U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 1-15046
BIO-AQUA SYSTEMS, INC.
----------------------
(Name of Small Business Issuer in its Charter)
Florida 65-026233
-------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 East Las Olas Blvd., Suite 1700, Fort Lauderdale, Florida 33301
-------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(954)766-7879
(Issuer's Telephone Number)
Securities registered under Section
12(b) of the Act:
Class A Common Stock, $.0001 par value and Class A Common Stock Warrants
------------------------------------------------------------------------
(Title of Class)
Securities registered under Section 12(g) of the
Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $5,598,354
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $3,159,992.25 as of June 20, 2000.
<PAGE>
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: June 20, 2000; 936,294 Shares of
Class A Common Stock and 1,700,000 Shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
- None -
Transitional Small Business Disclosure Format (Check One)
Yes No X
-------- -------
This special financial report is filed under Rule 15d-2 of the Securities
Exchange Act of 1934. The report contains only financial statements for year
ended December 31, 1999.
6071-0100 284476.1
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
BIO-AQUA SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bio-Aqua Systems, Inc.
Fort Lauderdale, Florida
We have audited the accompanying combined balance sheets of Bio-Aqua Systems,
Inc. (the "Company") as of December 31, 1999 and 1998, and the related combined
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1999 and 1998. 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, 1999 and 1998, 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
May 12, 2000
F-2
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Balance Sheets
December 31, 1999 and 1998
A S S E T S
<TABLE>
<CAPTION>
1999 1998
Current Assets:
------------------------------------------
<S> <C> <C>
Cash $ 102,621 $ 136,489
Accounts receivable (Note 2) 2,239,870 2,981,674
Other receivables 242,937 69,082
Inventory 594,283 761,869
Income taxes receivable (Note 3) 120,122 52,231
Offering costs 303,496 -
Other current assets (Note 4) 405,947 183,325
---------------- ----------------
Total Current Assets 4,009,276 4,184,670
---------------- ----------------
Property and Equipment, net (Note 5) 752,854 984,676
---------------- ----------------
Other assets (Note 6) 1,564,179 524,645
---------------- ----------------
$ 6,326,309 $ 5,693,991
================ ================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Balance Sheets (Continued)
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
Current Liabilities:
------------------------------------------------
<S> <C> <C>
Accounts payable $ 952,962 $ 990,749
Obligations with banks (Note 7):
Lines-of-credit 2,194,123 1,525,968
Current portion 80,743 158,603
Notes payable (Note 8) 644,415 124,775
Bridge loan payable (Note 11) 150,000 -
Accrued expenses and other current liabilities (Note 9) 211,137 399,638
Due to stockholder 1,300,000 -
---------------- ---------------
Total Current Liabilities 5,533,380 3,199,733
---------------- ----------------
Long-Term Liabilities:
Obligations with banks, excluding current
portion (Note 7) 378,161 478,813
---------------- ----------------
Stockholders' Equity:
Class A common stock, $.0001 par value; 20,000,000 shares authorized, 86,294
shares issued and outstanding
at December 31, 1999 (none in 1998) 9 -
Class B common stock, $.0001 par value; 2,000,000
shares authorized; 1,700,000 shares issued and
outstanding 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
Retained earnings 377,752 1,662,100
Accumulated other comprehensive income (492,607) (58,156)
---------------- ----------------
Total Stockholders' Equity 414,768 2,015,445
---------------- ----------------
$ 6,326,309 $ 5,693,991
================ ================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Statements of Income
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
------------------------ ------------------------
1999 1998
<S> <C> <C>
Revenues $ 5,598,354 $ 6,873,512
Cost of Operations 3,807,789 4,853,553
---------------- ----------------
Gross Profit 1,790,565 2,019,959
General and Administrative Expenses 1,572,512 1,555,661
---------------- ----------------
Income from Operations 218,053 464,298
---------------- ----------------
Other Income (Expenses):
Other, net 237,815 24,060
Interest expense (440,216) (280,266)
Loss on investment in related parties - (23,082)
Gain on sale of property and equipment - 54,963
---------------- ----------------
(202,401) (224,325)
---------------- ----------------
Net Income $ 15,652 $ 239,973
================ ================
Earnings Per Common Share - Basic $ 0.01 $ 0.14
================ ================
Weighted Average Common
Shares Outstanding 1,763,088 1,700,000
================ ================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B Additional Accumulated Other Total
----------------- ----------------- --------------------- ---------------- ---------------------
Common Common Paid-in Retained Comprehensive Stockholders'
Stock------------ --------------------- --------------------- ------- ---------------------
Stock Capital Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C>
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 - - - 15,652 - 15,652
Distribution to stockholder - - - (1,300,000) - (1,300,000)
Translation adjustment - - - - (434,451) (434,451)
--------- ---------- -------------- ------------- ------------- --------------
Balance at December 31, 1999 $ 9 $ 170 $ 529,444 $ 377,752 $ (492,607) $ 414,768
======== ========== ============== ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Statements of Cash Flows
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 15,652 $ 239,973
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 259,602 227,732
Loss on investment in related party - 23,082
Gain on sale of property and equipment - (54,963)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 741,804 (1,398,403)
Other receivables (173,855) (3,436)
Inventory 167,586 (463,923)
Income taxes receivable (67,891) 82,718
Other current assets (222,622) 65,953
Increase (decrease) in:
Accounts payable (37,787) 696,726
Accrued expenses and other current (188,501) 90,218
---------------- ----------------
liabilities
Net Cash Provided by (Used in) Operating Activities 493,988 (494,323)
---------------- ----------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (27,780) (195,761)
Proceeds from sale of property and equipment - 431,919
Other assets (1,039,534) (463,103)
---------------- ----------------
Net Cash (Used in) Provided by Investing Activities (1,067,314) (226,945)
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE>
BIO-AQUA SYSTEMS, INC.
Combined Statements of Cash Flows (Continued)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Financing Activities:
Net proceeds under lines-of-credit $ 668,155 $ 332,630
Net proceeds from related parties - 250,672
Proceeds from bridge loans 150,000 -
Costs of public offering (185,374) -
Proceeds of long-term debt 519,640 236,161
Payments of long-term debt (178,512) (25,720)
---------------- ---------------
Net Cash Provided by Financing Activities 973,909 793,743
---------------- ---------------
Effect of Exchange Rate Changes on Cash (434,451) 34,846
---------------- ---------------
(Decrease) Increase in Cash (33,868) 107,321
Cash - Beginning of Year 136,489 29,168
---------------- ---------------
Cash - End of Year $ 102,621 $ 136,489
================ ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 389,808 $ 280,266
Supplemental Disclosure of Non-Cash Financing Activities:
Issuance of Class A common stock in connection
with offering 118,122 -
Declaration of dividends payable to shareholder 1,300,000 -
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-8
<PAGE>
BIO-AQUA SYSTEMS, INC.
Notes to Combined Financial Statements (Continued)
BIO-AQUA SYSTEMS, INC.
Notes to Combined Financial Statements
Years ended December 31, 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
research and development 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 became effective as of the closing of the initial public offering of the
Company's stock (see Note 13). 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,
1998, 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 rates used at December 31, 1999 and 1998,
respectively, was 530.07 pesos to U.S. $1 and 531.11 pesos to U.S. $1. The
weighted average exchange rate used for the years ended December 31, 1999 and
1998 was 515.08 pesos to U.S. $1 and 465.98 pesos to U.S. $1, respectively.
F - 9
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 December 31, 1999 and 1998, approximately
20% of the Company's consolidated accounts receivable was attributable to one
customer.
Inventory - Inventory consists primarily of fish, feather, and krill meal
and is stated at the lower of cost or market. Cost is determined using the
weighted average method (first-in, first-out).
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 $672,000 and
$581,000 for the years ending December 31, 1999 and 1998, respectively, are
charged to operations and included in general and administrative expenses.
F - 10
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes - 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. 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.
Comprehensive Income - During 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components, including but not limited to, foreign
currency translation adjustments. The adoption of this statement had no impact
on the Company's net income or shareholders' equity.
Total comprehensive income for 1999 and 1998, respectively, includes
cumulative translation adjustments of approximately $400,000 and $60,000.
Earnings (Loss) Per Common Share - Basic - Earnings (loss) per common share
- basic is calculated using the weighted average number of common shares and
dilutive potential common stock outstanding during the year. The number of
shares used in the per share computations were 1,763,088 and 1,700,000 at
December 31, 1999 and 1998, respectively. Potential common stock, when included
in the computation of dilutive earnings per share, was anti-dilutive at December
31, 1999 and 1998.
Recent Pronouncements - 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, 1997. 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.
F - 11
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" which is effective for fiscal periods beginning after
June 15, 2000. The Company does not expect a material impact upon its financial
reporting or presentation due to the adoption of SFAS No. 133.
In October 1998, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 134 "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective for the first fiscal quarter
beginning after December 15, 1998. There is no impact to the Company's financial
reporting or presentation due to the adoption of SFAS No. 134.
In February 1999, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 135 "Recission of FASB Statement No. 75
and Technical Corrections" which is effective for financial statements issued
after February 15, 1999. There is no impact to the Company's financial reporting
or presentation due to the adoption of SFAS No. 135.
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.
NOTE 2 - RELATED PARTY TRANSACTIONS
During 1998, the Company earned royalty income of approximately $9,000 from
an affiliated company (none in 1999).
During 1999 and 1998, the Company made advances to other companies
affiliated by common ownership. As of December 31, 1999 and 1998, approximately
$358,000 and $187,000, respectively, were due from these affiliates, which are
included in accounts receivable on the accompanying balance sheets.
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 years ended December 31, 1999 and 1998,
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 which will be refunded. The resulting receivable is
included in current assets in the accompanying
balance sheets.
F - 12
<PAGE>
NOTE 3 - INCOME TAXES (Continued)
The following is a reconciliation of the statutory tax rates:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
Statutory tax rate 15% 15%
Benefit of credits and incentives from government (15) (15)
---------- ----------
Effective tax rate 0% 0%
========== ==========
</TABLE>
The Company was not liable for U.S. income taxes for the years
ended December 31, 1999 and 1998, 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 December
31, 1998 for approximately $74,000, and is included in accrued
expenses and other current liabilities. No deferred tax liability
was recognized at December 31, 1999.
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31,:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
Prepaid expenses $ 100,040 $ 8,325
Advances to suppliers 246,300 175,000
Bridge loan financing 59,607 -
-------------- -------------
$ 405,947 $ 183,325
============== ==============
</TABLE>
F - 13
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31,:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
Furniture and fixtures $ 155,032 $ 154,928
Machinery and equipment 1,536,188 1,508,512
Buildings and improvements 238,053 238,053
Land 39,511 39,511
Other 95,531 95,531
Vehicles 94,446 94,446
--------------- ----------------
2,158,761 2,130,981
Less accumulated depreciation (1,405,907) (1,146,305)
--------------- ----------------
$ 752,854 $ 984,676
=============== ================
</TABLE>
Depreciation expense was $259,602 and $227,732 for the years ended December
31, 1999 and 1998, respectively.
NOTE 6 - OTHER ASSETS
The Company has advanced approximately $1,550,000 and $500,000 to
a fishing vessel company as of December 31, 1999 and 1998,
respectively, (see Note 10).
NOTE 7 - OBLIGATIONS WITH BANKS
Obligations with banks consist of the following at December 31,:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
Lines-of-credit with monthly, semiannual 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 $ 2,194,123 $ 1,525,968
============== ==============
</TABLE>
F - 14
<PAGE>
NOTE 7 - OBLIGATIONS WITH BANKS (Continued)
Long-term debt consists of the following at December 31,:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
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 $ 458,904 $ 637,416
Less: Current portion (80,743) (158,603)
-------------- -------------
$ 378,161 $ 478,813
============== =============
</TABLE>
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 (Unidad de Fomento) is an indexed unit of account expressed
in pesos and adjusted according to inflation (CPI).
Future maturities of long-term debt are as follows:
Year Ending
December 31,
2000 $ 80,743
2001 84,777
2002 89,179
2003 93,984
2004 99,226
2005 10,995
---------------
$ 458,904
F - 15
<PAGE>
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, and
shareholders' personal guarantees.
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the
following at December 31,:
<TABLE>
<S> <C> <C>
1999 1998
-------------------------------------------------------------------------------------------------------------------
Salaries and employee related payables $ 101,152 $ 120,925
Sales and other taxes payable 48,885 87,367
Deferred taxes - 73,932
Other 61,100 117,414
-------------- --------------
$ 211,137 $ 399,638
============== ==============
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases various offices in Santiago,
Chile pursuant to operating leases. Rent expense for the years
ended December 31, 1999 and 1998 totaled approximately $114,000
and $110,000, respectively.
Future minimum rental payments under the lease are as follows:
Year Ending Annual
December 31, ------------
-----------------
Payments
2000 $ 102,000
================
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.
F - 16
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
As of December 31, 1999 and 1998, the Company advanced approximately
$1,550,000 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 an annual rate of 13.5%. For the year
ended December 31, 1999, the Company recorded interest income of approximately
$150,000 in the accompanying combined statements of
income.
In order to finance these advances to Kelor, the Company had borrowed
approximately $1,500,000 during 1999 from its available bank line-of-credit. The
Company expects that during the year 2000, Kelor will repay all the monies
advanced under this agreement to the Company.
NOTE 11 - OTHER MATTERS
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 did not pay any amounts during 1999 but is expected
to pay 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 did not pay any royalties during 1999 but is expected
to pay 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.
Bridge Loan - 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) dates
ranging from October 30, 1999 to January 15, 2001. As additional consideration,
the investors received 35,294 shares of Class A common stock valued at $3 per
share. The Company has capitalized these costs which 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
year ended December 31, 1999.
F - 17
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NOTE 11 - OTHER MATTERS (Continued)
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.
As the above transaction is between related parties under common control,
the above mentioned assets must be accounted for at historical cost. Such
amounts are immaterial and therefore, not reflected in the financial statements.
Due to the related party nature of this transaction, the purchase price of
$1,300,000 is recorded as a distribution and a liability, due to stockholder, in
the accompanying December 31, 1999 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, renting of office space and
rendering certain financial, advisory and consulting services, at an annual
payment of $30,000.
Employment Agreements - In 1999, the Company entered into a three year
agreement with the Company's President and a two year agreement with the
Company's 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 commencing on March 29, 2000 (the date the Company's IPO
became effective). 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 the Plan. No options have
been issued to date.
NOTE 12 - 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 1999 and 1998, sales to the top five customers amounted to approximately
57% and 65%, 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.
F - 18
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NOTE 13 - SUBSEQUENT EVENTS
On March 29, 2000, the Securities and Exchange Commission ("SEC") declared
effective the Company's registration statement in connection with the initial
public offering ("IPO") of the Company's stock. A total of 425,000 units (each
unit consisting of 2 shares of Class A Common Stock and 2 Redeemable Common
Stock Purchase Warrants) were sold at a price of $10 per unit to the
underwriters. The net proceeds raised in connection with the IPO were $3,697,500
after underwriters discounts of $552,500. The proceeds will be used to reduce
bank debt and for trading, research and development, marketing and working
capital.
F - 19
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act of 1934, as
amended, Bio-Aqua caused this report to be signed on its behalf by the
undersigned on June 22, 2000.
Bio-Aqua Systems, Inc.
By: /s/Max Rutman
---------------------
President and Chief Executive Officer
In accordance with the requirements of the Exchange Act of 1934, this
report was signed by the following persons in the capacities and on the date
stated above.
Signatures Title
/s/ Max Rutman President and Chief Executive
---------------------------------------
Max Rutman Officer and Director (Principal
Executive Officer)
/s/ Guillermo Quiroz Chief Financial Officer
Guillermo Quiroz (Principal Financial and
Accounting Officer)
/s/ Nestor Lagos Director
Nestor Lagos
/s/ Sergio Vivanco Director
Sergio Vivanco
