U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________ .
Commission File No. 0-24490
AQUAGENIX, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0419263
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6500 Northwest 15th Avenue, Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(305) 975-7771
(Issuer's telephone number)
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 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 for the past 90
days. Yes x No
The number of shares outstanding of the issuer's Common Stock, $.01 Par Value,
as of August 15, 1996 was 3,934,058.
Transitional Small Business Disclosure Format: Yes No x
Page 1 of 18 Pages
AQUAGENIX, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1: Financial Statements
Consolidated Balance Sheets as of December 31,
1995 and June 30, 1996 (unaudited) 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1995 and
June 30, 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1995 and June 30, 1996
(unaudited) 5
Notes to Consolidated Financial Statements 6-8
Item 2: Management's Discussion and Analysis or Plan of
Operation 9-15
PART II. OTHER INFORMATION 16-17
SIGNATURES 18
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
Assets 1995 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 687,183 $ 2,482,646
Marketable securities 639,095 0
Accounts receivable, net of allowance for doubtful
accounts of $40,632 and $45,392, respectivel 997,567 989,205
Income tax receivable 618,003 12,053
Inventories 370,497 501,304
Net assets of discontinued operations 0 376,027
Prepaid expenses and other 254,575 412,643
Total current assets 3,566,920 4,773,878
Property and equipment, net 1,746,016 1,859,362
Intangible assets, net 3,222,013 4,851,207
Deferred financing costs, net 146,875 206,873
Other assets 93,239 816,884
Total assets $ 8,775,063 $ 12,508,204
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 628,578 $ 167,346
Borrowings under credit agreements 522,317 404,415
Accounts payable 562,712 1,183,412
Net liabilities of discontinued operations 449,550 0
Other current liabilities 411,438 187,462
Total current liabilities 2,574,595 1,942,635
Long-term debt, net of current maturities 5,032,388 5,250,926
Deferred income tax 0 376,000
Total liabilities 7,606,983 7,569,561
Stockholders' equity:
Preferred stock, par value $.01,
1,000,000 shares authorized,
no shares issued and outstanding 0 0
Common stock, par value $.01,
10,000,000 shares authorized,
3,210,367 and 3,871,558 shares issued
and outstanding, respectively 32,104 38,716
Additional paid-in capital 8,419,164 11,351,481
Accumulated deficit (7,332,385) (6,451,554)
Unrealized gain on securities 49,197 0
Total stockholders' equity 1,168,080 4,938,643
Total liabilities and stockholders' equity $ 8,775,063 $ 12,508,204
The accompanying notes are an integral part of the Consolidated Financial
Statements
Page 3
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Revenues - Aquatic management operations $ 1,490,192 $ 2,479,478 $ 2,855,344 $ 4,732,112
Costs and expenses:
Costs of services 741,932 1,309,029 1,404,680 2,403,971
Selling, general and administrative 759,388 752,414 1,253,187 1,403,048
Depreciation and amortization 41,103 141,943 89,588 279,032
Total costs and expenses 1,542,423 2,203,386 2,747,455 4,086,051
Operating (loss) income (52,231) 276,092 107,889 646,061
Interest income 41,941 1,982 111,080 43,293
Interest expenses (82,391) (161,619) (92,174) (322,409)
(Loss) income from continuing operations before
income taxes (92,681) 116,455 126,795 366,945
Income tax (benefit) provision (31,512) 0 14,088 0
(Loss) income from continuing operations (61,169) 116,455 112,707 366,945
Discontinued operations:
Loss from environmental remediation business
segment, net of income taxes (269,059) 0 (278,550) 0
Change in allowance for estimated phase-out losses
from environmental remediation segment 0 (404,818) 0 464,689
Net (loss) income $ (330,228) $ (288,363) $ (165,843) $ 831,634
Earnings (loss) per common and common equivalent shares:
Continuing operations - primary $ (0.02) $ 0.03 $ 0.03 $ 0.11
Continuing operations - assuming full dilution (0.02) 0.03 0.03 0.11
Discontinued operations (0.09) (0.12) (0.08) 0.14
Net (loss) income per common share (0.11) (0.09) (0.05) 0.25
Weighted average common and common equivalent shares
outstanding:
Primary 3,126,887 3,411,639 3,342,194 3,322,364
Assuming full dilution 3,126,887 3,417,309 3,342,194 3,325,200
The accompanying notes are an integral part of the Consolidated Financial Statements
</TABLE>
Page 4
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
________
Six Months Ended
June 30
1995 1996
Cash flows from operating activities:
Net (loss) income $ (165,843) $ 831,634
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 89,588 279,032
(Gain) loss on sale of property and equipment 3,741 (9,312)
Gain on sale of securities (23,477) 0
Provision for doubtful accounts 4,576 50,942
Consulting fees 0 88,930
Discontinued operations (193,190) (793,238)
Net change in operating assets and liabilities (548,541) (23,852)
Net cash (used in) provided by operating
activities (833,146) 424,136
Cash flows from investing activities:
Proceeds from sale of marketable securities 1,654,785 624,187
Proceeds from sale of property and equipment 8,965 273,596
Cash paid for acquisitions (16,724) (51,221)
Purchase of marketable securities (328,878) 0
Purchase of property and equipment (110,666) (502,846)
Net cash provided by investing activities 1,207,482 343,716
Cash flows from financing activities:
Repayments of credit agreements (986) (117,902)
Payments of notes payable and long-term debt (104,924) (609,487)
Proceeds from other borrowings 9,885 255,000
Issuance of common stock 0 1,500,000
Net cash (used in) provided by financing
activities (96,025) 1,027,611
Cash and cash equivalents:
Increase 278,311 1,795,463
Beginning balance 270,847 687,183
Ending balance $ 549,158 $ 2,482,646
The accompanying notes are an integral part of the Consolidated Financial
Statements
Page 5
AQUAGENIX, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the
audited annual consolidated financial statements. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the footnotes thereto, together
with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995 of Aquagenix, Inc. (the
"Company"), as filed with the Securities and Exchange Commission. The
December 31, 1995 financial statements were derived from audited
consolidated financial statements, but do not include all disclosures
required by generally accepted accounting principles.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial
position and results of operations. The results of operations for the
interim periods are not necessarily indicative of the results to be
expected for the full year.
2. Business Combination
On June 7, 1996, the Company issued 270,000 shares of common stock and
paid $150,000 in cash for all the outstanding common stock of Aquatic
and Right of Way Control, Inc. ("ARC"). The Company entered into a
two-year employment agreement with one of the former shareholders of
ARC.
The Company has accounted for the acquisition using the purchase method
of accounting and the excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over 10-25 years.
The results of operations of the acquired company have been included in
the consolidated financial statements from the date of acquisition.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and ARC as if the acquisition had
occurred on January 1, 1995:
Six Months Ended June 30,
1995 1996
Revenues - Aquatic management operations $ 3,295,742 $ 5,127,742
Income from continuing operations $ 170,494 $ 417,202
Earnings per common and common
equivalent share - assuming full dilution $ 0.05 $ 0.12
Page 6
The pro forma results do not necessarily represent results which would
have occurred if the acquisition had taken place at the beginning of the
period, nor are they indicative of the results of future combined
operations.
ARC was a leading provider of industrial vegetation and utility right of
way management services in Florida, Georgia and Alabama. These services
include the control of noxious weeds in the right of way areas adjacent
to distribution and transmission power lines. The Company intends to
continue the existing business and to further develop the industrial
vegetation and utility right of way management services previously
conducted by ARC.
3. Discontinued Operations
On April 25, 1996, the Company sold certain assets and liabilities of
Haas Environmental Services, Inc. ("HES") to Heart Environmental Services,
Inc. (the "Buyer"), a New Jersey corporation for a total consideration of
$1,907,021. The aggregate consideration comprises (i) $681,000 in cash,
(ii) a three-year promissory note of $600,000 issued by the Buyer, bearing
interest at 9% per annum and collaterized by the pledge of 499 shares of
the Buyer's Common Stock pursuant to a Stock Pledge Agreement, (iii) the
cancellation of total obligations due to H&H Investments Corporation, Mr.
Eugene M. Haas and Mr. Robert E. Haas (collectively known as the "Haas
Shareholders") which amounted to $626,021. No pro forma information has
been provided for the disposal of HES since the operations of this
subsidiary were treated as discontinued operations in 1995.
The gain realized from the sale of HES was partly offset by the additional
provision made by the Company during the three month s ended June 30,
1996, for estimated phase-out losses relating to the discontinuation of
the remaining remediation subsidiary, Florida Underground Petroleum Tank
Contractors, Inc. ("FUPTC"), which includes anticipated operating losses
from December 1995 to the expected date of disposal ("the phase-out
period"). The phase-out period has been extended to allow more time to
complete the outstanding contractual obligations and to locate a buyer
for its remediation assets. Management currently estimates that the net
realizable value of its remaining remediation business approximates the
net book value of its net assets. However, higher than anticipated losses
from the completion of the remaining contractual obligations and higher
discontinuation expenses during the phase-out period combined with the
inability to locate a buyer for the assets of FUPTC may result in higher
than anticipated phase-out losses which may negatively impact year-to-date
results.
4. Earnings Per Share
Both primary and fully diluted earnings per common and common equivalent
shares were computed by dividing net income by the weighted average number
of shares outstanding after giving effect to dilutive stock options and
warrants to purchase common stock.
5. Income Taxes
No income taxes have been provided for the three months and six months
ended June 30, 1996 since the Company has a net operating loss
carryforward which is available to offset taxable income.
Page 7
6. Capital Lease
During April 1996, the Company entered into a sale and leaseback capital
lease agreement, for a principal amount of $300,000, with a commercial
equipment financing company to refinance the capital expenditures for
application equipment.
7. Private Placements
During June 1996, the Company completed three equity private placements
totaling 375,000 shares of the common stock of the Company at a price of
$4 per share for a total cash consideration of $1,500,000. Of the total,
125,000 shares were issued to Mr. Jeffrey T. Katz, a director of the
Company.
8. Subsequent Events
On July 23, 1996, the Company completed a private placement of 62,500
shares of common stock at a purchase price of $4 per share for an
aggregate amount of $250,000.
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
General
Aquagenix, Inc. (the "Company"), through its wholly-owned subsidiaries,
provides aquatic and industrial vegetation management services to both
governmental and commercial customers in Florida, Alabama, Georgia, North and
South Carolina. The Company's continued emphasis on quality service, growth
and acquisitions has resulted in the Company becoming the current largest
provider of aquatic and industrial vegetation management services in the
Southeastern United States. The Company's operations have grown since 1994
as a result of internal growth and the selective acquisition of privately
held waterway and vegetation management companies in Florida, Georgia and
the Carolinas.
In November 1995, the Company approved a plan to dispose of the environmental
remediation segment which comprises the Company's other two subsidiaries,
Florida Underground Petroleum Tank Contractors, Inc. ("FUPTC") and Haas
Environmental Services, Inc. ("HES"). Accordingly, the operations of the
environmental remediation segment have been accounted for as discontinued
operations and the operating losses and discontinuation expenses during the
phase-out period have been provided for in 1995. The operating results for
1996 include only the continuing operations relating to the aquatic and
vegetation management business.
Results of Operations
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1996
Revenues. The Company's revenues increased by $989,286, or 66.4%, from
$1,490,192 during the three months ended June 30, 1995 to $2,479,478 during
the three months ended June 30, 1996. The increase in revenues was primarily
attributable to an increase in the number of recurring waterway and industrial
vegetation management contracts as well as wetland planting contracts. This was
mainly brought about by expansion of its customer base in Florida, northern
Georgia, North Carolina and South Carolina as a result of intensive marketing
efforts and acquisitions.
In addition, the acquisition of Aquatic & Right of Way Control, Inc. ("ARC
Acquisition") contributed $100,423 of revenues from right of way contracts in
the current quarter. ARC is a leading provider of industrial vegetation and
utility right of way management services in Florida, Georgia and Alabama.
These services include weed control and growth regulation in right of way
areas adjacent to distribution and transmission power lines. The Company
has entered into a two-year employment agreement with ARC's former shareholder
/president and he will continue to develop the industrial right of way business
as well as to ensure continuity and goodwill. In addition to the typical
aquatic vegetation management customers, the Company has begun targeting its
marketing efforts at utilities and transportation authorities throughout the
Southeast and Sunbelt states to secure right of way contracts for the regions'
extensive network of power lines and highways. There has been a growing
trend in the outsourcing of work traditionally performed in-house by these
governmental and quasi-governmental agencies and private utility companies.
Page 9
In July 1996, the Company secured a $1 million three-year contract with Florida
Power & Light Company, Florida's largest electric utility company, for the
provision of industrial vegetation management services to their various power
substations throughout Florida.
Cost of services. Cost of services increased by $567,097, or 76.4%, from
$741,932 during the three months ended June 30, 1995 to $1,309,029 during the
three months ended June 30, 1996. The increase in cost of services was mainly
attributable to increased chemicals, insurance, fuel and labor costs which was
directly a result of the Company's expanding operations. As a percentage of
revenues, cost of services have increased from 49.8% in the second quarter of
1995 to 52.8% in the second quarter of 1996. The reduced gross margin was
attributable to a higher mix of industrial vegetation management contracts in
the second quarter of 1996 as compared to the corresponding quarter of 1995.
Gross margins from these contracts are generally lower than the aquatic
vegetation management contracts as they involve a higher usage of chemicals.
In addition, third party subcontractors are employed for control of vegetation
along utility lines using helicopters and aerial spray equipment.
Selling, general and administrative. Selling, general and administrative
expense decreased by $6,974, or 1.0%, from $759,388 during the three months
ended June 30, 1995 to $752,414 during the three months ended June 30, 1996.
The decrease in selling, general and administrative expenses was due mainly
to on-going cost control measures taken in relation to general corporate
expenses which have significantly offset the higher operating expenses
associated with the expanding operations and the assimilation of the ARC's
operations. As a percentage of revenues, such expenses have decreased from
51.0% in 1995 to 30.3% in 1996. This was attributable to operating
efficiencies and economies of scale achieved following the ARC, AmerAquatic
and L&L acquisitions and internal growth experienced by the Company. The
main factors contributing to the decrease in selling, general and administrative
expenses as a percentage of revenues as compared to 1995 include reduced
consulting and professional fees, and lower public relations and travel
expenses resulting from the streamlining of corporate operations.
Depreciation and amortization. Depreciation and amortization expense
increased from $41,103 in the second quarter of 1995 to $141,943 in the
second quarter of 1996. Such expense as a percentage of revenues increased
from 2.8% for the quarter ended June 30, 1995 to 5.7% for the corresponding
quarter in 1996. This increase reflected the depreciation of the additional
equipment acquired in connection with the AmerAquatic acquisition including
the purchase of application equipment in the first quarter of 1996. In
addition, there was an increase in amortization relating to intangibles
acquired from the AmerAquatic and L&L acquisitions.
Interest income. Interest income decreased by $39,959 from $41,941 for
the second quarter of 1995 to $1,982 for the corresponding quarter of 1996.
The decrease in interest income was consistent with the lower average balance
of marketable securities in 1996 as compared to 1995.
Interest expense. Interest expense increased by $79,228 from $82,391
during the three months ended June 30, 1995 to $161,619 during the three
months ended June 30, 1996 primarily as a result of the 12.5% Senior Secured
Note of $5,000,000 issued in October 1995 to finance the AmerAquatic
acquisition.
Page 10
Discontinued operations. The change in allowance for estimated phase-out
losses from discontinued operations related principally to an increase in
such allowance for the remaining remediation subsidiary, FUPTC. This has
been partly offset by the gain on sale of certain assets of HES. The phase-
out period for FUPTC has been extended to allow more time to complete the
outstanding contractual obligations and also to locate a buyer for its
remediation assets.
Quarterly results. Income from continuing operations increased by
$116,936 from a loss of $61,169 during the three months ended June 30, 1995
to $112,707 during the three months ended June 30, 1996. There was no
provision for income taxes for the three months ended June 30, 1996 in view
of the net operating loss carryforward. The second quarter's results continue
to indicate significant growth potential of the Company's aquatic and industrial
vegetation management business, especially in its industrial vegetation
management business, where the Company has begun to create a niche for itself,
with the ARC Acquisition providing the springboard from which marketing efforts
are being targeted at electric and power utilities, telephone and railroad
companies, transportation departments and industrial sites.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1996
Revenues. The Company's revenues increased by $1,876,768, or 65.7%, from
$2,855,344 during the six months ended June 30, 1995 to $4,732,112 during
the six months ended June 30, 1996. The increase in revenues was primarily
attributable to an increase in the number of recurring waterway and industrial
vegetation management contracts as well as wetland planting contracts. Much
of the growth in revenues resulted from more intensive marketing efforts
combined with an increasing trend toward governmental and private outsourcing
and the growing need to comply with environmental laws and regulations. The
acquisitions of AmerAquatic and L&L in last quarter of 1995 have also
contributed to this growth by enabling the Company to further expand its
customer base in Florida, northern Georgia, North Carolina and South Carolina.
In addition, the acquisition of ARC, which was completed on June 7, 1996,
contributed $100,423 of revenues from right of way contracts in the current
quarter. ARC is a leading provider of industrial vegetation and utility right
of way management services in Florida, Georgia and Alabama. These services
include the control of weeds and undergrowth in right of way areas adjacent
to distribution and transmission power lines.
Cost of services. Cost of services increased by $999,291, or 71.1%, from
$1,404,680 during the six months ended June 30, 1995 to $2,403,971 during
the six months ended June 30, 1996. The increase in cost of services was
mainly attributable to increased chemicals, insurance, fuel and labor costs
which was directly a result of the Company's expanding operations. As a
percentage of revenues, cost of services have increased from 49.2% for the
six months ended June 30, 1995 to 50.8% for the six months ended June 30,
1996. The reduced gross margin was attributable to a higher mix of
industrial vegetation management contracts in the six months ended June 30,
1996 as compared to the corresponding period of 1995. Gross margins from
these contracts are generally lower than the aquatic vegetation management
Page 11
contracts as they involve a higher usage of chemicals. In addition, third
party subcontractors are employed for control of vegetation along utility
lines using helicopters and aerial spray equipment.
Selling, general and administrative. Selling, general and administrative
expense increased by $149,861, or 12.0%, from $1,253,187 during the six months
ended June 30, 1995 to $1,403,048 during the six months ended June 30, 1996.
The increase in selling, general and administrative expenses was due mainly to
higher insurance and travel expenses, personnel and facility costs associated
with the expanding operations and expenditures to support the Company's
infrastructure. This has been offset by on-going cost control measures taken
in relation to general corporate expenses. As a percentage of revenues, such
expenses have decreased from 43.9% in 1995 to 29.6% in 1996. This was
attributable to operating efficiencies and economies of scale achieved following
the ARC, AmerAquatic and L&L acquisitions and internal growth experienced by the
Company. The key factors contributing to the lower percentage of selling,
general and administrative expenses to revenues as compared to the previous
period include reduced consulting and professional fees and lower public
relations and travel expenses resulting from the streamlining of corporate
operations.
Depreciation and amortization. Depreciation and amortization expense
increased from $89,588 for the first six months of 1995 to $279,032 for the
first six months of 1996. Such expense as a percentage of revenues increased
from 3.1% for the six months ended June 30, 1995 to 5.9% for the corresponding
period in 1996. This increase reflected the depreciation of the additional
equipment acquired in connection with the AmerAquatic acquisition including
the purchase of application equipment in the first quarter of 1996. In
addition, there was an increase in amortization relating to intangibles
acquired from the AmerAquatic and L&L acquisitions.
Interest income. Interest income decreased by $67,787, from $111,080
for the six months ended June 30, 1995 to $43,293 for the six months ended
June 30, 1996. The decrease in interest income was consistent with the lower
average balance of marketable securities in 1996 as compared to 1995.
Interest expense. Interest expense increased by $230,235 from $92,174
during the six months ended June 30, 1995 to $322,409 during the six months
ended June 30, 1996, primarily as a result of the 12.5% Senior Secured Note
of $5,000,000 issued in October 1995 to finance the AmerAquatic acquisition.
Discontinued operations. The change in the allowance for estimated phase-out
losses from discontinued operations for the six months ended June 30, 1996
related principally to the gain on sale of certain assets of HES which has been
partly offset by an increase in allowance for estimated phase-out losses for
the remaining remediation subsidiary, FUPTC. This increase in allowance for
estimated phase-out losses in the second quarter of 1996 has resulted in a
decrease in the earnings per common and common equivalent share for the
discontinued operations from $0.26 for the three months ended March 31, 1996
to $0.14 for the six months ended June 30 ,1996. The phase-out period for
FUPTC has been extended to allow more time to complete the outstanding
contractual obligations and to locate a buyer for its remediation
assets. Management currently estimates that the net realizable value of its
remaining environmental business approximates the net book value of its net
assets. However, the inability to locate a buyer for the assets of FUPTC,
Page 12
higher than anticipated operating losses from the completion of the
remaining contractual obligations and higher discontinuation expenses during
the remaining phase-out period may result in higher than anticipated phase-out
losses which may negatively impact the year-to-date results.
Liquidity and Capital Resources
Working capital. Working capital (excluding net assets/liabilities of
discontinued operations), which consists principally of cash and accounts
receivable , was $1,441,875 at December 31, 1995, compared to $2,455,216 at
June 30, 1996. The increase in working capital was mainly attributable to
the cash proceeds from the issuance of common stock in connection with certain
private placements undertaken in June 1996. Of the Company's accounts
receivable outstanding at December 31, 1995 and June 30 ,1996, $239,017 (23.5%)
and $356,316 (36.0%) were due from five customers, respectively. The Company
secured larger non-recurring contracts for the six months ended June 30, 1996
as compared to 1995. The collection period for accounts receivable improved
from 39 days at December 31, 1995 to 32 days at June 30, 1996. At June 30,
1996, the Company's allowance for doubtful debts was $45,392 which the Company
believes is currently adequate to cover anticipated losses based on prior
experience.
At June 30, 1996, the Company has loan agreements with SunTrust Bank, Miami,
N.A. ("SunTrust") which provided for borrowings under a revolving line of
credit of up to $750,000, a 15-year loan in the principal amount of $94,144
collaterized by certain real property and equipment loans in the principal
amounts of $90,624. At June 30, 1996, an aggregate of $529,787 was outstanding
under the loan agreements, of which $404,415 was outstanding under the line of
credit, $88,772 was outstanding under the 15-year loan and $36,600 was
outstanding under equipment loans. Advances under the line of credit are based
on certain borrowing formulas relating to eligible accounts receivable of EWM.
The receivables of the discontinued operations remain as pledged collateral to
this line of credit but cannot be used as part of the borrowing base under the
line. Interest accrues at 1.5% above prime for the line. This line of credit
expires in March 1997.
Capital Commitments As of June 30, 1996, the Company has capital
commiments to purchase fifty-five specialized application equipment known as
"Spra-Buggies" over the next 28 months at a purchase price of $25,000 per
equipment. The Company anticipates that these capital expenditures will be
funded by a combination of cash flows from operations and loans from equipment
financing companies.
Cash flows from operating activities. For the six months ended June 30,
1995, the Company's cash flows used in operations was $833,146 as compared to
cash generated from operations of $424,136 for the six months ended June 30,
1996. Of the net cash used in operating activities for the six months ended
June 30, 1995, $300,718 were used in continuing operations whereas for the
six months ended June 30, 1996, net cash provided by continuing operations
amounted to $752,685. The increase in cash flows from continuing operations
was primarily attributable to the cash flows generated from internal growth
and from acquired operations.
Page 13
Cash flows from investing activities. Cash provided by investing activities
in the six months ended June 30, 1996 of $343,716 was derived primarily
from the liquidation of marketable securities. This was partly offset by
capital expenditures of $502,846 for the six months ended June 30, 1996 which
related mainly to the purchase of application equipment.
Cash flows from financing activities. The Company repaid a total of
$727,389 of its borrowings during the six months ended June 30, 1996 which
included the repayment of the promissory note of $500,000 issued in
connection with the AmerAquatic Acquisition in October 1995. In April 1996,
the Company entered into a sale and leaseback capital lease agreement, for a
principal amount of $300,000, with a commercial equipment financing company
to refinance the capital expenditures for land-based application equipment
(also known as to "spra-buggies").
In June 1996, the Company completed three equity private placements totaling
375,000 shares of the common stock of the Company at a price of $4 per share
for a total cash consideration of$1,500,000. Of the total, 125,000 shares
were issued to Mr. Jeffrey T. Katz, a director of the Company. On July 23,
1996, the Company completed another private placement of 62,500 shares of the
common stock of the Company at a purchase price of $4 per share for an aggregate
amount of $250,000. The proceeds from these equity placements will primarily
be used to finance working capital and future acquisitions. The Company
continues to pursue potential acquisitions and to seek financing alternatives
such as private debt or equity offerings with potential investors or an increase
in credit facilities with banking institutions.
Discontinued operations. During the six months ended June 30, 1996, the
Company repaid all advances made to the discontinued operations under the
previous revolving line of credit with SunTrust which amounted to approximately
$818,000 and the long-term loan of $1,975,000 to SunTrust which was used to
finance the acquisition of HES in 1995. The repayments were funded primarily
from the proceeds of the liquidation of marketable securities and the loan
from USL Capital Corporation. The repayments of these liabilities combined
with net income from discontinued operations for the six months ended June 30,
1996 resulted in net assets of discontinued operations of $376,027 at June 30,
1996 compared to net liabilities of $449,550 at December 31, 1995.
In March 1996, the Company entered into an agreement with SunTrust for a one-
year extension to February 10, 1997 of the loan of $760,000 (the "FUPTC Loan")
advanced under a revolving line of credit for FUPTC relating to a specific
remediation project. The new terms include a monthly principal repayment of
$5,000 and interest at 1-1/2% above prime. The new maturity date of the loan
will be the earlier of the receipt of payments from the customer for the
specific remediation project or February 10, 1997. In addition, a principal
repayment of $100,000 was made in May 1996 in order to release the pledge on
the accounts receivable of HES by SunTrust. In July 1996, the entire
outstanding loan of $650,000 was repaid, so as to reduce interest expenses,
using primarily the proceeds from the refund of income taxes.
On April 25, 1996, the Company sold substantially all of the assets and
liabilities of HES to Heart Environmental Services, Inc. (the "Buyer"),
a New Jersey corporation for a total consideration of $1,907,021. The total
Page 14
consideration comprises (i) $681,000 in cash, (ii) a three-year promissory
note of $600,000 issued by the Buyer, bearing interest at 9% per annum and
collaterized by the pledge of 499 shares of the Buyer's Common Stock pursuant
to a Stock Pledge Agreement, (iii) the cancellation of total obligations
due to H&H Investments Corporation, Mr. Eugene M. Haas and Mr. Robert E. Haas
(collectively known as the "Haas Shareholders") which amounted to $626,021. In
connection with the HES Sale, the Company and the Haas Shareholders entered
into a lock-up agreement relating to the 219,000 shares of the Company's
common stock (the "Shares") owned by the Haas Shareholders. The lock-up
agreement provides that any sale or transfer of the Shares by the Haas
Shareholders will be restricted to an amount of not greater than 20,000 Shares
for every three-month period. As a result of the HES sale, the Company has
agreed not to pursue any claims against the Haas Shareholders in connection
with the Haas acquisition in February 1995.
The proceeds from the HES sale have been used to repay a portion of the loan
from USL Capital which amounted to $405,722 which includes $391,044 principal
and $14,678 interest payments. The proceeds were also used for a principal
repayment of the FUPTC Loan in the amount of $100,000 in May 1996 as mentioned
above and to settle certain remaining liabilities of HES.
The Company has been vigorously continuing its collection efforts in order to
improve the cash flows of its remediation segment until disposal. Gross
accounts receivable for the remediation segment, excluding a long-term
receivable of $1,048,222 at December 31, 1995 and $1,252,871 at June 30, 1996,
has decreased by $2,827,687 from $3,661,354 at December 31, 1995 to $833,667
at June 30, 1996. Collections accounted for approximately $1,100,000. The
remainder of the decrease was mainly due to the transfer of the uncollected
portion of the accounts receivable of HES which amounted to approximately
$1,188,000 back to Mr. Eugene M. Haas and Mr. Robert E. Haas, pursuant to the
Haas Purchase Agreement dated as of February 28, 1995 and the sale of the
receivables of HES in April 1996 which amounted to $565,909.
Page 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on June 21, 1996 and the
matters voted on at the meeting consisted of the following:
(a) The election of five nominees, namely, Andrew P. Chesler,
Abraham S. Fischler, Fred S. Katz, Allen H. Stern and Jeffrey
T. Katz to the Company's Board of Directors to hold office until
the Company's 1997 Annual Meeting of Stockholders or until their
successors are duly elected and qualified. The number of shares
voted for and against each nominee, as well as the number of
abstentions with respect to each nominee are set forth below:
Nominee Votes For Votes Against Votes Abstain
Andrew P. Chesler 2,879,222 69,400 277,936
Abraham S. Fischler 2,878,622 70,000 277,936
Fred S. Katz 2,878,622 70,000 277,936
Allen H. Stern 2,878,622 70,000 277,936
Jeffrey T. Katz 2,879,222 69,400 277,936
(b) The increase to 1,000,000 shares the number of shares of Common
Stock reserved for issuance pursuant to the Company's 1994
Employee Stock Option Plan. Votes from a majority of the shares
of the Common Stock were not received as to this matter to be
considered by the stockholders for approval. This matter
received 1,288,737 votes for, no vote against and 1,937,821
shares not voting which include broker non-votes.
(c) To adopt an Amended and Restated Directors Stock Option Plan and
to increase to 250,000 shares the number of shares of Common
Stock reserved for issuance pursuant thereto. Votes from a
majority of the shares of the Common Stock were not received
as to this matter to be considered by the stockholders for
approval. This matter received 1,308,152 votes for, no vote
against and 1,918,406 shares not voting which include broker
non-votes.
Page 16
(d) To ratify the appointment of Coopers & Lybrand, L.L.P.,
independent certified public accountants, as the Company's
auditors. 2,879,222 shares were voted in favor of their
appointment, no shares were voted against and 277,936 shares
abstained from voting on the matter.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the registrant filed the
following reports on Form 8-K:
(i) Current Report on Form 8-K dated June 7, 1996 (filed June 20,
1996) which reported the Company's acquisition of ARC.
(ii) Current Report on Form 8-K dated June 12, 1996 (filed June 28,
1996) which reported the Company's various equity private
placements.
(iii) Current Report on Form 8-K/A dated June 7, 1996 (filed August
19, 1996) which incorporated the financial statements of ARC
and pro forma financial information in relation to the ARC
acquisition.
Page 17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AQUAGENIX, INC.
Date: August 19, 1996 By: /s/ Andrew P. Chesler
Andrew P. Chesler,
Chairman of the Board,
Chief Executive Officer,
President and Treasurer
(Principal Executive Officer)
Date: August 19, 1996 By: /s/ Helen Chia
Helen Chia,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,482,646
<SECURITIES> 0
<RECEIVABLES> 1,034,597
<ALLOWANCES> 45,392
<INVENTORY> 501,304
<CURRENT-ASSETS> 4,773,878
<PP&E> 2,390,484
<DEPRECIATION> 531,122
<TOTAL-ASSETS> 12,508,204
<CURRENT-LIABILITIES> 1,942,635
<BONDS> 0
0
0
<COMMON> 11,390,197
<OTHER-SE> (6,451,554)
<TOTAL-LIABILITY-AND-EQUITY> 12,508,204
<SALES> 0
<TOTAL-REVENUES> 4,732,112
<CGS> 0
<TOTAL-COSTS> 2,403,971
<OTHER-EXPENSES> 1,682,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 279,116
<INCOME-PRETAX> 366,945
<INCOME-TAX> 0
<INCOME-CONTINUING> 366,945
<DISCONTINUED> 464,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831,634
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
