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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 0-29258
AQUAPRO CORPORATION
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(Exact name of Registrant as specified in its charter)
Tennessee 62-1598919
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
1100 Highway 3, Sunflower, Mississippi 38778
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(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (662) 569-3331
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
As of April 29, 1999, Registrant had outstanding 4,883,881 shares of common
stock, its only class of common equity outstanding.
Transitional Small Business Disclosure Format
(Check one): Yes [ ] No [ X ]
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INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at March 31, 1999 (unaudited)
and June 30, 1998 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months ended March 31, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 1999 and 1998 (unaudited) 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
AquaPro Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
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(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 250,371 $ 112,631
Trade accounts receivable 172,534 349,148
Receivable from affiliates 0 27,998
Live fish inventories 4,779,189 5,533,276
Prepaid expenses 103,454 21,303
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Total current assets 5,305,548 6,044,356
Property, buildings and equipment, net 5,775,519 6,003,163
Investments in cooperatives 817,769 833,894
Other assets 117,654 166,779
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Total assets $12,016,490 $13,048,192
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
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(Unaudited) (Note)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Notes payable $ 0 $ 599,964
Accounts payable and accrued expenses 311,227 241,662
Current maturities of long-term debt 454,403 426,574
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Total current liabilities 765,630 1,268,200
Long-term debt, less current maturities 3,637,025 3,829,981
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Total liabilities 4,402,655 5,098,181
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Stockholders' equity:
Common stock, no par value - authorized 100,000,000
shares, Issued and outstanding 4,883,881 at March 31,
1999 and 4,818,354 shares at June 30, 1998 15,367,803 15,405,803
Unearned compensation (41,414) (101,906)
Retained earnings (deficit) (7,712,554) (7,353,886)
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Total stockholders' equity 7,613,835 7,950,011
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Total liabilities and stockholders' equity $ 12,016,490 $ 13,048,192
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at the date indicated, but does not include all of the
information and footnotes required by generally accepted accounting principles.
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AquaPro Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
-----------------------------
1999 1998
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<S> <C> <C>
Net sales $ 1,330,351 $ 1,913,200
Cost of products sold 998,385 1,636,528
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Gross profit 331,966 276,672
Selling, general and administrative 386,444 474,369
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Operating loss (54,478) (197,697)
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Other (income) expense:
Equity in losses on investment in cooperatives 154,111 68,000
Interest expense 111,616 126,075
Other, net (100,417) (47,079)
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165,310 146,996
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Net loss $ (219,788) $ (344,693)
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Basic and diluted net loss per share (0.05) (0.17)
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Basic and diluted weighted average common shares outstanding 4,883,006 2,674,097
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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AquaPro Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
March 31,
-----------------------------
1999 1998
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<S> <C> <C>
Net sales $ 4,879,214 $ 4,168,988
Cost of products sold 3,721,587 3,585,000
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Gross profit 1,157,627 583,988
Selling, general and administrative 1,224,713 1,341,449
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Operating loss (67,086) (757,461)
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Other (income) expense:
Equity in losses on investment in cooperatives 221,681 95,257
Interest expense 361,691 338,262
Other, net (291,790) (127,104)
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291,582 306,415
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Net loss $ (358,668) $(1,063,876)
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Basic and diluted net loss per share (0.07) (0.50)
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Basic and diluted weighted average common shares outstanding 4,842,202 2,672,039
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</TABLE>
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AquaPro Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
March 31,
-----------------------------
1999 1998
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<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,126,898 $ (112,497)
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Cash flows from investing activities:
Purchases of property and equipment (266,283) (547,694)
Purchases of cooperative stock and related payments 0 (191,376)
Proceeds from note receivable from affiliate 27,998 0
Refund on stock investment 14,220 0
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Net cash used in investing activities (224,065) (739,070)
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Cash flows from financing activities:
Net increase (decrease) in notes payable (599,964) (401,473)
Principal payments on long-term borrowings (257,703) (258,853)
Proceeds from long-term borrowings 92,574 170,700
Proceeds from issuance of preferred stock 0 1,763,286
Payments of preferred stock dividends 0 (166,810)
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Net cash provided by (used in) financing activities (765,093) 1,106,850
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Net increase in cash and cash equivalents 137,740 255,283
Cash and cash equivalents at beginning of period 112,631 202,894
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Cash and cash equivalents at end of period $ 250,371 $ 458,177
=========== ===========
Non-cash financing activities:
Conversion of long-term debt to Series A Preferred Stock -- $ 984,014
Conversion of Preferred Warrants to common stock $ 48,530 --
Cancellation of 12,000 shares of non-vested common --
stock $ 48,000
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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AquaPro Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
1. Basis of Presentation of Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with the rules of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes otherwise necessary
for a fair presentation of financial position, results of operations and
cash flows, in conformity with generally-accepted accounting principles.
However, the information furnished, in the opinion of management, reflects
all adjustments necessary to present fairly the financial position, results
of operations and cash flows on a consistent basis. The results of
operations are not necessarily indicative of results which may be expected
for any other interim period or for the year as a whole.
2. Long-Term Debt and Stockholder's Equity
During the nine months ended March 31, 1999, the Company converted all
outstanding Preferred Stock Warrants, according to their terms, into
three-tenths (0.03) of a share each. In total, 70,589 new shares were
issued to the holders of the warrants.
Also during the nine months ended March 31, 1999, the Company issued 6,500
shares in grants to employees, and canceled 12,000 shares forfeited by
non-vested employees. 438 shares were issued to outside investors.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain factors
including those set forth in this Item 2 and elsewhere in, or incorporated
by reference into, this report. The Registrant has attempted to identify
forward-looking statements in this report by placing an asterisk (*)
following each sentence containing such statements.
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
REVENUE. Net sales during the three-month period ended March 31, 1999
totaled $1,330,351 compared to $1,913,200 for the same period in 1998. This
represents a decrease of $582,849 or 30.5%. Volume decreased 839,880 pounds
to 1,846,120 pounds of fish sold compared to 2,686,000 pounds sold during
the three-month period ended March 31, 1998. Accordingly, volume
represented a 31.3% decrease during the three months ended March 31, 1999
compared to the same period in 1998. The decrease in volume offset the
change in the average price of fish for the three-month period. This
average price saw an increase from 71.2 cents per pound in 1998 to 72.1
cents per pound in 1999.
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COST OF PRODUCTS SOLD AND MARGIN. Cost of products sold was $998,385, a
decrease of $638,143 or 39.0% compared to the same three-month period of
1998, while net sales decreased 30.5%. On a per pound basis, the costs of
products sold saw a decrease from 60.9 cents in the three-month period
ended March 31, 1998 to 54.1 cents in the same period in 1999. Gross profit
on sales was 25.0% during the three-month period ended March 31, 1999 as
compared to 14.5% in the same period in 1998. Cost of products sold is
largely dependent on the Company's cost structure in the previous year due
to the 12 to 18-month grow out period required for fish to reach a
marketable size.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses during the three-month period ended March 31, 1999 were $386,444
or $87,925 lower than in the three-month period ended March 31, 1998. Due
to lower sales volume, the selling, general and administrative expenses
represented an increase in relation to sales volume, from 17.7 cents per
pound sold in 1998 to 20.9 cents per pound in 1999.
EQUITY IN LOSSES ON INVESTMENT IN COOPERATIVE. During the three-month
period ended March 31, 1999, the Company recorded a net charge of $154,111
for its share of estimated losses of Delta Pride Catfish, Inc.'s (Delta
Pride) operations. During the same period in 1998, there was a charge of
$68,000 for such losses.
INTEREST EXPENSE. Interest expense decreased $14,459 or 11.5% to $111,616
in the three-month period ended March 31, 1999 compared to the same period
in 1998 due to a decrease in average borrowing.
RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE
MONTHS ENDED MARCH 31, 1998
REVENUE. Net sales during the nine-month period ended March 31, 1999
totaled $4,879,214 compared to $4,168,988 for the same period in the
previous year. This represents an increase of $710,226 or 17.0%. Volume
increased 919,230 pounds to 6,735,230 pounds of fish sold compared to
5,816,000 pounds sold during the nine-month period ended March 31, 1998.
Accordingly, volume represented a 15.8% increase during the nine months
ended March 31, 1999 compared to the same period in the previous year. This
volume increase was enhanced by an increase of over one-half cent in the
average selling price of fish over the previous year.
COST OF PRODUCTS SOLD AND MARGIN. Cost of products sold was $3,721,587, an
increase of $136,587 or 3.8% compared to the same nine-month period of the
previous year, while net sales increased 17.0%. On a per pound basis, the
costs of products sold saw a decrease from 61.6 cents in the nine-month
period ended March 31, 1998 to 55.3 cents in the current year. Gross profit
on sales was 23.7% during the nine-month period ended March 31, 1999 as
compared to 14.0% in the previous year.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses during the nine-month period ended March 31, 1999 were $1,224,713,
which was $116,736 lower than in the period ended March 31, 1998. Selling,
general and administrative expenses also represented a decrease in relation
to sales volume, from 23.1 cents per pound sold in the previous year
compared to 18.2 cents per pound in the current year.
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EQUITY IN LOSSES IN INVESTMENT ON COOPERATIVE. During the nine-month period
ended March 31, 1999, the Company recorded a net charge of $221,681 for its
share of estimated losses of Delta Pride's operations. During the same
period last year, the charge recorded was $95,257. The final such charge
for the fiscal year ended June 30, 1998 was $260,112.
INTEREST EXPENSE. Interest expense increased $23,429 or 6.9% to $361,691 in
the nine-month period ended March 31, 1999 compared to the same period in
the previous year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had a current ratio of 6.9 to 1, as
compared to 4.8 to 1 as of June 30, 1998. Current assets exceeded current
liabilities by $4,539,918 in March 1999 compared to $4,776,156 in June
1998. Cash and cash equivalents increased during the nine-month period
ended March 31, 1999 by $137,740.
Cash and cash equivalents were used primarily to fund operating losses and
grow live fish inventories. Live fish inventories decreased from
approximately 9.5 million pounds on June 30, 1998 to approximately 8.4
million pounds on March 31, 1999, while the cost basis of this inventory
decreased by approximately $754,000. Feeding activity is typically at its
lowest level the winter months of the Company's third fiscal quarter. Thus,
while additions to inventory decrease during this quarter, sales remain
somewhat level, thereby reducing inventory quantities.
In February 1999, the Company contracted with its feed vendor to purchase
11,000 tons of feed at a cost of $190.00 per ton. The cost under the new
contract represents a decrease of approximately 21% compared to last year's
cost per ton.
On April 26, 1999 (subsequent to the quarter covered by this report), a
$700,000 credit line was established with a bank in Mississippi to fund
catfish feed purchases. A second line of credit in the amount of $400,000
was established to be used for catfish production. The combined lines of
credit total $1,100,000, representing a 10% increase over the line of
credit set up with the same financial institution in 1998. Borrowings are
secured by shares of the Company's cooperative processing stock, live fish
inventories, all accounts receivable, part of the Company's catfish farming
properties, all equipment owned by the Company and by life insurance
policies on two of the Company's officers. Interest and principal are to be
paid from the Company's collections of accounts receivable, with 50%
applied to the feed line and 50% applied to the production line, first to
interest and secondly to principal. Interest accrues at the prime rate plus
165 basis points and the commitment matures on March 15, 2000.
For the nine-month period ended March 31, 1999, the Company saw a net
operating cash inflow of $1,126,898 compared to an outflow of $112,497 for
the same period in the previous year.
During the nine-month period ended March 31, 1999, the Company purchased
approximately $266,000 in property and equipment, including payment for a
substantial portion of the refurbishment of 135 water acres on one of the
Company's farms.
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YEAR 2000
On January 1, 2000, any clock or date recording mechanism incorporating
date sensitive software which uses only two digits to represent the year
may recognize a date using 00 as the year 1900 rather than 2000. This could
result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business activities.
The Company has conducted a review of its internal computer systems to
determine the extent of any Year 2000 problem including potential problems
with the Company's computer system relying on computer chips or software
that use dates stored as its first two digits (e.g., 99) versus four digits
(e.g., 1999). The review addressed both information technology (IT) and
non-IT systems. Non-IT systems typically include embedded technology such
as micro controllers.
Based on discussions with the vendors of both its hardware and software
equipment, the Company has concluded that certain facets of the system will
require further upgrading to become compliant with Year 2000. The Company
recently moved its accounting and information systems to its Mississippi
office. As part of the move, the Company is engaging an outside firm to
handle these upgrades. The Company expects to have its hardware and
software systems fully compliant with Year 2000 by the summer of 1999. The
Company does not expect any related Year 2000 problems to have a material
adverse effect on the Company's future operating results or financial
condition. The cost of the move and the verification is estimated to be
between three and seven thousand dollars ($3,000 - $7,000). The cost of
verification is expected to be less than one thousand ($1,000) of this
amount.
In regard to the Non-IT systems and micro controllers, the Company has
determined that the type of equipment employed on its catfish farms do not
utilize micro controllers or do not utilize micro controllers that are
date-sensitive. Modern farm trucks, however, do utilize computers to
control ignition and other functions to cause the engine to operate.
Discussions with the vendors of these vehicles indicated that those
functions are not date-sensitive.
The Company's major suppliers or customers face the same Year 2000 issues.
If they are not Year 2000 compliant, some disruption of the Company's
operations, sales or collections could occur.
The Company has made inquiries to its feed vendor and major customers. In
each of these cases, the response has been that the respective company
views the Year 2000 issues with all seriousness, is working on the issue
internally, and expects to be fully prepared by the summer of 1999. Those
companies have agreed to update their progress with AquaPro so the Company
may be assured of their compliance or modify its own plans accordingly.
The Company's major supplier, comprising approximately half of the
Company's expense budget for a year is Delta Western Feed Cooperative.
However, feeding normally begins in late February of each year, and,
accordingly, the Company does not anticipate a Year 2000 problem associated
with its feed vendors.
The Company's credit facility ($1,100,000) is through Community Bank. As
the proceeds from sales of catfish are received, Community withholds funds
on sales to apply against the outstanding balance
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of the credit line. Community Bank officials have addressed their
significant Year 2000 issues and are currently having the results of their
efforts reviewed by banking regulators. The Bank expects to issue a letter
to AquaPro shortly indicating successful conversion of its computer
systems.
The Company's major customers are catfish processors. In every case,
discussions have revealed that the processors intend to be ready for the
Year 2000 by the summer of 1999. The processors have hired outside
consultants that are reviewing both the micro controllers in the plant
processing equipment and the office information systems.
Their contingency plans would include reverting to a manual recording of
fish deliveries, sales of processed fish to their customers, billing,
collections, and payment to fish farmers. This could result in the
processors paying less for fish or increasing market prices thereby
reducing demand and sales of catfish. This would cause a decrease in sales
dollars and/or cause the Company to sell fewer pounds of fish.
The Company's worst case Year 2000 scenarios would include the processors'
or suppliers' information technology failure. Any switch to manual record
keeping would require the Company to hire additional personnel which could
add between one and two cents ($ .01 - .02) per pound sold. Management does
not believe that sales to processors and the mechanical day-to-day
operations would cease. It should be noted that the time of the year which
Year 2000 problems could occur is during a period of slow activity on a
catfish farm. The winter is normally a time to maintain equipment, fine
tune budgets for the coming feeding season and finalize credit lines.
AquaPro has attempted to diversify its customer base to limit its exposure
to customers who do not effectively deal with their Year 2000 issues.
OUTLOOK
This outlook section contains a number of forward-looking statements, all
of which are based on current expectations. Actual results may differ
materially. These statements do not reflect the potential impact of any
future mergers or acquisitions except as noted below.
AquaPro expects that the demand for and consumption of catfish will
continue to grow. According to the U.S. Department of Census, Catfish sales
nationwide increased twelve (12%) in 1997 and seven percent (7%) in 1998.
For the first quarter of calendar 1999 sales are up an additional four
percent (4%) over the same quarter in calendar 1998. However, this rate of
sales appears to have outpaced the availability of fish resulting in a
shortage of food sized fish and lower industry sales in the first three
weeks of April than the same period last year. Effective the latter weeks
of the Company's third fiscal quarter, the price received per pound
increased fourteen percent (14%) from seventy cents ($.70) last summer and
fall to eighty cents ($.80). AquaPro's revenues are totally dependent upon
sales of its fish. The Company's operating income or loss is a function of
the number of pounds of fish sold, the price received for those fish, the
costs to produce those fish, and the costs to operate as a publicly traded
company.
AquaPro's strategy is to increase its fish production and sales while
simultaneously reducing the costs per pound of operations and
administration. It is also striving to create new revenue streams with its
minced recovery system discussed below. Increasing both production of fish
and sales requires either
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an increase in the number of fish grown per acre, an increase in the number
of acres in production, or both.
While sales for the third quarter ended March 31, 1999 did not match the
record quarter of last year, the Company has increased its production and
sales from its existing acreage for the nine month periods by a record
15.8% compared to the same periods in fiscal 1998. Sales for the last three
months of this fiscal year are expected to be approximately 1,180,000
pounds or about the same as the record quarter ended 6/30/1998. If
management's sales budget is met by June 30, 1999 the Company will have had
a 14.25% increase over the prior year. Management continues to strive to
increase the production of fish per existing water acre and has budgeted
feeding and expense levels designed to increase production an additional
ten to fifteen percent (10-15%). Management expects that such a level of
production would be the highest sustainable output on the existing water
acres. However, market acceptance of catfish, our own conversion rate of
feed to pounds of fish, weather conditions and all of the uncertainties of
farming can have a detrimental impact on the outcome of fish production.
Cost of Products Sold is calculated by dividing the pounds in inventory
into the costs of raising that inventory, which gives an average cost per
pound. Fish require twelve to eighteen months to become marketable size, so
costs accumulate during this period. As current costs of farming increase
or decrease those costs affect the average cost for the whole inventory.
The result is that it takes over a year for the full impact of changed cost
to work its way through the inventory.
During the feeding seasons of Spring, Summer, and Fall the pounds in
inventory increase dramatically at a rate normally in excess of the costs
being added, reducing the average cost in inventory. During the winter,
sales continue but without pounds being added. Costs also continue (such as
depreciation, labor, etc.). Therefore, fewer pounds are divided into higher
costs resulting in an increase in the average cost per pound in inventory
and for sales.
For the nine months ended March 31, 1998 the Costs of Product Sold was 55.3
cents per pound versus 61.6 cents a year earlier. This is a result of
efforts to reduce farming costs. During the feeding season ended fall of
1997, the Company paid approximately 30 cents in feed costs for each pound
grown on its fish. On February 11, 1999, the Company fixed the price for
this year's feed by contract with its feed supplier. The price fixed per
ton results in a cost of 23.7 cents per pound added to inventory at the
Company's assumed 2.5 to 1.0 feed conversion rate. Eleven thousand tons
have now been booked at a total cost of $550,000 less than last year's
feeding costs. However, the effect of the lower feed cost will average in
over the entire feeding season.
Selling, General and Administrative Expenses have both a variable and fixed
component. For the nine months ended March 31, 1999, Selling, General and
Administrative Expenses were reduced to 18.2 cents per pound compared to
23.1 cents per pound for the nine months ended March 31, 1998. This
reduction was the result of the combination of fewer dollars being spent
during the period while more pounds of fish were sold. Seining and hauling
(selling expenses) are variable expenses and increase with increases in
sales of fish. For the nine months ended March 31, 1999, seining and
hauling represented twenty nine percent (29%) of total Selling, General and
Administrative Expenses (or 5.18 cents per pound).
Administrative expenses are costs such as accounting, legal, costs of SEC
filings, and professional office staff. The majority of these expenses are
not incurred by family farmers but is a necessity for a
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publicly held company such as AquaPro. These expenses do not tend to vary
with fish sales volume. For the nine months ended March 31, 1999, these
expenses represented seventy-one percent (71%) of total Selling, General
and Administrative Expenses (or 13 cents per pound.)
The Company's strategic plans include increasing the number of water acres
farmed in order to increase the number of pounds of fish sold. Increased
sales of fish would require only a slight increase in administrative costs.
It is management's belief that its budgeted production on its existing
farms can support the costs of operations and being a public company. It
further believes that the production from new acreage will not cause a
proportional increase in fixed expenses for the Company and hence those new
operations can produce a better net margin.
The Company is currently rebuilding 135 water acres of ponds on its Hidden
Lakes farm at a cost of approximately $200,000. These ponds have been out
of production because of their age and poor condition. The ponds are
expected to be completed in time for this year's growing season unless
climatic conditions lengthen the refurbishing period. The addition of the
135 acres will be an increase of approximately eight percent (8%) in
operating water acres for the Company. This year the newly constructed
ponds are budgeted to be fry grow out ponds, producing approximately
$250,000 worth of fingerlings this growing season for sale to other farmers
or for use on any new acreage the Company might acquire in the future. The
following growing season the ponds are slated to become grow out ponds for
food fish producing an additional 675,000 pounds of fish (at the Company
average of 5,000 lbs. per acre for food fish ponds).
Effective April 30, 1999 (subsequent to the quarter covered by this report)
the Company contracted to purchase an existing farm. The Company is
currently on the farm premises conducting extensive due diligence. Since
the assets are to be purchased "as is", the equipment is being inspected,
land surveyed for actual acreage, and fish seined and weighed. The expected
purchase will be the Company's first such acquisition since it was
consolidated from the eight Circle Creek limited partnerships, which
transpired on June 30th 1997.
The asset purchase from Kroeker Catfish Farms, Inc. and Marvin and Marie
Kroeker is expected to total $1,453,790 for land, ponds, equipment, and
prepaid feed contracts. The farm's stocker fish and fingerlings will also
be purchased for approximately $350,000 with the exact value to be
determined before closing. An additional $220,000 of stocker fish (1/4 to
1/3 lb. each) is expected to be purchased from a third party which will
bring the farm to full production this growing season. Selling volume thru
March 2000 is budgeted at 1,400,000 pounds in addition to that budgeted on
acreage already owned by AquaPro. The closing is expected by May 31, 1999.
The expected acquisition of 325 water acres when added to the newly
refurbished 135 acres at the Hidden Lakes farm will create a 28% increase
in production acres to 2,080 for AquaPro. No new administrative personnel
need to be added to operate the new water acres, and since each of the
three parcels borders one of our existing farms, fewer additional farm
employees are needed.
The Company is continuing its efforts to bring the process of recovering
high quality minced fish protein from the frames and trimmings of the fish
to the catfish industry. While such processes have existed for years in the
ocean fish industry, the catfish industry has not yet developed the
process, instead opting to sell the frames and trimmings as Offal to
rendering plants. Offal normally sells for two cents per pound but, because
of current low prices in the meal and oil market, now sell for 1/2 cent
14
<PAGE> 15
per pound. High quality minced block sells for a gross price of forty to
seventy (.40 - .70) cents per pound. The Company offers processors a
turn-key installation of the system in return for sharing a modest share of
the profits with AquaPro. The industry's largest processor, Delta Pride,
reviewed the Company's proposal and decided to attempt the project itself.
It obtained limited success and has currently decided to slow its emphasis
on development, instead focusing on more key operating problems at the
plant.
One other processor has hired a consulting and due diligence firm that has
met with our engineers in Alaska and desires to meet with our purchasers of
finished product. In order to protect its investment in this project,
AquaPro has proposed that the firm sign a confidentiality agreement before
agreeing to introduce the buyers. AquaPro has received verbal reassurances
and written confirmation is expected shortly. Management remains convinced
that the project is viable and will continue to pursue it.
The Company is encouraged by: (1) The improvement in cash flow from
operations as addressed in the "Liquidity and Capital Resources" section of
this report, (2) This year's purchase of feed at a lower cost than last
year, which should reduce costs of sales and increase gross profit over the
next twelve to eighteen months, and (3) The expected acquisition of a new
farm location which should increase volume without substantially increasing
administrative costs. These factors should combine to improve the Company's
bottom line over the foreseeable future.
The Company's future results of operations and the other forward-looking
statements contained in this outlook - in particular the statements
regarding growth in the catfish industry, gross margin, capital spending,
marketing and general and administrative expenses, involve a number of
risks and uncertainties. In addition to the factors discussed above, among
the other factors that could cause actual results to differ materially are
the following: risks involving the price and availability of equipment and
supplies, climatic, environmental and biological risks such as weather,
natural catastrophes and disease, and market risks regarding the price and
strength of the consumer market for the Company's catfish production. The
risk exposure of each of these categories is amplified by competition
between the Company and other catfish producers, particularly those located
within the Mississippi Delta. If the Company is unable to maintain its
operating costs at levels which allow the Company to realize a profit in
its catfish sales, the Company will not be profitable and if these
conditions would persist, the Company would fail and the shareholders would
lose some or all of their investment.
Certain risks, such as adverse climatic conditions, natural disasters,
disease, consumer demand and competition, are outside the Management's
control and, to a varying extent, cannot be planned for or avoided. The
occurrence of one or more of these events could deplete the Company's
operating reserves and resources and thereby result in the need for
additional capital.
AquaPro believes that it is in the right place at the right time in the
development of aquaculture. It believes that it has the talent and
experience to obtain business success, but future events such as access to
credit lines, revenues, costs, margins, and profits are all influenced by a
number of factors, including those discussed above, all of which are
inherently difficult to forecast.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
During the nine months ended March 31, 1999, the
Company converted all outstanding Preferred Stock
Warrants, according to their terms, into three-tenths
(0.03) of a share each. In total, 70,589 new shares
were issued to the holders of the warrants.
Also during the nine months ended March 31, 1999, the
Company issued 6,500 shares in grants to employees,
and canceled 12,000 shares forfeited by non-vested
employees. 438 shares were issued to outside investors.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits: 27 Financial Data Schedule
Reports on Form 8-K: None
16
<PAGE> 17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AquaPro Corporation
(Registrant)
Dated: May 13, 1999 By: /s/ Mike W. Jackson
------------ --------------------
Chief Accounting Officer
And Secretary
17
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