SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission File No. 0-18239
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
(Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1087879
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5102 South Westshore Boulevard, Tampa, Florida 33611
(Address of Principal Executive Offices, Including Zip Code)
Issuer's Telephone Number, Including Area Code: (813) 832-4040
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock.
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation SB contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10KSB or any
amendment to this Form 10KSB. X
State Issuer's revenues for its most recent fiscal year: $182,227.
As of June 28, 1996, 26,109,989 shares of common stock were outstanding, and
the aggregate market value of the common stock of the Registrant held by non-
affiliates was approximately $3,325,000.
Documents incorporated by reference: None.
<PAGE>
PART I
ITEM 1. BUSINESS.
THE COMPANY
Seahawk Deep Ocean Technology, Inc. (the "Company") was formed under the laws
of the State of Colorado on September 17, 1986, for the purpose of creating a
corporate vehicle to seek and acquire a business opportunity.
In October of 1988, the Company completed a public offering of 1,200,000
shares of Common Stock at an offering price of $.50 per share. The net
proceeds of that offering to the Company were approximately $490,000.
On March 13, 1989, the Company issued 2,000,000 shares of its no par value
Common Stock to the holders of 100% of the outstanding common stock of R/V
Seahawk, Inc. ("R/V Seahawk") in an exchange transaction in which R/V Seahawk
became a wholly owned subsidiary of the Company. During September 1989 the
Company's name was changed from Fox Ridge Capital, Inc. to Seahawk Deep Ocean
Technology, Inc. On March 2, 1992, R/V Seahawk was merged into the Company.
On June 12, 1992, the Company effected a one for fifty reverse split of the
shares of the Company's Common Stock outstanding. All financial information
and share data in this Form 10-KSB give retroactive effect to the reverse
split.
On September 12, 1989, the Company organized Seahawk Artifact Recovery, Inc.
and acquired 100% interest with the purchase of 625,000 shares of its no par
value common stock for $35,000 cash. This subsidiary was inactive throughout
1989 and 1990. In January, 1991, its name was changed to Seahawk Museum
Development, Inc. This subsidiary was developing plans for a shipwreck and
treasure museum in St. Petersburg, Florida, however, the Company's inability
to finance the museum has forced the Company to put the museum plans on hold
indefinitely.
Unless the context otherwise requires, the term "Company" as used herein
refers to Seahawk Deep Ocean Technology, Inc. and its wholly owned subsidiary
Seahawk Museum Development, Inc.
On February 4, 1991, the Company acquired all of the outstanding stock of
Valley Marine, Inc. ("VMI") in exchange for 600,000 newly issued shares of the
Company's Common Stock. VMI owned the Seahawk Retriever, a 204 foot vessel
During February, 1991, VMI merged into R/V Seahawk.
R/V Seahawk was formed on May 23, 1988, for the purpose of serving as general
partner for one or more limited partnerships which were to be formed to search
for valuable shipwrecks. R/V Seahawk was initially capitalized with $200,000
by John C. Morris, Gregory P. Stemm and three other investors. R/V Seahawk
then purchased equipment to be used for the search operations and signed an
agreement with marine archaeologist Robert Marx for the right to use data for
a suspected shipwreck site. R/V Seahawk then formed its first partnership,
Seahawk I, and raised $175,000 to fund the search activity. The fund raising
and initial search efforts were carried on during the remainder of 1988 and
into 1989 until April, 1989, when the Seahawk I partnership located its first
shipwreck.
In November 1995 the Company acquired all the outstanding stock of Seahawk,
Inc. in exchange for 2,400,000 newly issued shares of the Company's common
stock. Seahawk, Inc. owned the RV Seahawk, an 86 foot vessel. On March 31,
1996, Seahawk Inc. merged into the Company.
The Company is an oceanographic service company which is involved in deep
water search, survey and recovery operations. The Company serves as the
general partner for three limited partner ships which were formed for the
purpose of raising money to search for and locate shipwrecks. The Company
currently owns and operates a variety of sub-ocean equipment including an 83
foot survey vessel, ROV's (Remotely Operated Vehicles), and other specialized
search and recovery equipment which enables the Company to locate, photograph
and retrieve items lost on the seabed in deep water.
The Company also seeks opportunities where it can lease its equipment to
others and generally act as an underwater contractor.
The partnerships formed by the Company and for which the Company serves as the
general partner are engaged in the business of attempting to locate, identify,
recover and market the cargoes and artifacts associated with one or more
shipwrecks in a specific area. The Company, on the other hand, provides to
the partnerships the data, manpower and equipment necessary for the
partnerships to carry out this business purpose. The Company is also engaged
in the business of locating, identifying, recovering and marketing the cargoes
and artifacts associated with shipwrecks on its own behalf and for others on a
world wide basis.
SEAHAWK I, LTD., SEAHAWK II, LTD. AND EAGLE PARTNERS, LTD.
The Company has formed three limited partnerships (Seahawk I, Ltd., Seahawk
II, Ltd. and Eagle Partners, Ltd.) for the purpose of funding the search for
deep water shipwrecks in predesignated areas.
SEAHAWK I, LTD. During April, 1989, the first partnership (Seahawk I) located
and photographed a Spanish wreck which the Company believes was one of the
vessels lost during a storm in 1622. The wreck was found approximately 1,500
feet deep in international waters south of the Florida Keys. During June,
1989 a bell was recovered from the site in order to perfect the admiralty
claim in the United States District Court.
During June, 1990, Seahawk I commenced its predisturbance survey on this wreck
and during August, 1990, Seahawk I commenced actual recovery operations. The
recovery operations continued until November, 1990. The Seahawk Retriever
returned to the site in May, 1991, and resumed recovery operations which were
carried out periodically during the summer of 1991 until October 5, 1991, when
the Seahawk Retriever left the site. An area of approximately 2,690 square
feet surrounding the site has been excavated to a depth of 1.5 to 3 feet. The
remaining hull structure and ballast stone pile occupy about 430 square feet
of this area. A total area of 11,300 square feet has been scanned with a
metal detecting unit to a depth of approximately 14 inches and revealed in
excess of 130 targets, most of which were recovered.
Since the Company does not have the technical capability to determine the full
depth of the wreck, it is impossible to state what percentage of the wrecksite
has actually been excavated. The Company does believe that the Partnership
has reached a point of diminishing returns and the Partnership does not intend
to return to the wrecksite unless it is able to sell most of its artifacts and
the partners decide that the potential of recovering any artifacts or
treasure in the future justifies the expense of continuing with the recovery.
Management of the Company believes that this wreck is from the 1622 Spanish
fleet. This belief is based upon a number of factors including the following:
(1) the location of the shipwreck; and (2) similarities of a number of the
artifacts found on the shipwreck with artifacts found on the Atocha, a sunken
galleon from the 1622 Spanish fleet. The Company does not know what the name
of this vessel is or how much treasure it carried. The Company believes that
the keel length was approximately 56 to 57 feet long indicating that the
vessel size was between 100 and 220 tons. The Company also believes that the
vessel was most likely a moderate size merchant vessel.
A total of 16,480 artifacts have been recovered from the site. These include
twenty-seven gold finger bars, fourteen gold fragments, over eleven hundred
silver coins, a gold emerald ring, three mariner's astrolabes (a navigational
device used during the early 1600's), over 6,000 pearls, seventy
six clay olive jars and other miscellaneous items including musket balls,
wood, pottery and pottery shards. Seahawk I has incurred expenses in locating,
recovering, conserving and storing these artifacts of approximately $3,391,000
since inception, of which $646,025 has been capitalized into the costs of
artifacts on Seahawk I's books at December 31, 1995. The Company has
contributed $1,190,900 since inception to the capital of Seahawk I. Seahawk I
has engaged the Company to provide certain services, and the Company has
provided vessel operations and conservation and administrative services in the
amount of $633,322 which have been billed to Seahawk I but have not been paid.
These are carried in the Company's books as accounts receivable - affiliate.
The primary focus of the SEC Stop Order proceeding (see ITEM 3. LEGAL
PROCEEDINGS, below) was the value of the artifacts owned by the Company and
its partnership Seahawk I, Ltd. As a result of the decision of the
Administrative Law Judge on May 26, 1993, the financial statements of the
Company for the years ended December 31, 1990 and 1991 have been restated to
comply with GAAP.
Seahawk I, Ltd. is a Florida limited partnership which was formed on May 23,
1988, with R/V Seahawk as the sole general partner. The Partnership was
initially funded with a total of $175,000 which was raised from private
investors. The salvage operations for this shipwreck have required the
Partnership to raise additional funding. The Company will split with the
limited partners on a 50/50 basis the proceeds from the sale of all valuable
objects or artifacts after payment of the partnership expenses and a return of
all capital contributions to both the limited partners and the Company. The
expenses of the Partnership include the payment of ten percent (10%) of all
items salvaged to Tanit Corp., a company owned by Robert Marx, the marine
archaeologist who provided research and data relevant to this particular
project. Seahawk I raised an additional one million dollars ($1,000,000)
during 1990 to finance the initial salvage operations. In order to do this,
Seahawk I created a new class of limited partner which is entitled to twenty
percent (20%) of the partnership's net distributable income in return for an
investment of $500,000. The Company has also invested an additional $500,000
to maintain its right, as General Partner, to receive 50% of the partnership's
net distributable income.
On May 19, 1988, R/V Seahawk, Inc. and Tanit entered into an agreement whereby
R/V Seahawk obtained exclusive access to Mr. Marx's research and data covering
a specified search area defined on a map, so long as the project commenced
prior to May, 1991. In exchange for this exclusive right to Mr. Marx's
research and data, R/V Seahawk paid to Tanit a fee of $10,000 in cash and
agreed to pay to Tanit an additional fee equal to ten percent (10%) of the
value of all salvaged items recovered (the "Additional Payment") both as
additional consideration for the research and data and as consideration for
consulting services which Mr. Marx was to render during the project. R/V
Seahawk licensed the exclusive use of the research and data to Seahawk I, Ltd.
(the "Partnership") for the Partnership's use in the project. In return, the
Partnership assumed R/V Seahawk's obligation to pay the Additional Payment to
Tanit. On April 22, 1993, R/V Seahawk's and the Partnership's obligations
with respect to the additional payment were fully satisfied by the transfer of
certain artifacts to Tanit. The cost of the artifacts was $18,384.
Robert F. Marx is a 59 year old marine archaeologist, maritime historian and
author. He has participated in over 56 archaeological explorations and/or
recoveries around the world since 1953, and he has conducted extensive
historical research on the history of Spanish flotas and galleons. Mr. Marx
has written more than thirty books and 100 articles on various aspects of
marine archaeology.
During March, 1991, Seahawk I created a new class of limited partners and
raised a total of $691,800 to finance the recovery and conservation of
artifacts of the Partnership. The Company also invested an additional
$690,800 to maintain its right to receive 50% of the net distributable income.
As of December 31, 1995, the Company carries an account receivable from
Seahawk I, Ltd. of $633,322 and a note receivable from Seahawk I, Ltd. of
$300,000, less a provision for losses in excess of investment of $672,196.
SEAHAWK II, LTD. During May, 1989, R/V Seahawk formed Seahawk II, Ltd., a
Florida limited partnership ("Seahawk II"), and agreed to serve as the sole
general partner. Seahawk II is structured very similar to Seahawk I except
that the expenses of the Partnership include a payment of 5% of all items
salvaged to a fund for the crew. Seahawk II sold 50 Units at a price of
$30,000 per Unit. During 1989, Seahawk II commenced its proposed business of
attempting to locate deep water shipwrecks in a specific area off the east
coast of Florida, and found what management believed to be a colonial era
shipwreck. This belief was based on, among other things, the opinions of Dave
Moore described below relating to the age of the silver coins and cannons
found on the wreck. A cooking pot and piece of rigging were recovered from
the site in order to perfect the admiralty claim. During October, 1990,
Seahawk II conducted a predisturbance survey of this wreck site (referred to
as the "St. Augustine" site) utilizing Harbor Branch Oceanographic
Institution's Johnson SeaLink manned submersible. During this survey,
approximately 90 artifacts were recovered including two cannons, numerous
cannon balls, and a dozen copper cooking pots. Dave Moore, an archaeologist
who used to be employed by the Company, estimated the cannon is from the
1700's. Dave Moore holds a Masters Degree in Maritime History and Underwater
Research and he has over 10 years' experience in archaeology.
During April, 1991, the Johnson SeaLink returned to the site to continue work
on the shipwreck for 6 days. A good portion of the area surrounding the
ballast pile was uncovered and some timbers and ribs of the ship were exposed
which, according to archaeologist Robert Marx, indicated that the ship was
small in size most likely in the 50 to 75 ton range. During this trip, a
number of artifacts were recovered, including 6 Spanish silver coins, three
four foot cannons, more copper cooking pots, scores of lead musket and pistol
balls, pulley blocks and sheaves and other miscellaneous items. According to
Mr. Moore, the coins date between 1712 and 1714. Mr. Marx has reported to the
Company that he believes that the ship was a small Spanish vessel known as an
"Adviso" or advice boat sometimes called a "Patache." One or more of these
ships was usually employed in each treasure fleet with their main purposes
being to carry mail and official communications between the king and
government officials. According to Mr. Moore, this class of vessel was never
authorized to carry treasure, but contraband treasure was sometimes carried on
these ships. He has also stated that there was no way he could say whether or
not this shipwreck contains substantial amounts of treasure.
The Seahawk II Partnership currently has no cash, and the Partnership has no
plans except to attempt to liquidate the artifacts if a reasonable opportunity
to do so arises.
In December 1994 and November 1995 the Company asked the Partners to vote on
terminating the Partnership. The result of both votes was inconclusive and
the Company may consider asking the Partners to vote again on termination.
The Company carries an account receivable from Seahawk II, Ltd. of $14,928 as
of December 31, 1995, less a provision for doubtful debts and losses in excess
of investment of $23,544.
EAGLE PARTNERS, LTD. AND EAGLE MINERS, LTD. During November, 1991, the
Company formed Eagle Partners, Ltd., a Florida limited partnership ("Eagle
Partners"), with the Company serving as the general partner. Eagle Partners
sold 3 Units for a total of $150,000. The partnership is operating under a
joint venture agreement with a nonaffiliated researcher who has provided the
research and data for a 19th Century shipwreck off the east coast of the
United States. The joint venture agreement was entered into between the
Company and the researcher, and the Company assigned its rights and
responsibilities in the joint venture to Eagle Partners. According to the
researcher and newspaper accounts of the sinking, the vessel was believed to
have a valuable cargo of specie on board at the time of the sinking, although
there is no assurance that the researcher is correct or that the shipwreck
will be located. The researcher holds a Bachelor's Degree in
Interdisciplinary Studies with a concentration in Marine Archaeology, and he
has been involved in underwater archaeology and searching for shipwrecks for
over 25 years. He has written over 10 books and a number of articles on the
history of shipwrecks.
Pursuant to the terms of the joint venture agreement, the researcher was to
receive twenty percent (20%) of any items recovered from the ship in return
for his research and data. The partnership is responsible for conducting and
paying expenses of the search and recovery of the shipwreck and if successful,
for marketing any cargo which is recovered.
The joint venture agreement required the partnership to dedicate the vessel
R/V Seahawk (or a similar vessel with similar equipment) to work on this
project at least 120 days during 1992, and each year thereafter, beginning not
later than May 30 of each year. The joint venture agreement was amended in
June 1994. The amended agreement required the partnership to work on the
project for at least 60 days during 1994. The partnership did not meet this
schedule and was in default on the agreement. In such an event, the agreement
provided that all rights to conduct search and/or salvage efforts relative to
this wreck would revert to the researcher. The Company negotiated an
extension to the joint venture agreement under which the researcher's share of
any successful recovery was reduced to ten percent (10%) and the requirement
for the partnership to work on the project for a minimum number of days each
year was removed. In return the Company agreed to issue the researcher 60,000
shares of its Common Stock. The Company will attempt to raise additional
financing for this project but there is no assurance that it will be able to
do so.
The partnership's eighty percent interest in the joint venture was to be
allocated among the Company and the limited partners as follows: After the
return of all contributed capital each $50,000 unit was to receive 5% of the
first $1 million distributed, 4% of the second $1 million distributed, 3% of
the third $1 million distributed, 2% of the fourth $1 million distributed and
1% of anything over $4 million distributed. The Company, as the general
partner, was to receive the balance of any distribution. In early 1995, the
Company became aware of another company ("Sea Miners, Inc.") that was
searching for the same shipwreck (code named "Golden Eagle") and in order to
pool research and resources and to remove all-or-nothing competition, Eagle
Partners and Sea Miners formed an equal joint venture to search for the
vessel. The joint venture is to be operated via a Florida Limited Partnership
called Eagle Miners Limited. Eagle Partners and Sea Miners are equal and
joint General Partners of Eagle Miners. As a result of the joint venture,
each of the limited partners of Eagle Partners agreed to reduce their
entitlement of any distribution to one-half of the original amount Eagle
Miners has contracted to use the Company for all of its offshore services.
$100,000 was raised by the joint venture to finance the initial inspection of
certain sites that Sea Miners has revealed as possible shipwrecks in its
search area. The joint venture intends to raise additional financing for this
project but there is no assurance that it will be able to do so.
After reviewing the research, Eagle Partners established a primary search area
of 100 square miles and a larger search area of 600 square miles. During
1992, Eagle Partners searched approximately 500 square miles and located six
shipwrecks. During May 1993, using newly acquired research data, Eagle
Partners searched approximately 140 square miles and located five shipwrecks.
During 1994, Eagle Partners searched approximately 140 square miles.
During 1995 Eagle Partners inspected a number of seabed anomalies that might
have been sunken ships in the combined search areas of Eagle Partners and Sea
Miners. One such site was estimated to have similar general dimensions to the
Golden Eagle, and to protect its title to the wreck it was arrested in the
Untied States District Court Middle District of Tampa Division. The wreck has
not been positively identified as the Golden Eagle. Further visual
investigations of the site are expected to take place during 1996.
As of December 31, 1995, the Company carries an account receivable from Eagle
Partners of $1,031,450 and a note receivable from Eagle Partners of $50,000,
less a provision for losses in excess of investment of $1,108,008.
As of December 31, 1995, the Company carries an account receivable from the
Eagle Miners Joint Venture of $72,311 less a provision for doubtful debt of
$22,003.
MANAGEMENT OF PARTNERSHIPS
The following table sets forth information concerning the authority of the
general partner in the three partnerships referred to above for which the
Company serves as general partner. The purpose of this table is to disclose
generally the types of actions that the general partner can take without
needing approval of the limited partners and the types of actions where
approval of the limited partners is required.
ACTION APPROVAL OF LIMITED PARTNERS REQUIRED
1.Enter into contracts and agreements 1. No.
which the general partner ("G.P.")
deems necessary or advisable for the
conduct of the partnership's business.
2.Enter into partnerships or joint 2. No.
ventures.
3.Employ advisers or agents. 3. No.
4.Borrow money on secured or 4. No.
unsecured basis.
5.Amend limited partnership agreement. 5. Yes (by the holders of a majority
of the limited partnership units).
6.Admit additional G.P.'s. 6. Yes (by the holders of a majority
of the limited partnership units).
7.Admit additional limited partners. 7. No.
8.Sell additional units in the 8. No unless it requires amendment to
partnership partnership agreement
9.Remove G.P. 9. Yes* (by the holders of 75% of the
limited partnership units
10.Dissolve partnership. 10. Yes (by the holders of a majority
of the limited partnership units).
_______________
*In Seahawk II and Eagle Miners Limited, the limited partners do not have the
right to remove the general partner.
BACKGROUND
During the past few years, the number and seriousness of approaches by various
groups interested in ocean salvage have increased significantly, principally
because the development and application of new technology have improved
working capability in the deep sea.
The Company has been operating the research vessel Seahawk (the "Seahawk") for
the past seven years. In addition, it has been acquiring highly specialized
search, survey and recovery equipment. The Company has been working closely
with both consultants and employees considered to be some of the leading
experts at deep ocean search and recovery, diving on wrecks, and assembling a
shipwreck data base.
PLAN OF OPERATION
The Company expects that, at least initially, much of its deep ocean shipwreck
search and recovery activities will be funded by limited partnerships similar
to Seahawk I, Seahawk II and Eagle Partners thereby transferring most of the
economic risk of finding shipwrecks to the investors in these partnerships.
As soon as the Company believes that it has sufficient capital of its own to
finance these activities, it will do so in order to avoid diluting the
Company's interest in the wrecks. Management's only experience in forming and
marketing partnerships for the purpose of funding shipwrecks is Seahawk I,
Seahawk II, Eagle Partners and Eagle Miners.
The Company is also exploring joint ventures with others for the purpose of
searching for shipwrecks in deep water off the coasts of foreign countries
including Brazil and Portugal.
The Company and its partnerships expect to follow the following six steps in
their deep water expeditions.
1. DETERMINE TARGET SEARCH AREAS THROUGH RESEARCH. The first step in a deep
water search operation is to develop data on proposed sites through a
combination of research conducted by the Company or research purchased by the
Company from others. For example, the wreck located by Seahawk I, Ltd. was
based on research conducted by an archaeologist who was paid with a 10%
interest in the wreck. The Company has received research on numerous wrecks
throughout the world, and is continually, as time permits, reviewing this
research for possible recovery projects.
2. SEARCH FOR ANOMALIES IN THE TARGET AREAS. Once the target area search
sequence has been determined, the search will then be undertaken to locate
promising anomalies utilizing the Company's equipment.
If an anomaly is found, its precise location will be noted and mapped using
the navigational system which utilizes digital output from sensing devices and
logs it into the onboard computer's target navigational database.
After completing the search of a grid, a preliminary analysis will be made and
the position of promising targets will be noted. This will indicate those
sites and anomalies which will be revisited for visual verification and
inspection with the ROV's.
3. SURVEY AND VERIFICATION OF THE ANOMALY SITE. The initial verification
phase will serve to provide visual confirmation of the nature and composition
of the anomaly. In most cases, a look at the subject sites will quickly
determine whether they are natural bottom structures, manmade objects that
hold little interest (steel drums, cable, modern anchors, fishing equipment,
etc.) or potentially valuable sites. If the site looks promising, small
artifacts will be recovered in an attempt to date and identify the vessel.
This entire phase will be accomplished using ROV's, incorporating onboard
lights, cameras, sonar and tracking navigation systems.
With the video records and items recovered from the wrecksite, the Company
will attempt to identify the wreck(s) with the help of maritime historians and
marine archaeologists. Identifying ancient shipwrecks is extremely difficult,
however, and the Company has been unable to definitely define the shipwrecks
discovered by Seahawk I and Seahawk II. Once the wreck has been identified, a
determination of the cargo carried and historical and archaeological
significance of the wreck can be made.
4. ESTABLISHING LEGAL CLAIM TO THE SITE. If the site appears valuable, the
Company will take the necessary steps to legally claim title to the shipwreck.
This will usually involve a filing in the U.S. Admiralty Court. See "Legal
Aspects of International Salvage."
With respect to the wreck discovered by Seahawk I, the Partnership filed a
complaint seeking a warrant for the arrest of the vessel with the United
States District Court for the Middle District of Florida on June 30, 1989. On
June 30, 1989, the Court issued a warrant for the arrest of the wreck. Shortly
thereafter, a bell recovered from the wreck was presented to the Court and a
motion was filed requesting an order appointing the Company as custodian for
the wreck. On July 18, 1989, notice of the wreck was published and on
September 25, 1989, the Court entered an Order Noting Default since no
response was forthcoming from anyone to the notice published during July,
1989.
With respect to the wreck discovered by Seahawk II, the Partnership filed a
complaint for the arrest of the wreck with the U.S. District Court for the
Middle District of Florida on September 27, 1989. On the same date the Court
issued a warrant for the arrest of the wreck. On December 29, 1989, artifacts
from the wreck were presented to the Court and the Company was appointed by
the Court as the custodian for the artifacts. On February 13, 1990, notice of
the wreck was published, and on December 14, 1990, the Court awarded ownership
of the wreck to the Partnership.
With respect to a wreck discovered by Eagle Miners, the joint General Partner,
Eagle Partners, filed a complaint for the arrest of the wreck with the US
district Court for the Middle District of Florida in December 1995 and the
Court issued a warrant for the arrest of the wreck. An artifact from the
wreck was presented to the Court and Eagle Partners was appointed by the Court
as the custodian for the artifact. In January 1996, notice of the wreck was
published and the Court awarded ownership of the wreck to the Partnership.
5. PLANNING AND EXECUTION OF RECOVERY. Planning the actual recovery will
depend on a large number of factors such as condition of shipwreck, depth,
bottom conditions, current and tidal conditions. In the anticipated operating
depths, several pieces of equipment will play vital roles in the recovery
operation. First, a safe, stable ship must be used as the recovery platform.
The vessel must also be large enough from which to deploy the submersibles
that will be used as the actual salvage and recovery tools. These recovery
tools will include ROV's, some of which will be significantly larger and
capable of greater working ability than the ROV's used for initial visual
investigations.
Beginning with its salvage activities of the Seahawk I wreck site, the Company
has used the vessel Seahawk Retriever, a 210 foot supply vessel, as the
primary vessel from which the recovery operations are conducted. The Seahawk
Retriever was used to deploy the ROV named Merlin which was used for the
salvage and recovery activities. Merlin was sold in April, 1994, and the
Seahawk Retriever was sold in March 1996, but Management is confident that
similar equipment can be leased or purchased when required. (See "Equipment"
below for descriptions of the Seahawk Retriever and see Item 3. Legal
Proceedings, below, for a description of the litigation involving the Merlin
and Seahawk Retriever.)
6. CONSERVATION OF ARTIFACTS. Complete conservation of artifacts recovered
from shipwreck sites is a integral part of the Company's business plan. These
conservation efforts begin as soon as the ROV reaches the ocean floor. The
Company takes the utmost care in removing each artifact from the sea bed,
using specialized tools that are built on site and carried to the sea floor by
the ROV. Examples of such tools are specially built baskets and platforms
that are constructed to accommodate artifacts once they have been identified.
The ROV uses these tools, built to interface with its computer controlled
manipulators, to recover each artifact from the ocean floor as gently as
possible.
The artifacts are then placed in a larger recovery platform, which is designed
to separate and protect the artifacts from damaging each other during the trip
to the surface. On deck, the artifacts are then catalogued, photographed and
secured in specially constructed storage containers. The recovery process is
supervised by the Company's archaeologist who assists with the recovery,
coordinates data management, ensures proper artifact handling, and initiates
interpretation and analysis.
The Company has established a conservation laboratory in the building it
leases at 5102 South Westshore Boulevard, in Tampa, Florida, where the
artifacts are transported and conserved to a final, stable state. The Company
has purchased for its conservation laboratory the facilities necessary for
stabilization of most all artifacts recovered, including noble metals, iron,
ceramics and organic materials. Before and during conservation, the artifacts
are made available for inspection by other archaeologists and
conservationists. After conservation is completed, the artifacts may also be
made available to the public, in a museum setting.
7. MARKETING OF ARTIFACTS. The Company intends to realize revenue from
artifacts as follows:
(a) BY DIRECT SALES - Artifacts which have been properly categorized and
recorded and which are not deemed to be a necessary part of an archaeological
collection may be sold directly to collectors, dealers or through retail
outlets.
(b) BY SALE OF REPLICAS - Replicas of certain artifacts may be produced
and sold as such.
(c) DISPLAY - Artifacts may be displayed in museum attractions which
would generate revenue from entrance charges and merchandise sales.
In October 1993, the Company signed a marketing agreement with Buckeye
Communications, Inc. The agreement set out the terms under which the
Company's artifacts, products derived from the artifacts and products derived
from the Company's archive material will be marketed by Buckeye on a worldwide
exclusive basis. Any sales resulting from this marketing effort will result
in royalty payments to the Company. Similar agreements were signed between
Buckeye and Seahawk I, Ltd., Seahawk II, Ltd. and Eagle Partners, Ltd.
Management believed that the effect of these agreements would be to produce
revenue for the Company and, to the extent that their artifacts are used, for
the Limited Partnerships, without any corresponding cost of product
development or marketing. However, significant sales were not generated by
Buckeye, although arrangements are in place to develop a CD-ROM game based on
the Company's shipwreck searches. In 1995, Buckeye was placed by its
management in an orderly liquidation and the agreement between Buckeye and the
Company was terminated.
SHIPWRECK AND TREASURE MUSEUM
During 1991, the Company's wholly owned subsidiary, Seahawk Museum
Development, Inc., commenced construction of a shipwreck and treasure museum
in St. Petersburg, Florida. The museum was to be approximately 10,000 square
feet, and was to feature interactive displays aimed at entertaining as well as
educating visitors about undersea technology, archaeology, conservation and
the colorful history the artifacts and treasures represent.
The Company leased space for the museum starting in July, 1991, however,
during November of 1991, the Company was no longer able to make the monthly
lease payments, and during February, 1992, the Company negotiated a
termination of the lease with the lessor.
The Company's inability to finance the museum forced the Company to put the
museum plans on hold until appropriate financing can be arranged.
The Company intends to own, develop and operate theme attractions to be known
as Shipwreck and Treasure Museums. It is intended that such attractions will
display the artifacts and products recovered by the Company or the Limited
Partnerships, recreate the background and actual mission of the recovery crew
on each discovery, and create a gift shop that will sell artifacts and
products relating to the artifacts. In view of the failure of the Company to
arrange any financing it is unlikely that any such attractions will be built
in the near future. The Company intends to build such attractions either by
itself or in conjunction with other parties.
SOUTH AMERICAN PROJECT
On June 1, 1994, the Company signed an Agreement for Consulting Services with
Remarc International, Inc., a Colorado corporation controlled by two former
officers and directors of the Company, John Morris and Gregory Stemm. The
Agreement provides that Remarc will, at its own expense, seek to obtain for
the Company a permit from the appropriate government to search for and salvage
the particular shipwreck involved in the South American Project. If such a
permit were obtained for the Company by Remarc, then the Company agreed to
grant Remarc between 6% and 9-1/2% of the gross proceeds of any successful
recovery from the project. The actual percentage granted to Remarc was to
depend on the size of portion of the recovery that would be taken by the South
American government in return for the permit.
In furtherance of the negotiations for the permit, it became prudent to join
forces with a South American competitor to form a bidding Consortium. The
Consortium rendered the original South American Consultancy Agreement with
Remarc inappropriate, and under a Joint Venture Agreement dated August 1995
with the Company, Remarc agreed to forego its entitlement to the percentage of
the gross recovery of the project and instead become equal partners with the
Company in a South American company that owns half of the Consortium. The
Company and Remarc each own 24.5% of the South American company with the
remaining 51% being owned by Brazilians.
LEGAL ASPECTS OF INTERNATIONAL SALVAGE
The question of legal ramifications with regard to the recovery of shipwrecks
raises a number of issues. Salvors, historical interests and individuals
claiming ownership based on the payment of insurance claims all have potential
claims on goods brought up from the sea floor.
The seas are divided into four basic zones: the territorial sea, the
contiguous zone, the continental shelf, and the high seas. The Company
expects that most of its activities will be conducted in what is considered
the high seas. The site of the shipwreck found by Seahawk I, Ltd. is
approximately 25 miles from the Florida coastline in water approximately 1,500
feet deep. The site of the shipwreck found by Seahawk II, Ltd. is
approximately 60 miles from the Florida coastline in water approximately 1,200
feet deep. The Company believes that these shipwrecks are therefore located
in the high seas. No international agreement prevents the salvage of a
shipwreck from the high seas. Other countries, however, may claim a 200 mile
territorial limit and may assert claims to all shipwrecks located within that
distance from their coast.
Generally, there are two doctrines of maritime law that govern legal claims to
salvageable shipwrecks in the high seas. These are the law of finds and the
law of salvage. Both are well documented and accepted in United States common
law, and are also generally accepted as international law in practice. This
discussion centers on application of these laws in jurisdiction of U.S.
courts. The entity responsible for salvage is entitled to sue in rem against
the ship in federal admiralty court to establish its claim to the shipwreck
and cargo against all other claimants, known and unknown. The court employs a
fiction of convenience that a ship is a person against whom suits can be filed
and judgments entered, allowing actions to be brought against the vessel when
the owner is unknown or unreachable.
Legally, the claim may be decided according to the two competing maritime law
doctrines. If title to the wrecked ship or cargo is disputed, the salvaging
entity will seek to assert ownership under the law of finds. If the original
owner or owners are known, then the salvor will be entitled to a salvage award
under the law of salvage.
The first step in making claim is to establish control, or possession-in-fact,
over the shipwreck. To do so, the salvor must actually reduce objects from the
shipwreck to possession. Discovery of the shipwreck, or the mere intent to
raise the shipwreck or to recover objects from it, does not establish control.
Under the maritime law of finds, where a vessel has been abandoned, the finder
in possession becomes the owner of the vessel. Proof of abandonment includes
two factors: (1) the intent of the original owners to abandon the ship and
its cargo, and (2) the external act of abandonment, which may be either
express or constructive.
United States courts may interpret liberally constructive abandonment in
shipwreck cases where the ship has remained sunken for many years,
particularly if no serious previous salvage efforts have been made.
An entity responsible for the salvage of a sunken vessel and its cargo may
expect to defend its claim to title against the original owners or their
successors-in-interest, against rival Salvors, and against governments
asserting a historic interest in the shipwreck or cargo.
Potential claimants might include the insurers of the shipwreck as in the case
of COLUMBUS AMERICA DISCOVERY GROUP V. THE UNIDENTIFIED WRECKED AND ABANDONED
SAILING VESSEL (Civil Action 87-0363N). Unless the insurers expressly
disclaimed title after payment of a claim, and depending on the length of time
the ship has remained sunken, the insurers might have a valid claim of title
to recovered objects. The Courts in the Columbus America case held that the
insurers were entitled to up to 10% of the recovered objects that they can
demonstrate they provided coverage for.
DEEP OCEAN SURVEY AND RECOVERY
The Company believes that a market niche exists for a company which can offer
a comprehensive range of deep ocean search, survey, mapping and recovery
services. With the equipment currently owned or leased by the Company, as
described below, the Company can presently provide many of these services, or
lease its equipment to others who are engaged in such services.
EQUIPMENT
Following are descriptions of the vessels M/V Seahawk Retriever which was
owned and operated by the Company from 1990 to March 1996, and R/V Seahawk
which has been operated by the Company since 1989, and the other primary
equipment that is operated by the Company and normally available for search,
survey and recovery operations. As a result of the arrest of the Retriever,
described below, that vessel and its ROV, Merlin, were out of commission
between June, 1992 and April, 1994. The Merlin was sold in April, 1994 and
the Retriever was sold in March 1996.
SUPPLY VESSEL M/V SEAHAWK RETRIEVER
The Seahawk Retriever is a 210 foot, 489 gross ton, tug/supply vessel built in
1974 for the offshore oil industry. Drawing a full load draft of 17 feet and
having a breadth of 40 feet, the vessel has an open deck working area of 111
feet by 34 feet (3,800 square feet).
The ship is powered by two 18-cylinder ALCO engines, generating up to 7,200
shaft horsepower through reduction gearing and a controllable pitch propeller.
The ship is also fitted with a 380 horsepower bow thruster to assist with
maneuvering.
Electrical power is provided by two 200 kilowatt generators providing the ship
with all her electrical needs. Power to the ROV spread will be provided by an
independent 100 kilowatt generator mounted on deck.
The vessel currently has berthing and stores space for a crew of 24 in a
totally climate controlled environment.
During February, 1990, the Company entered into a ship's charter with Valley
Marine, Inc. (the "Charter") for the use of the Seahawk Retriever for a twelve
month period.
Simultaneously with the execution of the Charter, the Company also entered
into a stock option agreement with Valley Marine, Inc. and its shareholder,
Valley Resources, Ltd. ("VRL"), pursuant to which the Company granted to VRL
the option to exchange all of the outstanding shares of Valley Marine, Inc.
for restricted shares of the Company. The exact number of shares to be issued
was based on the total cash spent by Valley Marine purchasing and equipping
the vessel Seahawk Retriever. Since this amount was $1,510,000, the Company
agreed to issue 600,000 shares to VRL if the option was exercised. On
February 4, 1991, VRL exercised its option to exchange its stock in Valley
Marine for stock in the Company. Therefore, Valley Marine was acquired as a
wholly owned subsidiary of the Company, after which it was merged into R/V
Seahawk. R/V Seahawk was then merged into the Company.
On June 11, 1992, Commercial Union Capital Limited, London, England
("Commercial Union") filed a complaint against the Company and the Seahawk
Retriever in United States District Court, Tampa, Florida, alleging that
rentals on the Merlin remote operating vehicle (See "Merlin" below) had not
been paid and alleging that $1,647,139 was due and owing along with additional
interest costs and attorney fees. The court permitted the arrest of the
Seahawk Retriever on June 11, 1992. The Company contended that the arrest was
improper mainly because Commercial Union was not entitled to a maritime lien
on the vessel and on December 23, 1992, a magistrate judge recommended the
arrest be quashed and the vessel released. However, on May 21, 1993, a
district court judge concluded that the magistrate judge's recommendation
should not be adopted. This matter was settled during April, 1994. See ITEM
3. LEGAL PROCEEDINGS, below.
During August 1994, the Company entered into a Vessel Bareboat Charter and
Purchase Agreement with International Diving and Consulting Services, Inc.
("International Diving"), a Lafayette, LA based underwater services company.
On November 23, 1994, International Diving filed a voluntary petition in the
United States Bankruptcy Court under Chapter 11 of the Bankruptcy Code. Due
to this Chapter 11 filing, International Diving was not able to make the lease
payments.
On March 7, 1995, the U.S. Bankruptcy Court Western District of Louisiana,
Lafayette Opelousas Division ordered International Diving to make the
outstanding lease payments and all future payments under the Agreement as they
come due.
The same Bankruptcy Court ordered International Diving to make payments of
$45,568 on July 11, 1995, and to make payments of $53,179 on August 8, August
24 and September 5, 1995. The payment due on July 11, 1995, was made and
$45,000 was received on August 8, 1995. No further payments have been
received from International Diving.
On August 22, 1995, the Bankruptcy Court ordered that because International
Diving had failed to pay the sums required by the order of July 25, 1995, they
should immediately surrender the Retriever to the Company. The vessel was
repossessed by the Company on September 12, 1995.
In March 1996, and amended in April 1996, the company filed a claim against
International Diving in the Bankruptcy Court in the sum of $1,486,374 for
damages and other moneys due under the Agreement. Similar claims were filed
against one of the guarantors under the Agreement. It is the Company's policy
not to record any claims in its financial statements until any proceeds are
received. See ITEM 3. LEGAL PROCEEDINGS, below.
During the period December 8, 1995 to March 31, 1996 the Company chartered the
Retriever to American Oilfield Divers, Inc. of Lafayette, Louisiana ("AOD").
The main terms of the charter were that AOD would pay a day rate of $2,050 per
day when the vessel was working and pay any dockage costs when it was not.
During the period AOD incurred $47,250 of charter fees. On April 4, 1996, AOD
purchased the Retriever for $1,438,750 on an as-is-where-is basis via a wholly
owned subsidiary S&H Diving L.L.C. The purchase agreement provided for a sum
of $100,000 to be held in escrow for six months to pay for any bona fide lien
claims encumbering the vessel which accrued prior to March 31, 1996. The sale
resulted in a loss of $216,340 which was provided as a write down to the
Retriever in the December 31, 1995, financial statements.
VESSEL SEAHAWK. The Vessel Seahawk (the "Seahawk") is an 83 foot vessel which
was formerly owned by Seahawk, Inc. During November 1995, the Company
acquired 100% of the outstanding common stock of Seahawk, Inc. in a
transaction where the Company issued 2,400,000 shares of its Common Stock to
the shareholders of Seahawk, Inc. On March 31, 1996, Seahawk Inc. was merged
into the Company. The Seahawk was built in 1977 and extensively renovated in
1982. Its former owner, the University of North Carolina, used the Seahawk
for oceanographic research projects.
The Seahawk has accommodations for 11 persons for periods of up to 30
continuous days at sea. The Seahawk is equipped with midrange diving
equipment (including a decompression chamber) and a full array of navigational
and positioning equipment.
In March 1989, the Company entered into a ship's charter with Seahawk, Inc.
(the "Charter) for the use of the Seahawk for a twenty-four month period which
expired in March 1991. The Charter provided that Seahawk, Inc. was to provide
the Company with the use of the Seahawk and all equipment contained on board
for a charter fee of $6,000 per month. The Company was responsible for
providing the entire crew, fuel and all provisions and consumables as well as
providing for the day-to-day maintenance of the ship and on-board equipment.
The Company was also required to obtain protection and indemnity insurance
with a minimum valuation of $1,000,000, and hull insurance with a minimum
valuation of $900,000. The Charter was extended on a month-to-month basis on
the same terms from March 1991 until October 1, 1992. Commencing May 1, 1993,
the Charter was recommenced on the same terms.
ROV'S. The Company currently owns five Phantom ROV's: (1) Phantom H2D2, (2)
Phantom Hybrid, (3) Phantom 500, (4) Super Phantom, and (5) Phantom HD. These
remotely controlled underwater vehicles provide a cost effective method of
inspecting wrecks and bottom structure down to 1500 feet. Designed by Deep
Ocean Engineering, the Phantoms are capable of transmitting real time video of
the bottom directly back to the ship. The ROV design consists of syntactic
foam molded to anodized aluminum tubes. An assortment of machined parts,
electronics and motors are then added to complete the subsea package. The
vehicle is then fitted into a stainless steel crash frame. Several connectors
are attached to an umbilical that leads up to the surface controller.
ROV LEASING ACTIVITIES. The Company from time to time leases some or all of
its equipment to outside contracts.
COMPETITION
There are several companies operating on a world wide basis who may have the
technological capability necessary to compete with Seahawk. In the event
these companies decided to enter the shipwreck business, they may have greater
experience, technology and financial resources. In addition, there are a
number of investor groups, or other entities, which have been formed for the
purpose of searching for shipwrecks. As different technologies which can be
utilized in the search and recovery of shipwrecks are developed or improved
the likelihood of competitors may increase.
EMPLOYEES
The Company and its subsidiaries, have a total of approximately 8 employees.
These persons include John Lawrence and John Balch, executive officers of the
Company, administrative personnel, the captain of the vessel SEAHAWK,
assistants to the captain, and crew members of the vessel.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company and its subsidiaries maintain their offices at 5102 South
Westshore Boulevard, Tampa, Florida. The space is leased from a nonaffiliated
partnership pursuant to a lease which expired March 1, 1996. The lease is
currently running on a month-to-month basis while an extension is being
negotiated. Pursuant to the proposed extension of the lease, the Company
leases the first floor (approximately 5,200 square feet) for $5,500 per month
until September 30, 1995, and the second floor (approximately 5,000 square
feet) for $1,000 per month on a month-to-month basis.
The leased space provides the Company with corporate offices and conservation
lab in addition to providing space for artifact displays.
ITEM 3. LEGAL PROCEEDINGS.
There are no current legal proceedings, and the Company is not aware of any
threatened legal proceedings to which the Company is a party except the
following:
CLAIM AGAINST INTERNATIONAL DIVING AND CONSULTING SERVICES, INC. During
August 1994, the Company entered into a vessel Bareboat Charter and Purchase
Agreement with International Diving and Consulting Service, Inc.
("International Diving"), a Lafayette, Louisiana based underwater services
company. Pursuant to this agreement, International Diving agreed to charter
the Seahawk Retriever for the five year period commencing September 1, 1994,
and to purchase the vessel at the end of the five year period for $1,350,000
plus interest at a rate equal to 3% per annum over the Citibank New York prime
rate, less credits as explained in the next paragraph.
The Agreement further provided that International Diving would market the
vessel at a minimum day rate of $5,000, except that all lump sums or turnkey
projects would have a $6,000 minimum daily rate. International Diving further
guaranteed one hundred eighty (180) days utilization of the vessel at a rate
of $5,000, or an annual total of $900,000. The greater of the guaranteed
revenues or the actual revenues, after deduction for certain operating costs,
was to be shared between the Company and International Diving as follows:
(i) 35% to the Company as charter hire for the vessel; (ii) 30% to
International Diving for operating costs and profit; and (iii) 35% to the
Company which was to be applied toward the purchase price of the vessel.
Payments were due quarterly within 10 days after the end of each quarter. In
the event International Diving failed to purchase the vessel at the end of the
five year term, the vessel was to be returned to the Company and the 35%
payments which were credited toward the purchase price were to be retained by
the Company as liquidated damages. International Diving's performance under
this agreement was also personally guaranteed by its two principals.
On November 23, 1994, International Diving filed a voluntary petition in the
United States Bankruptcy Court under Chapter 11 of the Bankruptcy Code. Due
to this Chapter 11 filing, International Diving was not able to make the
lease payment in the amount of approximately $100,000 which was due to the
Company on December 10, 1994.
On March 7, 1995, the U.S. Bankruptcy Court Western District of Louisiana,
Lafayette, Opelousas Division, ordered International Diving to pay (a)
$130,836 on or before March 17, 1995; (b) $56,935 on or before April 7, 1995;
(c) $56,935 on or before May 7, 1995; and (d) all future payments under the
Agreement as they came due, and ordered that the Agreement be amended to grant
International Diving the option to purchase the Retriever for the sum of
$1,450,000 payable in cash on or before June 1, 1995. International Diving
declined the option to purchase the Retriever and made the payments under (a),
(b), and (c) above.
International Diving was unable to make the payment of $136,703.50 due on June
10, 1995 and on July 11, 1995 (as modified on July 25, 1995), the same
Bankruptcy Court ordered International Diving to make payments of $45,568 on
July 11, 1995, and to make payments of $53,179 on August 8, August 24 and
September 5, 1995. The payment due on July 11, 1995, was made and $45,000 was
received on August 8, 1995. No further payments have been received from
International Diving.
On August 22, 1995, the Bankruptcy Court ordered that because International
Diving had failed to pay the sums required by the order of July 25, 1995, they
should immediately surrender the Retriever to the Company. The vessel was
repossessed by the Company on September 12, 1995.
On June 5, 1996, the Company filed a claim and a motion for payment in the
Bankruptcy Court against International Diving and against one of the
principals of International Diving as guarantor for the company in the sum of
$1,486,374 for damages and other amounts payable by International Diving under
the Agreement. The claim reflected credit for sums received as a result of
the sale of the vessel to a third party following the breach by the debtor. In
accordance with Company policy, the claim has not been recorded in the
financial statements, and will not be until any proceeds are received.
Following is a summary of the settled litigation the Company has been involved
in during the past three years:
LAWSUIT FILED BY GREGORY P. STEMM. During February 1994, the Company agreed
with Carl Anderson, a principal shareholder, to convert two notes (the
"Notes") one for $44,448.78 and the other for $80,936.78, which, together with
accrued interest thereon, totaled $141,803 into 567,212 shares of Common Stock
in the Company. The Notes were payable to Gregory P. Stemm, a former officer
and director of the Company, who had sold them to Anderson on the basis that
they would be returned to him or paid for on their due date which was December
31, 1994. Anderson did not pay Stemm nor did he return the Notes to him.
Consequently, on April 27, 1995, Stemm filed a lawsuit against the Company
alleging that (a) the Company must pay him the principal and interest due on
the Notes plus attorneys' fees and such other relief as the Court saw just and
proper, and (b) Stemm was entitled to immediate possession of the Notes, and
(c) the Company and Anderson conspired to deprive Stemm of his right to
payment on the Notes and as a result Stemm was entitled to damages due to the
loss of value of the Notes plus interest, costs and attorneys' fees.
The Company defended the action on the basis that it was verbally informed by
both Anderson and Stemm that the Notes had been transferred to Anderson, and
that the Company relied on their representations and converted the Notes in
good faith. However, on the advice of counsel, the Company has agreed to
settle with Stemm. A preliminary settlement agreement has been signed with
Stemm, however, all of the details have not been finalized and the lawsuit has
not been dismissed. The Company has issued Stemm 360,000 shares of its Common
Stock and a two year note for $90,000 secured on the RV Seahawk or some other
Company assets to be agreed, in consideration for Mr. Stemm dismissing the
lawsuit. As part of the settlement of this matter, Carl Anderson agreed to
pay the Company $.25 per share for the 567,212 shares which he was issued
during February 1994.
SEC CIVIL ACTION. During August 1994, the SEC filed a civil action against
the Company and John Morris, Gregory Stemm and Daniel Bagley, three former
officers and directors of the Company, seeking injunctive relief against the
Company and injunctive and monetary relief against the former officers and
directors. The SEC did not seek any financial penalties or other monetary
relief against the Company.
The Complaint filed by the SEC alleged that the Company violated Section 17(a)
of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b)of the
Securities Exchange Act of 1934 and Rules 10b5, 12b20, 13a1, 13a13 and 13b21
promulgated thereunder. The SEC alleged that between April, 1989, and July,
1991, the Company and Messrs. Morris, Stemm and Bagley disseminated to the
public, in the form of television broadcasts, videotapes and press releases,
false and misleading material information and failed to disclose certain
material information concerning the Dry Tortugas shipwreck discovered and
excavated by the Company. The SEC alleged that the Company materially
overstated the value of the artifacts on its balance sheet and in other
financial information provided in the registration statement of the Company
and two amendments thereto filed in 1992 with the SEC and in certain periodic
reports of the Company filed in 1992 with the SEC.
The Company and the staff of the SEC negotiated a settlement of the matter
whereby the Company agreed to consent to the entry of a final judgment of
permanent injunction, without admitting or denying any of the allegations in
the complaint enjoining the Company from violations of certain provisions of
the federal securities law referenced in the preceding paragraph. In
addition, the Company agreed that it will not employ John Morris or Gregory
Stemm as officers and directors of the Company or any subsidiaries of the
Company, use corporate funds to pay for or reimburse any costs incurred by
Morris or Stemm for the defense of any civil or administrative action
instituted against them by the SEC, or redeem or purchase any stock they own
until after the termination of any such action. Finally, the Company agreed
to withdraw its pending appeal to the SEC of the Initial Decision issued in
the stop order proceeding.
SEC STOP ORDER PROCEEDING. On July 30, 1992, the SEC issued an order
directing the staff of the Division of Enforcement (the "Division") to conduct
an examination pursuant to Section 8(e) of the Securities Act of 1933 (the
Act") to determine whether a stop order should be issued relating to a
registration statement which the Company had filed during March 1992 and which
had become effective by the passage of time on August 1, 1992. Under Section
8(d) of the Act, a stop order proceeding was instituted against the Company by
order of the SEC dated January 12, 1993. A hearing was held before an SEC
Administrative Law Judge during late January and early February 1993.
On May 26, 1993, the Administrative Law Judge issued his Initial Decision.
The Judge concluded that the registration statement filed by the Company was
materially false and misleading and that the Company failed to cooperate with
the examination conducted by the Division's staff. A stop order was issued
suspending the effectiveness of the Company's registration statement.
The primary focus of the proceeding was the value of the shipwreck artifacts
owned by the Company and an affiliated partnership, Seahawk I, Ltd. The Judge
found that the Company had overstated the value of the artifacts on its
balance sheet and in other financial information provided in its registration
statement. The Judge concluded that the total net realizable value of all the
artifacts owned, at that time, by the Company and Seahawk I was $1,356,361 of
which amount $285,413 was attributed to the Company artifacts and $1,070,948
was attributed to the Seahawk I artifacts. As a result of this decision, and
in order to present the financial statements in accordance with generally
accepted accounting principles, the Company and the Partnership restated their
December 31, 1990 and 1991 financial statements.
The findings of the Administrative Law Judge could possibly be used by private
litigants in civil suits against the Company to prove that the Company
misstated material facts in certain periodic reports it filed with the SEC.
COMMERCIAL UNION LAWSUIT. On June 11, 1992 Commercial Union Capital Limited
("Commercial Union"), the company from which the Company leased its large ROV
"Merlin", filed a lawsuit in the United States District Court for the Middle
District of Florida, Tampa Division in Admiralty against R.V. Seahawk, Inc. IN
PERSONAM, Seahawk Deep Ocean Technology, Inc. In Personam and the "Seahawk
Retriever" IN REM.
In its complaint Commercial Union alleged that the Company had committed a
breach or default under its Lease Purchase Contract with Commercial Union
since the Company failed to make its payment due July 2, 1991, and failed to
make all payments due thereafter. Commercial Union further alleged that it
had elected to treat the breach by the Company as a termination of the Lease
Purchase Contract, entitling Commercial Union to recover the loss value as
defined in the Lease Purchase Contract as of June 9, 1992 of $1,173,370.89.
Commercial Union alleged that it was also entitled to receive the amount of
the Company's arrears equal to $447,208.19 plus interest on the arrears from
June 20, 1991 through June 9, 1992 of $26,560.11, and legal fees and costs
estimated at $156,113.20. Therefore, Commercial Union was seeking a judgment
against the Company in the amount of $1,647,139.19 as of June 9, 1992 plus (a)
interest accruing at the rate of $386.02 per day and (b) attorney fees and
costs estimated at $156,113.20.
Commercial Union, in its complaint, also sought a maritime lien against the
Seahawk Retriever, her engines, tackle, equipment and appurtenances and asked
that the ship be sold and the proceeds be paid towards the amount of any
judgment.
On June 18, 1992 the Company responded by filing a Motion to Quash the Arrest
Warrant and to dismiss the IN REM complaint. The motion was recommended by
the Magistrate Judge on December 23, 1992, but on May 21, 1993, a District
Court Judge concluded that the Magistrate Judge's recommendation should not be
adopted and the Seahawk Retriever was arrested. On August 6, 1993, the
Magistrate Judge gave a Report and Recommendation concerning Commercial
Union's Emergency Motion for an Interlocutory Sale of the M/V Seahawk
Retriever in which it was recommended that the vessel be sold at Interlocutory
Sale with a minimum bid of $1,000,000. On October 18, 1993, the United States
District Court Middle District of Florida Tampa Division made an Order for an
Interlocutory Sale of the M/V Seahawk Retriever to take place, without a
minimum bid, on November 9, 1993. The Order, however, contained certain
publication requirements that could not be met until some time in late
January, 1994. Accordingly, the Company requested further clarification from
the Court and the sale date was delayed to February 10, 1994.
On February 9, 1994, and as amended on April 1, 1994, the Company and
Commercial Union Capital Limited entered into a joint stipulation agreement to
delay sale of the Seahawk Retriever. The settlement provided for the Company
to pay Commercial Union $500,000 in cash and sign a $1,000,000 note payable
one year from closing secured by a first preferred ship mortgage on the
Seahawk Retriever, her engines, tackle, equipment and apparel. The note was
non-interest bearing through its due date, April 15, 1995. In March 1995,
Commercial Union agreed to extend the expiration date of the note to June 1,
1995, pursuant to a March 7, 1995, Agreement wherein International Diving and
Consulting Services, Inc., which was operating the Seahawk Retriever under a
charter agreement, was granted the option to purchase the vessel for the sum
of $1,450,000 payable in cash on or before June 1, 1995. International Diving
did not exercise this option and continued the five year charter under its
original terms. The Company and Commercial Union then reached an agreement
that the mortgage would be extended for two years until June 2, 1997. Under
the terms of the agreement, the new principal balance was $1,025,000 to be
paid in eight quarterly installments, with interest charged at 5% per annum
over the Citibank New York prime rate in effect on June 2, 1995, and adjusted
thereafter biannually on the first day of December and June each year. The
first seven quarterly installment were to comprise the interest accrued and
due on the date of the installment plus $50,000 of the principal. The eighth
and final installment was to comprise all the remaining amount due under the
note. The company did not pay the first three installments. On March 31,
1996 the Company sold the Seahawk Retriever and settled the amount due to
Commercial Union at that date, being $1,168,000, for $900,000. A benefit on
settlement of ships mortgage of $221,828 and a loss of $216,340 on the sale of
the vessel (shown as a provision for write down of the Retriever) were
recorded in the December 31, 1995, financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of shareholders during the
fourth quarter of the fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. The Company's common stock is traded
on the over-the-counter market. The following table sets forth the range for
high and low bid quotations for the Company's securities as reported by
NASDAQ. These prices are believed to be representative inter-dealer
quotations, without retail markup, markdown or commissions, and may not
represent actual transactions. The Company's common stock has been traded on
the NASDAQ system under the symbol "SDOT" since January 24, 1990, but on
February 10, 1994, was delisted from the NASDAQ Small Caps Stock Exchange for
noncompliance with the rule that requires companies with net equity lower than
$2,000,000 to maintain a minimum bid stock price of $1.00. The stock is
currently quoted on the OTC Bulletin Board.
BID
QUARTER ENDED HIGH LOW
March 31, 1993 $1.00000 $0.12500
June 30, 1993 $1.37500 $0.50000
September 30, 1993 $1.06250 $0.53130
December 31, 1993 $0.78130 $0.18750
March 31, 1994 $0.56250 $0.50000
June 30, 1994 $0.34380 $0.25000
September 30, 1994 $0.42190 $0.34380
December 31, 1994 $0.37500 $0.15625
March 31, 1995 $0.35938 $0.34375
June 30, 1995 $0.40625 $0.31250
September 30, 1995 $0.40625 $0.37500
December 31, 1995 $0.34375 $0.25000
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of
beneficial holders of the Company's no par value Common Stock at December 31,
1995, was approximately 8,000.
(c) DIVIDENDS. Holders of Common Stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. The Company
has not paid any dividends on its Common Stock and the Board of Directors of
the Company presently intends to pursue a policy of retaining earnings, if
any, for use in the Company's operations and to finance expansion of its
business. The declaration and payment of dividends in the future, of which
there can be no assurance, will be determined by the Board of Directors in
light of conditions then existing, including the Company's earnings, financial
condition, capital requirements and other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The Company was formed on September 17, 1986 for the purpose of creating a
corporate vehicle to seek and acquire a business opportunity. The Company
completed a public offering during October, 1988 and received net proceeds of
approximately $490,000. On March 13, 1989 the Company acquired 100% of the
outstanding stock of R/V Seahawk, Inc. ("R/V Seahawk") in exchange for
100,000,000 shares of the Company's Common Stock. The Company had no
significant operations prior to the March, 1989, acquisition of R/V Seahawk.
On March 2, 1992, R/V Seahawk was merged into the Company.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The net loss for the year ended December 31, 1995 was $1,398,981 compared to a
loss of $1,451,232 for the year ended December 31, 1994, a decrease in losses
of about 4%.
The increase in revenues to $607,344 in 1995 from $182,227 in 1994 resulted
from an increase in revenue producing partnership operations to $145,690 in
1995 from $50,285 in 1994, and an increase in revenue from others to $454,020
in 1995 from $131,942 during 1994. Revenue from affiliated partnerships was
mainly the result of billings for marine survey services during the third and
fourth quarters of 1995. There was a $322,078 increase in revenue from others
(to $454,020 in 1995 from $131,942 in 1994). This increase was largely due to
the revenue on the lease of the vessel "M/V Seahawk Retriever" pursuant to
Bareboat Charter Agreements between the Company and unrelated parties which
produced revenue throughout 1995. Charter revenue was earned only during the
later part of 1994. A provision for bad debt in the amount of $196,313 was
taken against such revenues during 1995 due to the bankruptcy of International
Diving and Consulting Services, Inc. and because a portion of the receivable
from an affiliate is not yet funded. The sale of the M/V Seahawk Retriever in
April 1996 will decrease charter revenues during 1996.
Operating expenses remained nearly the same at $820,715 in 1995 compared to
$836,580 in 1994. There was an increase in expense associated with vessel
operations to $401,594 in 1995 from $319,346 in 1994. This resulted primarily
from increases in the costs of personnel (to $201,011 from $178,567),
subcontracted services (to $72,335 from $419), and repairs and maintenance (to
$34,909 from $22,025), with a decrease in dockage (to $7,900 from $22,527),
travel (to 9,943 from $13,996) and vessel insurance (to $43,697 from $46,863).
The costs of personnel and subcontract services were up due to the crewing
requirements for survey work performed with the R/V Seahawk while the repair
and maintenance costs were primarily incurred to ready the M/V Seahawk
Retriever for charter. Decreases in dockage and insurance expenses were the
result of these costs being born by the charter parties periodically during
1995.
The rental of the vessel R/V Seahawk decreased to $60,000 in 1995 from $72,000
in 1994 as the vessel was rented for only 10 months in 1995 while it had been
rented for a full year in 1994. The R/V Seahawk was purchased by the Company
in November 1995 so the rental payments for that vessel will not be incurred
in 1996. Depreciation expense decreased to $226,673 in 1995 from $324,515 in
1994 mostly due to the sale in 1994 of the ROV Merlin and the expiration of
the useful life of some computer related equipment.
A $286,113 increase in administrative expense to $802,354 in 1995 from
$516,241 in 1994, resulted primarily from the increase in the provision for
bad debt expense (to $196,313 from $6,199), increased legal expenses (to
$101,156 in 1995 from $78,780 in 1994) and higher travel and transportation
expenses (to $65,976 from $48,189 in 1995). General legal expense was $23,616
lower in 1995 than during 1994, however this reduction was offset by $45,992
in legal costs that were incurred during 1995 associated with seeking permits
to work in the Azores. The Company did not have such costs in 1994. The
increase in travel costs were primarily the result of travel relating to the
Azores project and chartering the Seahawk Retriever out of Louisiana in 1995.
Interest expense was up by $62,777 due to an increase in the costs of notes
payable issued during 1994 being born for a full year during 1995. Interest
expense also continued to accrue to Commercial Union on the preferred ships
mortgage held on the Seahawk Retriever. An increase in losses resulting from
partnership operations to $126,002 in 1995 from $60,763 in 1994, was primarily
due to losses incurred in Eagle Partners, Ltd. which resumed search operations
for the shipwreck code named "Golden Eagle". There was also a reduction of
loss due to disposal of assets to $10,191 in 1995 from $45,181 in 1994 as
fewer assets were disposed of during 1995. The Seahawk Retriever was sold in
April 1996 and a provision of $216,340 on the loss on the sale and a benefit
on settlement of ships mortgage, of $221,828 were recorded in the year ended
December 31,1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The net loss for the year ending December 31, 1994 was $1,451,232 as compared
to a loss of $1,876,863 for the year ending December 31, 1993, a decrease in
losses of about 23%.
The reduction in revenues to $182,227 in 1994 from $436,631 in 1993 resulted
from a decrease in revenue producing partnership operations to $50,285 in 1994
from $430,545 in 1993. Revenue from affiliated partnerships was down
primarily due to management's decision to no longer perform marine services
for Eagle Partners, Ltd. until the partnership secures funding to pay for the
services. This was offset by a $125,856 increase in revenue from others (to
$131,942 in 1994 from $6,086 in 1993). This increase was largely due to the
revenue on the lease of the vessel "M/V Seahawk Retriever" pursuant to a
Bareboat Charter Agreement between the Company and an unrelated party which
began producing revenue in September 1994.
An increase in operating expenses to $836,580 in 1994 from $811,974 in 1993
resulted in part from an increase in expense associated with vessel operations
to $319,346 in 1994 from $225,403 in 1993. There were increases in the costs
of insurance (to $46,863 from $18,898), dockage (to $22,527 from $6,812), and
personnel (to $178,567 from $104,620) with a decrease in vessel maintenance
expenses to $22,025 in 1994 from $41,022 in 1993. The dockage, personnel, and
insurance increases were directly attributable to the overhead of the M/V
Seahawk Retriever in the third quarter of 1994 following the vessels release
from arrest. The Company did not bear such costs during 1993. The rental of
the vessel R/V Seahawk increased to $72,000 in 1994 from $54,000 in 1993 as
the vessel was rented for the full year in 1994 and only 9 months in 1993.
Depreciation expense decreased to $324,515 in 1994 from $426,087 in 1993
mostly due to the sale in 1994 of the ROV Merlin.
A $214,595 reduction in administrative expense to $516,241 from $730,835 in
1993, resulted primarily from reduced legal expenses (to $78,780 in 1994 from
$237,428 in 1993) as the Company no longer incurred the higher costs due to
the SEC investigation and the Commercial Union lawsuit in 1994. There was
also a reduction in accounting expense (to $33,434 from $58,247),
administrative salary expense (to $127,847 from $134,195) and a reduction in
general administrative costs of $8,106 due to the continued strategy of
overhead reduction in line with operational activity and cash resources.
There were moderate increases in costs of consulting (increase of $19,436),
printing (increase of $4,267), postage (increase of $2,178) and insurance
(increase of $2,941).
Interest expense was up by $60,792 due to an increase in notes payable during
1994 when new notes amounting to $310,000 were issued. Interest expense also
continued to accrue to Commercial Union on the long term debt. A decrease in
losses resulting from partnership operations to $60,763 in 1994 from $394,283
in 1993, was primarily due to a lack of funding for the partnerships'
operations and the consequent reduction in their overhead expenditure. There
was also a reduction of loss due to disposal of assets to $45,181 in 1994 from
$260,006 in 1993 since the loss on the sale of the ROV "Merlin" was provided
for in the earlier year.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1995, the Company's working capital deficit
increased slightly to a negative $(1,968,771). At December 31, 1994 the
Company had a working capital deficit of $(2,114,888).
The deficit decreased by $146,117 despite a net operating loss before
depreciation during the period of $1,172,258, because current debt was reduced
in the period by cash generated from private placements of the Company's
common stock and by conversion of debt into equity.
The Company continues to have very restricted liquidity. This situation
results principally through the lack of revenue from operations. The Company
has sought to produce revenues through the following:
1. Sales of subsea services to entities involved in shipwreck recovery
projects which are originated by the Company.
2. Sales of subsea services to other entities.
3. Lease of ships and subsea equipment.
4. Sale of artifacts and artifact related merchandise.
The Company's main source of revenue, sales to affiliated project entities
such as Limited Partnerships, depends on those partnerships being properly
funded. All three of the existing Limited Partnerships, Seahawk I, Ltd.,
Seahawk II, Ltd., and Eagle Partners, Ltd., are out of cash.
Until it can obtain additional financing or begin earning revenue from its
artifacts, either by direct sale or royalty on reproductions, Seahawk I, Ltd
will not be able to pay the balance of its liabilities to the Company. It is
not likely that the Partnership will be able to raise further financing except
through the sale of artifacts. The Partnership had planned to sell its
artifacts through the Seahawk Shipwreck and Treasure Museum, but the inability
to finance the museum had forced the Company to put the museum plans on hold
until appropriate financing could be arranged. The Company, acting in its
capacity as general partner of Seahawk I Ltd. is attempting to arrange for a
sale of the Partnership's collection of artifacts.
Seahawk II, Ltd is out of funds and the partners have decided they are not
willing to invest additional funds to continue further excavation of the wreck
site. The General Partner is unable to identify additional working capital to
work on the Partnership's wreck off St. Augustine, and has asked the partners
on two occasions to vote on terminating the Partnership. The results of those
votes were inconclusive.
Eagle Partners, Ltd. is also out of cash but has continued its search for a
shipwreck, known as the Golden Eagle, believed to have sunk off the east coast
of the Untied States. The Company has in the past provided survey services to
Eagle Partners, Ltd. on credit but has in effect provided in full against the
account receivable by assuming losses on investments sufficient to create a
negative balance on investment in the Partnership that is equal to the account
receivable.
During 1995, Eagle Partners Limited raised funds to continue its search for
the Golden Eagle using the Company's services. On July 18, 1995 the Company
announced that it had entered into a joint venture agreement with Sea Miners,
Inc. a Baltimore, MD company, to resume the search for this shipwreck. The
joint venture incorporates research by both parties concerning this wreck and
a pooling of resources to continue the search operations. Under the
agreement, the Company will continue to be the offshore contractor to the
joint venture for all marine operations. The Company earned revenues of
$50,000 during 1995 from this Joint Venture and expects to earn additional
revenue during 1996 if the Joint Venture can raise sufficient funding.
The Company is currently seeking to assist Eagle Partners in raising
sufficient funding to complete the Golden Eagle project. If properly funded,
the project will generate cash flow for the Company. Substantial cash would
be produced for the Company if the Golden Eagle is located and its cargo is
recovered and disposed of profitably.
The Company is reviewing other potential shipwreck projects and it is
anticipated that if the Company were to proceed with any of these projects, it
would help to form limited partnerships or similar entities for the purpose of
funding the projects. There is no assurance that any of the partnerships
would be successful in raising the necessary amount of funding.
During 1995 the Company generated over $50,000 selling its services to non-
shipwreck related customers and some $400,000 through the chartering of its
recovery vessel, the Seahawk Retriever. The charter agreement was with
International Diving and Consulting Services and was to produce an annual
revenue of $900,000 for five years. However, on November 23, 1994,
International Diving filed a voluntary petition in the United States
Bankruptcy Court under Chapter 11 of the Bankruptcy Code. Due to this Chapter
11 filing, International Diving was not able to make the lease payment in the
amount of approximately $100,000 which was due to the Company on December 10,
1994.
On March 7, 1995, the U.S. Bankruptcy Court Western Division of Louisiana,
Lafayette-Opelousas Division ordered International Diving to pay (a) $130,836
on or before March 17, 1995; (b) $56,935 on or before April 7, 1995; (c)
$56,935 on or before May 7, 1995; and (d) all future payments under the
Agreement as they come due, and ordered that the Agreement be amended to grant
International Diving the option to purchase the Retriever for the sum of
$1,450,000 payable in cash on or before June 1, 1995. International Diving
declined the option to purchase the Retriever and made the payments under (a),
(b), and (c) above.
International Diving was unable to make the payment of $136,703.50 due on June
10, 1995 and on July 11, 1995 (as modified on July 25, 1995) the same U.S.
Bankruptcy Court ordered International Diving to make payments of $45,568.00
on July 11 and July 25th 1995, and to make payments of $53,179 on August 8th,
August 24th, and September 5th, 1995. The payments due on July 11, 1995 and
July 25, 1995 were made. No further payments were made by International
Diving and on September 12, 1995, the vessel M/V Seahawk Retriever was
repossessed by the Company. An account receivable from International Diving
of $173,620 owing at December 31, 1995 was provided for as bad debt by the
Company due to the possibility that International Diving may be forced into a
Chapter 7 Bankruptcy Liquidation. The Company is, however, pursuing
International Diving for the outstanding payments through the same Bankruptcy
Court.
During the period December 8, 1995 to March 31, 1996 the Company chartered the
Retriever to American Oilfield Divers Inc. of Lafayette, Louisiana ("AOD").
The main terms of the charter were that AOD would pay a day rate of $2,050 per
day when the vessel was working and pay any dockage costs when it was not.
During the period AOD incurred $47,250 of charter fees. On April 4, 1996, AOD
purchased the Retriever for $1,438,750 on an as-is-where-is basis via a wholly
owned subsidiary S&H Diving L.L.C. The purchase agreement provided for a sum
of $100,000 to be held in escrow for six months to pay for any bona fide lien
claims encumbering the vessel which accrued prior to March 31, 1996.
After settlement of the mortgage on the vessel and various selling fees, the
sale of the Retriever has generated approximately $350,000 cash in the second
quarter of 1996, and the retained $100,000 should be released to the Company
in the third quarter. The sale of the Retriever means that no other revenue
will be produced for the Company from that asset in the future.
In November 1995 the Company acquired all the outstanding common stock of
Seahawk, Inc. a company that owns the RV Seahawk, the ship that the Company
uses for survey work. Prior to the acquisition the Company had chartered the
vessel at a cost of $6,000 per month, almost continually since March 1989.
The acquisition will reduce such rental costs in the future.
In October 1993 the Company signed a marketing agreement with Buckeye
Communications, Inc. The agreement set out the terms under which the
Company's artifacts, products derived from the artifacts and products derived
from the company's archive material would be marketed by Buckeye on a
worldwide exclusive basis. Any sales resulting from this marketing effort
would have resulted in royalty payments to the Company. Similar agreements
were signed between Buckeye and Seahawk I., Ltd., Seahawk, II, Ltd. and Eagle
partners Ltd. The agreements required a minimum revenue to the Company and
its Affiliates of $350,000 in the first two years in order for the agreements
to continue in force. The development of products under the marketing
agreement earned little revenue and the agreement expired in October 1995.
During 1994 Buckeye did provide licensing agreement with a third party to
develop a CD ROM game which is expected to enter the market in 1996 and
provide royalty income to the Company from that time. On October 1993 Buckeye
also agreed to provide Seahawk I, Ltd. with a loan of $250,000 at 10% per
annum interest for two years. The loan was secured by certain of the pearls
owned by Seahawk I, Ltd. and guaranteed by the Company. Under the terms of
the note, interest was payable quarterly, but none of the interest due was
paid. On December 1, 1994, an agreement was reached between the Company,
Seahawk I, Ltd., and Buckeye under which the Company assumed the Buckeye loan
and interest due in return for a note from Seahawk I, Ltd. The principal of
the loan was converted into 1,000,000 shares of common stock in the Company
and 200,000 shares of convertible redeemable preferred stock in the Company.
The outstanding interest of $54,156 was scheduled to be repaid at the rate of
$5,000 per month.
Apart from seeking to raise revenue from assets the Company has also sought to
conserve cash by the conversion of debt into equity.
During 1994 the Company issued 2,041,875 shares of its common stock for
$325,820 in cash and $200,000 of marketable securities which were later
converted into cash. The Company also issued 4,477,664 shares to pay
outstanding debt of $1,071,886 and 100,000 shares to purchase equipment which
was later sold for approximately $25,000. During 1995 1,863,699 shares
(including contingent bonus shares) were issued for $321,333, 1,057,739 shares
were issued to pay $261,099 in outstanding debt and 2,400,000 shares were
issued in an exchange agreement with Seahawk, Inc. valued at $904,080.
In order for the Company to remain in business during the next 12 months it is
necessary for the Company to pursue charter and contract work, generate new
sources of revenue or raise additional financing. The Company's current and
future efforts to obtain additional financing will concentrate on offering
additional equity to investors until such time as the Company's operational
cash flow is self supporting.
ITEM 7. FINANCIAL STATEMENTS.
Please see pages F-1 through F-69.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements between the Company and its independent
certified public accountants on any matter of accounting principles or
practices or financial statement disclosure since the Company's inception.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Directors and Officers of the Company are as follows:
Age Positions and Offices Held
John T. Lawrence 48 Chief Executive Officer,
President, Director of the
Company, and Chairman of the
Board
Daniel J. Derfus 52 Secretary and Director of the
Company
John B. Balch 48 Chief Operating Officer and
Director of the Company
There is no family relationship between any Director or executive officer of
the Company. All Directors and Officers will hold office until the next Annual
Meeting of Shareholders.
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the past
five years.
JOHN T. LAWRENCE has served as one of the Company's Directors since September
1991, as President of the Company since June 1993, as Chief Executive Officer
since January 1994, and as Chairman of the Board since February 1995. Mr.
Lawrence has served as Chairman of OSEL GROUP since November 1988. OSEL
GROUP, located in the United Kingdom, is engaged in the business of designing
and manufacturing subsea vehicles and sensors. The main trading company in
OSEL GROUP was recently placed into receivership, and its business and assets
were sold. From 1984 until 1988, Mr. Lawrence served as the Managing Director
of OSEL GROUP and from 1979 until 1984, he served as the Financial Director of
OSEL GROUP. From 1975 until 1979, he served as financial director of an oil
business subsidiary of the John Mowlem Group. In 1968, Mr. Lawrence joined
the London office of Peat Marwick Mitchell & Co. where he qualified as a
Chartered Accountant in 1971 and he continued with Peat Marwick Mitchell & Co.
until 1975. Mr. Lawrence received an honors degree in Chemistry from
University College of London in 1968.
DANIEL J. DERFUS has served as Director of the Company since September 1993,
and as Corporate Secretary since January 1994. He owns and operates a retail
wallpaper business in Tampa, Florida, and is a former director of Innova
Purewater, Inc. He retired from Exxon Corp. after seventeen years working for
that company at their Houston headquarters as well as in the Middle East. His
positions with Exxon included Vice President of Human Resources for AL Jubail
Petrochemical and Compensation and Benefits Manager for Exxon Marine
Transport. He was also responsible for a major study on the social and
economic effect of developing a 70M ton copper-zinc-ore body in the Wisconsin
Northwoods. Mr. Derfus received a B.S. in Business Administration from
Marquette University, an MA in Industrial Relations from the University of
Minnesota and he completed post graduate work at the University of Houston,
Bates College of Law.
JOHN P. BALCH has served as a Director of the Company and as Chief Operating
Officer since May 1994. Mr. Balch has also served as Managing Director of
OSEL GROUP (see above) since November 1988. Mr. Balch served as General
Manager and Director of OSEL GROUP from 1983 until 1988. From 1975 until
1979, he served as Operations Manager for DHB, a subsidiary of Oceaneering
International, Inc., which manufactured Atmospheric Diving Systems. From 1979
until 1983, Mr. Balch served as Managing Director of DHB and Worldwide Program
Manager for Oceaneering ADS. From 1969 until 1975, he progressed from
toolmaker to development engineer then product manager in three precision
engineering companies. Mr. Balch received a City and Guilds HNC in Mechanical
Engineering from Highbury College, Portsmouth, England in 1969.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
During the year ended December 31, 1995, three persons who were Officers,
Directors or beneficial owners of 10% or greater of the Company's Common Stock
failed to file reports on a timely basis under Section 16(a) of the Securities
Exchange Act of 1934.
John T. Lawrence and John P. Balch failed to file Form 4's for the month of
May, 1996 reporting that they each received options to purchase 200,000 shares
of the Company's common stock.
John T. Lawrence, John P. Balch and Daniel J. Derfus, Directors, failed to
file Form 4's for the month of May 1995, reporting that they each received
warrants to purchase 50,000 shares of the Company's common stock.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the years ended December
31, 1993, 1994 and 1995, of the Company's Chief Executive Officer and Chief
Operating Officer:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
PAYOUTS
SECURITIES ALL
ANNUAL RES- UNDERLYING
OTHER
NAME COM- TRICTED OPTIONS/ COM-
AND PRINCIPAL PENSA- STOCK SARS LTIP
PENSA
POSITION YEAR SALARY BONUS TION AWARD(S)(NUMBER) PAYOUTS TION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John T. Lawrence, 1995 $100,000 -0- -0- -0- -0- -0- -0-
President <FN1>
1994 $100,000 -0- -0- -0- -0- -0- -0-
<FN2> (2)
John P. Balch, 1995 $100,000 -0- -0- -0- -0- -0- -0-
Chief Operating
Officer
<FN>
<FN1>
Mr. Lawrence and Mr. Balch were each paid only $8,400 of their $100,000
salary. The balance was accrued.
<FN2>
Mr. Lawrence's total compensation for 1994 was $100,000. He received $27,888
in cash and $26,850 was accrued due to the Company's shortage of cash flow.
The balance of $45,262 was to be paid in stock by issuing 132,387 shares of
the Company's Common Stock. The number of shares was calculated monthly based
on the average closing bid prices of the Company's Common Stock during each
month. During June 1994, Mr. Lawrence was also issued 51,546 shares as
payment for $48,324.56 of accrued and unpaid wages for the year ended December
31, 1993.
</FN>
</TABLE>
The following table sets forth certain information relating to option grants
pursuant to the Company's Employee Stock Option Plan in the year ended
December 31, 1994, to the individual named in the Summary Compensation Table
above.
PERCENT OF
TOTAL OPTIONS/
OPTIONS/ SARS GRANTED EXERCISE
SARS TO EMPLOYEES OF BASE EXPIRATION
NAME (NUMBER) IN FISCAL YEAR PRICE ($/SH) DATE
John T. Lawrence 200,000 40.67% $.30 5/25/97
John P. Balch 200,000 40.67% $.30 5/25/97
EMPLOYEE STOCK OPTION PLAN
During April 1990, the Board of Directors adopted the Employee Stock Option
Plan (the "Plan") which was approved by the Company's shareholders on December
14, 1990. The Plan authorizes the issuance of options to purchase up to
400,000 shares of the Company's Common Stock.
The Plan allows the Board to grant stock options from time to time to
employees, officers and directors of the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. Vesting provisions are determined by the Board at the time options
are granted. The option price for any option will be no less than the fair
market value of the Common Stock on the date the option is granted.
During June 1990, the Board granted to John C. Morris, Gregory P. Stemm and
Daniel S. Bagley, III, options to purchase 20,000 shares each at an exercise
price of $10.00 per share. During January 1993, the Board granted options to
purchase 25,000 shares at $.20 each to James P. Beggins and during September
1993, the Board granted an option to purchase 25,000 shares at $.825 each to
Daniel J. Derfus.
OTHER STOCK OPTIONS AND WARRANTS
During 1993, John Lawrence and John Balch were each granted five year stock
options to purchase 400,000 shares: 100,000 at the exercise price of $0.70;
100,000 at the exercise price of $1.20; 100,000 at the exercise price of
$3.00; and 100,000 at the exercise price of $5.00. At the same time Douglas
Wakeling was granted 100,000 warrants to purchase shares at $0.70 and 100,000
at $1.20. In May 1994, the exercise prices of these warrants were reduced
from $0.70 to $0.40, $1.20 to $0.60, $3.00 to $1.50, and $5.00 to $2.50,
respectively. In May 1995, Mr. Lawrence and Mr. Balch were each granted
options to purchase 200,000 shares at $0.30 pursuant to the renewal of their
employment agreements.
The Board of Directors decided during 1994 to grant options below the market
to outside directors as compensation for their serving as a director. In
determining the number of options and exercise price, the Board agreed to give
each non-executive director value equivalent to 4% of the salary of the
Company's President. Accordingly, for the year ended December 31, 1994, the
Company granted the following options to the independent directors named
below:
NUMBER EXERCISE TERMINATION
NAME OF OPTIONS PRICE DATE
James P. Beggins 12,979 $.05 12/13/99
Daniel J. Derfus 12,979 $.05 12/13/99
The difference between the exercise price of the options and the market value
of shares of the Company's Common Stock on the date they were granted was
booked in the financial statements for 1994 as a compensation expense.
During December 1994, the Company issued to James P. Beggins and Daniel J.
Derfus warrants to purchase 15,000 shares each at a price of $.40 per share.
During May 1995, the Company issued to John T. Lawrence, John P. Balch and
Daniel J. Derfus, warrants to purchase 50,000 shares each at a price of $0.30
per share.
The Board also decided that since the Company could not afford to purchase
officer and director liability insurance, it would issue common stock to
directors to compensate for their potential liability for serving as
directors. The amount of common stock was to depend on an estimate of the
premium that would be payable for such insurance. In May 1995, the Board
decided that this obligation was an inappropriate way to deal with the lack of
such insurance and it was decided to replace the obligation for 1994 with a
cash payment of $5,000 to each director. The directors who are also executive
officers waived their rights to receive such payment.
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 28, 1996, the stock ownership of
each person known by the Company to be the beneficial owner of five percent or
more of the Company's common Stock, all Directors individually and all
Directors and Officers of the Company as a group. Except as noted, each
person has sole voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION> AMOUNT OF
NAME AND ADDRESS BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
<S> <C> <C>
Valley Resources, Ltd.<FN1> 2,631,587 10.3%
Osberton Hall
Worksop
Notts, England S81 OUF
John T. Lawrence 833,933<FN2> 3.2%
5102 South Westshore Boulevard
Tampa, FL 33611
Carl Anderson 7,548,487<FN3> 28.0%
19235 Highway 41 North
Lutz, FL 33549
Daniel J. Derfus 298,936<FN4> 1.2%
13399 Pine Bark Court
Largo, FL 34644
John P. Balch 833,933<FN5> 3.2%
5102 South Westshore Boulevard
Tampa, FL 33611
All Officers and 1,966,802<FN2><FN4><FN5> 7.3%
Directors as a Group
(3 Persons)
____________________
<FN>
<FN1>
Valley Resources, Ltd. is owned by Mr. A. F. Budge of the same address.
<FN2>
Includes 600,000 shares underlying currently exercisable options and 50,000
shares underlying currently exercisable warrants held by Mr. Lawrence.
<FN3>
Includes 2,306,250 shares underlying currently exercisable warrants held by
Mr. Anderson.
<FN4>
Includes 37,979 shares underlying currently exercisable options held by Mr.
Derfus, 25,000 shares underlying currently exercisable options held by Mr.
Derfus as custodian for his son, and 65,000 shares underlying currently
exercisable warrants owned by Mr. Derfus.
<FN5>
Includes 600,000 shares underlying currently exercisable options and 50,000
shares underlying currently exercisable warrants held by Mr. Balch.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From March 13, 1989 until October 1995, the Company chartered the Research
Vessel Seahawk from Seahawk, Inc., an affiliated Alabama corporation (the
"Charter"). The Charter provided that Seahawk, Inc. was to provide the
Company with the use of the Seahawk and all equipment contained on board for a
charter fee of $6,000 per month. The company was responsible for providing
the entire crew, fuel, all provisions and consumables as well as provide for
the day-to-day maintenance of the ship and on-board equipment. The company
also had to maintain protection and indemnity insurance. The Charter was a
written agreement for the first two years, and was verbally extended on a
month-to-month basis until October 1995. As of November 1995, the Company had
an accrued liability of $304,080 to Seahawk, Inc. for unpaid charter payments.
Seahawk, Inc., an Alabama corporation, was principally owned by John C. Morris
and Gregory P. Stemm, principal shareholders and former Officers and Directors
of the Company, and by A.F. Budge, a principal shareholder. The basic terms
of this Charter were negotiated by the prior management of the Company as part
of the acquisition by the Company of R/V Seahawk in 1989. During November
1995, the Company acquired 100% of the outstanding common stock of Seahawk,
Inc. in a transaction where the Company issued 2,400,000 shares of its Common
Stock to the shareholders of Seahawk, Inc. and agreed to include these shares
in the registration statement. Messrs. Morris and Stemm received 868,121
shares and 603,943 shares, respectively, and a corporation controlled by Mr.
Budge received 533,130 shares. The agreement also provided that if the
registration statement was not declared effective by May 1, 1996, the
shareholders of Seahawk, Inc. would have the option to rescind the
transaction. The registration statement was declared effective on February
14, 1996.
During February 1994, the Company issued 2,438,851 shares of its Common Stock
to the following affiliated persons who agreed to convert existing loans and
accrued interest into Common Stock:
NUMBER OF AMOUNT OF DEBT
NAME SHARES CONVERTED
Carl Anderson 1,868,400 $467,100
Megeve Investments 232,591 34,889
John C. Morris 337,860 50,679
Carl Anderson and John Morris were principal shareholders of the Company and
Megeve Investments acquired its shares as an assignee from Gregory Stemm, a
principal shareholder. All of the debt was converted at $.25 per share except
for the 232,591 shares issued to Megeve Investments and 212,533 of the shares
issued to John Morris, which were issued pursuant to the exercise of existing
warrants at an exercise price of $.15 per share.
During February 1994, the Company also issued 100,000 shares of Common Stock
to Carl Anderson, a principal shareholder, for the purchase of 36-foot motor
vessel valued at $30,000.
In connection with the resignations of John Morris and Greg Stemm as officers
and directors of the Company, the Company negotiated Separation Agreements
with each person. These agreements were executed on April 14, 1994, and
provide essentially that Messrs. Morris and Stemm will not compete with the
Company for a period of three years, and in consideration therefor, the
Company issued to each of Mr. Morris and Mr. Stemm warrants to purchase
500,000 shares of the Company's Common Stock at $0.50 per share for the same
three year period.
In January 1996 the Company signed a Letter of Intent with Remarc
International, Inc., a company controlled by Mr. Morris and Mr. Stemm. The
purpose of the Letter of Intent was to establish a working relationship
between the parties which will enable the parties to engage in a project
attempting to locate, recover, conserve and market the cargo of a 17th century
British warship. The Letter of Intent also envisioned a refinement to the
terms of the Separation Agreement with Mr. Morris and Mr. Stemm whereby four
types of shipwreck projects are defined together with the procedures whereby
Remarc shall request and the Company shall give permission for Mr. Morris and
Mr. Stemm to participate in those shipwreck projects.
During June 1994, the Company issued 240,000 shares of its Common Stock to six
accredited investors. These six investors originally invested in a private
offering during May and June 1993, and according to the terms of the 1993
private placement, if the Company did not register the original shares within
one year of the private offering, the Company was required to issue additional
shares in an amount equal to 30% of the shares originally purchased. Included
among these investors were Carl Anderson and Anthony F. Budge, who were each
issued 60,000 shares. Carl Anderson and Anthony F. Budge were both principal
shareholders of the Company.
During June 1994, the Company also issued 103,092 shares of Common Stock to
the following two employees and officers of the Company as payment for accrued
and unpaid remuneration for the year ended December 31, 1993:
NUMBER AMOUNT OF UNPAID
NAME OF SHARES REMUNERATION
John Lawrence 51,546 $48,324.56
John Balch 51,546 $48,324.56
During June and July 1994, the Company issued 983,125 shares of its Common
Stock to five accredited investors in a private placement conducted by the
Company at a price of $.32 per share. The investors also acquired two common
stock purchase warrants exercisable at $.32 per share for each share of Common
Stock they purchased. Included among the investors were Anthony F. Budge, a
director and principal shareholder, and Carl Anderson, a principal
shareholder. Mr. Budge purchased 156,250 shares and Mr. Anderson purchased
303,125 shares.
According to the terms of the above private placement, if the Company did not
register the original shares by December 31, 1994, the Company was required to
issue additional shares in an amount equal to 30% of the shares originally
purchased. A total of 326,813 additional shares were issued during January
1995, with Mr. Budge receiving an additional 46,875 shares and Mr. Anderson
receiving an additional 90,938 shares.
During November 1994, the Company issued 800,000 shares of its Common Stock
and common stock purchase warrants to buy 1,600,000 shares of Common Stock at
an exercise price of $.32 per share to Carl Anderson, a principal shareholder,
in exchange for 66,667 shares of common stock of Valley Forge Scientific Corp.
The Company also agreed to issue Mr. Anderson an additional 240,000 shares of
Common Stock if the 800,000 shares were not registered by March 10, 1995.
During January 1995, the Company issued 264,774 shares of Common Stock to the
following two employees and officers of the Company as payment for accrued and
unpaid remuneration for the year ended December 31, 1994:
NUMBER AMOUNT OF UNPAID
NAME OF SHARES REMUNERATION
John Lawrence 132,387 $41,850.87
John Balch 132,387 $41,850.87
During April 1995, the Company issued 300,563 shares of its Common Stock to
the five accredited investors. These five investors originally invested in a
private offering during June 1994, and according the terms of the 1994 private
offering, if the Company did not register the original shares by the end of
1994, the Company was required to issue additional shares in an amount equal
to 30% of the shares originally purchased. Two of these investors were Carl
Anderson who was issued 90,938 shares and A.F. Budge who was issued 46,875
shares.
During July 1995, the Company issued 25,000 shares to Daniel Derfus, a
Director, who agreed to convert part of an existing loan and accrued interest
into Common Stock. Mr. Derfus exercised existing warrants at $.30 per share.
During May 1995, the Company issued 240,000 shares of its Common Stock to Carl
Anderson, a principal shareholder. Mr. Anderson originally invested in a
private offering during November 1994, and according to the terms of the 1994
private offering, if the Company did not register the original shares by March
10, 1995, the Company was required to issue additional shares in an amount
equal to 30% of the shares originally purchased.
During October 1995, the Company issued 360,000 shares of its Common Stock to
Gregory Stemm, a shareholder and former officer and director, pursuant to a
preliminary settlement agreement of a lawsuit filed by Mr. Stemm against the
Company. (See "BUSINESS -- Litigation.")
During September and October 1995, the Company issued a total of 40,000 shares
of its Common Stock to John C. Morris, a shareholder and former officer and
director, upon payment to the Company of $10,000. These shares were sold
because Mr. Morris exercised anti-dilution rights he held under previously
issued warrants.
The Board of Directors was of the opinion that the terms of the above
transactions were at least as favorable as those which could be obtained from
independent third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
3 Articles of Incorporation and Bylaws Incorporated by reference to
Exhibit No. 3 to the Regis-
trant's Registration Statement
(No. 33-22037)
10.1 Agreement and Plan of Reorganization Incorporated by reference to
between Fox Ridge Capital, Inc. and Exhibit No. 10.2 to the Regis-
R.V. Seahawk, Inc. trant's Registration Statement
(No. 33-22037)
10.2 Agreement Among Fox Ridge Capital, Incorporated by reference to
Inc., Timothy J. Brasel, Janelle K. Exhibit No. 10.3 to the Regis-
Johnson and Susan A. Brasel dated trant's Registration Statement
April 24, 1989 (No. 33-22037)
10.3 Charter Agreement between Seahawk, Incorporated by reference to
Inc. and R/V Seahawk, Inc. Exhibit No. 10.4 to the Regis-
trant's Registration Statement
(No. 33-22037)
10.4 Contract for the Purchase of 2000 Incorporated by reference to
Series ROV between R/V Seahawk, Inc., Form 8-K dated December 7,
AOSC and Commercial Union Capital 1989
Limited
10.5 Master Lease Purchase Agreement be- Incorporated by reference to
tween Commercial Union Capital Lim- Form 8-K dated December 7,
ited and R/V Seahawk, Inc. 1989
10.6 Letter of Guarantee from Seahawk Deep Incorporated by reference to
Ocean Technology, Inc. to Commercial Form 8-K dated December 7,
Union Capital Limited 1989
10.7 Option and Agreement by and among Incorporated by reference to
Valley Resources, Ltd., Valley Marine, Form 10-K for the fiscal year
Inc. and Seahawk Deep Ocean Tech- ended December 31, 1989
nology, Inc.
10.8 Bareboat Charter Party between Valley Incorporated by reference to
Marine, Inc. and Seahawk Deep Ocean Form 10-K for the fiscal year
Technology, Inc. ended December 31, 1989
10.9 Common Stock Option for John C. Incorporated by reference to
Morris Form 10-K for the fiscal year
ended December 31, 1989
10.10 Common Stock Option for Gregory P. Incorporated by reference to
Stemm Form 10-K for the fiscal year
ended December 31, 1989
10.11 Lease with RFK Partnership for Incorporated by reference to
building at 5102 South Westshore Form 10-K for the fiscal year
Boulevard ended December 31, 1989
10.12 Statement of Intent with Harbor Branch Incorporated by reference to
Oceanographic Institution, Inc. Form 10-K for the fiscal year
ended December 31, 1989
10.17 Termination of Lease Agreement and Incorporated by reference to
Release of Liability dated February 7, Registrant's Registration
1992 Statement on Form S-1 (filed
March 18, 1992)
10.18 Trust Indenture with R/V Seahawk, Inc. Incorporated by reference to
dated August 16, 1991, as supplemented Registrant's Registration
Statement on Form S-1 (filed
March 18, 1992)
10.19 Exchange Agreement with R/V Seahawk Incorporated by reference to
dated August 16, 1991 Registrant's Registration
Statement on Form S-1 (filed
March 18, 1992)
10.20 Option Agreement dated January 24, Incorporated by reference to
1992 with Carl Anderson Registrant's Registration
Statement on Form S-1 (filed
March 18, 1992)
10.21 Loan Agreement dated January 6, 1992 Incorporated by reference to
with Carl Anderson Registrant's Registration
Statement on Form S-1 (filed
March 18, 1992)
10.22 Private Placement Agreement dated Incorporated by reference to
January 24, 1992 with Carl Anderson Registrant's Registration
Statement on Form S-1 (filed
March 18, 1992)
10.23 Agreement to Modify Warrant Exercise Incorporated by reference to
Price and Shares Subject to Option Registrant's Form 10-K for the
fiscal year ended December 31,
1992
10.24 Lease Termination Agreement dated Incorporated by reference to
October 1, 1992 with Seahawk, Inc. Registrant's Form 10-K for the
fiscal year ended December 31,
1992
22 Subsidiaries of the Registrant Attached
23.1 Consent of Guinta Ferlita & Attached
Walsh, P.A.
23.2 Consent of Baumann & Company Attached
P.A.
(b) REPORTS ON FORM 8-K. During the quarter ended December 31, 1995,
there were no Reports on Form 8-K filed.
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Form 10-KSB.
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
Page
Report of Independent Certified Public Accountants. . . . . . . . . .F-1
Consolidated Balance Sheet as of December 31, 1995. . . . . . . . .F-2, F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . .F-6, F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-10 to F-35
SEAHAWK I, LTD.
Report of Independent Certified Public Accountants. . . . . . . . . .F-36
Balance Sheet as of December 31, 1995 . . . . . . . . . . . . . . . .F-37
Statements of Operations for the Years Ended December 31,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-38
Statement of Partners' Capital for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . .F-38
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . F-39, F-40
Notes to the Financial Statements . . . . . . . . . . . . . . . .F-40 to F-47
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Reports of Independent Certified Public Accountants. . . . . . . . F-48, F-49
Balance Sheet as of December 31, 1995 . . . . . . . . . . . . . . . .F-50
Statements of Operations for the Years Ended December 31,
1995 and 1994 and from May 16, 1989 (Inception) to
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . .F-51
Statements of Partners' Capital for the Period of May 16,
1989 (Inception) to December 31, 1995. . . . . . . . . . . . . . . .F-52
Statements of Cash Flows for the Years Ended December 31,
1995 and 1994 and from May 16, 1989 (Inception) to
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . .F-53
<PAGE>
Notes to Financial Statements . . . . . . . . . . . . . . . . . .F-54 to F-58
EAGLE PARTNERS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Reports of Independent Certified Public Accountants . . . . . . . F-59, F-60
Balance Sheet as of December 31, 1995 . . . . . . . . . . . . . . . .F-61
Statements of Operations for the Years Ended December 31,
1995 and 1994 and from November 12, 1991 (Inception)
to December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . .F-62
Statements of Partners' Capital for the period November 12,
1991 (Inception) to December 31, 1995. . . . . . . . . . . . . . . .F-63
Statement of Cash Flows for the Years Ended December 31,
1995 and 1994 and from November 12, 1991 (Inception) to
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . .F-64
Notes to Financial Statements . . . . . . . . . . . . . . . . . .F-65 to F-69
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Seahawk Deep Ocean Technology, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheet of Seahawk Deep
Ocean Technology, Inc. as of December 31, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
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 financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 presentations. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Seahawk Deep Ocean
Technology, Inc. as of December 31, 1995 and the results of its operations,
changes in stockholders' equity and its cash flows for the years ended
December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,398,981 for 1995 and has
incurred substantial net losses for each of the past several years resulting
in an accumulated deficit of $12,431,974. At December 31, 1995, the Company
has negative working capital as indicated by current liabilities exceeding
current assets by $1,968,771. These factors, in addition to other factors as
discussed in Note 16, raise substantial doubt about its ability continue as a
going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in operation.
By/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 24, 1996
F-1
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,191
Marketable securities 9,184
Accounts receivable
Trade, net of allowance for doubtful debt 34,889
Other 4,100
Merchandise inventory 3,687
Prepaid expenses 85,004
Total current assets 145,055
PROPERTY AND EQUIPMENT, Net 2,244,416
OTHER ASSETS
Artifacts 305,746
Accounts and notes receivable - affiliate,
less losses in excess of investment
in affiliates of $1,797,294 302,509
Deposits 10,188
Purchased shipwreck research, net of $8,681
amortization 13,819
Total other assets 632,262
TOTAL ASSETS $ 3,021,733
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
CURRENT LIABILITIES
Accounts payable $ 436,530
Accrued expenses
Salaries 120,666
Interest due related parties 14,931
Interest due others 39,891
Other 38,241
First Preferred Ships Mortgage 900,000
Due to related parties 290,802
Notes payable - others 272,765
Total current liabilities 2,113,826
DEBT TO BE CONVERTED TO COMMON STOCK 145,306
STOCKHOLDERS' EQUITY
Preferred stock - no par value, 60,000,000
shares authorized, 200,000 shares
issued and outstanding 50,000
Common stock - no par value,
30,000,000 shares authorized,
24,919,573 shares issued and outstanding 13,076,429
314,784 contingent bonus shares 62,957
Paid in capital-stock options 5,191
Accumulated (deficit) (12,431,976)
762,601
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,021,733
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
1995 1994
REVENUES
Rental income - affiliates $ 145,690 $ 50,285
Rental income - others 454,020 131,942
Sales of artifacts 7,634 -
Total revenues 607,344 182,227
OPERATING EXPENSES
Vessel - operations 401,594 319,346
Vessel operations - affiliate 60,000 72,000
Conservation 44,378 38,149
Depreciation and amortization 226,723 324,515
Rent 83,070 82,570
Cost of artifact sales 4,950 -
Total operating expenses 820,715 836,580
GENERAL AND ADMINISTRATIVE EXPENSES 802,354 516,241
Total expenses 1,623,069 1,352,821
(LOSS) FROM OPERATIONS (1,015,725) (1,170,594)
OTHER INCOME (EXPENSE)
Interest income - affiliate 30,164 2,548
Interest income - others 296 1,589
Interest expense ( 252,776) ( 189,999)
Other income 5,000 11,168
Gain (Loss) on sale of
and unrealized loss provision
on marketable securities 19,900 ( 38,028)
Loss on disposal of equipment ( 10,191) ( 7,153)
Provision for writedown on
Retriever ( 216,390) -
Benefit on settlement of
ships mortgage 221,828 -
Cost of settlement of claims ( 55,085) -
Loss on investment in less
than 50 % owned entities ( 126,002) ( 60,763)
Total other income (expense)( 383,256) ( 280,638)
NET (LOSS) $(1,398,981) $(1,451,232)
NET (LOSS) PER SHARE $( 0.07) $( 0.09)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARES
EQUIVALENTS OUTSTANDING 21,327,705 16,484,605
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Con-
Paid-in tin-
Capital gent
Preferred Stock Common Stock Stock Bonus
Accumulated
Shares Amount Shares Amount Option Shares
Deficit
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993
Common Stock issued:
For cash - - 12,978,575 $10,041,457 - $
(9,581,763)
In exchange for
marketable
securities - - 1,195,001 310,820 -
-
For services - - 800,000 200,000 -
-
For subscription
agreement - - 151,713 36,502 -
-
For purchase of
equipment - - 46,875 15,000 -
-
Debt to equity
conversion 200,000 50,000 4,325,951 1,034,884 -
-
25,958 below market
options issued to
directors for fees - - - - 5,191
-
Net (loss) - - - - -
(1,451,232)
Balance,
December 31, 1994 200,000 $50,000 19,598,115 $11,668,663 $5,191
$(11,032,995)
Common stock issued:
For cash 1,863,699 258,376
As bonus in 1996 314,784 $62,957
For services 56,926 10,859
For debt 565,790 133,248
For exercise of
warrants issued 170,269 17,501
Warrant issued to
officers for
accrued remunera-
tion 264,774 83,702
To acquire Seahawk,
Inc. 2,400,000 904,080
Net (loss) - - - - - $
(1,398,981)
Balance,
December 31, 1995 200,000 $50,000 25,234,357 $13,076,429 $5,191 $62,957
$(12,431,976)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(1,398,981) $(1,451,232)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation and amortization 226,723 324,515
Provision for bad debt 196,313 5,764
Loss on sale of property and equipment 10,191 7,153
(Gain) loss on marketable securities (19,900) 38,028
(Benefit) on settlement of ships mortgage (221,827) -
Provision for write-down on Retriever 216,390 -
Proceeds from settlement of claims 104,402 -
Cost of settlement of claims 55,085 -
Stock issued for services 10,859 25,478
Loss on investment in less than
50% owned entities 126,002 60,763
(Increase) decrease in:
Trade accounts receivable ( 82,278) (127,231)
Other receivables 12,530 48,748
Inventory 9,103 742
Prepaid expenses ( 68,250) ( 13,029)
Trade accounts receivable affiliates (168,166) ( 47,413)
Deposits ( 18) 5,101
Increase (decrease) in:
Accounts payable 106,916 ( 32,899)
Accrued expenses 426,496 393,783
Net cash used by
operating activities (458,410) (761,729)
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
1995 1994
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and
equipment 4,000 675,002
Proceeds from sale of marketable
securities 146,013 26,179
Purchases of property and
equipment ( 20,152) ( 12,802)
Purchase of shipwreck research ( 12,500)
Net cash used by investing activities 117,361 688,379
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of notes payable - related 15,000 7,000
Issuances of notes payable - other 10,000 303,000
Repayments of notes payable - other (1,268) (46,000)
Payment of capital lease obligation - (500,000)
Proceeds from issuance of common stock
including contingent bonus shares 321,333 310,820
Net cash provided by financing
activities 345,065 74,820
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,016 1,470
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,175 2,705
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 8,191 $ 4,175
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
SUMMARY OF SIGNIFICANT NON-CASH TRANSACTIONS
During 1994:
1. Several debt holders, through the exercise of warrants and options,
converted their debt to stock. A summary of the debt converted to stock is as
follows:
Common Preferred
Accounts payable $ 25,477 78,074
Accounts payable-related 59,347 395,943
Accrued interest 77,064 314,208
Notes payable-related 139,498 619,407
Notes payable-other 740,000 2,950,032 $50,000 200,000
Debentures 30,000 120,000
$1,071,386 4,477,664 $50,000 200,000
2. The Company issued 46,875 shares of common stock for a $15,000 receivable.
3. The Company issued 800,000 shares of common stock in exchange for 66,667
shares of Valley Forge Scientific, Inc. common stock in an exchange valued at
$200,000.
4. The Company issued 100,000 shares of common stock valued at $30,000 for a
34 foot workboat.
During 1995:
1. Several debt holders, through the exercise of warrants and options,
converted their debt to stock. A summary of the debt converted to stock is as
follows:
Common
Amount Shares
Accounts payable $ 13,859 68,926
Accounts payable-related 83,702 264,774
Accrued interest 5,023 19,056
Notes payable-related 5,947 19,823
Notes payable-other 17,478 79,911
$126,009 452,490
2. The Company issued a total of 540,563 shares to subscribers in three prior
private placements because the Company's registration statement was not
declared effective by the agreed date in the private placement subscription
agreements.
3. The Company issued 2,400,000 shares of common stock in exchange for 100% of
the outstanding shares of Seahawk, Inc. stock in an exchange value at
$904,080.
4. The Company issued 100,000 shares of common stock as an amendment of a
settlement of past due debt.
5. The Company issued 60,000 shares of common stock for a receivable from
Eagle Partners' Ltd. in the amount of $9,300 in connection with services
performed for Eagle Partner's Limited.
6. The Company issued 360,000 shares of common stock valued at $90,000 as part
of a settlement of a law suit.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
SUMMARY OF SIGNIFICANT NON-CASH TRANSACTIONS (continued)
7. The Company issued 80,000 shares of common stock for a receivable from
Seahawk I, Ltd. in the amount of $20,000 in connection with Seahawk I, Ltd.'s
settlement of a note payable.
8. The Company assumed an account payable and a note payable of Seahawk I,
Ltd. for $10,286.
9. The Company settled debt to an unrelated party for $115,770 by
surrendering collateral of $129,328.
10. The Company settled accrued interest of $29,890 to a non-related party by
selling artifacts to that party.
11. The Company converted an account payable to a note payable amounting to
$87,011.
12. The Company issued a $90,000 note payable in satisfaction of a claim and
various accrued expenses.
13. The Company consolidated certain notes payable and accrued expenses of
$165,968 by issuing new notes payable of $170,500.
14. The Company settled notes payable of $23,500 and accrued expenses of
$14,303 for a related party receivable of $37,803.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
ORGANIZATION
Seahawk Deep Ocean Technology, Inc. (the "Company") was organized as a
Colorado corporation on September 17, 1986 for the purpose of acquiring a
business opportunity. On October 14, 1988 the Company completed its initial
public offering of 1,200,000 shares of common stock at an offering price of
$.50 per share. On March 13, 1989, the Company issued 2,000,000 shares of its
no par value common stock to the holders of 100% of the outstanding common
stock of R/V Seahawk, Inc. (a Florida corporation organized on May 23, 1988)
in an exchange transaction in which R/V Seahawk, Inc. became a wholly owned
subsidiary of the Company. On March 2, 1992, R/V Seahawk Inc. was merged into
the Company. On September 12, 1989 the Company organized Seahawk Museum
Development, Inc. and acquired 100% interest with the purchase of 625,000
shares of its no par common stock.
On November 3, 1995, the Company issued 2,400,000 shares of its no par value
common stock to the holders of 100% of the outstanding common stock of
Seahawk, Inc. (an Alabama corporation organized on March 6, 1987 for the
purpose of chartering a research vessel) in an exchange transaction in which
Seahawk, Inc. became a wholly owned subsidiary of the Company. All
shareholders of Seahawk, Inc. were also individually less than 10%
shareholders of the Company. The acquisition has been accounted for using the
purchase method of accounting. The vessel Seahawk (the Seahawk),an 83 foot
research vessel, was the only asset acquired in the transaction. Payables
previously due Seahawk, Inc. of $304,080 have been eliminated in
consolidation. The shares issued were valued at $904,080. Since March 1989,
the Company had chartered the Seahawk. Seahawk, Inc. only business was its
charter to the Company. The Company treated the transaction as a purchase of
the one asset and operating results have been included in the consolidated
statement of income from the date of acquisition (previously treated as
charter expense). Pro forma results of operations have not been presented
because the transaction is considered to be the purchase of an asset and not
the purchase of a business. On March 31, 1996, Seahawk, Inc. merged into the
Company.
NATURE OF BUSINESS
The Company is an oceanographic service company which is involved in deep
water search, survey and recovery operations. The Company serves as the
general partner for three limited partnerships which were formed for the
purpose of raising money to search for and locate shipwrecks. The Company
currently owns and operates a variety of subocean equipment including an 83
foot research vessel, ROV's (Remote Operated Vehicles), and other specialized
search and recovery equipment which enables it to locate, photograph and
retrieve items lost on the seabed in deep water.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity and have prepared them in
accordance with the Company's customary accounting practices.
F-10
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
BASIS OF PRESENTATION
The accompanying financial statements were prepared using the accrual basis of
accounting in accordance with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Seahawk Deep
Ocean Technology, Inc. and its wholly-owned subsidiaries, Seahawk Museum
Development, Inc. and Seahawk, Inc. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
REVENUE RECOGNITION
The Company derives its revenue primarily from rental of search and recovery
vessels, deep ocean survey and search equipment, remote operating vehicles,
and other electronic equipment to Seahawk I, Ltd., Seahawk II, Ltd., Eagle
Partners, Ltd. and other related and unrelated parties, as well as from its
distributive share of limited partnerships' net income.
MARKETABLE SECURITIES - TRADING ACCOUNT
Securities held as trading assets are stated at market value. Market
adjustments, gains or losses on the sales of trading securities are included
in other income (expense).
ACCOUNTS RECEIVABLE AND CREDIT CONCENTRATION
Trade accounts receivable includes the following:
Charter payments due from
International Diving $ 173,620
Less provision for uncollectible
accounts since International
Diving has filed for protection
under Chapter 11 of the Federal
Bankruptcy Act ( 173,620)
Due from unrelated party for
ROV services performed considered
to be 100% collectible 34,889
$ 34,889
F-11
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTS AND NOTES RECEIVABLE - AFFILIATE AND CREDIT CONCENTRATION
The Company uses the allowance method to account for uncollectible affiliate
accounts. The Company has provided an allowance for uncollectible accounts
since management considers the losses in excess of its investments in
affiliates as a provision for uncollectible accounts. (See Note 4).
ARTIFACTS
Artifacts are stated at the lower of cost or market value and consist
primarily of colonial age artifacts purchased from related and unrelated
entities.
DEPRECIATION
Property and equipment is stated at historical cost. Depreciation is provided
using the straight-line method for financial reporting purposes at rates based
on the assets' estimated useful lives. The major components of assets and
their estimated useful lives are as follows:
December 31,
1995 Years
Vessel "Seahawk Retriever" $ 1,500,000 35
Vessel "Seahawk" 600,000 10
Equipment on vessels and other 1,618,154 5 - 10
3,718,154
Less - accumulated depreciation (1,257,348)
- provision for write down
on "Seahawk Retriever"
(see Note 20) ( 216,390)
$ 2,244,416
For income tax purposes, depreciation is computed using accelerated methods
over statutory periods.
INVESTMENT IN AFFILIATES
The Company's investment in Seahawk I, Ltd., Seahawk II, Ltd. and Eagle
Partners, Ltd (less than 50% owned entities) is recorded on the equity method.
Under this method, the basis of such investments, including loans, advances,
and receivables are increased or decreased by the Company's distributive share
of the Partnerships' income or loss. The partnerships were formed for the
purpose of funding the search for deep water shipwrecks in predesignated
areas.
PURCHASED SHIPWRECK RESEARCH
The Company's cost of purchased shipwreck research is capitalized and
amortized over 3 years.
F-12
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common stock warrants and options are
not considered into the computation because they are antidilutive in the
aggregate.
STATEMENT OF CASH FLOWS
Short-term investments which have an original maturity of ninety days or less
are considered cash equivalents.
Cash payments of interest for the years ended December 31, 1995 and 1994
amounted to $41,432 and $38,068 respectively.
INCOME TAXES
The Company provides for deferred income taxes resulting from the timing
differences in reporting income and expenses for financial statement purposes
compared to the method of reporting for income tax purposes. No deferred
income taxes are reflected in the accompanying financial statements due to the
Company's losses from operations.
NOTE 3 - MARKETABLE SECURITIES
At December 31, 1995, marketable securities consist of 3,867 shares of common
stock of Valley Forge Scientific Inc., a stock traded in the over-the-counter
market and included in the NASDAQ Systems - Small Cap issues under the symbol
VLFS. These shares had an original cost of $11,601 and a fair market value
at December 31, 1995 of $9,184. A provision for loss on these shares was
taken in 1995 in the amount of $2,417.
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATES
The Company is a general partner and a less than 50% interest owner in Eagle
Partners, Ltd., Seahawk I, Ltd. and Seahawk II, Ltd (Florida limited
partnerships). The partnerships are accounted for on the equity method. The
report of independent certified public accountants on the 1995 financial
statements of Seahawk I, Ltd., Seahawk II, Ltd., and Eagle Partners, Ltd. each
includes an explanatory paragraph raising substantial doubt about the
partnership's ability to continue as a going concern. Pursuant to the
partnership agreements, net losses of the Partnerships will be allocated as
follows:
For Seahawk I, Ltd., 15% to the Class A Limited Partners, 10% for the Class B
Limited Partners, 25% of the Class C Limited Partners and 50% to the General
Partner. At such time as the capital account balance of any limited partner
(taking into consideration all units owned by a partner including Class A, B
and C) reaches zero, any further loss allocation shall be made to the general
partner.
For Seahawk II, Ltd. and Eagle Partners, Ltd. 99% to the Limited Partners and
1% to the General Partner until the Limited Partners' capital accounts have
been reduced to zero.
F-13
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATES
(Continued)
Net income is first allocated to the Limited Partners based on their
proportionate ownership interests to the extent of the net loss previously
allocated to them. Net income is then allocated to the General Partner to the
extent of the net loss previously allocated to it. Thereafter, net income
will be allocated as follows: For Seahawk I, Ltd., the remaining net income
is allocated 50% to the Limited Partners and 50% to the General Partner; for
Seahawk II, Ltd., the remaining net income is allocated 1% per unit of the
limited partnership interest (not to exceed 50%), and the balance to the
General Partner; for Eagle Partners, Ltd., the remaining net income is
allocated on a per unit basis with each $50,000 unit receiving 2.5% of the
first $1 million of income allocated, 2% of the second $1 million of income
allocated, 1.5% of the third $1 million of income allocated, 1% of the fourth
$1 million of income allocated and 0.5% of income over $4 million allocated.
The Company, as the general partner, will receive the balance of any net
income to be allocated.
The Company's total distributive share of Seahawk I, Ltd., Seahawk II, Ltd.
and Eagle Partners, Ltd. for 1995 and 1994 was $126,002 and $60,763
respectively. In accordance with the use of the equity method of accounting
for its investment in partnerships, the Company has reduced its investment in
those partnerships by its allocated portion of the partnership's losses.
The accounts and notes receivable from affiliates, less losses in excess of
investment in affiliates at December 31, 1995 is detailed as follows:
EAGLE
SEAHAWK SEAHAWK EAGLE MINERS
I II PARTNERS JOINT
LTD. LTD. LTD. VENTURE TOTAL
Note receivable $ 300,000 $ - $ 50,000 $ $ 350,000
Interest receivable 26,249 26,249
Accounts receivable 633,322 14,928 1,031,450 72,311 1,752,011
Less allowance for
doubtful accounts (6,454) (22,003) (28,457)
Less losses in
excess of invest-
ment in affiliates (672,196) (17,090) (1,108,008) - (1,797,294)
$ 287,375 $ (8,616) $ (26,558) $ 50,308 $ 302,509
The accounts receivable are unsecured but the Note Receivable from Seahawk I
Ltd
which becomes due in November 1996 is secured by 4,000 pearls owned by Seahawk
I, Ltd which are stated in that Company's artifact inventory at $36,000. (See
Note 11) The note receivable from Eagle Partners Ltd is secured by the
partnership's interest in the Eagle Miners Joint Venture.
Eagle Partners, Ltd. is a general partner of Eagle Miners Joint Venture. The
Company's receivable is a result of search services provided to the joint
venture. The Company has provided an allowance for doubtful account of
$22,003.
F-14
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATES
(Continued)
The Company has recorded losses in excess of its investments due to
managements'
commitment to provide additional financial support. In 1995, the Company
recorded its share of losses from affiliates primarily as a result of invoices
billed to the affiliates for services provided. Therefore, the Company
considers the negative investment account as a provision for uncollectible
accounts.
Summarized financial statement information is shown below:
SEAHAWK I, LTD.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS $ 1,835
OTHER ASSETS - ARTIFACTS 646,025
$ 647,860
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES $ 984,180
PARTNERS' CAPITAL
Capital contributions 2,511,040
Accumulated deficit (2,847,360)
TOTAL PARTNERS' CAPITAL (Deficit) ( 336,320)
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 647,860
SEAHAWK I, LTD.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
REVENUES $ 30,491 $ 7,978
COST OF REVENUES 4,709 4,330
GROSS PROFIT 25,782 3,648
OPERATING, GENERAL AND
ADMINISTRATIVE EXPENSES 12,162 38,113
INCOME (LOSS) FROM OPERATIONS 13,620 ( 34,465)
OTHER INCOME (EXPENSES) ( 41,383) ( 49,439)
NET INCOME (LOSS) $( 27,763) $( 83,904)
F-15
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS IN AFFILIATES (Continued)
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS $ 52
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES $ 17,144
PARTNERS' CAPITAL
Capital contributions 1,371,250
Deficit accumulated during
development stage (1,388,342)
NET PARTNERS' CAPITAL ( 17,092)
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 52
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
FROM MAY 16, 1989 (Inception) TO DECEMBER 31, 1995
May 16,1989
(Inception) to
1995 1994 December 31, 1995
REVENUES $ - $ - $ -
OPERATING, GENERAL
AND ADMINISTRATIVE
EXPENSES 1,890 6,734 1,399,930
(LOSS) FROM
OPERATIONS ( 1,890) ( 6,734) (1,399,930)
OTHER INCOME - - 11,588
NET (LOSS) $( 1,890) $( 6,734) $(1,388,342)
F-16
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS IN AFFILIATES (Continued)
EAGLE PARTNERS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS $ -
OTHER ASSETS
Investment in Eagle Miners (23,033)
TOTAL ASSETS $ (23,033)
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES $ 1,084,974
PARTNERS' DEFICIT
Capital contributions 150,100
Deficit accumulated
during the development stage (1,258,107)
TOTAL PARTNERS' DEFICIT (1,108,007)
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 23,033
STATEMENT OF OPERATIONS
November 12,1991
Year Ended Year Ended (Inception) to
December 31, 1995 December 31,1994 December 31,1995
REVENUES $ - $ - $ -
OPERATING, GENERAL
AND ADMINISTRATIVE
EXPENSES 13,910 12,826 1,184,725
(LOSS) FROM
OPERATIONS (13,910) (12,826) (1,184,725)
OTHER INCOME(Expense) ( 349)
LOSS IN PARTNERSHIP (73,033) - (73,033)
NET (LOSS) $(86,943) $ 12,826 $(1,258,107)
NOTE 5 - DEPOSITS
Deposits at December 31, 1995 consist of the following:
Deposit on office space $ 5,300
Utility deposits 4,870
$10,170
F-17
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - FIRST PREFERRED SHIPS MORTGAGE
As further discussed in Note 17 the capital lease obligation was settled for
$1,500,000 during 1994. $500,000 was due April, 1994 and $1,000,000 due on a
non-interest bearing note payable April, 1995 secured by a first preferred
ship mortgage on the Seahawk Retriever, her engines, tackle, equipment and
apparel. At December 31, 1994, the Company reflected the note payable at the
discounted present value of $970,590 using a 12% interest rate. In March,
1995 the agreement was amended and the date of the payment of the $1,000,000
extended to June 1, 1995. The Company and Commercial Union then reached an
agreement that the mortgage would be extended for two years until June 2,
1997. Under the terms of the agreement, the new principal balance was
$1,025,000, and was to be paid in eight quarterly installments, with interest
charged at 5% per annum over the Citibank New York prime rate in effect on
June 2, 1995, and adjusted thereafter biannually on the first day of December
and June each year. The first seven quarterly installments was to comprise
the interest accrued and due on the date of the installment plus $50,000 of
the principal. The eighth and final installment was to comprise all the
remaining amount due under the note. The Company did not pay the first three
installments. However, on April 5, 1996 the Company sold the Seahawk Retriever
and settled the amount due under the first preferred ships mortgage. (See Note
20)
NOTE 7 - DUE TO RELATED PARTIES
Amounts due to related parties at December 31, 1995 comprises:
Interest Book Value Amount
Due on Rate Secured on of Security Due
Secured note 31 Mar 97 12% Company
artifacts $ 9,738
Seahawk I
artifacts $ 70,147 $65,000
Secured note 31 Mar 97 12% Company
artifacts $105,070
Seahawk I
artifacts $ 21,370 105,500
Secured note 16 Mar 97 18% Company
artifacts $ 75,000 19,053
Secured note 31 Oct 97 12% Mortgage $600,000 90,000
Other advances demand - Unsecured - 11,249
$290,802
F-18
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE - OTHERS
Notes payable - others, at December 31, 1995 comprises:
Interest Book Value Amount
Due on Rate Secured on of Security Due
Unsecured note
repaid at demand 8% $ 85,743
$1,000 monthly
Other unsecured
notes demand 10% 7,500
Secured Seahawk I
note demand 10% artifacts 36,465 9,522
Secured Company
note 28 Feb 96 18% artifacts 57,634 50,000
Secured Company
note 1 Sept 96 18% artifacts 45,068 25,000
Secured Company
note 20 Oct 96 18% artifacts 122,820 95,000
$272,765
In March 1996 the secured note of $50,000 was extended for one year.
NOTE 9 - DEBT TO BE CONVERTED TO COMMON STOCK
Subsequent to December 31, 1995, several debt holders converted their debt to
Common Stock. A summary of short term debt to be converted is as follows:
Amount Shares
Accounts Payable $ 16,000 64,000
Accrued payroll 129,306 504,366
$ 145,306 568,366
NOTE 10 - COMMON AND PREFERRED STOCK
COMMON STOCK
On June 12, 1992, the Company effected a one for fifty reverse split on the
shares of the Company's common stock outstanding. The per share amounts and
number of shares in the financial statements have been retroactively adjusted
for the effect of this reverse stock split. Concurrently, the Company's
stockholders approved an amendment to the Articles of Incorporation decreasing
the authorized common stock to 30,000,000 shares of no par value common stock.
F-19
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMON AND PREFERRED STOCK (Continued)
PREFERRED STOCK
The Company is authorized to issue 60,000,000 shares of Preferred Stock, no
par value. The Preferred Stock may be issued in series from time to time with
such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The Company has
designated 200,000 shares of its Preferred Stock as Series 1 Convertible
Preferred Stock, of which 200,000 shares are currently outstanding. The Series
1 Convertible Preferred Stock has the following rights and preferences:
Each share may be converted into one share of the Company's Common Stock at
the option of the holder.
In the event that there is an effective registration statement covering the
shares of Common Stock into which the Series 1 shares may be converted and the
average closing bid price for the Company's Common Stock is at least $3.00 per
share, the Series 1 Stock will be automatically converted on a one for one
basis.
The Company may redeem shares of the Series 1 Stock at any time, at its option
on giving 7 days notice, at a price equal to the higher of $0.25 or the
average closing bid and asked prices for its Common Stock for the 10 days
prior to the date of the redemption notice. The Company is required to redeem
the Series 1 shares at the price set forth in the paragraph above, on the
earliest of the following:
(I) December 1, 1999;
(ii) The date that Buckeye Communications, Inc. ("Buckeye") provides the
Company with or arranges for the Company to be provided with, a cash infusion
of $500,000 or more;
(iii) The date the Company receives a cash infusion of $1,500,000 or more in a
single transaction or a series of four or less transactions in any one year.
If the Company receives proceeds from the sale of certain pearls which were
previously used as collateral for a loan from Buckeye, in excess of $50,000,
one half of the excess shall be applied to redeem shares of the Series 1 Stock
at the price set forth above.
Each share of the Series 1 Stock is entitled to one vote and votes with
holders of the Common Stock as a single class.
NOTE 11 - COMMON STOCK OPTIONS AND WARRANTS
On April 18, 1990, the Company's Board of Directors approved a Stock Option
Plan (the "Plan"). Under the Plan, stock options, which qualify as "incentive
stock options" under Section 422A of the Internal Revenue Code of 1954, as
amended (the "Code"), can be issued to employees of the Company.
Additionally, options can also be issued to the directors who render valuable
contributions to the Company. Pursuant to the Plan, options to purchase up to
400,000 shares of the Company's common stock may be granted to employees
and/or Directors of the Company. The Plan is administered by the Board of
Directors, which is empowered to determine the terms and conditions of each
option, subject to the limitation
F-20
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMON STOCK OPTIONS AND WARRANTS (Continued)
that the exercise price cannot be less than the market value of the Common
Stock on the date of the grant (110% of the market value in the case of option
granted to an employee who owns 10% or more of the Company's outstanding
Common Stock) and no options can have a term in excess of 10 years (5 years in
the case of options granted to employees who own 10% or more of the Company's
Common Stock). The Plan was approved by the shareholders of the Company at
the stockholders' meeting held on December 14, 1990.
Option activity is summarized as follows:
Number of Shares Price per Share
Balance December 31, 1993 344,000 $0.20 - 10.00
Granted 1994 39,500 $0.30
Terminated 1994 ( 99,500) $0.20 - 7.00
Balance December 31, 1994 284,000 $0.20 - 10.00
Granted 1995 92,000 $0.30
Terminated 1995 (83,000 $0.20 - 10.00
Exercised 1995 (4,000) $0.20
Balance December 31, 1995 289,000 $0.20 - 0.83
The following options to purchase the Company's common shares were outstanding
on December 31, 1995.
Date Number of Shares Exercise Price Expiration Date
1/18/93 132,500 $ 0.20 *
9/16/93 25,000 $ 0.83 9/15/98
11/22/94 39,500 $ 0.30 12/14/96
5/12/95 92,000 $ 0.30 5/12/98
289,000
* The $0.20 options are valid until 30 days after employee's past due salary
is paid.
During January, 1990 the Board of Directors of the Company voted to decline
the purchase of the RV Seahawk, owned by Seahawk, Inc. (a related party). In
accordance with a prior agreement (see Note 13) Seahawk, Inc. was granted
options to buy 2,000,000 shares of the Company's common stock at $0.15.
Seahawk, Inc. has assigned these options to others.
Activity in these Warrants can be summarized as follows:
No. of Shares
Balance, December 31, 1993 742,955
Exercised (570,451)
Balance, December 31, 1994 172,504
Exercised (105,269)
Expired ( 67,235)
Balance, December 31, 1995 -
F-21
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMON STOCK OPTIONS AND WARRANTS (Continued)
On June 2, 1993, the Company's Board of Directors approved a total of
1,000,000 incentive stock options to be issued to three senior members of the
management team as part of their contract of employment. On May 11, 1994 the
exercise price of the stock options were reduced. These options are described
as follows:
Original New
Exercise Exercise Expiration
Date Number of Shares Price Price Date
6/2/93 300,000 $0.70 $0.40 6/2/98
6/2/93 300,000 $1.20 $0.60 6/2/98
6/2/93 200,000 $3.00 $1.50 6/2/98
6/2/93 200,000 $5.00 $2.50 6/2/98
1,000,000
Warrant activity is summarized as follows:
Number of Shares Price per Share
Balance December 31, 1993 1,163,382 $0.1375-5.00
Granted 5,565,750 $0.25 - 1.00
Exercised ( 100,000) $ 0.1375
Expired ( 75,000) $0.15 - 2.00
Balance December 31, 1994 6,554,132 $0.25 - 5.00
Granted 766,750 $0.25 - 0.50
Exercised ( 65,000) $0.25 - 0.30
Expired - $ -
Balance December 31, 1995 7,255,882 $0.25 - 5.00
F-22
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMON STOCK OPTIONS AND WARRANTS (Continued)
The following warrants to purchase the Company's common shares were
outstanding on December 31, 1995:
Date No. of Shares Exercise Price Expiration Date
01/21/92 23,000 Note A Note A
01/21/92 32,191 $2.00 Note B
01/21/92 32,191 5.00 Note A
01/21/92 119,000 Note C Note A
01/24/92 100,000 Note D -
06/24/93 250,000 0.25 12/31/96
10/13/93 250,000 0.25 10/13/99
01/01/94 32,000 0.38 12/31/95
02/18/94 50,000 0.30 02/28/96
03/01/94 25,000 0.30 03/01/96
04/06/94 142,000 Note C Note A
04/01/94 400,000 0.25 12/31/99
05/19/94 1,000,000 0.50 04/14/97
06/01/94 100,000 1.00 06/30/97
10/19/94 100,000 0.50 10/19/96
05/11/94 15,000 0.40 Note E
05/11/94 15,000 0.40 Note E
07/31/94 606,250 0.32 07/31/96
07/31/94 772,500 0.32 07/31/96
07/31/94 312,500 0.32 07/31/96
07/31/94 12,500 0.32 07/31/96
07/31/94 300,000 0.32 07/31/96
11/10/94 1,800,000 0.32 11/10/96
03/31/95 112,500 0.30 03/31/97
06/02/95 100,000 0.32 06/02/97
10/31/95 14,250 0.50 10/31/96
09/30/95 360,000 0.32 10/01/97
10/01/95 100,000 0.50 10/20/97
09/30/95 80,000 0.30 09/30/97
7,255,882
Note A - 3 months after effective date of Registration Statement
Note B - 18 months after effective date of Registration Statement
Note C - 110% of lowest closing bid 180 days prior to exercise
Note D - $2.50 or divide 100,000 by lowest bid during prior 180 days
Note E - 180 days after resignation
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company receives some of its revenues from the rental of a vessel and deep
ocean search and survey equipment and the sale of services leased to Seahawk
I, Ltd., Seahawk II, Ltd. and Eagle Partners, Ltd. For the years ended
December 31, 1995 and 1994, the Company recorded revenues of $145,690 and
$50,285
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<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS (Continued)
respectively, from these partnerships. At December 31, 1995 accounts
receivable-affiliates includes $1,752,011 from this rental activity. See Note
4 for discussion of allowances for doubtful accounts and losses in excess of
investments in affiliates and its relationship to accounts receivable-
affiliates.
From March 13, 1989 until October 1995, the Company chartered the vessel
SEAHAWK from Seahawk, Inc., an affiliated Alabama corporation (the "Charter").
The Charter provided that Seahawk, Inc. was to provide the Company with the
use of the SEAHAWK and all equipment contained on board for a charter fee of
$6,000 per month. The company was responsible for providing the entire crew,
fuel, all provisions and consumables as well as provide for the day-to-day
maintenance of the ship and on-board equipment. The company also has to
maintain protection and indemnity insurance. The Charter was a written
agreement for the first two years, and was verbally extended on a
month-to-month
basis until October 1995.
Seahawk, Inc., an Alabama corporation, was principally owned by John C. Morris
and Gregory P. Stemm, principal shareholders and former Officers and Directors
of the Company, and by A.F. Budge, a principal shareholder. The basic terms
of this Charter were negotiated by the prior management of the Company as part
of the acquisition by the Company of R/V Seahawk in 1989. During November
1995, the Company acquired 100% of the outstanding common stock of Seahawk,
Inc. in a transaction where the Company issued 2,400,000 shares of its Common
Stock to the shareholders of Seahawk, Inc. and agreed to include these shares
in a registration statement. Messrs. Morris and Stemm received 868,121 shares
and 603,943 shares, respectively, and a corporation controlled by Mr. Budge
received 533,130 shares. The agreement also provided that if the registration
statement was not declared effective by May 1, 1996, the shareholders of
Seahawk, Inc. would have the option to rescind the transaction. The
registration statement was declared effective on February 14, 1996.
During February 1994, the Company issued 2,438,851 shares of its Common Stock
to the following affiliated persons who agreed to convert existing loans and
accrued interest into Common Stock:
Number of Debt
Name Shares Converted
Carl Anderson 1,868,400 $467,100
Megeve Investments 232,591 34,889
John C. Morris 337,860 50,679
Carl Anderson and John Morris were principal shareholders of the Company and
Megeve Investments acquired its shares as an assignee from Gregory Stemm, a
principal shareholder. All of the debt was converted at $.25 per share except
for the 232,591 shares issued to Megeve Investments and 212,533 of the shares
issued to John Morris, which were issued pursuant to the exercise of existing
warrants at an exercise price of $.15 per share.
During February 1994, the Company also issued 100,000 shares of Common Stock
to Carl Anderson, a principal shareholder, for the purchase of 36-foot motor
vessel valued at $30,000.
F-24
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS (Continued)
In connection with the resignations of John Morris and Greg Stemm as officers
and directors of the Company, the Company negotiated Separation Agreements
with each person. These agreements were executed on April 14, 1994, and
provide essentially that Messrs. Morris and Stemm will not compete with the
Company for a period of three years, and in consideration therefor, the
Company issued to each of Mr. Morris and Mr. Stemm warrants to purchase
500,000 shares of the Company's Common Stock at $0.50 per share for the same
three year period.
During June 1994, the Company issued 240,000 shares of its Common Stock to six
accredited investors. These six investors originally invested in a private
offering in June 1993, and according to the terms of the 1993 private
placement, if the Company did not register the original shares within one year
of the private offering, the Company was required to issue additional shares
in an amount equal to 30% of the shares originally purchased. Included among
these investors were Carl Anderson and Anthony F. Budge, who were each issued
60,000 shares. Carl Anderson and Anthony F. Budge were both principal
shareholders of the Company.
During June 1994, the Company also issued 103,092 shares of Common Stock to
the following two employees and officers of the Company as payment for accrued
and unpaid remuneration for the year ended December 31, 1993:
Number Unpaid
Name of Shares Remuneration
John Lawrence 51,546 $48,324
John Balch 51,546 $48,324
During June and July 1994, the Company issued 983,125 shares of its Common
Stock to five accredited investors in a private placement conducted by the
Company at a price of $.32 per share. The investors also acquired two common
stock purchase warrants exercisable at $.32 per share for each share of Common
Stock they purchased. Included among the investors were Anthony F. Budge, a
director and principal shareholder, and Carl Anderson, a principal
shareholder. Mr. Budge purchased 156,250 shares and Mr. Anderson purchased
303,125 shares.
According to the terms of the above private placement, if the Company did not
register the original shares by December 31, 1994, the Company was required to
issue additional shares in an amount equal to 30% of the shares originally
purchased. A total of 326,813 additional shares were issued during January
1995, with Mr. Budge receiving an additional 46,875 shares and Mr. Anderson
receiving an additional 90,938 shares.
During November 1994, the Company issued 800,000 shares of its Common Stock
and common stock purchase warrants to buy 1,600,000 shares of Common Stock at
an exercise price of $.32 per share to Carl Anderson, a principal shareholder,
in exchange for 66,667 shares of common stock of Valley Forge Scientific Corp.
The Company also agreed to issue Mr. Anderson an additional 240,000 shares of
Common Stock if the 800,000 shares are not registered by March 10, 1995.
During January 1995, the Company issued 264,774 shares of Common Stock to the
following two employees and officers of the Company as payment for accrued and
unpaid remuneration for the year ended December 31, 1994:
F-25
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS (Continued)
Number Unpaid
Name of Shares Remuneration
John Lawrence 132,387 $41,850
John Balch 132,387 $41,850
During April 1995, the Company issued 300,563 shares of its Common Stock to
five accredited investors. These investors originally invested in a private
offering during June 1994, and according the terms of the private offering, if
the Company did not register the original shares by the end of 1994, the
Company was required to issue additional shares in an amount equal to 30% of
the shares originally purchased. Two of these investors were Carl Anderson
and A.Budge who were issued 90,938 and 46,875 shares respectively.
During July 1995, the Company issued 25,000 shares to Daniel Derfus, a
Director, who agreed to convert part of an existing loan and accrued interest
into Common Stock. Mr. Derfus exercised existing warrants at $.30 per share.
During May 1995, the Company issued 240,000 shares of its Common Stock to Carl
Anderson, a principal shareholder. Mr. Anderson originally invested in a
private offering during November 1994, and according to the terms of the 1994
private offering, if the Company did not register the original shares by March
10, 1995, the Company was required to issue additional shares in an amount
equal to 30% of the shares originally purchased.
From October 1995 Carl Anderson rented a motor car to the Company for $5,000
per annum. At December 31, 1995, the accrued rental due to Carl Anderson was
$833.
During October 1995, the Company issued 360,000 shares of its Common Stock to
Gregory Stemm, a shareholder and former officer and director, pursuant to a
settlement agreement which resolved a lawsuit filed by Mr. Stemm against the
Company. (See Note 13.)
During September 1995, the Company issued a total of 40,000 shares of its
Common Stock to John Morris, a shareholder and former officer and director,
upon payment to the Company of $10,000. These shares were sold because Mr.
Morris exercised anti-dilution rights he held under previously issued
warrants.
NOTE 13 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". There is no effect on prior
operations as a result of the change. This new statement changes the criteria
for the recognition and measurement of deferred tax assets or liabilities,
including net operating loss carry forwards.
As of December 31, 1995, the Company had a net operating loss carry forward of
approximately $12,343,000 which is available to offset future taxable income.
The carry forward will begin to expire in the year 2004. The Company has not
recorded a deferred tax asset since the use of the carry forward is
indeterminable at this time.
F-26
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES
OFFICE AND WAREHOUSE LEASE
In December 1990, the Company entered into a lease agreement for 17,500 square
feet of office and warehouse space. The lease, commencing January 15, 1991,
was for a term of three years with an option to renew for two additional one-
year renewal periods. Rent during the initial term was $120,000 per year
payable as follows: First year, $5,000 per month plus $60,000 of the
Company's common stock; Second year, $6,667 per month plus $40,000 of the
Company's common stock. The exact number of shares issued was determined by
dividing the $60,000 and $40,000 by the average of the bid and the asking
price on the last trading day prior to the commencement day. In April 1993,
the Company re-negotiated the lease effective January 1, 1993 and ending
December 31, 1993 and then renewed the lease until March 31, 1996 after which
the lease operates on a month to month basis. The lease provides for 7,000
square feet of office and warehouse space at a monthly rate of $5,500 and a
further 5,000 square feet of office and warehouse space at monthly rate of
$1,000 with no additional common stock.
GUARANTOR OF AFFILIATE'S LOAN
The Company guaranteed a $250,000 10% note payable of its affiliate, Seahawk
I, Ltd.. The loan was due December 31, 1995 and was secured with 3,500 natural
pearls from the affiliate's artifact collection. The loan was in default due
to non payment of interest and so the Company, as guarantors, accepted a
secured note from Seahawk I, Ltd. for $300,000 and at the same time satisfied
the principal of the loan by issuance of 900,000 shares of common stock and
200,000 shares of Series 1 preferred stock.
LEGAL ASPECTS OF INTERNATIONAL SALVAGE
Legal ramifications with regard to the recovery of shipwrecks raise a number
of issues. Salvors, historical interests and individuals claiming ownership
based on the payment of insurance claims all have potential claims on goods
brought up from the sea floor.
An entity responsible for the salvage of a sunken vessel and its cargo may
expect to defend its claim to title against the original owners or their
successors-in-interest, against rival salvors, and against governments
asserting a historic interest in the shipwreck or cargo.
Potential claimants might include the insurers of the shipwreck as in the SS
Central America case(Civil Action 87-363-N). Unless the insurers expressly
disclaimed title after payment of a claim, and depending on the length of time
the ship has remained sunken, the insurers might have a valid claim of title
to recovered objects.
LAWSUIT RELATING TO NOTES CONVERTED INTO STOCK
During February, 1994 the Company agreed with Carl Anderson to convert two
notes ("the Notes"), one for $44,448 and the other for $80,936 which, together
with accrued interest thereon, totaled $141,804 into 567,212 shares of Common
Stock in the Company. The Notes were in the name of Gregory P. Stemm, a
former officer and director of the Company, who had sold them to Anderson. On
April 27, 1995,
F-27
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Stemm filed a lawsuit against the Company alleging that (a) the Company must
pay him the principal and interest due on the Notes plus attorneys' fees and
such other relief as the Court sees just and proper, and (b) Stemm is entitled
to immediate possession of the Notes, and (c) the Company and Anderson
conspired to deprive Stemm of his right to the Notes and as a result Stemm is
entitled to damages due to this action on the basis that it the loss of value
of the Notes plus interest, costs and attorneys' fees.
The Company defended the action on the basis that it was verbally informed by
both Anderson and Stemm that the Notes had been transferred to Anderson, and
that the Company relied on their representations and converted the Notes in
good faith. However, on the advice of counsel, the Company has agreed to
settle with Stemm. The Company has issued Stemm 360,000 shares of its Common
Stock and raised a two year secured note at 12% per annum for $90,000, in
consideration for Mr. Stemm dismissing the lawsuit. The total settlement was
valued in the Company's books at $180,000. As part of the settlement of this
matter, Carl Anderson agreed to pay the Company $.25 per share for the 567,212
shares which he was issued during February 1994.
BONUS SHARES ISSUABLE TO PARTICIPANTS IN PRIVATE PLACEMENTS
In June, 1994 and November, 1994 the Company issued 1,001,875 and 800,000
shares of common stock respectively in two private placements. Under the
terms of these private placements, if the stock issued was not registered by
December 31, 1994, and March 10, 1995, a bonus of 30% of the original issue
became due. The shares were not registered within the time limit,
consequently 300,562 shares of common stock were issued in January, 1995 and
240,000 were issued in May, 1995.
In July 1995 the Company issued 1,259,136 shares of Common Stock in a private
placement. Under the terms of the private placement, if the stock issued was
not registered by December 31, 1995 a bonus of 25% of the original issue
became due. The shares were not registered until February 14, 1996 and
314,784 shares of common stock were issued in January 1996.At December 31,
1995, the bonus shares were reflected in stockholders' equity as contingent
bonus shares valued at $62,957.
SHARES ISSUED IN PAYMENT OF PERFORMANCE PENALTY
During 1995, the Company entered an agreement with an unrelated party under
which the Company was required to issue 40,000 shares of its Common Stock to
the unrelated party if the Company did not complete a minimum level of hours
by December 31, 1995, searching for the shipwreck known as the Golden Eagle.
The required level of work was not performed and the Company issued 40,000
shares to the party in January 1996.
PESQAMAR AND THE REMARC CONSULTANCY AGREEMENT
On June 1, 1994, the Company signed an Agreement for Consulting Services with
Remarc International, Inc., a Colorado corporation controlled by two former
officers and directors of the Company, John Morris and Gregory Stemm. The
Agreement provided that Remarc would, at its own expense, seek to obtain for
the Company a permit from the appropriate government to search for and salvage
a particular shipwreck known as the "Santa Rosa" in Brazilian waters. If such
a
F-28
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
permit were obtained for the Company by Remarc, then the Company agreed to
grant Remarc between 6% and 9-1/2% of the gross proceeds of any successful
recovery from the project. The actual percentage granted to Remarc was to
depend on the size of portion of the recovery that would be taken by the
Brazilian government in return for the permit.
In furtherance of the negotiations for the permit, it became prudent to join
forces with a Brazilian competitor to form a bidding Consortium. The
Consortium rendered the consultancy Agreement with Remarc inappropriate, and
under a Joint Venture Agreement dated August 1995 with the Company, Remarc
agreed to forego its entitlement to the percentage of the gross recovery of
the project and instead become equal partners with the Company in a Brazilian
domiciled company, Pesqamar Pesquisas Arqueologicas Maritimas Ltda.
(Pesqamar), that owns half of the Consortium. The Company and Remarc each own
24.5% of the voting common stock of Pesqamar with the remaining 51% being
owned by Brazilians. The Company and Remarc also each own 50% of the non
voting preferred stock of Pesqamar. Under the new arrangement Remarc will fund
Pesqamar's costs and the Company will refund 50% of any costs to Remarc when
external project funding for the Santa Rosa project is in place.
NOTE 15 - SEC INVESTIGATION
SEC CIVIL ACTION. During August 1994, the SEC filed a civil action against
the Company and John Morris, Gregory Stemm and Daniel Bagley, three former
officers and directors of the Company, seeking injunctive relief against the
Company and injunctive and monetary relief against the former officers and
directors. The SEC did not seek any financial penalties or other monetary
relief against the Company.
The Complaint filed by the SEC alleged that the Company violated Section 17(a)
of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b) of the
Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-a, 13a-13 and
13b2-1 promulgated thereunder. The SEC alleged between April, 1989 and July,
1991 the Company and Messrs. Morris, Stemm and Bagley disseminated to the
public, in the form of television broadcasts, videotapes and press releases,
false and misleading material information and failed to disclose certain
material information concerning the Dry Tortugas shipwreck discovered and
excavated by the Company. The SEC alleged that the Company materially
overstated the value of the artifacts on its balance sheet and in other
financial information provided in the registration statement of the Company
and two amendments thereto filed in 1992 with the SEC and in certain periodic
reports of the Company filed in 1992 and with the SEC.
The Company and the staff of the SEC negotiated a settlement of the matter
whereby the Company agreed to consent to the entry of a final judgment of
permanent injunction, without admitting or denying any of the allegations in
the complaint enjoining the Company from violations of certain provisions of
the federal securities law referenced in the preceding paragraph. In
addition, the Company agreed that it will not employ John Morris or Gregory
Stemm as officers and directors of the Company or any subsidiaries of the
Company, use corporate funds to pay for or reimburse any costs incurred by
Morris or Stemm for the defense of any civil or administrative action
instituted against them by the SEC,
F-29
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SEC INVESTIGATION (Continued)
or redeem or purchase any stock they own until after the termination of any
such action. Finally, the Company agreed to withdraw its pending appeal to
the SEC of the Initial Decision issued in the stop order proceeding.
SEC STOP ORDER PROCEEDING. On July 30, 1992, the SEC issued an order
directing the staff of the Division of Enforcement (the "Division") to conduct
an examination pursuant to Section 8(e) of the Securities Act of 1933 (the
"Act") to determine whether a stop order should be issued relating to a
registration statement which the Company had filed during March, 1992 and
which had become effective by the passage of time on August 1, 1992. Under
Section 8(d) of the Act, a stop order proceeding was instituted against the
Company by order of the SEC dated January 12, 1993. A hearing was held before
an SEC Administrative Law Judge during late January and early February, 1993.
On May 26, 1993, the Administrative Law Judge issued his Initial Decision. The
Judge concluded that the registration statement filed by the Company was
materially false and misleading and that the Company failed to cooperate with
the examination conducted by the Division's staff. A stop order was issued
suspending the effectiveness of the Company's registration statement.
The primary focus of the proceeding was the value of the shipwreck artifacts
owned by the Company and Seahawk I, Ltd. The Judge found that the Company had
overstated the value of the artifacts on its balance sheet and in other
financial information provided in its registration statement. As a result of
this decision, and in order to present the financial statements in accordance
with generally accepted accounting principles, the Company and the Partnership
restated their December 31, 1990 and 1991 financial statements.
The findings of the Administrative law Judge could possibly be used by private
litigants in civil suits against the Company to prove that the Company
misstated material facts in certain SEC filings.
NOTE 16 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $1,398,981 for 1995 and has incurred substantial net losses for each
of the past several years resulting in an accumulated deficit of $12,431,976.
At December 31, 1995, the Company has negative working capital as indicated by
current liabilities exceeding current assets by $1,968,771. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. In addition to shipwreck projects for which Management is currently
seeking permits and raising funds, Management plans to obtain rental income
from its marine assets and enter the museum attraction business. Management
feels that these factors will contribute toward achieving profitability.
The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
F-30
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SETTLEMENT OF A LAWSUIT RELATED TO CAPITAL LEASE OBLIGATION AND SALE
OF REMOTELY OPERATED VEHICLE
In 1990, the Company acquired a Remotely Operated Vehicle (ROV) under the
provisions of a long-term lease. For financial reporting purposes, the ROV
had been capitalized in accordance with the Statement of Financial Accounting
Standards No. 13.
In June, 1992, Commercial Union Capital Limited ("Commercial Union"), the
company from which the Company leases its large ROV "Merlin", filed a lawsuit
against R.V. Seahawk, Inc. IN PERSONAM, Seahawk Deep Ocean Technology, Inc.
IN PERSONAM and the "Seahawk Retriever" IN REM.
In its complaint Commercial Union alleged that the Company had committed a
breach or default under its Lease Purchase Contract with Commercial Union
since the Company failed to make its payment due July 2, 1991 and had failed
to make all payments due thereafter. Commercial Union further alleged that it
has elected to treat the breach by the Company as a termination of the Lease
Purchase Contract, entitling Commercial Union to recover the loss value as
defined in the Lease Purchase Contract as of June 9, 1992 of $1,173,371.
Commercial Union alleged that it is also entitled to receive the amount of the
Company's arrears equal to $447,208 plus interest on the arrearage from June
20, 1991 through June 9, 1992 plus (a) interest accruing at the rate of $386
per day and (b) attorney fees and costs estimated at $156,113.
Commercial Union, in its complaint, was also seeking a maritime lien against
the Seahawk Retriever, her engines, tackle, equipment and appurtenances and
asking that the ship be sold and the proceeds be paid toward the amount of any
judgment.
On June 18, 1992, the Company responded by filing a Motion to Quash the Arrest
Warrant and to dismiss the IN REM Complaint. On December 23, 1992, a
magistrate judge recommended the arrest be quashed and the vessel released.
However on May 21, 1993 a district court judge concluded that the magistrate
judge's recommendations should not be adopted.
On February 9, 1994 and amended on April 1, 1994, the Company and Commercial
Union entered into a joint stipulation agreement to delay sale of the Seahawk
Retriever. The settlement provided for the Company to pay Commercial Union
$500,000 in cash and sign a $1,000,000 note payable one year from closing
secured by a first preferred ship mortgage on the Seahawk Retriever, her
engines, tackle, equipment and apparel. The note is non-interest bearing
through its due date. The note was payable on April 15, 1995 but in March
1995, because of the bankruptcy filing of the third party charterer of the
Retriever (See Note 17) Commercial Union agreed to extend the expiration date
of the note to June 1, 1995. The note was settled as part of the sale of the
Retriever in April 1996, (See Note 20).
The Company also agreed to grant Commercial Union warrants to purchase 400,000
shares of the Company's common stock at an exercise price of the lower of
$.3125 and the lowest price per share at which the Company issues stock during
the life of the warrants. At December 31, 1995, the exercise price was $.25.
F-31
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SETTLEMENT OF A LAWSUIT RELATED TO CAPITAL LEASE OBLIGATION AND SALE
OF REMOTELY OPERATED VEHICLE (Continued)
To permit the Company to generate the $500,000 in cash needed to close this
transaction, Commercial Union allowed the Company to sell the ROV "Merlin" to
a third party. On March 8, 1994, the Company and Commercial Union entered
into an agreement with the third party to sell the ROV "Merlin" for $650,000
cash. All cash on the sale was received by April 11, 1994.
NOTE 18 - VESSEL BAREBOAT CHARTER AND PURCHASE OPTION AGREEMENT
During August 1994, the Company entered into a Vessel Bareboat Charter and
Purchase Agreement with International Diving and Consulting Services, Inc.
("International Diving"), a Lafayette, Louisiana based underwater service
company. Pursuant to this agreement, International Diving agreed to charter
the SEAHAWK RETRIEVER for the five year period commencing September 1, 1994,
and to purchase the vessel at the end of the five year period for $1,350,000
plus interest at a rate equal to 3% per annum over the Citibank New York prime
rate less credits as explained in the next paragraph.
The agreement further provides that International Diving will market the
vessel at a minimum day rate of $5,000, except that all lump sums or turnkey
projects will have a $6,000 minimum daily rate. International Diving further
guarantees one hundred eighty (180) days utilization of the vessel at a rate
of $5,000, or an annual total of $900,000. The greater of the guaranteed
revenues or the actual revenues, after deduction for certain operating costs,
will be shared between the Company and International Diving as follows: (I)
35% to the Company as charter hire for the vessel; (ii) 30% to International
Diving for operating costs and profit; and (iii) 35% to the Company which will
be applied toward the purchase price of the vessel. Payments are due
quarterly within 10 days after the end of each quarter. In the event
International Diving fails to purchase the vessel at the end of the five year
term, the vessel is to be returned to the Company and the 35% payments which
are credited toward the purchase price will be retained by the Company as
liquidated damages. International Diving's performance under this agreement
has also been personally guaranteed by the two principals of International
Diving.
On November 23, 1994, International Diving filed a voluntary petition in the
United states Bankruptcy Court under Chapter 11 of the Bankruptcy Code. Due
to this Chapter 11 filing, International Diving was not able to make the lease
payment in the amount of approximately $100,000 which was due to the Company
on December 10, 1994.
On March 7, 1995, the U.S. Bankruptcy Court Western District of Louisiana,
Lafayette - Opelousas Division ordered International Diving to pay (a)
$130,836 on or before March 17, 1995; (b) $56,935 on or before April 7, 1995;
(c) $56,935 on or before May 7, 1995; and (d) all future payments under the
Agreement as they come due, and ordered that the Agreement be amended to grant
International Diving the option to purchase the Retriever for the sum of
$1,450,000 payable in cash on or before June 1, 1995.
International Diving has declined the option to purchase the Retriever and has
made the payments under (a), (b), and (c) above. International Diving was
unable to make the payment of $136,703.50 due on June 10, 1995, and on July
11, 1995 (as modified on July 25, 1995), the same Bankruptcy Court ordered
International
F-32
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - VESSEL BAREBOAT CHARTER AND PURCHASE OPTION AGREEMENT (Continued)
Diving to make payments of $45,568 on July 11 and July 25, 1995, and to make
payments of $53,179 on August 8, August 24, and September 5, 1995. The
payment due on July 11, 1995 was made and $45,000 was received on August 8,
1995. No further payments have been received.
On August 22, 1995, the Bankruptcy Court ordered that because International
Diving had failed to pay the sums required by order of July 25, 1995, they
should immediately surrender the Retriever to the Company. The vessel was
repossessed by the Company on September 12, 1995 and sold for $1,438,750 in
April 1996.(See Note 19)
On June 5, 1996, the Company filed a claim and a motion for payment in the
Bankruptcy Court against International Diving and against one of the
principals of International Diving as guarantor for the company, in the sum of
$1,486,374 for damages and other amounts by International Diving under the
Agreement. The claim reflected credit for sums received as a result of the
sale of the vessel to a third party following the breach by the debtor. In
accordance with Company policy, the claim will not be recorded in the
financial statements until any proceeds are received.
NOTE 19 - COST OF SETTLEMENT OF CLAIMS
During 1995 the Company settled past due debts with three note holders and
certain other creditors at a cost to the Company of $55,085.
To settle a past due note, the Company turned over collateral valued at
$129,328 to the note holder for the principal of the note and accrued interest
amounting to $115,770, creating a loss on settlement of $13,558.
The Company settled a past due note and interest ($65,575), accrued expenses
($18,161), and current obligations($14,000) with a related party by issuing a
2 year secured note payable in the amount of $105,500, creating a loss on
settlement of $7,264.
The Company settled a past due note with interest ($58,284), and accrued
expenses ($11,649) owed to a related party in exchange for a note in the
amount of $65,000, which generated a gain on the settlement of $3,934.
The Company settled a dispute with two other related parties in which notes
originally held by the first party were converted to stock by the second party
who purchased the notes but did not fully pay for them. The original note
holder sued the Company for repayment of the notes and settled with the
Company for $180,000, $90,000 of which was settled by issuance of 360,000
shares of the Company's Common Stock and 360,000 warrants to purchase the
Company's Common Stock at $0.32 per share and issuance of a secured 2 year
note in the amount of $90,000. The party that had previously been issued
stock for the notes then agreed to reimburse the Company $141,803 which was
the amount that the stock would have cost under the original conversion. This
resulted in a loss on this settlement in the amount of $38,197.
F-33
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
SETTLEMENT OF FIRST PREFERRED SHIPS MORTGAGE AND SALE OF THE RETRIEVER
In April 1996, the Company sold the Retriever to an unrelated party for
$1,438,750. Prior to the sale, the Company owed Commercial Union $1,025,000
plus $142,826 in accrued interest ($96,828 of which was accrued as of December
31, 1995). The Company was able to settle the entire principal and interest
for $900,000.
The first preferred ships mortgage settlement and loss on sale of the
Retriever is reflected in the financial statements for the year ended December
31, 1995, as follows:
Selling price $ 1,438,750
less commission and fees ( 84,864)
Net selling price 1,353,886
Net book value 1,570,276
Provision for writedown $ 216,390
First preferred ships mortgage $ 1,025,000
Accrued interest December 31, 1995 96,828
1,121,828
Debt settled for 900,000
Benefit on settlement of ships mortgage $ 221,828
NOTE 21 - ECONOMIC DEPENDENCE
For the year ended December 31, 1995, approximately $381,667 of revenues were
attributable to a single major customer from the charter of the Seahawk
Retriever which was sold in April 1996.
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995
Revenues $ 122,327 $ 116,940 $ 198,223 $ 164,904
Net Income (loss) (219,103) (187,922) (405,930) (586,026)
Income (loss) per
share (0.01) (0.01) (0.02) (0.03)
Weighted average
number of common
shares and
common shares
equivalent
outstanding 20,167,811 20,262,761 20,488,249 21,327,705
F-34
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
1994
Revenues $ 23,855 $ 16,873 $ 6,472 $ 135,027
Net Income (loss) (368,260) (344,330) (394,611) (272,458)
Income (loss) per
share (0.03) (0.02) (0.03) (0.02)
Weighted average
number of common
shares and
common shares
equivalent
outstanding 13,909,545 14,852,105 15,307,307 16,484,605
The increase in revenues during the Fourth Quarter of 1994 results from the
charter of the RV Seahawk Retriever to an unrelated party (see Note 17).
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Limited Partners of
Seahawk I, Ltd.
Tampa, Florida
We have audited the accompanying balance sheet of Seahawk I, Ltd. (a Florida
limited partnership) as of December 31, 1995 and the related statements of
operations, partners' capital and cash flows for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentations. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Seahawk I, Ltd. as of
December 31, 1995 and the results of its operations, changes in partners'
capital and its cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounted principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As shown in the financial
statements, the partnership incurred a net loss of $27,763 for 1995, has
incurred substantial net losses for each of the past six years and has a
partners' deficit of $336,320. In addition, the Partnership has negative cash
flows from its operating activities. These factors, in addition to other
factors as discussed in Note 9, raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Partnership cannot continue in operation.
By:/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A
Tampa, Florida
May 24, 1996
F-36
<PAGE>
SEAHAWK I, LTD.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash $ 268
Accounts receivable 421
Inventory - other 1,146
Total Current Assets 1,835
OTHER ASSETS
Artifact inventory 646,025
$ 647,860
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable - affiliates $ 633,322
Accounts payable - other 4,087
Accrued expenses 34,671
Notes payable - Limited Partners 12,100
Note payable - General Partner 300,000
Total Current Liabilities $ 984,180
PARTNERS' CAPITAL (DEFICIT)
Capital contributions 2,511,040
Accumulated deficit (2,847,360)
( 336,320)
$ 647,860
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
SEAHAWK I, LTD.
STATEMENTS OF OPERATION
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
1995 1994
SALES $ 30,491 $ 7,978
COST OF SALES 4,709 4,330
GROSS PROFIT 25,782 3,648
OPERATING EXPENSES 8,122 32,588
GENERAL AND ADMINISTRATIVE EXPENSES 4,040 5,525
12,162 38,113
PROFIT (LOSS) FROM OPERATIONS 13,620 ( 34,465)
OTHER INCOME (EXPENSE)
Interest expense ( 41,383) ( 49,439)
NET (LOSS) $( 27,763) $( 83,904
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
Number Capital Accumulated
Units Contributions Deficit
BALANCE, December 31, 1993 204 2,511,040 (2,735,693)
NET (LOSS) - - ( 83,904)
BALANCE, December 31, 1994 204 2,511,040 (2,819,597)
NET (LOSS) - - ( 27,763)
BALANCE, December 31, 1995 204 $ 2,511,040 $(2,847,360)
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
SEAHAWK I, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 and 1994
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $( 27,763) $( 83,904)
Adjustments to reconcile net loss to
net cash used by operating activities:
Decrease in prepaid expense 3,915 -
Decrease (increase) in accounts
receivable-other ( 171)
(Decrease) increase in accounts
payable-affiliates ( 19,156) 25,855
(Decrease) increase in accrued expenses 32,467 ( 815)
(Decrease) increase in accounts
payable - other 2,000 2,000
(Increase) decrease in inventory
- artifacts and other 4,709 4,148
Total adjustments 23,935 31,017
Net cash (used)
by operating activities ( 3,828) ( 52,887)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds - 50,000
Net cash provided by
financing activities ( - ) 50,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 3,828) ( 2,887)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,096 6,983
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 268 $ 4,096
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
SEAHAWK I, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
SIGNIFICANT NON-CASH TRANSACTIONS
In 1995, non-cash financing activities included the following:
Collateralized artifact inventory taken due to
default of an obligation of the General Partner.
Reflected as a reduction of account payable
- affiliates $ 129,328
Limited Partners' notes payable assumed and
satisfied by General Partner 20,786
In 1995, non-cash operating activities included the following:
Artifact inventory given to Limited Partner
noteholder to satisfy accrued interest payable 5,625
Accrued interest payable assumed and satisfied
by General Partner 9,500
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Seahawk I, Ltd. (The "Partnership") was formed May 23, 1988 as a Florida
limited partnership. The Partnership consists of several Limited Partners and
a corporate General Partner, Seahawk Deep Ocean Technology, Inc. (the General
Partner). The purpose of the Partnership is to engage in expeditions to
locate, identify, and retrieve samples from shipwrecks in waters off the coast
of Florida. Since the Partnership has located a colonial age sunken vessel,
the purpose of the Partnership has been expanded to include the salvage and
recovery of artifacts.
The Partnership agreement extends through December 31, 1998, and may be
terminated earlier at any time at the election of the General Partner with the
consent of a Majority - In - Interest of the Limited Partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
As provided in the Partnership Agreement, the Partnership's accounts are
maintained on the cash basis of accounting for tax purposes, however, for
financial statement purposes they are adjusted to the accrual basis in order
to conform with generally accepted accounting principles.
USE OF ESTIMATES
The Partnership uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
INVENTORY - ARTIFACTS
Inventory consists of artifacts and precious metals recovered from a colonial
age sunken vessel discovered off the coast of Florida. Inventory is stated at
the lower of cost or market. Cost of individual artifacts is determined as
the estimated net realizable value.
STATEMENT OF CASH FLOWS
Cash includes cash in bank.
ALLOCATION OF NET INCOME AND NET LOSSES
Initially, net losses of the Partnership were allocated 99% to the Class A
Limited Partners and 1% to the General Partner until the Class A Limited
Partners' capital accounts had been reduced to zero. Net income was to be
first allocated to the Limited Partners based on their proportionate ownership
interests to the extent of net losses previously allocated to them. Next; net
income was to be allocated to the General Partner to the extent of net losses
previously allocated to him. All remaining net income was to be allocated 50%
to the Limited Partners and 50% to the General Partner.
Upon completion of the Class B limited partnership offering in 1990, the
allocation of net losses and income was as follows:
F-41
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net losses of the Partnership allocated 30% to the Class A Limited Partners,
20% to the Class B Limited Partners and 50% to the General Partner.
Net income was to be allocated to the Limited Partners, as it was before,
based on their proportional ownership interests to the extent of net loss
previously allocated to them and to the General Partner to the extent of net
loss previously allocated to him. All remaining net income will be allocated
30% to Class A Limited Partners, 20% to Class B Limited Partners and 50% to
the General Partner.
Upon completion of the Class C limited partnership offering, the allocation of
net losses and income is as follows:
Net losses shall be allocated 15% to the Class A Limited Partners, 10% to the
Class B Limited Partners, 25% to the Class C Limited Partners and 50% to the
General Partner. At such time as the capital account of any limited partner
reaches zero, any further loss allocation shall be made to the General
Partner.
Net income shall be allocated first to the limited partners to the extent of
any net losses previously allocated, then to the General Partner to the extent
of losses allocated to the General Partner. Any additional net income shall
be allocated 15% to the Class A Limited Partners, as a class, 25% to the Class
B Limited Partners, 25% to the Class C Limited Partners and 50% to the General
Partner.
DISTRIBUTION OF CASH
Cash available for distribution from Partnership operations represents cash
generated from Partnership activities after payments of all expenses of the
Partnership and the establishment of any reserves deemed appropriate by the
General Partner. Any distributions shall be made in the following order of
priority:
First to the Partners to repay outstanding loans to the Partnership; then to
the Class A Limited Partners in the amount sufficient to return to the Class A
Limited Partners the total amount of their cumulative Capital Contributions to
the Partnership. Then, 50% to the Class B Limited Partners as a class and 50%
to the General Partner until the Class B Limited Partners as a class and the
General Partner have received distributions in the amount of $500,000 each,
taking into account prior distributions of cash or property. Then 50% to
Class C Limited Partners as a class and 50% to the General Partner until the
Class C Limited Partners and the General Partners have received distributions
in the amount of their original contribution, taking into account prior
distributions of cash or property. Then, to the Partners in amounts up to and
in proportion to their respective capital account balances if any. Then the
balance shall be distributed 15% to Class A Limited Partners, 10% to Class B
Limited Partners 25% to Class C Limited Partners and 50% to the General
Partner.
INCOME TAXES
In accordance with Section 701 of the Internal Revenue Code, the Partnership
is not a taxable entity, therefore the results of operations flow through to
the partners for tax purposes. The tax returns and the amounts of Partnership
income or loss distributed to the partners are subject to examination by
Federal and State taxing authorities.
F-42
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE
Notes payable at December 31, 1995 consist of the following:
Notes payable to certain Limited Partners
with interest at the rate of 15% per
annum payable January 15th of each year.
The principal sum plus accrued interest
was due October 10, 1992, unsecured. $ 12,100
Note payable to General Partner (see Note 4 below) 300,000
$ 312,100
NOTE 4 - NOTE PAYABLE GENERAL PARTNER AND OTHER INFORMATION
During 1993 the Partnership issued a note payable to an unrelated party in the
sum of $250,000 with interest payable quarterly in arrears. The principal sum
plus any accrued interest was to be payable on October 31, 1995. The loan was
secured with 3,500 natural pearls from the Partnership's artifact collections
and was guaranteed by the General Partner. The note fell into default as a
result of non-payment of interest and on December 1, 1994 an agreement was
reached between the note holder and the General Partner whereby the principal
was satisfied by the issue of 900,000 shares of common stock and 200,000
shares of Series 1 preferred stock in the General Partner. The General Partner
also agreed to pay the outstanding interest in cash. In return for this
settlement of their debt to the unrelated party the Partnership issued to the
General Partner a note for $300,000 payable on November 30, 1995 together with
accrued interest at the rate of 10% per annum. The note is secured by 4,000
pearls owned by the Partnership valued in the Company's artifact inventory at
$36,000.
In June 1992, the General Partner received loans of $200,000 from unrelated
parties and $50,000 from a related party. The notes were due December 31,
1992 with interest at 10% per annum payable at the time the note is paid off.
These notes were collateralized by all the gold artifacts owned by the
Partnership, approximately 500 ounces. As additional consideration, the
General Partner issued two year warrants to purchase an aggregate of 200,000
shares of common stock at 110% of the lowest closing bid price of the General
Partner's common stock during the 180 calendar days prior to the exercise date
with the maximum exercise price to be $3 per share. All these notes were
converted to common stock of the General Partner in May 1993 except the
$50,000 loan from a related party. The collateral for that loan was changed
from the Partnership's gold to assets owned by the General Partner. In March
1995 the related party consolidated the loan and outstanding interest with
other debt due by the General Partner and issued a new note for $105,500 which
is repayable on March 31, 1997. The new note is secured with Partnership
artifacts valued in the Partnership's artifact inventory at $21,370, and
artifacts owned by the General Partner and listed in the General Partner's
artifact inventory at $105,070.
In December 1992 the General Partner received a loan of $10,000 from an
unrelated party. The note was due on December 1, 1993 with interest at 10%
per annum payable at the time the note was paid off. The note is
collateralized by silver coins owned by the Partnership valued in the
Company's artifact inventory at $22,284. The note was increased to $17,000 in
January 1994 and extended until December 1, 1995. There was no change made to
the collateral but as consideration for the first note the General Partner
issued two year warrants to
F-43
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE (Continued)
purchase 40,000 shares of common stock at $0.25 per share and as consideration
for the extended note the General Partner issued two year warrants to purchase
32,000 shares of common stock at $0.38 per share. In March 1995 the note was
extended for one year on the basis that the validity of the $0.25 warrants was
extended until six months after all amounts due under the note are repaid. In
July 1995 accrued interest was paid, certain of the principal was repaid and
the note was amended to $9,522.55. In January 1996 the note and accrued
interest was incorporated into a new note for $10,500 repayable on April 1,
1996 with the condition that if the loan is not repaid within 60 days of the
due date the entire collateral will be forfeited in lieu of the amount due.
In June 1993 the General Partner received a loan of $250,000 from an unrelated
party. The note was due on July 31, 1994 with interest at 10% per annum
payable at the time the note was paid off. The note was collateralized by gold
artifacts owned by the Partnership valued in the Company's artifact inventory
at $466,685. As additional consideration the General Partner issued two year
warrants to purchase 250,000 shares of common stock at $1.00 per share. In
September 1994 the General Partner paid the note and the collateral was
released.
In June 1994, the General Partner received a loan of $100,000 from an
unrelated party. The note became due on June 1, 1995, together with interest
at 10% per annum. The note was collateralized by gold artifacts owned by the
Partnership valued in the Partnership's artifact inventory at $129,328. As
additional consideration the General Partner issued two year warrants to
purchase 100,000 shares of common stock at $1.00 per share. In December 1995
the note was paid off by surrendering the collateral to the note holder. In
the books of the Partnership the transaction was treated as a reduction of
$129,328 in the amount due to the General Partner.
In October 1994 the General Partner received a loan of $95,000 from an
unrelated party. The note became due on October 20, 1995, with interest at
10% per annum payable at the time the note is paid off. The note is
collateralized by gold artifacts owned by the Partnership valued in the
Company's artifact inventory at $128,393. As additional consideration the
General Partner issued two year warrants to purchase 100,000 shares of common
stock at $0.50 per share. In October 1995 the note was extended until October
1996, and the General Partner issued 100,000 new warrants to purchase shares
of common stock at $.50 per share.
In March 1995 the General Partner received a loan of $65,000 from a related
party. The note becomes due on March 31, 1997, with interest at 12% per annum
payable half-yearly. The note is collateralized by artifacts owned by the
Partnership valued in the Partnership's artifact inventory at $70,147,
together with artifacts owned by the General Partner and valued in the General
Partner's artifact inventory at $9,738.
NOTE 5 - RELATED PARTY TRANSACTIONS
The General Partner performed conservation and administrative services for the
Partnership. The total amount of these expenses for the years ended December
31, 1995 and 1994 was $9,360 and $33,649 respectively.
F-44
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
The Partnership has borrowed funds from its affiliates and its affiliates have
paid certain expenses on behalf of the Partnership. The Partnership accrues
interest on advances from affiliates at the rate of 12% per annum based on the
average monthly balance.
The Partnership has a note payable to the General Partner for $300,000. (See
Note 4).
NOTE 6 - CONTINGENCIES
The Partnership is contingently liable, under a consulting agreement to an
unrelated company, for an amount equal to ten (10) percent of the total value
of all artifacts and other valuable items recovered, if any, from the sites
identified in an agreed research area, after subtraction of any share taken by
any government in whose waters the recovered materials are raised, in exchange
for which the Partnership will secure the services of that company's principal
employee in connection with the historical and archeological aspects of the
Partnership operations.
LEGAL ASPECTS OF INTERNATIONAL SALVAGE
The question of legal ramifications with regard to the recovery of shipwrecks
raises a number of issues. Salvors' historical interests and individuals
claiming ownership based on the payment of insurance claims all have potential
claims on goods brought up from the sea floor.
An entity responsible for the salvage of a sunken vessel and its cargo may
expect to defend its claim to title against the original owners or their
successors - in - interest, against rival salvors, and against governments
asserting a historic interest in the shipwreck or cargo.
Potential claimants might include the insurers of the shipwreck as in the SS
Central America case (Civil Action 87-363-N). Unless the insurers expressly
disclaimed title after payment of a claim, and depending on the length of time
the ship has remained sunken, the insurers might have a valid claim of title
to recovered objects.
NOTE 7 - SEC INVESTIGATION OF GENERAL PARTNER
SEC CIVIL ACTION. During August 1994, the SEC filed a civil action against
the General Partner and John Morris, Gregory Stemm and Daniel Bagley, three
former officers and directors of the General Partner, seeking injunctive
relief against the General Partner and injunctive and monetary relief against
the former officers and directors. The SEC did not seek any financial
penalties or other monetary relief against the General Partner.
The Complaint filed by the SEC alleged that the General Partner violated
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and
13(b) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-a,
13a-13 and 13b2-1 promulgated thereunder. The SEC alleged between April 1989
and July 1991 the General Partnership and Messrs. Morris, Stemm and Bagley
disseminated to the public, in the form of television broadcasts, videotapes
and press releases,
F-45
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - SEC INVESTIGATION OF GENERAL PARTNER (Continued)
false and misleading material information and failed to disclose certain
material information concerning the Dry Tortugas shipwreck discovered and
excavated by the General Partner. The SEC alleged that the General Partner
materially overstated the value of the artifacts on its balance sheet and in
other financial information provided in the registration statement of the
General Partner and two amendments thereto filed in 1992 with the SEC and in
certain periodic reports of the General Partner filed in 1992 and with the
SEC.
The General Partner and the staff of the SEC negotiated a settlement of the
matter whereby the General Partner agreed to consent to the entry of a final
judgment of permanent injunction, without admitting or denying any of the
allegations in the complaint enjoining the General Partner from violations of
certain provisions of the federal securities law referenced in the preceding
paragraph. In addition, the General Partner agreed that it will not employ
John Morris or Gregory Stemm as officers and directors of the General Partner
or any subsidiaries of the General Partner, use corporate funds to pay for or
reimburse any costs incurred by Morris or Stemm for the defense of any civil
or administrative action instituted against them by the SEC, or redeem or
purchase any stock they own until after the termination of any such action.
Finally, the General Partner agreed to withdraw its pending appeal to the SEC
of the Initial Decision issued in the stop order proceeding.
SEC STOP ORDER PROCEEDING. On July 30, 1992, the SEC issued an order
directing the staff of the Division of Enforcement (the "Division") to conduct
an examination pursuant to Section 8(e) of order should be issued relating to
a registration statement which the General Partner had filed during March 1992
and which had become effective by the passage of time on August 1, 1992.
Under Section 8(d) of the Act, a stop order proceeding was instituted against
the General Partner by order of the SEC dated January 12, 1993. A hearing was
held before an SEC Administrative Law Judge during late January and early
February 1993.
On May 26, 1993, the Administrative Law Judge issued his Initial Decision.
The Judge concluded that the registration statement filed by the General
Partner was materially false and misleading and that the General Partner
failed to cooperate with the examination conducted by the Division's staff. A
stop order was issued suspending the effectiveness of the General Partner's
registration statement.
The primary focus of the proceeding was the value of the shipwreck artifacts
owned by the General Partner and the partnership. The Judge found that the
General Partner had overstated the value of the artifacts on its balance sheet
and in other financial information provided in its registration statement.
The Judge concluded that the total net realizable value of all the artifacts
owned by the General Partner and Partnerships was $1,356,361 of which amount
$285,413 was attributed to the General Partner artifacts and $1,070,948 was
attributed to the Partnership's artifacts. As a result of this decision, and
in order to present the financial statements in accordance with generally
accepted accounting principles, the General Partner and the Partnership
restated their December 31, 1990 and 1991 financial statements.
The findings of the Administrative law Judge could possibly be used by private
litigants in civil suits against the General Partner to prove that the Company
misstated material facts in certain periodic reports it filed with the SEC.
F-46
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - LICENSING AND MARKETING AGREEMENT
On October 13, 1993 the Partnership entered into a Master Licensing and
Marketing Agreement with Buckeye Communications, Inc. ("Buckeye"). Under the
Agreement, Buckeye was to develop an integrated marketing strategy to market,
sell and distribute the artifacts recovered by the Partnership. Buckeye had
the exclusive worldwide right to market and sell the artifacts and any
additional products that were developed by Buckeye and the General Partner
related to the artifacts (i.e., artifact replicas), the General Partner's
video library and its archives, through a variety of distribution channels.
Buckeye failed to produce any significant revenue for the Partnership and the
Agreement was terminated in October 1995.
NOTE 9 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Partnership as a going concern. However, the Partnership has sustained
substantial operating losses during its operation and has used substantial
amounts of working capital in its operation. The Partnership incurred a net
loss of $27,763 in 1995, has incurred substantial net losses for each of the
past six years and has a partners' deficit of $336,320. In addition, the
Partnership has negative cash flows from its operating activities. These
factors raise substantial doubt about the Partnership's ability to continue as
a going concern.
In addition, the SEC investigation of the General Partner has inhibited the
raising of capital in the public market as well as from obtaining financing
from private sources; and, the audited financial statements of the General
Partner indicate substantial doubt exists as to the continuance of its future
operations.
In order for the General Partner to remain in business during the next twelve
months it is necessary for the General Partner to either generate revenues or
raise additional financing. The General Partner, acting in its capacity as
general partner for the Partnership, is attempting to sell the artifacts owned
by Seahawk I, Ltd., replicas and merchandise based on the artifacts.
If Seahawk I is able to conduct a sale of the artifacts, management believes
that the sale should yield at least enough for the General Partners to recover
most of its accounts and notes receivable. However, the final resolution and
recoverability of actual amounts is dependent upon future events, the outcome
of which are not fully determined at the present time. Accordingly, no
provision for any additional losses that may result has been made in the
financial statements.
The financial statements do not include any adjustments that might be
necessary if the Partnership is unable to continue as a going concern.
F-47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Seahawk II, Ltd.
Tampa, Florida
We have audited the accompanying balance sheet of Seahawk II, Ltd. (a Florida
limited partnership in the development stage) as of December 31, 1995 and the
related statements of operations, partners' capital and cash flows for the
years ended December 31, 1995 and 1994. We did not audit the financial
statements of Seahawk II, Ltd. from the period May 16, 1989 (inception) to
December 31, 1991. Those statements were audited by other auditors whose
report dated February 11, 1992 (except for Note 5 as to which the date is June
14, 1993) expressed an unqualified opinion on those statements. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Seahawk II, Ltd. (a Florida
limited partnership in the development stage) as of December 31, 1995 and the
results of its operations, changes in partners' capital and its cash flows for
the years ended December 31, 1995 and 1994 and the cumulative amounts since
its inception, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As shown in the financial
statements, the Partnership incurred a net loss of $1,890 for 1995 and has a
partners' deficit of $17,092. In addition, the Partnership has no cash flow
from its operating activities. These factors, in addition to other factors as
discussed in Note 7, raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Partnership cannot continue in operation.
By:/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 24, 1996
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
To the Partners of
Seahawk II, Ltd.
Tampa, Florida
We have audited the statements of operations, partners' capital and cash flows
of Seahawk II, Ltd. (a Florida limited partnership in the development stage)
for the period from May 16, 1989 (inception) to December 31, 1991, which
reflected cumulative expenses of $1,346,238 and partners' capital of $25,012.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the statements of operations, partners' capital and cash flows
referred to above present fairly, in all material respects, the operations,
changes in partners' capital and its cash flows of Seahawk II, Ltd. (a Florida
limited partnership in the development stage) for the period May 16, 1989
(inception) to December 31, 1991 as reflected in the cumulative total columns
in conformity with generally accepted accounting principles.
By:/s/ Baumann & Company, P.A.
BAUMANN & COMPANY, P.A.
Tampa, Florida
February 11, 1992
(except for Note 5 as to which the
date is June 14, 1993)
F-49
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash $ 52
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts Payable
Affiliate $ 14,927
Other 2,217
17,144
PARTNERS' CAPITAL (DEFICIT)
Capital contributions 1,371,250
Deficit accumulated
during development stage (1,388,342)
( 17,092)
$ 52
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
May 16, 1989
Years Ended December 31, (Inception) to
1995 1994 Dec. 31,1995
REVENUES $ - $ - $ -
OPERATING EXPENSES
Vessel rental 560,951
Boat operation 69,839
Technician fees 43,647
Consumables and supplies 11,184
Shuttle service 4,138
Repairs and maintenance 1,695
Communications 1,834
Equipment rental 317,956
Research costs 200,000
Conservation costs - 4,104 14,592
- 4,104 1,225,836
GENERAL AND
ADMINISTRATIVE EXPENSES
Accounting fees 1,440 1,580 30,912
Administrative fees 450 1,050 33,423
Legal and other
professional fees 68,096
Travel and entertainment 8,717
Promotions and printing 4,401
License and fees 5,945
Amortization 19,510
Other 3,090
1,890 2,630 174,094
Total expenses 1,890 6,734 1,399,930
(LOSS) FROM OPERATIONS ( 1,890) ( 6,734) (1,399,930)
OTHER INCOME (EXPENSE)
Interest income 12,976
Interest expense ( 1,388)
- - 11,588
NET (LOSS) $( 1,890) $( 6,734) $(1,388,342)
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE COMPANY)
PARTNERS' CAPITAL MAY 16, 1989 (INCEPTION) TO DECEMBER 31, 1995
Subscrip- Accumulated
Number Capital tions during
of Contri- Receive- Development
Units butions able Stage
UNITS ISSUED 28 $ 840,100 $(420,000) $ -
PLACEMENT COSTS ( 65,100)
NET (LOSS),
May 16, 1989 to
December 31, 1989 ( 734,168)
BALANCE,
December 31, 1989 28 775,000 ( 420,000) ( 734,168)
UNITS ISSUED 22 660,000 420,000
PLACEMENT COSTS ( 63,750)
NET (LOSS) 1990 ( 476,568)
BALANCE,
December 31, 1990 50 1,371,250 - (1,210,736)
NET (LOSS) 1991 ( 135,502)
BALANCE,
December 31, 1991 50 1,371,250 - (1,346,238)
NET (LOSS) 1992 ( 29,308)
BALANCE,
December 31, 1992 50 1,371,250 - (1,375,546)
NET (LOSS) 1993 ( 4,172)
BALANCE,
December 31, 1993 50 1,371,250 - (1,379,718)
NET (LOSS) 1994 - ( 6,734)
BALANCE,
December 31, 1994 50 1,371,250 - (1,386,452)
NET (LOSS) 1995 - ( 1,890)
BALANCE,
December 31, 1995 50 $1,371,250 $ - $(1,388,342)
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
Years Ended May 16, 1989
December 31, (Inception)to
1995 1994 Dec.31, 1995
CASH FLOWS FROM
OPERATING ACTIVITIES
Net (loss) during development stage $(1,890) $(6,734) $(1,388,342)
Adjustments to reconcile net loss to
net cash used by operating activities:
Amortization 19,510
(Increase) in organization costs (19,510)
Increase in accounts payable -
affiliates 690 6,011 14,927
Increase in accounts payable - other 1,200 723 2,217
Total adjustments 1,890 6,734 17,144
Net cash (used) by operating activities - - (1,371,198)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
partnership units - - 1,371,250
Net cash provided by financing activities - - 1,371,250
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ( - ) ( - ) 52
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 52 52 -
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 52 $ 52 $ 52
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Seahawk II, Ltd. (the "Partnership") was formed May 16, 1989 as a Florida
limited partnership. The Partnership consists of several limited partners and
a corporate general partner, Seahawk Deep Ocean Technology, Inc. The purpose
of the Partnership is to engage in expeditions to locate, identify, and
retrieve samples from ship wrecks in waters off the coast of Florida. The
Partnership is a development stage enterprise and has not realized any
expedition revenue.
The Partnership agreement extends through December 31, 2025, and may be
terminated earlier at any time at the election of the General Partner with the
consensus of a Majority-In-Interest of the Limited Partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
As provided in the Partnership Agreement, the Partnership's accounts are
maintained on the cash basis of accounting for tax purposes, however, for
financial statement purposes they are adjusted to the accrual basis in order
to conform with generally accepted accounting principles.
USE OF ESTIMATES
The Partnership uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
ORGANIZATIONAL COSTS
Organizational costs, consisting principally of legal and professional service
fees, which were incurred during the formation of the Partnership were
capitalized and amortized over the initial year of operation.
RESEARCH COSTS
Research costs, consisting principally of fees paid to a related party for
information that will be useful in identifying and locating colonial ship
wrecks, were capitalized and amortized over the first two years of operations.
ALLOCATION OF PROFITS AND LOSSES
Net losses of the Partnership will be allocated 99% to the Limited Partnership
and 1% to the General Partner until the limited partners' capital accounts
have been reduced to zero, thereafter, the net losses will be allocated to the
general partner. Net income is first allocated to the Limited Partners based
on their proportionate ownership interests to the extent of net losses
previously allocated to them. Net income is then allocated to the General
Partner to the extent of net losses previously allocated. All remaining net
income is allocated 1% per unit of limited partnership interest, and the
balance to the General Partner.
F-54
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DISTRIBUTION OF CASH FLOW
Cash available for distribution from Partnership operations represents cash
generated from Partnership activities after payment of all expenses of the
Partnership and the establishment of any reserves deemed appropriate by the
General Partner. Cash available for distribution will be distributed to the
extent of the Limited and General Partners' initial cash contributions to the
Partnership. Then to the General Partner up to the amount of its credit
balance if any. Thereafter, cash available for distributions will be
distributed 1% per unit of limited partnership interest, and the balance to
the General Partner.
INCOME TAXES
In accordance with Section 701 of the Internal Revenue Code, the Partnership
is not a taxable entity, therefore the results of operations flow through to
the partners for tax purposes. The tax returns and the amounts of Partnership
income or loss distributed to the partners are subject to examinations by
federal and state taxing authorities.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Partnership has entered into a license agreement with Seahawk
Oceanographic Services, Inc. (SOS), a corporation of which its two
shareholders are also two major shareholders of the Partnership's General
Partner. Under the terms of the agreement, the Partnership acquired all
rights, title and interest in, and to certain research, data and other
information relating to potential ancient and modern shipwreck sites in the
waters off the east coast of Florida. In accordance with the agreement, the
Partnership made an initial payment of $50,000. The agreement further
specifies that upon confirmation and certification from an independent source
that the Partnership has discovered the site of a colonial shipwreck in the
research area specified by the agreement, the Partnership will pay SOS a fee
of $150,000. One colonial shipwreck has been found and certified, and the
Partnership has paid the corresponding fee.
Additionally, if the Partnership discovers any additional colonial shipwrecks
in the research area, which are also independently verified, the Partnership
will pay SOS an additional fee of $200,000 for each additional colonial
shipwreck.
The Partnership leased a research vessel and on-board electronic research,
survey and salvage equipment from its General Partner to perform search,
identification and salvage equipment activities at a rate which the General
Partner established as reasonable from time to time. The leasing arrangement
was terminated at the completion of the project. In addition, the Partnership
pays an administrative fee and a fee for personnel services to its General
Partner. The total amount incurred by the Partnership during 1995 and 1994
was $690 and $4,104, respectively, and cumulative charges during the
development stage total $893,502.
F-55
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CONTINGENCIES
CONSULTING AGREEMENT
The Partnership is contingently liable under a consulting agreement to an
unrelated company, for an amount equal to ten (10) percent of the total value
of all artifacts and other valuable items recovered, if any, from the sites
identified in an agreed research area, after subtraction of any shares taken
by any government in whose waters the recovered materials are raised, in
exchange for which the Partnership will secure the services of that company's
principal employee in connection with the historical and archeological aspects
of the Partnership operations. No valuable artifacts or other valuable items
have been recovered as of December 31, 1995.
LEGAL ASPECTS OF INTERNATIONAL SALVAGE
The question of legal ramifications with regard to the recovery of shipwrecks
raises a number of issues. Salvors, historical interests and individuals
claiming ownership based on the payment of insurance claims all have potential
claims on goods brought up from the sea floor.
An entity responsible for the salvage of a sunken vessel and its cargo may
expect to defend its claim to title against the original owners or their
successors-in-interest, against rival salvors, and against governments
asserting a historic interest in the shipwreck or cargo. Potential claimants
might include the insurers of the shipwreck as in the SS Central America case
(Civil Action 87-363-N). Unless the insurers expressly disclaimed title after
payment of a claim, and depending on the length of time the ship has remained
sunken, the insurers might have a valid claim of title to recovered objects.
NOTE 5 - SEC INVESTIGATION OF GENERAL PARTNER
SEC CIVIL ACTION. During August 1994, the SEC filed a civil action against
the General Partner and John Morris, Gregory Stemm and Daniel Bagley, three
former officers and directors of the General Partner, seeking injunctive
relief against the General Partner and injunctive and monetary relief against
the former officers and directors. The SEC did not seek any financial
penalties or other monetary relief against the General Partner.
The Complaint filed by the SEC alleged that the General Partner violated
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and
13(b) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-a,
13a-13 and 13b2-1 promulgated thereunder. The SEC alleged between April 1989
and July 1991 the General Partner and Messrs. Morris, Stemm and Bagley
disseminated to the public, in the form of television broadcasts, videotapes
and press releases, false and misleading material information and failed to
disclose certain material information concerning the Dry Tortugas shipwreck
discovered and excavated by the General Partner. The SEC alleged that the
General Partner materially overstated the value of the artifacts on its
balance sheet and in other financial information provided in the registration
statement of the General Partner and two amendments thereto filed in 1992 with
the SEC and in certain periodic reports of the General Partner filed in 1992
and with the SEC.
F-56
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - SEC INVESTIGATION OF GENERAL PARTNER (Continued)
The General Partner and the staff of the SEC negotiated a settlement of the
matter whereby the General Partner agreed to consent to the entry of a final
judgment of permanent injunction, without admitting or denying any of the
allegations in the complaint enjoining the General Partner from violations of
certain provisions of the federal securities law referenced in the preceding
paragraph. In addition, the General Partner agreed that it will not employ
John Morris or Gregory Stemm as officers and directors of the General Partner
or any subsidiaries of the General Partner, use corporate funds to pay for or
reimburse any costs incurred by Morris or Stemm for the defense of any civil
or administrative action instituted against them by the SEC, or redeem or
purchase any stock they own until after the termination of any such action.
Finally, the General Partner agreed to withdraw its pending appeal to the SEC
of the Initial Decision issued in the stop order proceeding.
SEC STOP ORDER PROCEEDING. On July 30, 1992, the SEC issued an order
directing the staff of the Division of Enforcement (the "Division") to conduct
an examination pursuant to Section 8(e) of the Securities Act of 1933 (the
"Act") to determine whether a stop order should be issued relating to a
registration statement which the General Partner had filed during March 1992
and which had become effective by the passage of time on August 1, 1992.
Under Section 8(d) of the Act, a stop order proceeding was instituted against
the General Partner by order of the SEC dated January 12, 1993. A hearing was
held before an SEC Administrative Law Judge during late January and early
February 1993.
On May 26, 1993, the Administrative Law Judge issued his Initial Decision.
the Judge concluded that the registration statement filed by the General
Partner was materially false and misleading and that the General Partner
failed to cooperate with the examination conducted by the Division's staff. A
stop order was issued suspending the effectiveness of the General Partner's
registration statement.
The primary focus of the proceeding was the value of the shipwreck artifacts
owned by the General Partner and an affiliated partnership, Seahawk I, Ltd.
The Judge found that the General Partner had overstated the value of the
artifacts on its balance sheet and in other financial information provided in
its registration statement. The Judge concluded that the total net realizable
value of all the artifacts owned by the General Partner and Seahawk I was
$1,356,361 of which amount $285,413 was attributed to the General Partner
artifacts and $1,070,948 was attributed to the Seahawk I artifacts. As a
result of this decision, and in order to present the financial statements in
accordance with generally accepted accounting principles, the General Partner
and the Seahawk I restated their December 31, 1990 and 1991 financial
statements.
The findings of the Administrative law Judge could possibly be used by private
litigants in civil suits against the General Partner to prove that the Company
misstated material facts in certain periodic reports it filed with the SEC.
NOTE 6 - LICENSING AND MARKETING AGREEMENT
On October 13, 1993 the Partnership entered into a Master Licensing Agreement
with Buckeye Communications, Inc. ("Buckeye"). Under the Agreement, Buckeye
was to develop an integrated marketing strategy to market, sell and distribute
the artifacts recovered by the Partnership. Buckeye did not produce any
revenue for the Partnership under the agreement which was terminated in
October 1995.
F-57
<PAGE>
SEAHAWK II, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As shown in the financial
statements, the Partnership incurred a net loss for 1995 and has an
accumulated deficit. In addition, the Partnership has no cash flow from its
operating activities. These factors raise substantial doubt about its ability
to continue as a going concern.
The Partnership is virtually out of money and the partners have decided they
are not willing to invest additional funds to continue further excavation of
the wreck site. The General Partner has been unable to obtain additional
working capital to work on the Partnership's wreck off Saint Augustine, and in
December 1994 and again in November 1995 asked the partners to vote on
terminating the Partnership. The results of the votes were inconclusive and
the General Partner may consider asking the partners to vote again on
terminating the Partnership.
In addition the SEC investigation of the General Partner inhibited the raising
of capital in the public market as well as from obtaining financing from
private sources; and, the financial statements of the General Partner indicate
that substantial doubt exists as to the continuance of its future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Partnership cannot continue in operation.
F-58
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
To the Partners of
Eagle Partners, Ltd.
Tampa, Florida
We have audited the accompanying balance sheet of Eagle Partners, Ltd. (a
Florida limited partnership in the development stage) as of December 31, 1995
and the related statements of operations, partners' capital and cash flows for
the years ended December 31, 1995 and 1994. We did not audit the financial
statements of Eagle Partners, Ltd. from the period from November 12, 1991
(inception) to December 31, 1991. Those statements were audited by other
auditors whose report dated February 11, 1992 (except for Note 5 as to which
the date is June 14, 1993) expressed an unqualified opinion on those
statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eagle Partners, Ltd. (a
Florida limited partnership in the development stage) as of December 31, 1995,
and the results of its operations, changes in partners' capital and its cash
flows for the years ended December 31, 1995 and 1994 and in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As shown in the financial
statements, the Partnership incurred a net loss of $86,943 for 1995 and has a
partners' deficit of $1,258,108. In addition, the Partnership has negative
cash flows from its operating activities and has no cash at December 31, 1995.
These factors, in addition to other factors as discussed in Note 7, raise
substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Partnership cannot continue in operation.
By:/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 24, 1996
F-59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
To the Partners of
Eagle Partners, Ltd
Tampa, Florida
We have audited the statements of operations, partners' capital and cash flows
of Eagle Partners, Ltd. (a Florida limited partnership in the development
stage) for the period from November 12, 1991 (inception) to December 31, 1991,
which reflected cumulative expenses of $267,500 and partners' deficit of
$116,877. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the statements of operations, partners' capital and cash flows
referred to above present fairly, in all material respects, the operations,
changes in partners' capital and cash flows of Eagle Partners, Ltd. (a Florida
limited partnership in the development stage) for the period from November 12,
1991 (inception) to December 31, 1991 as reflected in the cumulative total
columns in conformity with generally accepted accounting principles.
By:/s/ Baumann & Company, P.A.
BAUMANN & COMPANY, P.A.
Tampa, Florida
February 11, 1992
(except for Note 5 as to which
the date is June 14, 1993)
F-60
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
December 31, 1995
TOTAL ASSETS -
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Loan Payable - affiliate $ 50,000
Accounts payable - affiliate 1,031,450
- other 3,525
Losses in excess of Investment in
joint venture 23,033
1,108,000
PARTNERS' CAPITAL (DEFICIT)
Capital contributions 150,100
Deficit accumulated during the
development stage (1,258,108)
(1,108,008)
$( - )
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
November 12,1991
(Inception) to
Year Ended December 31, December 31,
1995 1994 1995
REVENUE $ - $ - $ -
OPERATING EXPENSES
Vessel rental 1,107,000
Aircraft rental 24,768
Other - 10,680 18,822
- 10,680 1,150,590
GENERAL AND ADMINI-
STRATIVE EXPENSES 13,910 2,146 34,135
(LOSS) FROM OPERATIONS (13,910) ( 12,826) (1,184,725)
OTHER INCOME (EXPENSE)
Interest income - - 525
Interest expense - - ( 874)
Loss on investment
in Joint Venture (73,034) - ( 73,034)
(73,034) - ( 73,383)
NET (LOSS) $(86,944) $(12,826) $(1,258,108)
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM NOVEMBER 12, 1991 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Number Capital during
of Contri- Development
Units butions Stage
Issuance of General
Partner Interest $ 100 $ -
Issuance of Limited
Partner Units 3 150,000
NET (LOSS)
November 12, 1991 to
December 31, 1991 (266,977)
BALANCE,
December 31, 1991 3 150,100 (266,977)
NET (LOSS) 1992 (524,313)
BALANCE,
December 31, 1992 3 150,100 (791,290)
NET (LOSS) 1993 (367,048)
BALANCE,
December 31, 1993 3 $(150,100) $(1,158,338)
NET (LOSS) 1994 (12,826)
BALANCE,
December 31, 1994 3 $(150,100) $(1,171,164)
NET (LOSS) 1995 (86,944)
BALANCE,
December 31, 1995 3 $(150,100) $(1,258,108)
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
November 12, 1991
Years Ended December 31, (Inception) to
1995 1994 December 31, 1995
CASH FLOW FROM OPERATING
ACTIVITIES
Net (loss) $(86,944) $(12,826) $(1,258,108)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Loss on Investment in
Joint Venture 73,034 - 73,034
Decrease in other
receivables - - 25,000
Increase in accounts
payable 63,910 12,826 1,084,974
Total adjustments 136,944 12,826 1,183,008
Net cash (used) by
operating activities 50,000 - (75,100)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance
of partnership units - - 125,100
CASH FLOWS FROM INVESTING
ACTIVITIES
Investment in Joint Venture (50,000) - (50,000)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS - - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD - - -
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ - $ - $ -
SIGNIFICANT NON-CASH
TRANSACTION:
Issuance of partnership
units for note receivable $ - $ - $ 25,000
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Eagle Partners, Ltd. (the "Partnership") was formed November 12, 1991 as a
Florida limited partnership. The Partnership consists of several limited
partners and a corporate general partner, Seahawk Deep Ocean Technology, Inc.
The purpose of the Partnership is to engage in expeditions to locate,
identify, recover and market the cargo of a shipwreck believed to have sunk
off the east coast of the United States. The Partnership is a development
stage enterprise and has not realized any expedition revenue.
In July 1995, the General Partner became aware of another company, Sea Miners,
Inc., which was also searching for the same shipwreck. In order to pool
research and resources and to remove all-or-nothing competition, the
Partnership and Sea Miners, Inc. formed a joint venture. In March 1996, the
joint venture was formalized into a new Partnership called Eagle Miners, Ltd.
The Partnership agreement extends through December 31, 1996, and may be
terminated earlier at any time at the election of the General Partner with the
consent of a Majority-In-Interest of the Limited Partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
As provided in the Partnership Agreement, the Partnership's accounts are
maintained on the cash basis of accounting for tax purposes, however, for
financial statement purposes they are adjusted to the accrual basis in order
to conform with generally accepted accounting principles.
USE OF ESTIMATES
The Partnership uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
INCOME TAXES
In accordance with Section 701 of the Internal Revenue Code, the Partnership
is not a taxable entity, therefore the results of operations flow through to
the partners for tax purposes. The tax returns and the amounts of Partnership
income or loss distributed to the partners are subject to examinations by
federal and state taxing authorities.
ALLOCATION OF PROFITS AND LOSSES
Net losses of the Partnership will be allocated 99% to the Limited Partners
and 1% to the General Partner until the limited partners' capital accounts
have been reduced to zero. All allocations of net losses thereafter are made
solely to the General Partner. Net income is first allocated to the Limited
Partners based on their proportionate ownership interests to the extent of net
losses previously allocated to them. Net income is then allocated to the
General Partner to the extent of net losses previously allocated. All
remaining net income is allocated on a per unit of limited partnership
interest as follows:
F-65
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Each $50,000 unit will receive 2.5% of the first $1 million of income
allocated, 2% of the second $1 million allocated, 1.5% of the third $1 million
allocated, 1% of the fourth $1 million allocated, 0.5% of anything over $4
million allocated and the balance to the General Partner.
DISTRIBUTION OF CASH FLOW
Cash available for distribution from Partnership operations represents cash
generated from Partnership activities after payment of all expenses of the
Partnership and the establishment of any reserves deemed appropriate by the
General Partner. Cash available for distribution will be distributed to the
extent of the Limited and General Partners' initial cash contributions to the
Partnership. Thereafter, cash available for distributions will be distributed
as follows:
Each $50,000 unit will receive 2.5% of the first $1 million distributed, 2% of
the second $1 million distributed, 1.5% of the third $1 million distributed,
1% of the fourth $1 million distributed and 1% of anything over $4 million
distributed. The General Partner will receive the balance of any distribution.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Partnership leases a research vessel and on-board electronic research,
survey and salvage equipment from its General Partner to perform search,
identification and salvage activities at a rate which the General Partner
establishes as reasonable from time to time. Unless sooner terminated, the
leasing arrangement will extend through completion of the project. The total
amount incurred by the Partnership in 1995, 1994 and cumulative during the
development stage are none, $10,680 and $1,117,680 respectively, of which
$1,028,570 is in accounts payable at December 31, 1995.
In June 1992, the General Partner received loans of $200,000 from unrelated
parties and $50,000 from a related party. The lenders will receive (in
addition to other considerations) an aggregate of 6.25% of the General
Partners' share of the net profit, if any, from the sale of any recovered
cargo by the Partnership.
NOTE 4 - CONTINGENCIES
JOINT VENTURE AGREEMENTS
The Partnership is operating under a joint venture agreement with a researcher
who has provided the research and data for a 19th Century shipwreck off the
east coast of the United States. According to the researcher, the vessel was
believed to have a valuable cargo of gold coins on board at the time of the
sinking, although there is no assurance that the researcher is correct or that
the shipwreck will be located.
Pursuant to the terms of the original joint venture agreement, the researcher
was to receive twenty percent (20%) of any items recovered from the ship
provided that it is located in the designated search area in return for his
research and data. The Partnership was responsible for conducting the search
and recovery of the shipwreck and if successful, for marketing any cargo which
is recovered. The partnership was to receive eighty percent (80%) of any
recovery.
F-66
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CONTINGENCIES (Continued)
The joint venture agreement required the partnership to dedicate the vessel
R.V. Seahawk (or a similar vessel with similar equipment) to work on this
project at least 120 days during 1992, and each year thereafter, beginning not
later than May 30 of each year. The joint venture agreement was amended in
June 1994. The amended agreement required the partnership to work on the
project for at least 60 days during 1994. The partnership did not meet this
schedule and was in default on this agreement. In such an event, the
agreement provided that all rights to conduct search and/or salvage efforts
relative to this wreck would revert to the researcher. The General Partner
has negotiated an extension to the joint venture agreement under which the
researcher's share of any successful recovery was reduced to ten per cent
(10%) and the requirement for the partnership to work on the project for a
minimum period each year was removed. In return the General Partner agreed to
issue the researcher 60,000 shares of its Common Stock.
Under the terms of the Partnership Agreement, after accounting for losses
previously allocated, net income was to be allocated on a per unit of Limit
Partnership interest as follows:
Each $50,000 unit was to receive 5% of the first $1 million of income
allocated; 4% of the second $1 million allocated; 3% of the third $1 million
allocated; 2% of the fourth $1 million allocated; 1% of anything over $4
million allocated and the balance to the General Partner.
In early 1995, the General Partner became aware of another company ("Sea
Miners, Inc.") that was searching for the same shipwreck (code named "Golden
Eagle") and in order to pool research and resources and to remove
all-or-nothing
competition, the Partnership and Sea Miners formed an equal joint
venture to search for the vessel. The joint venture is to be operated via a
Florida Limited Partnership called Eagle Miners Ltd. The Partnership and Sea
Miners are equal and joint general partners of Eagle Miners. As a result of
the joint venture, each of the limited partners of Eagle Partners agreed to
reduce their entitlement of any distribution to one-half of the original
amount in the paragraph above. Eagle Miners has contracted to use the General
Partner for all of its offshore services. $100,000 was raised by the joint
venture for the initial inspection of certain sites that Sea Miners has
revealed possible shipwrecks in its search area. The joint venture intends to
raise additional financing for this project but there is no assurance that it
will be able to do so.
LEGAL ASPECTS OF INTERNATIONAL SALVAGE
Legal ramifications with regard to the recovery of shipwrecks raises a number
of issues. Salvors historical interests and individuals claiming ownership
based on the payment of insurance claims all have potential claims on goods
brought up from the sea floor.
An entity responsible for the salvage of a sunken vessel and its cargo may
expect to defend its claim to title against the original owners or their
successors -in -interest, against rival salvors, and against governments
asserting a historic interest in the shipwreck or cargo.
F-67
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CONTINGENCIES (Continued)
Potential claimants might include the insurers of the shipwreck as in the SS
Central America case (Civil Action 87-363-N). Unless the insurers expressly
disclaimed title after payment of a claim, and depending on the length of time
the ship has remained sunken, the insurers might have a valid claim of title
to recovered objects.
NOTE 5 - SEC INVESTIGATION OF GENERAL PARTNER
SEC CIVIL ACTION. During August 1994, the SEC filed a civil action against
the General Partner and John Morris, Gregory Stemm and Daniel Bagley, three
former officers and directors of the General Partner, seeking injunctive
relief against the General Partner and injunctive and monetary relief against
the former officers and directors. The SEC did not seek any financial
penalties or other monetary relief against the General Partner.
The Complaint filed by the SEC alleged that the General Partner violated
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and
13(b) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-a,
13a-13 and 13b2-1 promulgated thereunder. The SEC alleged between April 1989
and July 1991 the General Partner and Messrs. Morris, Stemm and Bagley
disseminated to the public, in the form of television broadcasts, videotapes
and press releases, false and misleading material information and failed to
disclose certain material information concerning the Dry Tortugas shipwreck
discovered and excavated by the General Partner. The SEC alleged that the
General Partner materially overstated the value of the artifacts on its
balance sheet and in other financial information provided in the registration
statement of the General Partner and two amendments thereto filed in 1992 with
the SEC and in certain periodic reports of the General Partner filed in 1992
and with the SEC. The General Partner and the staff of the SEC negotiated a
settlement of the matter whereby the General Partner agreed to consent to the
entry of a final judgment of permanent injunction, without admitting or
denying any of the allegations in the complaint enjoining the General Partner
from violations of certain provisions of the federal securities law referenced
in the preceding paragraph. In addition, the General Partner agreed that it
will not employ John Morris or Gregory Stemm as officers and directors of the
General Partner or any subsidiaries of the General Partner, use corporate
funds to pay for or reimburse any costs incurred by Morris or Stemm for the
defense of any civil or administrative action instituted against them by the
SEC, or redeem or purchase any stock they own until after the termination of
any such action. Finally, the General Partner agreed to withdraw its pending
appeal to the SEC of the Initial Decision issued in the stop order proceeding.
SEC STOP ORDER PROCEEDING. On July 30, 1992, the SEC issued an order
directing the staff of the Division of Enforcement (the "Division") to conduct
an examination pursuant to Section 8(e) of the Securities Act of 1933 (the
"Act") to determine whether a stop order should be issued relating to a
registration statement which the General Partner had filed during March 1992
and which had become effective by the passage of time on August 1, 1992.
Under Section 8(d) of the Act, a stop order proceeding was instituted against
the General Partner by order of the SEC dated January 12, 1993. A hearing was
held before an SEC Administrative Law Judge during late January and early
February 1993.
F-68
<PAGE>
EAGLE PARTNERS, LTD.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - SEC INVESTIGATION OF GENERAL PARTNER (Continued)
On May 26, 1993, the Administrative Law Judge issued his Initial Decision.
the Judge concluded that the registration statement filed by the General
Partner was materially false and misleading and that the General Partner
failed to cooperate with the examination conducted by the Division's staff. A
stop order was issued suspending the effectiveness of the General Partner's
registration statement.
The primary focus of the proceeding was the value of the shipwreck artifacts
owned by the General Partner and an affiliated partnership, Seahawk I, Ltd.
The Judge found that the General Partner had overstated the value of the
artifacts on its balance sheet and in other financial information provided in
its registration statement. The Judge concluded that the total net realizable
value of all the artifacts owned by the General Partner and Seahawk I was
$1,356,361 of which amount $285,413 was attributed to the General Partner
artifacts and $1,070,948 was attributed to the Seahawk I artifacts. As a
result of this decision, and in order to present the financial statements in
accordance with generally accepted accounting principles, the General Partner
and the Seahawk I restated their December 31, 1990 and 1991 financial
statements.
The findings of the Administrative law Judge could possibly be used by private
litigants in civil suits against the General Partner to prove that the Company
misstated material facts in certain periodic reports it filed with the SEC.
NOTE 6 - LICENSING AND MARKETING AGREEMENT
On October 13, 1993 the Partnership entered into a Master Licensing and
marketing Agreement with Buckeye Communications, Inc. ("Buckeye"). Under the
Agreement, Buckeye was to develop and integrated marketing strategy to market,
sell and distribute the artifacts recovered by the Partnership. Buckeye did
not produce any revenue for the Partnership under the Agreement which was
terminated in October, 1995.
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As shown in the financial
statements, the Partnership incurred a net loss for 1995 and has a Partners'
Deficit. In addition, the Partnership has negative cash flows from its
operating activities and had no cash at December 31, 1995. These factors
raise substantial doubt about its ability to continue as a going concern.
In view of these matters, substantial doubt exists as to the continuance of
future Partnership operations. The Partnership is out of money and the
partners are seeking to raise additional funds possibly through the sale of
additional partnership units or through joint venture arrangements.
In addition, the SEC investigation of the General Partner inhibited the
raising of capital in the public market as well as from obtaining financing
from private sources; and, the audited financial statements of the General
Partner indicates that substantial doubt exists as to the continuance of its
future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Partnership cannot continue in operation.
F-69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act, the Registrant has duly caused this Amendment to be signed on its behalf
by the undersigned thereunto duly authorized.
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
Dated: September 16, 1996 By/s/ John T. Lawrence
John T. Lawrence,
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this Report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ John T. Lawrence Chief Executive Officer, September 16, 1996
John T. Lawrence President, Chairman of the
Board and a Director
________________________ Secretary and Director _________, 1996
Daniel J. Derfus
/s/ John P. Balch Chief Operating Officer, September 16, 1996
John P. Balch Principal Financial and
Accounting Officer and
Director
EXHIBIT 22
SUBSIDIARIES
Name State of Incorporation
Seahawk Museum Development, Inc. Colorado
(Formerly Seahawk Artifact Recovery, Inc.)
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Seahawk Deep Ocean Technology, Inc.
We hereby consent to the incorporation of our reports appearing in the Annual
Report on Form 10-KSB of Seahawk Deep Ocean Technology, Inc., for the year
ended December 31, 1995, in the Registration Statement on Form S-8, File no.
33-41524 of Seahawk Deep Ocean Technology, Inc.
/s/ Giunta, Ferlita & Walsh, P.A.
GIUNTA, FERLITA & WALSH, P.A.
Tampa, Florida
May 24, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Seahawk Deep Ocean Technology, Inc.
We hereby consent to the incorporation of our reports, on Seahawk II, Ltd.,
and Eagle Partners, Ltd, dated February 11, 1992, appearing in the Annual
Report on Form 10-KSB of Seahawk Deep Ocean Technology, Inc., for the year
ended December 31, 1995, in the Registration statement on Form S-8, File No.
33-41524 of Seahawk Deep Ocean Technology, Inc.
/s/ Baumann & Company, P.A.
BAUMANN & COMPANY, P.A.
Tampa, Florida
August 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages F-2, F-3 and F-4 of
the Company's Form 10-KSB for the fiscal year ended December 31, 1995, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,191
<SECURITIES> 9,184
<RECEIVABLES> 38,989
<ALLOWANCES> 0
<INVENTORY> 3,687
<CURRENT-ASSETS> 145,055
<PP&E> 3,501,764
<DEPRECIATION> (1,257,348)
<TOTAL-ASSETS> 3,021,733
<CURRENT-LIABILITIES> 2,113,826
<BONDS> 0
0
50,000
<COMMON> 13,076,429
<OTHER-SE> (12,363,828)
<TOTAL-LIABILITY-AND-EQUITY> 3,021,733
<SALES> 7,634
<TOTAL-REVENUES> 607,344
<CGS> 4,950
<TOTAL-COSTS> 820,715
<OTHER-EXPENSES> 802,354
<LOSS-PROVISION> (1,015,725)
<INTEREST-EXPENSE> (252,776)
<INCOME-PRETAX> (1,398,981)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398,981)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
