Thursday, November 1, 2001

Isle aquaculture firm
faces bankruptcy lawsuit

5 creditors file suit to force
Chapter 11 to recoup their losses

By Tim Ruel

A group of five local and mainland businesspeople has filed to place Big Island aquaculture firm Aquasearch Inc. into bankruptcy, drawing the opposition of the company's chairman and co-founder.

The group, which says it is owed a total of $553,430 by Aquasearch from recent loans and other claims, filed on Tuesday in U.S. Bankruptcy Court to place Kona-based Aquasearch into involuntary Chapter 11 reorganization bankruptcy. Two of the creditors have minority ownership of Aquasearch.

Some of the principles involved have indicated that they want to take over Aquasearch, said Mark Huntley, the firm's chairman and chief executive. Although he hadn't had time to completely review the bankruptcy petition, Huntley said Aquasearch will dispute the move. "We question the good faith of the creditors and the legitimacy of their claims," Huntley said.

Aquasearch has 20 days to respond to the bankruptcy filing, after it is officially served. Under bankruptcy rules, three or more creditors can band together to a force a firm into bankruptcy, but the move still requires approval of the bankruptcy court. A hearing would be scheduled to determine if the creditors have standing.

After Aquasearch has a chance to review its options, the firm will probably seek action against the creditors, such as court sanctions, Huntley said, noting that the firm has the right to make a case for itself. The main problem with the creditors' claim is that they never discussed delinquent loans or bankruptcy with Aquasearch, he said. "This is a complete surprise," he said.

Of the five creditors, only one, Virginia Tiu, talked with Aquasearch about the $25,000 she's owed for a note that has become due, Huntley said. Tiu has previously stated that she is not on agreeable terms for repayment, Huntley said. The rest of Aquasearch's approximately 100 creditors and vendors have accounts that are either current or on agreeable terms, he added.

But another of the creditors in the bankruptcy petition, Kenneth Crowder of San Bernardino, Calif., has filed two lawsuits against Aquasearch in the past couple weeks in California, alleging breach of a distribution contract and other agreements. He wants immediate repayment of a $75,480 loan, and wants to put Aquasearch into bankruptcy over the same claim.

Crowder said he loaned Aquasearch the money in September to help cover the firm's payroll from a previous week. His son's firm, C&J Distributors of Rancho Cucamonga, Calif., had reached an agreement with Aquasearch to distribute the firm's nutritional supplements, which are derived from microalgae grown in Kona. Crowder claims Aquasearch never lived up to a promise to advertise its product in California after Crowder bought inventory from Aquasearch.

Huntley said he knew of no such advertising agreement.

Crowder said he simply wants new people in charge of Aquasearch.

"The product is excellent," Crowder said. "The business is there. The management is unsatisfactory."

"The number of creditors now who do not have executed contracts and have relied on verbal assurances gives me a great deal of concern," Crowder said, declining to go into details.

In response, Huntley noted that 97 percent of Aquasearch's shareholders voted at the firm's annual meeting in September to keep the current slate of directors, which in turn appoints the firm's management. "It sounds like a vote of confidence to me," Huntley said.

The other creditors who are seeking to put Aquasearch into bankruptcy are:

>> Lance Nakamura, owed $350,000 for a 90-day unsecured bridge loan;
>> Gregory Kowal, owed $75,000; and
>> Edward Sun, a former Aquasearch employee owed $27,949.

An attorney representing the creditors declined comment yesterday. Kowal, owner of downtown broker-dealer First Honolulu Securities Inc., owns 12,113,343 of Aquasearch's shares, or about 11 percent of the company, according to Aquasearch's 2000 annual report. Nakamura and his wife own 6,208,866 shares, about 5 percent of Aquasearch. Nakamura and Kowal acquired their shares through convertible notes, sold between June 1997 and Oct. 31, 2000.

Aquasearch, a Colorado corporation, was founded in February 1988 by scientists from the Scripps Institution of Oceanography at the University of California, San Diego. The firm offered its stock publicly in 1989. Its facilities are located on state land at the Natural Energy Laboratory of Hawaii Authority at Keahole Point.

Aquasearch has lost a total of $19.2 million since it went public, filings show.

In the second quarter, the firm's loss narrowed to $833,234 from $1.33 million in the year-earlier period. The firm in March 2000 started selling its main product, AstaFactor, which is named after the microalgae component astaxanthin.

Aquasearch had total debts of $5 million, largely unsecured, and assets of $4.47 million as of July 31, according to Huntley and the firm's recent statement to the Securities & Exchange Commission.

Financially speaking, Aqua-search has been heading in a positive direction, Huntley said.

The firm had record sales of $100,000 in October, a 70 percent increase from September, said Huntley, who noted the figure was unaudited.

The company, which primarily has sold its product in Hawaii at Longs Drug Stores, recently had its first sale from a new mainland roll-out.

Under a deal with products broker Morgan & Sampson, Aquasearch's product will hit store shelves in 12 western states. A Southern California roll-out is scheduled to start Nov. 18.

At the same time, however, Aquasearch's production has outstripped its sales, and the firm recently put half of its 30 employees on temporary leave, Huntley said. The main issue is that production has risen 250 percent because of optimal conditions, and the firm is making five times as much product at the same level of cost.

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