<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from ___________ to ______________
Commission file number 0-29258
AQUAPRO CORPORATION
- --------------------------------------------------------------------------------
(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)
105 Bonnabrook Dr., Suite 202, Hermitage, Tennessee 37076
- --------------------------------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (615) 899-0804
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 November 16, 1998, Registrant had outstanding 4,818,354 shares of common
stock, its only class of common equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
<PAGE> 2
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 FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMPARED
TO THE QUARTER ENDED SEPTEMBER 30, 1997
REVENUE. Net sales during the three month period ended September 30,
1998 totaled $1,678,440 compared to $1,293,443 for the same period in 1997. This
represents an increase of $384,997 or 29.8%. Volume increased 473,820 pounds to
2,245,820 pounds of catfish sold, a record first quarter high for the Company,
compared to 1,772,000 pounds sold during the three month period ended September
30, 1997. Accordingly, volume represented a 26.7% increase during the three
months ended September 30, 1998 compared to the same period in 1997. Volume
increased due to increased stocking and feeding levels attained in calendar 1998
compared to calendar 1997.
Sales volume is greatly affected by stocking and feeding levels in the
12 to 18 month grow out period required for fish to mature to market size. This
increase in volume was partially enhanced by a price increase of approximately 2
cents a pound to 74.7 cents realized in 1998 compared to 1997 when the average
price of fish sold was 72.9 cents. This increase in average price resulted from
higher prices received by the Company's major customers from food distributors,
restaurants, and grocers due to a shortage in supply of fish. The Company's
major customers in turn passed on the higher prices to the catfish farmers,
including the Company. In November 1998, prices have lowered to the range of 68
to 75 cents per pound, primarily due to the seasonal increase of supply of fish
after the growing season and the lower demand during the Thanksgiving and
Christmas seasons. However, the Company cannot predict the future trend of fish
prices.*
Management expects sales volume to decline slightly from the quarter
ended September 30, 1998, but to exceed the volume of sales from the quarter
ended December 31, 1997.*
<PAGE> 3
GROSS PROFIT during the three month period totaled $377,299 compared
to $203,933 for the same period in 1997. This represents an increase of $173,366
or 85% in Gross Profit. Gross Profits are expected to continue to increase as
Cost of Goods Sold decrease.*
COST OF PRODUCTS SOLD AND MARGIN. Cost of Products Sold was $1,301,141,
an increase of $210,131 or 19.3% compared to the same three month period of
1997, while net sales increased 29.8%. Margin from fish sales was 22.5% during
the three month period ended September 30, 1998 as compared to a margin of 15.7%
in the same period in 1997.
Cost of Goods Sold per pound decreased 7% to 58 cents per pound for the
quarter ended September 30, 1998 from 62 cents in the quarter ended September,
1997.
Management expects Cost of Goods Sold per pound to continue to reduce
due to increased inventory growth at reduced cost.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and
Administrative expenses during the three month period ended September 30, 1998
were $382,258 or $48,660 lower than in the three month period ended September
30, 1997. This is a 12.7% decrease in total costs and a decrease of 30.2%, based
on volume. Selling, General, and Administrative costs per pound reduced from 24
cents to 17 cents per pound sold. Seining and hauling increased approximately
$30,000 because of increased sales, with the net decrease resulting from
reductions in administrative, legal, and accounting costs.
DELTA PRIDE ASSESSMENT (EQUITY IN LOSSES ON INVESTMENT IN COOPERATIVE).
During the three month period ended September 30, 1998, the Company recorded a
net charge of $23,000 for its share of estimated losses of Delta Pride's
operations for its current fiscal year. No reserve was recorded for the period
ended September 30, 1997.
Starting in October of 1998, the Company began making the first of five
$34,984.59 monthly payments to Delta Pride. A sixth and final payment of
$30,632.76 is due the 15th of March, 1999. The total payments of $205,555.71
represent the cooperative assessment to the Company for its share of Delta
Pride's losses for its fiscal year ended June 30, 1998.
In an effort to reduce these charge backs, the Company's president has
run for and been elected to the Board of Directors of Delta Pride. The first
year of his three year term ended in October of 1998. The results of the efforts
of the Board of Directors at Delta Pride have not yet been successful in
reducing that cooperative's losses. There can be no assurance that the losses
can be stopped*
<PAGE> 4
Over the last three years, the Company has reduced its dependence upon
sales to Delta Pride from approximately 90% of sales to approximately 45% of
sales expected for the current year.*
INTEREST EXPENSE. Interest expense increased $34,734 or 36.3% to $130,368
in the three month period ended September 30, 1998 compared to the same period
in 1997. The average outstanding balances on short-term feed lines of credit
were higher in the quarter ended September 30, 1998 than in the same period in
the prior year. Management anticipates slightly higher levels of debt and
interest expense during the next four quarters due to funding certain capital
expenditures and increased levels of short-term borrowings during the summer
feeding season.*
SEASONALITY OF OPERATING RESULTS. In prior years, the revenues of AquaPro
have fluctuated from quarter to quarter depending on stocking levels and results
of feeding. Also, prices for live fish have tended to rise during the first part
of the year and drift downward during the summer, only to rise again in
September and October and fall in November and December before beginning the
annual price cycle again. Accordingly, interim operating results of the Company
may vary from quarter to quarter and year to year and cannot be predicted with
certainty.*
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a current ratio of 3.5 to 1, as
opposed to 4.8 to 1 at June 30, 1998. Current assets exceeded current
liabilities by $4,811,804 in September 1998 compared to $4,776,156 in June 1998.
Cash and cash equivalents reduced during the three month period ended September,
1998 by $46,767.
Cash and cash equivalents were used primarily to fund operating expenses
and to grow live fish inventories. Live fish inventories increased by
approximately $567,959 during the three month period ended September 30, 1998
due to the three months of feeding during the summer. Management expects live
fish inventories to decrease during the next two quarters from normal sales
activities since the feeding season does not begin fully until the second
calendar quarter of 1999. Feed costs are added to inventory when purchased.
The Company intends to fund its operations primarily through fish sales,
cash reserves and its $1,000,000 feed credit line with a bank. On May 14, 1998,
a $1,000,000 credit line was established with a bank in Mississippi as a
revolving line of credit solely for catfish feed purchases. Borrowings are
secured by shares of the Company's cooperative processing stock, accounts
receivable, live fish inventories and two of the Company's farming properties.
Interest is paid monthly and principal is paid with approximately 55 percent (40
cents per pounds of fish sold) of all collections of accounts receivable.
<PAGE> 5
Interest accrues at the prime rate plus 165 basis points and the commitment
expires March 15, 1999 with no prepayment penalty. As of November 12, 1998 the
balance owed on the revolving line of credit is $624,529. The Company, based on
its current sales schedule, intends to retire the entire amount before the
March, 1999 due date.*
Notwithstanding the above, Management believes that additional capital will
be necessary to support the Company's growth and on going operations. Management
believes that current cash combined with cash proceeds from sales of fish will
be adequate to fund its planned existing operation through June 30, 1999.
However, additional capital will be needed to finance any future capital
expenditures. Moreover, the Company may require additional capital, which it may
seek through equity or debt financing, collaborative arrangements with corporate
partners, equipment lease financing or funds from other sources. No assurance
can be given that these funds will be available to the Company on acceptable
terms, if at all. In addition, because of the Company's possible need for funds
to support future operations, it may seek to obtain funds when conditions are
favorable, even if it does not have an immediate need for additional capital at
such time.
Item 3. 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. AquaPro is in the
process of moving its accounting and information systems to its Mississippi
office. As part of the move, the Company has engaged an outside firm to handle
these upgrades. The Company expects to have the system functional in Mississippi
by the summer of 1999. AquaPro does not expect that any such problems will 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. The source of
funds for this cost is accounted for in the Company's normal office overhead.
<PAGE> 6
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. In each case, the information
technology used is of a simple basis and compliance on the easier side of the
difficulty continuum.
The Company's major supplier, comprising approximately half of the
Company's expense budget for a year (i.e. $2,400,000) is Delta Western Feed
Cooperative. However, no feeding is expected until late February. If Delta
Western could not comply by that date and there were a total break down of their
systems, manual books would have to be kept.
The Company's credit facility ($1,000,000) is through Community Bank. As
the proceeds of sales of catfish are received, Community withholds forty cents
($.40) per pound of fish sales to apply against the outstanding balance 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 credit facility, feed purchases and draws and repayments on
its credit line go hand in hand. Historically, Delta Western has guaranteed
payment of ninety percent (90%) of the Company's feed line to the Bank.
Currently the day-to-day transactions are reviewed by AquaPro, Delta Western and
the Bank.
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.
<PAGE> 7
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 worst case 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. It is not thought that sales 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
vendors who do not effectively deal with their Year 2000 issues.
<PAGE> 8
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, hereunto duly authorized.
AquaPro Corporation
(Registrant)
Dated: February 9, 1999 By: /s/ George S. Hastings, Jr
---------------- --------------------------
President and Chairman
