Re-read the SEA, Inc. case. Assume you are the financial statement auditor for SEA, Inc. Issues of going concern need to be considered.

1) At December 31, 1994, should it be concluded that there is substantial doubt about the going concern status of SEA, Inc. Do not exercise hindsight bias. Use only the information known at the time.

2)At December 31, 1995, should it be concluded that there is substantial doubt about the going concern status of SEA, Inc. Do not exercise hindsight bias. Use only the information known at the time.

AICPA Case Development Progmn Case No. 94-03: SE-l. Inc. 0 1 -.___._____________ SEA. INC. Robert M. Keith. Professor University of South Florida, Tampa. Florida David M. Dennis. Professor University of South Florida. Tampa. Florida Peter Rodriguez. Jr., Partner Ernst dc Young, Tampa. Florida THE COMPANY: HISTORY AND PURPOSE Jackson (Jack) Wright has been interested in sailing, pirates, and ocean lore since he was a small boy. After majoring in marketing at the University of South Florida, Jack became successful as a real estate developer, but in his heart he still longed to be involved with a business that would take him closer to the sea. The news of Mel Fisher's salvage of the Nuestra Senora dc Atocha, the richest sunken treasure discovery in history, gave Jack and his best friend. Mike Sierra, the nal push they needed. Early in 1994 they founded Searchers for Elusive Artifacts. Inc. (SEA. Inc.) investing $200,000 each to provide the company's initial capitalization. Wright and Sierra wrote the following statement of business purpose for their new corporation: "SEA, Inc. is an oceanographic service company involved in deep water search, survey. and recovery. SEA respects the ocean environment and endeavors to preserve the ecosystem of each recovery site. SEA recognizes its obligation to explore the historical signicance of each find, and to provide complete conservation of artifacts recovered. " SEA. Inc. operates in the following ways: I. SEA maintains a eet of surface and subsurface vessels which can be used to locate, survey. and recover sunken shipwrecks. These vessels are used by the corporation in its own interest and leased to others. 2. SEA acts as a general partner in a series of limited partnerships formed for the purpose of raising money to locate. identify, recover, and market the cargoes of shipwrecks in a specific geographic area. SEA's policy is to maintain at least a 50% ownership interest in each of these ventures. 3. SEA plans to construct a museum to serve as a center for displaying artifacts and for entertaining and educating the general public about undersea technology. archaeology. conservation. and the colorful history of the artifacts and the treasures they represent. Copyright 1994 by the American Institute of Certied We Accountant HIGH) and donated to the public domain for educational use. Cares developed and distributed under the \"GPA Gnu Development Program are intended for are in higher education for instructional purposes only. and are notfor application in practice. The AJCPA neither approves nor endorse: this me or any minim provided herewith or subsequently developed. AICPA Case Development Program Case No. 94-03: SEA, lite. O 2 NAUTILUS, LTD. Shortly alter incorporation, SEA formed its rst partnership with ve other investors. Immediately thereaher archeologicat information about suspected shipwreck sites was purchased from Roman VanWert. a noted marine archeologist and historian. During February 1994 with the help of VanWert's charts and calculations, Nautilus located and photographed a Spanish wreck in approximately 1,800 feet of water south of the Florida Keys. The vessel. believed to be one lost in a hurricane in 1622. was found in international waters. The ship's bell. recovered in May 1994 was removed from the site in order to perfect the admiralty claim in the United States District Court. In early June, lack Wright invited the local television and print media to a news conference where he displayed the ship's bell and a few of the artifacts that had been recovered. He trumpeted the discovery as the most valuable since the Atocha and observed that, while the exact amount and nature of the cargo was still to be detemtined, the value of the nd could be as much as $35 million. During the subsequent months more than 18.000 artifacts were recovered from the site. An inventory of these included 39 gold bars, 10 gold fragments. a gold ruby pendant. over a thousand silver coins. 5 mariner's astrolabes (navigational devices used in the 1600's), over 5,000 pearls. 50 olive jars. pottery, musket balls. cannon. and other miscellaneous items. By the end of the year it was not possible to determine what portion of the wreck site had actually been explored, but SBA and the Nautilus partners believed that a point of diminishing returns had been reached and planned no attempt at additional recovery until most of the recovered artifacts had been sold. At that time the partners would decide whether the potential of recovering additional artifacts justied the expense of continuing recovery. FINANCIAL STATEMENTS Selected data from SEA's 1994 annual report follow: SEA, Inc. Consolidated Income Statement For the year ended December 31. 1994 Revenues: Rental Income (Afliate) ......................................... $1,658,000 Rental Income (Others) .......................................... 24,000 Total Revenues ............................................... $1,682,000 Operating Expenses: Vessel Operations ............................................. 575,000 Conservation ................................................ 268,200 Other Exploration Expenses ....................................... 536.400 Depreciation ................................................ 815.000 General and Administrative Expenses ................................. 813,00 Total Operating Expenses ........................................ 3 008 Loss from Operations ............................................. (1,326,400) Other hicomc (Expense) Interest Expense ............................................ j 1 13,200} Loss ........................................................ $0,439,600) Less: Minority Interest ............................................ M Net (Loss) .................................................... W Net {loss} Per Share .............................................. i {1.07) AICPA Case Development Program Case No. 94413: SEA. Inc. 6 3 W SEA. Inc. Consolidated Balance Sheet December 31, 1994 ASSETS Current Assets: Cash ..................................................... $ 36,800 Inventory of Artifacts ........................................... 1 251 600 Total Current Assets ........................................... 1,288,400 Plant and Equipment: Plant and Equipment ........................................... $ 4,825,000 Less: Accumulated Depreciation ........................... 1815.000) 4 010 000 Total Assets ................................................... g 53983100 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable ............................................. $ 88,000 Payable to Related Parties ............................... ' ......... 221,880 Rent Payable ................................................ 15 000 Total Current liabilities ......................................... 324.880 Noncurrent Liabilities: Payable on ROV .............................................. 104.000 Capital lease obligation .......................................... 821.000 Debenture Bonds Payable ........................................ 650 000 Total Noncurrent Liabilities ....................................... 1 575 000 Total Liabilities ................................................. 1,899.8 Stockholders' Equity: Conunon Stock ............................................... 4,610,000 Retained Earnings (decit) ........................................ (1,211,480) Total Stockholders' Equity ........................................ 3,398,520 Total Liabilities and Stockholders' Equity ................................. s 5.298300 Selected Notes to SEA. Inc.. Consolidated Financial Statements: Note 1: Inventory of Artifacts. SEA. Inc. (The Company) values inventory in the consolidated statements at lower of cost or market. Nautilus Ltd. (The Parmership) incurred costs of $1,788,000 in locating, recovering. conserving, and storing shipwreck artifacts. The Partnership capitalized $1,251,600 of these costs as "Inventory of Artifacts." An appraisal by Paul Cavendish of Antiquities Research and Assessment. Inc. estimated the market value to be $2.75 million. Mr. Cavendish earned his Ph.D. in the history of the colonial trading period; his dissertation is entitled. \"An Inquiry into Spanish Trading with the New World: 1550 - 1700." Cavendish has been employed by Antiquities Research for the past ve years specializing in museum collections of precious metals and silver coins of the colonial era. Since most of the inventory is stored in preservation tanks. the appraisal was performed by examining a sample of each item and relying on photographs of the remainder. Items of inventory are appraised using the following methods: AICPA Case Development Program Case No. 94-03: 554. Inc. 0 4 Gold Bars are valued at 5.5 times their meltdown value. Similar bars from the Atocha were sold several years earlier for 3 times meltdown. Silver Coins are valued at $250 each, the amount for which similar coins in heavily corroded condition are sold by Mel Fisher in his Key West museum shop. Pottery is valued taking into consideration the fact that much of it contains the Papal miter indicating that a high church ofcial was traveling on the ship. Fragments are valued by considering the amount at which these are sold by Fisher in his museum shop. Arrrolabes recovered by the Atocha were sold for approximately $100,000 each. Those recovered by the Partnership are believed to be worth twice as much. Pearls are valued at an average of $600 each based on a careful examination of a few dozen specimen and photographs of those remaining. Olive Jars are valued based upon a recent sale of one jar for $10,000. Other miscellaneous items including jewelry and ship hardware are valued at the estimated amount they will bring in the retail collectibles or memorabilia market. Nate 2: Related Party Transactions. The Company receives substantially all of its revenues from the rental of vessels and deep ocean search and survey equipment leased to Nautilus, Ltd., an afliated partnership in which the Company has a 59% ownership share. The Company leases a Questor SHD ROV (Remote Operated Vehicle) from a related entity. Rent of $10,000 per month is payable in advance on a month-tomonth basis. As of December 31, 1994 $10,000 is in arrears. The Board of Directors is of the opinion that the terms of this transaction are at least as favorable as those which could be obtained from independent third parties. Note 3: Comminnents and Contingencies. In Jarmary, 1994, the Company entered into a lease agreement for 18,000 square feet of ofce and warehouse space. The lease commencing January 15, 1994, is for a term of three years with an option to renew for two additional oneyear periods. Rent during the initial term is $120,000 per year payable as follows: First year, $5,000 per month plus 8,000 shares of the company's stock deliverable on July 1, 1994. During years two and three rent is to be $10,000 per month payable monthly. in May, 1994, the Company entered into a capital lease arrangement with Maritime Financial Union to acquire a Houdini 5000 model ROV. This equiptnent was capitalized at $900,000 and requires monthly payments of $22,850 for ve years. Note 4: Equipment. The Company employs two primary types of equipment in its search and recovery operations: a surface ship, and remotely operated underwater vehicles (ROVs). A description follows: The Seahound Retriever is a 200 foot, 489 gross ton, tuglsupply vessel built in 1978 for the offshore oil industry. Drawing a full load draft of 17 feet and having a breadth of 40 feet, the vessel has an open deck working area of 112 feet by 35 feet. The ship has berthing and stores space for a crew of 20 in a tetally climate controlled environment. In addition to the generators supplying the ship's own electrical needs. an independent 100 kilowatt on-board generator supplies the power required to operate the ROVs. During February, 1994, the Company entered into a ship's bare boat charter with Imperial Marine, an unrelated company, for use of the Seahourid Retriever for a twelve month period. Simultaneously with the execution of the Charter, the Company also entered into a stock option agreement with Imperial Marine. By exercising this option Imperial would exchange ownership of the Seahound Retriever for 575,000 shares of the Company's common stock and $1,000,000 cash. During June, 1994, Imperial exercised the option and received cash and shares valued at $2,250,000. The Company currently owns two Questor ROVs: (l) Questor LD, and 2) Questor Utility. These remotely controlled underwater vehicles provide a cost-effective method of inspecting wrecks and bottom structure down to 2,000 feet. These, together with the leased Questor SHD (Note 2) and Houdini 5000 (Note MCPA Case Development Program Case No. 94-03: SEA. lire. O 5 3), provide the ability to photograph and safety retrieve marine artifacts using the Seahound Retriever as a base of operations. Note 5: Shipwreck and Treasure Museum. The Company plans to construct a museum to serve as a center for displaying artifacts and for emcrtaining and educating the general public about undersea technology, archaeology, conservation. and tlte colorful history of the artifacts and the treasures they represent. The Mel Fisher Maritime Heritage Society Museum in Key West. Florida indicates how successful such a venture can be. Each day Ve hundred people visit the museum; the gift shop run by the museum sells selected artifacts such as silver coirn, pearls. and pottery fragments. The Company believes that shipwreck artifacts have greater value as museum displays and gin shop souvenirs than as items to be auctioned piecemeal to collectors. The Antiquities Research and Assessment, lnc., appraisal takes this plan into consideration. Note 6: Market Quotations for Company Stock. SEA. Inc... stock is traded in the over-thecounter market. NASDAQ reports high and low bid quotations for 1994 as follows: Bid Quarter Ended High Low March 31, 1994 54.125 $3.75 June 30, 1994 54.50 $3.125 September 30. 1994 $3.00 $1.125 December 31, 1994 5 .875 $ .375 1995 OPERATIONS Poseidon lad. During February 1995, SEA. Inc, formed Poseidon, Ltd, a Florida limited partnership, and agreed to serve as the sole general partner. Poseidon is structured similarly to Nautilus except that the expenses of the Partnership include a payment of 5% of all items salvaged to a fund for the crew. During the year Poseidon commenced its proposed business of attempting to locate deep water wrecks in a specic area off the east coast of Florida and found what is believed to be a colonial era shipwreck. A cooking pot and piece of rigging were recovered from the site to perfect the admiralty claim. By the end of 1995 approximately 120 artifacts were recovered including seven cannons, more than a dozen copper cooking pets, 6 Spanish silver coins, scores of musket and pistol balls, pulley blocks, and other miscellaneous items. Jim Stokley. a consulting archeologist employed by the Partnership, estimates the coins and cannon are from the early 1700's. Mr. Stokley believes that the vessel discovered was primarily used to carry mail and ofcial communications between the Icing and government ofcials. While these ships were never authorized to carry treasure, contraband treasure was sometimes carried. Stokley stated that there is no way he can say whether this shipwreck contains substantial amounts of treasure. Poseidon. Ltd. currently has very little cash. The partners are considering various options including salvaging the site (which would require additional nancing) and selling the site to another partnership for its salvage. If it appears that additional nancing is not likely. SEA. Inc. , may consider terminating the partnership. SEA, Inc. has written off its entire investment in Poseidon, Ltd. legal Proceedings. On June 11, 1995, Maritime Financial Union. the entity from which the Company leases its large Houdini 5000 ROV, led suit in the United States District Court for the Middle District of Florida, Tampa Division in Admiralty against SEA, 111C... and the Seahound Retriever. In its complaint Maritime Union alleged that the Company had committed a breach or default under its Lease Purchase Contract with Maritime Union since the Company failed to make its payment due January 3. 1995 and all payments due thereafter. Within the provisions of the contract. Maritime contended that it was entitled to recover the loss value of $808,396.69. Maritime also conteMed that it was also entitled to receive the amount of the Company's arrears equal to 5131.100 plus interest on the arrears of $6,169.50. and legal fees artd costs estimated at $156,113.20. Therefore, Maritime Union was seeking a judgment against the Company in the amount of 51.107.779.39 as of June 11, 1995 plus interest accruing at the rate of $273.15 per day. AICPA Case Development Program Case No. 94-03: SEA, Inc. 0 6 Maritime Union. in its complaint. also sought a maritime lien against the Seahound Retriever. her engines. tackle. equipment and appurtenances and asked that the ship be sold and the proceeds be paid toward the amount of any judgment. As of December 31. 1995. the Court has ordered the sale of the Seahound Retriever on February 25. 1996. without minimum bid. The proceeds of the sale will be held by the Court until the litigation and appeals in the case are completed. The Irensttre Museum. Early in 1995 the Company leased space and began construction of the shipwreck and treasure museum in Tampa. During July [995, the Company was no longer able to make lease payments and negotiated a termination with the lessor. As part of the settlement, the Company issued 40,000 shares of common stock to the lessor. Marketing Agreement. In October 1995. the Company signed a marketing agreement with Global Telecommuni- cations Marketplace. Inc. The agreement sets out the terms under which the Company's artifacts. products derived from the artifacts and products derived from the Company's archive material will be marketed by Global on a worldwide exclusive basis. Sales resulting from this marketing effort will result in royalty payments to the Company. Similar agreements were signed with Nautilus, Ltd. and Poseidon. Ltd.. The effect of these agreements will be to produce revenue for the Company and. to the extent that their artifacts are used. for the Partnerships, without any corresponding cost of product development or marketing. While it is too early to quantify the ammnt and timing of potential revenue. Global guarantees $1,000,000 minimum revenues to the Company during the ve year initial term of the agreement. Global also provided the Company with a loan of $250,000 at 10% per armum interest for two years. The loan is secured by 3.500 of the pearls owned by the Company. Selected 1995 Financial Statement Date. The following data is taken from SEA's December 31 . 1995 nancial statements: Inventory of Artifacts .............................................. $ 1.376.450 Total Liabilities ................................................. $ 3.089.000 Retained Earnings (Decit) .......................................... $01,640,800) Total Stockholders' Equity .......................................... $ 469,200 Net Loss for the Year ............................................. $0,429,420) The 1995 audited statements were issued on April 30, 1996. 1995 Market Quotations for Company Stock. NASDAQ reports high and low bid quotations for 1995 as follows: _Bid__ Quarter Ended High Low March 31. 1995 $1.125 $.25 June 30, 1995 $1.625 $.50 September 30. 1995 _ $1.00 $.625 December 31, 1995 S .875 5.125 1996 ADDITIONAL INFORMATION On February 9, 1996. the Company and Maritime Union signed a joint Stipulation and Emergency Motion to stop the sale of the Retriever and for Settlement of Action. The Joint Stipulation was an agreemem in principle to settle the action and release the Retriever to the Company in return for a cash payment of $400,000. a deferred payment for 1 year of 5800.000 (such deferred payment to be secured by the Retriever) and an issue of Warrants to purchase 400.000 shares of the Company's Common Stock for $0.3125 per share. On April 3. I996. the agreement was completed. The Houdini was sold to a third party to raise the cash payment of $400,000. AICPA Case Development Program Case No. 94-03: SEA, Inc. + 7 QUESTIONS Financial Accounting Issues: 1. How does GAAP require that the artifacts be valued on SEA's financial statements? Does it appear that the 1994 valuation is appropriate? Explain. What alternative balance sheet classification of the artifacts could you suggest? Do you believe that SEA's classification is appropriate? 2. What additional information does SEA need to provide to adequately disclose its transactions with related parties? 3. How should stock issued in exchange for goods and noncash assets be valued? Are the values used by SEA appropriate in the stock for rent and stock for assets transactions described in the case? How should the post-balance sheet events between SEA and Maritime Union be accounted for and disclosed in the 1995 statements? Explain. 5. What other disclosure, classification, or accounting issues do you recognize from your study of this case? Auditing Issues: 1. What would be considered sufficient, competent evidence in evaluating the appropriate carrying value of the artifacts? 2. Should a specialist be consulted in attempting to determine the value of artifacts? If so, how should the qualifications of the specialist be determined and evaluated? 3. Has the Company complied with GAAP in the valuation of inventory, and disclosure of related party transactions? If not, what are the implications for the auditor's report language? 4. Should the auditor consider the need for a going concern paragraph in the audit report of SEA or either of the two limited partnerships? REFERENCES: Primary American Institute of Certified Public Accountants. Statement on Auditing Standards No. I (AU 560), "Subsequent Events" (AICPA, 1972). Statement on Auditing Standards No. 11 (AU 336), "Using the Work of a Specialist" (AICPA, 1975). Statement on Auditing Standards No. 19 (AU 333), "Client Representations" (AICPA, 1977). Statement on Auditing Standards No. 31 (AU 326), "Audit Evidence" (AICPA, 1980). Statement on Auditing Standards No. 45 (AU 334), "Related Parties" (AICPA, 1983). Statement on Auditing Standards No. 58 (AU 508), "Reports on Audited Financial Statements" (AICPA, 1988). 1990" (AICPA, 1988). Statement on Auditing Standards No. 64 (AU 334), "Omnibus Statement on Auditing Standards - Financial Accounting Standards Board. Statement of Financial Accounting Concepts No. 6 "Elements of Financial Statements, " (Stamford, CT: FASB, 1985). FASB, 1975). Statement of Financial Accounting Standards No. 5 " Accounting for Contingencies, " (Stamford, CT: Statement of Financial Accounting Standards No. 16 "Prior Period Adjustments, " (Stamford, CT: FASB, 1977).AICPA Case Development Program Case No. 94-03: SEA, Inc. * 8 FASB, 1982). Statement of Financial Accounting Standards No. 57 "Related Party Disclosures," (Stamford, CT: Secondary American Institute of Certified Public Accountants. Accounting Research Bulletin No. 51 "Consolidated Financial Statements," (New York, NY: AICPA, 1959) Financial Accounting Standards Board. Statement of Financial Accounting Standards No. 13 "Accounting for Leases, " (Stamford, CT: FASB, 1976). Statement of Financial Accounting Standards No. 94 "Consolidation of All Majority-Owned Subsidiaries, " (Stamford, CT: FASB, 1987) FASB, 1987). Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows," (Stamford, CT: Background Goddio, Frank. "The Tale of the San Diego." National Geographic (July, 1994), pp. 34-57. Starr, Mark; Moreau, Ron; and Friday, Carolyn. "Treasure Hunt: Wrecks to Riches." Newsweek (August 5, 1985), pp. 18-20, 23. Stall, Sam. "Treasures of the Atocha. " The Saturday Evening Post (November, 1986), pp. 50-55, 100