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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1997
[ ] 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.
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Name of Small Business Issuer in its Charter
Colorado 84-1087879
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State or Other Jurisdiction I.R.S. Employer Identification
of Incorporation or Organization Number
5102 South Westshore Boulevard, Tampa, Florida 33611
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Address of Principal Executive Offices, Including Zip Code
Registrant'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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes --- No -x-
The Issuer's revenues for the most recent fiscal year were $179,265.
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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 10-KSB or any
amendment to this Form 10-KSB. ___
As of May 9, 1999, 28,157,614 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by non-
affiliates was approximately $785,600.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (Check One:) Yes-- No-X-
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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 forced the Company to put the museum plans on hold
indefinitely and Seahawk Museum Development, Inc. has been inactive since
1993. 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 five 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 R/V Seahawk, an 86 foot vessel. On March 31,
1996, Seahawk Inc. merged into the Company.
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In February 1999, the Company organized RV Seahawk, Inc., a Florida
Corporation, and acquired its entire share capital for $100. The Company then
transferred the R/V Seahawk into RV Seahawk, Inc.
The Company is an oceanographic service company that is involved in deep-
water search, survey and recovery operations. The Company serves as the
general partner for limited partnerships that 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, ROVs (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 pre-designated areas.
SEAHAWK I, LTD. Seahawk I, Ltd. was a Florida limited partnership that 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 that was raised from
private investors. During April 1989, the partnership located and photographed
a Spanish wreck that 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 pre-disturbance survey on this wreck
and during August 1990, Seahawk I commenced actual recovery operations. The
recovery operations continued until October 1991. The Company decided that the
Partnership had reached a point of diminishing returns and the Partnership
will not return to the wreck site.
A total of 16,480 artifacts were recovered from the site. These included
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 incurred expenses in locating, recovering,
conserving and storing these artifacts of approximately $3,391,000 since
inception, of which $625,275 was capitalized into the historical costs of
artifacts on Seahawk I's books at December 31, 1997. The Company has
contributed $1,190,900 since inception to the capital of Seahawk I. Seahawk I
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engaged the Company to provide certain services, and the Company provided
vessel operations and conservation and administrative services in the amount
of $646,081 that were billed to Seahawk I but had not been paid by December
31, 1997. These are carried in the Company's books at that date as accounts
receivable - affiliate. In March 1998, this account receivable was settled by
payment of $491,381 in cash and restricted securities in an unrelated publicly
quoted corporation valued at $81,112.
The salvage operations for this shipwreck required the Partnership to raise
additional funding. The Company was to split with the limited partners on a
50/50 basis the proceeds from the sale of all the 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 also invested an additional $500,000 to
maintain its right, as General Partner, to receive 50% of the partnership's
net distributable income.
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, 1997, in addition to the account receivable from Seahawk I,
Ltd. of $646,081 and a note receivable from Seahawk I, Ltd. of $300,000, less
a provision for losses in excess of investment of $714,634. In March 1998, the
Partnership's artifacts were sold and the proceeds used to repay the accounts
receivable and note receivable by the Company. On September 30, 1998 the
Partnership was terminated after a first and final distribution to the Limited
Partners.
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 pre-disturbance 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
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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 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 $14,191 as
of December 31, 1997, less a provision for doubtful debts and losses in excess
of investment of $31,820.
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
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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"). 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 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 was
not positively identified as the Golden Eagle. Further visual investigations
of the site took place during 1996 but bad visibility prevented a positive
identification. Yet further visual investigations of the site took place
during 1997 which established that the wreck was not the Golden Eagle.
The terms of the original Partnership Agreement provided for the termination
of the Partnership on December 31, 1996. However, the partners have agreed to
extend the termination date to December 31, 1999.
As of December 31, 1997, the Company carries an account receivable from Eagle
Partners of $1,061,444, a note receivable from Eagle Partners of $50,000,
accrued interest of $9,932 and a provision for losses in excess of investment
of $1,151,789.
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As of December 31, 1997, the Company carries an account receivable from the
Eagle Miners Joint Venture of $53,023 less a provision for doubtful debt of
$29,503.
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.
APPROVAL OF
ACTION 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
partnership to 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") since 1989. In addition, it has been
acquiring highly specialized search, survey and recovery equipment. The
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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 database.
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 has also set up 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 seven 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 ROVs.
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 ROVs, incorporating onboard
lights, cameras, sonar and tracking navigation systems.
Using video records and items recovered from the wreck site, 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
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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."
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 ROVs, some of which will be significantly larger and
capable of greater working ability than the ROVs used for initial visual
investigations.
6. CONSERVATION OF ARTIFACTS. Complete conservation of artifacts recovered
from shipwreck sites is an 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 seabed,
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.
(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 that would
generate revenue from entrance charges and merchandise sales.
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In November 1996, the Company signed an agreement with the Collier County
Museum, Naples Florida, to exhibit certain of the artifacts recovered from the
Seahawk I site. Under the agreement the Company provided the artifacts and
display materials for 6 months in return for a $20,000 fee. The exhibit opened
in February 1997 and attracted record numbers of visitors to the museum.
In October 1997, the Company signed an agreement with Michael's International
Treasure Jewelry, Inc., Key West Florida, to exhibit certain artifacts for a
minimum period of 12 months, at a rental of $57,500 per quarter in advance.
The artifacts included the entire inventory of Seahawk I, Ltd. The agreement
also provided for Michael's to have an option to purchase the artifacts for
$2,500,000 ($750,000 cash and $1,750,000 in common stock of Vanderbilt Square,
Inc., a publicly quoted affiliate of Michael's) at any time during the term of
the lease. Any revenue from the agreement was to be divided between the
Company and Seahawk I, Ltd. in the ratio of the respective book values of the
assets involved. On February 10, 1998, Vanderbilt changed its name to Treasure
and Exhibits International, Inc. ("TEI"). Prior to the agreement, the Company
signed an agreement with Odyssey Marine Exploration, Inc. to pay Odyssey 10%
of any proceeds from the lease or subsequent sale pursuant to the introduction
by Odyssey of Michaels and Vanderbilt to the Company.
On March 19, 1998, TEI entered an agreement with the Company and Seahawk
I, Ltd. To purchase all of Seahawk I, Ltd.'s artifacts, their related
documentation and all of the Company's artifacts. The consideration was
$822,056 in cash and 9,500,000 newly issued shares of TEI's common
stock, which were valued at the time of the agreement at $0.17 per share
or $1,615,000. Immediately thereafter Seahawk I, Ltd. repaid all its
debt to the Company in cash and TEI stock, repaid other loans to two of
the limited partners and made a pro rata distribution to the limited
partners of the remaining TEI stock based on the limited partners' total
investment in Seahawk I, Ltd.
On July 20,1998, the Company agreed to sell its remaining holding of
5,302,084 shares in TEI to First Consolidated Financial Corp., a Florida
corporation, for a total consideration of $450,677 ($0.085 per share).
The agreement provided for the cash to be paid in five installments,
$180,270 on the date of the agreement and at least $50,000 during each
of September, October and November 1998 with the balance in by December
31, 1998. In the event, after paying the first installment, no further
payment was made until November 10, 1998, when the Company accepted a
discount of $10,407 in return for the whole of the balance being paid on
that date.
SHIPWRECK AND TREASURE MUSEUM
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 suitable 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.
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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, Salvanav, 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 known as Pesqamar, that owned half of the Consortium,
known as Conpas. The Company and Remarc each owned 24.5% of Pesqamar,
with the remaining 51% being owned by Brazilians. By May 1998, Pesqamar
had incurred over $300,000 of expenses, half of which were payable by
the Company. Under an agreement dated June 1, 1998, the Company's
portion of the expenditure was satisfied by the transfer of 1 million
shares of common stock of Treasure & Exhibits international, Inc. to
Remarc on the basis that (a) the Company also transferred 165.5 shares
of Preferred Non-Voting shares in Pesqamar to Remarc and (b) Remarc be
responsible for all future expenditure of Pesqamar. Following the
completion of the agreement, the Company owns 428.75 of the 1,750 shares
of common voting stock and 1,459.5 of the 3,250 shares of Preferred Non-
Voting stock in Pesqamar. In October 1996, Conpas completed a search of
almost 400 square miles of its search area and revealed 25 anomalies
with characteristics indicative of possible sites of shipwrecks. Conpas
visually inspected some of these anomalies with an ROV during 1997 and
1998. On April 27, 1999 the members of the Consortium of Conpas signed
an agreement to terminate Conpas and apply for two new permits in the
names of Pesqamar and Salvanav. The permits will be for separate areas
of approximately 50% each of the previously permitted search area. The
Pesqamar area includes the prime anomalies previously revealed in the
search of October 1996. Under the terms of the Agreement, the previous
members of the Consortium of Conpas will operate independently,
including the provision of project finance and offshore operations. In
the event either party recovers the particular shipwreck involved in the
Project, it must share with the other party 4% of the gross proceeds of
the shipwreck after the South American Government has been paid. On
April 31, 1999 the applications for the new permits were submitted to
the South American Government and the Company expects Pesqamar to
receive its new permit in June 1999. After the new permits are issued
and before the end of 1999, the Company plans for Pesqamar to visually
inspect the balance of the 25 anomalies.
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
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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. No international agreement prevents the
salvage of a shipwreck from the high seas. Some 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.
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EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
To the extent that the Company engages in shipwreck search and recovery
activities in the territorial, contiguous or exclusive economic zones of
countries, the Company must comply with applicable regulations and
treaties. In addition, there is currently an initiative being considered
in the United Nations Educational, Scientific & Cultural Organization
("UNESCO") known as the Convention on the Protection of Underwater
Cultural Heritage. If adopted, it would restrict access to historical
shipwrecks throughout the world to the extent that it would require
compliance with guidelines set forth by the International Council of
Monuments and Sites (ICOMOS). These guidelines require adherence to
strict archeological practices, and the Company intends to follow these
guidelines in all projects to which they are applicable. The article in
the ICOMOS guideline, which may be problematic to the Company, is the
requirement that items of cultural significance not be traded. The
Company believes that the primary value of the cargoes it sells is trade
goods (such as coins, bullion, and gems), and therefore the Company does
not believe that these items constitute articles of cultural
significance. Nevertheless, The Company believes that the proposed
convention, if adopted, would increase regulation of shipwreck recovery
operations and result in higher costs.
DEEP OCEAN SURVEY AND RECOVERY
The Company believes that a market niche exists for a company that 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.
RISK FACTORS RELATING TO BUSINESS OF THE COMPANY.
1. HISTORY OF OPERATING LOSSES. The Company has incurred substantial
operating losses since its inception. During the fiscal year ended
December 31, 1997, the Company had a net loss of $697,937 and had an
accumulated deficit of $14,330,759. In the Company's financial
statements for the year ended December 31, 1997, Giunta, Ferlita &
Walsh, P.A., the Company's independent certified public accountants,
included an opinion which expressed substantial doubt as to the
Company's ability to continue as a going concern. A similar
qualification is likely to be expressed in the 1998 audit report. There
can be no assurance that the Company will be able to continue in
business or that it will ever be able to achieve profitable operations.
(See "FINANCIAL STATEMENTS" )
2. NEED FOR ADDITIONAL FINANCING. The Company needs additional
financing in order to finance the search for additional ship wrecks, the
continued excavation of wreck sites and to pay the continuing overhead
expenses of the Company. The Company currently has no clear source for
any material revenues or financing. The Company's future revenues or
financing will depend upon the sale of artifacts, the formation of new
partnerships to pay for search and recovery, the leasing of equipment to
others, or the exercise of outstanding warrants.
3. SPECULATIVE NATURE OF SHIPWRECK SEARCH AND RECOVERY. The search for
possible shipwrecks and the recovery of objects therefrom, particularly
in deep water, is an extremely speculative, high risk venture. Even
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though the Company's first two partnerships, Seahawk I, Ltd. and Seahawk
II, Ltd., have each located shipwreck sites, there is no assurance that
any objects located will be of any significant actual value. In
addition, the retrieval and identification of such objects will be
costly and time consuming. If a shipwreck is determined by the Company
to be worthy of salvage, because of the costs and inherent risks of
deep-water salvage, there can be no assurance that sufficient additional
funds or salvage contracts with others can be obtained for such salvage.
Even if funds are obtained, there can be no assurance that such salvage
will prove successful.
4. SEC INVESTIGATION. 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 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 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, the Company and Seahawk I, Ltd. restated its
December 31, 1990 and 1991 financial statements.
The SEC authorized the staff of the Division to file a civil action
against the Company and 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-1,
13a-13 and 13b2-1 promulgated thereunder. The SEC alleged that between
April, 1989, and July, 1991, the Company and three former directors and
officers 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 also alleged, as it did in the stop order proceeding,
that the Company materially overstated the value of artifacts on its
balance sheet and in other financial information provided in the
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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 have negotiated a settlement of the matter
that has been approved by the SEC. The Company has agreed to consent to
the entry of a final judgment of permanent injunction, without admitting
or denying any of the allegations in the complaint to be filed by the
SEC, 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 the former officers
and directors 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 them 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.
After their separation from the Company, the former officers and
directors continued to defend the action brought against them personally
by the SEC and the case was concluded in November 1997, when they were
acquitted of any violations under the securities acts as charged.
In March 1998, the Company received a demand for indemnity from the
former officers and directors, for payment of the expenses that they
incurred in defending the action. Their claim for a total of some
$700,000 was made under Colorado corporate law. The Company resisted the
claim, and in December 1998, the former officers and directors have
filed a lawsuit to pursue the claim. The company has taken advice on the
merits of the claim and is of the opinion that the Consent Agreement the
Company entered into with the SEC renders the claim invalid under the
doctrine of supremacy of Federal law over State law. Consequently, in
January 1999, the Company filed a Motion to Dismiss Complaint in the
state court and a Motion for Preliminary and Permanent Injunction in the
federal court.
5. DIFFICULTY IN OBTAINING FINANCING FOR SEARCH AND SALVAGE. The
Company's survival and potential for profitability depends on the
projects in which it is engaged being properly financed. There is no
assurance that the Company or a partnership set up for the purpose, as
the case may be, will be able to successfully raise such funds. Once a
shipwreck is found, additional financing will generally be necessary to
finance the salvage activities. There can be no assurance that the
Company, or the Partnership, as the case may be, will be able to
successfully raise additional funds at an acceptable cost, if at all.
6. SUCCESS DEPENDENT ON MANAGEMENT. Success of the Company depends on
the active participation of John T. Lawrence and John P. Balch. The
Company has no "key-man" life insurance on, or employment agreement
with, either of these persons. The loss of the services of either Mr.
Lawrence or Mr. Balch would adversely affect the Company's business and
its likelihood of continuing operations.
7. NATURAL HAZARDS. Underwater salvage and recovery operations are
inherently difficult and dangerous and may be delayed or suspended by
weather, sea conditions and other natural hazards. Further, such
operations may be undertaken more safely during certain months of the
year than during others. There can be no assurances that the Company
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and or entities it is affiliated with will be able to conduct their
search and or recovery operations only during such favorable periods.
In addition, even though sea conditions in the search location are
somewhat predictable, the possibility exists that unexpected conditions
in the search area may occur and that such unexpected conditions might
adversely affect the Company's operations. Further, it is possible that
natural hazards may prevent or significantly delay search and or
recovery operations and therefore any distributions.
8. TITLE TO OBJECTS LOCATED. Persons and entities other than the
Company (both private and governmental) may claim title to shipwrecks or
objects located by the Company. Even if the Company is successful in
locating and salvaging one or more shipwrecks, there is no assurance
that the Company will be able to establish its right to property
recovered as against governmental entities claiming an interest therein,
prior owners, insurance claims or other attempted salvors.
9. UNCERTAIN MARKET FOR AND VALUE OF RECOVERED OBJECTS. Even if
valuable items can be located and salvaged by the Company, it is
difficult to predict the price that might be realized for these items.
The value of many recovered items will fluctuate with a precious metals
market that has been highly volatile in recent years. Additionally,
sale for historical or numismatic value may require the assistance of
experts, which assistance might not be readily available and could be
prohibitively expensive. Moreover, the entrance on the market of a
large supply of antique items from shipwrecks located and salvaged by
the Company or others could itself depress the market for these items.
10. DELAY IN DISTRIBUTION OR SALE OF RECOVERED ITEMS. The methods and
channels to be used in the disposition of the salvaged items are
uncertain at present. Ready access to buyers for disposition of any
artifacts or other valuable salvaged items recovered by the Company,
cannot be assured and delays in the disposition of such salvaged items
are very possible. In fact, the Company may decide to not sell all or a
portion of the salvaged items for a certain period of time in an attempt
to enhance their value. The storage and security of salvaged items
pending sale will most likely be expensive.
11. COMPETITION. There are currently a number of entities competing in
the business segments the Company is engaged in, and other companies are
likely to enter these areas of business in the future. In such cases,
the competitors may have greater financial resources than those of the
Company.
12. OUTSTANDING WARRANTS. At the date of this report Company has
outstanding 5,928,817 Common Stock Purchase Warrants that may be
exercised at prices per share ranging from $0.05 to $5.00. The Company
does not have enough authorized and unissued Common Stock to issue to
the Warrant Holders if they all exercise their warrants. Consequently it
is inevitable that the Company will take steps to increase its
authorized Common Stock as soon as it is able to fund the necessary
Shareholders' Meeting. The exercise of such Warrants could have an
adverse effect on the market price for the Company's Stock.
13. DIVIDENDS. No dividend has been paid on the Common Stock since
inception and none is contemplated at any time in the foreseeable
future.
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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, preference and
limitations as the Board of Directors of the Company may determine by
resolution. The potential exists, therefore, that preferred stock might
be issued which would grant dividends preferences and liquidation
preferences to preferred shareholders over common shareholders. Unless
the nature of a particular transaction and applicable statutes require
such approval, the Board of Directors has the authority to issue these
shares without shareholder approval. The issuance of Preferred Stock
may have the effect of changing the control of the Company without any
further action by shareholders.
PUBLIC MARKET FOR COMPANY'S COMMON STOCK. Although presently there is a
limited market for the Company's Common Stock on the NASD OTC Bulletin
Board, there can be no assurance that such a market can be sustained.
Under a new rule announced in January 1999, after a phasing in period,
the NASD will eliminate from the OTC Bulletin Board any company that is
not up to date with filing its financial reports with the SEC. The
Company is not currently up to date with its filings and although
efforts are being made to bring the filings in line, there is a
possibility that the Company's quotation may be suspended.
The investment community could show little or no interest in the Company
in future. As a result, purchasers of the Company's securities may have
difficulty in selling such securities should they desire to.
16. CONFLICTS OF INTEREST. The Company has formed in the past, and may
in the future, form partnerships to pay for the search and recovery of
shipwrecks where the Company serves as the general partner of the
partnership. Potential conflicts of interest may exist between the
Company and the partnerships.
EQUIPMENT
Following are descriptions of the vessel 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.
RESEARCH VESSEL SEAHAWK. The Vessel R/V Seahawk (the "Seahawk") is an
83 foot vessel owned by Seahawk, Inc., a 100% subsidiary of the Company.
Until it was sold to the Company Seahawk, Inc. was an affiliate of the
Company. (See "TRANSACTIONS WITH MANAGEMENT AND OTHERS.") 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 an
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
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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.
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.
ROVS. The Company currently owns or leases four Phantom ROVs. 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 worldwide basis that 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 has 4 employees, John Lawrence and John Balch, executive
officers of the Company, a project manager and a controller.
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 that expired March 1,
1996. The lease is currently running on a month-to-month basis while an
extension is being negotiated. Pursuant to the expired lease, the
Company leases the first floor (approximately 5,200 square feet) for
$5,500 per month, and the second floor (approximately 5,000 square feet)
for $1,000 per month. The leased space provides the Company with
corporate offices and a conservation laboratory.
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:
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CLAIM AGAINST INTERNATIONAL DIVING AND CONSULTING SERVICES, INC.
On June 5, 1996, the Company filed a claim and a motion for payment in
the Bankruptcy Court against International Diving and Consulting
Service, Inc. ("International Diving"), a Lafayette, Louisiana based
underwater services company, and against one of the principals of
International Diving as guarantor for the company, in the sum of
$1,486,374. The claim was for damages and other amounts payable by
International Diving for breach of an Agreement to charter the M/V
Seahawk Retriever, then owned by the Company, for the five year period
commencing September 1, 1994. 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. Management believes it unlikely that
the Company will recover any of the sum claimed and in accordance with
Company policy, the claim has not been recorded in the financial
statements, and will not be unless and until any proceeds are received.
LAWSUIT BY FORMER OFFICERS AND DIRECTORS
In March 1998, the Company received a demand for indemnity from Greg
Stemm, John Morris and Dan Bagley; all former directors and officers of
the Company, for payment of the sum of expenses they incurred in
defending an action brought against them by the Securities and Exchange
Commission. The indemnification claim was made under Colorado corporate
law. The Company has received itemization of the purported legal fees
and costs incurred in the defense of the former directors and officers
in the amount of approximately $700,000. The Company resisted the claim
and in December 1998, the former directors and officers filed a lawsuit
pursuant to their claim.
The Company's directors have investigated the merits of the claim
including the fact that the Company formerly agreed with the Securities
and Exchange Commission that it would not pay the legal expenses of the
former officers and directors in their defense of the action in
question.
The Company is of the opinion that the agreement with the Securities and
Exchange Commission takes priority over state law and in January
1999,the Company filed in the state court a Motion to Dismiss Complaint,
a Motion for More Definite Statement and Motion to Strike. At the same
time the Company filed a Motion for Preliminary and Permanent Injunction
in the federal court.
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, 1997.
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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 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. The following table sets forth the range for high and
low bid quotations for the Company's securities as reported by the OTC
Bulletin Board. These prices are believed to be representative inter-
dealer quotations, without retail markup, markdown or commissions, and
may not represent actual transactions.
Bid
Quarter Ended High Low
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
March 31, 1996 $0.15625 $0.12500
June 30, 1996 $0.12500 $0.10938
September 30, 1996 $0.12500 $0.12500
December 31, 1996 $0.18750 $0.14063
March 31, 1997 $0.12500 $0.12500
June 30, 1997 $0.12500 $0.10938
September 30, 1997 $0.18750 $0.14063
December 31, 1997 $0.15625 $0.12500
(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, 1997, was approximately 6,000.
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.
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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, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The net loss for the year ending December 31, 1997 was $697,937 compared
to a loss of $1,200,846 for the year ending December 31, 1996, a
decrease in losses of about 43%.
The increase in revenues to $179,265 in 1997 from $69,386 in 1996
resulted from an increase in offshore operations to $154,411 in 1997
from $930 in 1996, a decrease in revenue from sales of artifacts to
$3,548 from $19,363. Revenue from affiliated partnerships was
negligible in 1997 and 1996 due to the absence of project finance in the
affiliates.
Operating expenses were reduced to $343,549 in 1997 from $714,140 in
1996, a 54% reduction due largely to the curtailment of offshore
activity and lower project costs in Brazil. There was a decrease in
expense associated with vessel operations to $77,041 in 1997 from
$278,433 in 1996. This resulted primarily from decreases in the costs
of personnel (to $2,190 from $106,686), the costs of subcontracted
services (to $6,427 from $61,493) and repairs and maintenance (to $8,902
from $23,208). The costs of personnel and subcontract services were down
due to the reduced crewing requirements. A one-off cost of $33,177 was
incurred in 1996 as a result of an abortive sale and lease back
arrangement on the vessel.
Depreciation expense decreased to $141,744 in 1997 from $179,867 in 1996
the difference being due to depreciation charged in 1996 on the M/V
Seahawk Retriever, which was still owned by the Company until its sale
in early 1996.
The costs of renting the Company's premises was reduced in 1997 to
$33,413 from $83,070 in 1996 because of a one-off, backdated reduction
in rent negotiated with the lessor.
A $102,570 increase in general and administrative expense to $560,619 in
1997 from $458,049 in 1996, resulted primarily from the increase in the
provision for bad debt expense (to $23,267 from $2,730) and increased
payroll charges (to $278,556 in 1997 from $205,694 in 1996). The payroll
increases reflect an increase in salary for the two executive directors.
Interest expense was up by $43,894 to $129,089 in 1997 due to additional
loans and default levels of interest incurred on overdue notes. Interest
income at $58,930 in 1997 compared to $35,151 in 1996 reflected the
21
<PAGE>
higher default rate of interest charged by the Company to Seahawk I,
Ltd. on an overdue note. An increase in losses resulting from
partnership operations to $56,613 in 1997 from $44,356 in 1996 was due
to increased administrative costs in each of the partnerships.
In 1997 the Company decided to write back provisions made for accounts
payable relating to expenditure prior to 1993 no longer considered
payable by management. The total gain on this one-off write back was
$169,242.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The net loss for the year ending December 31, 1996 was $1,200,846
compared to a loss of $1,398,981 for the year ending December 31, 1995,
a decrease in losses of about 14%.
The drop in revenues to $69,386 in 1996 from $607,344 in 1995 resulted
from a decrease in revenue producing partnership operations to $930 in
1996 from $145,690 in 1995, a decrease in revenue from others to $49,093
in 1996 from $454,020 in 1995 and an improvement in sales of artifacts
to $19,363 from $7,634. Revenue from affiliated partnerships was
negligible in 1996 due to the absence of project finance in the
affiliates. The $404,927 decrease in revenue from others (to $49,093 in
1996 from $454,020 in 1995) was due to the loss of charter revenue from
the lease of the vessel M/V Seahawk Retriever that was sold in April
1996.
Operating expenses were reduced to $714,140 in 1996 from $820,715 in
1995, a 13% reduction due largely to the curtailment of offshore
activity. There was a decrease in expense associated with vessel
operations to $278,433 in 1996 from $401,594 in 1995. This resulted
primarily from decreases in the costs of personnel (to $106,686 from
$201.011), subcontracted services (to $50 from $72,335), and repairs and
maintenance (to $23,208 from $34,909). The costs of personnel and
subcontract services were down due to the reduced crewing requirements.
These reductions were offset by the Company's share of the South
American project costs amounting to $101,258. The Company incurred such
costs for the first time in 1996.
There were no rental charges for the vessel R/V Seahawk in 1996 because
the Company purchased it in November 1995. Rental charges of $60,000
were incurred in the previous 10 months of 1995. A one-off cost of
$33,177 was incurred in 1996 as a result of an abortive sale and lease
back arrangement on the vessel. Depreciation expense included a full
year's depreciation of the R/V Seahawk but decreased to $179,867 in 1996
from $226,673 in 1995 mostly due to the sale in early 1996 of the M/V
Seahawk Retriever.
A $344,305 decrease in general and administrative expense to $458,049 in
1996 from $802,354 in 1995, resulted primarily from the decrease in the
provision for bad debt expense (to $2,730 from $196,313) and decreased
legal expenses (to $12,140 in 1996 from $101,156 in 1995). The
exceptional bad debt provision in 1995 was for the debt due from a
charterer of the Seahawk Retriever that filed for bankruptcy before
paying its debt. Legal expenses in 1995 were incurred as a result of the
bankruptcy and in respect of filing a permit to search for shipwrecks in
the Azores.
22
<PAGE>
Interest expense was down by $167,581 due to the repayment of the Ships
Mortgage on the Seahawk Retriever in early 1996. A decrease in losses
resulting from partnership operations to $44,356 in 1996 from $126,002
in 1995, was primarily due to smaller losses incurred by Eagle Partners,
Ltd. in 1996 because of less costly operations in searching for the
shipwreck code named "Golden Eagle". There was also a gain on disposal
of assets of $3,350 in 1996 compared to a loss on disposal of $10,191 in
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, the Company's working capital
deficit increased by $431,856 to a negative $(2,047,760). At December
31, 1996 the Company had a working capital deficit of $(1,615,904).
The deficit increased mainly because of a net operating loss before
depreciation during the period of $543,391, offset by debt paid by
issuance of the Company's common stock.
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 revenue 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. The existing Limited Partnerships, Seahawk II,
Ltd., and Eagle Partners, Ltd., are out of cash.
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 Eagle Partners Limited had entered into a limited
partnership agreement with Sea Miners, Inc. a Baltimore, MD company, to
resume the search for this shipwreck. The name of the new limited
23
<PAGE>
partnership is Eagle Miners Limited. The joint venture incorporates
research by both parties concerning the Golden Eagle and a pooling of
resources to continue the search operations. Under the agreement, the
Company will continue to be the offshore contractor to Eagle Miners
Limited for all marine operations. The Company earned no revenues
during 1997 and 1998 from this Joint Venture but expects to earn revenue
during 1999 if Eagle Miners Limited can raise sufficient funding.
The Company is currently seeking to assist Eagle Miners limited 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 1997 the Company generated over $114,000 selling its services to
shipwreck related customers.
In November 1996, the Company signed an agreement with the Collier
County Museum, Naples Florida; to exhibit certain of the artifacts
recovered from the Seahawk I site. Under the agreement the Company
provides the artifacts and display materials for 6 months in return for
a $20,000 fee. The exhibit opened in February 1997 and attracted record
numbers of visitors to the museum.
In October 1997, the Company signed an agreement with Michael's
International Treasure Jewelry, Inc., Key West Florida, to exhibit
certain artifacts for a minimum period of 12 months, at a rental of
$57,500 per quarter in advance. The artifacts included the entire
inventory of Seahawk I, Ltd. The agreement also provided for Michael's
to have an option to purchase the artifacts for $2,500,000 ($750,000
cash and $1,750,000 in common stock of Vanderbilt Square, Inc., a
publicly quoted affiliate of Michael's) at any time during the term of
the lease. Any revenue from the agreement was to be divided between the
Company and Seahawk I, Ltd. in the ratio of the respective book values
of the assets involved. On February 10, 1998, Vanderbilt changed its
name to Treasure and Exhibits International, Inc.("TEI"). Prior to the
agreement, the Company signed an agreement with Odyssey Marine
Exploration, Inc. to pay Odyssey 10% of any proceeds from the lease or
subsequent sale pursuant to the introduction by Odyssey of Michaels and
Vanderbilt to the Company.
On March 19, 1998, TEI entered an agreement with the Company and Seahawk
I, Ltd. To purchase all of Seahawk I, Ltd.'s artifacts, their related
documentation and all of the Company's artifacts. The consideration was
$822,056 in cash and 9,500,000 newly issued shares of TEI's common
stock, which were valued at the time of the agreement at $0.17 per share
or $1,615,000. Immediately thereafter, Seahawk I, Ltd. repaid all its
debt to the Company in cash and TEI stock, repaid other loans to two of
the limited partners and made a pro rata distribution to the limited
partners of the remaining TEI stock based on the limited partners' total
investment in Seahawk I, Ltd.
24
<PAGE>
On July 20,1998, the Company agreed to sell its remaining holding of
5,302,084 shares in TEI to First Consolidated Financial Corp., a Florida
corporation, for a total consideration of $450,677 ($0.085 per share).
The agreement provided for the cash to be paid in five installments,
$180,270 on the date of the agreement and at least $50,000 during each
of September, October and November 1998 with the balance in by December
31, 1998. In the event, after paying the first installment, no further
payment was made until November 10, 1998, when the Company accepted a
discount of $10,407 in return for the whole of the balance being paid on
that date.
Apart from seeking to raise revenue from assets the Company has also
sought to conserve cash by the conversion of debt into equity.
During 1996 the Company issued 363,143 shares of its common stock in
payment of $65,000 of outstanding debt and 536,866 shares were issued
against exercised warrants for $77,112, to settle outstanding debt.
During 1997 the Company issued 270,185 shares of its common stock for
$36,000 in cash and 333,333 shares in payment of an overdue Note for
$50,000. In the same year the Company received $319,000 in loans from
various individuals $46,000 of which was later converted into 256,000
shares of common stock.
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-55.
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.
25
<PAGE>
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:
Name Age Positions and Offices Held
John T. Lawrence 51 Chief Executive Officer, President,
Director of the Company, and Chairman
of the Board
John B. Balch 50 Secretary, Chief Operating Officer and
Director of the Company
J. Robert Shaw 45 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 was placed into receivership in 1992,
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 KPMG Peat Marwick where he qualified as a Chartered
Accountant in 1971 and he continued with KPMG until 1975. Mr. Lawrence
gained an honors degree in Chemistry from University College of London
in 1968.
Mr. Lawrence is Treasurer and a founding Board Member of the
Professional Shipwreck Explorers Association (ProSEA). ProSEA is a non-
profit trade association which provides a forum through which deep sea
salvors, archaeologists and government entities work together to promote
a high standard of ethics and principles in dealing with deep sea
shipwreck resources.
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
26
<PAGE>
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.
JAMES ROBERT SHAW Joined the Board of Directors of the Company in July
1997. Mr. Shaw has also served, since 1994, as President and CEO of
Classic Restaurants International, Inc., a publicly traded company
engaged in the entertainment business. Prior to that appointment he was
an investment banker for several years and owned a franchise of a
Broker-Dealership at Schneider Securities. Mr. Shaw received a BA from
Carson Newman College in 1979 and an MA from the Southern Baptist
Theological Seminary in 1983.
COMPLIANCE WITH SECTION 12(A) OF THE SECURITIES EXCHANGE ACT OF 1934
ITEM.10 EXECUTIVE COMPENSATION
The following table summarizes the compensation for the years ended
December 31, 1995, 1996 and 1997, of the Company's Chief Executive
Officer and Chief Operating Officer:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------- ------------------- -------
SECURI-
TIES
UNDERLY-
OPTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------ ----- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John T. Lawrence, 1997 $132,000 -0- -0- -0- -0- -0- -0-
Chief Executive 1996 $120,000 -0- -0- -0- -0- -0- -0-
Officer 1995 $100,000 -0- -0- -0- -0- -0- -0-
John P. Balch, 1997 $132,000 -0- -0- -0- -0- -0- -0-
Chief Operating 1996 $120,000 -0- -0- -0- -0- -0- -0-
Officer 1995 $100,000 -0- -0- -0- -0- -0- -0-
</TABLE>
OSEL Group Ltd., a UK corporation that supplied the services of Mr. Lawrence
and Mr. Balch was paid only $16,800 of their $200,000 remuneration in 1995.
The balance was accrued in the financial statements as of December 31, 1995.
In 1996, OSEL Group was paid a total of $105,176 in cash and 304,366 shares of
the Company's common stock as payment for the accrued 1995 remuneration. The
number of shares was calculated monthly based on the average closing bid
prices of the Company's Common Stock during each month.
In 1996, Mr. Lawrence and Mr. Balch were each paid $37,600 of their $120,000
salary and the balance of $82,400 was accrued for each of them as at December
31, 1996.
27
<PAGE>
In 1997, Mr. Lawrence and Mr. Balch were each paid $0 of their $132,000 salary
and the balance of $132,000 was accrued for each of them as at December 31,
1997.
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, 1997, to the individual named in the Summary Compensation Table
above.
PERCENTAGE OF
TOTAL OPTIONS/
NAME AND PRINCIPAL OPTIONS/ SARs GRANTED EXERCISE
POSITION SARs TO EMPLOYEES OF BASE EXPIRATION
- ------------------- -------- -------------- -------- ----------
John T. Lawrence -0- -0- -0- -0-
John P. Balch -0- -0- -0- -0-
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.
OTHER STOCK OPTIONS AND WARRANTS
During June 1996, Mr. Lawrence and Mr. Balch were each granted options to
purchase 200,000 shares at $0.12 per share pursuant to the renewal of their
employment agreements, and the Company issued to Mr. Lawrence, Mr. Balch and
Mr. Derfus, warrants to each purchase 50,000 shares at a price of $0.12 per
share.
In January 1997, the Company issued to Mr. Lawrence and Mr. Balch warrants to
purchase 50,000 shares each at a price of $0.13 per share and 500,000 shares
each at $0.13 per share pursuant to the renewal of their employment contracts.
In July 1997, Mr. Shaw was granted 200,000 warrants to purchase shares at a
price of $0.11 per share as compensation for joining the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth, as of January 15, 1999, 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.
28
<PAGE>
AMOUNT OF
NAME AND ADDRESS BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ------------------- ---------- ----------
Valley Ocean Technology, Ltd.(1) 2,241,587 8.0%
Osberton Hall
Worksop
Notts, England S81 OUF
John T. Lawrence 1,633,933 (2) 5.5%
5102 South Westshore Boulevard
Tampa, FL 33611
Carl Anderson 9,618,112 (3) 27.6%
19235 Highway 41 North
Lutz, FL 33549
John P. Balch 1,602,183 (4) 5.4%
5102 South Westshore Boulevard
Tampa, FL 33611
J. Robert Shaw 200,000 (5) 0.7%
5102 South Westshore Boulevard
Tampa, FL 33611
All Officers and 3,436,116 (2)(4)(5) 11.0%
Directors as a Group
(3 Persons)
_________________
(1) Valley Ocean Technology, Ltd. is owned by Mr. A. F. Budge of the same
address.
(2) Includes 1,400,000 shares underlying currently exercisable options and
50,000 shares underlying currently exercisable warrants held by Mr. Lawrence.
(3) Includes 6,686,250 shares underlying currently exercisable warrants held
by Mr. Anderson.
(4) Includes 1,400,000 shares underlying currently exercisable options and
50,000 shares underlying currently exercisable warrants held by Mr. Balch.
(5) Includes 200,000 shares underlying currently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During January 1996, the Company extended the repayment date of a $300,000
promissory note due to the Company by Seahawk I, Ltd. to October 31, 1996. In
March 1998, the note and $123,857 accrued interest was paid in restricted
common stock of Treasure and Exhibits International, Inc. valued at $0.017 per
share.
During February 1996, the Company issued 304,366 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, 1995:
29
<PAGE>
AMOUNT
NUMBER OF UNPAID
NAME OF SHARES REMUNERATION
John Lawrence 152,183 $44,400
John Balch 152,183 $44,400
During February 1996, pursuant to the payment of past due salary of an ex
employee, the Company authorized a reduction from $0.40 per share to $0.21 per
share in the exercise price of the employee's warrants to purchase 200,000
shares of the Company's common stock. The employee then exercised the options
and the amount due was offset against past due salary of $41,506.
In October 1996, the Company issued to Carl Anderson 2,140,000 class AH-1 and
2,140,000 class AH-2 warrants to purchase the Company's common stock at $0.13
per share, pursuant to an agreement that Anderson lends the Company a minimum
of $100,000. The AH-1 warrants were exercisable until March 24, 1997, and the
Company extended the expiration date to September 24, 1997, in January 1997,
when Anderson increased the loan by $65,000. The class AH-2 warrants were
exercisable until September 24, 1999, but to a maximum number equivalent to
the number of previously exercised class AH-1 warrants.
During 1997, Carl Anderson loaned to the Company a total of $322,650 interest
free. In September 1997, Anderson expressed his intention to convert $278,200
of the loans into 2,140,000 shares of common stock of the Company by
exercising his AH1 warrants and the Company issued a 1 year note for the
balance of $45,000 repayable on October 31, 1998 with 12% annual interest. The
note was repaid in December 1998 but the Company was unable to comply with the
request to convert the $278,200 because it had insufficient authorized common
stock available. In May 1999 the Company entered into an Agreement with Mr.
Anderson under which the remaining $278,000 was incorporated into a
convertible note with interest accruing on an annual basis at 18% from
September 1997. The note provided that the loan and accrued interest would be
repaid in cash or, at Anderson's option, in the Company's common stock at the
conversion rate of $0.035 per share on December 31, 1999 (the "First Due
Date"). The Agreement also provided that in the event that the Company does
not repay the loan on that date, the Note will be extended on the same terms
for one year to December 31, 2000, at which time the principal and accrued
interest must be repaid in cash or, at the at Anderson's option, in the
Company's common stock at the conversion rate of $0.025 per share. As an
incentive to enter this agreement the Company extended the expiration date of
Mr. Anderson's T1 and AH2 warrants to December 31, 2000, and reduced the
exercise price to $0.05 per share.
In May 1998, Anderson loaned the Company $73,500 for one month at an annual
interest of 18% and secured with 3,500,000 shares of common stock in
Vanderbilt Square Corporation. As part of the consideration for making the
loan the Company agreed to extend the validity of certain warrants belonging
to Anderson. The loan was repaid on the due date.
In July 1997, J. Robert Shaw was appointed a director of the Company and
issued 200,000 options to purchase the Company's common stock at $0.11 per
share.
In January 1999, the Company issued 100,000 stock options to purchase the
Company's common stock at $0.03 per share to each of the two executive
directors and 50,000 stock options to purchase the Company's common stock at
$0.03 per share to Mr. Shaw. At the same time the Company issued 100,000 stock
options to purchase the Company's common stock at $0.03 per share to each of
30
<PAGE>
the two executive directors pursuant to their renewing their contracts of
employment.
In February 1999, the company issued 20,000 shares of its common stock to Mr.
Shaw as compensation for acting as sole officer and director of its subsidiary
RV Seahawk, Inc.
In February 1999, the two executive directors each donated 50,000 of their
unrestricted common stock in the Company to a lender as an incentive to lend
the Company $154,000. In compensation the Company agreed to pay each executive
director $3,500 in cash and 100,000 shares of its common stock.
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.
31
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8K.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
3 Articles of Incorporation and Bylaws Incorporated by reference to
Exhibit No. 3 to the
Registrant'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
R.V. Seahawk, Inc. Registrant'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
Johnson and Susan A. Brasel dated Registrant's Registration
April 24, 1989 Statement (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
Registrant'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 Ltd. 1989
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 build- Incorporated by reference to
ing at 5102 South Westshore Boulevard Form 10-K for the fiscal year
ended December 31, 1989
32
<PAGE>
10.12 Statement of Intent with Harbor Incorporated by reference to
Branch Oceanographic Institution, Form 10-K for the fiscal year
Inc. ended December 31, 1989
10.17 Termination of Lease Agreement and Incorporated by reference to
Release of Liability dated Registrant's Registration
February 7, 1992 Statement on Form S-1 (filed
March 18, 1992)
10.18 Trust Indenture with R/V Seahawk, Incorporated by reference to
Inc. dated August 16, 1991, as Registrant's Registration
supplemented 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 S1 (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 S1 (filed
March 18, 1992)
10.23 Agreement to Modify Warrant Exercise Incorporated by reference to
Price and Shares Subject to Option Registrant's Form 10K 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 10K for the
fiscal year ended December 31,
1992
22 Subsidiaries of the Registrant Attached
23.1 Consent of Guinta Ferlita & Attached
Walsh, P.A.
During the quarter ended December 31, 1997, there were no Form 8K's filed.
33
<PAGE>
(a) 1. The following Financial Statements are filed as part of this Form KSB.
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
Page
Report of Independent Certified Public Accountants .............. F 1
Consolidated Balance Sheet as of December 31, 1997 .............. F 2
Consolidated Statements of Operations for the Years
Ended December 31,1997 and 1996 .............. F 3
Consolidated Statement of Stockholders' Equity for
the Years Ended December 31,1997 and 1996 .............. F 4
Consolidated Statements of Cash Flows for the Years
Ended December 31,1997 and 1996 .............. F 5-6
Notes to Consolidated Financial Statements .............. F 7-26
SEAHAWK I, LTD.
Report of Independent Certified Public Accountants .............. F 27
Statement of Net Assets (Liabilities)in Liquidation
as of December 31, 1997 ............... F 28
Statement of Changes in Net Assets (Liabilities) in
Liquidation on December 31, 1997 ................ F 29
Statements of Operations for the Years Ended
December 31, 1997 and 1996 - Historical Basis ................ F 30
Statement of Partners' Capital for the Years Ended
December 31, 1997 and 1996 - Historical Basis ................ F 31
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 ................ F 32
Notes to the Financial Statements ................ F 33-39
SEAHAWK II, LTD.
Reports of Independent Certified Public Accountants .............. F 40
Balance Sheet as of December 31, 1997 .............. F 41
Statements of Operations for the Years Ended
December 31, 1997 and 1996 .............. F 42
Statements of Partners' Capital for the Years
Ended December 31, 1997 and 1996 .............. F 43
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 .............. F 44
Notes to Financial Statements .............. F 45-47
34
<PAGE>
EAGLE PARTNERS, LTD.
Reports of Independent Certified Public Accountants .............. F 48
Balance Sheet as of December 31, 1997 .............. F 49
Statements of Operations for the Years Ended
December 31, 1997 and 1996 .............. F 49
Statements of Partners' Capital for the Years Ended
December 31, 1997 and 1996 .............. F 50
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 .............. F 51
Notes to Financial Statements .............. F 52-55
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholdersof Seahawk Deep Ocean Technology,
Inc.Tampa, FloridaWe have audited the accompanying consolidated balance sheet
of Seahawk Deep Ocean Technology, Inc. as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996. 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, 1997 and
the results of its operations, changes in stockholders' equity and its cash
flows for the years ended December 31, 1997 and 1996 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 $697,937 for 1997 and has
incurred substantial net losses for each of the past several years resulting
in an accumulated deficit of $14,330,759. At December 31, 1997, the Company
has negative working capital as indicated by current liabilities exceeding
current assets by $2,047,760. These factors, in addition to other factors as
discussed in Note 14, 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.
/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 11, 1999
F 1
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
CURRENT ASSETS
Cash and cash equivalents $ 582
Accounts receivable - Other 2,962
Prepaid expenses 5,298
----------
Total current assets 8,842
----------
PROPERTY AND EQUIPMENT, Net 672,715
OTHER ASSETS
Artifacts 303,073
Accounts and notes receivable - affiliate,
less losses in excess of investment in
affiliates of $1,898,243 291,256
Deposits and advances 14,775
Purchased shipwreck research, net of $25,000
amortization -
----------
Total other assets 609,104
TOTAL ASSETS $1,290,661
==========
CURRENT LIABILITIES
Overdraft $ 1,452
Accounts payable $ 404,506
Accrued expenses
Salaries 466,919
Interest due related parties 15,472
Interest due others 150,842
Other 75,953
Due to related parties 334,200
Notes payable - others 607,258
----------
Total current liabilities 2,056,602
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, 27,693,991 shares
issued and outstanding 13,509,627
Paid in capital-stock options 5,191
Accumulated (deficit) (14,330,759)
----------
(765,941)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,290,661
==========
The accompanying notes are an integral part of these financial statements.
F 2
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
REVENUES
Income - affiliates $ 40,000 $ 930
Rental income - others 135,717 49,093
Sales of artifacts 3,548 19,363
---------- -----------
Total revenues 179,265 69,386
OPERATING EXPENSES
Vessel - operations 77,041 278,433
Vessel operations - affiliate - 18,177
South American Project 36,305 101,258
Conservation 53,210 50,750
Depreciation and amortization 141,424 179,867
Rent 33,413 83,070
Cost of artifact sales 2,156 2,585
---------- -----------
Total operating expenses 343,549 714,140
GENERAL AND ADMINISTRATIVE EXPENSES 560,618 458,049
---------- -----------
Total expenses 904,167 1,172,189
---------- -----------
(LOSS) FROM OPERATIONS (724,902) (1,102,803)
---------- -----------
OTHER INCOME (EXPENSE)
Interest income - affiliate 58,930 35,000
Interest income - others - 150
Interest expense (123,718) (85,195)
Other income (expense) 1,624 (10,000)
Gain (Loss) on sale of
and unrealized loss provision
on marketable securities - (483)
Gain (Loss) on sale of equipment 3,295 3,350
Reduction of accounts payable
provision 169,364 -
Gain on settlement of claims - 3,491
Loss on investment in less
than 50 % owned entities (82,530) (44,356)
---------- -----------
Total other income (expense) 26,965 (98,043)
---------- -----------
NET (LOSS) $ (697,937) $(1,200,846)
---------- -----------
NET (LOSS) PER SHARE $ (0.02) $ (0.05)
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON SHARES
EQUIVALENTS OUTSTANDING 26,653,790 25,918,700
========== ===========
The accompanying notes are an integral part of these financial statements
F 3
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CON-
TIN-
PAID-IN GENT
PREFERRED STOCK COMMON STOCK CAPITAL BONUS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK SHARES DEFICIT
$ $ $ $ $
------- ------ ---------- ---------- ------- ------ -----------
Balance,
December 31,
1995 200,000 50,000 25,234,357 13,076,249 5,191 62,957 (12,431,976)
Common Stock
Issued:
As bonus in
1996 (62,957)
For services 200,000 31,000
For debt 163,143 34,000
For exercise
of warrants 232,500 34,500
For exercise
of warrants
issued to
officers for
accrued
remuneration 304,366 42,612
Net (loss) (1,200,846)
------- ------ ---------- ---------- ------- ------ -----------
Balance,
December 31,
1996 200,000 50,000 26,134,366 13,281,498 5,191 - (13,632,822)
Common Stock
Issued:
For cash 270,185 36,050
For services 280,000 35,000
For debt 784,444 127,580
Issued to
officers for
accrued
remuneration 100,000 12,500
For extending
a loan 25,000 4,500
As penalty on
Contract 100,000 12,500
Net (loss) (697,937)
------- ------ ---------- ---------- ------ ----- ------------
Balance,
December 31,
1997 200,000 50,000 27,693,991 13,509,628 5,191 - (14,330,759)
======= ====== ========== ========== ===== ===== ===========
The accompanying notes are an integral part of these financial statements.
F 4
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (621,390) $(1,200,846)
----------- -----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 139,424 179,868
Provision for bad debt 15,000 2,730
(Gain) Loss on sale of equipment (3,295) (3,350)
(Gain) loss on marketable securities - 483
Debt forgiveness - (3,491)
Stock issued for services 80,000 24,800
Loss on investment in less than 50% owned
entities 54,843 44,356
(Increase) decrease in:
Trade accounts receivable - 26,889
Other receivables 6,778 (1,752)
Inventory 3,687 2,673
Prepaid expenses 28,315 43,191
Trade accounts receivable affiliates (60,435) (7,768)
Deposits 5,111 (1,498)
Increase (decrease) in:
Accounts payable (232,314) 471
Accrued expenses 316,996 320,427
----------- -----------
Net cash used by operating activities (267,279) (572,817)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,295 1,362,235
Proceeds from sale of marketable securities - 8,701
Purchases of property and equipment (76,529) (16,138)
----------- -----------
Net cash provided by investing activities (71,234) 1,354,798
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of notes payable - related 218,200 31,000
Issuances of notes payable - other 207,655 978
Repayment of notes payable - related - (25,000)
Repayments of notes payable - other (124,799) (3,114)
Payment of capital lease obligation (900,000) (900,000)
Proceeds from issuance of common stock 36,050 6,500
----------- -----------
Net cash provided (used) by financing
activities (789,636) (789,636)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,407) (7,655)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 536 8,191
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ (871) $ 536
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 34,799 $ 3,932
=========== ===========
Taxes paid $ - $ -
=========== ===========
The accompanying notes are an integral part of these financial statements.
F 5
<PAGE>
SEAHAWK DEEP OCEAN TECHNOLOGY, INC.
SUMMARY OF SIGNIFICANT NON-CASH TRANSACTIONS
During 1996:
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 Stock
Amount Shares
Accounts payable $ 19,000 81,000
Accrued salary 70,612 504,366
Notes payable-other 15,000 82,143
-------- -------
$104,612 667,509
======== =======
The Company issued 200,000 shares to three unrelated consultants for services
rendered in the amount of $31,000.
During 1997:
1. Several debt holders converted their debt to stock. A summary of the debt
converted to stock is as follows:
Common Stock
Amount Shares
Accounts payable $ 31,500 195,107
Accrued salary 12,500 100,000
Notes payable-other 96,080 589,333
-------- -------
$104,612 667,509
======== =======
2. The Company issued 130,000 shares of its Common Stock to each of two
directors of Pesqamar, the Company's Brazilian joint venture company, as
payment for past services rendered to Pesqamar.
The Company issued 4,000 shares of its Common Stock to each of five persons
who served in an advisory group to the Company's Board.
The Company converted $36,000 of its account payable to Solaris International,
Inc. into a promissory note for $36,000 payable on March 31, 1998, with
interest at 10% per annum.
The Company issued 4,500 shares of its Common Stock to a person as an
inducement to extend a loan for a further period of 12 months.
The accompanying notes are an integral part of these financial statements.
F 6
<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.'s 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).
In February, 1999, the Company organized RV Seahawk, Inc., a Florida
Corporation, and acquired its entire share capital for $100. The Company then
transferred the R/V Seahawk into RV Seahawk, Inc.
Nature of Business
The Company is an oceanographic service company that is involved in deep water
search, survey and recovery operations. The Company serves as the general
partner for three limited partnerships that 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 research
vessel, ROVs (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 7
<PAGE>
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 subsidiary, Seahawk Museum
Development, 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 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 $ 173,620
Less provision for uncollectible
accounts since debtor has filed
for protection under the Federal
Bankruptcy Act (173,620)
Due from unrelated party considered
to be 100% collectible 2,962
---------
$ 2,962
=========
Accounts and Notes Receivable - Affiliate
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.
F 8
<PAGE>
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,
1997 Years
Vessel "Seahawk" $ 672,028 10
Equipment on vessel and other 845,205 5 - 10
-----------
1,517,233
Less - accumulated depreciation ( 844,518)
-----------
$ 672,715
===========
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 pre-
designated areas.
Purchased Shipwreck Research
The Company's cost of purchased shipwreck research is capitalized and
amortized over 3 years.
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 that have an original maturity of ninety days or less
are considered cash equivalents.Cash payments of interest for the years ended
December 31, 1997 and 1996 amounted to $33,626 and $3,932 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.
Reallocation of Notes Payable as of December 31, 1996
F 9
<PAGE>
From January 1, 1997, the Company considers the status of Mr. John Morris and
Mr. Greg Stemm and their affiliates as non-related parties. Since they had
previously been treated in the financial statements as related parties, the
comparative figures as at December 31, 1996, have been adjusted from those
shown in the Company's Form 10-KSB for the year ended December 31, 1996. The
items affected are as follows:
Per 10-KSB Restated
Dec 31, 1996 Comparatives
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 535,259 $ 535,259
Accrued expenses
Salaries 205,305 205,305
Interest due related parties 55,383 -
Interest due to others 70,486 125,869
Other 132,085 132,085
Due to related parties 424,143 126,589
Notes payable - others 253,129 550,683
----------- -----------
Total current liabilities 1,675,790 1,675,790
----------- -----------
NOTE 3 - 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 1997 financial
statements of 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.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.In accordance with the use of the equity method of
F 10
<PAGE>
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, 1997 is detailed as follows:
EAGLE EAGLE
SEAHAWK I SEAHAWK II PARTNERS MINERS
LTD. LTD. LTD. LTD. TOTAL
--------- ---------- -------- -------- ----------
$ $ $ $ $
Note receivable 300,000 50,000 350,000
Interest receivable 110,248 9,932 120,180
Accounts receivable 646,081 30,875 1,061,444 53,023 1,791,423
Less allowance for
doubtful accounts (16,684) (29,503) (46,187)
Less losses in excess
of investment in
affiliates (742,301) (30,820) (1,151,039) (1,924,160)
-------- ------- ---------- ------- ----------
314,028 (16,629) (29,663) 23,520 291,256
In March 1998, Seahawk I, Ltd. Sold its entire collection of artifacts for
$541,982 cash and 6,263,350 shares in the common stock of the purchaser,
Treasure Exhibits International, Inc., a total consideration of $1,606,752. In
accordance with the Partnership Agreement the partnership used most of the
proceeds to repay the Note receivable, accrued interest and accounts
receivable to the Company. (See Note 16 SUBSEQUENT EVENTS)
The accounts receivable are unsecured but the Note Receivable from Seahawk I
Ltd. which became due in November 1996 was secured by 4,000 pearls owned by
Seahawk I, Ltd. which were stated in that Company's artifact inventory at
$36,000The note receivable from Eagle Partners Ltd. is secured by the
partnership's interest in Eagle Miners Ltd.Eagle Partners, Ltd. is a general
partner of Eagle Miners Ltd. The Company's receivable is a result of search
services provided to Eagle Miners. The Company has provided an allowance for
doubtful account of $29,503.The Company has recorded losses in excess of its
investments due to management's commitment to provide additional financial
support. In 1997, 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.
F 11
<PAGE>
NOTE 4 - INVESTMENT IN AFFILIATES
Summarized financial statement information on a historical basis is shown
below:
SEAHAWK I, LTD. SEAHAWK II, LTD. EAGLE PARTNERS, LTD.
--------------- ---------------- --------------------
$ $ $
BALANCE SHEET
December 31, 1997
ASSETS:
CURRENT ASSETS 224 52 -
OTHER ASSETS-
Artifacts 625,275 - -
----------- ---------- -----------
TOTAL ASSETS 625,499 52 -
=========== ========== ===========
LIABILITIES AND
PARTNERS' CAPITAL:
CURRENT LIABILITIES 1,083,079 30,875 1,151,039
PARTNERS CAPITAL:
Capital
contributions 2,511,041 1,371,250 150,100
Accumulated
deficit (2,968,621) (1,402,972) (1,301,139)
----------- ---------- -----------
TOTAL PARTNERS'
CAPITAL (deficit) (457,581) (31,723) -
----------- ---------- -----------
TOTAL LIABILITIES
AND PARTNERS' CAPITAL
(deficit) 625,499 52 -
=========== ========== ===========
STATEMENT OF
OPERATIONS SEAHAWK I, LTD. SEAHAWK II, LTD. EAGLE PARTNERS, LTD.
--------------- ---------------- --------------------
FOR THE YEAR ENDED 1997 1996 1997 1996 1997 1996
$ $ $ $ $ $
------ ------ ----- ------ ------ --------
REVENUES 10,000 20,750 - - - -
COST OF REVENUES 10,000 20,750 - - - -
GROSS PROFIT - - - - - -
OPERATING GENERAL
AND ADMINISTRATIVE
EXPENSES 21,567 9,420 11,000 3,360 21,817 8,178
------- ------- ------ ------ ------- -------
LOSS FROM OPERATIONS (21,567) (9,420) (11,000) (3,360) (21,817) (8,178)
OTHER EXPENSES (57,068)(33,160) - - (4,932) (8,104)
------- ------- ------ ------ ------- -------
NET LOSS (78,635)(42,580) (11,000) (3,360) (26,749) (16,282)
======= ======= ====== ====== ======= =======
In light of the known liquidation of Seahawk I, Ltd. On September 30, 1998,
the financial statements for that partnership as of December 31, 1997, were
restated with estimated liquidation values as follows:
F 12
<PAGE>
SEAHAWK I,LTD.
STATEMENT OF NET ASSETS IN LIQUIDATION
$
ASSETS 967,455
LIABILITIES 794,298
-------
NET ASSETS IN LIQUIDATION 173,157
-------
NOTE 5 - DEPOSITS AND ADVANCES
Deposits and advances at December 31, 1997 consist of the following:
Deposit on rented real estate $ 1,500
Utility deposits 4,870
Other deposits 205
Advance for use of automobile 8,200
-------
$14,775
=======
NOTE 6 - DUE TO RELATED PARTIES
Amounts due to related parties at December 31, 1997 comprises:
Interest Book Value Amount
Due on Rate Secured on of Security Due
--------- -------- ---------- ----------- ------
Accrued director's
Fees demand none none 11,000
Loan pending stock
Issue none 18% none 278,200
Unsecured Note 10/31/98 12% none 45,000
--------
$334,200
========
The Note for $45,000 was repaid in December 1998, and In May 1999 the Company
entered into an Agreement with Mr. Anderson under which the remaining $278,000
was incorporated into a convertible note with interest accruing on an annual
basis at 18% from September 1997. The note provided that the loan and accrued
interest would be repaid in cash or, at Anderson's option, in the Company's
common stock at the conversion rate of $0.035 per share on December 31, 1999
(the "First Due Date"). The Agreement also provided that in the event that the
Company does not repay the loan on that date, the Note will be extended on the
same terms for one year to December 31, 2000, at which time the principal and
accrued interest must be repaid in cash or, at the at Anderson's option, in
the Company's common stock at the conversion rate of $0.025 per share. As an
incentive to enter this agreement the Company extended the expiration date of
Mr. Anderson's T1 and AH2 warrants to December 31, 2000, and reduced the
exercise price to $0.05 per share.
NOTE 7 - NOTES PAYABLE - OTHERS
Notes payable - others, at December 31, 1997 comprises:
F 13
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Interest Book Value Amount
Due on Rate Secured on of Security Due
- -------------- ------ -------- ---------- ----------- ------
Unsecured note
repayable at demand 8% $ - $83,129
$1,000 monthly
Unsecured note 3/31/98 10% - 36,000
Secured Company
note 9/1/96 18% artifacts 45,068 25,000
Secured Company
note 11/20/99 18% artifacts 122,820 120,000
Secured Company
note 10/20/98 12% artifacts 105,070
Seahawk I
Artifacts 21,370 123,500
Secured Company
note 10/31/98 18% artifacts 29,000 24,000
Secured Company
note 11/7/96 18% artifacts 75,000 19,053
Secured Company
note 3/31/97 18% artifacts 9,738
Seahawk I
Artifacts 70,174 65,000
Secured Company
note 11/20/98 14% vessel 600,000 50,000
Other demand none - 61,576
-------
$607,258
=======
All the secured notes and all but $38,900 of the others were repaid during
1998.
F 14
<PAGE>
NOTE 8 - 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.
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 designated
200,000 shares of its Preferred Stock as Series 1 Convertible Preferred Stock.
The Series 1 Convertible Preferred Stock was converted into 200,000 shares of
Common Stock in August 1998. In January 1997, the Company designated
30,000,000 shares of its Preferred Stock as Series 2 Preferred Stock. In
February 1998, the Company designated 550,000 shares of its Preferred stock as
Series 3 Preferred Stock. 550,000 shares of the Series 3 were outstanding as
of May 14, 1999. In February 1999, the Company designated 4,000 of its
Preferred stock as Series 4 Preferred Stock. 2,700 shares of the Series 4 were
outstanding as of May 14, 1999. In March 1999, the Company designated an
additional 6,000,000 of its Preferred stock as Series 2 Preferred Stock.
7,200,000 shares of the Series 2 were outstanding as of May 14, 1999.
The Series 1 Convertible Preferred Stock had 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 that 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.
The Series 2 Convertible Preferred Stock has the following rights and
preferences:Each share may be converted into one fifth of one share of the
Company's Common Stock at the option of the holder at any time after February
1, 2000. In the event that there is an effective registration statement
covering the shares of Common Stock into which the Series 2 shares may be
converted and the average closing bid price for the Company's Common Stock is
F 15
<PAGE>
at least $3.00 per share, the Series 2 Stock will be automatically converted
on a one for one fifth basis.The Company may redeem shares of the Series 2
Stock at any time, at its option, on giving 7 days notice, at a price equal to
the higher of $0.0134 per share 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 2 shares at the price
set forth in the paragraph above on or before February 1, 2007.Each share of
the Series 2 Stock is entitled to one vote and votes with holders of the
Common Stock as a single class.
The Series 3 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 at any time after January 31, 1999. In the
event that the average closing bid price for the Company's Common Stock is at
least $1.00 per share for 10 consecutive trading days, all the outstanding
Series 3 Stock will be automatically converted on a one for one basis.The
Company may redeem shares of the Series 3 Stock at any time, at its option on
giving 7 days notice, at a price of $0.10 per share. The Company is required
to redeem the Series 3 shares at the aforementioned price on or before July 1,
2003.Each share of the Series 3 Stock is entitled to one vote and votes with
holders of the Common Stock as a single class.
The Series 4 Convertible Preferred Stock has the following rights and
preferences:Each share may be converted into one thousand shares of the
Company's Common Stock at the option of the holder at any time after July 1,
1999. In the event that the average closing bid price for the Company's Common
Stock is at least $1.00 per share for 10 consecutive trading days, all the
outstanding Series 4 Stock will be automatically converted on a one thousand
for one basis.
The Company may redeem shares of the Series 4 Stock at any time, at its option
on giving 7 days notice, at a price of $25.00 per share. The Company is
required to redeem the Series 4 shares at the aforementioned price on or
before July 1, 2003.Each share of the Series 4 Stock is entitled to one vote
and votes with holders of the Common Stock as a single class.
NOTE 9 - 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 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 on December 14, 1990. Option activity during 1996
and 1997 is summarized as follows:
F 16
<PAGE>
Number of Shares Price per Share
Balance December 31, 1995 289,000 $0.20 - 0.83
Granted 1996 105,000 $0.13
Terminated 1996 (121,000) $0.20 - 0.30
Exercised 1996 - $ -
--------- -------------
Balance December 31, 1996 273,000 $0.13 - 0.83
Granted 1997 - $ -
Terminated 1997 (112,500) $0.20
Exercised 1997 - $ -
--------- -------------
Balance December 31, 1997 160,500 $0.13 - 0.83
========= =============
The following options to purchase the Company's common shares were outstanding
on December 31, 1997.
Date Number of Shares Exercise Price Expiration Date
9/16/93 25,000 $ 0.83 9/15/98
5/12/95 60,000 $ 0.30 5/12/98
5/10/96 75,500 $ 0.13 5/10/99
------- ------
160,500
-------
The executive options as at December 31, 1997, are described as follows:
Original New
Exercise Exercise Expiration
Date Number of Shares Price Price Date
6/02/93 200,000 $0.70 $0.40 6/02/98
6/02/93 200,000 $1.20 $0.60 6/02/98
6/02/93 200,000 $3.00 $1.50 6/02/98
6/02/93 200,000 $5.00 $2.50 6/02/98
5/12/95 500,000 $0.30 Note A
6/25/96 500,000 $0.12 Note A
1/15/97 1,100,000 $0.13 Note A
7/16/97 200,000 $0.11 7/16/02
---------
3,100,000
=========
Note A: 180 Days after Termination of Employment Contract.
On February 15, 1996 the exercise price of 200,000 of the executive options
belonging to an individual was reduced to $0.21 per share and as part of a
termination of employment arrangement, he exercised all 200,000 options
against his past due salary and interest thereon amounting to $41,506. On June
25, 1996, two officers were each granted 200,000 stock options as an
inducement to renew their contract of employment and three directors were each
granted 50,000 incentive stock options, all with an exercise price of $0.12
per share. In January 1997, the Company issued two officers warrants to
purchase 50,000 shares each at a price of $0.13 per share and 500,000 shares
each at $0.13 per share pursuant to the renewal of their employment contracts.
F 17
<PAGE>
In July 1997, a director was granted 200,000 warrants to purchase shares at a
price of $0.11 per share as compensation for joining the Board of Directors.
Granted 1997 1,178,185 $0.125-0.25
Exercised 1997 (256,000) $0.180
Expired 1997 (2,813,750) $0.250-5.00
---------- -----------
Balance December 31, 1997 8,853,960 $0.125-5.00
The following warrants were outstanding on December 31, 1997:
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 Note H
10/13/93 250,000 0.25
10/13/99-
04/06/94 142,000 Note C Note A
04/01/94 400,000 0.25 12/31/99
05/11/94 15,000 0.40 Note E
07/31/94 606,250 0.05 12/31/00 Note G,I
11/10/94 1,800,000 0.32 Note A
07/08/96 132,143 0.25 06/30/98 Note H
09/24/96 2,140,000 0.13 09/02/99 Note G
09/24/96 2,140,000 0.05 12/31/00 Note I
03/31/97 288,000 0.125 03/31/99 Note H
09/26/97 85,000 0.13 09/26/99
10/31/97 24,000 0.15 10/31/99
10/08/97 185,185 0.135 10/08/99
10/20/97 240,000 0.15 10/20/99
11/09/97 100,000 0.25 11/09/99
---------
8,803,960
=========
Note A - 3 months after effective date of Registration StatementNote B - 18
months after effective date of Registration StatementNote 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 daysNote E - 180 days after resignationNote F -
Expiration date extended as part of extension of loanNote G - Expiration date
extended as part of loan agreementNote H - Warrants had expired by the date of
this report
Note I - Exercise price reduced as part of loan agreement
The Company does not have enough authorized and unissued Common Stock to issue
to the Warrant Holders if they all exercise their warrants. Consequently it is
inevitable that the Company will take steps to increase its authorized Common
Stock as soon as it is able to fund the necessary Shareholders' Meeting.
NOTE 10 - 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
F 18
<PAGE>
I, Ltd., Seahawk II, Ltd., Eagle Partners, Ltd. and Eagle Miners Ltd. For the
years ended December 31, 1997 and 1996, the Company recorded revenues of $930
and $145,690 respectively, from these partnerships. At December 31, 1997
accounts receivable-affiliates includes $1,730,979 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 October 1995 Carl Anderson rented a motor car to the Company for $5,000
per annum. At December 31, 1997, the accrued rental due to Anderson was
$833.During January 1996, the Company extended the repayment date of a
$300,000 promissory note due to the Company by Seahawk I, Ltd. to October 31,
1996. During February 1996, the Company issued 304,366 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, 1996:
Amount
Number of Unpaid
Name of Shares Remuneration
John Lawrence 152,183 $44.400
John Balch 152,183 $44.400
During February 1996, pursuant to the payment of past due salary of an ex
employee, the Company authorized a reduction from $0.40 per share to $0.21 per
share in the exercise price of the employee's warrants to purchase 200,000
shares of the Company's common stock. The employee then exercised the options
and the amount due was offset against past due salary of $41,506. In October
1996, the Company issued to Carl Anderson 2,140,000 class AH-1 and 2,140,000
class AH-2 warrants to purchase the Company's common stock at $0.13 per share,
pursuant to an agreement that Anderson lends the Company a minimum of
$100,000. The AH-1 warrants were exercisable until March 24, 1997, and the
Company extended that expiration date to September 24, 1997, in January 1997,
when Anderson increased the loan by $65,000. The class AH-2 warrants are
exercisable until September 24, 1999, but to a maximum number equivalent to
the number of previously exercised class AH-1 warrants.
In January, 1997, two officers were each granted 500,000 stock options as an
inducement to renew their contract of employment and three directors were each
granted 50,000 stock options, all with an exercise price of $0.13 per share.
In July 1997, J. Robert Shaw was appointed a director of the Company and
issued 200,000 options to purchase the Company's common stock at $0.11 per
share.
In During 1997, Carl Anderson loaned to the Company a total of $322,650
interest free. In November 1997, Anderson expressed his intention to convert
$278,200 of the loans into 2,140,000 shares of common stock of the Company by
exercising his AH1 warrants and the Company issued a 1 year note for the
balance of $45,000 repayable on October 31, 1998 with 12% annual interest. The
Company was unable to issue the shares to Anderson because it had insufficient
authorized common stock available. In May 1999 the Company entered into an
Agreement with Mr. Anderson under which the remaining $278,000 was
incorporated into a convertible note with interest accruing on an annual basis
at 18% from September 1997. The note provided that the loan and accrued
interest would be repaid in cash or, at Anderson's option, in the Company's
common stock at the conversion rate of $0.035 per share on December 31, 1999
(the "First Due Date"). The Agreement also provided that in the event that the
Company does not repay the loan on that date, the Note will be extended on the
F 19
<PAGE>
same terms for one year to December 31, 2000, at which time the principal and
accrued interest must be repaid in cash or, at the at Anderson's option, in
the Company's common stock at the conversion rate of $0.025 per share. As an
incentive to enter this agreement the Company extended the expiration date of
Mr. Anderson's T1 and AH2 warrants to December 31, 2000, and reduced the
exercise price to $0.05 per share.
NOTE 11 - INCOME TAXESEffective 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, 1997, the Company had a net operating loss carry forward of
approximately $14,000,000, 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.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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
recovered.
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.
Common Stock commitments exceeding authorized shares
In October 1997, Carl Anderson, a principal shareholder of the Company,
exercised warrants to purchase 2,140,000 shares of Common Stock at $0.13 per
share. At that time the Company informed Mr. Anderson that it did not have
enough unissued authorized Common stock to be able to fulfill his purchase
order and Mr. Anderson retracted the exercise of the warrants. It is the
intention of the Directors of the Company to increase the authorized Common
Stock to cover all present and foreseeable commitments.
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 permit were obtained for the Company by Remarc, then the Company agreed to
F 20
<PAGE>
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 funded Pesqamar's costs and the
Company was to refund 50% of any costs to Remarc when external project funding
for the Santa Rosa project is in place. The Company and Remarc each owned
24.5% of the South American company with the remaining 51% being owned by
Brazilians. By May 1998, Pesqamar had incurred over $300,000 of expenses, half
of which were payable by the Company. Under an agreement dated June 1, 1998,
the Company's portion of the expenditure was satisfied by the transfer of 1
million shares of common stock of Treasure & Exhibits International, Inc. to
Remarc on the basis that (a) the Company also transferred 165.5 shares of
Preferred Non-Voting shares in Pesqamar to Remarc and (b) Remarc to be
responsible for all future expenditure of Pesqamar. Following the completion
of the agreement, the Company owns 428.75 of the 1,750 shares of common voting
stock and 1,459.5 of the 3,250 shares of Preferred Non-Voting stock in
Pesqamar.
NOTE 13 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $697,937 for 1997 and has incurred substantial net losses for each of
the past several years resulting in an accumulated deficit of $14,330'759. At
December 31, 1997, the Company has negative working capital as indicated by
current liabilities exceeding current assets by $2,047,760. 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.
NOTE 14 - COST OF SETTLEMENT OF CLAIMS
During 1996 the Company settled amounts due to an unrelated party by issuance
of stock valued at $10,000 and a cash payment of $1,228. This resulted in a
gain on settlement of $3,491.
NOTE 15 - REDUCTION OF ACCOUNTS PAYABLE PROVISION
During 1997, management reduced the redundant portion of a provision set up in
1993 for accounts payable, which, on the basis of experience gained since that
time, management considers no longer necessary. The amount of the reduction
was $169,364.
F 21
<PAGE>
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996
Revenues $ 51,710 $ 5,054 $ 2,506 $ 7,531
Net Income (loss) (319,757) (293,980) (220,924) (366,185)
Income (loss) per
share (0.01) (0.01) (0.01) (0.01)
Weighted average
number of common
shares and common
shares equivalent
outstanding 25,351,480 25,700,665 25,846,287 25,918,700
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997
Revenues $ 15,698 $ 19,904 $ 25,465 $ 118,198
Net Income (loss) (177,568) (220,880) (181,190) (118,299)
Income (loss) per
share (0.01) (0.01) (0.01) (-)
Weighted average
number of common
shares and common
shares equivalent
outstanding 26,273,699 26,514,336 26,515,032 26,653,790
NOTE 17 - SUBSEQUENT EVENTS
Conversion of Series 1 Preferred Stock
The Series 1 Convertible Preferred Stock was converted into 200,000 shares of
Common Stock in August 1998.
Issuance of Series 3 Preferred Stock
In February 1998, the Company issued 550,000 shares of Series 3 preferred
stock to a non-affiliated company as part payment for subcontracted services
valued at $55,000.
Lease and Sale of Artifacts
In October 1997, the Company signed an agreement with Michael's International
Treasure Jewelry, Inc., Key West Florida, to exhibit certain artifacts for a
minimum period of 12 months, at a rental of $57,500 per quarter in advance.
The artifacts included the entire inventory of Seahawk I, Ltd. The agreement
also provided for Michael's to have an option to purchase the artifacts for
$2,500,000 ($750,000 cash and $1,750,000 in common stock of Vanderbilt Square,
Inc., a publicly quoted affiliate of Michael's) at any time during the term of
the lease. Any revenue from the agreement was to be divided between the
Company and Seahawk I, Ltd. in the ratio of the respective book values of the
assets involved. On February 10, 1998, Vanderbilt changed its name to Treasure
and Exhibits International, Inc.("TEI"). Prior to the agreement, the Company
signed an agreement with Odyssey Marine Exploration, Inc. to pay Odyssey 10%
of any proceeds from the lease or sale pursuant to the introduction by Odyssey
of Michaels and Vanderbilt to the Company.
F 22
<PAGE>
On March 19, 1998, TEI entered an agreement with the Company and Seahawk I,
Ltd. to purchase all of Seahawk I, Ltd.'s artifacts, their related
documentation and all of the Company's artifacts. The consideration was
$822,056 in cash and 9,500,000 newly issued shares of TEI's common stock which
were valued at the time of the agreement at $0.17 per share or $1,615,000.
Immediately thereafter Seahawk I, Ltd. repaid all its debt to the Company in
cash and TEI stock, repaid other loans to two of the limited partners and in
September 1998, in accordance with the Partnership Agreements, 1,998,196
shares of TEI stock were distributed to all the limited partners in proportion
to their original capital contributions, which totalled $1,311,040. Each
Limited Partner received approximately 1.52 shares for each $1 of capital they
contributed. The General Partner received no repayment of its original capital
contribution of $1,200,000. The Limited Partners voted to terminate the
partnership as of September 30, 1998.
In July 20,1998, the Company agreed to sell its remaining holding of 5,302,084
shares in TEI to First Consolidated Financial Corp., a Florida corporation,
for a total consideration of $450,677 ($0.085 per share). The agreement
provided for the cash to be paid in five tranches, $180,270 on the date of the
agreement and at least $50,000 during each of September, October and November
1998 with the balance due by December 31, 1998. In the event, after paying the
first tranche, no further payment was made until November 10, 1998, when the
Company accepted a discount of $10,407 in return for the whole of the balance
being paid on that date.
The transactions with TEI can be summarized as follows:
i) In total.
Cash Shares Shares Total
$ # $ $
------- --------- --------- ---------
Artifacts sold for 822,056 9,500,000 1,615,000 2,437,056
Less commission 76,750 1,008,827 166,500 243,250
------- --------- --------- ---------
Net Sale proceeds 745,306 8,491,173 1,448,500 2,193,806
Less provision for
costs of sale 5,000 5,000
------- --------- --------- ---------
Net proceeds after
provision 740,306 8,491,173 1,448,500 2,188,806
Book value of artifacts
sold 928,348
---------
Profit on sale of
Artifacts 1,260,458
---------
F 23
<PAGE>
ii) In the books of the Company.
Cash Shares Shares Total
$ # $ $
------- --------- --------- ---------
Artifacts sold for 280,074 3,236,650 550,230 830,304
Less commission 26,149 343,708 56,727 82,875
------- --------- --------- ---------
Net Sale proceeds 253,926 2,892,942 493,503 747,429
Less provision for
costs of sale 5,000 5,000
------- --------- --------- ---------
Net proceeds after
provision 248,926 2,892,942 493,503 742,429
Book value of artifacts
sold 303,073
---------
Gain on sale of
Artifacts 439,356
---------
iii) In the books of Seahawk I, Ltd.
Cash Shares Shares Total
$ # $ $
------- --------- --------- ---------
Artifacts sold for 541,982 6,263,350 1,064,771 1,606,752
Less commission 50,601 665,119 109,773 160,375
------- --------- --------- ---------
Net Sale proceeds 491,380 5,598,231 954,997 1,446,377
Book value of artifacts
sold 625,275
---------
Profit on sale of
Artifacts (historical
Basis) 821,102
Reduction in value of
5,598,231 shares of
TEI stock to $0.085 per
Share on liquidation
Basis 479,146
---------
Profit on sale of
Artifacts (liquidation
Basis) 341,956
=========
Short term loan
In May 1998, Carl Anderson loaned the Company $73,500 for one month at an
annual interest of 18% and secured with 3,500,000 shares of common stock in
Vanderbilt Square Corporation. As part of the consideration for making the
loan the Company agreed to extend the validity of certain warrants belonging
to Anderson. The loan was repaid on the due date.
F 24
<PAGE>
Payment of Pesqamar account payable
In May 1998, the Company, under the Pesqamar joint venture agreement with
Remarc International, Inc. dated August 17,1995, had accrued a debt due to
Remarc for running expenses of Pesqamar in the sum of $153,018. In payment of
that amount, the Company transferred to Remarc 1 million restricted shares of
common stock in Vanderbilt Square Corporation, and, in lieu of the agreement
from Remarc that all future Pesqamar expenses would be borne fully by Remarc,
the Company transferred 2.5% of its holding in Pesqamar to Remarc.
Demand for Indemnity from former directors
In March, 1998, the Company received a demand for indemnity from Greg Stemm,
John Morris and Dan Bagley, all former directors and officers of the Company,
for payment of the sum of expenses they incurred in defending an action
brought against them by the Securities and Exchange Commission. The
indemnification claim was made under Colorado corporate law. The Company has
received itemization of the purported legal fees and costs incurred in the
defense of the former directors and officers in the amount of approximately
$700,000. The Company resisted the claim and in December, 1998, the former
directors and officers filed a lawsuit pursuant to their claim.
The Company's directors have investigated the merits of the claim including
the fact that the Company formerly agreed with the Securities and Exchange
Commission that it would not pay the legal expenses of the former officers and
directors in their defense of the action in question.
The Company is of the opinion that the agreement with the Securities and
Exchange Commission takes priority over state law and in January, 1999,the
Company filed in the state court a Motion to Dismiss Complaint, a Motion for
More Definite Statement and Motion to Strike. At the same time the Company
filed a Motion for Preliminary and Permanent Injunction in the federal court.
Issue of Series 2 Preferred Stock
In March, 1999 the Company entered an agreement with Drexel Aqua Technologies,
Inc., a Delaware corporation, under which Drexel is to purchase 36,000,000
shares of the Company's Series 2 Preferred Stock for $500,000. The
consideration is to be paid at the rate of $50,000 or more each month and the
stock is to be issued on a pro - rata basis. On payment of the first $50,000
Drexel were entitled to appoint two directors to the board of the Company and
on payment of the second $50,000 Drexel were entitled to appoint a third
director. On full payment of the consideration Drexel are entitled to appoint
a total of four directors. The proceeds of the sale are to be used
specifically for current payroll, taxes, rent, administrative expenditures,
legal fees and the costs of shareholder meetings. At the same time the Company
and Drexel signed an agreement subject to due diligence, for the Company to
acquire the entire share capital of Drexel's wholly owned subsidiary, Sindia
Expedition, Inc.("SEI") for shares of Common Stock in the Company. The number
of shares to be issued for the acquisition of SEI will depend on the valuation
of that corporation. SEI is the sole owner of all the rights to a shipwreck in
Ocean City, New Jersey known as the Sindia.
Extension of Loan following request for conversion
During 1997 Carl Anderson, a principal shareholder of the Company, advanced
the Company $278,200. In September 1997 Mr. Anderson applied to the Company to
exercise his AH1 warrants and requested that the advances be converted into
F 25
<PAGE>
<PAGE>
2,140,000 shares of the Company's common stock. The Company had insufficient
unissued authorized stock and were unable to comply with the request.
In May 1999 the Company entered into an Agreement with Mr. Anderson under
which the $278,000 was incorporated into a convertible note with interest
accruing on an annual basis at 18% from September 1997. The note provided that
the loan and accrued interest would be repaid in cash or, at Anderson's
option, in the Company's common stock at the conversion rate of $0.035 per
share on December 31, 1999 (the "First Due Date"). The Agreement also provided
that in the event that the Company does not repay the loan on that date, the
Note will be extended on the same terms for one year to December 31, 2000, at
which time the principal and accrued interest must be repaid in cash or, at
the at Anderson's option, in the Company's common stock at the conversion rate
of $0.025 per share. As an incentive to enter this agreement the Company
extended the expiration date of Mr. Anderson's T1 and AH2 warrants to December
31, 2000, and reduced the exercise price to $0.05 per share.
F 26
<PAGE>
Report of Independent Certified Public Accountants
Limited Partners of
Seahawk I, Ltd.
Tampa, Florida
We have audited the accompanying statement of net assets (liabilities) in
liquidation of Seahawk I, Ltd. (a Florida limited partnership) as of December
31, 1997 and the related statements changes in net assets(liabilities) in
liquidation on December 31, 1997, and statements of operations, partners'
capital and cash flows for the years ended December 31, 1997 and 1996. 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, 1997 and the results of its operations, changes in partners'
capital and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounted principles.
/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A
Tampa, Florida
May 11, 1999
F 27
<PAGE>
SEAHAWK I, LTD.
STATEMENT OF NET ASSETS (LIABILITIES)IN LIQUIDATION
DECEMBER 31, 1997
ASSETS
Cash $ 224
Artifact inventory 967,231
-----------
$ 967,455
-----------
LIABILITIES
Accounts payable - General Partner $ 569,407
Accrued expenses - General Partner 56,751
Accrued expenses - Limited Partner 7,510
Notes payable - Limited Partners 6,203
Note payable - General Partner 154,427
-----------
$ 794,298
-----------
NET ASSETS IN LIQUIDATION $ 173,157
===========
The accompanying notes are an integral part of these financial statements.
F 28
<PAGE>
SEAHAWK I, LTD.
STATEMENT OF CHANGES IN NET ASSETS(LIABILITIES)IN LIQUIDATION
ON DECEMBER 31, 1997
INCREASE IN NET ASSETS (LIABILITIES) IN LIQUIDATION
Artifact inventory $ 341,956
Accounts Payable - General Partner 76,674
Notes and Interest - Limited Partners 13,038
Notes and Interest - General Partner 199,070
---------
$ 630,738
PARTNERS' EQUITY ON HISTORICAL BASIS
PRIOR TO RESTATEMENT ON LIQUIDATION BASIS (457,581)
---------
ENDING NET ASSETS IN LIQUIDATION $ 173,157
=========
The accompanying notes are an integral part of these financial statements.
F 29
<PAGE>
SEAHAWK I, LTD.
STATEMENTS OF OPERATION
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996 - HISTORICAL BASIS
1997 1996
----------- -----------
SALES $ 10,000 $ 20,750
COST OF SALES 10,000 20,750
-------- --------
GROSS PROFIT - -
-------- --------
OPERATING EXPENSES 12,000 3,360
GENERAL AND ADMINISTRATIVE EXPENSES 9,567 6,060
-------- --------
21,567 9,420
-------- --------
PROFIT (LOSS) FROM OPERATIONS (21,567) (9,420)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (57,068) (33,160)
-------- --------
NET (LOSS) $(78,635) $(42,580)
======== ========
The accompanying notes are an integral part of these financial statements.
F 30
<PAGE>
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996 - HISTORICAL BASIS
Number Capital Accumulated
Units Contributions Deficit
------ ------------- -----------
BALANCE,December 31, 1995 204 2,511,040 (2,847,360)
NET (LOSS)1996 - - ( 42,580)
--- ----------- -----------
BALANCE,December 31, 1996 204 $ 2,511,040 $(2,889,940)
NET (LOSS)1997 - - ( 78,635)
--- ----------- -----------
BALANCE, December 31, 1997 204 $ 2,511,040 (2,968,575)
=== =========== ===========
The accompanying notes are an integral part of these financial statements.
F 31
<PAGE>
SEAHAWK I, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996 - HISTORICAL BASIS
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(78,681) $(42,580)
-------- --------
Adjustments to reconcile net loss to
net cash used by operating activities:
Decrease (increase)in accounts receivable 421 -
(Decrease) increase in accounts
payable - affiliates 24,664 (11,905)
(Decrease) increase in accrued expenses 56,491 33,735
(Decrease) increase in accounts
payable - other (4,087) -
(Increase) decrease in inventory - other 1,146 20,750
-------- --------
Total adjustments 78,637 42,580
-------- --------
Net cash used by operating activities 44 -
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 44 -
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 268 268
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 224 $ 268
-------- --------
SUPLEMENTAL DISCLOSURE INTEREST PAID $ - $ -
======== ========
TAXES PAID $ - $ -
======== ========
SIGNIFICANT NON-CASH TRANSACTIONS
In 1996 and 1997 there were no significant non-cash transactions.
The accompanying notes are an integral part of these financial statements.
F 32
<PAGE>
SEAHAWK I, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, BUSINESS AND PLAN OF LIQUIDATION
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 was to engage in expeditions to
locate, identify, and retrieve samples from shipwrecks in waters off the coast
of Florida. When the Partnership located a colonial age sunken vessel, the
purpose of the Partnership was expanded to include the salvage and recovery of
artifacts.
On March 19, 1998, The General Partner and the Partnership agreed to sell all
of their artifacts and related documentation to Treasure & Exhibits
International, Inc.(TEI). The total consideration before a 10% commission paid
for the introduction of TEI to the Partnership, was $822,056 in cash and
9,500,000 newly issued shares of TEI's common stock which were valued at the
time of the agreement at $0.17 per share or $1,615,000. Immediately thereafter
the Partnership repaid all its debt to the General Partner in cash and TEI
stock using the $0.17 per share valuation, then using the TEI stock at the
$0.17 valuation, repaid other loans to two of the limited partners. The
Partnership then made a pro rata distribution to the limited partners of the
remaining TEI stock based on the limited partners' total investment in Seahawk
I, Ltd. On July 20, 1998, the General Partner sold its remaining 5,302,084
shares of TEI stock for $450,677, valuing the stock at $0.085 per share.
The Partnership's portion of the transaction with TEI can be summarized as
follows:
Per
Cash Shares Shares Share Total
$ # $ $ $
------- --------- --------- ------ ---------
Artifacts sold for 541,982 6,263,350 532,385 0.085 1,074,367
Less commission 50,601 665,119 56,535 0.085 107,136
------- --------- --------- ------ ---------
Net Sale proceeds 491,380 5,598,231 475,850 0.085 967,231
Book value of
artifacts sold 625,275
Profit on sale of ---------
Artifacts 341,956
Use of Proceeds: ---------
Repayment of accounts
payable 491,380 954,257 81,112 0.085 572,493
Repayment of Notes 2,645,778 224,891 0.085 224,891
Distributed to LPs 1,998,196 169,847 0.085 169,847
------- --------- --------- ------ ---------
Total proceeds used 491,380 5,598,231 954,997 0.085 967,231
======= ========= ========= ====== =========
In accordance with the Partnership Agreements, the 1,998,196 shares of TEI
stock were distributed to the Limited Partners in proportion to their original
capital contributions, which totalled $1,311,040. Each Limited Partner
F 33
<PAGE>
received approximately 1.52 shares for each $1 of capital they introduced. The
General Partner received no repayment of its original capital contribution of
$1,200,000.
The Partnership agreement extended through December 31, 1998, but following
the sale of all the Partnership's assets in March 1998, it was terminated as
of September 30, 1998, 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 were
maintained on the cash basis of accounting for tax purposes, however, for
historical financial statement purposes they were adjusted to the accrual
basis in order to conform with generally accepted accounting principles.
As of December 31, 1997, it was the management's intention to sell the
artifacts to TEI and liquidate the Partnership, and from that date the
Partnership has measured its assets and liabilities at the amounts of cash and
cash equivalents expected in liquidation and reports changes in estimates when
they are known. The financial statements have been shown on the original
historical basis up to and including December 31, 1997, and restated at that
date on the new liquidation basis.
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 in the
historical balance sheet is stated at the lower of cost or market. Cost of
individual artifacts is determined as the estimated net realizable value. In
the Statement of Net Assets (Liabilities) in Liquidation, the artifacts are
shown at the value of the net proceeds of their sale.
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 34
<PAGE>
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 and Property
All cash and property distributed to the Limited Partners shall be distributed
among the Limited Partners in the proportion that the cumulative capital
contribution of each partner bears to the cumulative capital contribution of
all Limited Partners
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.
NOTE 3 - ADJUSTMENTS OF ESTIMATED VALUES
Effective with the decision to liquidate, the carrying amounts of assets and
liabilities were adjusted from their historical basis to the amounts of cash
expected from their realization and settlement. The initial adjustment
increased net assets by $630,737 from $(457,580) to $173,157 as follows:
F 35
<PAGE>
Historical Estimated
Basis Liquidation
Value
__________ ___________
Cash $ 224 $ 224
Artifact inventory 625,275 967,231
Accounts payable - General Partner (646,081) $ (569,407)
Accrued expenses - General Partner (110,248) ( 56,751)
Accrued expenses - Limited Partner ( 14,650) ( 7,510)
Notes payable - Limited Partners ( 12,100) ( 6,203)
Note payable - General Partner (300,000) (154,427)
--------- ---------
$(457,580) $ 173,157
========= =========
NOTE 4 - NOTES PAYABLE
Notes payable at December 31, 1997 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 5 below) 300,000
----------
$ 312,100
==========
During 1998, the Loans were repaid with TEI stock valued at $0.17 per share.
NOTE 5 - 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 General Partner's historical
artifact inventory at $36,000. In March 1998, the note was repaid with shares
in the stock of a corporation that purchased the Partnership's artifacts. (see
Note 8 Subsequent Events)
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.
All the gold artifacts owned by the Partnership, approximately 500 ounces,
collateralized these notes. 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
F 36
<PAGE>
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 was
repayable on March 31, 1997. The new note is secured with Partnership
artifacts valued in the Partnership's historical 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 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
1997, and the General Partner issued 100,000 new warrants to purchase shares
of common stock at $.50 per share. In October 1997, the principal of the Note
was increased to $120,000 to incorporate the accrued interest and the Note was
extended for another 12 months to October 31, 1998.
In October 1997, the Company signed an agreement with Michael's International
Treasure Jewelry, Inc., Key West Florida, to exhibit certain artifacts for a
minimum period of 12 months, at a rental of $57,500 per quarter in advance.
The artifacts included the entire inventory of the Partnership. The agreement
also provided for Michael's to have an option to purchase the artifacts for
$2,500,000 ($750,000 cash and $1,250,000 in common stock of Vanderbilt Square,
Inc.) at any time during the term of the lease. Any revenue from the agreement
is divided between the Partnership and the General Partner in the ratio of the
respective book values of the assets involved.
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 historical 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.
In March 1998, the Partnership sold all its artifacts to Treasure and Exhibits
International, Inc. (see Note 8 Subsequent Events) and all notes secured by
the artifacts were repaid.
NOTE 6 - 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, 1997 and 1996 was $8,825 and $8,825 respectively. 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).
F 37
<PAGE>
NOTE 7 - CONTINGENCIES
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 8 - LIQUIDATION BASIS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The historical financial statements
contemplate continuation of the Partnership as a going concern. However the
General Partner, acting in its capacity as general partner for the
Partnership, sold the artifacts owned by Seahawk I, Ltd., in March 1998 (see
Note 9 Subsequent Events). The sale yielded enough for the General Partners to
recover most of its accounts and notes receivable. The financial statements at
December 31, 1997 have been prepared on a liquidation basis using the known
proceeds of the sale to revalue the artifacts and the liabilities settled with
the proceeds.
NOTE 9 - SUBSEQUENT EVENTS
Lease and Sale of Artifacts
In October 1997, the Partnership signed an agreement with Michael's
International Treasure Jewelry, Inc., Key West Florida, to exhibit certain
artifacts for a minimum period of 12 months, at a rental of $57,500 per
quarter in advance. The artifacts comprised the Partnership's and the General
Partner's entire inventory. The agreement also provided for Michael's to have
an option to purchase the artifacts for $2,500,000 ($750,000 cash and
$1,750,000 in common stock of Vanderbilt Square, Inc., a publicly quoted
affiliate of Michael's) at any time during the term of the lease. Any revenue
from the agreement was to be divided between the Partnership and the General
Partner in the ratio of the respective book values of the assets involved. On
February 10, 1998, Vanderbilt changed its name to Treasure and Exhibits
International, Inc.("TEI"). Prior to the agreement, the General Partner signed
an agreement with Odyssey Marine Exploration, Inc. to pay Odyssey 10% of any
proceeds from the lease or subsequent sale pursuant to the introduction by
Odyssey of Michaels and Vanderbilt to the Company.
On March 19, 1998, TEI entered an agreement with the General Partner and the
Partnership To purchase all of the artifacts and their related documentation.
The consideration was $822,056 in cash and 9,500,000 newly issued shares of
TEI's common stock which were valued at the time of the agreement at $0.17 per
share or $1,615,000. Immediately thereafter the Partnership repaid all its
debt to the General Partner in cash and TEI stock, repaid other loans to two
of the limited partners and made a pro rata distribution to the limited
F 38
<PAGE>
partners of the remaining TEI stock based on the limited partners' total
investment in Seahawk I, Ltd.
The Partnership's portion of the transaction with TEI is summarized in Note 1
In accordance with the Partnership Agreements, the 1,998,196 shares of TEI
stock were distributed to the Limited Partners in proportion to their original
capital contributions, which totalled $1,311,040. Each Limited Partner
received approximately 1.52 shares for each $1 of capital they introduced. The
General Partner received no repayment of its original capital contribution of
$1,200,000.
The Limited Partners voted to terminate the partnership as of September 30,
1998.
F 39
<PAGE>
<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) as of December 31, 1997 and the related statements of
operations, partners' capital and cash flows for the years ended December 31,
1997 and 1996. 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) as of December 31, 1997 and the results of its
operations, changes in partners' capital and its cash flows for the years
ended December 31, 1997 and 1996 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 $11,000 for 1997 and has a
partners' deficit of $30,823. In addition, the Partnership has no cash flow
from its operating activities. These factors, in addition to other factors as
discussed in Note 5, 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.
/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 11, 1999
F 40
<PAGE>
SEAHAWK II, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS
Cash $ 52
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts Payable
Affiliate $ 30,875
---------
30,875
---------
PARTNERS'CAPITAL (DEFICIT)
Capital contributions 1,371,250
Accumulated Deficit (1,402,073)
---------
( 31,823)
---------
$ 52
=========
The accompanying notes are an integral part of these financial statements.
F 41
<PAGE>
SEAHAWK II, LTD
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
-------- --------
REVENUES $ - $ -
-------- --------
OPERATING EXPENSES
Conservation costs - -
-------- --------
- -
-------- --------
GENERAL AND ADMINISTRATIVE EXPENSES
Accounting fees 3,360
Administrative fees 11,000 -
-------- --------
11,000 3,360
-------- --------
Total expenses 11,000 3,360
-------- --------
(LOSS) FROM OPERATIONS (11,000) (3,360)
-------- --------
NET (LOSS) $(11,000) $ (3,360)
======== ========
The accompanying notes are an integral part of these financial statements
F 42
<PAGE>
SEAHAWK II, LTD.
PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
Subscrip-
Number Capital tions
Of Contri- Receive- Accumulated
Units butions able Deficit
------ ------- --------- -----------
BALANCE,
December 31, 1995 50 $1,371,250 $ - $(1,388,343)
NET (LOSS) 1996 - ( 2,730)
-- ---------- ------- -----------
BALANCE,
December 31, 1996 50 $1,371,250 $ - $(1,391,073)
NET (LOSS) 1997 - ( 11,000)
-- ---------- ------- -----------
BALANCE,
December 31, 1997 50 $1,371,250 $ - $(1,402,073)
-- ---------- ------- -----------
The accompanying notes are an integral part of these financial statements.
F 43
<PAGE>
SEAHAWK II, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(11,000) $(3,630)
Adjustments to reconcile net loss to
net cash used by operating activities:
Increase in accounts payable affiliates 11,000 2,730
Increase in accrued expenses 900
------- -------
Total adjustments 11,000 3,630
------- -------
Net cash (used)by operating activities - -
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 52 52
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 52 $ 52
======= =======
The accompanying notes are an integral part of these financial statements.
F 44
<PAGE>
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 has not realized any expedition revenue and since its funds are
depleted, no expedition revenue can be expected in the future.
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 45
<PAGE>
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 were 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 1997 and 1996
was $10,000 and $2,830, respectively, and cumulative charges since inception
total $906,332.
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
F 46
<PAGE>
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, 1997.
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 - 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 1997 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.
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 47
<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) as of December 31, 1997 and the related
statements of operations, partners' capital and cash flows for the years ended
December 31, 1997 and 1996. 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) as of December 31, 1997, and the results of its
operations, changes in partners' capital and its cash flows for the years
ended December 31, 1997 and 1996 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 $23,224 for 1997 and has a
partners' deficit of $1,297,615. In addition, the Partnership has negative
cash flows from its operating activities and has no cash at December 31, 1997.
These factors, in addition to other factors as discussed in Note 5, 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.
/s/ Giunta, Ferlita & Walsh, P.A.
Giunta, Ferlita & Walsh, P.A.
Tampa, Florida
May 11, 1999
F 48
<PAGE>
EAGLE PARTNERS, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
December 31,
1997
-----------
TOTAL ASSETS $ -
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Loan payable - affiliate $ 50,000
Accounts payable - affiliate 1,064,969
Accrued expenses - affiliate 9,932
Losses in excess of Investment in joint venture 26,138
-----------
1,151,039
-----------
PARTNERS' CAPITAL (DEFICIT)
Capital contributions 150,100
Deficit accumulated since inception (1,301,139)
-----------
(1,151,039)
-----------
$( - )
===========
STATEMENT OF OPERATIONS
Year Ended Year Ended
December 31 December 31
1997 1996
----------- -----------
REVENUE $ - $ -
--------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES 21,817 8,178
--------- ----------
LOSS FROM OPERATIONS ( 21,817) (8,178)
--------- ----------
OTHER EXPENSE
Interest expense ( 4,932) ( 5,000)
Loss on investment in Joint Venture ( 3,104)
--------- ----------
( 4,932) ( 8,104)
--------- ----------
NET LOSS $( 26,749) $( 16,282)
--------- ----------
The accompanying notes are an integral part these financial statements.
F 49
<PAGE>
EAGLE PARTNERS, LTD.
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Number Capital
of Contri- Accumulated
Units butions Deficit
----- ------- -----------
BALANCE, December 31, 1995 3 150,100 (1,258,108)
NET (LOSS) 1996 ( 16,282)
-- -------- -----------
BALANCE, December 31, 1996 3 $150,100 $(1,274,390)
NET (LOSS) 1997 ( 26,749)
-- -------- -----------
BALANCE, December 31, 1997 3 $150,100 $(1,301,139)
== ======== ===========
The accompanying notes are an integral part these financial statements.
F 50
<PAGE>
EAGLE PARTNERS, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $( 26,749) $( 16,282)
--------- ---------
Adjustments to reconcile net loss to
net cash used by operating activities:
Loss on investment in Joint Venture - 3,104
Increase in accounts payable 26,749 13,178
--------- ---------
Total adjustments 26,749 16,282
--------- ---------
Net cash (used)by operating activities - -
CASH FLOWS FROM INVESTING ACTIVITIES - -
========= =========
CHANGE IN CASH AND CASH EQUIVALENTS - -
========= =========
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD - -
========= =========
END OF PERIOD $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
F 51
<PAGE>
EAGLE PARTNERS, LTD.
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.
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 1995, the
joint venture was formalized into a new Partnership called Eagle Miners, Ltd.
The original Partnership agreement extended through December 31, 1995, and was
extended to December 31, 1999, by a unanimous vote of the partners, but it 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 52
<PAGE>
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 1997, 1996 and cumulative since
inception are $none, $none and $1,117,680 respectively, of which $1,028,570 is
in accounts payable at December 31, 1997.
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
Partner's 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.
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
F 53
<PAGE>
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
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 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.
NOTE 5 - 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 1997 and has a Partners'
F 54
<PAGE>
Deficit. In addition, the Partnership has negative cash flows from its
operating activities and had no cash at December 31, 1997. 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.
The audited 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 55
<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: June 10, 1999 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, June 10, 1999
John T. Lawrence President, Chairman of the
Board, Principal Financial
and Accounting Officer and
a Director
/s/ John P. Balch Secretary, Chief Operating June 10, 1999
John P. Balch Officer, and Director
/s/ J. Robert Shaw Director June 10, 1999
J. Robert Shaw
EXHIBIT 22
SUBSIDIARIES
Name State of Incorporation
1. Seahawk Museum Development, Inc. Colorado
(Formerly Seahawk Artifact Recovery, Inc.)
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, 1997, 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 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on page 2 and 4 of the
Company's Form 10-KSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 536
<SECURITIES> 0
<RECEIVABLES> 5,298
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,842
<PP&E> 0
<DEPRECIATION> 844,518
<TOTAL-ASSETS> 1,290,661
<CURRENT-LIABILITIES> 2,056,602
<BONDS> 0
<COMMON> 13,509,627
0
50,000
<OTHER-SE> (14,330,759)
<TOTAL-LIABILITY-AND-EQUITY> 1,290,661
<SALES> 179,265
<TOTAL-REVENUES> 179,265
<CGS> 2,156
<TOTAL-COSTS> 343,549
<OTHER-EXPENSES> 560,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,718
<INCOME-PRETAX> (697,937)
<INCOME-TAX> 0
<INCOME-CONTINUING> (697,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (697,937)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
