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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT #1
TO
FORM 10-KSB
__X__Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended January 31, 2000.
or
_____Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______ to ______.
Commission File Number 0-25868
Controlled Environment
Aquaculture Technology, Inc.
(Exact name of small business as specified in its charter)
Colorado 84-129316
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3375 Koapaka Street
Honolulu, Hawaii 96819
(Address of principal executive offices)
(808) 836-3707
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
----------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements
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for the past 90 days. Yes__X__ No_____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. _X_
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2000 was $3,381,056. As of March 15, 2000, there were
4,355,450 shares of the registrant's common stock outstanding. The registrant's
revenue for the most recent fiscal year was $2,096,372.
Transitional small business disclosure format Yes___ No_X_
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
General
Controlled Environment Aquaculture Technology, Inc. ("Ceatech or the
"Company") was incorporated under the laws of the State of Colorado on January
19, 1995. In August 1997, Ceatech's common stock began trading
"over-the-counter" under the symbol CEAT on the NASD Bulletin Board.
Ceatech was a development stage company from its inception in January
1995 to February 1999. During this period, the Company focused primarily on
capital formation, planning and design of its advanced technology shrimp
aquaculture facilities, location and acquisition of its hatchery and farm sites,
and construction and equipping of its present hatchery and growout facilities.
Sale of the Company's hatchery products, high health broodstock and post larvae
"seed" animals, began in 1998. Sales of consumable product raised in the
Company's farm growout facilities began in February 1999.
Operations
At present, the Company is concentrating on two aspects of the overall
shrimp aquaculture business: (i) the development of a large, modern shrimp farm
operation for the production, preparation, packaging and distribution of premium
quality Pacific white shrimp; and (ii) the breeding, rearing and sale of high
health hatchery products, primarily broodstock and post larvae "seed" stock, to
commercial shrimp operations throughout the world.
In its own aquaculture farm operations located in Hawaii on the Island
of Kauai, the Company utilizes highly advanced technologies for intensive,
sustainable shrimp aquaculture farming which were developed as part of a U.S.
Shrimp Farming Program sponsored by the U.S. Department of Agriculture.
Moreover, these technologies evolved from over 15 years of research and
practical experimentation conducted within this USDA program by, among others,
several of the Company's key technical, managerial and operations personnel.
Strict quality controls over the entire shrimp production process from
breeding to distribution for sale are an integral part of the Company's
technologically advanced aquaculture methods. All of
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the farm stock is sourced from the Company's own state-of-the-art breeding
and hatchery facilities at which selectively bred broodstock and seed stock
are produced and reared under tightly controlled conditions designed and
maintained to prevent the introduction of disease and to insure animal high
health. The farm growout facilities are fully lined circular ponds designed
with and linked to water supply and drainage facilities that enable
continuous water exchange and complete waste removal between growing cycles.
One-half acre ponds are used as nursery units for the rearing of post larvae
seed stock to juvenile stage animals, and one acre production ponds are used
for growing the juvenile shrimp to market size. The one acre production ponds
are also designed to enable rapid and complete one-time harvesting of a pond
which minimizes product deterioration resulting from handling and handling
time. The farm shrimp are fed exclusively with a commercial feed specifically
developed and formulated to provide good nutrition and promote rapid growth.
Finally, the entire growout system includes extensive drainage canals and
large settling basins designed to minimize the environmental impact of waste
discharge from the farm.
Currently, freshly harvested shrimp are initially sorted and prepared
for distribution and marketing by Company employees at a subleased facility
located in the nearby town of Hanapepe. At the present time, freezing and
packing of frozen product must be hired out to an unaffiliated company in
Honolulu, on the island of Oahu. However, the Company recently made arrangements
to acquire the leasehold interest in its existing Hanapepe site and to construct
and equip a new facility on that site that will enable it to accomplish all of
the necessary sorting, preparation, freezing and packaging functions.
Competition
Because of the global nature of the shrimp industry, the Company to a
degree experiences competition for its consumable product from the full range of
domestic/foreign and capture/culture suppliers. Despite the common condition of
excess demand relative to supply of shrimp, sporadic short-term changes in
supplies can cause fluctuations in shrimp prices globally. The Company strives
to differentiate itself from the low-cost suppliers via its strategy to target
the market for premium product, and to identify itself as a cultured product
from Hawaii. As for the sale of hatchery products, the State of Hawaii has five
commercial operations of varying size that sell high health broodstock. The
Company is one of very few purely commercial operations in the world, and one of
the largest in Hawaii
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to market the SPF (specific pathogen free) shrimp hatchery products globally.
The competitive advantage of the Company is supported by the extensive length
of time that these SPF genetic lines have been maintained and bred, the
reputation of the technical staff, and the high degree of isolation of these
sources from major shrimp farming areas with histories of disease problems.
Marketing
The Company itself markets a small amount of its farm production to
local users, but the vast majority of farm product is marketed throughout the
U.S. under an arrangement with a large wholesale seafood distributor based in
Honolulu, Hawaii. Farm product has been and is marketed under the names Hawaiian
Plantation Shrimp and Kauai Shrimp. Because the market for shrimp hatchery
products is highly specialized and largely dependent upon the reliability and
scientific/technical repute of the supplier, the Company's senior personnel
handle all marketing, sale and distribution of its high health hatchery
products.
Employees
As of January 31, 2000, the Company had approximately 51 employees, of
which 33 were full-time. Currently, none of the Company's employees are
represented by a collective bargaining agreement. The Company believes its
relations with employees are good.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Honolulu, Hawaii. The
corporate offices consist of leased office space of approximately 1,200 square
feet. In addition, the Company leases 900 square feet of office space in Waimea,
on the island of Kauai. The Company also leases a 2,000 square foot processing
facility located in the town of Hanapepe, Kauai, which the Company intends to
acquire.
The Company's farm operation is located on approximately 140 acres of
leased land at the Kekaha Aquacultural Park. The lease with the State of Hawaii
has a 45-year term that expires on December 31, 2043. Base rent is set for the
first 15 years with rent in excess of the base value up to 3% of gross proceeds
from sales. The base rent only is subject to increase every 10th year of the
lease. The Company is allowed to recover all of its capital investment prior to
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the payment of percentage royalty.
On April 9, 1998, the Company was granted a revocable permit with
immediate right of entry to approximately 313 additional acres from the State of
Hawaii, Department of Land and Natural Resources. The Company is not actively
contemplating expanding farm operations into this area at this time due to its
distance from existing operations.
ITEM 3. LEGAL PROCEEDINGS
As of January 31, 2000, there was no litigation pending in which
Ceatech or any of its subsidiaries is a party or in which, to the best of
management's knowledge, Ceatech or any of its subsidiaries may be joined as a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended January 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock and Dividend Policy
The Company's common stock is currently traded on the Over the Counter,
Bulletin Board under the symbol "CEAT." The following table sets forth the
Company's high and low closing prices for the Company's common stock as reported
on the Bulletin Board for the periods indicated.
<TABLE>
<CAPTION>
High Low
Fiscal Year 1997
<S> <C> <C>
Third Quarter 5 2 1/2
Fourth Quarter 4 1/4 3 3/8
Fiscal Year 1998
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<S> <C> <C>
First Quarter 4 1/4 3 3/8
Second Quarter 3 5/8 2 7/8
Third Quarter 2 3/4 2 1/8
Fourth Quarter 4 1/2 2 1/8
Fiscal Year 1999
First Quarter 3 3/8 2 1/2
Second Quarter 2 11/16 1 1/2
Third Quarter 1 3/4 11/16
Fourth Quarter 1 3/32 13/16
</TABLE>
The closing sale price of the Company's common stock as reported on the
Over the Counter, Bulletin Board on March 15, 2000 was $1 3/8 per share. The
prices presented are bid prices which represent prices between broker-dealers
and don't include retail mark-ups and mark-downs or any commission to the
dealer. The prices may not reflect actual transactions.
At January 31, 2000, there were approximately 378 stockholders of
record of the Company's common stock. There is no established public trading
market for the Company's Class A warrants.
There have been no cash dividends declared or paid on the shares of
common stock, and management does not anticipate payment of dividends in the
foreseeable future. In addition, the Company's Bank of America Construction Loan
presently restricts payment of cash dividends, possibly as long as seven years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain statements which may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, and especially those which include variations of the words
"believes," "intends," "estimates," "anticipates," "expects," "plans," or
similar language, are likely to be forward-looking statements, and as such, are
likely to concern matters which involve risks, uncertainties and other factors
that could materially and adversely affect the outcome or results indicated by
or inferred from the statements themselves. Therefore, the reader is
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advised that the following discussion should be considered in light of the
discussion of risks and other factors contained in this Form 10-KSB and in
the Company's other filings with the Securities and Exchange Commission, and
that no statements contained in the following discussion or in this Form
10-KSB should be construed as a guarantee or assurance of future performance
or future results.
Overview
During the fiscal year ended January 31, 2000, the Company made
substantial progress toward realizing its ultimate objective of becoming a large
scale, profitable shrimp agri-business by applying the technologically modern
aquaculture methods described previously. Construction of the first 20 growout
ponds and support infrastructure was completed in July 1999, and all of the
growout ponds were in full production by the second half of the year. During
this period, the productive capability of the Company's unique production
technology has met and exceeded initial estimates.
Nevertheless, while per pond production yields have been very
encouraging, occasionally exceeding by more than 20% the yields projected at the
inception of the business, total sales revenue has been well short of total
operating costs. As a result, the Company has continued to incur substantial
losses from its existing farming operations, and it is apparent that production
from just 20 growout ponds will not generate sufficient revenue to cover the
Company's recurring operational and administrative expenses and to carry and
amortize its debt.
Losses from farm operations were mitigated somewhat by increased sales
of hatchery products, especially broodstock, in the latter part of the year. The
late resurgence and increase in hatchery sales provided an encouraging sign for
future prospects in this area of the Company's business. Nevertheless, while the
Company plans to allocate more resources to expand its share of the worldwide
market for hatchery products, the inherent risks involved and the volatility of
this market are such that the potential revenue from this source is not enough
to warrant the Company's reducing its commitment to farm operations as a primary
area of enterprise.
In view of the severity of operating losses over the past two years,
the Company has identified several development strategies and steps which must
be taken and are in the process of being taken to insure the Company's survival
and future success. First, the
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Company will need to acquire, develop and equip a facility for sorting,
packaging and freezing farm product which will enable the Company to maximize
production, handle harvests more efficiently, and respond more effectively to
the product distribution requirements of different segments of the market.
Second, the Company will need to construct and put into operation more
growout ponds in order to take advantage of certain economies of scale
inherent in its advanced aquaculture methods and thereby increase farm
production at lower incremental cost and take full advantage of its existing
infrastructure. Third, the Company must continue to refine and develop
marketing strategies and distribution arrangements for the sale of the
increased production anticipated from the operation of more ponds. Finally,
the Company must continue its aggressive efforts to expand the client base
and highly profitable sales of its hatchery broodstock lines.
The Company's original business plan assumed that virtually all of its
farm product would be marketed in fresh, chilled, whole form. Accordingly, no
provisions were made to develop and properly equip a facility for sorting,
packing and freezing high volumes of freshly harvested shrimp. Actual marketing
experience during the past year has shown that the distributor's perceived risks
of trying to sell large quantities of fresh, chilled whole shrimp are
unacceptably high, and as a result, the Company has had to avail itself of
whatever facilities were immediately available to prepare and package harvested
shrimp in more widely marketable forms (i.e., fresh, chilled tails and frozen
whole and frozen tails). As indicated previously, the sorting of shrimp (by
size), de-heading and packing for shipment to distributors or for shipment to
Honolulu for freezing has been done in a small facility located in the nearby
town of Hanapepe, which was formerly used for processing and selling local fish
products. Freezing has been done at a small, independently owned freezing and
packing plant in Honolulu, whose limited size only allows the Company to freeze
approximately 3,500 pounds of product per week, and whose schedule sometimes has
prevented the Company from freezing any product over a given period.
The limited size of the existing Kauai preparation and packaging
facility, together with the limited availability of the independent Honolulu
freezing and packing plant, constitute an operations bottleneck which has
reduced harvesting efficiency and increased production costs. The Kauai facility
is not large enough or well enough equipped to handle the harvest of an entire
pond, and the freezing schedule imposed by the Honolulu packing plant places
additional constraints on quantities of shrimp that can be harvested at
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any given time. As a consequence, the Company has been unable to take full
advantage of the rapid, mechanically efficient harvesting methods designed
into the farm's infrastructure and has been forced to harvest in increments
using traditional, labor intensive methods. Less efficient harvesting has
resulted in lengthened crop cycles, thereby substantially increasing
production expenses, especially for feed and electric power. Transportation
and storage costs associated with having to ship freshly harvested shrimp to
Honolulu for freezing have added significantly to the costs of preparing
shrimp for the market, and the limited availability and freezing capacity of
the Honolulu packing plant has adversely affected the Company's ability to
service potential high volume customers.
Hence, while it is now clear that to achieve profitability, the Company
must increase its farm production and sales to substantially higher levels than
currently possible with only 20 production ponds in service, the Company's first
priority is to acquire and develop a suitable facility at which the Company can
efficiently and timely package all of its farm production, in fresh chilled or
frozen form, to meet the demands of all segments of the market for the product.
To that end, the Company has entered into a contract to acquire the leasehold
interest in the site of the existing preparation and packaging facility in
Hanapepe and has made plans to construct and equip a new and expanded facility
with the capacity to handle the entire volume and frequency of full pond
harvests generated by an expanded farm of up to 100 ponds. The Company currently
estimates that acquisition and development costs will be approximately $1.0
million, and it has arranged for $1.0 million in convertible debenture financing
to fund the payment of such costs. See Liquidity and Capital Resources below.
Concurrently, the Company is planning expansion of the farm and will
undertake such expansion as soon as financing and/or additional infusion of
capital will permit. The Company's existing 20 pond farm operation is located on
14 contiguous parcels of land comprising 140 acres within a State owned and
designated agricultural park site known as the Kekaha Agricultural Park. These
parcels are leased from the State of Hawaii Department of Agriculture for a term
of 45 years. Unused portions of the land already under lease will permit
expansion of the farm up to as many as 40 ponds. The Company currently estimates
that the development costs for 20 more production ponds will be approximately
$2.5 million.
Beyond the Company's present plans for expansion within the
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Kekaha Agricultural Park, the Company has a permit and right of entry to use
a 313 acre parcel of land near but not adjacent to the existing farm site.
There also are several thousand acres of State owned lands adjacent to and in
the immediate vicinity of the farm, most of which are presently devoted to
the growing of sugar cane but which may become available in the near future.
The State of Hawaii is presently conducting discussions with the present user
and others regarding the future use and control of these lands, but the
Company is unaware of any impending use and is actively engaged in presenting
the case that its shrimp agri-business and other related industries provide
the most viable replacement use for significant portions of these lands.
Expansion of the Company's operations would have the additional benefit
of enabling the Company to devote more of its resources to the production of
high health broodstock and seed stock in order to take full advantage of the
recent resurgence in the highly profitable market for hatchery products.
Following catastrophic crop losses suffered in the past year as a result of
disease, more and more shrimp operations around the world are moving to combat
introduction of disease into their systems by improving biosecurity measures at
their hatcheries, implementing more stringent controls on the importation of
live shrimp, such as broodstock and post larvae seed animals, and increasingly
relying on the importation of "SPF" (specific pathogen free) broodstock and
hatchery animals selectively bred and raised in highly controlled disease free
conditions. Over the past year, the Company has strengthened and now occupies a
strong position in the market for such broodstock and hatchery products.
Expansion of the Company's facilities will enhance this position by affording
increased capability and flexibility to capture a larger share of the market for
hatchery products as it expands.
Experience in marketing its farm product over the past year has
reinforced management's belief that the Company can and should maintain market
acceptance of its shrimp as a premium product commanding a price substantially
higher than prices generally applicable in the commodity market. Accordingly,
the Company's marketing and distribution arrangement with the largest
distributor of seafood products in Hawaii was established in large measure
because of this distributor's willingness to work closely with Company
management in product promotions designed to obtain premium pricing. Similarly,
the Company's selection of other distributors located on the U.S. mainland has
been and continues to be predicated on whether a particular distributor's
customer base and plan of
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distribution will compliment the Company's basic strategy of marketing a
premium product.
Even under such self-imposed strategic restrictions, the Company's
efforts in marketing consumable product have been constrained, not by lack of
demand, but by present limitations on production and packaging capability,
especially of frozen product. The Company has received serious inquiries and has
continued to explore high volume markets for frozen product in both Europe and
Asia and the U.S. mainland. It is apparent, however, that the Company must
expand its production capacity in order to make a significant entry into these
potentially lucrative markets.
As a result, the Company has continued the general marketing plan
developed over the past year. Sales of fresh, chilled, whole shrimp are limited
to the local Hawaii market, and sales of product in fresh, chilled, tail-only
form are earmarked for the U.S. mainland, mostly to specialty seafood stores and
outlets in several major west coast cities and to a limited number of specialty
food outlets in the midwest and east coast. Frozen product, mainly frozen tails,
is sold both locally and on the U.S. mainland. At the same time, marketing and
distribution contacts have been developed and maintained to enable the Company
to enter into the high volume premium shrimp markets of Europe and Asia when
production capacity permits.
The following discussion of results of operations and liquidity and
capital resources should be read in conjunction with the Consolidated Financial
Statements and related Notes contained in Item 7. - Financial Statements.
Results of Operations
General. Since inception in January 1995, the Company has sustained net
losses of approximately $3.8 million. Such losses have generally been financed
through a combination of internally generated funds, funds provided by loans
with financial institutions and stockholders, and funds provided through the
sale of common stock units, which are comprised of common stock and Class A
warrants to purchase common stock at $2.00 per share. Based on current shrimp
production levels and near-term projected sales revenue, the Company will be
required to obtain additional financing in order to continue to fund losses
until such time as expanded production facilities are operational. Based on
current plans such expansion could require up to twelve months to complete.
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The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements for the fiscal years ended January 31, 2000 and 1999, the
Company incurred losses of approximately $1.6 million and $1.4 million,
respectively. In addition, the Company currently has no committed source of
outside capital available to fund future losses. These factors, among others,
may indicate that the Company will be unable to continue as a going concern for
a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its existing loan agreements, to obtain additional
financing or refinancing as may be required, and ultimately to attain positive
operating cash flow. The Company is actively pursuing plans for additional
financing through, among others, an equity offering, additional debt financing,
or some combination thereof. See Liquidity and Capital Resources below for
further discussion.
Management does not consider a comparison of year to year results to be
necessarily meaningful because the Company's production facilities did not
become fully operational until July 1999.
Year End. For purposes of the following discussion, the Company's 1999
fiscal year ended on January 31, 2000 and the 1998 fiscal year ended on January
31, 1999.
Product Sales. The Company's revenue from shrimp sales for the 1999
fiscal year was approximately $2.1 million compared to approximately $373,000
for the 1998 fiscal year. The increase in revenue is primarily the result of
sales of farm shrimp in fiscal year 1999 versus no such sales in fiscal 1998.
During the 1999 fiscal year ended, the Company sold approximately 293,000 pounds
of farm shrimp. There were no such farm shrimp sales in the prior fiscal year as
the Company was still constructing the shrimp growout ponds and farm shrimp were
being produced. In addition, the Company had revenue from the sale of broodstock
of approximately $546,000 for the 1999 fiscal year as compared to revenue of
approximately $320,000 for the 1998 fiscal year. The number of broodstock sold
in
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fiscal year 1999 was more than double as compared to the 1998 fiscal year as
a result of more product available for sale and wider product acceptance.
However, total sales revenue from broodstock for the 1999 fiscal year did not
increase in a manner which was commensurate with the increased numbers sold
because of price discounts that were offered to large-volume clients.
Cost of Sales. Cost of sales for the 1999 fiscal year was approximately
$2.2 million compared to $349,955 in fiscal year 1998. This increase was
principally the result of farm shrimp sales in 1999 as compared to no sales in
1998. The gross profit during the 1999 fiscal year was negatively impacted by
lower of cost or market adjustments to inventory of approximately $36,000. Such
adjustments reflect certain inventory costing issues which the Company is
continuing to resolve and refine given the unique, experimental, and start-up
nature of the Company's production and farming techniques. It is anticipated,
however, that when the sorting, freezing and packaging facility is constructed
and operational, most, if not all, of these inventory costing issues will be
resolved or mitigated.
General and Administrative Expenses. General and administrative
expenses for the fiscal year ended January 31, 2000 and January 31, 1999 were
approximately $1.3 million. During the third quarter of fiscal year 1999, the
Company implemented a comprehensive cost reduction and containment program which
included, among other things, payroll reductions of up to 40% for all employees,
a moratorium on all long-term contractual commitments, a freeze on all new
salaried hires, a comprehensive review of all existing contracts and
arrangements including insurance coverage, and a reduction of outside
professional services provided to the Company. The Company intends to further
scrutinize all expenditures in order to identify additional cost savings areas.
In addition, during the fiscal year ended January 31, 2000, the Company
determined that certain non-inventory assets had no value, and accordingly,
recognized an asset impairment loss of $43,500.
Interest income (expense). For the fiscal years ended January 31, 2000
and January 31, 1999, the Company incurred total interest costs of approximately
$292,000 and $38,253, respectively, of which $124,881 and $35,525 was
capitalized to the Company's self-constructed real property improvements, and
$167,000 and $2,728 was recognized as interest expense, respectively.
Construction of the self-constructed assets is substantially complete and
accordingly, interest incurred will no longer be capitalized to such
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assets.
Liquidity and Capital Resources
Since inception in January 1995 through January 1999, the Company
financed its development stage operations and infrastructure requirements
primarily through a combination of equity and debt.
During the year ended January 31, 2000, the Company received a total of
$275,000 in unsecured short-term financing from a trust entity controlled by a
Company stockholder, as evidenced by two promissory notes. The original due
dates of both notes have passed but have been extended to May 2, 2000, by mutual
agreement. The notes may be prepaid in whole or in part at any time without
penalty. Subject to formal approval by the Board of Directors, Ceatech is
contemplating an agreement whereunder the debt evidenced by these notes may be
changed into convertible debentures or directly converted into equity as part of
a second private placement of common stock units.
On May 5, 1998, the Company entered into a revolving credit agreement,
as amended, with Central Pacific Bank in the amount of $235,000, secured by a
$250,000 Central Pacific Bank certificate of deposit. At January 31, 2000 the
outstanding balance on the line of credit was $235,000. The expiration date on
the revolving credit agreement, as amended, is August 2, 2000, at which time the
full unpaid principal balance together with interest thereon, is due and payable
in full. Interest on the outstanding borrowing accrues at 1.50% above the
Central Pacific Bank certificate of deposit interest rate.
On September 9, 1998, the Company entered into a construction loan
agreement with the Bank of America which provided for advances of up to a
maximum principal amount of $3,000,000. The proceeds from such loan were to be
used to construct certain improvements on real property owned in leasehold by
the Company and located on the island of Kauai in Hawaii. As of January 31,
2000, $2,942,019 was outstanding on the loan and the improvements were
substantially complete. The Company intends to convert this Construction Loan to
a Permanent Loan in accordance with the terms of the loan agreement. The
Permanent Loan would provide for monthly payments over a period of seven years
and a balloon payment may be due at the end of the seven-year amortization
period. The interest rate on the Permanent Loan for the first two years would be
based on Bank of America's Reference Rate plus 2.0% per year. Such
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rate would be subject to quarterly adjustments. From years three through
seven, the interest rate would be based on the most recently auctioned United
States Treasury Bond or Note plus 2.75%.
On March 22, 2000, the Company entered into a convertible debenture
subscription agreement ("Subscription Agreement") with Hibiscus Investments,
Inc., an existing stockholder, for the issuance of two 7.75% convertible
subordinated debentures of $500,000 ("Debenture"), each of which is to be issued
within twelve months of the date of the Subscription Agreement. Proceeds from
the Debentures are to be used primarily to construct a sorting, packing and
freezing facility ("Processing Facility"). The Company currently estimates that
the costs of acquiring the leasehold interest in the land and constructing and
equipping the Processing Facility will be approximately $1.0 million. The
Debentures are due and payable on or before March 22, 2007 with interest payable
quarterly on the outstanding balance. Such debentures entitle the holder to
convert the entire face amounts, together with accrued but unpaid interest
thereon, into fully paid and nonassessable units, each of which consists of one
share of common stock and one Class A Common Stock Purchase Warrant entitling
the holder thereof to purchase an additional share of common stock at a price of
$2.00 within two years of the date of issuance of the warrant. The conversion
price shall be equal to $1.00 per unit. The additional shares issued upon
conversion of the debentures may further dilute the interests of the current
shareholders and could reduce their proportionate ownership and voting power in
the Company. As of January 31, 2000, there were no convertible debentures
outstanding.
The Company requires additional capital to expand its growout
facilities and for working capital purposes. The Company currently estimates
that the costs of constructing 20 additional ponds will be approximately $2.5
million. In addition, the Company currently believes its ability to generate
sufficient funds internally for working capital purposes is limited by the lack
of such facilities. As such, the Company will require an outside source of
working capital during the period of construction of these facilities, currently
estimated to take up to twelve months. Therefore, the Company is aggressively
exploring its available financing options including, but not limited to, an
equity offering, additional debt financing or some combination thereof. The
Company's inability to obtain additional financing on acceptable terms would
have a material adverse effect on the Company. See Note 3. to Consolidated
Condensed Financial Statements.
16
<PAGE>
Year 2000 Disclosure
The Company utilizes third-party computer equipment and software that
appears to have experienced no significant disruptions as a result of the Year
2000 date change. Failure of such third-party equipment or software to operate
properly with regard to the Year 2000 and thereafter could require the Company
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company will continue to monitor its computer systems
to ensure that any latent Year 2000 computer matters that may arise are
addressed promptly.
Certain Factors That Might Affect Future Results
The Company does not provide financial performance forecasts. Ceatech's
operating results and financial condition have varied in the past and may in the
future vary significantly depending on a number of factors. Except for the
historical information in this report, the matters contained herein include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in the forward-looking statements made in this report and
presented elsewhere by management from time to time. Such factors, among others,
may have a material adverse effect upon the Company's business, results of
operations and financial condition.
The availability of land for expansion of the Company's farm facility
poses risks which vary in accordance with the scope of intended expansion. The
existing 20 production pond farm operation is located entirely within the
State-owned and designated agricultural park site known as the Kekaha
Agricultural Park ("Agripark"). The Company leases this land from the State of
Hawaii Department of Agriculture for a term of 45 years. Unused portions of the
land already under lease will permit expansion of the farm to at least 40 ponds,
and management does not foresee any use permit issues involved in expanding the
farm on these lands. There are several more parcels within the Agripark which
the Company might acquire and which would permit expansion of the farm to 47
ponds. The ability to acquire these parcels is not certain, as each of these
parcels is currently under lease to a third party. The Company does have rights
to acquire (by lease) all or portions of a separate 313 acre site that could
accommodate up to 100 production ponds, but management has not actively explored
immediate expansion into this area due to its
17
<PAGE>
distance from existing operations. For major expansion in the future, the
Company is also looking to acquire some of the abundant acreage adjacent to
the Agripark currently planted in sugar cane which may become available in
the future. Subdivision requirements, land use approval and permit issues
would be significant factors affecting the availability and ultimate
feasibility of expanding into these adjacent lands, but acquisition risks are
mitigated by the present lack of economically suitable uses for such lands.
The geology, location and climate of Hawaii present certain risks of
natural disasters such as hurricanes, volcanic eruptions, flooding, and
tsunamis. In 1992 for example, Hurricane Iniki caused substantial damage on the
island of Kauai. Though the Company was not operating during Hurricane Iniki,
the prototype ponds, which were in place at the time, sustained little damage
during the storm. The majority of the Company's infrastructure consists of
low-profile basins that present little vertical relief, and are expected to
survive exposure to hurricane winds, although no assurance can be made that such
infrastructure would survive. In addition, the Company's hatchery building is
designed to survive winds of up to 140 mph and storm waters from adjacent lands
are directed into existing drainage ditches. To the extent that natural
disasters such as hurricanes or severe storms occur on Kauai, the Company's
operations and financial condition may be adversely affected.
The business of the Company is subject to substantial local, state and
federal regulations, including, but not limited to, protecting health and safety
of food products, archeological preservation laws, and environmental
regulations. The Company believes that it currently has acquired all necessary
permits and licenses for its animals, seawater wells, pumps, ponds, and
buildings constructed to date. There can be no assurance, however, that the
Company will be able to obtain any additional permits or licenses that may be
required in the future. Although the Company is not currently aware of any
environmental compliance issues, no assurance can be given that such issues will
not have a material adverse effect on the Company's operation in the future.
The Company's farming sites were formerly sites of agriculture
operations, which involved use of pesticides and other agriculture chemicals.
The use of lined ponds and seawater taken from below the freshwater groundwater
resource where residual agriculture chemicals may temporarily reside is believed
to avoid any reasonable likelihood that such chemicals could affect
18
<PAGE>
product quality, and tests have confirmed the absence of such pesticides in
the incoming water. In October 1999, the Hawaii State Department of Health
granted the Company a permit for discharge of farm effluents to the ocean.
This Permit is valid through April 2004, and allows a discharge volume to
support a farming operation consisting of 100 ponds. Establishment of the new
shrimp packaging/freezing facility on Kauai will require approval of a
facility design permit from the Department of Health. A delay in the approval
of the Company's planned packaging facility could negatively affect the
Company's operations. Although management is not currently aware of any
environmental compliance issues that are expected to have a material adverse
effect on the Company, no assurance can be given that such regulations will
not have a material adverse effect on the Company's operation in the future.
The Company's personnel includes acknowledged authorities in the field
of shrimp aquaculture and high health shrimp breeding and production systems.
Although the Company performs cross-training among its technical staff,
maintains various operational protocol documents, and carries insurance on
several key employees, the specialized nature of this marine bio-technical
operation suggest that loss of key personnel could have a material adverse
affect on the Company.
Shrimp diseases have caused serious economic impacts to shrimp
aquaculture operations worldwide and the occurrence of an infection at the
Company's operations would have a material adverse affect on its operations. The
establishment of import bans on live shrimp by foreign countries to which the
Company markets its shrimp hatchery products, or changes to air shipment
regulations could negatively affect its ability to sell into these markets.
Commercially available feeds of appropriate nutritional composition and
acceptable price need to be shipped from off-island to the farm. The
unavailability of feeds, large price increases, or the interruption of transport
logistics would negatively impact the Company's operations.
All of the potential vectors of the primarily viral shrimp pathogens
are not completely understood, but transmission from infected parents to
offspring and contamination from adjacent shrimp farms are understood to be
principal causes of infection. The Company has aggressively pursued a disease
prophylaxis strategy in a number of ways. The farming location was sited in an
arid, isolated portion of Kauai, an island where no other shrimp farms exist,
and seawater is drawn from deep seawater wells rather than directly from
19
<PAGE>
the ocean to preclude the incidental introduction of pathogens. When
beginning operations, the Company first established its hatchery operation
with state-of-the-art animals known to be free of diseases associated with
shrimp aquaculture elsewhere, and committed to the exclusive use of its high
health seed in all its farming operations. The Company established rigorous
quarantine and biosecurity procedures, a continuous pathological surveillance
program, and animal health management protocols, and it controls the transfer
of materials, animals, vehicles and pedestrian traffic on its hatchery.
Although these are the most effective and sound means to insure the health
status of its animal stocks, there can be no assurance that incidents of
infection will not occur within one of its properties.
As a result of the fact that importation of infected broodstock may be
a key source of infection, several countries where shrimp farming is practiced
have increased restrictions, instated special animal quality assurance
requirements, and in some cases temporarily instated bans on importation of live
animals. Generally, these actions work in favor of the Company's marketing of
its high health hatchery products because their health quality can pass the most
rigorous standards. A substantial proliferation in the number shrimp farming
countries instituting overall bans on the importation of live animals, or
regulatory changes to the air shipment of live animals could negatively affect
the foreign sale of these products.
The capability to import appropriate feeds at acceptable prices is a
risk that the Company has attempted to address through the establishment of
relations with multiple feed vendors. Nonetheless, the continued existence of
these feed suppliers, substantial, industry-wide changes to the economics of the
total feed industry, or the occurrence of strikes which would interrupt shipping
logistics could negatively impact the Company's operations.
The sale price of the Company's premium shrimp is affected to some
degree by global market conditions. The Company's strategy is to secure a price
premium by differentiating the product from commodity-grade products by virtue
of its excellent taste, texture and purity. Despite this effort, if the global
shrimp market suddenly became flooded with low priced commodity grade product,
it is possible that the amount of premium for high-quality product could fall in
the face of excessive supply. The capability to secure sales of the premium
shrimp and high health hatchery products outside the limited Hawaiian markets is
critical to the Company's market strategy. The Company has received numerous
expressions of interest
20
<PAGE>
from large clients worldwide to purchase its premium Pacific white shrimp
when its packing/freezing operation can regularly supply sufficient volumes.
Despite such willingness, the present inability to secure contracts for such
purchases represents an uncertainty, which could adversely affect the
Company's operation. Increasing the sale of hatchery products entails
continued penetration into new markets and client bases in Asia and the
Americas. The increased year-over-year sales volume expected for 1999, and
the expanded customer base have been encouraging, but because this market
relies heavily on word of mouth endorsements from associates and exigencies
within the industry, it is difficult to predict the rate at which sales can
be expected to grow.
ITEM 7. FINANCIAL STATEMENTS
The Company's Financial Statements, together with the independent certified
public accountants' report, appear at pages F-1 through F-28 of this Form
10-KSB.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The names, ages and positions of all directors and executive officers
serving the Company as of January 31, 2000 were as follows:
<TABLE>
<CAPTION>
Positions Held and
Name Age Tenure
<S> <C> <C>
John Chen 41 Director
Ernest K. Dias 61 President,
Chief Operating Officer and
Director
21
<PAGE>
<S> <C> <C>
Ronald L. Ilsley 58 Director
Gordon J. Mau 52 Chairman,
Board of Directors
Charles Spira 67 Director
</TABLE>
Mr. Chen has been a member of the Board of Directors since 1998. Mr.
Chen serves as President and Owner of Plum Creek Golf & Country Club and Plum
Creek Villages, a 500-acre residential community surrounding the golf course in
Castle Rock, Colorado, where he is also a member of various local economic
development organizations. Mr. Chen also serves as President and Owner of
Carlton Oaks Golf & Country Club located in Santee, California.
Mr. Dias has been President, Chief Operating Officer and a Director of
the Company since 1997. From 1988 to 1997, he was Manager of Facilities
Development and Construction for The Oceanic Institute in Honolulu, Hawaii. Mr.
Dias holds a bachelor of science degree in Engineering from San Jose State
University.
Mr. Ilsley has served as a Director since 1997. He was the Company's
Chief Financial Officer from February 1997 to October 1999. Mr. Ilsley received
his bachelor of arts degree from California State University Northridge and is a
graduate of Pepperdine University Graduate School of Business and Finance.
Mr. Mau has been Chairman of the Board of Directors since October 1999
and a member of the Board since 1998. Mr. Mau is a practicing attorney in Hawaii
specializing in real estate and serves as an officer and/or director of various
organizations including Hawaii National Bank Overseas Investors, Inc., Henry H.
Wong Foundation and the Waialae Country Club, among others. Mr. Mau is a
graduate of Lafayette College (B.A. Economics) and New York Law School (J.D.).
Charles P. Spira has been a member of the Board of Directors since
October 1997. Mr. Spira is President of Pacific View Management, Inc., a firm
which is engaged in real estate development and national television
syndications. He has also served on the long-range planning committee of the
Board of Directors of St. Joseph Medical Center Foundation and as Chief
Financial Officer of Newport Communications International, Inc. Mr. Spira is a
Certified Public
22
<PAGE>
Accountant whose career included managing the tax department of Arthur
Anderson & Company in Los Angeles.
The above-mentioned directors will hold these offices until the next
annual shareholders meeting.
To the best knowledge and belief of the Company, each of the directors,
officers or beneficial owners of more than 10% of the Company's securities named
herein has filed all reports required to be filed by Section 16(a) of the
Securities Exchange Act of 1934.
At a meeting of the Board of Directors on March 7, 2000, the Board
confirmed the appointment of Mr. Edward T. Foley as Executive Vice President and
Chief Financial Officer. He had been serving as a consultant to the Company
since October 1999. He replaces Mr. Ronald L. Ilsley as Chief Financial Officer.
Most recently, Mr. Foley held a similar position at C. Brewer Homes,
Inc., a publicly held land development company based in Hawaii. His background
includes senior-level financial positions with Hawaii companies: Castle & Cooke,
Inc. and Dole Food Company, Inc. Mr. Foley is a Certified Public Accountant and
holds a bachelor of science degree in Accountancy from the University of
Illinois.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
its named executive officers or directors for services rendered in all
capacities to the Company during the fiscal year ended January 31, 2000. During
the fiscal year ended January 31, 2000, no executive officer received
compensation in excess of $100,000 for services rendered in all capacities to
the Company and no officer or director held any stock options, or received any
other form of non-cash compensation.
<TABLE>
<CAPTION>
Name Position Held Compensation
<S> <C> <C>
Ernest K. Dias President, $ 45,833
Chief Operating Officer
23
<PAGE>
Ronald L. Ilsley Chief Financial Officer $ 50,000
</TABLE>
The Company had no employment contracts with any of its officers or
directors during the fiscal year ended January 31, 2000. In addition, the
Company's directors do not receive any cash compensation for service on the
Board of Directors, but are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 15, 2000, with
respect to the beneficial ownership of the Company's common stock by: (i) each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Company's common stock; (ii) each director; (iii) named executive officers;
and (iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
Unity House Inc. 600,000 13.78 %
444 Hobrun Lane
Honolulu, HI 96815
John Chen 538,500 12.36%
2137 Kahala Circle
Castle Rock, CO 80104
J A Garcia &
Ruth E. Garcia 405,000 9.31 %
16105 Woodvale Road
Encino, CA 91436
Ernest K. Dias 300,000 6.89 %
3375 Koapaka St, Ste. H402
Honolulu, HI 96819
24
<PAGE>
Hibiscus Investments, Inc. 280,000 6.43 %
9010 Miramar Road, Suite 100
San Diego, CA 92126
Ronald L. Ilsley 150,000 3.44%
1014 Riverside Dr.
Burbank, CA 91506
Gordon J. Mau 148,000 3.40 %
1000 Bishop Street, Suite 303
Honolulu, HI 96813
Charles S. Spira 74,000 1.70 %
2700 Neilson Way, Apt 1721
Santa Monica, CA 90405
Directors and named
named executive officers
as a group ( 5 persons) 1,210,500 27.79 %
</TABLE>
The foregoing table does not take into account 1,224,000 shares which may
be acquired by the named directors upon exercise of outstanding Class A Common
Stock Purchase Warrants which expire December 31, 2001. Such Class A warrants
constitute "restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933, and accordingly, may not be sold or transferred by the
holders thereof in the absence of an effective registration statement or an
opinion of counsel satisfactory to the Company that a proposed transfer does not
violate applicable securities laws.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended January 31,
2000.
b. Exhibits.
25
<PAGE>
Exhibit No. Document Description
3.1 Articles of Incorporation (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997)
3.2 Bylaws of the Registrant (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997)
4.1 Warrant Agent Agreement (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997).
10.1 Convertible Debenture Subscription Agreement, dated March 22, 2000,
between the Registrant and Hibiscus Investments, Inc.
10.2 Negative Pledge Agreement, dated March 29, 2000, between the Registrant
and Hibiscus Investments, Inc.
21 List of Subsidiaries (incorporated by reference to Form 10-KSB/A filed
with the Securities and Exchange Commission on behalf of the Company on
May 13, 1997).
23 Consent of Carpenter, Kuhen & Sprayberry
27 Financial Data Schedule.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereto duly authorized.
Controlled Environment Aquaculture Technology, Inc.
(Registrant)
By:/s/_____________________
Ernest K. Dias, President and Chief Operating Officer and Director
Date: May 16, 2000
Pursuant to the requirements of the Securities Act of 1934, 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 Title Date
By:/s/____________ Chairman of the Board May 16, 2000
Gordon J. Mau
By:/s/____________ President and Chief May 16, 2000
Ernest K. Dias Officer and Director
(principal executive officer)
By:/s/____________ Executive Vice President May 16, 2000
Edward T. Foley and Chief Financial Officer
(principal financial and accounting officer)
By:/s/____________ Director May 16, 2000
John Chen
By:/s/____________ Director May 16, 2000
Charles P. Spira
- -----------------
Ronald L. Ilsley Director May 16, 2000
27
<PAGE>
Controlled Environment Aquaculture Technology, Inc.
Index to Consolidated Financial Statements
The following consolidated financial statements of Controlled
Environment Aquaculture Technology, Inc.
are included in Item 8 of the Form 10-KSB for the year ended January 31, 2000.
<TABLE>
<S> <C>
Independent Certified Public Accountants' Report
and Consent F-2, F-3
Consolidated Balance Sheet - January 31, 2000 F-5
Consolidated Statements of Operations - Years ended
January 31, 2000 and 1999 F-7
Consolidated Statements of Cash Flows - Years ended
January 31, 2000 and 1999 F-8
Consolidated Statements of Stockholders' Equity - Years
ended January 31, 2000 and 1999 F-10
Notes to Consolidated Financial Statements - January 31, 2000 F-13
</TABLE>
F-1
<PAGE>
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation of our report dated February 21,
2000 in this Form 10-KSB, related to the consolidated financial statements of
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries.
/s/ Carpenter, Kuhen & Sprayberry
Oxnard, California
May 12, 2000
F-2
<PAGE>
Independent Certified Public Accountants' Report
To the Board of Directors and Stockholders
Controlled Environment Aquaculture Technology, Inc.
We have audited the accompanying consolidated balance sheet of Controlled
Environment Aquaculture Technology, Inc. and Subsidiaries as of January 31,
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended January 31, 2000 and 1999. 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 audits.
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 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 audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Controlled Environment
Aquaculture Technology, Inc., and Subsidiaries as of January 31, 2000, and the
consolidated results of their operations and their cash flows for the years
ended January 31, 2000 and 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. As discussed in Note 3 to the
consolidated financial statements, for the year ended January 31, 2000, the
Company incurred a loss from operations of $1,442,564, and at January 31, 2000
the Company had a retained deficit of $3,805,713 which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to those matters are described in Note 3. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
F-3
<PAGE>
/s/ Carpenter, Kuhen & Sprayberry
Oxnard, California
February 21, 2000,
except as to Note 15, which is as of March 22, 2000
F-4
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
January 31,
2000
Assets
<S> <C>
Current Assets:
Cash $ 213,935
Restricted cash 329,292
Accounts receivable,
net of allowance for
doubtful accounts
of $20,000 276,413
Inventory 579,621
Other current assets 44,452
Total current assets 1,443,713
Property, plant and
equipment - net 4,668,925
Other assets 52,500
Total Assets $ 6,165,138
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 391,188
Accrued expenses 50,358
Notes payable 275,000
Revolving line of credit 235,000
Current portion of
long-term debt 325,656
Other current liabilities 14,799
Total current liabilities 1,292,001
Long-term debt $ 2,705,481
Commitments and contingencies --
F-5
<PAGE>
<S> <C>
Stockholders' Equity:
Preferred stock at $100 par value:
10,000,000 shares authorized, none
issued and outstanding
Common stock at no par value:
100,000,000 shares authorized
4,355,450 issued and outstanding 5,765,044
Additional paid-in capital 208,325
Retained deficit (3,805,713)
Total stockholders' equity 2,167,656
Total liabilities and
stockholders' equity $ 6,165,138
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended January 31,
2000 1999
<S> <C> <C>
Sales $ 2,096,372 $ 372,529
Cost of sales 2,188,265 349,955
Gross margin (91,893) 22,574
General and administrative expenses
1,350,671 1,297,984
Loss from operations (1,442,564) (1,275,410)
Other income 15,653 --
Interest income 13,133 27,609
Interest expense (167,000) (2,728)
Loss before cumulative effect of a change in
accounting principle (1,580,778) (1,250,529)
Cumulative effect of change in accounting
principle -- (98,189)
Net loss $(1,580,778) $(1,348,718)
Basic and diluted loss per common share:
Loss before cumulative effect of a change in
accounting principle (0.37) (0.35)
Cumulative effect of a change in accounting
principle -- (0.03)
Net loss per common
share $ (0.37) $ (0.38)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended January 31,
2000 1999
<S> <C> <C>
Operating activities
Net loss $(1,580,778) $(1,348,718)
Adjustments to reconcile
net loss to net cash used in operating activities:
Depreciation 295,760 228,687
Asset impairment loss 43,500 --
Common stock issued as
employee compensation 123,250 --
Cumulative effect of a change
in accounting principle -- 98,189
Net changes in operating
assets and liabilities:
Accounts receivable (224,048) (39,706)
Inventory 80,319 (407,496)
Other current assets 59 (21,326)
Other assets 1,900 (55,900)
Accounts payable 161,545 222,138
Accrued expenses (20,141) 57,938
Other current liabilities (43,139) 29,538
Net cash used in operating
activities (1,161,773) (1,236,656)
Investing activities
Capital expenditures (569,658) (3,178,334)
Net cash used in investing
activities (569,658) (3,178,334)
Financing activities
Restricted cash used (provided)
for a specific purpose 45,539 (374,831)
Proceeds from sale of common
stock units 600,000 1,666,250
Conversion of Class A warrants 400,000 --
Proceeds from notes payable 275,000 --
F-8
<PAGE>
<S> <C> <C>
Proceeds from issuance
of debt 512,891 2,429,128
Borrowing from revolving
line of credit 60,000 175,000
Principal payments on long-term
debt (9,843) (13,750)
Payment of preferred stock
dividend -- (20,625)
Collection of common stock
subscription receivable -- 80,000
Net cash provided by financing
activities 1,883,587 3,941,172
Change in cash and cash
equivalents 152,155 (473,818)
Cash and cash equivalents
at beginning of year 61,780 535,598
Cash and cash equivalents
at end of year $ 213,935 $ 61,780
Supplemental cash flow information:
Common stock issued for capital
expenditures $ 89,250 $ --
Loan to purchase equipment $ 98,962 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Page 1 of 2
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance at January 31, 1998 5,000 $ 495,800 2,939,450 $2,592,544
Preferred stock dividends
($4.125 per share) -- -- -- --
Issuance of common stock units -- -- 716,000 1,666,250
Conversion of preferred stock (5,000) (495,800) 250,000 500,000
Net loss -- -- -- --
Balance at January 31, 1999 -- -- 3,905,450 4,758,794
Common stock issued in
accordance with Sunkiss
Shrimp Co. acquisition agreement -- -- 100,000 212,500
Issuance of common stock units -- -- 150,000 393,750
Conversion of Class A warrants -- -- 200,000 400,000
Net loss -- -- -- --
Balance at January 31, 2000 -- -- 4,355,450 $5,765,044
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Page 2 of 2
Additional Total
paid-in Retained Stockholders'
capital Deficit Equity
<S> <C> <C> <C>
Balance at January 31, 1998 $ 2,075 $ (851,392) $ 2,239,027
Preferred stock dividends
($4.125 per share) -- (20,625) (20,625)
Issuance of common stock units -- -- 1,666,250
Conversion of preferred stock -- (4,200) --
Net loss -- (1,348,718) (1,348,718)
Balance at January 31, 1999 2,075 (2,224,935) 2,535,934
Common stock issued in
accordance with Sunkiss
Shrimp Co. acquisition
agreement -- -- 212,500
Issuance of common stock units 206,250 -- 600,000
Conversion of Class A warrants -- -- 400,000
Net loss -- (1,580,778) (1,580,778)
Balance at January 31, 2000 $ 208,325 $(3,805,713) $ 2,167,656
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2000
1. ORGANIZATION
Controlled Environment Aquaculture Technology, Inc. ("the Company"),
formerly known as Global Capital Access Corporation, was incorporated under the
laws of the State of Colorado on January 19, 1995.
The Company was a development stage company from its inception in
January 1995 to February 1999. During this period, the Company's efforts were
focused primarily on capital formation, planning and design of its advanced
technology shrimp aquaculture facilities, location and acquisition of its
hatchery and farm sites, and construction and equipping of its present hatchery
and growout facilities. Sale of the Company's hatchery products, high health
broodstock and post larvae "seed" animals, began in 1998. Sales of comestible
product raised in the Company's farm growout facilities began in February 1999.
At present, the Company is concentrating on two aspects of the overall
shrimp aquaculture business: (i) the development of a large, modern shrimp farm
operation for the production, preparation, packaging and distribution of premium
quality Pacific white shrimp; and (ii) the breeding, rearing and sale of high
health hatchery products, primarily broodstock and post larvae "seed" stock, to
commercial shrimp operations throughout the world. In its own aquaculture farm
operations located in Hawaii on the Island of Kauai, the Company utilizes highly
advanced technologies for intensive, sustainable shrimp aquaculture farming
which were developed as part of the U.S. Shrimp Farming Program sponsored by the
U.S. Department of Agriculture. Moreover, these technologies evolved from years
of research and practical experimentation conducted within the USDA program by,
among others, several of the Company's key technical, managerial and operations
personnel.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of
F-12
<PAGE>
Controlled Environment Aquaculture Technology, Inc. and its wholly owned
subsidiaries, Ceatech HHGI Breeding Corp., Ceatech Plantations, Inc., Sunkiss
Shrimp Co., Ltd., and Hawaii High Health Seafood Corp. Significant intercompany
transactions and amounts have been eliminated in consolidation.
Revenue Recognition
Revenue from the sale of the Company's broodstock and farm shrimp is
recognized upon shipment of the product at which time title passes to the
customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying value of certain of the Company's financial instruments,
including cash, accounts receivable and accounts payable approximates fair value
due to the relatively short maturity of such instruments. The carrying value of
the Company's borrowings under its short-term notes payable, revolving line of
credit and long-term debt instruments approximate fair value based on
discounting the projected cash flows using market rates available for similar
maturities. None of the Company's financial instruments are held for trading
purposes.
Concentration of Credit Risk - Cash
The Company maintains its cash balances in financial institutions
located in Honolulu, Hawaii. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout the year ended
January 31, 2000, the Company maintained balances in excess of federally insured
limits. The Company's uninsured balances totaled $261,146 at January 31, 2000.
F-13
<PAGE>
Major Customers
The Company had four major customers which accounted for approximately
60% of sales during the year ended January 31, 2000 and approximately 80% of
accounts receivable at January 31, 2000. During the year ended January 31, 1999,
three major customers accounted for approximately 50% of sales.
Development Stage Company
The Company is no longer an enterprise in the development stage as
defined by Statement of Financial Accounting Standards No. 7 - Accounting and
Reporting by Development Stage Enterprise.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all investment instruments purchased with a maturity of three months
or less to be cash. No such investment instruments existed at January 31, 2000.
Restricted Cash
Restricted cash includes, (i) a $250,000 certificate of deposit pledged
as security for repayment of the outstanding revolving line of credit with
Central Pacific Bank and, (ii) retention of certain undisbursed construction
costs in connection with the Bank of America construction loan, which funds are
to be released when construction is complete and final inspection is done.
Accounts Receivable
The allowance for doubtful accounts is established through a provision
for bad debt charged to expense. Receivables are charged off against the
allowance when management believes that the collection of the account is
unlikely. Recoveries of amounts previously charged off are recorded as revenues.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in first-out method. Costs include proportionate costs of
broodstock, plus the cost of maintenance to maturity.
F-14
<PAGE>
Inventory at January 31, 2000 was composed of the following:
Shrimp held for sale:
Broodstock $ 45,673
Farm Shrimp 21,981
Shrimp in maturation process 414,293
Supplies 97,674
$579,621
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation of
property, plant and equipment are provided using both the straight-line and
declining-balance methods over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
<S> <C>
Ponds 10-20 Years
Land improvements 15-39 Years
Buildings 20-39 Years
Agricultural equipment 7-10 Years
Office furniture and fixtures 5-7 Years
Vehicles 5 Years
</TABLE>
<TABLE>
<CAPTION>
Property, plant and equipment at January 31, 2000 consisted of the following:
<S> <C>
Ponds 1,920,840
Land improvements 1,428,184
Buildings 929,048
Agricultural equipment 725,080
Office furniture and
fixtures 118,036
F-15
<PAGE>
<S> <C>
Vehicles 71,767
5,192,955
Less - Accumulated
depreciation (524,030)
4,668,925
</TABLE>
Interest Expense
The Company follows the policy of capitalizing interest as a component of the
cost of property, plant and equipment constructed for its own use. Total
interest costs incurred were as follows:
<TABLE>
<CAPTION>
Year ended January 31,
2000 1999
<S> <C> <C>
Interest capitalized to property,
plant and equipment $124,881 $ 35,525
Interest expense 167,000 2,728
Total interest costs incurred $291,881 $ 38,253
Interest paid $106,028 --
Income Taxes
</TABLE>
The Company files a consolidated federal income tax return. The
subsidiaries pay to or receive from the parent company the amount of federal
income taxes they would have paid or received had the subsidiaries filed
separate federal income tax returns.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Net Loss Per Share
Loss per share calculations are in accordance with Statement of
Financial Standards No. 128-Earnings Per Share. Basic loss per share is
calculated by dividing net loss by the weighted average number of common shares
outstanding for the year. Diluted loss per share is
F-16
<PAGE>
computed by dividing net loss by the weighted average number of common shares
outstanding plus the dilutive effect, if any, of the outstanding Class A
warrants. The basic and diluted loss per share calculations are the same
because potentially dilutive Class A warrants had an antidilutive effect for
the years ended January 31, 2000 and 1999. Basic net loss per share is based
on the weighted average number of common shares outstanding of 4,254,628 and
3,547,158 at January 31, 2000 and 1999, respectively.
Reclassifications
Certain reclassifications of prior years' financial statements have
been made to conform to the current year's presentation.
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, therefore, do
not include any adjustments relating to the recoverability of assets and
satisfaction of liabilities that might result should the Company be unable to
continue as a going concern. As shown in these consolidated financial
statements, the Company has sustained net losses of approximately $1.6 million
and $1.3 million for the years ended January 31, 2000 and 1999, respectively,
and at January 31, 2000, had a retained deficit of approximately $3.8 million.
In addition, the Company has experienced negative cash flows from operations of
approximately $1.2 million for each of the two fiscal years ended January 31,
2000. These factors, among others, may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time.
Management believes that the continued existence of the Company is
dependent upon its ability to obtain external financing in order to construct
additional growout ponds and to fund working capital requirements. Therefore, it
is currently management's intent to obtain the outside financing necessary to
construct 20 more growout ponds and to fund the Company's working capital
requirements during the construction period by way of an equity offering,
additional debt financing, or some combination thereof. There can be no
assurance that the Company will be able to obtain such financing on satisfactory
terms. Failure to obtain such financing on acceptable terms could have a
material adverse effect on the Company's business, operating results and
financial condition.
F-17
<PAGE>
4. NOTES PAYABLE
On March 1, 1999, a stockholder of the Company advanced the Company
$50,000. This promissory note, as extended, is due and payable on August 2,
2000, together with interest on any unpaid balance thereof at an annual interest
rate of 10%. This promissory note may be prepaid in whole or in part at any time
without penalty.
On November 2, 1999, a stockholder of the Company advanced the Company
$225,000. This promissory note, as extended, is due and payable on August 2,
2000, together with interest on any unpaid balance thereof at an annual interest
rate of 9.75%. This promissory note may be prepaid in whole or in part at any
time without penalty.
5. REVOLVING LINE OF CREDIT
The Company has a $235,000 revolving line of credit, of which $235,000
was outstanding at January 31, 2000, with Central Pacific Bank, secured by
$250,000 certificate of deposit, with an interest rate of 1.5% over CD rate. The
amount is due May 5, 2000.
6. LONG-TERM DEBT
On September 9, 1998, the Company entered into a construction loan
agreement ("Construction Loan") with the Bank of America which provided for
advances of up to a maximum principal amount of $3,000,000. The proceeds from
the Construction Loan were used to construct certain improvements, including
self-constructed growout ponds, buildings and other land improvements on real
property owned in leasehold by the Company. The United States Department
Agriculture, Rural Business-Cooperative Service has provided the Bank of America
with a guarantee of up to 90% of the principal and interest as a result of any
loss. In addition, the Company has pledged substantially all of its assets as
collateral for the loan.
The Construction Loan Agreement permits the Company to repay the amount
over a period of seven years following the initial due date if the Company
satisfies certain conditions, which are substantially met. The Company intends
to convert the Construction Loan to a Permanent Loan in accordance with the loan
agreement. The Permanent Loan would provide for monthly payments over seven
years and a balloon payment may be due at the end of the seven year amortization
period. Upon conversion, interest is payable at 2% over
F-18
<PAGE>
the Bank of America Reference Rate for the first two years. Thereafter, the
bank may, at its option, offer the following interest rate options: a)
Floating Rate (Reference Rate plus 1.75%); b) adjustable rate based on a
one-year Constant Maturities Treasury Index plus 2.75%; or c) six month jumbo
certificate of deposit rate plus 2.5%.
As of January 31, 2000, the principal balance outstanding on the
Construction Loan was $2,942,019 and the improvements substantially complete.
The current annual interest rate on the Construction Loan is Bank of America's
Reference Rate plus 2.0%. For the year ended January 31, 2000, the weighted
average interest rate was 10.5%.
Under the terms of the Construction Loan, the Company must, among other
things; 1) maintain a minimum tangible net worth of $2,000,000; 2) not declare
or pay out any dividends to its shareholders during the term of the loan; 3) not
repurchase treasury stock or make cash transfers to stockholders, and 4) not
exceed a ratio of 1.7 to 1 of total senior liabilities to total net worth.
Future maturities for the Construction Loan are as follows:
<TABLE>
<S> <C>
Years ending January 31, 2001 $ 308,227
2002 339,659
2003 374,297
2004 412,467
2005 and thereafter 1,507,369
$ 2,942,019
</TABLE>
Equipment Loan
In June 1999, the Company entered into an installment sale contract
with Pacific Machinery, Inc. to acquire two Caterpillar generators for $116,400
with a cash down payment of $17,400. The installment loan, which is secured by
the generators, was provided by Caterpillar Financial Services Corporation and
is payable in 60 equal monthly installments of $2,030 with interest at 8.5%.
Future maturities for equipment loan are as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
Years Ending January 31,
<S> <C>
2001 $ 17,429
2002 18,970
2003 20,647
2004 22,471
2005 and thereafter 9,640
$ 89,157
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases approximately 140 acres of land from the State of
Hawaii. The lease has a 45-year term, which expires on December 31, 2043. Base
rent is set for the first 15 years of the lease term. Additional rent due is any
amount in excess of the base rent up to 3% of gross proceeds from the sale of
commodities produced on the land. The rent amounts are to be re-determined every
10th year of the lease. The Company also leases land from the State of Hawaii.
The lease has a 35-year term, which expires on July 31, 2029. Rent is the
greater of $800 per year or 3% of gross receipts. The rent amounts are to be
re-determined every 10th year of the lease. In addition, the Company leases
office space in Honolulu under a noncancellable operating lease. Rent expense
under these leases was $34,003 and $3,076 during the years ended January 31,
2000 and 1999, respectively.
Minimum future payments required under noncancellable leases with
remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Land Leases Office Lease
Years ending January 31,
<S> <C> <C>
2001 $ 13,089 $ 18,456
2002 13,089 18,456
2003 13,089 18,456
2004 13,089 15,380
2005 and thereafter 497,847 -
$ 550,203 $ 70,748
</TABLE>
F-20
<PAGE>
8. STOCKHOLDERS' EQUITY
The Company has authorized 100 million shares of no par value common
stock. Each share entitles the holder to one vote. There are no dividend or
liquidation preferences, participation rights, call prices or rates, sinking
fund requirements, or unusual voting rights associated with these shares. As of
January 31, 2000, the Company had 4,355,450 shares of common stock outstanding.
In addition, as of January 31, 2000, the Company had outstanding
2,760,149 Class A Common Stock Purchase Warrants ("Class A warrants")
exercisable at $2.00 per share. The Company reserves the right to extend the
expiration date or reduce the exercise price of any or all classes of warrants
upon giving five days notice. The warrants can only be exercised when a current
registration statement is on file.
The Company has 10,000,000 shares of preferred stock authorized. Under
the terms of the Articles of Incorporation, the Board of Directors may issue
preferred stock for any proper corporate purpose. In approving any issuance, the
Board has the broad authority to determine rights, privileges, and preferences
of the preferred stock, which may be issued as more than one class or series.
The rights, privileges, and preferences may include voting, dividend,
conversion, redemption, participation, and liquidation rights. As of January 31,
2000 and 1999, no preferred stock was issued or outstanding.
In May 1999, an existing stockholder purchased an additional 150,000
common stock units at $4.00 per unit. Each common stock unit consists of one
share of the Company's common stock and one Class A warrant to purchase one
additional share of common stock at a price of $2.00 through December 31, 2001.
Total proceeds to the Company were $600,000, which were primarily used for
working capital purposes.
In May 1999, in accordance with the terms of an Agreement and Plan of
Reorganization dated as of January 14, 1997 (the "Sunkiss Agreement") between
the Company and Sunkiss Shrimp Co., Ltd. ("Sunkiss") with regard to conditional
performance shares, the Company issued 100,000 shares of its common stock for no
cash consideration to the two former shareholders of Sunkiss, who are currently
employees of the Company. The transaction was accounted for according to
Accounting Principles Board No. 25, which states that
F-21
<PAGE>
the common stock issued is valued at the fair market value of the stock on
the date of issuance. The fair market value of the stock at date of issuance
was $21/8 per share, as determined by the closing price of the Company's
stock. Such shares are subject to Rule 144 under the Securities Act of 1933,
and accordingly, may not be sold or transferred by the holders thereof in the
absence of an effective registration statement or an opinion of counsel
satisfactory to the Company that a proposed transfer does not violate
applicable securities laws.
The Company is currently contemplating an additional equity offering.
The issuance of this additional equity may further dilute the interests of the
current stockholders and could reduce their proportionate ownership and voting
power in the Company.
9. RESTRICTIONS ON DIVIDENDS
The terms of the construction loan payable to Bank of America restrict
the declaration and payment of dividends during the time the loan is
outstanding. The loan is expected to be paid by September 2006.
10. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses shown on the statement of
operations consist of the following:
<TABLE>
<CAPTION>
Year ended January 31,
2000 1999
<S> <C> <C>
Wages $ 595,121 $ 503,116
Legal and accounting 105,807 129,866
Travel 94,406 122,781
Insurance 78,571 131,624
Rent 72,172 41,247
Depreciation 57,713 54,030
Professional and
consulting fees 55,596 100,319
Utilities 55,329 32,112
Advertising 49,472 84,863
Asset impairment loss 43,500 --
F-22
<PAGE>
<S> <C> <C>
Supplies 39,177 27,682
Equipment rental 35,361 12,053
Repairs and maintenance 26,916 15,647
Other 41,530 42,644
$1,350,671 $1,297,984
</TABLE>
During the year ended January 31, 2000, the Company determined that
certain non-inventory assets had no value and, accordingly, recognized an asset
impairment loss of $43,500.
11. PENSION PLAN
The Company has a qualified profit sharing plan with a 401(k) deferred
compensation provision. All employees who are at least 21 years of age and have
completed one year of service or were full-time employees at the time of
adoption are eligible to participate. Participating employees may contribute up
to 15% of their annual compensation, limited to an annual maximum amount as set
periodically by the Internal Revenue Service. The Company may match a portion of
the employee contributions on a discretionary basis, determined on an annual
basis. During the years ended January 31, 2000 and 1999, the Company did not
make a matching contribution. Employees are immediately vested in their own
contributions.
12. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes.
Under SFAS No. 109, deferred income tax assets and liabilities are determined
based on the temporary differences between the financial statement and income
tax basis of assets and liabilities using enacted income tax rates for the year
in which the temporary differences are expected to reverse. Deferred income tax
expenses or credits are based on changes in the deferred income tax assets or
liabilities from period to period.
Deferred income tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods and for loss
carryforwards. Deferred income tax liabilities may be recognized for temporary
differences that will result in taxable amounts in future periods. A valuation
allowance is recognized if, based on the available evidence, it is more likely
than not that some
F-23
<PAGE>
portion or all of the deferred tax asset will not be realized. Due to the
ongoing nature of losses and the potential inability of the Company to
realize a benefit from such losses, a valuations allowance has been
established for all of the deferred income tax asset. If the Company achieves
profitability at a future date, some or all of the deferred income tax asset
may be realized.
A reconciliation of the Company's reported income taxes to the
statutory federal rate is as follows:
<TABLE>
<CAPTION>
Years ended January 31,
2000 1999
<S> <C> <C>
Computed federal
statutory taxes $ 553,272 $ 437,536
State income taxes, net
of federal tax benefit 101,170 80,007
Other (1,867) (15,547)
Valuation allowance (652,575) (501,996)
</TABLE>
$ - $ -
The primary components of temporary differences which give rise to
deferred taxes at January 31, 2000, are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward $1,571,318
Difference between tax and
book basis of property,
plant and equipment (177,347)
Other timing differences 45,004
Deferred tax valuation
allowance (1,438,975)
$ -
</TABLE>
At January 31, 2000, an operating loss carryforward of approximately
$3,500,000 expiring in various years through 2019 is available to offset future
taxable income for financial reporting purposes.
13. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
F-24
<PAGE>
PRINCIPLE
In 1998, the Accounting Standard Executive Committee of the American
Institute of Certified Public Accountants issued Statement on Position 98-5
Reporting on the Costs of Startup Activities. This statement requires that costs
of startup activities, including organizational costs, be expensed as incurred.
Any costs previously capitalized are required to be written off in the current
year. The effect of this change was to increase the net loss for the year ended
January 31, 1999 by $98,189 or $.03 per share.
14. SEGMENT REPORTING
During the year ended January 31, 2000, the Company had two reportable
segments: broodstock and consumable shrimp. The broodstock segment sells adult,
breeding shrimp and the farm shrimp segment produces and sells shrimp for
consumption. In prior years the farm shrimp segment was not significant to the
Company. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately because each segment requires different
technology and marketing strategies.
The following financial information relates to the Company's business
segments for the fiscal year ended January 31, 2000:
<TABLE>
<CAPTION>
Broodstock Farm Shrimp Total
<S> <C> <C> <C>
Operations data:
Sales $ 545,910 $ 1,550,462 $ 2,096,372
Cost of Sales 238,954 1,949,311 2,188,265
Gross margin 306,956 (398,849) (91,893)
General and administrative
expenses 130,701 1,219,970 1,350,671
Income (loss) from
operations 176,255 (1,618,819) (1,442,564)
Other income -- 15,653 15,653
Interest income 871 12,262 13,133
Interest expense (838) (166,162) (167,000)
Net income (loss) $ 176,288 $(1,757,066) $(1,580,778)
Supplemental financial data:
F-25
<PAGE>
<S> <C> <C> <C>
Depreciation $ 49,532 $ 246,228 $ 295,760
Capital expenditures $ -- $ 569,658 $ 569,658
</TABLE>
15. SUBSEQUENT EVENT
On March 22, 2000, the Company entered into a convertible debenture
subscription agreement ("Subscription Agreement") with Hibiscus Investments,
Inc., an existing shareholder, for the issuance of two 7.75% convertible
subordinated debentures of $500,000 ("Debenture") each within twelve months of
the date of the Subscription Agreement. The Debentures are due and payable on or
before March 22, 2007 with interest payable quarterly on the outstanding
balance. Such debentures entitle the holder to convert the debenture, together
with accrued but unpaid interest thereon, into fully paid and nonassessable
units, each of which consists of one share of common stock and one Class A
Common Stock Purchase Warrant entitling the holder thereof to purchase an
additional share of common stock at a price of $2.00 within two years of the
date of issuance of the warrant. The conversion price shall be equal to $1.00
per unit. The conversion of the Debentures into common stock may further dilute
the interests of the current stockholders and could reduce their proportionate
ownership and voting power in the Company. As of January 31, 2000, there were no
convertible debentures outstanding.
F-26
<PAGE>
Exhibit Index
Exhibit No. Document Description
3.1 Articles of Incorporation (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997)
3.2 Bylaws of the Registrant (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997)
4.1 Warrant Agent Agreement (incorporated by reference to Form 10-KSB/A
filed with the Securities and Exchange Commission on behalf of the
Company on May 13, 1997).
10.1 Convertible Debenture Subscription Agreement, dated March 22, 2000,
between the Registrant and Hibiscus Investments, Inc.
10.2 Negative Pledge Agreement, dated March 29, 2000, between the Registrant
and Hibiscus Investments, Inc.
21 List of Subsidiaries (incorporated by reference to Form 10-KSB/A filed
with the Securities and Exchange Commission on behalf of the Company on
May 13, 1997).
23 Consent of Carpenter, Kuhen & Sprayberry
27 Financial Data Schedule.
F-27
<PAGE>
Exhibit 10.1 - Convertible Debenture Subscription Agreement
CONVERTIBLE DEBENTURE SUBSCRIPTION AGREEMENT
This is an AGREEMENT between CONTROLLED ENVIRONMENT AQUACULTURE
TECHNOLOGY, INC., a Colorado corporation ("Ceatech") and HIBISCUS INVESTMENTS,
INC., a California corporation ("Hibiscus") for the purchase by Hibiscus of not
more than two 7.75% Convertible Subordinated Debentures of $500,000.00 each (the
"Debentures"), to be issued by Ceatech at such time or times as Ceatech may
determine within twelve months after the date hereof, and to be due and payable
on or before seven years after the date of this Agreement.
In consideration of the mutual promises and covenants herein contained,
the parties hereby agree, represent and warrant as follows:
1. SUBSCRIPTION. By execution of this Agreement, Hibiscus hereby
subscribes for not more than two Debentures. Debentures shall be issued at such
time or times as Ceatech may determine at any time within twelve months after
the date hereof, only in denominations of $500,000.00. Hibiscus agrees that upon
receipt of not less than thirty days prior written notice from Ceatech of its
election to issue a Debenture, it will tender to Ceatech, in cash or other form
of immediately available funds, sufficient funds for purchase of the portion of
such Debentures to be issued. Within three business days following receipt by
Ceatech of the purchase funds, Ceatech shall issue to Hibiscus a Debenture
substantially in the form attached hereto. The commitment of Hibiscus to
purchase up to two Debentures as aforesaid shall expire twelve months after the
date of this Agreement.
2. ACCEPTANCE. By execution of this Agreement, Ceatech accepts the
subscription of Hibiscus to purchase Debentures, and Ceatech agrees to tender
the Debentures purchased upon receipt of the proceeds therefor, subject to the
conditions described in paragraph 1 above.
3. CONSIDERATION. The consideration for each Debenture shall be 100%
of the face amount of the Debenture, or $500,000.00. Upon receipt by Hibiscus of
notice of Ceatech's election to issue a Debenture, Hibiscus shall pay the
consideration to Ceatech in cash or other form of immediately available funds.
1
<PAGE>
4. PURCHASER WARRANTIES: Hibiscus warrants and represents that:
(a) Hibiscus believes it has received all information it considers
necessary or appropriate for deciding whether to execute this Subscription
Agreement and subscribe for the purchase of the Debentures. Hibiscus has had the
opportunity to ask questions and receive answers from Ceatech regarding the
terms of the Debentures and regarding the business, properties, prospects and
financial condition of Ceatech, and Ceatech has made available to Hibiscus all
documents and information requested by Hibiscus.
(b) Hibiscus is experienced in evaluating and investing in securities
of companies in the development stage and acknowledges that it is able to fend
for itself and to bear the economic risk of the investment. Hibiscus has such
knowledge and experience in financial and business matter that it is capable of
evaluating the merits and risks of a subscription for purchase of Debentures,
and in making such evaluation, Hibiscus has relied only on its own analysis of
the merits and risks of the investment, and on the information and documents
provided by Ceatech pursuant to requests from Hibiscus therefor, if any.
(c) Hibiscus is an "accredited investor" as defined in Regulation D
promulgated by the Securities and Exchange Commission.
(d) Hibiscus is subscribing for the purchase of Debentures for its own
account for investment purposes, and not with a view to distribution or resale.
Hibiscus has no present intention of selling, granting any participation in, or
otherwise distributing the Debentures.
(e) Hibiscus understands and acknowledges that the Debentures (and any
Units, which represent shares of Common Stock and Class A Common Stock Purchase
Warrants, issued upon conversion of the Debentures) will constitute "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933. Accordingly, Hibiscus acknowledges that the Debentures (and any Units,
which represent shares of Common Stock and Class A Common Stock Purchase
Warrants, issued upon conversion of the Debentures) may not be sold,
transferred, or otherwise disposed of in the public market without registration
under the Securities Act of 1933 and applicable state securities laws, or an
exemption therefrom, unless restrictions under said Rule 144 have expired.
2
<PAGE>
(f) The person executing this Agreement on Hibiscus's behalf has been
duly authorized by Hibiscus to execute and deliver this Agreement to Ceatech on
behalf of Hibiscus and to bind Hibiscus to the terms of this Agreement.
5. PURCHASER NOTICE AND DELIVERY. All notices to Hibiscus required
or permitted to be given hereunder and all delivery of Debentures to Hibiscus
pursuant to Paragraph 1 of this Agreement shall be deemed to be given when
personally delivered or sent by certified mail, return receipt requested,
addressed to Hibiscus at:
Hibiscus Investments, Inc.
9010 Miramar Road, Ste. 100
San Diego, CA 92126
Attention:
or at such address of which Ceatech has received notice pursuant to Section 5 of
this Agreement.
6. COMPANY NOTICE. All notices to Ceatech required or permitted
hereunder shall be deemed to given when personally delivered or sent by
certified mail, return receipt requested, addressed to Ceatech at:
1000 Bishop Street
Suite 303
Honolulu, Hawaii 96813
Attention: Edward T. Foley or Gordon J. Mau
or at such other address of which Hibiscus has received notice pursuant to
Section 5 of this Agreement.
7. MISCELLANEOUS.
(a) Failure of Ceatech to exercise any right or remedy under this
Agreement or delay by Ceatech in exercising same will not be deemed as a waiver
thereof.
(b) This Agreement may be amended or modified only by written
instrument executed by both parties hereto.
(c) This Agreement shall be construed, governed and enforced in
accordance with the laws of the State of Hawaii.
3
<PAGE>
(d) This Agreement and the rights and obligations contained herein
shall be binding upon the parties hereto and their legal representatives,
successors and permitted assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement this
_______day of _____________, 2000.
CONTROLLED ENVIRONMENT HIBISCUS
AQUACULTURE TECHNOLOGY, INC. INVESTMENTS, INC.
By:______________________________ By:______________________________
Its Executive Vice President Its
By:______________________________ By:______________________________
Its Secretary Its
"Ceatech" "Hibiscus"
CONVERTIBLE SUBORDINATED DEBENTURE
No.______________________________ $ 500,000.00 _
CONTROLLED ENVIRONMENT AQUACULTURE TECHNOLOGY, INC.
(A Colorado Corporation)
Airport Industrial Park, 3375 Koapaka Street, Suite H402
Honolulu, Hawaii 96819
Dated as of ________, 2000. Convertible Subordinated Debenture
7.75% Interest
Due:__________________________
CONTROLLED ENVIRONMENT AQUACULTURE TECHNOLOGY, INC., a Colorado
corporation, hereinafter called "Ceatech", for value received, hereby promises
to pay to HIBISCUS INVESTMENTS, INC. ("Hibiscus"), or the registered holder
hereof, upon presentation of this Debenture at the office of Ceatech in the City
of Honolulu, Hawaii, United States of America, the principal sum of
4
<PAGE>
FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00), on or before the date
due set forth above, being eighty-four (84) months after the date of the
Subscription Agreement hereinafter described, in legal of the United States
of America, and to pay interest on the principal sum at the rate of seven and
three quarters of one percent (7.75%) per annum, from date of issue until
payment of the principal sum has been duly tendered. The interest so payable
hereunder shall be paid to the person in whose name this Debenture is
registered with Ceatech.
1. General. This Debenture is one of two duly authorized Debentures
of Ceatech, designated as its 7.75% Convertible Subordinated Debentures, (the
Debentures") limited to $1,000,000.00 aggregate principal amount, all issued or
to be issued, pursuant to the terms of a "Convertible Debenture Subscription
Agreement" dated March 22, 2000, between Ceatech and Hibiscus ("Subscription
Agreement"), and under and pursuant to exemptions from registration under the
Securities Act of 1933, pursuant to Section 3(b) and/or Section 4(2) thereof,
and pursuant to an exemption under Section 304 of the Trust Indenture Act of
1939.
This Debenture shall be signed on behalf of Ceatech by its President or a
Vice-President and by its Secretary or an Assistant Secretary. No instrument in
the form of this Debenture will be valid for any purpose unless it shall bear
such signatures, manually signed. Such signatures shall be conclusive evidence
that this Debenture was duly executed and delivered.
Interest shall be payable quarterly on the last day of each calendar
quarter during the term of this Debenture to the registered holder hereof on
each such date, as shown on registry maintained by Ceatech, unless and until
this Debenture is earlier redeemed or converted as hereinafter provided.
Ceatech shall keep a register in which, subject to such reasonable
procedures as it may prescribe, Ceatech shall register Debentures and shall
register the transfer of Debentures. Upon due presentment of any Debenture to
Ceatech for registration of transfer, Ceatech shall execute, register and
deliver in the name of the transferee or transferees a new Debenture for the
principal amount.
2. Redemption. This Debenture shall be redeemable at the option of
Ceatech only as a whole and not in part, on not less than 30 days nor more than
60 days notice at a price equal to 100% of the
5
<PAGE>
original purchase price, with all interest accrued to the redemption date.
Furthermore, if two Debentures have been issued pursuant to the Subscription
Agreement, redemption of the Debentures must be in the order of issuance.
In the event Ceatech intends to exercise its right to redeem this
Debenture, Ceatech shall fix a date for redemption and shall mail a notice of it
intent to redeem at least 30 but not more than 60 days prior to the date fixed
for redemption to the registered holder of the Debenture at the last address of
the holder, as it appears on Ceatech's register. Such mailing shall be by first
class mail. Notice, if mailed in the manner herein provided, shall be
conclusively presumed to have been duly given, whether or not the holder
receives such notice.
Each such notice of redemption shall specify the date fixed for
redemption, and shall state that the payment of the redemption price of the
Debenture, together with accrued interest to the date fixed for redemption,
shall be made at the principal office of Ceatech, or at such other place
designated by Ceatech, upon presentation and surrender of such Debenture, and
that from and after such date interest thereon will cease to accrue.
3. Conversion Privilege and Price. The registered holder of this
Debenture shall have the right, at the holder's option, at any time following
the date which is three months after the date of issuance and which is prior to
the date of payment of the full redemption price hereof, to convert the whole of
this Debenture, together with accrued but unpaid interest thereon, into fully
paid and nonassessable Units, each of which consists of one share of Ceatech
Common Stock and one Class A Common Stock Purchase Warrant entitling the holder
thereof to purchase an additional share of Ceatech Common Stock at a price of
$2.00 within two years of the date of issuance of the Warrant. The number of
Units into which this Debenture may be converted ("Conversion Units") shall be
determined by dividing the aggregate principal amount hereof, together with all
accrued interest to the date of conversion by the applicable Conversion Price
(as defined below) in effect at the time of such conversion. The Conversion
Price shall be equal to $1.00 per Unit.
In case this Debenture is called for redemption by Ceatech and payment of
the full redemption price hereof is duly tendered and made available to the
record holder of this Debenture in accordance with paragraph 2, the right of the
holder to convert this Debenture shall cease and terminate at the close of
business on the date fixed for
6
<PAGE>
redemption, whether or not the holder tenders this Debenture and accepts
payment.
In order to convert this Debenture into Units, the holder shall surrender
this Debenture at the principal office of Ceatech, accompanied by written notice
to Ceatech of the holder's election to convert. The written notice shall state
the name or names in which the certificate or certificates representing the
Conversion Units are to be issued. As soon as practicable thereafter, Ceatech
shall cause its transfer agent to issue and deliver to the person or entity
specified in the written notice of conversion, a certificate or certificates for
the proper number of shares of Ceatech Common Stock and Class A Common Stock
Purchase Warrants issuable upon conversion. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of
surrender of the Debenture and receipt by Ceatech of written notice of
conversion, and the person or entity entitled to receive the Conversion Units
shall be treated for all purposes as the record holder of thereof as of such
date.
No fractional shares of Units shall be issued upon conversion of this
Debenture. In lieu of issuing any fractional Units upon the conversion of this
Debenture, Ceatech shall pay in cash to the record holder any amount of
outstanding principal and accrued but unpaid interest which is not so converted.
Ceatech shall pay any and all transfer agent fees or other costs that may
be payable in respect of the issuance or delivery of Conversion Units to the
record holder hereof upon conversion of this Debenture. However, Ceatech shall
not be required to pay any transfer tax or other similar fee which may be
payable in respect of any transfer involved in the issuance or delivery of
Conversion Units in a name other than that in which the Debenture so converted
was registered.
Ceatech shall at all times reserve and keep available, out of its
authorized but unissued Common Stock and Class A Common Stock Purchase Warrants,
for the purpose of effecting the conversion of this Debenture, the full number
of Conversion Units then deliverable upon the conversion of this Debenture.
In the event that Ceatech issues any "Additional Shares of Common Stock"
(as hereinafter defined), at any time during the term of this Debenture and
prior to its conversion or redemption, an adjustment shall be made in the
Conversion Price of this Debenture.
7
<PAGE>
For purposes of this paragraph 3, the term "Additional Shares of Common
Stock" shall mean all shares of Common Stock (in excess of the 4,355,450
presently outstanding shares), issued by Ceatech at any time during the term
of this Debenture and prior to its conversion or redemption, other than
shares of Common Stock issued or issuable:
(a) For consideration per share which is equal to, or greater than, the
Conversion Price for this Debenture in effect on the date of, and immediately
prior to, such issue.
(b) Upon conversion of this Debenture and/or any other outstanding Debenture
which is a part of the same authorized issue of Debentures as this Debenture;
and
(c) Upon conversion of a Debenture issued subsequent to this Debenture under a
different and separately authorized issue of Debentures under different terms
and conditions, including a different Conversion Price; and
(d) Upon exercise of the Class A Common Stock Purchase Warrants issued and
outstanding as of the date of hereof; and
The Conversion Price in effect with respect to this Debenture shall be
reduced, concurrently with the issuance of any Additional Shares of Common
Stock, to a price (calculated to the nearest cent) determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
Ceatech for the total number of Additional Shares of Common Stock so issued
would purchase at such Conversion Price in effect immediately prior to such
issuance, and the denominator of which is the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued. For purposes of the above calculation, the
number of shares of Common Stock outstanding immediately prior to such issue
shall be calculated on a fully diluted basis, as if all convertible Debentures
and all other outstanding convertible securities of Ceatech had been fully
converted into shares of Common Stock immediately prior to such issuance, and
all issued and outstanding Class A Common Stock Purchase Warrants had been fully
exercised immediately prior to such issuance, but not including in such
calculation any additional shares of Common Stock issuable with respect to the
Debentures solely as a result of the adjustment of the
8
<PAGE>
Conversion Price resulting from the issuance of Additional Shares of Common
Stock causing such adjustment.
For purposes of this paragraph 3, insofar as the consideration received
by Ceatech for the issuance of any Additional Shares of Common Stock consists of
cash, it shall be computed at the aggregate amount of cash received by Ceatech.
To the extent such consideration consists of property other than cash, it shall
be computed at the fair market value thereof at the time of such issuance, as
determined in good faith by the Board of Directors.
In the event that Ceatech shall declare or pay, without consideration,
any dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by split, reclassification or otherwise than by payment of a dividend in
Common Stock or in any right to acquire Common Stock), or in the event that the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then the Conversion Price for this Debenture in effect immediately prior to such
event shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event that
Ceatech shall declare or pay, without consideration, any dividend on the Common
Stock payable in any right to acquire Common Stock for no consideration, then
Ceatech shall be deemed to have made a dividend payable in Common Stock in an
amount of shares equal to the maximum number of shares issuable upon exercise of
such rights to acquire Common Stock.
4. Events of Default. If any of the events specified in this
paragraph 4 shall occur (herein individually referred to as an "Event of
Default"), the holder of the Debenture may, so long as such condition exists,
declare the entire principal and accrued interest hereon immediately due and
payable by written notice to Ceatech:
(a) Default in the payment of the principal and unpaid accrued
interest of this 7.75% Debenture and of any other outstanding Debentures which
are part of the authorized issue of 7.75% Convertible Subordinated Debentures of
Ceatech, when due and payable, if such default is not cured by Ceatech within
ten days after the holder has given Ceatech written notice of such default; or
9
<PAGE>
(b) The voluntary institution by Ceatech of proceedings to be
adjudicated as bankrupt or insolvent, or the consent by it to institution of
bankruptcy or insolvency proceedings against it or the filing by it of a
petition or answer or consent seeking reorganization or release under the
federal Bankruptcy Act, or any other applicable federal or state law, or the
consent by it to the filing of any petition or the appointment of a receiver,
liquidator, assignee, trustee or other similar official of Ceatech, or of any
substantial part of its property or the making by it of an assignment for the
benefit of creditors, or the taking of corporate action by Ceatech in
furtherance of such action; or
(c) If, within 60 days after the commencement of an action against
Ceatech (and service of process in connection therewith on Ceatech) seeking any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, such action shall
not have been resolved in favor of Ceatech or all orders or proceedings
thereunder affecting the operations or the business of Ceatech stayed, or if the
stay of any such order or proceeding shall thereafter be set aside, or if,
within 60 days after the appointment without the consent or acquiescence of
Ceatech of any trustee, receiver or liquidator of Ceatech or of all or any
substantial part of the properties of Ceatech, such appointment shall not have
been vacated; or
(d) Ceatech fails to pay and discharge in a timely manner, or cause to
be paid or discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of Ceatech, including but not limited to, any and all payroll taxes and
withholding; provided however, that any such tax, assessment, charge or levy
need not be paid if the validity thereof shall currently be contested in good
faith by appropriate proceedings and if Ceatech shall have set aside on its
books adequate reserves with respect thereto, and provided further, that Ceatech
will pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as
security therefor; or
(e) Ceatech shall fail to keep any properties and assets which are
pledged as collateral security for payment of all outstanding Debentures, in
good repair, working order and condition, reasonable wear and tear excepted, or
shall fail to make all needful and proper repairs, renewals, replacements,
additions and improvements thereto, or shall fail to comply at any time with any
material term or condition of any lease to which it is a party or pursuant to
which it occupies or has
10
<PAGE>
possession of any property if the breach of such provision might have a
material and adverse effect on the condition, financial or otherwise, or
operation of Ceatech; or
(f) Ceatech shall fail at any time to duly observe and conform to all
valid requirements of governmental authorities relating to the conduct of
Ceatech's business or to its property or assets, including but not limited to,
maintaining any and all necessary governmental permits or licenses.
5. Consolidation, Merger and Sale. Upon any consolidation, merger or
sale in which Ceatech is not the continuing entity, this Debenture shall be
immediately due and payable in full unless the continuing corporation (other
than Ceatech) shall enter into a supplemental Debenture satisfactory to the
holder undertaking to make all payments due and to assume all covenants made
under the Debenture. Nothing in the Debenture will prohibit Ceatech from
consolidating or merging with or into any other corporation, or from selling or
conveying all or substantially all of the property and assets of Ceatech to any
other corporation if such an undertaking is given contemporaneously with such
transaction.
6. Subordination. This Debenture shall be subordinate or subject in
right of payment of principal only to the prior payment by Ceatech of its
promissory note dated on or about October 20, 1998, as amended, in the amount of
$3,000,000.00, in favor of Bank of America, Bank of America Community
Development Bank, Rancho Cordova, California, but shall not be subordinate or
subject in right of payment to any other debts or obligations of Ceatech.
7. Other. No provision of this Debenture shall alter or impair the
obligation of Ceatech, which is absolute and unconditional, to pay the principal
and interest on this Debenture at the time and place and at the rate and in the
currency herein prescribed.
In accordance with the Subscription Agreement, the 7.75% Convertible
Subordinated Debentures, including this Debenture, are issuable, in registered
form without coupons, only in denominations of $500,000.00.
Ceatech may deem and treat the registered holder of this Debenture as the
absolute owner hereof, whether or not this Debenture shall be overdue and
notwithstanding any notation of ownership or other writing hereon, for the
purpose of receiving payment hereof or
11
<PAGE>
on account hereof and for all other purposes, and Ceatech shall be affected
by any notice to the contrary.
No recourse shall be had for the payment of the principal or the interest
on this Debenture, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of any Debenture supplemental hereto, against
any incorporator, stockholder, officer or director, past, present or future, of
Ceatech or any successor corporation, whether by virtue of any constitution,
statute, or rule of law, or by the enforcement of any assessment or penalty or
otherwise, all such liability being, by the acceptance hereof, and as part of
the consideration for the issue hereof, expressly waived and released.
In the event of a dispute regarding or involving the meaning of the terms
and provisions of this Debenture, the laws of the State of Hawaii shall govern.
Unless the holder of this Debenture is otherwise notified in writing, all
notices to Ceatech shall be sent to its principal place of business as it
appears on the face of this document with a copy sent to:
CEATECH USA, Inc.
c/o Edward T. Foley or Gordon J. Mau
1000 Bishop Street, Suite 303
Honolulu, Hawaii 96813
A facsimile transmission copy of this Debenture, or any notice given
pursuant hereto, which bears signatures of authorized representatives of either
Ceatech or the holder hereof, as the case may be, shall be deemed valid evidence
of the instrument or document, provided that a true copy of the instrument or
document bearing actual signatures is sent to the receiving party within three
business days of the facsimile transmission.
WITNESS the signatures of its duly authorized Officers.
Dated:_____________, 2000
CONTROLLED ENVIRONMENT AQUACULTURE TECHNOLOGY, INC.
By:_________________________________________
EDWARD FOLEY
Its Executive Vice President
12
<PAGE>
By:_________________________________________
RONALD W. K. YEE
Its Secretary
13
<PAGE>
Exhibit 10.2 - Negative Pledge Agreement - between Controlled Environment
Aquaculture Technology, Inc. and Hibiscus Investments, Inc.
NEGATIVE PLEDGE AGREEMENT
This is an AGREEMENT between CONTROLLED ENVIRONMENT AQUACULTURE
TECHNOLOGY, INC., a Colorado corporation ("Ceatech") and HIBISCUS INVESTMENTS,
INC., a California corporation ("Hibiscus") for Ceatech to provide collateral to
Hibiscus in connection with and as a part of that certain "Convertible Debenture
Subscription Agreement" dated March 22, 2000 between Ceatech and Hibiscus (the
"Subscription Agreement") for the purchase by Hibiscus of not more than two
7.75% Convertible Subordinated Debentures of $500,000.00 each (the
"Debentures"), to be issued by Ceatech at such time or times as Ceatech may
determine within twelve months after the date of the Subscription Agreement.
BACKGROUND
A. Ceatech has entered into a contract to acquire the leasehold
interest in certain land and improvements located at 3630 Hanapepe Road,
Hanapepe, Hawaii 96716, more particularly described as Tax Map Key Parcel No.
(4) 1-9-010: 037 (the "Site"), for the purposes of further improving and
constructing on the Site and equipping a processing and packaging facility (the
"Facility") to prepare the production from its shrimp aquaculture business for
distribution and sale.
B. Ceatech is in need of capital to acquire the Site and to construct
and equip the Facility, and has entered into the Subscription Agreement with
Hibiscus as a means of raising capital for such purposes.
C. In accordance with the Subscription Agreement, Hibiscus has agreed
to purchase up to $1,000,000.00 in Debentures to provide Ceatech with the
capital needed to acquire the Site and construct and equip the Facility, and has
requested that Ceatech mortgage and pledge the Site and Facility as security for
the indebtedness to be evidenced by the Debentures.
D. Ceatech is willing to mortgage and pledge the Facility as
collateral for the Debentures, as and when the Site has been
1
<PAGE>
acquired and construction of the improvements and major equipping of the
Facility has been completed, and if the Lessor of the Site, being the State
of Hawaii, through its Department of Land and Natural Resources, permits and
consents to the mortgaging and pledging of the Site and Facility to Hibiscus.
AGREEMENT
NOW, THEREFORE, in consideration of the BACKGROUND information set forth
above and of the promises and agreements of the parties contained in the
Subscription Agreement, Ceatech and Hibiscus hereby covenant and agree to and
with each other as follows:
1. As and when both of the following events shall have occurred: (i)
Ceatech has acquired the leasehold interest in the Site; and (ii) at least one
of the Debentures has been issued by Ceatech and purchased by Hibiscus under and
pursuant to the terms and provisions of the Subscription Agreement, then Ceatech
will prepare a mortgage and collateral pledge agreement of the Site and of the
improvements, fixtures and equipment to be constructed and located thereon
"Security Instrument"), in form and substance satisfactory to both Ceatech and
Hibiscus, to secure repayment of the indebtedness of Ceatech to Hibiscus
pursuant to the Subscription Agreement and as evidenced by the Debenture or
Debentures issued or to be issued thereunder. Ceatech shall then proceed in good
faith to secure the consent and agreement of the Lessor of the Site to the
giving and granting of such Security Instrument to Hibiscus.
2. Hibiscus acknowledges that Ceatech has made no representation or
warranty that the Lessor of the Site will consent and agree to the giving and
granting of such Security Instrument to Hibiscus; and Ceatech hereby represents
to Hibiscus that it has no information or reason to believe that the Lessor will
not consent and agree to such Security Instrument.
3. However, Ceatech does hereby further notify Hibiscus that as a
condition of its consent and agreement to giving and granting of such Security
Instrument, the Lessor of the Site may require significant exceptions to and/or
limitations on the security interest of Hibiscus in and to the property as
provided by the Security Agreement, including, but not limited to, a
subordination of the security interest of Hibiscus to a paramount Lessor's lien
in all real and personal property for unpaid rent; and Hibiscus agrees that if
any such exceptions and/or limitations imposed by the Lessor are
2
<PAGE>
unacceptable to Hibiscus, Ceatech will not be deemed to have defaulted on its
obligation under this Agreement to give and grant a Security Instrument to
Hibiscus.
4. If Ceatech acquires the Site prior to the issuance and purchase of
at least one of the Debentures by Hibiscus, Ceatech expressly covenants and
agrees that it will not mortgage, pledge, hypothecate or otherwise make a
voluntary transfer of the Site, or any material or equipment owned by Ceatech
and intended to be incorporated into or used at the Facility, as collateral to
secure the repayment of indebtedness to any other person or party; and if
Ceatech commits a breach of this covenant and agreement, such breach shall
likewise be deemed a breach by Ceatech of its covenants and agreements contained
in the Subscription Agreement. For the purposes of this paragraph, Lessor's or
vendors' liens arising by operation of law shall not be considered voluntary
collateral transfers.
5. For as long as Ceatech is indebted to Hibiscus under Debentures
issued pursuant to the Subscription Agreement, Ceatech covenants and agrees that
it will not, without the express prior written consent of Hibiscus, mortgage,
pledge, hypothecate or otherwise make a voluntary transfer of the Site, or any
material or equipment owned by Ceatech and intended to be incorporated into or
used at the Facility, as collateral to secure the repayment of indebtedness to
any other person or party, whether or not any such proposed security interest is
junior and subordinate to the security interest of Hibiscus, if any; and
Hibiscus covenants and agrees that its consent to the giving and granting of any
such proposed security interest will not be unreasonably withheld.
6. This Agreement and the representations, acknowledgements,
covenants and agreements of the parties hereto shall be binding upon and inure
to the benefit of Ceatech and its successors and assigns, and Hibiscus and its
successors and assigns as registered holders of Debentures issued under and
pursuant to the Subscription Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
this ______ day of ____________, 2000.
CONTROLLED ENVIRONMENT HIBISCUS
AQUACULTURE TECHNOLOGY, INC. INVESTMENTS, INC.
3
<PAGE>
By: By:
EDWARD FOLEY KENJI KATO
Its Executive Vice President Its President
By:
RONALD W. K. YEE
Its Secretary
"Ceatech" "Hibiscus"
4
<PAGE>
Exhibit 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation of our report dated February 21,
2000 in this Form 10-KSB, related to the consolidated financial statements of
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries.
/s/ Carpenter, Kuhen & Sprayberry
Oxnard, California
May 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 543,227
<SECURITIES> 0
<RECEIVABLES> 296,413
<ALLOWANCES> 20,000
<INVENTORY> 579,621
<CURRENT-ASSETS> 1,443,713
<PP&E> 5,192,955
<DEPRECIATION> 524,030
<TOTAL-ASSETS> 6,165,138
<CURRENT-LIABILITIES> 1,292,001
<BONDS> 0
0
0
<COMMON> 5,765,044
<OTHER-SE> (3,697,388)
<TOTAL-LIABILITY-AND-EQUITY> 6,165,138
<SALES> 2,096,372
<TOTAL-REVENUES> 2,096,372
<CGS> 2,188,265
<TOTAL-COSTS> 3,538,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,000
<INCOME-PRETAX> (1,580,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,580,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (98,189)
<NET-INCOME> (1,580,778)
<EPS-BASIC> (.37)
<EPS-DILUTED> (.37)
</TABLE>
