, semi-annual and annual
maturity dates and interest rates ranging from 9%
to 13.8% APR.; fully collateralized by a personal
guarantee from a stockholder and certain assets of
the Company. Currency: Chilean Pesos and UF.......
$ 2,311,896 $1,525,968 $1,193,338
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-13
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 7--OBLIGATIONS WITH BANKS--(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank with maturity date in January 2005 and
fully collateralized by a personal guarantee from a
stockholder and certain assets of the Company, bearing
interest at 13.7%. Currency: Chilean Pesos and UF.......
$ 521,611 $637,416 $461,334
Less: Current portion...................................... (121,609) (158,603) (106,320)
--------- -------- --------
$ 400,002 $478,813 $355,014
========= ======== ========
</TABLE>
The note payable was refinanced in October 1998 increasing the debt by
approximately $236,000.
Interest rates on all of these loans are based on the Asociacion de Bancos
y Entidades Financieras, (T.A.B.) rate, which represents a daily average of the
interest paid by banks on its deposits. The rate is then adjusted upwards
approximately 1.5% for the banks profit, and then an additional 1.0%-1.7%
reflecting the individual risk of the bank on the individual loan. There are no
covenants or restrictions imposed on the aforementioned obligations with any of
the banks involved.
The UF is an indexed unit of account expressed in pesos and adjusted
according to inflation (CPI).
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------
<S> <C>
1999............................................................ $ 158,603
2000............................................................ 81,521
2001............................................................ 88,594
2002............................................................ 97,670
2003............................................................ 102,947
2004 and thereafter............................................. 108,081
------------
$ 637,416
============
</TABLE>
NOTE 8--NOTES PAYABLE
Notes payable consist of various short-term loans bearing interest at rates
ranging from 12% to 14% per annum. The notes are secured by approximately
$274,000 of accounts receivable.
F-14
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 9--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and employee related payables...................... $ 44,167 $120,925 $105,155
Sales and other taxes payable............................... 1,467 87,367 195,248
Deferred taxes.............................................. 73,932 73,932 79,755
========= ======== ========
Other....................................................... 79,708 117,414 19,678
========= ======== ========
$ 199,274 $399,638 $399,836
========= ======== ========
</TABLE>
NOTE 10--COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases various offices in Santiago, Chile
pursuant to operating leases. Monthly rental payments were approximately $3,000
during 1998 and 1997. Rent expense for the nine months ended September 30, 1999
and 1998 and the years ended December 31, 1998 and 1997 totaled approximately
$117,000, $63,000, $119,000 and $73,000, respectively.
Future minimum rental payments under the lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING ANNUAL
DECEMBER 31, PAYMENTS
- ---------------------------------------------------------------- ------------
<S> <C>
1999............................................................ $ 144,648
2000............................................................ 17,484
------------
$ 162,132
============
</TABLE>
Commercial Agreement--During 1998, the Company entered into an agreement
with Kelor Trading Ltd. ("Kelor") a fishing vessel company, for the exclusive
rights to Kelor's krill products. Pursuant to the agreement, the Company has
committed to advance Kelor up to $2,000,000 for its exploration. In return,
Kelor agrees to pay the Company the following; (i) a 3% commission of sales,
(ii) $20 per ton of krill meal sold and (iii) 5% of krill oil produced on board
by the Company's technological package.
As of September 30, 1999 and December 31, 1998, the Company advanced
approximately $887,000 and $500,000, respectively, to Kelor which is included in
other assets on the accompanying 1999 and 1998 combined balance sheets. This
agreement is due within 18 months with interest at a rate of 13.5%.
NOTE 11--OTHER MATTERS
Initial Public Offering--The Company signed a letter of intent with an
underwriter to offer 1,200,000 shares of Class A common stock and 1,200,000
redeemable common stock purchase warrants to the public in an initial public
offering, being made on a firm commitment basis. Each of the warrants entitles
the registered holder to purchase one share
F-15
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 11--OTHER MATTERS--(CONTINUED)
of Class A common stock. Total anticipated funds being raised will be
approximately $6,900,000. The net proceeds will be used for the continued
development of the Company.
Royalty Agreements--In June 1998, the Company and a non-profit corporation
(CECS) entered into a 10-year agreement with R-Biopharm GMBH (Biopharm), a
German company, in which the Company and CECS has agreed to provide technology
it possesses with respect to a red-tide detection kit. In exchange for this
technology, the Company and CECS will receive 12.5% royalties of net sales of
the detection kit. Biopharm will pay a minimum of $5,000 in 1999 and a minimum
of $15,000 for each remaining year under the agreement. Sales of this red tide
detection kit are expected to begin in the first quarter of 2000. The royalties,
including the minimum payments, will be shared 60% by the Company and 40% by
CECS.
Under a separate agreement, dated June 20, 1998, between Inual (a company
related through common ownership) and Biopharm, Inual has agreed to supply
Biopharm with all toxins and conjugates necessary to produce the red-tide
detection test kit. This agreement provides that Inual shall receive royalties
of 12.5% of the net sales of the test kit for 10 years dated from the execution
of the agreement. Biopharm will pay a minimum royalty of $5,000 during 1999 and
a minimum of $15,000 for each remaining year under the agreement. This payment
constitutes minimum royalties against the 12.5% of net sales on an annual basis.
In addition to this 12.5% royalty, Inual shall receive $400,000 from Biopharm in
consideration for supplying Biopharm with a customer list for the future
potential sales of the test kit. This payment is due two years from the date of
the agreement. Inual transferred this contract to the Company in July 1999 and
the Company shall receive 100% of its benefits.
NOTE 12--YEAR 2000 ISSUE
Computer programs used by businesses worldwide were written using two
digits rather than four digits to define the applicable year. Accordingly, these
programs recognize the dates "00" and "01" as the years 1900 and 1901 rather
than the years 2000 and 2001. The Company recognizes the need to ensure its
operations will not be adversely impacted by year 2000 computer program failures
arising from program processes and calculations misinterpreting the year 2000
date. The Company has evaluated its financial and operational systems to
determine the impact the year 2000 issue will have on its operations. The
Company also plans to communicate with its significant suppliers, dealers,
financial institutions, and others with which it conducts business to determine
the extent the Company may be impacted by third parties' failure to address the
year 2000 issue. Although the Company plans to be year 2000 compliant prior to
December 31, 1999 and expects no material impact to the Company's operations,
there can be no assurance that the failure of the Company or such third parties
to successfully address their respective year
F-16
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 12--YEAR 2000 ISSUE--(CONTINUED)
2000 issues will not have a material adverse effect on the Company's business,
financial condition, cash flows, and result of operations.
NOTE 13-- INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
The Company operates predominantly in one industry segment--that being the
production, research, and development of animal nutrition and related products.
During 1998 and 1997, sales to the top five customers amounted to approximately
65% and 52%, respectively, of total sales.
Customers outside Chile are worldwide, but primarily in South America,
United States, Asia, Europe and Australia. No single country or geographic
region is significant to the overall operations of the Company. All the
Company's assets are located within Chile.
NOTE 14--SUBSEQUENT EVENT
Bridge Loans--In April and May 1999, the Company entered into several
bridge loans totaling $150,000 with investors which were used for short-term
operations. These loans are evidenced by promissory notes bearing interest at 8%
per year. The Company is obligated to repay these notes the earlier of (i) the
closing date of the aforementioned initial public offering, or (ii) ranging from
March 30, 2,000 to January 15, 2001. As additional consideration, the investors
received 35,294 shares of Class A common stock valued at $3 per share. The
Company has capitalized these costs and are included in other current assets and
are being amortized over the term of the loans. Interest expense relating to
these loans amounted to approximately $50,000 for the nine months ending
September 30, 1999.
Trademarks--In June 1999, the Company entered into an agreement to purchase
the outstanding common stock of Profeed, Inc., an entity related through common
control, upon completion of the initial public offering ("IPO"). Profeed's sole
assets consist of the Tepual and Inual trademarks and has had no other activity
since its inception. The Company will purchase Profeed for $1,300,000, of which
$400,000 will be paid out of the proceeds of the IPO. The balance will be paid
either from sales of products sold under the Tepual and Inual brands, third
party financing, or other working capital.
Through September 30, 1999, Profeed has not received any royalties or
commissions for its ownership of these trademarks. Additionally, no material
changes in the Company's revenues and expenses are expected through its
ownership of these trademarks.
As the above transaction is between related parties under common control,
the above mentioned assets must be accounted for at historical cost. Such amount
is immaterial and therefore, not reflected in the financial statements. Due to
the related party nature of this transaction, the purchase price of $1,300,000
is recorded as a distribution and a liability,
F-17
<PAGE>
BIO-AQUA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998
NOTE 14--SUBSEQUENT EVENT--(CONTINUED)
due to stockholder, in the accompanying September 30, 1999 (unaudited) combined
financial statements.
Rental and Consulting Agreement--In 1999, the Company entered into an
agreement with an affiliate of one of the Company's directors to perform certain
services including acting as the U.S. liaison, rental of office space and
certain financial, advisory and consulting services, at an annual payment of
$30,000.
Employment Agreements--In 1999, the Company entered into a three year
employment agreement with the Company's President and Chief Financial Officer.
Pursuant to the terms and conditions of the employment agreements, the President
shall receive an initial annual base salary of $200,000 and the Chief Financial
Officer shall receive an initial annual base salary of $100,000. In addition to
the base salaries, they are entitled to receive various incentives and other
compensation amounting up to $100,000 and $20,000 as President and Chief
Financial Officer, respectively.
Stock Option Plan--Subsequent to year end, the Board of Directors of the
Company and a majority of the Company's shareholders adopted a Stock Option Plan
(the "Plan"). The Company will reserve a small amount of shares (not yet
determined) of Class A common stock for issuance under this Plan. No options
have been issued under the Plan.
F-18
<PAGE>
<TABLE>
<S> <C>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS. YOU MUST NOT RELY ON ANY BIO-AQUA SYSTEMS, INC.
UNAUTHORIZED INFORMATION OR REPRESENTATIONS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR 425,000 UNITS
ANY SALE MADE UNDER THIS PROSPECTUS, IMPLIES
THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS
SINCE THE DATE OF THIS PROSPECTUS OR THAT EACH UNIT CONTAINING
THE INFORMATION CONTAINED IN THIS PROSPECTUS TWO SHARES OF CLASS A COMMON
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE STOCK AND TWO REDEEMABLE COMMON
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS STOCK PURCHASE WARRANTS
AN OFFER TO SELL ONLY THE SECURITIES OF
FERED IN THIS PROSPECTUS, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT
IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY
AS OF ITS DATE.
Until April 22, 2000 (25 days after the
commencement of this offering), all dealers
that effect transactions in these
securities, whether or not participating in
this offering, may be required to deliver a
prospectus. This is in addition to the
obligations of dealers to deliver a
prospectus when acting as underwriters and
with respect to their unsold allotments or
subscriptions.
-------------------- ----------------
TABLE OF CONTENTS PROSPECTUS
PAGE ----------------
Prospectus Summary............................. 4
Selected Financial Data........................ 6
Risk Factors................................... 7
Use of Proceeds................................ 11
Dividend Policy ............................... 13
Dilution....................................... 13
Capitalization................................. 14
Exchange Rates................................. 15
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................. 16
Business....................................... 21
Additional Information ........................ 48 INSTITUTIONAL EQUITY CORPORATION
Management..................................... 50 (877) 467-7891
Certain Relationships and
Related Transactions......................... 57 CAPITAL WEST SECURITIES, INC.
Bridge Financing............................... 58 (877) 664-6644
Principal Shareholders......................... 59
Description of Securities...................... 60
Shares Eligible for March 29, 2000
Future Sale.................................. 63
Underwriting................................... 65
Legal Matters.................................. 73
Experts........................................ 73
Index to Financial Statements.................. F-1
</TABLE>
