As filed with the Securities and Exchange Commission on February 22, 2000
Registration No. 333-81829
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 7 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BIO-AQUA SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
FLORIDA 0200 65-0926223
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Numbers) Identification No.)
1900 GLADES ROAD, SUITE 351
BOCA RATON, FLORIDA 33431 1900 GLADES ROAD, SUITE 351
(561) 416-8930 BOCA RATON, FLORIDA 33431
(Address and Telephone Number of (Address of Principal Place of Business or
Principal Executive Offices) Intended Principal Place of Business)
DAVID MAYER
BIO-AQUA SYSTEMS, INC.
1900 GLADES ROAD, SUITE 351
BOCA RATON, FLORIDA 33431
(561) 416-8930
(Name, address and telephone number of agent for service)
Copies to:
CHARLES B. PEARLMAN, ESQ. NORMAN R. MILLER, ESQ.
BRIAN A. PEARLMAN, ESQ. WOLIN, RIDLEY & MILLER, LLP
ATLAS PEARLMAN P.A. 1717 MAIN STREET, SUITE 3100
350 EAST LAS OLAS BOULEVARD, SUITE 1700 DALLAS, TEXAS 75201
FORT LAUDERDALE, FLORIDA 33301 TELEPHONE (214) 939-4900
TELEPHONE (954) 763-1200 FACSIMILE (214) 939-4949
FACSIMILE (954) 766-7800
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis under Rule 415 under the Securities Act of 1933, as
amended, check the following box: [X]
If this form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering: [ ]
If this form is a post-effective amendment filed under Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made under Rule 434, please
check the following box: [ X ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Amount Proposed Proposed Amount of
Securities to be Registered to be Maximum Maximum Registration
Registered Offering Price Aggregate Fee
per Security Offering Price(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Units, including 75,000 Units issuable 575,000 $12.00 $6,900,000 $1,821.60
under Underwriter's Over Allotment
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock(2) 1,150,000 (2) (2) -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable Class A Common Stock
Purchase Warrants(2) 1,150,000 (2) (2) -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock(3) 1,150,000 $7.20 $8,280,000 $2,185.92
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(4) 100,000 $.0001 $10 $.003
- ------------------------------------------------------------------------------------------------------------------------------------
Units Underlying the Underwriter's
Warrants 50,000 $19.80 $990,000 $263.36
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock(5) 100,000 (5) (5) -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase
Warrants 100,000 (5) (5) -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock(6) 100,000 $11.88 $1,188,000 $313.63
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $17,358,010 $4582.524(7)
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee under Rule 457 under the Securities Act of 1933, as amended.
(2) Included in the units. No additional registration fee is required
(3) Issuable upon the exercise of the redeemable common stock purchase
warrants. Under Rule 416 there are also registered an indeterminate number
of shares of class A common stock, which may be issued pursuant to the
anti-dilution provisions applicable to the redeemable common stock purchase
warrants, the underwriters' warrants and the redeemable common stock
purchase warrants issuable under the underwriters' warrants.
(4) Underwriters' warrants to purchase up to 100,000 units, consisting of an
aggregate of 200,000 shares of class A common stock and 200,000 redeemable
common stock purchase warrants.
(5) Included in the units underlying the underwriters' warrants. No additional
fee required.
(6) Issuable upon exercise of redeemable common stock purchase warrants
underlying the underwriters' units.
(7) Fee calculated using new formula. Fee has been paid.
The registrant will amend this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
under Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED February 22, 2000
BIO-AQUA SYSTEMS, INC.
500,000 UNITS
We are offering 500,000 units. Each unit consists of two shares of
class A common stock and two redeemable common stock purchase warrants. Our
shares and warrants included in our units will automatically separate 30 days
from the date of this prospectus, after which our class A common stock and
warrants will trade separately. We expect our initial public offering price to
be between $10 and $12 per unit.
Prior to this offering, there has been no public market for our units,
class A common stock or warrants.
INVESTING IN OUR UNITS CLASS A COMMON STOCK AND WARRANTS INVOLVES
CERTAIN RISKS. SEE RISK FACTORS ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
Per Unit Total in the Offering
Public Offering Price $ 11.00 $5,500,000
Underwriting Discounts and
Commissions $ 1.10 $ 550,000
Proceeds to Bio-Aqua Systems, Inc. $ 9.90 $4,950,000
The underwriters may, under some circumstances, for 45 days after the
date of this prospectus, purchase up to an additional 75,000 units consisting of
an aggregate of 150,000 shares of class A common stock and 150,000 warrants from
us at the public offering price, less underwriting discounts and commissions.
It is expected that delivery of our units will be made, in a firm
commitment offering, against payment on or about ____________, 2000.
INSTITUTIONAL EQUITY CORPORATION
CAPITAL WEST SECURITIES, INC.
NUTMEG SECURITIES, LTD.
Prospectus __________, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 4
Selected Financial Data................................................... 6
Risk Factors.............................................................. 7
Use of Proceeds .......................................................... 12
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
Until _________, 2000 (25 days after the commencement of this
offering), all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligations of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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....................... 500,000 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 the effective date of
this prospectus, 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 the date of this
prospectus. The exercise price of
each warrant is $___ 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
______, 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
$____ (200%)per share for 30
consecutive trading days.
Class A common stock outstanding
after the offering:.................................. 1,086,294
Class B common stock outstanding
after the offering................................... 1,700,000
Warrants outstanding
after the offering................................... 1,000,000
We are presently seeking listing of our securities on the American Stock
Exchange. Our proposed Amex symbols are:
Units.........................................SEAU
Class A common stock..........................SEA
Warrants .....................................SEAW
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 500,000 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) $ 3,529,324
Total assets $ 4,089,157 $ 5,693,991 $ 6,546,695 $ 8,931,695
Total long-term liabilities $ 355,014 $ 478,813 $ 400,002 $ 400,002
Total liabilities $ 2,348,531 $ 3,678,546 $ 6,078,040 $ 4,028,040
Stockholders' equity $ 1,740,626 $ 2,015,445 $ 468,655 $ 4,903,655
</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 500,000 units offered will be
approximately $5,500,000, assuming an initial public offering price of $11.00
per unit. The net proceeds, without giving effect to the exercise of the
over-allotment option, will be approximately $4,435,000 after giving effect to:
o the representative's discounts of $550,000,
o a 3% non-accountable expense allowance to the representative
of $165,000, 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 3% 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;
o third party financing; or
o proceeds from the offering.
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 $1,500,000 33.8%
Initial Payment for the Purchase of Brands $400,000 9.0%
Contingent Payment for the Purchase of Brands $900,000 20.2%
Development of Red Tide Kits $500,000 11.3%
Development of Immune
Stimulants $350,000 8.0%
Research and Development of Poultry
Vaccines $300,000 6.8%
Marketing $200,000 4.5%
Repayment of Bridge Loans $150,000 3.4%
Working Capital $135,000 3.0%
-------- ---
TOTAL $4,435,000 100.0%
========== =====
</TABLE>
Between April and May 1999 we received bridge loans in the
aggregate amount of $150,000 from third party accredited investors. These
loans are evidenced by promissory notes bearing interest at 8% per year
with maturity dates ranging from March 31, 2000 through January 1, 2001.
Our anticipated use of net proceeds are based upon our current
status of operations and anticipated business plans. It is possible that
the application of funds may vary depending on numerous factors including,
but not limited to, changes in the economic climate or unanticipated
complications, delay and expenses. We currently estimate that the net
proceeds from this offering will be sufficient to meet our liquidity and
working capital requirements for the next 12 months. However, there can be
no assurance that the net proceeds of this offering will satisfy our
requirements for any particular period of time. Additional financing may be
required to implement our long-term business plan. There can be no
assurance that any such additional financing will be available when needed
on terms acceptable to us, if at all. Pending use of the proceeds of this
offering, we may make temporary investments in bank certificates of
deposit, interest bearing savings accounts, prime commercial paper, U.S.
Government obligations and money market funds. Any income derived from
these short term investments will be used for working capital.
We have wide discretion in the use of our proceeds. We reserve the
right to use the funds obtained from this offering for other purposes not
presently contemplated which we deem to be in our best interest and the
best interest of our shareholders. As a result, our success will be
substantially dependent upon the discretion and judgment of our management.
The 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 500,000 units containing 1,000,000 shares of
class A common stock, at an assumed initial public offering price of $11.00
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 $4,903,655 or $1.76 per share of common
stock. This would represent an immediate increase in the net tangible book
value per share of common stock of $2.48 to existing shareholders and an
immediate dilution of $3.74 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 $5.50
Net tangible book value per share of
class A and B common stock before the offering $ .26
Increase attributable to new investors $2.48
====
Proforma net tangible book value after the offering $1.76
Dilution to new investors $3.74
Percentage of dilution to new investors 68.00%
</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 1,000,000 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 64.11% $ 529,623 8.78% $0.30
New Investors 1,000,000 35.89% $5,500,000 91.22% $5.50
Total 2,786,294 100.00% $6,029,623 100.00% $2.16
</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 500,000 units,
assuming an initial public offering price of $11.00 per unit or $5.50 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> <C>
Long-term Debt $ 400,002 $ 400,002
Stockholders' equity:
Class A common stock ($.0001 par value) 20,000,000 shares authorized; 86,294
shares issued
and outstanding (actual) and 1,086,294 (as adjusted) 9 109
Class B common stock ($.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 4,964,344(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 $ 4,903,655
Total capitalization $ 868,657 $ 5,303,657
- -------------------
(1) Reconciliation: Issuance of 500,000 units at $11.00 $ 5,500,000
Less offering costs (350,000)
representative's discounts (550,000)
3% non-accountable expense to representative (165,000)
------------
Total Proceeds $ 4,435,000
less 1,000,000 shares at $.0001 par value 100
------------
$ 4,434,900
Plus actual additional paid in capital 529,444
------------
Total: $ 4,964,344
============
</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
- ---------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate" or "continue" or use of
negative or other variations or comparable terminology.
We caution that these statements are further qualified by important
factors that could cause actual results to differ materially from those
contained in the forward-looking statements, that these forward-looking
statements are necessarily speculative, and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements.
OVERVIEW
We generate substantially all of our revenues from the sale of certain
products such as fish meal, feather meal and krill meal which we purchase from
third parties under our own brand for resale to our customers throughout the
world. As of 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.
16
<PAGE>
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.
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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.
20
<PAGE>
BUSINESS
GENERAL
Bio-Aqua Systems, Inc. was organized in March 1999 as a holding company
to acquire a 99.9% interest in Tepual, S.A., a Chilean corporation established
in 1982 with its principle offices in Santiago, Chile. Before the effective
date, Tepual, S.A. is owned 90% by Flagship Import Export LLC, a company
wholly-owned by Max Rutman and 10% owned by Atik, S.A., a company owned by
Paulina Rutman and Andrea Rutman.
Since inception, our major source of revenue has been generated through
the branded sale of various products for animal nutrition, including fish meal,
feather meal and krill. These products are sold worldwide as a nutrient additive
for fish, poultry and livestock raised for human consumption with the
recognition that there is a direct correlation between the health of the animals
raised for human consumption and the consumer. We sell these nutrient products
under the 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.
21
<PAGE>
BACKGROUND
Tepual, organized in 1982 as a Chilean limited partnership, was
incorporated in 1996 when Tepual began commercial operations which capitalized
on research and development projects initiated by Inual, a Chilean company.
Inual, wholly owned by Max Rutman and Paulina Rutman, was organized in 1973.
Inual is currently a non-operating entity, with no assets. Prior to 1985 Tepual
and Inual generated revenues through grants from various government entities and
private foundations. These grants decreased starting in 1985, due in part to
privatization in Chile and an overall decrease in grants from private
foundations. We expanded our brokerage division to replace the revenues lost
from the decrease in the aforementioned grants to aid in the continuous funding
required to support our research and development department.
As our brokerage business began to grow, we developed relationships
which have given us a first hand view of the biological and processing factors
that affect the business of our customers and suppliers. Through years of
research and development we have developed and are developing commercially
viable solutions to these biological and processing factors in automatic control
for fish meal processing, salmon and shrimp immune stimulants, poultry vaccines
and red tide detection and cleansing process. Through our work on nutrient
quality, we have developed a unique automatic control processing system which
facilitates the production of the highest nutrient level fish meal while
avoiding toxicity for the fish meal industry. Through research in animal health
we have developed poultry vaccines and salmon immune stimulants. Through
research in marine toxins, we have developed new and potential methods for
detecting and cleansing toxins found in red tide.
We will consolidate ourselves on the effective date through the
following transactions:
1. A stock exchange agreement shall be effectuated where Bio-Aqua
receives Flagship Import Export LLC's 90% interest in Tepual in return for
1,529,910 shares of class B common stock. Also, two stock purchase agreements
shall be simultaneously effectuated where Atik S.A. shall purchase 169,990
shares of class B common stock of Bio-Aqua and Bio-Aqua shall purchase Atik
S.A.'s 10% in Tepual. Tepual shall then become our majority owned (99.9%)
subsidiary. Due to Chilean law, which requires that a Chilean corporation be
owned by not less than two shareholders, 15 shares of Tepual stock will continue
to be owned by Max Rutman, through his ownership interest in Flagship Import
Export LLC.
2. We will acquire the rights to the 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.
22
<PAGE>
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.
23
<PAGE>
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.
24
<PAGE>
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.
25
<PAGE>
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
26
<PAGE>
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
<PAGE>
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
38
<PAGE>
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
39
<PAGE>
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.
40
<PAGE>
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.
41
<PAGE>
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.
42
<PAGE>
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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
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.
47
<PAGE>
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.
48
<PAGE>
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.
49
<PAGE>
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
50
<PAGE>
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
51
<PAGE>
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.
52
<PAGE>
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;
53
<PAGE>
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
54
<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.
55
<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.
56
<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
57
<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
Bio-Aqua than those available from unaffiliated parties.
BRIDGE FINANCING
Between April and May 1999, we received loans in the aggregate amount
of $150,000 from six third party accredited investors. These loans are evidenced
by promissory notes bearing interest at 8% per year. We are obligated to repay
five of these loans on the earlier of the closing of this offering or January 1,
2001. A loan from Inversiones Kau Kau, S.A., a Chilean corporation, for $50,000
is due on the earlier of the closing of this offering or March 31, 2000. As
additional consideration, the investors that loaned us $150,000 received an
aggregate of 35,294 shares of class A common stock.
58
<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 61% of the outstanding common stock issued and will represent an
aggregate approximately 89% 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% 53.9% 89.1% 79.8%
Atik, S.A 169,990 9.5% 6.1% 9.9% 8.9%
Max Rutman 1,530,010(1)(2) 85.7% 54.9% 89.1% 79.8%
Guillermo Quiroz -0- -0- -0- -0- -0-
David Mayer(3) 51,000 2.9% 1.8% .6% .1%
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% 56.7% 89.7% 79.8%
</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.
59
<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 date of this prospectus, 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
60
<PAGE>
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 80% 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, but which shares shall be subject to a lock-up
period of twenty-four months from the effective date.
WARRANTS
Our warrants will be issued in registered form 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 $___,
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.
61
<PAGE>
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 $____ 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.
62
<PAGE>
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 55% of the common stock and
will have the right to cast 80% 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 class A common
stock and our warrants is American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, we will have 1,086,294 shares
of class A common stock outstanding, 1,236,294 shares if the over-allotment
option is exercised in full but without giving effect to the exercise of our
warrants and 1,700,000 shares of class B common stock outstanding, of which
35,294 shares of class A common stock and all of the class B
63
<PAGE>
common stock outstanding are restricted securities as the term is defined under
the Securities Act. Prior to the consummation of this offering our class A
common stock was held by seven entities and our class B stock was held by three
entities.
The 1,000,000 shares of class A common stock included in our units,
1,150,000 shares if the over-allotment option is exercised in full, will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares 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 1,000,000 shares of class A common stock have been
registered, 1,150,000 shares if the over-allotment option is exercised in full,
and reserved for issuance upon exercise of our warrants.
In general, Rule 144 promulgated under the Securities Act permits a
shareholder of ours who has beneficially owned restricted shares of any class of
common stock for at least one year to sell without registration, within a
three-month period, such number of shares not exceeding the greater of one
percent of the then outstanding shares of any class of common stock or,
generally, the average weekly trading volume during the four calendar weeks
preceding the sale, assuming our compliance with certain reporting requirements
of Rule 144. Furthermore, if the restricted shares of any class of common stock
is held for at least two years by a person not affiliated with us (in general, a
person who is not our executive officer, director or principal shareholder
during the three month period prior to resale), such restricted shares can be
sold without any volume limitation. Since we were not organized until March 18,
1999, the 51,000 shares of class A common stock issued on March 18, 1999, will
not be eligible to be resold until March 18, 2000, subject to the lock-up
provisions described below. Any sales of shares 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.
64
<PAGE>
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
Capital West Securities, Inc.
Nutmeg Securities, Ltd.
TOTAL 500,000
=======
The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the shares of class A common
stock and our warrants are subject to approval of certain legal matters by
counsel to the underwriter and to certain other events. The underwriters are
obligated to purchase all shares of common stock and warrants we are offering
(other than those covered by the over-allotment option described below), if any
such shares are purchased.
We have been advised by the representatives of the underwriters that
the underwriters propose initially to offer the shares of common stock and
warrants to the public at the offering price set forth on the cover page of this
prospectus and through members of the NASD. The representatives have also
advised us that the underwriters may allow a concession, not in excess of $___
per share of class A common stock and $____ per warrant, in their discretion, to
certain domestic dealers who are members of the NASD and which domestic dealers
agree to sell our securities in conformity with the NASD Conduct Rules. No NASD
member will receive 10% or more of the net proceeds of this offering. 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 50,000
units containing 100,000 shares of class A common stock and 100,000 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 $____ per unit and
o $____ 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 $___ 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 75,000 units containing 150,000 shares of class A common stock and
150,000 warrants at the initial public offering price, less the underwriting
discount set forth on the cover page of this prospectus. The underwriters, or
the 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>
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 UNAUTHORIZED INFORMATION OR REPRESENTATIONS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS, IMPLIES
THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS
OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS 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.
--------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary............................. 3
Selected Financial Data........................ 5
Risk Factors................................... 7
Use of Proceeds................................ 12
Dividend Policy ............................... 14
Dilution....................................... 14
Capitalization................................. 16
Exchange Rates................................. 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................. 18
Business....................................... 24
Additional Information ........................ 52
Management..................................... 54
Certain Relationships and
Related Transactions......................... 61
Bridge Financing............................... 62
Principal Shareholders......................... 63
Description of Securities...................... 64
Shares Eligible for
Future Sale.................................. 67
Underwriting................................... 69
Legal Matters.................................. 73
Experts........................................ 73
Index to Financial Statements.................. F-1
500,000 UNITS
EACH UNIT CONTAINING
TWO REDEEMABLE COMMON
STOCK PURCHASE WARRANTS
BIO-AQUA SYSTEMS, INC.
----------------
PROSPECTUS
----------------
INSTITUTIONAL
EQUITY CORPORATION
CAPITAL WEST SECURITIES, INC.
NUTMEG SECURITIES, LTD.
___________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporation. Our articles
of incorporation and bylaws provides that we shall indemnify to the fullest
extent permitted by the Florida Business Corporation Act any person whom it may
indemnify thereunder.
The provisions of Florida law that authorize indemnification do not
eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available. In addition, each director will continue to be subject to
liability for (a) violations of criminal laws, unless the director has
reasonable cause to believe that his or her conduct was lawful or had no
reasonable cause to believe his conduct was unlawful, (b) deriving an improper
personal benefit from a transaction, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or conscious disregard for our best
interests in a proceeding by or in our right to procure a judgment in its favor
or in a proceeding by or in the right of a shareholder. The statute does not
affect a director's responsibilities under any other law, such as the federal
securities laws.
The effect of Florida law, our articles of incorporation and our bylaws
is to require us to indemnify our officers and directors for any claim arising
against such persons in their official capacities if such person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Under the terms of the underwriting agreement, our directors and
officers also are indemnified against certain civil liabilities that they may
incur under the Securities Act.
To the limit indemnification for liabilities arising under the
Securities Act, may be permitted to our directors, officers or control persons
control, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts expected to be incurred in connection with the offering described in
this registration statement. All amounts are estimated except the registration
fee, NASD Fee and the underwriters' non-accountable expense allowance.
II-1
<PAGE>
Securities and Exchange Commission/Registration fee and
other documents*.................................................. $ 5,700
NASD filing fee*................................................... 2,500
AMEX filing fee*................................................... 20,000
Printing and engraving expenses*................................... 62,000
==========
Accounting fees and expenses*...................................... 50,000
Legal fees and expenses*........................................... 200,000
Blue Sky fees and expenses*........................................ 9,000
Transfer Agent fees and expenses* ................................. 800
----------
Total* ............................................................ $ 350,000
==========
*Estimated
We will pay all of the above expenses of this offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On March 18, 1999, we issued 100 shares of class B common stock to Mr.
Rutman, our president, chief executive officer and chairman of the board for par
value, as promotional shares. The issuance of the shares of class B common stock
were exempt from registration under Section 4(2) of the Securities Act.
Between April and May 1999, six accredited investors loaned us $150,000
at an interest rate of 8% per year. As consideration for this loan, the
investors received an aggregate of 35,294 shares of class A common stock. These
investors had access to, or were otherwise provided with, our information,
including financial. On March 18, 1999, we issued 51,000 shares of class A
common stock to David Mayer at our formation. Accordingly, the issuance of the
shares of class A common stock were exempt from registration under Section 4(2)
of the Securities Act.
As of the effective date, Flagship Import Export LLC, wholly-owned and
controlled by Mr. Rutman and Atik, owned and controlled by Paulina and Andrea
Rutman, will acquire 1,699,900 shares of class B common stock. The shareholders
of Flagship Import Export LLC and Atik were provided with, or otherwise had
access to, our information, including financial. Accordingly, the issuances of
the shares of class B common stock to Flagship Import Export LLC and Atik will
be exempt from registration under Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
Exhibit No. Description of Exhibit
1.1 Form of Underwriting Agreement(2)
1.2 Form of Agreement Among Underwriters(1)
1.3 Form of Selected Dealers Agreement(1)
II-2
<PAGE>
2.1 Stock Exchange Agreement between Flagship Import Export LLC and
Bio-Aqua for the exchange of class B common stock of Bio-Aqua for
shares of Tepual S.A.(1)
2.3 Stock Purchase Agreement between Atik, S.A. and Bio-Aqua for the
purchase of class B common stock (1)
2.4 Stock Purchase Agreement between Bio-Aqua and Atik, S.A. for the
purchase of shares of Tepual S.A.(1)
2.5 Stock Purchase Agreement between Profeed, Inc. and Bio-Aqua for the
acquisition of Profeed, Inc. and the rights to the Tepual(TM)and
Inual(TM)brands and trademarks(1)
3.1 Bio-Aqua's Articles of Incorporation(1)
3.1(a) Articles of Amendment to the Articles of Incorporation of Bio-Aqua(1)
3.2 Bio-Aqua's Bylaws(1)
4.1 Form of warrant agreement together with the form of warrant
certificate(2)
4.2 Form of representative's warrant agreement together with the form of
representative's purchase warrant certificate(2)
4.3 Form of class A common stock certificate (1)
5.1 Opinion of Atlas Pearlman P.A.(2)
10.1 Stock Option Plan(1)
10.2 Association Agreement between Tepual S.A. and Centro de Estudios
Cientificos de Santiago and Implementation Agreement (1)
10.3 Agreement between Tepual S.A., Centro de Estudios Cientificos de
Santiago and R-Biopharm (1)
10.4 Agreement Between Inual S.A. and R-Biopharm (1)
10.5 Distribution Agreement between Inual S.A. and R-Biopharm (1)
10.6 License Agreement between Tepual S.A. and Biosur S.A.C. (1)
10.7 Marketing Agreement between Tepual S.A. and Biosur S.A. (1)
10.8 Commercial Agreement between Tepual S.A. and Kelor Trading Ltd. (1)
10.9 Form of Bridge Loan Documents(1)
10.10 Employment Agreement between Tepual S.A. and Max Rutman(1)
10.11 Employment Agreement between Tepual S.A. and Guillermo Quiroz(1)
10.12 Consulting Agreement between Bio-Aqua and David Mayer(1)
10.13 Recognition of Bank Note with Hemisphere National Bank(1)
10.14 Recognition of Bank Note with Corpbanca(1)
10.15 Recognition of Bank Note with Banco Sud Americano(1)
10.16 Recognition of Bank Note with Banco Santander(1)
10.17 Recognition of Bank Note with Banco do Brasil(1)
10.18 Lease Agreement between Bio-Aqua and Andean Financial Corporation(1)
10.19 Lease Agreement between Tepual and Kaman Construcciones Limitada(1)
10.20 Lease Agreement between Tepual and Don Lindor Ltda.(1)
10.21 Lease Agreement between Tepual and Centrovet Ltda.(1)
10.22 Lease Agreement between Tepual and Turteltaub(1)
21 Subsidiaries of Registrant(1)
II-3
<PAGE>
23.1 Consent of Atlas Pearlman P.A. (to be included in its opinion filed as
Exhibit 5.1)(2)
23.2 Consent of Spear, Safer, Harmon & Co. P.C.(1)
27 Financial Data Schedule(1)
99.3 U.S. Patent Application for PSP Red Tide Detection Kit(1)
99.4 U.S. Patent Application for Red Tide Cleansing System(1)
99.5 Consent of Guillermo Quiroz(1)
99.6 Consent of Nestor Lagos(1)
99.7 Consent of Sergio Vivanco(1)
99.8 Consent of Robert A. Shuey, III(1)
- --------------------
(1) Previously filed
(2) Filed herein
ITEM 28. UNDERTAKINGS.
We undertake that:
(a) we will file, during any period in which we offer or sell our
securities, a post-effective amendment to this registration statement to:
(1) include any prospectus required by section 10(a)(3)
of the Securities Act;
(2) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and
(3) include any additional or changed material
information on the plan of distribution;
(4) for determining liability under the Securities Act,
we will treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering.
(5) we will file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
(6) we will provide to the underwriter at the closing of
this offering certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
(b) As indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the above provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission
II-4
<PAGE>
such indemnification is against public policy as expressed in the Securities Act
and is unenforceable. In the event that a claim for indemnification against such
liabilities (other than our the payment of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by any director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) We undertake that:
(1) For determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered in the prospectus, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering of the securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorizes this
amendment to be signed on its behalf by the undersigned, in the City of Ft.
Lauderdale, State of Florida, on this 18 day of February 22, 2000.
BIO-AQUA SYSTEMS, INC.
By: /s/ Max Rutman
-----------------
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement was signed by the following persons in
the capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ Max Rutman President and Chief February 22, 2000
- ------------------------- Executive Officer and
Max Rutman Director (Principal
Executive Officer)
/s/ Guillermo Quiroz Chief Financial Officer February 22, 2000
- ------------------------ (Principal Financial and
Guillermo Quiroz Accounting Officer)
/s/ David Mayer Director February 22, 2000
---------------
David Mayer
II-6
UNDERWRITING AGREEMENT
<PAGE>
TABLE OF CONTENTS
-----------------
Page
Underwriting Agreement.................................................... 1
SECTION 1................................................................. 1
Description of Securities................................................. 1
SECTION 2................................................................. 2
Representations and Warranties of the Company............................. 2
2.01. Registration Statement and Prospectus...................... 2
2.02. Accuracy of Registration Statement and Prospectus.......... 2
2.03. Financial Statements....................................... 3
2.04. Independent Public Accountant.............................. 3
2.05. No Material Adverse Change................................. 3
2.06. No Defaults................................................ 3
2.07. Incorporation and Standing................................. 3
2.08. Legality of Outstanding Stock.............................. 4
2.09. Legality of Stock, Warrants and Representative's Warrants.. 4
2.10. Prior Sales................................................ 4
2.11. Litigation................................................. 4
2.12. Warrants and Representative's Warrants..................... 4
2.13. Finder..................................................... 5
2.14. Exhibits................................................... 5
2.15. Tax Returns................................................ 5
2.16. Property................................................... 5
2.17. Patents & Trademarks....................................... 5
2.18. Authority.................................................. 6
2.19. Environmental Laws......................................... 6
2.20. ERISA...................................................... 6
2.21. No NASD Affiliation........................................ 6
2.22. Foreign Corrupt Practices Act.............................. 6
SECTION 3................................................................. 6
Purchase and Sale of the Units............................................ 6
3.01. Purchase of Stock and Over-Allotment Option................ 6
3.01.01. Default by an Underwriter......................... 7
3.01.02. Liability of Defaulting Underwriter............... 7
3.01.03. Right of Remaining Underwriters................... 7
3.02. Public Offering Price...................................... 7
3.02.01. Payment For Units................................. 8
3.02.02. Closing........................................... 8
-i-
<PAGE>
3.02.03. Inspection of Certificates........................ 8
3.03. Sale of Representative's Warrants.......................... 8
3.04. Representative's Expense Allowance......................... 8
3.05. Representations of the Parties............................. 9
3.06. Post-Closing Information................................... 9
3.07. Re-Offers By Selected Dealers.............................. 9
SECTION 4................................................................. 9
Registration Statement and Prospectus..................................... 9
4.01. Delivery of Registration Statements........................ 9
4.02. Delivery of Preliminary Prospectus......................... 9
4.03. Delivery of Prospectus..................................... 10
4.04. Further Amendments and Supplements......................... 10
4.05. Use of Prospectus.......................................... 10
SECTION 5................................................................. 11
Covenants of the Company.................................................. 11
5.01. Objection of Representatives to Amendments or Supplements.. 11
5.02. Company's Best-Efforts to Cause Registration
Statement to Become Effective............................ 11
5.03. Preparation and Filing of Amendments and Supplements....... 11
5.04. Blue-Sky Qualification..................................... 11
5.05. Financial Statements....................................... 12
5.06. Reports and Financial Statements to the Representatives.... 12
5.07. Expenses Paid by the Company............................... 12
5.08. Reports to Shareholders.................................... 13
5.09. Section 11(a) Financials................................... 13
5.10. Post-Effective Availability of Prospectus.................. 13
5.11. Application of Proceeds.................................... 13
5.12. Undertakings of Certain Shareholders....................... 13
5.13. Delivery of Documents...................................... 13
5.14. Cooperation With Representative's Due Diligence............ 14
5.15. No Sale Period............................................. 14
5.16. Appointment of Transfer Agent.............................. 14
5.17. Compliance With Conditions Precedent....................... 14
5.18. Section 462(b) Registration Statement...................... 14
5.19. Registration Under the Exchange Act........................ 14
5.20. Designation of Member of Company's Board of Directors...... 14
5.21. Key Man Insurance.......................................... 14
5.22. Application to Moody's or Standard & Poors................. 15
5.23. AMEX Listing............................................... 15
5.24. Exclusivity................................................ 15
5.25. Consulting................................................. 15
SECTION 6................................................................. 15
-ii-
<PAGE>
Indemnification........................................................... 15
6.01. Indemnification By Company................................. 15
6.02. Indemnification By Underwriters............................ 17
SECTION 7................................................................. 17
Effectiveness of Agreement................................................ 17
SECTION 8................................................................. 18
Conditions of the Underwriters' Obligations............................... 18
8.01. Effectiveness of Registration Statement.................... 18
8.02. Accuracy of Registration Statement......................... 18
8.03. Casualty and Other Calamity................................ 18
8.04. Litigation and Other Proceedings........................... 18
8.05. Lack of Material Change and Other Conditions............... 18
8.06. AMEX Listing Approval...................................... 19
8.07. Accountant's Comfort Letter and Update..................... 19
8.08. Review By and Opinion of Underwriter's Counsel............. 19
8.09. Opinion of Counsel......................................... 19
8.10.01. Accountant's Letter..................................... 21
8.10.02. Conformed Copies of Accountant's Letter................. 22
8.11. Officer's Certificate...................................... 22
8.12. Secretary's Certificate.................................... 23
8.13. Tender of Delivery of Units................................ 23
8.14. Blue-Sky Qualification..................................... 23
8.15. Approval of Representative's Counsel....................... 23
8.16. Officers' Certificate As a Company Representative.......... 24
8.17. Acquisition of Tepual S.A. and Profeed, Inc................ 24
SECTION 9................................................................. 24
Termination............................................................... 24
9.01. Termination Because of Non-Compliance...................... 24
9.02. Market Out Termination..................................... 24
9.03. Company's Right to Terminate............................... 24
9.04. Effect of Termination Hereunder............................ 25
SECTION 10................................................................ 25
Underwriter's Representations and Warranties.............................. 25
10.01. Registration as Broker-Dealer and Member of NASD.......... 25
10.02. No Pending Proceedings.................................... 25
SECTION 11................................................................ 25
-iii-
<PAGE>
Rights and Obligations.................................................... 25
11.01. Consultation With Representative.......................... 25
11.02. Exercise of Warrants...................................... 25
SECTION 12................................................................ 26
Notice.................................................................... 26
12.01. Notice to the Company 26 12.02. Notice to the Underwriters 26
SECTION 13................................................................ 27
Miscellaneous............................................................. 27
13.01. Benefit................................................... 27
13.02. Survival.................................................. 27
13.03. Governing Law............................................. 27
13.04. Underwriters' Information................................. 27
13.05. Counterparts.............................................. 27
-iv-
<PAGE>
500,000 Units
BIO-AQUA SYSTEMS, INC.
Each Unit Consisting of Two Shares of Class A Common Stock and
Two Redeemable Common Stock Purchase Warrants
Underwriting Agreement
----------------------
Institutional Equity Corporation
Capital West Securities, Inc.
As Representatives of the Underwriters
c/o Institutional Equity Corporation
5910 North Central Expressway, Suite 1480
Dallas, Texas 75206
Ladies and Gentlemen:
Bio-Aqua Systems, Inc., a Florida company (together with subsidiaries,
the "Company"), of 1900 Glades Road, Suite 351, Boca Raton, Florida 33431,
hereby confirms its agreement with the representative of the Underwriters,
Institutional Equity Corporation and Capital West Securities, Inc.
(collectively, the "Representatives"), and other members of the Underwriting
Group (hereinafter the "Underwriting Group" or "Underwriters") as follows:
SECTION 1
Description of Securities
The Company's authorized and outstanding capitalization when the
offering of the securities contemplated hereby is permitted to commence and at
the Closing Date (hereinafter defined), will be as set forth in the Registration
Statement and Prospectus included therein (hereinafter defined). The Company
proposes to issue and sell to the Underwriting Group an aggregate of 500,000
units (the "Units"), each consisting of two shares of the Company's Class A
Common Stock, $.0001 par value (the "Stock"), and two redeemable common stock
purchase warrants (the "Warrants") and Redeemable Representative's Warrants
entitling the Representative to purchase an aggregate of 50,000 units containing
100,000 shares of Stock and 100,000 warrants, similar but not identical to the
Units ("Representative's Warrants"). The Units, together with (a) the shares of
Stock and Warrants comprising the Units and (b) the shares of Stock issuable
upon exercise of the Warrants are collectively referred to as the "Underwritten
Securities." The Stock and Warrants will automatically separate thirty (30) days
from the Effective Date (hereinafter defined), after which the Stock and
Warrants will trade separately. The Underwriting Group shall also have an
over-allotment option to purchase up to an additional 75,000 units containing
150,000 shares of Stock and 150,000 Warrants at the initial public offering
minus the Underwriter's discount as provided in Section 3.01 hereof.
1
<PAGE>
SECTION 2
Representations and Warranties of the Company
In order to induce the Underwriting Group to enter into this Agreement
the Company hereby represents and warrants to and agrees with the Underwriting
Group as follows:
2.01. Registration Statement and Prospectus. A registration statement
on Form SB-2 (File No. 333-81829) (the "Registration Statement") with respect to
the Units, including the related Prospectus, copies of which have heretofore
been delivered by the Company to the Underwriter, has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations ("Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder, and said
Registration Statement has been filed with the Commission under the Act; one or
more amendments to said Registration Statement, copies of which have heretofore
been delivered to the Representative, has or have heretofore been filed; and the
Company may file on or prior to the effective date additional amendments to said
Registration Statement, including the final Prospectus.
As used in this Agreement: the term "Registration Statement" refers to
and means said Registration Statement on Form SB-2 and all amendments thereto,
including the Prospectus, all exhibits and financial statements, as it becomes
effective; the term "Prospectus" refers to and means the Prospectus included in
the Registration Statement when it becomes effective; and the term "Preliminary
Prospectus" refers to and means any prospectus included in said Registration
Statement before it becomes effective. The terms "Effective Date" and
"Effective" refer to the date the Commission declares the Registration Statement
filed with the Electronic Data Gathering, Analysis and Retrieval system
("EDGAR") effective pursuant to Section 8 of the Act.
2.02. Accuracy of Registration Statement and Prospectus. The
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus with respect to the Units, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and the applicable Rules and Regulations of the Commission thereunder, and
to the best of the Company's knowledge, has not included at the time of filing
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading. When the Registration
Statement becomes Effective and on the Closing Date (as hereinafter defined),
the Registration Statement and Prospectus, and any further amendments or
supplements thereto, will contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations for the
purposes of the proposed public offering of the Units, and all statements of
material fact contained in the Registration Statement and Prospectus will be
true and correct, and neither the Registration Statement nor the Prospectus will
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein necessary to make the statements therein not
misleading; provided, however, the Company does not make any representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon written information furnished by
the Representative on behalf of the Underwriters specifically for use therein.
2.03. Financial Statements. The financial statements of the Company
together with related schedules and notes as set forth in the Registration
Statement and Prospectus will present fairly the
2
<PAGE>
financial position of the Company and the results of its operations and the
changes in its financial position at the respective dates and for the respective
periods for which they apply; such financial statements have been prepared in
accordance with generally accepted principles of accounting consistently applied
throughout the periods concerned except as otherwise stated therein or with
respect to quarterly periods, normal recurring adjustments.
2.04. Independent Public Accountant. Spear, Safer, Harmon & Co., P.A.,
which has certified, or shall certify, certain of the financial statements
filed, or to be filed, with the Commission as part of the Registration Statement
and Prospectus, are independent certified public accountants within the meaning
of the Act and the Rules and Regulations.
2.05. No Material Adverse Change. Except as may be reflected in or
contemplated by the Registration Statement or the Prospectus, subsequent to the
dates as of which information is given in the Registration Statement and
Prospectus, and prior to the Closing Date, (i) there shall not be any material
adverse change in the condition, financial or otherwise, of the Company or in
its business taken as a whole; (ii) there shall not have been any material
transaction entered into by the Company or its subsidiaries other than
transactions in the ordinary course of business; (iii) neither the Company nor
any of its subsidiaries shall have incurred any material obligations, contingent
or otherwise, which are not disclosed in the Prospectus; (iv) there shall not
have been, nor will there be, any change in the capital stock or long-term debt
(except current payments) of the Company; (v) the Company has not, and will not,
have paid or declared any dividends or other distributions on its common stock;
and (vi) there are no currency exchange control laws or withholding taxes of any
applicable country which govern the payment of dividends on the stock of the
Company or the stock of any of the subsidiaries of the Company except as set
forth in the Prospectus and Registration Statement.
2.06. No Defaults. Neither the Company nor any of its subsidiaries is
in any default which has not been waived in the performance of any material
obligation, agreement or condition contained in any debenture, note or other
evidence of indebtedness or any indenture or loan agreement of the Company. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated, and compliance with the terms of this
Agreement will not conflict with or result in a breach of any of the terms,
conditions or provisions of, or constitute a default under, the articles of
incorporation, as amended, or bylaws of the Company, any note, indenture,
mortgage, deed of trust or other agreement or instrument to which the Company is
a party or by which it or any of its property is bound, or any existing law,
order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality, agency or body, arbitration tribunal or court,
domestic or foreign, having jurisdiction over the Company or its property. The
consent, approval, authorization, or order of any court or governmental
instrumentality, agency or body is not required for the consummation of the
transactions herein contemplated except such as may be required under the Act or
under the blue sky or securities laws of any state or jurisdiction.
2.07. Incorporation and Standing. The Company is, and at the Closing
Date will be, duly incorporated and validly existing in good standing as a
corporation under the laws of the State of Florida and the Company and/or its
subsidiaries is duly authorized to do business in all other states and
applicable foreign jurisdictions, including Chile, with authorized and
outstanding capital stock as set forth in the Registration Statement and the
Prospectus, and with full power and authority
3
<PAGE>
(corporate and other) to own its property and conduct its business, present and
proposed, as described in the Registration Statement and Prospectus; the Company
has full power and authority to enter into this Agreement; and the Company is
duly qualified and in good standing as a foreign corporation in each
jurisdiction in which it owns or leases real property or transacts business
requiring such qualification except where failure to so qualify would not have a
material adverse effect on the Company. The Company has no subsidiaries other
than as shown in Exhibit 21 to the Registration Statement.
2.08. Legality of Outstanding Stock. The outstanding common stock of
the Company has been duly and validly authorized, issued and is fully paid and
non-assessable and will conform in all material respects to all statements with
regard thereto contained in the Registration Statement and Prospectus. No sales
of securities have been made by the Company in violation of the registration
provisions of the Securities Act of 1933.
2.09. Legality of Stock, Warrants and Representative's Warrants. All
outstanding shares of Stock (including, without limitation, the shares of Stock
underlying (i) the Units to be sold by the Company hereunder, (ii) the Warrants,
and (iii) the Representative's Warrants) have been duly and validly authorized
and, when issued and delivered against payment therefor as provided in this
Agreement, will be validly issued, fully paid and non-assessable. The
Underwritten Securities and Representative's Warrants upon issuance will not be
subject to the preemptive rights of any shareholders of the Company. The
Warrants and Representative's Warrants when sold and delivered, will constitute
valid and binding obligations of the Company enforceable in accordance with the
terms thereof subject to bankruptcy, insolvency, auditors' rights generally and
equitable principles of law. A sufficient number of shares of Stock and Warrants
have been reserved for issuance upon exercise of the Warrants and
Representative's Warrants. The Underwritten Securities and Representative's
Warrants will conform to all statements with regard thereto in the Registration
Statement and Prospectus.
2.10. Prior Sales. No securities of the Company, of an affiliate or of
a predecessor of the Company have been sold within one year prior to the date
hereof, except as set out in the Registration Statement.
2.11. Litigation. Except as set forth in the Registration Statement
and Prospectus, there is, and at the Closing Date there will be, no action, suit
or proceeding before any court or governmental agency, authority or body pending
or to the knowledge of the Company threatened which might result in judgments
against the Company not adequately covered by insurance or which collectively
might result in any material adverse change in the condition (financial or
otherwise), the business or the prospects of the Company, or would materially
affect the properties or assets of the Company.
2.12. Warrants and Representative's Warrants. Upon delivery of and
payment for the Warrants and Representative's Warrants to be sold by and to the
Company as set forth in Section 3.03 of this Agreement, the Underwriter and the
Underwriter's designees will receive good and marketable title thereto, free and
clear of all liens, encumbrances, charges and claims whatsoever, except for any
encumbrances imposed under Securities laws or as contained in this Agreement;
and the Company will have on the Effective Date of the Registration Statement
and at the time of delivery of such Warrants or Representative's Warrants full
legal right and power and all
4
<PAGE>
authorization and approval required by law to sell, transfer and deliver such
Warrants or Representative's Warrants in the manner provided hereunder.
2.13. Finder. The Company knows of no outstanding claims for services
in the nature of a finder's fee or origination fee with respect to the sale of
the Units hereunder resulting from its acts for which the Representative may be
responsible.
2.14. Exhibits. There are no contracts or other documents which are
required to be filed as exhibits to the Registration Statement by the Act or by
the Rules and Regulations which have not been so filed and each contract to
which the Company or any of its subsidiaries is a party and to which reference
is made in the Prospectus has been duly and validly executed, is or will be at
the Effective Date, in full force and effect in all material respects in
accordance with their respective terms, including but not limited to the
Employment Agreement between the Company and Max Rutman, Exhibit No. 10.10, the
Employment Agreement between Guillermo Quiroz and the Company, Exhibit No.
10.11, and the various distribution and licensing agreements in Exhibits
10.2-10.8, and none of such contracts have been assigned by the Company; and the
Company knows of no present situation or condition or fact which would prevent
compliance with the terms of such contracts, as amended to date. Except for
amendments or modifications of such contracts in the ordinary course of
business, the Company has no intention of exercising any right which it may have
to cancel any of its obligations under any of such contracts, and has no
knowledge that any other party to any of such contracts has any intention not to
render full performance under such contracts.
2.15. Tax Returns. The Company has filed all federal and state tax
returns which are required to be filed by it and has paid all taxes shown on
such returns and on all assessments received by it to the extent such taxes have
become due. The Company has filed all tax returns required by it in any foreign
jurisdictions. All taxes with respect to which the Company is obligated have
been paid or adequate accruals have been set up to cover any such unpaid taxes.
2.16. Property. Except as otherwise set forth in or contemplated by
the Registration Statement and Prospectus, the Company has good title, free and
clear of all liens, encumbrances and defects, except liens for current taxes not
due and payable, to all property and assets which are described in the
Registration Statement and the Prospectus as being owned by the Company, subject
only to such exceptions as are not material and do not adversely affect the
present or prospective business of the Company.
2.17. Patents & Trademarks. Except as disclosed in the Registration
Statement or Prospectus, the Company has sufficient licenses, permits and other
governmental authorizations currently necessary for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and has not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
are in violation of, or cause the Company to violate, any law, rule, regulation
or order of the United States, any state, county or locality, or of any agency
or body of the United States or of any state, county or locality, the violation
of which would have a material adverse effect.
5
<PAGE>
2.18. Authority. The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and this
Agreement is the valid, binding and legally enforceable obligation of the
Company.
2.19. Environmental Laws. Neither the Company nor any of its
subsidiaries has violated any foreign, federal, state or local law relating to
the protection of human health and safety, the environmental or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental Laws"),
or incurred costs or liabilities associated with these Environmental Laws,
except for such violations which singly or in the aggregate would not have a
material adverse effect on the business, prospects, financial condition or
results of the Company and its subsidiaries taken as a whole.
2.20. ERISA. Neither the Company nor any of its subsidiaries has
violated any provisions of the Employee Retirement Income Security Act of 1974,
as amended, or the rules and regulations promulgated thereunder, in each case
that is applicable to the Company or such subsidiary, except for such violations
which singly or in the aggregate would not have a material adverse effect on the
business, financial condition or results of the Company and its subsidiaries
taken as a whole.
2.21. No NASD Affiliation. Except as previously disclosed in writing
by the Company to the Representative, no officer, director or 10% stockholder of
the Company has any National Association of Securities Dealers, Inc. (the
"NASD") affiliation.
2.22. Foreign Corrupt Practices Act. The Company has not, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
SECTION 3
Purchase and Sale of the Units
3.01. Purchase of Stock and Over-Allotment Option. The Company hereby
agrees to sell to members of the Underwriting Group named in Schedule I hereto
(for all of whom the Representative is acting), severally and not jointly, and
each member of the Underwriting Group, upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees to purchase from the Company, severally and not jointly, the number of
Units set forth opposite their respective names in Schedule I hereto at a
purchase price of $_____ per Unit, less the underwriting discounts. The
Representative is also granted Representative's Warrants entitling it to
purchase an aggregate of 50,000 Units containing 100,000 shares of Stock and
100,000 Warrants at a purchase price of $_____ per unit, at 165% of the initial
public offering price of the Units. The Representative's Warrants are
exercisable for a period of four years commencing one year following the
Effective Date. Pursuant to NASD Rule 2710(a)(7)(A) the Representative's
Warrants and warrants acquired by the Representative will be restricted from
sale, transfer, assignment, or hypothecation for a period of one year from the
Effective Date of the
6
<PAGE>
Registration Statement, except to officers or partners (not directors) of the
Representative and members of the selling group and/or their officers or
partners.
The Company hereby grants to the Representative an over allotment
option (the "Over-allotment Option") for a period of forty-five days after the
Effective Date to purchase at the initial public offering price of $_____ per
Unit up to 75,000 Units containing 150,000 shares of Stock and 150,000 Warrants,
less the underwriting discounts, in order to cover over-allotments.
3.01.01. Default by an Underwriter. If any of the Underwriters shall
fail to purchase the entire number of Units set opposite its name in Schedule I
hereto, and such failure to purchase shall constitute a default by such
Underwriter in the performance of its obligations under this Agreement, the
remaining Underwriters shall have the right and shall be obligated to take up
and pay for (in the respective proportions which the number of Units set
opposite the names of the several remaining Underwriters bears to the aggregate
number of Units set opposite the names of all the remaining Underwriters) the
entire amount of Units which the defaulting Underwriter agreed but failed to
purchase, provided, however, that the aggregate amount of all such increases for
all non-defaulting Underwriters shall not exceed _____ Units and provided,
further, that in the event that such additional Units shall exceed the foregoing
maximum, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the entire amount (but not less than all) of the remaining Units
which all defaulting Underwriters agreed but failed to purchase. The foregoing
obligations shall be subject to Section 8 hereof.
3.01.02. Liability of Defaulting Underwriter. Nothing contained in
this Section 3.01.02 shall relieve any defaulting Underwriter of its liability,
if any, to the Company or to the remaining Underwriters for damages occasioned
by its default hereunder.
3.01.03. Right of Remaining Underwriters. If any of the Underwriters
shall fail to purchase the entire number of Units set opposite its name and such
failure to purchase shall not constitute a default by such Underwriter in the
performance of its obligations under this Agreement, the remaining Underwriters
shall have the right, but shall not be obligated, to take up and pay for (in
such proportions as may be agreed upon among them) the entire amount (but not
less than all) of the Units which all withdrawing Underwriters agreed but failed
to purchase.
3.02. Public Offering Price. After the Commission notifies the Company
that the Registration Statement has become Effective, the Underwriters propose
to offer the Units to the public at a public offering price of $_____ per Unit,
as set forth in the Prospectus. The Underwriters may allow a discount of $______
upon sales of Units to selected dealers as may be determined from time to time
by the Representative.
3.02.01. Payment For Units. Payment for the Units (including the
Over-allotment Option Units) which the Underwriters agree to purchase shall be
made to the Company or its order by wire transfer, certified or official bank
check or checks (in immediately available funds), in the amount of the purchase
price by or on behalf of the Representative at the offices of the Representative
in Dallas, Texas, upon delivery to the Representative of certificates for the
Underwritten Securities in
7
<PAGE>
definitive form in such numbers and registered in such names as the
Representative requests in writing at least one full business day prior to such
delivery.
3.02.02. Closing. The time and date of delivery and payment hereunder
is herein called the "Closing" and shall take place at the office of
Institutional Equity Corporation at 5910 North Central Expressway, Suite 1480,
Dallas, Texas 75206, or at such other place that shall be agreed upon by the
Company and the Underwriters, on the third business day following the effective
date of this Agreement (unless postponed in accordance with Section 9) or such
other time not later than ten business days after such date as shall be agreed
upon by the Representative and the Company ("Closing Date"). Should the
Representative elect to exercise any part of the Over-allotment Option pursuant
to Section 3.01 herein above, the time and date of delivery and payment for said
over-allotment units shall be as mutually agreed, but not later than the 45th
calendar day after the Effective Date. Said date is hereinafter referred to, as
the "Over-Allotment Closing Date."
3.02.03. Inspection of Certificates. For the purpose of expediting the
checking and packaging of the certificates for the Underwritten Securities, the
Company agrees to make the certificates available for inspection by the
Representative at the office of Institutional Equity Corporation, set forth
above in Dallas, Texas at least one full business day prior to the proposed
delivery date.
3.03. Sale of Representatives Warrants. The Representative may
purchase for nominal consideration, at the closing of the sale of all the Units
contemplated by this Underwriting Agreement, Representative's Warrants entitling
the Representative to 50,000 Units containing 100,000 shares of Stock and
100,000 Warrants, which shall not be exercisable or transferable for a twelve
month period following the Effective Date. The Representative's Warrants shall
be exercisable for a period of four years commencing one year following the
Effective Date at 165% of the initial public offering price, upon the terms and
conditions provided in the Representative's Warrants. The Company shall not be
obligated to sell and deliver the Representative's Warrants, and the
Representative will not be obligated to purchase and pay for the
Representative's Warrants, except upon payment for the Units pursuant to Section
3.02.01 hereof.
3.04. Representatives Expense Allowance. It is understood that the
Company shall reimburse the Representative for its expenses on a non-accountable
basis in the total amount of 3% of the gross proceeds from the offering,
including proceeds from the sale of the over-allotment units, if exercised. At
the Closing and, if applicable, on the Over-Allotment Closing Date, the Company
shall pay to the Representative the unpaid balance of such allowance to defray
the expenses incurred by the Representative in connection with the offering. The
Representative shall be solely responsible for all expenses incurred by it in
connection with the offering including, but not limited to, the expenses of its
own counsel except as set forth in Section 5.07 hereof.
3.05. Representations of the Parties. The parties hereto respectively
represent that as of the Closing Date the representations herein contained and
the statements contained in all the certificates theretofore or simultaneously
delivered by any party to another, pursuant to this Agreement, shall in all
material respects be true and correct.
8
<PAGE>
3.06. Post-Closing Information. The Representative covenants that
reasonably promptly after the Closing Date, it will supply the Company with all
information required from the Underwriters for the completion of any applicable
forms and such additional information as the Company may reasonably request to
be supplied to the securities commissions of such states in which the
Underwritten Securities have been qualified for sale.
3.07. Re-Offers By Selected Dealers. On each sale by the Underwriters
of any of the Units to selected dealers, the Representatives shall require the
selected dealer purchasing any such Units to agree to re-offer the same on the
terms and conditions of the offering set forth in the Registration Statement and
Prospectus.
SECTION 4
Registration Statement and Prospectus
4.01. Delivery of Registration Statements. The Company shall deliver
to the Representative without charge two signed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative five conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements and
exhibits. The signed copies of the Registration Statement so furnished to the
Representative will include signed copies of any and all consents and
certificates of the independent public accountant certifying to the financial
statements included in the Registration Statement and Prospectus and signed
copies of any and all consents and certificates of any other persons whose
profession gives authority to statements made by them and who are named in the
Registration Statement or Prospectus as having prepared, certified, or reviewed
any part thereof.
4.02. Delivery of Preliminary Prospectus. The Company will deliver to
the Representative, without charge, as many copies of each Preliminary
Prospectus filed with the Commission bearing in red ink the statement required
by Regulation S-B Item 501(6) and (7) as may be required by the Underwriters.
The Company consents to the use of such documents by the Underwriters and by
dealers prior to the Effective Date of the Registration Statement. The Company
will deliver at its expense such copies of the Preliminary Prospectus as the
Representative may deem necessary in order to recirculate the Preliminary
Prospectus and/or to permit compliance with the provisions of Rule 15c2-11. For
purposes of this paragraph, the term "Preliminary Prospectus" shall be deemed to
include after the Effective Date of the Registration Statement a Rule 430A
subject to completion prospectus and the Company will deliver to the
Representative, after the effective date at its expense such copies of the Rule
430A prospectus subject to completion as the Representative deems necessary in
connection with the offering.
4.03. Delivery of Prospectus. The Company will deliver, at its
expense, as many printed copies of the Prospectus as the Underwriters may
require for the purposes contemplated by this Agreement and shall deliver said
printed copies of the Prospectus to the Representative as soon as practicable on
effectiveness of this Agreement, but in no event more than one business day
after the effective date of this Agreement. The Company will deliver such
additional copies at its expense as may be necessary to permit dealers to comply
with the requirements of Rule 174. If the Representative determines to use a
Term Sheet together with a prospectus subject to completion
9
<PAGE>
in accordance with Rule 434 to satisfy the delivery of prospectus requirement,
the Company shall furnish the Representative with such number of copies of the
Term Sheet meeting the requirements of Rule 434 and will file such number of
copies with the Commission as required by Rule 424(b) to permit the
Representative to deliver the final prospectus to purchasers in the offering in
this manner.
4.04. Further Amendments and Supplements. If, during such period of
time as in the opinion of the Representative or its counsel a Prospectus
relating to this financing is required to be delivered under the Act, any event
occurs or any event known to the Company relating to or affecting the Company
shall occur as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made not misleading, or if it is necessary
at any time after the Effective Date of the Registration Statement to amend or
supplement the Prospectus to comply with the Act, the Company will forthwith
notify the Representative thereof and prepare and file with the Commission such
further amendment to the Registration Statement or supplemental or amended
Prospectus as may be required and furnish and deliver to the Representative and
to others whose names and addresses are designated by the Representative, all at
the cost of the Company, the number of copies of the amended or supplemented
Prospectus designated by the Representative, which is so amended or supplemented
to not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the Prospectus not misleading in the
light of the circumstances when it is delivered to a purchaser or prospective
purchaser, and which will comply in all respects with the Act.
4.05. Use of Prospectus. The Company authorizes the Underwriters in
connection with the distribution of the Units and all dealers to whom any of the
Units may be sold by the Underwriters to use the Prospectus as from time to time
amended or supplemented, in connection with the offering and sale of the Units,
and in accordance with the applicable provisions of the Act and the applicable
Rules and Regulations and applicable state blue sky or securities laws.
SECTION 5
Covenants of the Company
The Company covenants and agrees with the Underwriters that:
5.01. Objection of Representatives to Amendments or Supplements. After
the date hereof, the Company will not at any time, whether before or after the
Effective Date of the Registration Statement, file any amendment or supplement
to the Registration Statement or Prospectus, unless and until a copy of such
amendment or supplement has been previously furnished to the Representative
within a reasonable time period prior to the proposed filing thereof, or of
which the Representative or counsel for the Representative has reasonably
objected to, in writing, on the ground that such amendment or supplement is not
in compliance with the Act or the Rules and Regulations.
5.02. Company's Best-Efforts to Cause Registration Statement to Become
Effective. The Company will use its best efforts to cause the Registration
Statement and any post-effective amendment subsequently filed, to become
effective as promptly as reasonably practicable and will
10
<PAGE>
promptly advise the Representative, and will confirm such advice in writing (i)
when the Registration Statement shall have become effective and when any
amendment thereto shall have become Effective and when any amendment of or
supplement to the Prospectus shall be filed with the Commission; (ii) when the
Commission shall make a request or suggestion for any amendment to the
Registration Statement or the Prospectus or for additional information and the
nature and substance thereof; and (iii) of the issuance by the Commission of an
order suspending the effectiveness of the Registration Statement pursuant to
Section 8 of the Act or of the initiation of any proceedings for that purpose;
(iv) of the happening of any event which in the judgment of the Company makes
any material statement in the Registration Statement or Prospectus untrue or
which requires the making of any changes in the Registration Statement or
Prospectus in order to make the statements therein not misleading; and (v) of
the refusal to qualify or the suspension of the qualification of the Units for
offering or sale in any jurisdiction, or of the institution of any proceedings
for any of such purposes. The Company will use every reasonable effort to
prevent the issuance of any such order or of any order preventing or suspending
such use, to prevent any such refusal to qualify or any such suspension, and to
obtain as soon as possible a lifting of any such order, the reversal of any such
refusal and the termination of any such suspension.
5.03. Preparation and Filing of Amendments and Supplements. The Company
will prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement or
Prospectus, in form satisfactory to counsel to the Company, as in the opinion of
counsel to the Representative and of counsel to the Company, may be necessary in
connection with the offering or distribution of the Units and will use its best
efforts to cause the same to become effective as promptly as possible.
5.04. Blue-Sky Qualification. The Company will, when and as requested
by the Representative, use reasonable efforts to qualify the Underwritten
Securities or such part thereof as the Representative may determine for sale
under the so-called blue sky laws of the State of Florida, and of so many other
states as the Representative may reasonably request, and to continue such
qualification in effect so long as required for the purposes of the distribution
of the Units.
5.05. Financial Statements. The Company, at its own expense, will
prepare and give and will continue to give such financial statements and other
information to and as may be required by the Commission, or the proper public
bodies of the states in which the Underwritten Securities may be qualified.
5.06. Reports and Financial Statements to the Representatives. During
the period of five years from the Closing Date, the Company will deliver to the
Representative, copies of each annual report of the Company and (i) within 105
days after the close of each fiscal year of the Company, a financial report of
the Company and its subsidiaries, if any, on a consolidated basis, and a similar
financial report of all unconsolidated subsidiaries, if any, all such reports to
include a balance sheet as of the end of the preceding fiscal year, an income
statement, a statement of changes in financial condition and an analysis of
shareholders' equity covering such fiscal year, and all to be in reasonable
detail and certified by independent public accountants for the Company; (ii)
within 50 days after the end of each quarterly fiscal period of the Company
other than the last quarterly fiscal period in any fiscal year, copies of the
consolidated income statement and statement of changes in financial condition
for that period, and the balance sheet as of the end of that period of the
Company
11
<PAGE>
and its subsidiaries, if any, and the income statement, statement of changes in
financial condition and the balance sheet of each unconsolidated subsidiary, if
any, of the Company for that period, all subject to year-end adjustment,
certified by the principal financial or accounting officer of the Company; (iii)
copies of all other statements, documents, or other information which the
Company shall mail or otherwise make available to any class of its security
holders, or shall file with the Commission; and (iv) upon request in writing
from the Underwriter, furnish to the Underwriter such other information as may
reasonably be requested and which may be properly disclosed to the
Representative with reference to the property, business and affairs of the
Company and its subsidiaries, if any.
5.07. Expenses Paid by the Company. The Company will pay, whether or
not the transactions contemplated hereunder are consummated or this Agreement is
prevented from becoming effective or is terminated, all costs and expenses
incident to the performance of its obligations under this Agreement including:
all expenses incident to the authorization of the Underwritten Securities and
their issue and delivery to the Representative; any original issue taxes in
connection therewith; all transfer taxes, if any, incident to the initial sale
of the Units to the public; the Blue Sky fees and expenses of the
Representative's counsel and accountants; the costs and expenses incident to the
preparation, printing and filing under the Act and with the National Association
of Securities Dealers, Inc. of the Registration Statement, any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto; the
cost of printing, reproducing and filing all exhibits to the Registration
Statement, the underwriting documents and the Selected Dealers Agreement, the
cost of printing and furnishing to the Representative copies of the Registration
Statement and copies of the Prospectus as herein provided; and, the cost of
qualifying the Underwritten Securities under the state securities or Blue Sky
laws as provided in Section 5.04 herein, including expenses and disbursements of
the Representative incurred in connection with such qualification.
5.08. Reports to Shareholders. During the period of five years from
the Closing Date, the Company will, as promptly as possible, not to exceed 120
days, after each annual fiscal period render and distribute reports to its
shareholders which will include audited statements of its operations and changes
of financial position during such period and its balance sheet as of the end of
such period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion.
5.09. Section 11(a) Financials. The Company will make generally
available to its security holders and will deliver to the Representative, as
soon as practicable, but in no event later than the first day of the sixteenth
full calendar month following the Effective Date of the Registration Statement,
an earnings statement (as to which no opinion need be rendered but which will
satisfy the provisions of Section 11(a) of the Act) covering a period of at
least 12 months beginning after the Effective Date of the Registration
Statement.
5.10. Post-Effective Availability of Prospectus. Within the time
during which the Prospectus is required to be delivered under the Act, the
Company will comply, at its own expense, with all requirements imposed upon it
by the Act, as now or hereafter amended, by the Rules and Regulations, as from
time to time may be in force, and by any order of the Commission, so far as
necessary to permit the continuance of sales or dealings in the Units.
12
<PAGE>
5.11. Application of Proceeds. The Company will apply the net proceeds
from the sale of the Units substantially in the manner set forth in the
Registration Statement and Prospectus. No NASD member shall receive 10% or more
of the net proceeds.
5.12. Undertakings of Certain Shareholders. The Company will deliver
to the Representative, prior to or simultaneously with the execution of this
Agreement, the undertaking by its existing shareholders immediately prior to the
Effective Date that shares of common stock and any other securities issued for a
period of twelve months from the Effective Date (other than those offered in
connection with this Offering, including the underlying securities, the
representative's warrants and the underlying securities) that such person shall
not directly or indirectly offer or sell to the public any portion of the shares
of common stock owned prior to the effective date of this Agreement or hereafter
acquired by exercise of an option for a period of twenty-four months, 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 lock-up period. The lock-up periods begin on the later of the date
of issuance or the Effective Date, and are subject to early termination at the
sole discretion of the Representative. An appropriate legend referring to these
restrictions will be marked on the face of the certificates representing all
such securities.
5.13. Delivery of Documents. At the Closing, the Company will deliver
to the Representative true and correct copies of the articles of incorporation
and certificate of incorporation of the Company and Tepual S.A. and all
amendments thereto, all such copies to be certified by the Secretary of State of
appropriate jurisdiction; true and correct copies of the bylaws of the Company
and Tepual S.A. and of the minutes of all meetings of the directors and
shareholders of the Company and Tepual S.A. held prior to the Closing Date which
in any way relate to the subject matter of this Agreement; and true and correct
copies of all material contracts to which the Company and/or Tepual S.A. is a
part, other than contracts for the sale of products or services in the normal
course of business.
5.14. Cooperation With Representatives Due Diligence. At all times
prior to the Closing Date, the Company will cooperate with the Representative in
such investigation as the Representative may make, or cause to be made, of all
the properties, business and operations of the Company in connection with the
purchase and public offering of the Units, and the Company will make available
to the Representative in connection therewith such information in its possession
as the Representative may reasonably request.
5.15. No Sale Period. No offering, sale or other disposition of any
common stock, equity or long-term debt will be made within one year after the
Effective Date of the Prospectus, directly or indirectly, by the Company,
without the Representative's prior written consent.
5.16. Appointment of Transfer Agent. The Company has appointed
American Stock Transfer Trust Company as Transfer Agent for the Units subject to
the Closing. The Company will not change or terminate such appointment for a
period of three years from the Effective Date without first obtaining the prior
written consent of the Representative, which consent shall not be unreasonably
withheld.
13
<PAGE>
5.17. Compliance With Conditions Precedent. The Company will use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Underwriters in Section 8 hereof.
5.18. Section 462(b) Registration Statement. The Company shall, upon
the demand of the Representative, file a Registration Statement pursuant to
Section 462(b) covering up to an additional 23% of the Securities offered.
5.19. Registration Under the Exchange Act. The Company shall, within
90 days after the Effective Date, register the class of equity securities which
constitutes the Underwritten Securities by filing with the Securities and
Exchange Commission a Registration Statement (and such copies thereof as the
Commission may require) with respect to such securities, containing such
information and documents as the Commission may specify comparable to that which
is required in an application to register a security pursuant to subsection (g)
of Section 12 of the Act, as amended.
5.20. Designation of Member of Company's Board of Directors. The
Representative shall have the right to designate as a member of the Board of
Directors or at the Representative's option, an individual to attend the
meetings of the Board of Directors of the Company for a period of five years
after the Effective Date. The attending individual shall not be compensated for
attendance in excess of any fee paid to any other members of the Board of
Directors, provided however that in the event Robert A. Shuey, III, a principal
of the Representative, is designated as a director, he shall receive a fee of
$1,000.00 per month.
5.21. Key Man Insurance. The Company, as of the Effective Date, will
use its best efforts and in good faith attempt to obtain one million dollar
($1,000,000) key man life insurance policy, from a qualified insurance company,
on Max Rutman, the Chief Executive Officer, President and Chairman of the Board
of the Company, for which the Company will be the beneficiary. The Company will
use its best efforts to maintain such insurance for 5 years from Effective Date.
5.22. Application to Moody's or Standard & Poors. The Company shall,
within 120 days after the Effective Date, apply for listing in either Moody's
Over-the-Counter Manual or Standard & Poors and shall use its best efforts to
have the Company listed in such manual.
5.23. AMEX Listing. For a period of five years from the Effective Date
of the Registration Statement, the Company will use its best efforts, at its
cost and expense, to effect and maintain the quotation of the Underwritten
Securities on the American Stock Exchange and will file with the American Stock
Exchange all documents and notices required by the American Stock Exchange for
companies that have securities that are traded in the over the counter market
and quotations for which are reported by the American Stock Exchange.
5.24. Exclusivity. The Company agrees that it will not negotiate with
any underwriter or other person relating to a possible offering of the Company's
securities through March 15, 2000. The Company represents and warrants that,
except as disclosed to the Representative, the Company's subsidiaries are wholly
owned by the Company, and that it has not granted any other person any right to
underwrite or register shares thereof or entered into any agreement to pay any
finder's or financial services fee that would be triggered by consummation of
this offering.
14
<PAGE>
5.25. Consulting. The Company has agreed to engage the Representative
as consultants for a period of two (2) years from the Closing of the offering at
a fee of $60,000 per annum payable to the Representative commencing on the
Effective Date and continuing for a period of two years. The Representative
agrees to provide (1) general financial consulting services and advice
pertaining to the Company's business affairs, (2) assistance in developing,
studying and evaluating financing and capital structure, (3) mergers and
acquisitions activity and corporate financing proposals, (4) preparation of
reports and studies, and (5) assistance in negotiations and discussions
pertaining to the above. The Company shall execute and deliver to the
Representative a Financial Consulting Agreement, in form attached as Annex A.
SECTION 6
Indemnification
6.01. Indemnification By Company. The Company agrees to indemnify and
hold harmless the Underwriters and each person who controls any underwriter
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act or any other statute
or at common law and to reimburse persons indemnified as above for any legal or
other expenses (including the cost of any investigation and preparation)
incurred by them in connection with any litigation, whether or not resulting in
any liability, but only insofar as such losses, claims, damages, liabilities and
litigation arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereto or any application or other document filed in order to qualify
the Underwritten Securities under the blue sky or securities laws of the states
where filings were made, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, all as of the date when the Registration Statement or
such amendment, as the case may be, becomes effective, or any untrue statement
or alleged untrue statement of a material fact contained in the Prospectus (as
amended or supplemented if the Company shall have filed with the Commission any
amendments thereof or supplements thereto), or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the indemnity agreement contained in this
Section 6.01 shall not apply to amounts paid in settlement of any such
litigation if such settlements are effected without the consent of the Company,
nor shall it apply to the Underwriter or any person controlling the Underwriters
in respect of any such losses, claims, damages, liabilities or actions arising
out of or based upon any such untrue statements or alleged untrue statement, or
any such omission or alleged omission, if such statement or omission was made in
reliance upon information peculiarly within the knowledge of the Underwriter and
furnished in writing to the Company by the Underwriter specifically for use in
connection with the preparation of the Registration Statement and Prospectus or
any such amendment or supplement thereto. This indemnity agreement is in
addition to any other liability which the Company may otherwise have to the
Underwriters. The Underwriters agree within ten days after the receipt by them
of written notice of the commencement of any action against them or against any
person controlling them as aforesaid, in respect of which indemnity may be
sought from the Company on account of the indemnity agreement
15
<PAGE>
contained in this Section 6.01 to notify the Company in writing of the
commencement thereof. The failure of the Underwriters so to notify the Company
of any such action shall relieve the Company from any liability which it may
have to the Underwriters or any person controlling them as aforesaid on account
of the indemnity agreement contained in this Section 6.01, but shall not relieve
the Company from any other liability which it may have to the Underwriters or
such controlling person. In case any such action shall be brought against the
Underwriters or any such controlling person and the Underwriters shall notify
the Company of the commencement thereof, the Company shall be entitled to
participate in (and, to the extent that it shall wish, to direct) the defense
thereof at its own expense, but such defense shall be conducted by counsel of
recognized standing and reasonably satisfactory to the Representative or such
controlling person or persons, defendant or defendants in such litigation. The
Company agrees to notify the Representative promptly of commencement of any
litigation or proceedings against it or any of its officers or directors, of
which it may be advised, in connection with the issue and sale of any of its
securities and to furnish to the Representative, at its request, copies of all
pleadings therein and permit the Representative to be an observer therein and
appraise the Representative of all developments therein, all at the Company's
expense. Provided, however, that in no event shall the indemnification agreement
contained in this Section 6.01 inure to the benefit of the Representative (or
any person controlling the Representative) on account of any losses, claims,
damages, liabilities or actions arising from the sale of the Units upon the
public offering to any person by such Representative if such losses, claims,
damages, liabilities or actions arise out of, or are based upon, an untrue
statement or omission or alleged untrue statement or omission in a Preliminary
Prospectus and if the Prospectus shall correct the untrue statement or omission
or the alleged untrue statement or omission which is the basis of the loss,
claim, damage, liability or action for which indemnification is sought and a
copy of the Prospectus had not been sent or given to such person at or prior to
the confirmation of such sale to him in any case where such delivery is required
by the Securities Act, unless such failure to deliver the Prospectus was a
result of non-compliance by the Company with Section 4.03 hereof.
6.02. Indemnification By Underwriters. The Underwriters severally
agree, to the extent of and only to the extent of their commitment pursuant to
Schedule I, in the same manner as set forth in Section 6.01 above, to indemnify
and hold harmless the Company, the directors of the Company and each person, if
any, who controls the Company with respect to any statement in or omission from
the Registration Statement or any amendment thereto, or the Prospectus (as
amended or as supplemented, if amended or supplemented as aforesaid) or any
application or other document filed in any state or jurisdiction in order to
qualify the Underwritten Securities under the blue sky or securities laws
thereof, or any information furnished pursuant to Section 3.05 hereof, if such
statement or omission was made in reliance upon information peculiarly within
its knowledge and furnished in writing to the Company by the Representative on
its behalf specifically for use in connection with the preparation thereof or
supplement thereto. The Underwriters shall not be liable for amounts paid in
settlement of any such litigation if such settlement was effected without the
consent of the Representative. In case of commencement of any action in respect
of which indemnity may be sought from the Underwriters on account of the
indemnity agreement contained in this Section 6.02, each person agreed to be
indemnified by the Underwriters shall have the same obligation to notify the
Underwriters as the Underwriters have toward the Company in Section 6.01 above,
subject to the same loss of indemnity in the event such notice is not given, and
the Underwriters shall have the same right to participate in (and, to the extent
that they shall wish, to direct) the defense of such action at their own
expense, but such defense shall be conducted by counsel of recognized standing
and satisfactory to the Company. The Underwriters agree to notify the Company
promptly of the commencement of any litigation or proceeding against the
Underwriters or against any such controlling person, of which it may be advised,
in connection with
16
<PAGE>
the issue and sale of any of the securities of the Company, and furnish to the
Company at its request copies of all pleadings therein and apprize it of all the
developments therein, all at the Company's expense, and permit the Company to be
an observer therein.
SECTION 7
Effectiveness of Agreement
This Agreement shall become effective upon release by the
Representative of the Units for offering after the Effective Date. The time of
the release by the Representative of the Units for offering, for the purposes of
this Section 7, shall mean the time of the release by the Representative of the
Units for public sale pursuant to the Registration Statement. The Representative
agrees to notify the Company immediately after the Representative shall have
released the Units, that this Agreement has become effective. This Agreement
shall nevertheless, become effective at such time earlier than the time
specified above, after the Effective Date, as the Representative may determine
by notice to the Company.
SECTION 8
Conditions of the Underwriters' Obligations
The Underwriters' obligations hereunder to purchase the Units and to
make payment to the Company hereunder on the Closing Date shall be subject to
the accuracy, as of the Closing Date, of the representations and warranties on
the part of the Company herein contained, to the performance by the Company of
all its agreements herein contained, to the fulfillment of or compliance by the
Company with all covenants and conditions hereof, and to the following
additional conditions:
8.01. Effectiveness of Registration Statement. The Registration
Statement shall have become effective on or prior to 12:00 Noon EST time, on the
Effective Date hereof, or such later date as the Underwriter may agree to. On or
prior to the Closing Date, no order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission or be pending; any
request for additional information on the part of the Commission (to be included
in the Registration Statement or Prospectus or otherwise) shall have been
complied with to the satisfaction of the Commission; and neither the
Registration Statement or the Prospectus nor any amendment thereto shall have
been filed to which counsel to the Representative shall have reasonably objected
in writing or have not given their consent.
8.02. Accuracy of Registration Statement. The Representative shall not
have disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of counsel to the Representative, is
material, or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein, or is necessary to make the
statements therein not misleading.
8.03. Casualty and Other Calamity. Between the date hereof and the
Closing Date, the Company shall not have sustained any loss on account of fire,
explosion, flood, accident, calamity or any other cause, of such character as
materially adversely affects its business or property considered as an entire
entity, whether or not such loss is covered by insurance and the President of
17
<PAGE>
the Company shall not have suffered any injury or disability of a nature which
would materially adversely affect his ability to properly function as an officer
and director of the Company.
8.04. Litigation and Other Proceedings. Between the date hereof and
the Closing Date, there shall be no litigation instituted or threatened against
the Company before or by any federal or state commission, regulatory body or
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding would materially adversely affect the
business, franchises, licenses, patents, operations or financial condition or
income of the Company considered as an entity.
8.05. Lack of Material Change and Other Conditions. Except as
contemplated herein or as set forth in the Registration Statement and
Prospectus, during the period subsequent to the date of the last audited balance
sheet included in the Registration Statement and prior to the Closing Date, the
Company (A) shall have conducted its business in the usual and ordinary manner
as the same was being conducted on the date of the last audited balance sheet
included in the Registration Statement, (B) except in the ordinary course of its
business, the Company shall not have incurred any liabilities or obligations
(direct or contingent) or disposed of any of its assets, or entered into any
material transaction or suffered or experienced any substantially adverse change
in its condition, financial or otherwise.
8.06. AMEX Listing Approval. The American Stock Exchange shall have
approved the Company's listing application under the symbols "SEAU" for the
Units, "SEA" for the Stock and "SEAW" for the Warrants.
8.07. Accountant's Comfort Letter and Update. At the Closing the
Representative shall have received from Spear, Safer, Harmon & Co. a letter
dated such date, in form and substance satisfactory to the Representative,
containing statements and information of the type ordinarily included in
accountants' "comfort letter" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and Prospectus; and, at the Closing, the Representative shall also
have received from Spear, Safer, Harmon & Co. a letter, dated at the Closing
Date, to the effect that they reaffirm the statements made in the letter
furnished pursuant to the previous clause, except that the specified date
referred to shall be a date not more than three days prior to the Closing Date.
At the Closing Date, the capital stock and surplus accounts of the Company shall
be substantially the same as at the date of the last audited balance sheet
included in the Registration Statement, without considering the proceeds from
the sale of the Units, other than as may be set forth in the Prospectus.
8.08. Review By and Opinion of Underwriter's Counsel. The
authorization of the Underwritten Securities, the Representative's Warrants, the
Registration Statement, the Prospectus and all corporate proceedings and other
legal matters incident thereto and to this Agreement shall be reasonably
satisfactory in all respects to counsel to the Representative. The
Representative shall have received an opinion dated as of the Closing Date from
its counsel, substantially in the form of the opinion called for by Section
8.09(viii), qualified in such manner as the Representative may deem acceptable.
18
<PAGE>
8.09. Opinion of Counsel. The Company (which term shall include any
subsidiaries of the Company) shall have furnished to the Representative the
opinions, dated the Closing Date, addressed to the Representative, from Atlas,
Pearlman P.A. and Abud, Vivanco & Vergara, counsels to the Company, to the
effect that based upon a review by them of the Registration Statement,
Prospectus, the Company's certificate of incorporation, bylaws, and relevant
corporate proceedings, an examination of such statutes they deem necessary and
such other investigation by such counsel as they deem necessary to express such
opinion:
(i) Bio-Aqua Systems, Inc. has been duly incorporated and is a
validly existing corporation in good standing under the laws of Florida, with
full corporate power and authority to own and operate its properties and to
carry on its business as set forth in the Registration Statement and Prospectus.
(ii) The Company is duly qualified or registered as a foreign
corporation in any applicable state or foreign jurisdiction cognizant that the
Company's ownership of property and its conduct of business requires such
qualification or registration and that the failure to so qualify would have a
material adverse effect on its operations.
(iii) To its knowledge, Bio-Aqua Systems, Inc. has authorized
an outstanding capital stock as set forth in the Registration Statement and
Prospectus; the outstanding common stock of the Company and the Underwritten
Securities conform in all material respects to the statements concerning them in
the Registration Statement and Prospectus; the outstanding common stock of
Bio-Aqua Systems, Inc. has been duly and validly issued and is fully-paid and
nonassessable and to its knowledge contains no preemptive rights; the Stock has
been, and the shares of Warrant Stock issuable upon exercise of the Warrants
will be, duly and validly authorized and, upon issuance thereof and payment
therefor in accordance with this Agreement and the Warrants, will be duly and
validly issued, fully paid and nonassessable, and to its knowledge will not be
subject to the preemptive rights of any shareholder of Bio-Aqua Systems, Inc.
(iv) The Warrants and Representative's Warrants have been duly
and validly authorized and issued and are valid and binding instruments
enforceable in accordance with their terms.
(v) To the Company's knowledge, a sufficient number of shares
of Stock and Warrants have been duly reserved for issuance upon exercise of the
Warrants and the Representative's Warrants.
(vi) No consents, approvals, authorizations or orders of
agencies, officers or other (United States) regulatory authorities are known to
such counsel which are necessary for the valid authorization, issue or sale of
the Underwritten Securities hereunder, except as required under the Act or blue
sky or state securities laws.
(vii) The issuance and sale of the Underwritten Securities,
Representative's Warrants and the consummation of the transactions herein
contemplated and compliance with the terms of this Agreement will not conflict
with or result in a breach of any of the terms, conditions, or provisions of or
constitute a default under the certificate of incorporation, or bylaws of
Bio-Aqua Systems, Inc.,
19
<PAGE>
or any note, indenture, mortgage, deed of trust, or other agreement or
instrument known to such counsel to which the Company is a party or by which the
Company or any of its property is bound or any existing law (provided this
paragraph shall not relate to federal or state securities laws), order, rule,
regulation, writ, injunction, or decree known to such counsel of any government,
governmental instrumentality, agency, body, arbitration tribunal, or court
domestic or foreign, having jurisdiction over the Company or its property.
(viii) The Registration Statement has become effective under
the Act and, to the best of the knowledge of such counsel, after such counsel
has conducted a reasonable investigation, no order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending by the Commission under the Act; and
the Registration Statement and Prospectus, and each amendment and supplement
thereto, comply as to form in all material respects with the requirements of the
Act and the Rules and Regulations thereunder, and nothing has come to such
counsel's attention that either the Registration Statement or the Prospectus or
any such amendment or supplement contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which made (except that no opinion need be expressed as to
financial statements and the notes thereto contained in the Registration
Statement or Prospectus).
(ix) Such counsel is familiar with all contracts referred to
in the Registration Statement or Prospectus and such contracts are sufficiently
summarized or disclosed therein or filed as exhibits thereto as required, and
such counsel does not know of any further contracts required to be summarized or
disclosed or filed, and such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company is the subject of such a
character required to be disclosed in the Registration Statement or the
Prospectus which are not disclosed and properly described therein.
(x) This Agreement has been duly authorized and executed by
the Company and is a valid and binding agreement of the Company.
(xi) Simultaneously with the Closing, the Company shall have
acquired good and marketable title to a 99% equity interest in Tepual S.A., a
Chilean company ("Tepual"), and acquired all of the rights to the InualTM and
TepualTM brands by acquiring all of the issued and outstanding stock of Profeed,
Inc., a Bahamian company ("Profeed"), free and clear of any adverse claims,
liens or encumbrances. All of such equity interests and shares of common stock
were duly authorized, validly issued, fully paid and non-assessable. Tepual and
Profeed are duly organized and are validly existing and in good standing in
their respective jurisdictions, and they are duly qualified as a foreign
corporation and in good standing in all states in which failure to qualify would
have a material adverse effect. InualTM and TepualTM have been duly and validly
registered as trademarks in Chile, Colombia, Taiwan, China, Ecuador, Mexico
(only TepualTM ), Japan, Peru and South Africa. There are no claims for
trademark infringement pending or, to our knowledge, threatened against Profeed.
As to routine factual matters such as the issuance of stock
certificates and receipt of payment therefor, the states and countries in which
the Company transacts business, the adoption of resolutions reflected by the
Company's minute book and the like, such counsel may rely on the
20
<PAGE>
certificate of an appropriate officer of the Company. Such opinion shall also
cover such other matters incident to the transactions contemplated by this
Agreement as the Underwriter or their Counsel shall reasonably request.
8.10.01. Accountant's Letter. The Underwriter shall have received a
letter addressed to it and dated the date of this Agreement and the Closing
Date, respectively, from Spear, Safer, Harmon & Co., independent public
accountants for the Company, stating that (i) with respect to the Company they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and the response to Item
509 of Regulation S-K as reflected by the Registration Statement is correct
insofar as it relates to them; (ii) in their opinion, the financial statements
examined by them of the Company at all dates and for all periods referred to in
their opinion and included in the Registration Statement and Prospectus, comply
in all material respects with the applicable accounting requirements of the Act
and the published Rules and Regulations thereunder with respect to registration
statements on Form S-B2; (iii) on the basis of certain indicated procedures (but
not an examination in accordance with generally accepted accounting principles),
including examinations of the instruments of the Company set forth under
"Capitalization" in the Prospectus, a reading of the latest available interim
unaudited financial statements of the Company, whether or not appearing in the
Prospectus, inquiries of the officers of the Company or other persons
responsible for its financial and accounting matters regarding the specific
items for which representations are requested below and a reading of the minute
books of the Company, nothing has come to their attention which would cause them
to believe that during the period from the last audited balance sheet included
in the Registration Statement to a specified date not more than five days prior
to the date of such letter (a) there has been any change in the capital stock or
other securities of the Company or any payment or declaration of any dividend or
other distribution in respect thereof or exchange therefor from that shown on
its audited balance sheets or in the debt of the Company from that shown or
contemplated under "Capitalization" in the Registration Statement or Prospectus
other than as set forth in or contemplated by the Registration Statement or
Prospectus; (b) there have been any material decreases in net current assets or
net assets as compared with amounts shown in the last audited balance sheet
included in the Prospectus so as to make said financial statements misleading;
and (c) on the basis of the indicated procedures and discussions referred to in
clause (iii) above, nothing has come to their attention which, in their
judgment, would cause them to believe or indicate that (1) the unaudited
financial statements and schedules set forth in the Registration Statement and
Prospectus do not present fairly the financial position and results of the
Company, for the periods indicated, in conformity with the generally accepted
accounting principles applied on a consistent basis with the audited financial
statements, and (2) the dollar amounts, percentages and other financial
information set forth in the Registration Statement and Prospectus under the
captions "Prospectus Summary," "Risk Factors," "Dilution," "Capitalization,"
"Exchange Rates", "Remuneration," "Bridge Financing", "Business", "Principal
Shareholders," and "Certain Relationships and Related Transactions" are not in
agreement with the Company's general ledger, financial records or computations
made by the Company therefrom.
8.10.02. Conformed Copies of Accountant's Letter. The Representative
shall be furnished without charge, in addition to the original signed copies,
such number of signed or photostatic or conformed copies of such letters as the
Representative shall reasonably request.
21
<PAGE>
8.11. Officer's Certificate. The Company shall have furnished to the
Representative its certificate by the Chief Executive Officer and the Chief
Financial Officer, dated as of the Closing Date, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Date, and the Company
has complied in all material respects with all the agreements and has satisfied
all the conditions on its part to be performed or satisfied at or prior to the
Closing Date.
(ii) The Registration Statement has become effective and no
order suspending the effectiveness of the Registration Statement has been issued
and to the best of the knowledge of the respective signers, no proceeding for
that purpose has been initiated or is threatened by the Commission.
(iii) The respective signers have each carefully examined the
Registration Statement and Prospectus and any amendments and supplements
thereto, and to the best of their knowledge the Registration Statement and the
Prospectus and any amendments and supplements thereto contain all statements
required to be stated therein, and all statements contained therein are true and
correct in all material respects, and neither the Registration Statement nor
Prospectus nor any amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances when made, not misleading and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or a supplemented Prospectus which has not been so set forth.
(iv) Except as set forth in the Registration Statement and
Prospectus since the respective dates as of which the periods for which
information is given in the Registration Statement and Prospectus and prior to
the date of such certificate, (A) there has not been any material adverse
change, financial or otherwise, in the affairs or condition of the Company, and
(B) the Company has not incurred any liabilities, direct or contingent, or
entered into any transactions, otherwise than in the ordinary course of
business.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, no dividends or
distribution whatever have been declared and/or paid on or with respect to the
common stock of the Company.
8.12. Secretarys Certificate. The Company shall have furnished to the
Representative a certificate of the Secretary of the Company certifying as to
certain information and other matters as the Representative may reasonably
request.
8.13. Tender of Delivery of Units. All of the Units being offered by
the Company and the Warrants being purchased from the Company by the
Representative shall be tendered for delivery in accordance with the terms and
provisions of this Agreement.
8.14. Blue-Sky Qualification. The Underwritten Securities shall be
qualified in such states as the Underwriters through their Representative may
reasonably request pursuant to Section 5.04, and each such qualification shall
be in effect and not subject to any stop order or other proceeding on the
Closing Date.
22
<PAGE>
8.15. Approval of Representatives Counsel. All opinions, letters,
certificates and evidence mentioned above or elsewhere in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in
form and substance satisfactory to counsel to the Representative, whose approval
shall not be unreasonably withheld. The suggested form of such documents shall
be provided to the counsel for the Representative, at least one business day
before the Closing Date. The Representative's counsel will provide a written
memorandum stating such closing documents which they deem necessary for their
review. Such memorandum shall be delivered at least three business days before
the Closing Date to counsel for the Company.
8.16. Officers' Certificate As a Company Representative. Any
certificate signed by an officer of the Company and delivered to the
Representative or to counsel for the Representative will be deemed a
representation and warranty by the Company to the Representative as to the
statements made therein.
8.17. Acquisition of Tepual S.A. and Profeed, Inc. Simultaneously with
the Closing, the Company shall have acquired good and marketable title to a 99%
equity interest in Tepual, and acquired all of the rights to the InualTM and
TepualTM brands by acquiring all of the issued and outstanding stock of Profeed
free and clear of any adverse claims, liens or encumbrances.
SECTION 9
Termination
9.01. Termination Because of Non-Compliance. This Agreement may be
terminated by the Representative by notice to the Company in the event that
there has been, since the time of execution of this Agreement or since the
respective dates as of which the information is given in the Prospectus, any
material adverse change in the financial condition, or business affairs of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or if the Company shall have failed
or been unable to comply with any of the terms, conditions or provisions of this
Agreement on the part of the Company to be performed, complied with or fulfilled
(including but not limited to those specified in Sections 2, 3, 4, 5, and 8
hereof) within the respective times herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Representative in writing.
9.02. Market Out Termination. This Agreement may be terminated by the
Representative by notice to the Company at any time if payment for and delivery
of the Units is rendered impracticable or inadvisable because (i) trading in
securities generally on the New York Stock Exchange, American Stock Exchange, or
NASDAQ (including NASDAQ SmallCap) shall have been suspended or materially
limited, (ii) a general moratorium on commercial banking activities in New York
or Florida shall have been declared by either federal or state authorities, or
(iii) there has occurred a material adverse change in the financial markets in
the United States or elsewhere including, but not limited to: a war, new
outbreak of hostilities or escalation thereof, or any other national calamity
shall have occurred, or any development involving a crisis or change in
political, financial, or economic conditions, the effect of which on the
financial markets of the United States
23
<PAGE>
or overseas is such as it would be impracticable or inadvisable for the
Representative to proceed or continue with this Agreement or with the public
offering. Notice of such termination may be given to the Company by telegram,
telecopy or telephone and shall subsequently be confirmed by letter.
9.03. Company's Right to Terminate. In the event any action or
proceeding of the type referred to in subparagraph 9.02 above shall be
instituted or threatened against the Underwriters at any time prior to the
effective date hereunder, the Underwriters fail to comply with subparagraphs
10.01 and 10.02, or in the event there shall be filed by or against the Company
in any court pursuant to any federal, state, local or municipal statute, a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of its assets or if it makes an assignment
for the benefit of creditors, the Company shall have the right on three days'
written notice to the Representative to terminate this Agreement without any
liability to the Underwriters of any kind except for the payment of all expenses
as provided herein.
9.04. Effect of Termination Hereunder. Any termination of this
Agreement pursuant to this Section 9 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party thereto; except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Section 5.07 unless terminated under 9.03; and the Company and the
Representative shall be obligated to pay, respectively, all losses, claims,
damages or liabilities, joint or several, under Section 6.01 in the case of the
Company and Section 6.02 in the case of the Representative.
SECTION 10
Underwriter's Representations and Warranties
The Underwriters represent and warrant to and agree with the Company
that:
10.01. Registration as Broker-Dealer and Member of NASD. Each
Underwriter is registered as a broker-dealer with the Securities and Exchange
Commission and is registered as a broker-dealer in all states in which it
conducts business and is a member in good standing of the National Association
of Securities Dealers, Inc.
10.02. No Pending Proceedings. There is not now pending or threatened
against the Underwriters any action or proceeding of which it has been advised,
either in any court of competent jurisdiction, before the Securities and
Exchange Commission or any state securities commission concerning its activities
as a broker or dealer, nor have any of the Underwriters been named as a "cause"
in any such action or proceeding.
SECTION 11
Rights and Obligations
11.01. Consultation With Representative s. See Section 5.25.
Consulting. In reference to the rights and obligations of the Representative
provided in the Consulting Agreement, the Company shall not be required to
consult with the Underwriters concerning any borrowings from banks and
institutional lenders or concerning financing under any equipment leasing or
similar arrangements.
24
<PAGE>
11.02. Exercise of Warrants. Upon the exercise of any Warrants after
the Effective Date, the Company will pay the Representative, as principal and
not in its representative capacity, a fee of four percent (4%) of the difference
between the initial offering price and the aggregate exercise price of the
Warrants if: (i) the market price of the Company's Stock is greater than the
exercise price of the Warrants on the date of exercise; (ii) the exercise of the
Warrants was solicited by a member of the NASD; (iii) the Warrants are not held
in a discretionary account; (iv) the disclosure of compensation arrangements has
been made in documents provided to customers, both as part of the original
offering and at the time of the exercise; (v) the solicitation of the exercise
of the Warrants was not in violation of Regulation M promulgated under the
Exchange Act; and (vi) the solicitation of the exercise of the Warrants is in
compliance with NASD Notice to Members 81-38. The warrant solicitation fee is to
be received only by brokers designated in writing by the Company. The Company
agrees not to solicit the exercise of any Warrants through brokers or dealers
other than through the Representative provided that the Company shall not be
required to pay the Representative any solicitation fee as to any Warrants
solicited solely by the Company without any action on the part of the
Representative and provided the Company is permitted by applicable laws to so
solicit the exercise of the Warrants. The Company will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Representative. The exercise of the Warrants other than through the
Representative will be presumed to be unsolicited unless the customer has
indicated in writing that the transaction was not unsolicited and has designated
the broker/dealer which is to receive compensation for the exercise. The warrant
solicitation fee to be paid upon the exercise of the warrants will not be paid
before (12) twelve months after the effective date of the offering.
SECTION 12
Notice
Except as otherwise expressly provided in this Agreement:
12.01. Notice to the Company. Whenever notice is required by the
provisions of this Underwriting Agreement to be given to the Company, such
notice shall be in writing addressed to the Company as follows:
Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, FL 33431
Telephone: (561) 416-8930
Attention: David Mayer
With a copy to:
Charles B. Pearlman, Esq.
Brian Pearlman, Esq.
Atlas, Pearlman, P.A.
200 East Las Olas Blvd., Suite 1900
Fort Lauderdale, FL 33301
Telephone: (954) 763-1200
Telefax: (954) 766-7800
25
<PAGE>
12.02. Notice to the Underwriters. Whenever notice is required by the
provisions of this Agreement to be given to the Underwriters, such notice shall
be given in writing addressed to the Representative at the address set out at
the beginning of this Agreement, with a copy to:
Institutional Equity Corporation
Capital West Securities, Inc.
c/o Institutional Equity Corporation
5910 North Central Expressway, Suite 1480
Dallas, Texas 75206
Attention: Robert A. Shuey, III
With a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller, LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
Telephone: (214) 939-4906
Telefax: (214) 939-4949
SECTION 13
Miscellaneous
13.01. Benefit. This Agreement is made solely for the benefit of the
Underwriters, the Company, their respective officers and directors and any
controlling person, and their respective successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successor" or the term "successors and assigns" as used in this Agreement
shall not include any purchasers, as such, of any of the Units.
13.02. Survival. The respective indemnities, agreements,
representations, warranties, covenants and other statements of the Company or
its officers as set forth in or made pursuant to this Agreement and the
indemnity agreements of the Company and the Underwriters contained in Section 6
hereof shall survive and remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or the Underwriters or any
such officer or director thereof or any controlling person of the Company or of
the Underwriters, (ii) delivery of or payment for the Stock, (iii) the Closing
Date, and (iv) any successor of the Company and the Underwriters or any
controlling person, officer or director thereof, as the case may be, shall be
entitled to the benefits hereof.
13.03. Governing Law. The validity, interpretation and construction of
this Agreement and of each part hereof will be governed by the laws of the State
of Texas, with venue and jurisdiction lying in the federal or state courts of
Dallas County, Texas.
26
<PAGE>
13.04. Underwriters' Information. The statements with respect to the
public offering of the Stock on the cover page of the Prospectus and under the
caption "Underwriting"' in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2.02
hereof, in Section 6.01 hereof and Section 6.02 hereof.
13.05. Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth our Agreement.
Very truly yours,
BIO-AQUA SYSTEMS, INC.
By:
-------------------
ATTEST:
- ---------------------------
Secretary
WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE LETTER SETS FORTH THE
AGREEMENT BETWEEN THE COMPANY AND US.
INSTITUTIONAL EQUITY CORPORATION
CAPITAL WEST SECURITIES, INC.
AS REPRESENTATIVES
BY: INSTITUTIONAL EQUITY CORPORATION
By:
-----------------------------
27
<PAGE>
ANNEX A
INSTITUTIONAL EQUITY CORPORATION
5910 North Central Expressway, Suite 1480
Dallas, Texas 75206
CONSULTING AGREEMENT
--------------------
February ___, 2000
Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, Florida 33431
Attention: Mr. Max Rutman
Chairman of the Board, President and Chief Executive Officer
Dear Sirs:
This will confirm the arrangements, terms and conditions pursuant to
which Institutional Equity Corporation and Capital West Securities, Inc.
(collectively, the "Consultant") has been retained to serve as consultants and
advisors to Bio-Aqua Systems, Inc., a Florida corporation (the "Company"), for
the term set forth in Section 3 below. The undersigned hereby agrees to the
following terms and conditions:
1. Engagement. The Company hereby retains the Consultant to perform
consulting and advisory services, and the Consultant hereby accepts such
retention and agrees to do and perform consulting and advisory services, upon
the terms and conditions set forth herein.
2. Duties of the Consultant.
(a) Consulting Services. The Consultant will provide such
general financial consulting services and advice pertaining to the Company's
business affairs (as further set forth below), as and when the Company may from
time to time reasonably request upon reasonable notice. Without limiting the
generality of the foregoing, the Consultant will assist the Company in
developing, studying and evaluating financing and capital structure, mergers and
acquisitions activity and corporate financing proposals, prepare reports and
studies thereon when advisable, and assist in negotiations and discussions
pertaining thereto.
(b) Financing. The Consultant will assist and represent the
Company in obtaining both short and long-term financing, when so requested by
the Company in the Company's sole discretion. The Consultant will be entitled to
additional compensation under such terms as may be agreed to by the parties in
connection therewith.
<PAGE>
(c) Wall Street Liaison. The Consultant will, when
appropriate, arrange meetings between representatives of the Company and
individuals and financial institutions in the investment community, such as
security analysts, portfolio managers and market makers.
The services described in this Section 2 shall be rendered by the
Consultant in consultation with the Company at such time and place and in such
manner (whether by conference, telephone, letter or otherwise) as the Consultant
and the Company may reasonably determine.
3. Term. The term of this Agreement shall commence on the date hereof
and continue for a period of two years from the date hereof (the "Term").
4. Compensation. As compensation in full for the Consultant's services
hereunder during the Term, the Company shall pay to the Consultant $60,000 per
annum, in equal monthly installments, commencing on the effective date.
5. Expenses. The Company shall pay and reimburse the Consultant for all
reasonable out-of-pocket expenses incurred by the Consultant and approved in
advance in writing by the Company in the performance of their services under
this Agreement.
6. Relationship. Nothing herein shall constitute Consultant as an
employee or agent of the Company. Except as might hereinafter be expressly
agreed, the Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever. Nothing herein shall preclude the Company from
enjoying the services of any other investment banking firm during the term of
this Agreement or any entity providing similar services as the Consultant.
7. Confidentiality. Except in the course of the performance of its
duties hereunder, and in such case, only upon express written consent of the
Company, the Consultant agrees that they shall not disclose any trade secrets,
know-how, or other proprietary information not in the public domain learned as a
result of this Agreement unless and until such information becomes generally
known or is in the public domain.
8. Finder's or Broker's Fees. The Company acknowledges and agrees that,
with the written agreement and at the request of the Company, the Consultant may
act as a finder or financial consultant in various business transactions in
which the Company or any of its subsidiaries may be involved, such as mergers,
acquisitions, joint ventures or investments and that the Consultant may be
entitled to receive a finder's fee or brokerage commission or other rights,
profits or payments in connection with such transactions provided, however, that
the Company and the Consultant has entered into an agreement prior thereto
regarding the services to be performed by and the fee to be paid to the
Consultant.
9. Permitted Activities. Nothing contained in this Agreement shall
limit or restrict the right of the Consultant or of any officer, director,
shareholder, employee, agent or representative of the Consultant to be a
partner, owner, director, officer, employee, agent or representative of, or
engage in, any other business, whether of a similar nature or not, or limit or
restrict the right of the Consultant to render services of any kind to any other
corporation, firm, individual or other entity.
2
<PAGE>
Nothing contained in this Agreement shall limit or restrict the right of the
Company to retain the services of other investment bankers or financial
consultants.
10. Assignment and Termination. This Agreement shall not be assignable
by any party except to a successor to all or substantially all of the business
of either party without the prior written consent of the other party, which
consent may be arbitrarily withheld by the party whose consent is required.
11. Notices. All notices hereunder shall be in writing and shall be
validly given, made or served if in writing and delivered in person or when
received by facsimile transmission, or five days after being sent first class
certified or registered mail, postage prepaid or one day after being sent by
nationally recognized overnight courier to the party for whom intended at the
addresses as set forth above or at such other address as may be provided.
12. Governing Law; Submission to Jurisdiction. This agreement shall be
interpreted, construed, governed and enforced according to the laws of the State
of Florida without giving effect to the conflicts of law rules thereof. The
Company and the Consultant hereby agree that any action, proceeding or claim
against it arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of Florida or of the United
States of America in Florida, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company and the Consultant hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum and also hereby irrevocably waive any right or claim to trial by jury in
connection with any such action, proceeding or claim.
13. Amendments. No amendment or modification of the terms or conditions
of this Agreement shall be valid unless in writing and signed by the parties
hereto.
14. Indemnification. As a consultant for the Company, the Consultant
must at times rely upon the information supplied to the Consultant by the
Company's officers, directors, agents and employees as to accuracy and
completeness. Therefore, the Company agrees to indemnify, hold harmless and
defend the Consultant, its directors, officers, employees and agents from and
against any and all claims, actions, proceedings, losses, liabilities, costs and
expenses (including without limitation, reasonable attorneys' fees) incurred by
any of them in connection with or as a result of any inaccuracy, incompleteness
or omission of information given to the Consultant in writing by the Company's
officers, directors, agents or employees in connection with the rendering of
services by the Consultant requested by the Company hereunder.
15. Counterparts. This Agreement may be executed in one or more
counterparts which, taken together, shall constitute one and the same
instrument, and this Agreement shall become effective when one or more
counterparts have been signed by each of the parties. It shall not be necessary
in making proof of this Agreement or any counterpart hereof to account for more
than one such counterpart.
3
<PAGE>
Very truly yours,
INSTITUTIONAL EQUITY CORPORATION
By:
-----------------------------------
Name:
---------------------------
Title: ---------------------------
CAPITAL WEST SECURITIES, INC.
By:
-----------------------------------
Name:
---------------------------
Title: ---------------------------
AGREED AND ACCEPTED:
BIO-AQUA SYSTEMS, INC.
By: /s/ Max Rutman
---------------------------
Max Rutman
Chairman of the Board, President and
Chief Executive Officer
4
WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") is made and entered into as of
this ____ day of ___________, 2000, by and between BIO-AQUA SYSTEMS, INC. a
corporation organized and existing under the laws of the State of Florida
("Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, as warrant agent
("Warrant Agent").
WHEREAS, the Company proposes to offer and sell a maximum of 500,000
Units ("Units") containing 1,000,000 shares of common stock ("Class A Common
Stock"), $.0001 par value per share and 1,000,000 redeemable Class A Common
Stock purchase warrants ("Warrants") exercisable for an aggregate of 1,000,000
shares of Class A Common Stock, plus up to an additional 75,000 Units issuable
in connection with the Underwriters' over-allotment, together with all of the
Class A Common Stock and Warrants comprising all such Units and the shares of
Class A Common Stock issuable upon exercise of the warrants, pursuant to a
Registration Statement on Form SB-2 (the "Prospectus"), File Number 333-81829,
filed with the Securities and Exchange Commission; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, registration of transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent
to act as agent for the Company in accordance with the instructions hereinafter
set forth in this Agreement, and the Warrant Agent hereby accepts such
appointment.
2. Form of Warrants. The text and the terms of the Warrants, and the form of
election to purchase shares of Class A Common Stock appearing on the reverse
side thereof shall be substantially as set forth in Exhibit A attached hereto
and made a part hereof. The Warrants shall be executed on behalf of the Company
by the manual or facsimile signature of the president or a vice president of the
Company and by the manual or facsimile signature of the secretary or assistant
secretary of the Company under its corporate seal, affixed or in facsimile.
The Warrants shall be dated by the Warrant Agent as of the initial date
of issuance thereof, and upon transfer or exchange, the Warrant shall be dated
as of such subsequent issuance date.
3. Registration and Countersignature. The Warrant Agent shall maintain books
for the transfer and registration of the Warrants. Upon the initial issuance of
the Warrants, the Warrant Agent shall issue and register the Warrants in the
<PAGE>
names of the respective registered holders, and upon subsequent issuance, such
Warrants shall be registered in the names of the respective succeeding
registered holders. The Warrants shall be countersigned by the Warrant Agent (or
by any successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may be so countersigned, however, by the Warrant Agent (or by its
successor as warrant agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signature appears
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery. Until a Warrant is transferred
on the books of the Warrant Agent, the Company and the Warrant Agent may treat
any registered holder of Warrants as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary.
4. Registration of Transfers and Exchanges. The Warrant Agent shall transfer
any outstanding Warrants on the books to be maintained by the Warrant Agent for
that purpose, upon surrender thereof for transfer, properly endorsed or
accompanied by appropriate instructions for transfer with proper documentary
stamps affixed thereto, if requested. Upon any such transfer, a new Warrant
shall be issued to the transferee, and the surrendered Warrant shall be canceled
by the Warrant Agent. Warrants so canceled shall be delivered by the Warrant
Agent to the Company from time to time. Warrants may be exchanged at the option
of the holder thereof when surrendered at the office of the Warrant Agent, for
another Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of shares of
Class A Common Stock. The Warrant Agent is hereby irrevocably authorized to
countersign and deliver the Warrants in accordance with the provisions of this
Paragraph 4, and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrants duly executed on behalf of the Company
for such purpose.
5. Exercise of Warrants. Subject to the provisions of this Agreement, each
registered holder of Warrants shall have the right, which right may be exercised
as in such Warrants expressed, during the five year period commencing thirty
days from the date of the Company's Prospectus dated _________ ____, 2000
("Prospectus") to purchase from the Company, and the Company shall issue and
sell to such registered holder of Warrants, the number of fully paid and
non-assessable shares of Class A Common Stock specified in such Warrants, upon
surrender to the Company at the office of the Warrant Agent, with the form of
election to purchase on the reverse side thereof duly completed and signed, and
upon payment to the Warrant Agent for the account of the Company of the Exercise
Price, as hereinafter defined, for the number of shares of Class A Common Stock
in respect of which such Warrants are then exercised. Payment of such Exercise
Price may be made in cash or by certified check, bank draft, or postal or
express money order, payable in United States dollars, to the order of the
Company. Subject to the provisions of Paragraph 8 hereof, upon such surrender of
Warrants and payment of the Exercise Price as aforesaid, the Company, acting
through the Warrant Agent, shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the registered holder of
such Warrants and in such name or names as such registered holder may designate,
a certificate or certificates for the full number of shares of Class A Common
Stock so purchased upon the exercise of such Warrants. Such certificates shall
be deemed to have been issued, and any person so designated to be named therein
shall be deemed to have become a holder of record of such Class A Common Stock,
<PAGE>
as of the date of surrender of such Warrants and payment of the Exercise Price,
as aforesaid; provided, however, that if, at the date of surrender of such
Warrants and the payment of such Exercise Price, the transfer books for the
Class A Common Stock purchasable upon the exercise of such Warrants shall be
closed, the certificates for the shares in respect of which such Warrants are
then exercised shall be issuable as of the date on which such books shall next
be opened, and until such date the Company shall be under no duty to deliver any
certificate for such shares; provided further, however, that the transfer books
aforesaid, unless otherwise required by law, shall not be closed at any one time
for a period longer than 20 days. The right of purchase represented by the
Warrants shall be exercisable, at the election of the registered holders
thereof, either as an entirety or, from time to time, for part of the shares
specified therein, and in the event that any Warrant is exercised in respect of
less than all of the shares specified therein at any time prior to the date of
expiration of the Warrants, a new Warrant or Warrants will be issued for the
remaining number of Class A Common Stock specified in the Warrant so
surrendered, and the Warrant Agent is hereby irrevocably authorized to
countersign and to deliver the required new Warrants pursuant to the provisions
of this Paragraph 5 and of Paragraph 3 of this Agreement, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrants duly executed on behalf of the Company for such purposes.
Notwithstanding anything contained herein to the contrary, no Warrant
may be exercised if the issuance of Class A Common Stock in connection therewith
would constitute a violation of the registration provisions of federal or state
securities laws.
The Company will use its best efforts to file and keep effective a
current prospectus which will permit the purchase and sale of the Warrants and
the Class A Common Stock underlying the Warrants. In addition, the Company will
use its best efforts to qualify for sale the Warrants and the Class A Common
Stock underlying the Warrants in those states in which the Warrants and the
Class A Common Stock are to be offered.
Upon thirty (30) days' prior written notice to all holders of the
Warrants, the Company shall have the right to reduce the exercise price and/or
extend the term of the Warrants in compliance with the requirements of Rule
13e-4 to the extent applicable.
The "Exercise Price" of the Warrants shall mean the exercise price
specified in the Warrants until the occurrence of a recapitalization or
reclassification that, pursuant to the provisions hereof, shall require an
increase or decrease in the exercise price of the Warrants, and thereafter shall
mean said price as adjusted from time to time in accordance with the provisions
hereof. No such adjustment shall be made unless such adjustment would change the
then purchase price per share by Ten Cents ($.10) or more; provided, however,
that all adjustments not so made shall be deferred and made when the aggregate
thereof would change the then purchase price per share by Ten Cents ($.10) or
more. No adjustment made pursuant to any provision hereof shall have the effect
of increasing the total consideration payable upon exercise of any of the
Warrants.
<PAGE>
6. Adjustments in Certain Cases. In case the Company shall at any time prior
to the exercise or termination of any of the Warrants effect a recapitalization
or reclassification of such character that its Class A Common Stock shall be
changed into or become exchangeable for a larger or smaller number of shares,
then, upon the effective date thereof, the number of shares of Class A Common
Stock that the holders of the Warrants shall be entitled to purchase upon
exercise thereof shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in such number of shares of Class A
Common Stock by reason of such recapitalization or reclassification on, and the
purchase price per share of such recapitalized or reclassified Class A Common
Stock shall, in the case of an increase in the number of shares, be
proportionately decreased and, in the case of a decrease in the number of
shares, be proportionately increased.
In case the Company shall at any time prior to the exercise or
termination of any of the Warrants distribute to holders of its Class A Common
Stock cash, evidences of indebtedness, or other securities or assets, other than
as dividends or distributions payable out of current or accumulated earnings,
then, in any such case, the holders of the Warrants shall be entitled to
receive, upon exercise thereof, with respect to each share of Class A Common
Stock issuable upon such exercise, the amount of cash or evidences of
indebtedness or other securities or assets that such holder would have been
entitled to receive with respect to the Class A Common Stock as a result of the
happening of such event, had the Warrants been exercised immediately prior to
the record date or other date fixing shareholders to be affected by such event
(without giving effect to any restriction upon such exercise).
In case the Company shall at any time prior to the exercise or
termination of any of the Warrants consolidate or merge with any other
corporation or transfer all or substantially all of its assets to any other
corporation preparatory to a dissolution, then the Company shall, as a condition
precedent to such transaction, cause effective provision to be made so that the
holders of the Warrants, upon the exercise thereof after the effective date of
such transaction, shall be entitled to receive the kind and amount of shares,
evidences of indebtedness, and/or other property receivable on such transaction
by a holder of the number of shares of Class A Common Stock as to which the
Warrants were exercisable immediately prior to such transaction (without giving
effect to any restriction upon such exercise); and, in any such case,
appropriate provision shall be made with respect to the rights and interests of
the holders thereof to the effect that the provisions of the Warrants shall
thereafter be applicable (as nearly as may be practicable) with respect to any
shares, evidences of indebtedness, or other securities or assets thereafter
deliverable upon exercise of the Warrants.
<PAGE>
Whenever the number of shares of Class A Common Stock or other types of
securities or assets purchasable upon exercise of any of the Warrants shall be
adjusted as provided herein, the Company shall forthwith obtain and file with
its corporate records a certificate or letter from a firm of independent public
accountants of recognized standing, which may include the Company's then
independent auditing firm setting forth the computation and the adjusted number
of shares of Class A Common Stock or other securities or assets purchasable
hereunder resulting from such adjustments, and a copy of such certificate or
letter shall be mailed to each of the registered holders of the Warrants. Any
such certificate or letter shall be conclusive evidence as to the correctness of
the adjustment or adjustments referred to therein and shall be available for
inspection by the holders of the Warrants on any day during normal business
hours.
In the event that at any time as a result of an adjustment made
pursuant hereto the holders of the Warrants shall become entitled to purchase
upon exercise thereof shares, evidences of indebtedness, or other securities or
assets (other than Class A Common Stock, then, wherever appropriate, all
references herein to Class A Common Stock shall be deemed to refer to and
include such shares, evidences of indebtedness, or other securities or assets,
and thereafter the number of such shares, evidences of indebtedness, or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions
hereof.
7. Redemption. The Warrants may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant (subject to adjustment as set forth herein)
at any time commencing twelve (12) months from the date of the Prospectus upon
not less than thirty (30) days prior written notice, subject to exercise by the
Warrant holder, if the closing price of the Company's Class A Common Stock, as
reported by the principal exchange on which the Class A Common Stock is traded,
the American Stock Exchange, as the case may be, equals or exceeds $____ per
share for thirty (30) consecutive trading days. However, the Company may not
redeem the Warrants at any time that a current registration statement under the
Securities Act of 1933 covering the shares of Class A Common Stock issuable upon
exercise of the Warrants is not then in effect. On and after the date fixed for
redemption, the Registered Holder shall have no rights with respect to the
Warrants except to receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
8. Payment of Taxes. The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of securities upon the exercise of the
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes that may be payable in respect of any transfer involved in the
issue or delivery of any securities in a name other than that of the registered
holder of Warrants in respect of which such securities are issued and, in such
case, neither the Company nor the Warrant Agent shall be required to issue or
deliver any certificate representing such securities or any Warrant until the
person requesting the same has paid to the Company or the Warrant Agent the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid. 9.ab Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Warrant Agent may
countersign and deliver in exchange and substitution for and upon cancellation
of the mutilated Warrant or in lieu of and substitution for the Warrant lost,
stolen or destroyed, a new Warrant of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Warrant
Agent of such loss, theft or destruction of such Warrants and indemnity, if
requested, also satisfactory to them. Applicants for such substitute Warrants
shall also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.
<PAGE>
10. Reservation of Class A Common Stock. Prior to the issuance of any
Warrants, there shall have been reserved, and the Company shall at all times
keep reserved out of the authorized and unissued Class A Common Stock, a number
of shares of Class A Common Stock sufficient to provide for the exercise of the
rights of purchase represented by the Warrants, and the transfer agent for the
Class A Common Stock and every subsequent transfer for any of the Company's
Class A Common Stock issuable upon the exercise of any of the rights of purchase
aforesaid are hereby irrevocably authorized and directed at all times to reserve
such number of authorized and unissued Class A Common Stock as shall be
requisite for such purpose. The Company agrees that all Class A Common Stock
issued upon exercise of the Warrants shall be, at the time of delivery of the
certificates representing such Class A Common Stock, validly issued and
outstanding, fully paid and non-assessable. The Company will keep a copy of this
Agreement on file with the transfer agent for the Class A Common Stock and with
every subsequent transfer agent for the Company's Class A Common Stock issuable
upon the exercise of the right of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
from such transfer agent stock certificates required to honor outstanding
Warrants that have been exercised. The Company will supply such transfer agent
with duly executed stock certificates for such purpose. All Warrants surrendered
in the exercise of the rights thereby evidenced shall be canceled by the Warrant
Agent and shall thereafter be delivered to the Company, and such canceled
Warrants shall constitute sufficient evidence of the number of shares of Class A
Common Stock that have been issued upon the exercise of such Warrants. All
Warrants surrendered for transfer, exchange or partial exercise shall be
canceled by the Warrant Agent and delivered to the Company. Promptly after the
date of expiration of the Warrants, the Warrant Agent shall certify to the
Company the total aggregate amount of Warrants then outstanding and, thereafter,
no Class A Common Stock shall be subject to reservation in respect of such
Warrants.
11. Disposition of Proceeds on Exercise of Warrants. Upon the exercise of the
Warrants, the Warrant Agent shall promptly deposit the payment into an escrow
account established by mutual agreement of the Company and the Warrant Agent at
a federally insured commercial bank. All funds deposited in the escrow account
will be disbursed on a weekly basis to the Company once they have been
determined by the Warrant Agent to be collected funds. Once the funds are
determined to be collected, the Warrant Agent shall cause the share
certificate(s) representing the exercised Warrants to be issued. 12.ab Merger or
Consolidation or Change of Name of Warrant Agent. Any corporation or company
that may succeed to the business of the Warrant Agent by merger or consolidation
or otherwise to which the Warrant Agent shall be a party, or any corporation or
company or otherwise succeeding to the business of the Warrant Agent shall be
the successor to the Warrant Agent hereunder without the execution or filing of
any paper or any further act on the part of any of the parties hereto; provided,
however, that such corporation would be eligible for appointment as a successor
Warrant Agent under the provision of Paragraph 14 of this Agreement. In case at
the time such successor to the Warrant Agent shall succeed to the agency created
by this Agreement or in case at any time the name of the Warrant Agent shall be
changed, and any of the Warrants shall have been countersigned but not
delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrants so
countersigned; and in case at the time any of the Warrants shall not have been
countersigned, the successor to the Warrant Agent may countersign such Warrants,
either in the name of the predecessor Warrant Agent or in the name of the
successor Warrant Agent; and in all such cases, such Warrants shall have the
full force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned; and if at that time any of the Warrants
shall not have been countersigned, the Warrant Agent may countersign such
Warrants either in its prior name or in its changed name; and in all such cases,
such Warrants shall have the full force provided in the Warrants and this
Agreement.
13. Duties of the Warrant Agent.
(a) The Warrant Agent undertakes the duties and obligations
imposed by this Agreement upon the following terms and conditions, by all of
which the Company shall be bound:
(i) The statements contained herein and in the
Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same, except such as
described by the Warrant Agent or action or actions taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants, except as herein otherwise provided.
(ii) The Warrant Agent shall not be responsible
or any failure of the Company to comply with any of the covenants contained in
this Agreement or in the Warrants to be complied with by the Company.
(iii) The Warrant Agent may execute and exercise any
of the rights or powers hereby vested in it or perform any duty hereunder,
either itself, or by or through its attorneys, agents or employees.
<PAGE>
(iv) The Warrant Agent may consult at any time
with counsel satisfactory to it (who may be counsel for the Company), and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any holder of any Warrant in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or advice of such
counsel, provided the Warrant Agent shall have exercised reasonable care in the
selection and continued employment of such counsel.
(v) The Warrant Agent shall incur no liability
or responsibility to the Company or to any holder of any Warrant for any action
taken in reliance upon any notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument reasonably believed by it to
have been signed, sent or presented by the proper party or parties.
(vi) The Company agrees to pay the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement; to reimburse the Warrant Agent for all expenses,
taxes, governmental charges and other charges of any kind and nature incurred by
the Warrant Agent in the execution of this Agreement; and to indemnify the
Warrant Agent and save it harmless from and against any and all liabilities,
including judgments, costs and reasonable attorneys' fees for anything done or
omitted by the Warrant Agent in the execution of this Agreement, except as a
result of the Warrant Agent's negligence or bad faith.
(vii) The Warrant Agent shall be under no obligation
to institute any action, suit or legal proceeding, or to take any other action
likely to involve expense, unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity. All rights of action under this Agreement or under any of the
Warrants or in the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent, and any recovery of judgment
shall be for the benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
(viii) The Warrant Agent and any shareholder,
director, officer, partner or employee of the Warrant Agent may buy, sell or
deal in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as fully and
freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
(ix) The Warrant Agent shall act hereunder solely as
agent, and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not be liable for anything that it may do or refrain from
doing in connection with this Agreement, except for its own negligence or bad
faith.
<PAGE>
(x) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of the Warrants during normal
business hours at its principal office in Colorado.
14. Change of Warrant Agent. The Warrant Agent may resign and be discharged
from its duties under this Agreement by giving notice in writing to the Company
and by giving notice by mail to holders of the Warrants at their addresses as
such addresses appear on the Warrant register of such resignation, specifying a
date when such resignation shall take effect, which date shall not be less than
30 days after the mailing of said notice. The Warrant Agent may be removed at
the discretion of the Company by like notice to the Warrant Agent from the
Company and by like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal, or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may apply
to any court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. After appointment, any successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed, but the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent any
property at the time held by it hereunder, and execute and deliver any further
assurance, conveyance act or deed necessary for the purpose. Not later than the
effective date of any such appointment, the Company shall give notice thereof to
the predecessor Warrant Agent and each transfer agent for the Class A Common
Stock, and shall forthwith give notice to the holders of the Warrants in the
manner prescribed in this section. Failure to file or mail any notice provided
for in this Section 14, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Warrant Agent or the
appointment of any successor Warrant Agent, as the case may be.
15. Identity of Transfer Agent. Forthwith upon the appointment of any transfer
agent other than the Warrant Agent for the Class A Common Stock of the Company
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
<PAGE>
16. Notices. Any notice pursuant to this Agreement to be given or made by the
Warrant Agent or by the registered holder of any Warrant to the Company shall be
deemed to have been sufficiently given or made if sent by certified mail, return
receipt requested, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
To the Company: Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, FL 33431
To the Warrant Agent: American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Any notice pursuant to this Agreement to be given or made by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be deemed to
have been sufficiently given or made if sent by certified mail, return receipt
requested, postage prepaid, addressed (until another address is filed ln writing
by the Warrant Agent with the Company) to the Warrant Agent as set forth above.
17. Standard of Conduct. Notwithstanding any implication to the contrary
elsewhere herein, whenever the Company or the Warrant Agent are required or
permitted to make any judgment or to take any action, no such judgment or action
shall be made or taken in bad faith or in any arbitrary or capricious fashion.
18. Supplements and Amendments. The Company and the Warrant Agent may, from
time to time, supplement or amend this Agreement without the approval of any of
the holders of the Warrants in order to cure any ambiguity or to correct or
supplement any provision contained herein that may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder that the Company and the Warrant Agent
may deem necessary or desirable, that shall not be inconsistent with the
provisions of the Warrants, and that shall not materially adversely affect the
rights of the holders of the Warrants.
19. Successors. All of the covenants and provisions hereof by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
20. Merger or Consolidation of the Company. The Company will not merge or
consolidate with or into any other corporation, unless the corporation resulting
from such merger or consolidation (if not the Company) shall expressly assume,
by supplemental agreement satisfactory in form to the Warrant Agent and executed
and delivered to the Warrant Agent, the due and punctual performance and
observance of each and every covenant and condition of this Agreement to be
performed and observed by the Company.
21. Florida Contract. This Agreement and each Warrant issued hereunder shall
be deemed to be a contract made under the laws of the State of Florida and for
all purposes shall be construed in accordance with the laws of said state.
22. Benefits of this Agreement. Nothing in this Agreement shall be construed
to give any person or corporation, other than the Company, the Warrant Agent and
the registered holders of the Warrants, any legal or equitable right, remedy or
claim under this Agreement, but this Agreement shall be for the sole and
exclusive benefit of the Company and the Warrant Agent and their respective
successors and of the holders of the Warrant certificates.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
BIO-AQUA SYSTEMS, INC.
By:______________________________
Name: __________________________
Its: _____________________________
ATTEST:
- ------------------------
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By:______________________________
Name: __________________________
Its: _____________________________
ATTEST:
- ------------------------
<PAGE>
[FORM OF FACE OF WARRANT CERTIFICATE]
No.___ ____ Warrants
VOID AFTER ____________, 2005
WARRANT CERTIFICATE FOR PURCHASE
OF CLASS A COMMON STOCK
BIO-AQUA SYSTEMS, INC.
This certifies that FOR VALUE RECEIVED, _____________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Common Stock Redeemable Warrants ("Warrants") specified above. Each Warrant
represented hereby entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Warrant Certificate and the Warrant
Agreement of even date herewith (the "Warrant Agreement"), one fully paid and
nonassessable share of Class A Common Stock, par value $.0001 per share ("Common
Stock"), of BIO-AQUA SYSTEMS, INC., a Florida corporation (the "Company") at any
time commencing _______________, 2000, and expiring on the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse side hereof duly executed,
at the corporate office of American Stock Transfer & Trust Company, as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $____
per share (subject to adjustment) (the "Purchase Price") in the lawful money of
the United States of America in cash or by official bank or certified check made
payable to the Company. No fractional shares of Common Stock will be issued.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement by and among the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (Florida Time) on
_______, 2005, or such earlier date as the Warrants shall be redeemed. If such
date shall in the State of Florida be a holiday or a day on which banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (Florida
time) the next following day which in the State of Florida is not a holiday or a
day on which banks are authorized to be closed.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented hereby unless a registration
statement under the Securities Act of 1933, as amended, with respect to such
securities is effective. The Company has covenanted and agreed that it will file
a registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding. The Warrants represented hereby shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment, with the appropriate transfer fee
per certificate in addition to any tax or other governmental charge imposed in
connection therewith, for registration of transfer of this Warrant Certificate
at such office, a new Warrant Certificate or Warrant Certificates representing
an equal aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, commencing twelve (12) months following the effective date of the
Company's registration statement on Form SB-2 filed with the Securities and
Exchange Commission at a redemption price of $.05 per Warrant, upon thirty (30)
days' prior written notice, if (i) the average closing price of the Common
Stock, as reported on the American Stock Exchange, the principle exchange on
which the Common Stock is traded, the American Stock Exchange, as the case may
be, equals or exceeds $____ per share for any thirty (30) consecutive trading
days ending within thirty (30) days prior to the date of the notice of
redemption. On and after the date fixed for redemption, the Registered Holder
shall have no rights with respect to the Warrants represented hereby except to
receive the $.05 per Warrant upon surrender of this Warrant Certificate. Upon
thirty (30) days' prior written notice to all holders of the Warrants and
subject to the consent of the Company's lead underwriter or representative, the
Company shall have the right to reduce the exercise price and/or extend the term
of the Warrants in compliance with the requirements of Rule 13e-4 to the extent
applicable.
2
<PAGE>
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Florida.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by one of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
BIO-AQUA SYSTEMS, INC.
Dated________________, 2000 By:______________________________
Name:____________________________
Title:___________________________
[corporate seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By:____________________________
Authorized Officer
3
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(Please print or type name and address)
and be delivered to
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Dated: ____________________ X_________________________________
Signature
_________________________________
_________________________________
Address
4
<PAGE>
________________________________
Taxpayer Identification Number
________________________________
Signature Guaranteed
________________________________
THE SIGNATURE TO THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN
UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A
MEMBER OF THE MEDALLION STAMP PROGRAM.
5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _________________hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF TRANSFEREE
_________________________________________
_________________________________________
_________________________________________
_________________________________________
(Please print or type name and address)
___________ of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints ____________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
Dated: ____________________ X_________________________________
Signature
_________________________________
_________________________________
Address
_________________________________________
Taxpayer Identification Number
_________________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE
FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE
MEDALLION STAMP PROGRAM.
6
REPRESENTATIVE'S WARRANT AGREEMENT
This Representative's Warrant Agreement (the "Agreement") is dated as
of February __, 2000 between Bio-Aqua Systems, Inc., a Florida corporation (the
"Company"), Institutional Equity Corporation and Capital West Sercurities, Inc.
( collectively, the "Representative").
WITNESSETH
WHEREAS, the Company proposes to issue to the Representative warrants
(the "Representative's Warrants"), entitling the Representative to purchase an
aggregate of 50,000 units ("Units"), containing 100,000 shares of Class A Common
Stock (the "Class A Stock") and 100,000 warrants, after a lock up period of
twelve months, at a purchase price of $____ per Unit.
WHEREAS, the Representative has agreed pursuant to the Underwriting
Agreement dated February___, 2000 between the Representative and the Company to
act as the Representative in connection with the Company's proposed public
offering (the "Offering") of 500,000 Units (the "Units"), each Unit consisting
of two shares of Class A Stock and two redeemable common stock purchase warrants
("Warrants"), at an initial public offering price of $___ per Unit; and
WHEREAS, the Representative's Warrants issued pursuant to this
Agreement are being issued by the Company to the Representative, or to its
designees who are officers of the Representative or to members of the selling
group participating in the Offering and/or their respective officers or partners
(collectively, the "Designees"), in consideration for, and as part of the
Representative's compensation in connection with acting as the Representative
for the Offering;
NOW, THEREFORE, in consideration of these premises, the payment by the
Representative or its Designees to the Company of One Hundred Twenty Dollars
($120.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. GRANT.
The Representative and/or the Designees are hereby granted the right to
purchase, commencing ________ __, 2001 until 5:00 P.M., Eastern time, on
_________, 2005 (the "Warrant Exercise Term"), up to 50,000 Units, consisting of
100,000 fully-paid and non-assessable shares of Class A Stock and 100,000
warrants at an initial exercise price (subject to adjustment as provided in
Article 6 hereof) of $____ per Unit. The warrants are exercisable at any time
commencing _________, 2001 until 5:00 P.M., Eastern time on ________, 2005. The
Holder (defined hereafter) may purchase, upon exercise of the Representative's
Warrants, either all or part of the Class A Stock or all or part of the
warrants, or all or part of both. The Class A Stock and, except as provided in
Article 13 hereof, the warrants are in all respects identical to the Class A
Stock and Warrants, respectively, being sold to the public pursuant to the terms
and provisions of the Underwriting Agreement.
<PAGE>
2. WARRANT CERTIFICATES.
The warrant certificates delivered, and to be delivered pursuant to
this Agreement shall be for the Representative's Warrants in the form set forth
in Exhibit A attached hereto (the "Representative's Warrant Certificates") and
for the warrants in the form of Exhibit B attached hereto (the "warrant
Certificate"), each with such appropriate insertions, omissions, substitutions
and other variations as required or permitted by this Agreement.
3. EXERCISE OF WARRANTS.
The Representative's Warrants initially are exercisable at a purchase
price of $_____ per Unit, payable in cash or by check to the order of the
Company, or any combination thereof, subject to adjustment as provided in
Article 8 hereof. Upon surrender of the Representative's Warrant Certificate(s)
with an Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Units purchased, at the
Company's principal offices in Florida (currently located at 1900 Glades Road,
Suite 351, Boca Raton, Florida 33431) the registered holder of a
Representative's Warrant Certificate ("Holder(s)") shall be entitled to receive
a certificate or certificates for the Class A Stock so purchased and a
certificate or certificates for the Warrants so purchased. The purchase rights
represented by each Representative's Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of Class A Stock or fractional warrants). In the case of the purchase of
less than all Class A Stock or warrants purchasable under any Representative's
Warrant Certificate, the Company shall cancel said Representative's Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Representative's Warrant Certificate of like tenor for the balance of the Class
A Stock or warrants purchasable thereunder.
4. ISSUANCE OF CERTIFICATES.
Upon the exercise of the Representative's Warrants, the issuance of
certificates for the Class A Stock purchased and certificates for the warrants
purchased, and upon the exercise of the warrants, the issuance of certificates
for the Class A Stock purchased shall be made forthwith (and in any event within
three (3) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
<PAGE>
The Representative's Warrant Certificates and the certificates
representing the Class A Stock and the warrants shall be executed on behalf of
the Company by the manual or facsimile signature of the present or any future
Chairman or Vice Chairman of the Board of Directors or Chief Executive Officer,
President or Vice President of the Company under its corporate seal reproduced
thereon, attested to by the manual or facsimile signature of the present or any
future Secretary or Assistant Secretary of the Company. Representative's Warrant
Certificates and certificates representing the warrants shall be dated the date
of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS AND REDEMPTION.
The Holder of a Representative's Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Representative's Warrants are
being acquired as an investment and not with a view to the distribution thereof,
and that the Representative's Warrants, Class A Stock, warrants and Class A
Stock obtained by exercise of the warrants, may not be sold, transferred,
assigned, pledged or hypothecated or otherwise disposed of, in whole or in part,
for a period of one (1) year from the date hereof, except to the Representative
or to the Designees. The Representative's Warrants may be redeemed at the option
of the Company, at a redemption price of $0.05 per Warrant (subject to
adjustment as set forth herein) at any time commencing twelve (12) months from
the date of the Prospectus upon not less than thirty (30) days prior written
notice, subject to exercise by the Representative, if the closing bid price of
the Company's Class A Stock, as reported by the principal exchange on which the
Common Stock is traded, the NASDAQ SmallCap Market or the National Quotation
Bureau, Incorporated, as the case may be, equals or exceeds $____ per share for
thirty (30) consecutive trading days. However, the Company may not redeem the
Representative's Warrants at any time that a current registration statement
under the Securities Act of 1933 covering the shares of Class A Stock issuable
upon exercise of the Representative's Warrants is not then in effect. On and
after the date fixed for redemption, the Holder shall have no rights with
respect to the Representative's Warrants except to receive the $0.05 per
Representative's Warrant upon surrender of the Representative's Warrant
Certificate.
6. PRICE.
6.1. INITIAL AND ADJUSTED EXERCISE PRICE.
The initial exercise price of each Representative's Warrant
shall be $____ per Unit. The adjusted exercise price per Unit shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price per Unit, in accordance with the provisions of Article 8 hereof.
6.2. EXERCISE PRICE.
The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
<PAGE>
7. REGISTRATION RIGHTS.
7.1. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
All of the Representative's Warrants, the Class A Stock, the
warrants, and the shares underlying the warrants have been registered for
purposes of public distribution under the Securities Act of 1933, as amended
(the "Securities Act").
7.2. REGISTRABLE SECURITIES.
As used herein the term "Registrable Securities" means each of
the Representative's Warrants, the Class A Stock, the warrants, and the Class A
Stock underlying the warrants and any Class A Stock issued upon any stock split
or stock dividend in respect of such Class A Stock; provided, however, that with
respect to any particular Registrable Security, such security shall cease to be
Registrable Securities when, as of the date of determination, (i) it has been
effectively registered under the Act and disposed of pursuant thereto, (ii)
registration under the Act is no longer required for subsequent public
distribution of such security, or (iii) it has ceased to be outstanding. In the
event of any merger, reorganization, consolidation, recapitalization or other
change in corporate structure affecting the Class A Stock, such adjustment shall
be made in the definition of "Registrable Securities" as is appropriate in order
to prevent any dilution or enlargement of the rights granted pursuant to this
Article.
7.3. COVENANTS OF THE COMPANY WITH RESPECT TO
REGISTRATION.
The Company covenants and agrees as follows:
(a) Once effective, the Company will use its best
efforts to maintain the effectiveness of the Registration Statement until the
earlier of (i) the date that all of the Registrable Securities have been sold or
(ii) the date the Holders thereof receive an opinion of counsel to the Company
that all of the Registrable Securities may be freely traded without registration
under the Act, under Rule 144(k) promulgated under the Act or otherwise.
(b) In connection with the registration under Section
7.1 hereof, the Company shall file the Registration Statement as expeditiously
as possible, but in any event no later than furnishing each Holder of
Registrable Securities such number of prospectuses as shall reasonably be
requested.
(c) The Company shall pay all costs, fees and
expenses (other than underwriting fees, discounts and non-accountable expense
allowance applicable to the Registrable Securities) fees and expenses of counsel
retained by the Holders of Registrable Securities in connection with all
Registration Statements filed pursuant to Section 7.1 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses, and blue
sky fees and expenses.
(d) The Company will take all necessary action which
may be required in qualifying or registering the Registrable Securities included
in the Registration Statement, for offering and sale under the securities or
blue sky laws of such states as are reasonably requested by the Holders of such
securities.
<PAGE>
(e) Nothing contained in this Agreement shall be
construed as requiring any Holder to exercise the Representative's Warrants or
the warrants held by such holder prior to the initial filing of any registration
statement or the effectiveness thereof.
(f) If the Company shall fail to comply with the
provisions of this Article, the Company shall, in addition to any other
equitable or other relief available to the Holders of Registrable Securities, be
liable for any or all incidental, special and consequential damages sustained by
the Holders of Registrable Securities, requesting registration of their
Registrable Securities.
(g) The Company shall promptly deliver copies of al
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement to each holder of Registrable Securities
included for such registration in such Registration Statement pursuant to
Section 7.1 hereof requesting such correspondence and memoranda and to the
managing underwriter, if any, of the offering in connection with which such
Holder's Registrable Securities are being registered and shall permit each
holder of Registrable Securities and such underwriter to do such reasonable
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the Registration Statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportUnities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such holder of Registrable Securities or underwriter shall
reasonably request.
7.4 DEMAND REGISTRATION.
Upon the written request of a majority of the holders of
Registrable Securities at any time during the Warrant Exercise Period, the
Company shall promptly file and use its best efforts to cause to become
effective an appropriate registration statement under the Securities Act
covering such number of Registrable Securities as such holders shall request and
to register the sale of such Registrable Securities so that such Registrable
Securities may be sold at such times and in such manner as the holders thereof
shall determine, provided, that holder of Registrable Securities may effect such
demand registration only one time and provided further, that such demand
registration right shall terminate upon the earlier to occur of (a) the
registration for sale to the public of the number of Registrable Securities for
which such holders shall have requested registration or (b) the registration for
sale to the public of such portion of the warrants, or the Class A Stock
underlying such warrants, issued by the Company to the Representative for which
the Representative shall have requested registration. Registrations under this
Section 7.4 shall be on such appropriate registration form of the Securities and
Exchange Commission (i) as shall be selected by holders of a majority of the
Registrable Securities so to be registered and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the method or
methods of disposition desired by such holders. The Company agrees to include in
any such registration statement all information which holders of Registrable
Securities being registered shall reasonably request. If the registration
pursuant to this Section 7.4 involves an underwritten offering, the underwriter
or underwriters shall be selected by the holders of a majority of Registrable
Securities to be included in such registration.
<PAGE>
7.5 PIGGY-BACK REGISTRATION.
(a) If the Company at any time during the
Warrant Exercise Period proposes to register any of its securities under the
Securities Act (other than by a registration on Form S-8, S-4 or any successor
similar forms or any other form not available for registering the Registrable
Securities) for sale to the public, whether or not for sale for its own account,
it will each such time, at least 30 days prior to filing the registration
statement, give written notice to all holders of Registrable Securities (as
defined herein) of its intention to do so. Upon the written request of any such
holder made within 15 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
holder and the intended method of disposition thereof), the Company will use its
best efforts to effect the registration under the Securities Act of all
Registrable Securities, to the extent required to permit the disposition of the
Registrable Securities so to be registered, provided that if, at any time after
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each holder of Registrable Securities
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration but not from its obligation to grant such piggy-back
registration in any subsequent registration by the Company, and (ii) in the case
of a determination to delay registering, shall be permitted to delay registering
any Registrable Securities being registered pursuant to this Section 7.5, for
the same period as the delay in registering such other securities.
(b) If (i) a registration pursuant to this
Section 7.5 involves an underwritten offering of the securities so being
registered, whether or not for sale for the account of the Company, to be
distributed (on a firm commitment basis) by or through one or more underwriters
of recognized standing, whether or not the Registrable Securities so requested
to be registered for sale for the account of holders of Registrable Securities
are also to be included in such underwritten offering, and (ii) the managing
underwriter of such underwritten offering shall inform the Company and the
holders of Registrable Securities requesting such registration by letter of its
belief that the number of securities requested to be included in such
registration exceeds the number which can be sold in (or during the time of)
such offering, then the Company may include in such offering all securities
proposed by the Company to be sold for its own account and may decrease the
number of Registrable Securities and other securities of the Company requested
to be included in such registration by decreasing the number of Registrable
Securities and other securities of the Company requested to be included in such
registration (pro rata on the basis of the number of shares of such securities
held by such person immediately prior to the filing of the registration
statement with respect to such registration) to the extent necessary to reduce
the number of securities to be included in the registration to the level
recommended by the managing underwriter.
(c) Except as otherwise provided in this
Section 7.5, all expenses incurred in connection with each effective
registration pursuant to Section 7.4 or Section 7.5 (excluding in each case
underwriter's discounts and commissions applicable to Registrable Securities),
including, without limitation, in each case, all registration, filing and
National Association of Securities Dealer fees; all fees and expenses of
complying with securities or blue sky laws; all word processing, duplicating and
printing expenses, messenger, delivery and shipping expense; fees and
disbursements of the accountants and counsel for the Company including the
expenses of any special audits or "cold comfort" letters or opinions required by
or incident to such registrations; and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities (but excluding
underwriting discounts and commissions, if any) shall be borne by the Company.
In all cases, each holder of Registrable Securities shall pay the underwriter's
discounts and commissions applicable to the securities sold by such holder.
<PAGE>
7.6 REGISTRATION PROCEDURES.
If and whenever the Company is required to use reasonable
efforts to effect the registration of any Registrable Securities under the
Securities Act as provided in Section 7.4 or 7.5, the Company will, subject to
the limitations provided herein, as expeditiously as possible:
(a) prepare and (as soon thereafter as possible
or in any event no later than 60 days after the end of the period within which
requests for registration may be given to the Company or such longer period as
the Company shall in good faith require to produce the financial statements
required in connection with such registration) file with the Commission the
requisite registration statement to effect such registration and thereafter use
reasonable efforts to cause such registration statement to become effective,
provided that the Company may discontinue any registration of its securities
which are not Registrable Securities at any time prior to the effective date of
the registration statement relating thereto;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement until such time as all of such securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement; provided, however, that the
Company shall not in any event be required to keep the registration statement
effective for a period of more than nine months after such registration
statement becomes effective;
(c) furnish to each seller of Registrable
Securities covered by such registration statement such number of conformed
copies of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under Rule
414 under the Securities Act, and such other documents, as such seller may
reasonable request;
<PAGE>
(d) use its reasonable best efforts to register
or qualify all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdictions as each seller thereof shall reasonably request, to keep such
registration or qualification in effect for so long as such registration
statement remains in effect (provided, however, that the Company shall not in
any event be required to keep such registration or qualification in effect for a
period of more than nine months after such registration or qualification becomes
effective), and take any other action which may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the securities owned by such seller, except that the Company
shall not for any such purpose be required to qualify generally to do business
as a foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subsection (d) be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;
(e) use its reasonable best efforts to cause all
Registrable Securities covered by such registration statement to be registered
with or approved by such other United States Federal or state governmental
agencies or authorities as may be necessary to enable the seller or sellers
thereof to consummate the disposition of such Registrable Securities;
(f) furnish to each seller of Registrable
Securities a copy, or, upon request, a signed counterpart, addressed to the
underwriters, if any, of (i) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), and (ii) a "comfort" letter, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants who have
audited the Company's financial statements included in such registration
statement, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
the accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters as the underwriters, if any, may reasonable request;
(g) notify each seller of Registrable Securities
covered by such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and at the request of any
such seller, prepare and furnish to such seller a reasonable number of copies of
a supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made;
(h) otherwise use reasonable efforts to comply
with all applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months beginning with the first
full calendar month after the effective date of such registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and will furnish to each such seller, upon request of such
seller, at least five days prior to the filing thereof a copy of any amendment
or supplement to such registration statement or prospectus and shall not file
any thereof to which any such seller shall have delivered to the Company an
opinion of counsel that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of the rules
and regulations thereunder;
<PAGE>
(i) provide and cause to be maintained a
transfer agent for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement;
(j) use its reasonable efforts to list all
Registrable Securities covered by such registration statement on any securities
exchange on which any of the Registrable Securities is then listed; and
(k) refrain from making any sale or distribution
of any equity securities of the Company, except pursuant to any employee stock
option plan and any preexisting agreement for the sale of such securities, for
at least ninety (90) days after the closing of the public offering pursuant to
such registration.
It shall be a condition precedent to the obligations of the
Company to take any action with respect to registering a holder's Registrable
Securities pursuant to this Section 7.6 that such seller of Registrable
Securities as to which any registration is being effected furnish the Company in
writing such information regarding such seller, the Registrable Securities and
other securities of the Company held by such seller, and the distribution of
such securities as the Company may from time to time reasonably request in
writing. If a holder refuses to provide the Company with any of such information
on the grounds that it is not necessary to include such information in the
registration statement, the Company may exclude such holder's Registrable
Securities from the registration statement if the Company provides such holder
with an opinion of counsel to the effect that such information must be included
in the registration statement and such holder thereafter continues to withholder
such information. The deletion of such holder's Registrable Securities from a
registration statement shall not affect the registration of the other
Registrable Securities to be included in such registration statement.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 7.6(g), such holder
will forthwith discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 7.6(g) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such holder's possession, of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
7.7 UNDERWRITTEN OFFERINGS.
If the Company at any time proposes to register any of its
securities under the Securities Act as contemplated by Section 7.4 or Section
7.5 and such securities are to be distributed by or through one or more
<PAGE>
underwriters, the Company will, if requested by any holder of Registrable
Securities as provided in Section 7.4 or Section 7.5 and subject to the
provisions of Section 7.5(b), arrange for such underwriters to include all the
Registrable Securities to be offered and sold by such holder owning the
securities to be distributed by such underwriters. In such event, the holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters. Any
such holder shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such holder, such holder's Registrable
Securities or other securities of the Company, such holder's intended method of
distribution and any representations, warranties or agreements required by law.
7.8 PREPARATION; REASONABLE INVESTIGATION.
In connection with the preparation and filing of each
registration statement under the Securities Act pursuant to this Agreement, the
Company will give the holders of Registrable Securities registered under such
registration statement, their underwriters, if any, and one counsel or firm of
counsel and one accountant or firm of accountants representing all the holders
of Registrable Securities to be registered under such registration statement,
the opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, and will give each of them such
access to its books and records and such opportunities to discuss the business
of the Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
7.9 INDEMNIFICATION.
(a) Indemnification by the Company. In the
event any Registrable Securities are included in a registration statement under
this Section 7, to the extent permitted by law, the Company will, and hereby
does, indemnify and hold harmless the seller of any Registrable Securities
covered by such registration statement, its directors and officers, each other
person who participates as an underwriter in the offering or sale of such
securities and each other person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller or any
such director or officer or underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such seller and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damages, liability (or
action or proceeding in respect thereof) or expense arises solely out of or is
based solely upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
<PAGE>
Company by such seller expressly for use in the preparation thereof, and
provided further that the Company shall not be liable to any person who
participates as an underwriter within or sale of Registrable Securities or any
other person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damages, liability (or action or proceeding in respect thereof) or expense
arises out of such person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended, to the person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Securities to such person if such statement or omission was corrected in such
final prospectus. Securities to such person if such statement or omission was
corrected in such final prospectus. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such seller
or any such director, officer, underwriter or controlling person and shall
survive the transfer of such securities by such seller.
(b) Indemnification by the Sellers. The Company
may require, as a condition to including any Registrable Securities in any
registration statement filed pursuant to Section 7.6, that the Company shall
have received an undertaking satisfactory to it from the prospective seller of
such securities, to indemnify and hold harmless (in the same manner and to the
same extent as set forth in subdivision (a) of this Section 7.9) each
underwriter, each director of the Company, each officer of the Company and each
other person, if any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in strict conformity
with written information furnished to the Company by such seller expressly for
use in the preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement; provided that
such prospective seller shall not be liable to any person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such person's failure to send or give a copy of the final prospectus, as
the same may be then supplemented or amended, to the person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person if such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect, regardless of any
investigation made by or on behalf of any underwriter, the Company or any such
director, officer or controlling person and shall survive the transfer of such
securities by such seller. In no event shall the liability of any selling holder
of Registrable Securities under this Section 7.9(b) be greater in amount than
the dollar amount of the proceeds received by such holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) Notices of Claims, etc. Promptly after
receipt by an indemnified party of notice of the commencement of any action or
proceeding involving a claim referred to in the preceding subdivisions of this
Section 7.9, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
<PAGE>
commencement of such action, provided that the failure of any indemnified party
is actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties shall exist in respect of such claim, the indemnifying
parties shall be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
(d) Other Indemnification. Indemnification
similar to that specified in the preceding subdivisions of this Section 7.9
(with appropriate modifications) shall be given by the Company and each seller
of Registrable Securities with respect to any required registration or other
qualification of securities under any Federal or state law or regulation of any
governmental authority other than the Securities Act.
(e) Indemnification Payments. The
indemnification required by this Section 7.9 shall be made by periodic payments
of the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
(f) Contribution. If the indemnification
provided for in this Section 7.9 from the indemnifying party is unavailable to
an indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such loss, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties in connection
with the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including any
untrue statement of material fact or things, whether any action in question,
including any untrue statement of material fact or omission or alleged omission
to state a material fact, has been made by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 7.9(c), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
<PAGE>
The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 7.9(f) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 7.9(f), no underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and no
selling holder shall be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of such
selling holder were offered to the public exceeds the amount of any damages
which such selling holder has otherwise been required by pay by reason of such
untrue statement or omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this
Section 7.9, the indemnifying parties shall indemnify each indemnified party to
the full extent provided in Section 7.9(a) through Section 7.9(e) without regard
to the relative fault of said indemnifying party or indemnified party or any
other equitable consideration provided for in this Section 7.9(f).
7.10 REPORTING REQUIREMENTS UNDER SECURITIES EXCHANGE ACT
OF 1934.
When it is first legally required to do so, the Company shall
register its Class A Stock under Section 12 of the Exchange Act (as hereinafter
defined) and shall keep effective such registration and shall timely file such
information, documents and reports as the Commission may require or prescribe
under Section 13 of the Exchange Act. From and after the effective date of the
first registration statement filed by the Company under the Securities Act, the
Company shall (whether or not it shall then be required to do so) timely file
such information, documents and reports which a corporation, partnership or
other entity subject to Section 13 or 15(d) (whichever is applicable) of the
Exchange Act is required to file.
Immediately upon becoming subject to the reporting
requirements of either Section 13 or 15(d) of the Exchange Act, the Company
shall forthwith upon request furnish any holder of Registrable Securities (i) a
written statement by the Company that it has complied with such reporting
requirements, (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the commission as such holder may reasonably request in availing itself of an
exemption from the sale of Registrable Securities without registration under the
Securities Act. The Company acknowledges and agrees that the purposes of the
requirements contained in this Section 7.10 are (i) to enable any such holder to
comply with the current public information requirement contained in Paragraph
(c) of Rule 144 under the Securities Act should such holder ever wish to dispose
of any of the securities of the Company acquired by it without registration
under the Securities Act in reliance upon Rule 144 (or any other similar
exemptive provision) and (ii) to qualify the Company for the use of registration
statements on Form S-3. In addition, the Company shall take such other measures
and file such other information, documents and reports, as shall hereafter be
required by the Commission as a condition to the availability of Rule 144 under
the Securities Act (or any similar exemptive provision hereafter in effect) and
the use of Form S-3. The Company also covenants to use its best efforts, to the
extent that it is reasonably within its power to do so, to qualify for the use
of Form S-3.
<PAGE>
7.11 SHAREHOLDER INFORMATION.
The Company may require each holder of Registrable Securities
as to which any registration is to be effected pursuant to this Section 7 to
furnish the Company such information in writing with respect to such holder and
the distribution of such Registrable Securities as the Company may from time to
time reasonably request in writing and as shall be required by law or by the
Commission in connection therewith.
7.12 FORMS.
All references in this Agreement to particular forms of
registration statements are intended to include, and shall be deemed to include,
references to all successor forms which are intended to replace, or to apply to
similar transactions as, the forms herein referenced.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SECURITIES.
The following adjustments apply to the Exercise Price of the
Representative's Warrants with respect to the Units. In the event the Exercise
Price per Unit so purchasable is adjusted, then the Exercise Price of the
Representative's Warrants relating to the Units purchasable thereunder shall be
adjusted in the same proportion.
8.1. DISTRIBUTION OF SECURITIES.
In case the Company shall at any time after the date hereof
pay a dividend in shares of common stock or make any issuance or distribution in
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock (other than securities to employees of the Company
pursuant to an employee stock purchase or option plan that has been approved by
the Company's stockholders in which non-executive employees are eligible to
participate), then upon such dividend or distribution, the holder of
Representative's Warrants shall receive the amount of such dividend in shares of
common stock or the amount of such other distribution in shares of common stock
which would have otherwise been payable to such holder if it had been the holder
of record of common stock issuable upon exercise of its Representative's Warrant
on the record date for the determination of those entitled to such stock
dividend or distribution.
8.2. SUBDIVISION AND COMBINATION.
In case the Company shall at any time subdivide or combine the
outstanding shares of common stock, the Exercise Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination.
8.3. ADJUSTMENT IN NUMBER OF SECURITIES.
Upon each adjustment of the Exercise Price pursuant to the
provisions of this Article, the number of Units issuable upon the exercise of
each Representative's Warrant shall be adjusted to the nearest full number by
<PAGE>
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number Units issuable upon exercise of the
Representative's Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price. Notwithstanding the
foregoing, in the case of adjustments to the exercise price of the
Representative's Warrants with respect to the warrants and/or the number of
warrants purchasable upon exercise of the Representative's Warrants, if an event
occurs that results in an adjustment of the number and/or price of the shares of
common stock issuable upon exercise of the Warrants pursuant to the Warrant
Agreement by and among the Company and the Representative, resulting in
automatic adjustment in the number and/or price of the Class A Stock underlying
the warrants issuable upon exercise of the Representative's Warrants pursuant to
Section 8.5 hereof, then the adjustment provided for in this Section shall not,
in such instance, result in any further adjustment in the aggregate number of
shares of Class A Stock ultimately issuable upon exercise of the
Representative's Warrants.
8.4. RECLASSIFICATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification or change of the outstanding
shares of common stock (other than a change in par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in the case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger in which
the Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of common stock, except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holders shall
thereafter have the right to purchase the kind and number of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owners of
both the Class A Stock and the underlying warrant Class A Stock immediately
prior to any such events.
8.5. ADJUSTMENT OF UNDERLYING WARRANTS' EXERCISE PRICE AND
SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS.
With respect to any of the warrants, whether or not the
warrants have been exercised and whether or not the warrants are issued and
outstanding, the exercise price for, and the number of shares of Class A Stock
issuable upon exercise of the warrants shall automatically be proportionately
adjusted in accordance with the Warrant Agreement, upon the occurrence of any of
the events described therein. Thereafter, until the next such adjustment or
until otherwise adjusted in accordance with this Section 8.5, the warrants shall
be exercisable at such adjusted exercise price and for such adjusted number of
shares of Class A Stock.
8.6. DISTRIBUTION OF ASSETS.
In the event that the Company shall at any time prior to the
exercise of all Representative's Warrants or warrants make any distribution of
its assets to Holders of its common stock as a liquidating or a partial
liquidating dividend, then the Holder of Representative's Warrants and warrants
who exercises its Representative's Warrants or warrants after the record date
<PAGE>
for the determination of those Holders of common stock entitled to such
distribution of assets as a liquidating or partial liquidating dividend shall be
entitled to receive for the Representative's Warrant Price or warrant price per
Representative's Warrant or Warrant, in addition to each share of common stock,
the amount of such distribution (or, at the option of the Company, a sum equal
to the value of any such assets at the time of such distribution as determined
by the Board of Directors of the Company in good faith) which would have been
payable to such holder had he been the Holder of record of the common stock
receivable upon exercise of his Representative's Warrant or warrant on the
record date for the determination of those entitled to such distribution. At the
time of any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this Subsection
8.6.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
Each Representative's Warrant Certificate or warrant certificate is
exchangeable, without expense, upon the surrender thereof by the registered
Holder at the principal executive office of the Company, for a new
Representative's Warrant certificate or warrant certificate of like tenor and
date representing, in the aggregate, the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Representative's Warrant
certificate or warrant certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to it, and reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Representative's Warrant certificate, or warrant
certificate, if mutilated, the Company will make and deliver a new
Representative's Warrant certificate or warrant certificate of like tenor, in
lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Class A Stock or fractions of warrants upon the exercise of the
Representative's Warrants, nor shall it be required to issue scrip or pay cash
in lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Class A Stock and warrants.
11. RESERVATION AND LISTING OF SECURITIES.
The Company shall, at all times, reserve and keep available out of its
authorized Class A Stock of common stock, solely for the purpose of issuance
upon the exercise of the Representative's Warrants and the warrants, such number
of shares of Class A Stock as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Representative's
Warrants and payment of the Exercise Price therefor, all Class A Stock issuable
upon such exercise shall be duly and validly issued, fully paid, non-assessable
and not subject to the preemptive rights of any shareholder. The Company further
covenants and agrees that upon exercise of the warrants and payment of the
respective warrant exercise price therefor, all Class A Stock for warrants
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder. As
long as the Representative's Warrants shall be outstanding, the Company shall
use its best efforts to cause all Class A Stock issuable upon the exercise of
the Representative's Warrants and the warrants and all warrants to be listed on
or quoted by NASDAQ or listed on such national securities exchange, in the event
the common stock is listed on a national securities exchange.
<PAGE>
12. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Agreement shall be construed as conferring
upon the Holder or Holders the right to vote or to consent or to receive notice
as a shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Representative's Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the Holders of its
Class A Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the Holders of its Class A
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) reclassification or change of the outstanding Class A
Stock (other than a change in par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding Class
A Stock, except a change as a result of a subdivision or combination of such
shares or a change in par value, as aforesaid), or a sale or conveyance to
another corporation of the property of the Company as an entirety is proposed;
or
(e) the Company or an affiliate of the Company shall propose
to issue any rights to subscribe for Class A Stock or any other securities of
the Company or of such affiliate to all the shareholders of the Company; then,
in any one or more of said events, the Company shall give written notice to the
Holder or Holders of such event at least fifteen (15) days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
<PAGE>
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. WARRANTS.
As set forth in Section 8.3 of this Agreement, the exercise price of
the warrants and the number of shares of Class A Stock issuable upon the
exercise of the warrants are subject to adjustment, whether or not the
Representative's Warrants have been exercised and the warrants have been issued,
in the manner and upon the occurrence of the events set forth in the Warrant
Agreement, which is hereby incorporated herein by reference and made a part
hereof as if set forth in its entirety herein. Subject to the provisions of this
Agreement and upon issuance of the warrants, each registered Holder of such
warrants shall have the right to purchase from the Company (and the Company
shall issue to such registered Holders) up to the number of fully paid and
non-assessable shares of Class A Stock underlying the warrants, free and clear
of all preemptive rights of shareholders, provided that such registered Holder
complies, in connection with the exercise of such Holder's warrants, with the
terms governing exercise of the Warrants set forth in the Warrant Agreement, and
pays the applicable exercise price, determined in accordance with the terms of
the Warrant Agreement. Upon exercise of the warrants, the Company shall
forthwith issue to the registered Holder of any such warrants, in such Holder's
name or in such name as may be directed by such Holder, certificates for the
number Class A Stock so purchased. The warrants shall be transferable in the
manner provided in the Warrant Agreement, and upon any such transfer, a new
warrant shall be issued promptly to the transferee. The Company covenants to,
and agrees with, each Holder that without the prior written consent of all the
Holders, the Warrant Agreement will not be modified, amended, canceled, altered
or superseded, and that the Company will send to each Holder, irrespective of
whether or not the warrants have been exercised, any and all notices required by
the Warrant Agreement to be sent to Holders of the Warrants.
14. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Representative's Warrants
or warrants, to the address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may designate by
notice to the Holders.
15. SUPPLEMENTS AND AMENDMENTS.
The Company and the Representative may from time to time supplement or
amend this Agreement without the approval of any Holders of the Representative's
Warrants or warrants in order to cure any ambiguity, to correct or supplement
any provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem not to
adversely affect the interests of the Holders of Representative's Warrant
certificates or warrant certificates.
<PAGE>
16. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.
17. TERMINATION.
This Agreement shall terminate at the close of business on _________,
2005. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when all Representative's Warrants and warrants have been exercised
and all Warrant Securities have been resold to the public; provided, however,
that the provisions of Section 7.3 (a), (c), (d), (e) and (h) shall survive any
termination pursuant to this Section until the close of business on __________,
2006.
18. GOVERNING LAW.
This Agreement and each Representative's Warrant certificate and
warrant certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Florida and for all purposes shall be construed in
accordance with the laws of said State.
19. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representative and any other
registered Holder or Holders of the Representative's Warrant certificates or
warrant certificates any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of the
Company and the Representative and any other Holder or Holders of the
Representative's Warrant Certificates or warrant certificates.
20. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
BIO-AQUA SYSTEMS, INC.
By:
Name:
Title:
INSTITUTIONAL EQUITY CORPORATION
By:
Name:
Title:
CAPITAL WEST SECURITIES, INC
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
<PAGE>
EXHIBIT A
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE REPRESENTATIVE'S WARRANT
AGREEMENT REFERRED TO HEREIN.
EXERCISABLE AT ANY TIME COMMENCING _________, 2001
UNTIL 5:00 P.M., EASTERN TIME, _______, 2005
_______ Representative's Warrants
REPRESENTATIVE'S WARRANT CERTIFICATE
This Representative's Warrant Certificate certifies that
___________________________ or registered assigns, is the registered Holder of
__________ Representative's Warrants to purchase, at any time commencing
________, 20001 until 5:00 P.M. Eastern time on _______, 2005 (the "Expiration
Date"), up to 50,000 Units, consisting of 100,000 fully-paid and non-assessable
shares of the Class A Common Stock, par value $.0001 per share (the "Class A
Stock") of Bio-Aqua Systems, Inc., a Florida corporation (the "Company"), and
100,000 redeemable common stock purchase warrants, at an initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $____ per
Unit, at an office or agency of the Company, but subject to the conditions set
forth herein and in the Representative's Warrant Agreement dated as of _______,
2000 between the Company and Institutional Equity Corporation. Payment of the
Exercise Price may be made in cash, or by certified or official bank check in
New York Clearing House funds payable to the order of the Company, or any
combination thereof.
No Representative's Warrant may be exercised after 5:00 P.M., Eastern
time, on the Expiration Date, at which time all Representative's Warrants
evidenced hereby, unless exercised prior thereto, shall thereafter be void.
The Representative's Warrants evidenced by this Representative's
Warrant Certificate are part of a duly authorized issue of Representative's
Warrants issued pursuant to the Representative's Warrant Agreement, which
Representative's Warrant Agreement is hereby incorporated by reference in and
made a part of this instrument and is hereby referred to in a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and the Holders (the words "Holder(s)" meaning the registered
Holders or registered Holder) of the Representative's Warrants.
<PAGE>
The Representative's Warrant Agreement provides that upon the
occurrence of certain events, the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the Holder,
issue a new Representative's Warrant Certificate evidencing the adjustment in
the Exercise Price and the number and/or type of securities issuable upon the
exercise of the Representative's Warrants; provided, however, that the failure
of the Company to issue such new Representative's Warrant Certificate shall not
in any way change, alter, or otherwise impair, the rights of the Holder as set
forth in the Representative's Warrant Agreement.
This Representative's Warrant Certificate may be divided or combined
with other Representative's Warrant Certificates of other denominations upon
surrender hereof at an office or agency maintained by the Company for such
purpose, together with a written notice specifying the names and denominations
(in whole Representative's Warrants) in which new Representative's Warrant
Certificates are to be issued, signed by the Holder thereof or his duly
authorized attorney, together with the funds to pay any transfer, documentary,
stamp or other taxes or government charges payable in connection with such
transfer and any other amounts required pursuant to this Representative's
Warrant Certificate. Upon such surrender and payment, a new Representative's
Warrant Certificate or Certificates representing a like aggregate number of
Representative's Warrants shall be issued and delivered in accordance with such
notice.
Upon the exercise of less than all of the Representative's Warrants
evidenced by this Certificate, the Company shall forthwith issue to the Holder
hereof a new Representative's Warrant Certificate representing such number of
unexercised Representative's Warrants.
The Company may deem and treat the registered Holder(s) hereof as the
absolute owner(s) of this Representative's Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the Holder(s) hereof,
and for all other purposes, and the Company shall not be affected by any notice
to the contrary.
All terms used in this Representative's Warrant Certificate which are
defined in the Representative's Warrant Agreement shall have the meanings
assigned to them in the Representative's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Representative's
Warrant Certificate to be duly executed under its corporate seal.
Dated: ___________, 2000
BIO-AQUA SYSTEMS, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT B
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE AT ANY TIME COMMENCING _________, 2000
UNTIL 5:00 P.M., EASTERN TIME, _______, 2005
No. W-_____ _________ Warrants
WARRANT CERTIFICATE
This warrant Certificate certifies that ______________________ , or
registered assigns, is the registered Holder of _________________________
(_______) warrants to purchase, at any time until 5:00 P.M. Eastern time on
_______, 2005 ("Expiration Date"), an aggregate of up to 100,000 shares of Class
A Common Stock, par value $.0001 per share (the "Class A Stock"), of Bio-Aqua
Systems, Inc., a Florida corporation (the "Company"), at an initial exercise
price, subject to adjustment in certain events (the "Exercise Price"), of
$______ per Share, upon surrender of this warrant Certificate and payment of the
Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement dated
as of _______, 2000 between the Company and Institutional Equity Corporation
(the "Representative's Warrant Agreement"). Payment of the Exercise Price may be
made in cash, or by certified or official bank check in New York Clearing House
funds payable to the order of the Company, or any combination thereof.
The warrants issuable upon exercise of the Representative's Warrants
will be exercisable at any time from _______, 2001 (or such earlier date on
which the Representative consents to the exercise of the Public Warrants (as
defined in the Representative's Warrant Agreement which is hereinafter defined)
until 5:00 P.M. Eastern time _______, 2005 each warrant entitling the Holder
thereof to purchase one fully-paid and non-assessable share of Class A Stock of
the Company, at an initial exercise price, subject to adjustment in certain
events, of $_____ per share. The warrants are issuable pursuant to the terms and
provisions of a certain agreement dated as of _________, 2000 by and among the
Company and Institutional Equity Corporation (the "Representative's Warrant
Agreement"). The Representative's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to
(except as otherwise provided in the Warrant Agreement) for a description of the
rights, limitations of rights, manner of exercise, anti-dilution provisions and
other provisions with respect to the warrants.
No warrant may be exercised after 5:00 P.M., Eastern time, on the
Expiration Date, at which time all warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
<PAGE>
The warrants evidenced by this warrant Certificate are part of a duly
authorized issue of warrants issued pursuant to the Representative's Warrant
Agreement, which Representative's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to in a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the Holders (the words "Holders" or
"Holder" meaning the registered Holders or registered Holder) of the warrants.
The Representative's Warrant Agreement provides that, upon the
occurrence of certain events, the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the Holder,
issue a new warrant Certificate evidencing the adjustment in the Exercise Price
and the number and/or type of securities issuable upon the exercise of the
warrants; provided, however, that the failure of the Company to issue such new
warrant Certificates shall not in any way change, alter, or otherwise impair the
rights of the Holder as set forth in the Representative's Warrant Agreement.
This warrant Certificate may be divided or combined with other warrant
Certificates of other denominations upon surrender hereof at an office or agency
maintained by the Corporation for such purpose, together with a written notice
specifying the names and denominations (in whole warrants) in which new warrant
Certificates are to be issued, signed by the Holder thereof or his duly
authorized attorney, together with the funds to pay any transfer, documentary,
stamp or other taxes or government charges payable in connection with such
transfer and any other amounts required pursuant to this warrant Certificate.
Upon such surrender and payment, a new warrant Certificate or certificates
representing a like aggregate number of warrants shall be issued and delivered
in accordance with such notice.
Upon the exercise of less than all of the warrants evidenced by this
Certificate, the Company shall forthwith issue to the Holder hereof a new
warrant Certificate representing such number of unexercised warrants.
The Company may deem and treat the registered Holder(s) hereof as the
absolute owner(s) of this warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the Holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this warrant Certificate which are defined in the
Representative's Warrant Agreement shall have the meanings assigned to them in
the Representative's Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this warrant Certificate to
be duly executed under its corporate seal.
Dated: _____________, 2000
BIO-AQUA SYSTEMS, INC.
By:
Name:
Title:
ATLAS PEARLMAN P.A.
350 East Las Olas Boulevard, Suite 1700
Fort Lauderdale, Florida 33301
February 18, 2000
Bio-Aqua Systems, Inc.
1900 Glades Road, Suite 351
Boca Raton, Florida 33434
Re: Registration Statement on Form SB-2; Bio-Aqua Systems, Inc.
(the "Company"), Registration No. 333-81829
Gentlemen:
This opinion is submitted pursuant to the applicable rules of the
Securities and Exchange Commission with respect to the registration by the
Company of 500,000 Units, each Unit ("Unit") consisting of two shares of Class A
Common Stock, par value $.0001 ("Class A Common Stock") and two Redeemable
Common Stock Purchase Warrants ("Warrants") exercisable for an aggregate of
1,000,000 shares of Class A Common Stock, plus up to an additional 75,000 Units
issuable in connection with the Underwriters' over-allotment option and 50,000
Units issuable upon exercise of the Representative's Warrants, together with all
of the Class A Common Stock and Warrants comprising all such Units and the
shares of Class A Common Stock issuable upon exercise of the Warrants .
In connection therewith, we have examined and relied upon original,
certified, conformed, photostat or other copies of (i) the Articles of
Incorporation and Bylaws of the Company; (ii) resolutions of the Board of
Directors of the Company authorizing the offering and the issuance of the Common
Stock, the Warrants, and the shares of Common Stock underlying the Warrants, and
related matters; (iii) the Registration Statement and the exhibits thereto; and
(iv) such other matters of law as we have deemed necessary for the expression of
the opinion herein contained. In all such examinations, we have assumed the
genuineness of all signatures on original documents, and the conformity to
originals or certified documents of all copies submitted to us as conformed,
photostat or other copies. In passing upon certain corporate records and
documents of the Company, we have necessarily assumed the correctness and
completeness of the statements made or included therein by the Company, and we
express no opinion thereon. As to the various questions of fact material to this
opinion, we have relied, to the extent we deemed reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments
<PAGE>
Bio-Aqua Systems, Inc.
February 18, 2000
Page 2
furnished to us by the Company, without independently checking or verifying the
accuracy of such documents, records and instruments.
Based upon the foregoing, we are of the opinion that the Units, Class A
Common Stock, the Warrants, and the shares of Class A Common Stock underlying
the Warrants have been duly and validly authorized and when issued and paid for
in accordance with their terms will be fully paid and non-assessable. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to use our name under the caption "Legal Matters" in the
prospectus comprising part of the Registration Statement. Affiliates of Atlas
Pearlman, P.A. own 1,176 shares of Class A Common Stock. In giving such consent,
we do not thereby admit that we are included in with the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations promulgated thereunder.
Sincerely,
/s/ ATLAS PEARLMAN P.A.
-------------------------------
ATLAS PEARLMAN P.A.
