SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to___________.
Commission file number 0-24490
AQUAGENIX, INC.
---------------------------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 65-0419263
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6500 N.W. 15TH AVENUE
FORT LAUDERDALE, FLORIDA 33309
------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
(954) 975-7771
-------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Securities Exchange Act
of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
-----------------------------------------
(Title of Class)
- 1 -
<PAGE>
Check whether the registrant: (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
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x
State registrant's revenues for its most recent fiscal year:
$13,188,266
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on March 6, 1998, computed by reference to the
closing sale price on that date: $22,973,724.
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "Common Stock"), as of March 6, 1998, was 5,312,575.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None.
- 2 -
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BACKGROUND
Aquagenix, Inc., a Delaware corporation (the "Company"), through its
wholly-owned subsidiary, provides aquatic and industrial vegetation management
services to governmental and commercial customers in the States of Florida,
Georgia, North and South Carolina, Arizona, Alabama, California and Tennessee.
The Company offers a variety of aquatic and industrial vegetation management and
maintenance services, consisting primarily of the control of aquatic weeds,
algae and exotic plants, brush and noxious tree control, wetland planting and
restoration, installation of fountains and aeration systems and the stocking of
fish for game and plant and insect control.
The Company was incorporated under the laws of the State of Delaware
in May 1993 to acquire all of the issued and outstanding capital stock of
Aquagenix Land-Water Technologies, Inc. ("ALWT"), formerly known as
Environmental Waterway Management, Inc. and Florida Underground Petroleum Tank
Contractors, Inc. ("FUPTC"). Prior to their acquisition by the Company, ALWT had
been engaged in the aquatic management business, primarily aquatic weed, algae
and plant control, since its formation in October 1990. In February 1995, the
Company acquired Haas Environmental Services ("HES"). Both FUPTC and HES had
been engaged in the environmental remediation business, primarily remediation of
petroleum contaminated soil and ground water. The operations of FUPTC and HES
have been discontinued since November 1995. Unless the context requires
otherwise, the "Company" refers to Aquagenix, Inc. and its consolidated
subsidiaries, ALWT, Aquagenix Land-Water Technologies of Arizona, Inc.
("ALWTA"), Aquatic and Right of Way Control, Inc. ("ARC"), Aquatic Dynamics,
Inc. ("ADI"), Aquagenix Land-Water Technologies of Georgia, Inc. (formerly known
as Good Shepherd, Inc. d/b/a Green Pastures, Inc., - "GPI"), FUPTC and HES.
(B) BUSINESS OVERVIEW
The Company offers a variety of aquatic and industrial vegetation
management services, consisting primarily of the control of aquatic weeds, algae
and exotic plants, brush and noxious tree control, utility line and pole
maintenance, wetland planting and restoration, installation of fountains and
aeration systems and the stocking of fish for game and pest and plant control.
The Company's services are intended to assist in flood control, maintain the
health, beauty, quality and natural balance of life in aquatic and terrestrial
environments, and in some instances, to maintain reasonable access to critical
utility and other right of way areas. They are designed to suit individual
customer requirements, many of whom maintain waterways and lands in compliance
with federal,
- 3 -
<PAGE>
state and local environmental laws and regulations. Lakes, canals, ponds, rivers
and wetlands have become increasingly popular forms of aesthetic and
recreational components in cities, golf courses, country clubs, commercial and
residential developments, apartment complexes and parks in and throughout the
United States. Waterways provide facilities for recreational use, such as
fishing and water sports, and are important for flood control, drainage,
wildlife preservation and as a source of water for industrial and residential
use. As a result of natural and other factors, including overgrowth of noxious
weeds, algae and exotic plants, which deplete oxygen and restrict the flow of
water, waterways and wetlands require ongoing management to preserve and
maintain their functional use, biological health and aesthetic value.
In the Sunbelt states of Florida, Georgia, South Carolina, North
Carolina, Tennessee, Mississippi, Missouri, Louisiana, Texas, New Mexico,
Arizona, Nevada and California, there are over 5,500 golf courses and country
clubs , most of which require aquatic management services; and as a result of
the climate and topography within the Sunbelt states, the majority of real
estate developers have water features which require maintenance. The market for
aquatic management services on private land in Florida alone is estimated to
exceed $100 million.
There is also a growing trend toward privatization of aquatic and
industrial vegetation management services carried out on public lands by public
works personnel of governmental agencies as they come under increasing fiscal
pressures to reduce costs. The South Florida Water Management District, one of
the Company's customers, had performed its own vegetation management work years
ago and had subsequently awarded work to the Company. The potential market for
such services on public land in Florida is estimated to exceed $500 million.
Additionally, because extensive land development in the Sunbelt
states and other coastal states has depleted natural wetlands, federal and state
legislation has been enacted to preserve wetlands by requiring property owners
and developers to restore portions of developed properties to their natural
state, in what is known as a "no net loss" policy. In May 1994, a $700 million
restoration project for Florida's Everglades was adopted by the State of
Florida, which contemplates that the federal government, the State of Florida
and a group of landowners will jointly fund restoration of portions of Florida's
Everglades. The Company will seek to capitalize on perceived demand for aquatic
management services, particularly wetlands planting and restoration services.
With annual revenues of approximately $13 million for 1997, the
Company is currently one of the largest providers of aquatic and industrial
management services in the United States.
(C) BUSINESS OF ISSUER
COMPANY SERVICES
Aquatic Weed, Algae and Exotic Plant Control. The term "aquatic
weed" encompasses a large, diverse group of plant types, consisting of four
basic groups which pose a problem to waterways: floating aquatics, submersed
aquatics, emergent and ditchbank weeds and grasses.
- 4 -
<PAGE>
Algae, a fifth classification, is a lower form of submersed plant life and is
the cause of "scum" on the water's surface. Left unattended, aquatic weeds,
algae and plants appear and propagate in excessive amounts and interfere with
the aquatic environment's natural balance. Thick masses of aquatic weeds can
disrupt boat traffic, fishing and other water sports, lower the oxygen levels of
water resulting in fish kills and create water flow problems. Noxious weeds
generate foul odors, visual eyesores and create breeding grounds for mosquitos
and other pests. Most noxious aquatic weeds, exotic plants and trees have been
imported into the Sunbelt States without natural enemies and have proceeded to
displace natural and native plant life. While beneficial plants are essential to
creating a properly balanced aquatic ecosystem and provide food and shelter for
various species of fish, birds and animals, dense infestations of aquatic weeds
and algae prevent sunlight from entering the water, potentially endangering all
living inhabitants of aquatic environments.
The Company offers a variety of methods for vegetation control which
range from spot chemical treatment and biological control through the use of
beneficial fish species to mechanical harvesting, deep-water cutting and manual
removal. The Company establishes treatment programs for lakes, canals, ponds,
reservoirs, rivers, estuaries, marine areas and wetlands by assessing ambient
water quality and vegetation and the specific needs of individual customers. The
Company maintains a data base of computerized water analysis information and
property management control and service records designed to provide customers
with a comprehensive aquatic treatment plan. Company-trained and licensed
applicators utilize approved, environmentally safe algicides and herbicides and
special spraying equipment to disperse algicides and herbicides in water and on
adjacent land to control the growth of aquatic weeds, algae and exotic plants.
The Company typically uses small boats equipped with tanks to hold liquid
formulations and spray arms for spraying from the water. Similarly equipped
four-wheel drive all-terrain vehicles are utilized for spraying from the
shoreline. Significant reduction in the growth of aquatic weeds, algae and
exotic plants is usually achieved within three to four weeks. The customers for
these services typically agree to annual contracts which provide for monthly
service and payment.
In addition to the regular application of algicides and herbicides,
the Company utilizes harvesting methods to control aquatic weeds. Harvesting is
performed either manually or mechanically, depending upon the nature and extent
of the growth of undesirable aquatic weeds and plants. Mechanical harvesting is
typically expensive but achieves immediate results. The Company engages
third-party contractors which utilize barges equipped with special attachments
to cut, gather and crop aquatic weeds. Harvesting is done on a
project-by-project basis.
The Company also controls submersed aquatic weeds, algae and insects
by introducing several species of fish which includes the Triploid Grass Carp, a
genetically-engineered weed-eating fish which may consume as much as three times
its body weight each day, and the Gambusia, or Mosquitofish, which may consume
up to its weight in mosquito larvae and pupae each day. Additionally, the
Company stocks different types of Tilapia in the Western United States for the
control of toxic algae formations. The Company, when required, obtains necessary
permits from state governmental authorities to use biological control methods on
a project basis. The Company also offers a variety of species of fish for
stocking lakes and ponds for recreational purposes, including Smallmouth Bass,
Largemouth Bass, Bluegill, Black Crappie, Warmouth Perch and
- 5 -
<PAGE>
Channel Catfish. The Company's personnel perform salinity, Ph and oxygen tests,
conduct surveys of existing fish population and create aquatic sanctuaries for
successful fish habitation. The Company obtains its requirements of fish from a
number of suppliers.
For the years ended December 31, 1997 and 1996, aquatic weed, algae
and exotic plant control services accounted for approximately 73% and 77%,
respectively, of the Company's total revenues.
Industrial Vegetation Management. The Company provides professional
right of way weed control along utility lines, pipelines, transmission lines,
distribution lines, railroads, power substations, canals, ditches, bridges and
other industrial sites for private and public sector customers.
The Company inspects target areas to determine environmental
factors, safety factors, geographic criteria surrounding plant life and combines
this information with input from the customers. The Company subsequently
provides precision low volume application weed, brush and tree control to the
designated system(s). The Company's services are varied and may be "bundled" to
meet specific customer needs. It maintains a large inventory of application
equipment at peak performance condition and has the most complete array of
equipment available for each job.
The means in which the Company provides industrial vegetation
management services may vary according to customer specifications and/or
prevailing circumstances surrounding the services employed. Distribution power
lines are serviced by ground application techniques principally through the use
of four-wheel drive trucks, one-ton spray trucks, track equipment and
all-terrain vehicles (ATVs). Safety guard rails and transportation right of ways
are serviced by highly specialized transport vehicles equipped with computer
injection systems designed specifically for these functions. Transmission power
lines are managed from the air by helicopters and aerial TVB spray equipment.
Power substations and other industrial sites are serviced by specialized ground
application equipment coupled with personnel using backpack sprayers.
Industrial vegetation management services accounted for
approximately 17% of the Company's total revenues for both the years ended
December 31, 1997 and 1996.
Wetland Planting and Restoration. The preservation and propagation
of wetland areas has become recognized as an important part of maintaining the
ecosystem. Aquatic and wetland plants are critical components of healthy ponds,
lakes or waterways, inasmuch as these plants form a base for an important link
between the beginnings of the food-chain and higher forms of plant and animal
life. The Company believes that the quality of water is directly attributable to
the balance of the water's and shoreline's vegetation.
Working in conjunction with engineers, governmental agencies and
environmental groups, the Company provides turnkey programs to develop, restore
and maintain wetlands in compliance with environmental regulations. The Company
provides long-term maintenance services and monitoring regimen required by
regulatory agencies. Without a long-term maintenance program, a recently planted
area is vulnerable to being taken over by exotic or noxious plant species,
thereby displacing the desirable plants and resulting in costly remediation
measures. The Company currently
- 6 -
<PAGE>
engages in wetland planting utilizing its personnel and equipment and, to the
extent necessary, third-party equipment. For the years ended December 31, 1997
and 1996, wetland planting restoration services accounted for approximately 3%
and 4%, respectively, of the Company's total revenues.
Desert Rain(TM) Fountains. The Company offers an extensive line of
decorative floating fountains, trademarked "Desert Rain(TM)", to enhance the
visual appeal and beauty of waterways, while providing ecological benefits,
including increased circulation, reduced stagnation and the reduction of odors
caused by algae. The Company's fountains feature a unique, interchangeable
nozzle which allows the customer to select from several different spray
patterns. Fountains are fabricated using quality waterproof materials which are
treated to resist corrosion. Nozzle assemblies are manufactured using
high-density polyurethane, epoxy, brass and stainless steel for durability.
Aeration Systems. The Company also offers aeration systems designed
to permit waterways to digest organic sediments which deplete oxygen, trap
gasses and result in general degradation of water quality. The Company's
aeration systems are custom designed systems consisting of a pattern of porous
stones which are laid on the bottom of a lake and a relatively silent air
compressor mounted on the shore. When air is injected from the compressor
through pipes to the stones, air rises through the water oxygenating and
cleansing it. The Company's aeration systems are designed to minimize fish kills
and foul odors and to facilitate lake management and the operations of
wastewater and aquaculture industries. Revenues derived from fountain and
aeration system installation, repair and maintenance services comprise 5% and 1%
of total revenues for the years ended December 31, 1997 and 1996, respectively.
CUSTOMERS
The Company provides aquatic and industrial vegetation management
services to utilities, golf courses, country clubs, real estate owners and
developers, homeowners and condominium associations, apartment complexes and
various municipal, state and federal governmental authorities and taxing
districts, many of which maintain waterways and lands in compliance with local
environmental laws and regulations. The Company currently provides aquatic and
industrial vegetation management services to approximately 94 customers in the
public sector. Substantially all of the Company's contracts for aquatic and
industrial vegetation management services are recurring in nature and, for the
year ended December 31, 1997, comprised 65% of total revenues (1996: 73%) and
totaled approximately 3,000 customers. The recurring annual contracts for
aquatic vegetation management services provide for monthly payments and are
automatically renewable. The contracts for industrial vegetation management
services are usually renewable for a term of up to three years and provide for
payments based on a cost per acre or mile of land under management.
For the year ended December 31, 1997, 23% of the Company's revenues
were derived from governmental customers as compared to 19% for 1996.
Governmental customers which formerly provided aquatic or vegetation management
services through government employees have accounted for a significant portion
of the Company's revenues. It is anticipated that a substantial portion of the
- 7 -
<PAGE>
Company's future revenues will be derived from governmental and
quasi-governmental customers. Government contracts are subject to special risks,
including delays in funding; lengthy review processes for awarding contracts;
non-renewal; delay, termination, reduction or modification of contracts in the
event of changes in the government's policies or as a result of budgetary
constraints; and increased or unexpected costs resulting in losses.
Historically, the Company has been dependent on a limited number of
contracts for a significant portion of its revenues. For the years ended
December 31, 1997 and 1996, the Company's five largest customers accounted for
approximately 11% and 19%, respectively, of the Company's total revenues. For
the year ended December 31, 1997, the Company has further broadened its customer
base and no one customer accounts for more than 3% of the Company's total
revenues.
There can be no assurance that the Company will obtain additional
contracts for projects similar in scope to those previously obtained or retain
existing customers or attract and retain new customers or that the Company will
not remain largely dependent on non-recurring contracts with a limited customer
base, which will constitute a significant portion of the Company's revenues.
INSURANCE AND BONDING
The Company carries insurance coverage which the Company considers
sufficient to meet applicable regulatory and customer requirements and to
protect the Company's assets and operations. The Company's insurance coverage
currently includes $2 million of comprehensive general liability insurance, up
to $1 million of pollution liability insurance and $10 million of excess
liability insurance. The Company attempts to operate in a professional and
prudent manner and to reduce its liability risks through specific risk
management efforts, including employee training. Nevertheless, a partially or
completely uninsured claim against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the Company and its financial
condition. In addition, the inability to obtain insurance of the type and in the
amounts required could impair the Company's ability to obtain new contracts,
which are, in certain instances, conditioned upon the availability of adequate
insurance coverage.
The aquatic and industrial vegetation management business involves
potentially significant risks of statutory, contractual and common law liability
for environmental damage and personal injury. The Company, and in certain
instances, its officers, directors and employees, may be subject to claims
arising from the Company's on-site or off-site services, including chemicals
used in its operations, and environmental contamination by the Company, its
contracted transporters or disposal site operators. All such persons may be
liable for site investigation, site cleanup costs and natural resource damages,
which costs could be substantial, regardless of whether they exercised due care
and complied with all relevant laws and regulations. There can be no assurance
that the Company will not face claims resulting in substantial liability for
which the Company is uninsured, that hazardous substances or materials are not
or will not be present at the Company's facilities or that the Company will not
incur liability for environmental impairment.
- 8 -
<PAGE>
The Company is required, in most instances, to post bid and/or
performance bonds in connection with contracts or projects with government
entities and, to a lesser extent, private sector customers. To date, the Company
has been able to obtain bonds in amounts of up to approximately $4 million per
bond. However, there is no assurance that this will continue. The Company
anticipates that in the future it will continue to be required to post bid
and/or performance bonds in connection with contracts or projects with
government entities and, to an increasing extent, private sector customers. In
addition, new or proposed legislation in various jurisdictions require or will
require the posting of substantial bonds or require other financial assurances
with respect to particular projects. There can be no assurance that the Company
will be able to obtain bonds in the amounts required.
MARKETING
To date, marketing has principally been conducted through the
efforts of the Company's management and sales personnel. The Company uses
various marketing methods, including direct mailings, in-person solicitation,
print advertising and participation in trade shows and conventions, and
periodically mails attractive, full-color sales brochures and advertises in
trade journals. The Company's sales force consists of approximately eighteen
people, who are responsible for securing potential customers in their respective
geographic markets, receive salaries plus a percentage of gross profits derived
from Company services. The Company also obtains customers through
recommendations and referrals from existing customers and environmental
engineers and consultants. The Company's executive officers devote significant
time and effort to maintain continuing customer relationships. The Company has
also engaged business development consultants to develop marketing strategies
for utility and federal and state governmental service contracts and to monitor
sales opportunities.
The Company typically obtains private and public contracts for its
services through the process of competitive bidding. The Company's marketing
efforts include subscribing to several bid reporting services and monitoring
trade journals and other industry sources for bid solicitations by various
entities, including government authorities and related instrumentalities, and
responding to such bid solicitations, which include requests for proposals and
requests for qualifications. In response to a request for proposal or
qualification, the soliciting entity generally requires a written response
within a set period of time. Generally, in the case of a request for a proposal,
a bidder submits a proposal detailing its qualifications, the services to be
provided and the cost of the services to the soliciting entity which then, based
on its evaluation of the proposals submitted, awards the contract to the
successful bidder. Generally, in the case of a request for qualification, a
bidder submits a response describing its experience and qualifications, the
soliciting entity then selects the bidder believed to be the most qualified, and
then negotiates all the terms of the contract, including the cost of the
services.
The Company believes that accurate bidding is important to the
Company's business. Accordingly, the Company utilizes a computerized bidding
system and engages personnel at potential sites to determine cost factors used
in submitting bids. Public contracts are usually longer-term (two to three
-9-
<PAGE>
years) and may periodically be put up for bid even though the Company has
provided quality services and has formed a strong relationship with the
customer. While a bid price is an important factor in obtaining contracts, the
Company believes that potential customers also consider reputation, experience,
safety record and the financial condition of bidders in awarding contracts.
Because of its familiarity with the nature of the contracts and the basis on
which they are awarded, the Company is often able to retain contracts that are
put up for bid. In the past, the Company has been able to retain approximately
85% of contracts which fall into this category. However, there can be no
assurance that the Company will continue to be successful in having its bids
accepted. The competitive bidding process is typically lengthy and often results
in the expenditure of significant sums and allocation of resources in connection
with bids that may be rejected. Additionally, inherent in this process is the
risk that actual performance costs may exceed the projected costs, especially in
relation to disputes on the performance of services, upon which the submitted
bids or contract prices are based.
COMPETITION
The aquatic and vegetation management service industry is highly
competitive. The Company faces competition from several hundred companies
throughout the Sunbelt States. In recent years, government authorities have
implemented an extensive regulatory framework directed toward alleviating
various environmental problems. The complex nature of government regulation has
resulted in significantly increased sophistication and costs of aquatic and
industrial vegetation management, handling and disposal methods, facilities and
equipment. Consequently, the industry has become increasingly capital intensive
and competitive.
The Company believes that the principal competitive factors in the
aquatic and industrial vegetation management industry are reputation, technical
proficiency, managerial expertise, financial assurance capability (particularly
as it relates to bonding), price and breadth of services offered, including
documentation capabilities. With its internal growth and its recent
acquisitions, the Company is currently the largest commercial provider of
aquatic and vegetation management services in the United States. With its highly
credible track record, substantial bonding and insurance capabilities, its
investment in managerial expertise, equipment and computerized operations and
the increased leverage with its chemical suppliers, management believes that the
Company does have a competitive edge in the business. The Company utilizes
highly specialized proprietary equipment for weed and algae control both in
water and on land ('amphibian' in nature). This equipment results in high
efficiency and accuracy in vegetation control. The Company has developed a
customized software package which provides individual job budgets, branch work
schedules, integrated customer service and sales activity tracking and
collaborative communications. All these allow the Company to provide quality
service, improve efficiency and costs control and provide competitive yet
profitable bids.
Competition in the aquatic and industrial vegetation management
industry is, however, expected to increase in the foreseeable future. A
significant number of aquatic management projects continue to be performed "in
house" by the major water management districts, many of which may have
substantially greater financial and other resources than the Company. The
Company also
- 10 -
<PAGE>
expects that a significant number of new market entrants will seek to bid on new
aquatic management projects for the Everglades. There can be no assurance that
the Company will be able to compete successfully in its markets.
SUPPLIERS AND SUBCONTRACTORS
The Company is dependent on third-party suppliers and manufacturers
for all of its requirements of algicides and herbicides, fish and aeration
systems used in its vegetation management business. Although the Company
purchases all of these supplies from numerous suppliers and believes that
alternative sources of supply are available, failure by such suppliers and
manufacturers to continue to supply the Company with products on commercially
reasonable terms, or at all, in the absence of readily available alternate
sources, would adversely affect the Company's ability to deliver products and
provide services on a timely and competitive basis. The Company is dependent on
the ability of its suppliers and manufacturers, among other things, to satisfy
performance, quality and regulatory specifications and dedicate sufficient
production capacity for supplies within scheduled delivery times. The Company
does not maintain contracts with any of its suppliers or manufacturers and
purchases supplies pursuant to purchase orders placed from time to time in the
ordinary course of business. In addition, the Company currently leases certain
specialized equipment, including mechanical harvesting or certain planting
equipment and is dependent upon third-party subcontractors to provide necessary
equipment, relevant expertise, transportation and other facilities on a project
basis. In the event such subcontractors were to become unavailable to the
Company at acceptable cost levels, or at all, the Company's business could be
materially adversely affected.
PERMITS AND LICENSES
The Company and, in certain instances, its employees are required to
obtain and maintain licenses and permits in connection with its operations. The
Company's employees currently hold the necessary permits for application of the
algicides and herbicides utilized by the Company in its aquatic management
business. The Company is required to obtain permits from state and local
governments for the harvesting and planting of aquatic plants in connection with
its wetlands planting activities on a project basis. The Company may also be
required to obtain surface water permits in connection with its aquatic
management activities on a project basis depending on the nature of the body of
water.
The Company anticipates that it will be required to obtain and
maintain additional licenses in geographic areas in which it intends to expand
its operations. The Company believes, based upon the level of training of its
employees and past experience, that it will be able to obtain all such required
licenses, although there is no assurance that it will be able to do so.
- 11 -
<PAGE>
OPERATIONS
Headquartered in Fort Lauderdale, Florida, the operations of the
Company are decentralized with twelve customer service offices, one in each of
Fort Lauderdale, West Palm Beach, Orlando, Sarasota, Tampa, Jacksonville, Fort
Myers (all in Florida), Myrtle Beach (South Carolina), Tempe (Arizona), Athens
(Georgia), Alabaster (Alabama) and Martinez (California). Each customer service
office is headed by a branch manager and supported by sales representatives. As
a result of maintaining decentralized operations, the Company is able to reduce
transit time and per diem expenses while providing better services to a larger
customer base. The branch offices can also be utilized to integrate acquisitions
within its geographic region of operations and are easily expandable to handle
increased levels of business without a meaningful increase in administrative
expenses. This was the case with the Jacksonville, Tampa and Fort Lauderdale
operations acquired from Aquatic and Right of Way Control, Inc and AmerAquatic,
Inc. (see below - "Recent Acquisitions"). Each office has the same basic set-up,
systems and general operations which is a key aspect in the implementation of
the Company's expansion strategy in that branch offices can be quickly
established in multiple geographical areas in a proven company format. Offices
are fully computerized with established customer service protocol. This enables
the Company's services to be efficient, professional and responsive to the
client base.
EXPANSION STRATEGY
The Company believes that continuing initiatives of governmental
authorities relating to environmental problems as well as the gradual
privatization of in-house governmental and utility based aquatic and industrial
vegetation management contracts have resulted in significant opportunities for
its business, through internal growth and acquisitions. Management estimates
that only 30% of the aquatic and vegetation management industry is served by
commercial companies. The Company's expansion strategy is: (i) to acquire
similar and complementary businesses and integrate their operations into the
existing business so as to create economies of scale and provide a fully
integrated, customized service package for its customers; (ii) to intensify
marketing efforts through the Company's specialized marketing team in providing
a comprehensive approach to integrated vegetation management, especially
targeted at utilities and municipalities; (iii) open additional decentralized
branch offices that allow the Company to expand its geographic markets while
maintaining quality service and minimizing operating expenses; and (iv) to
achieve critical mass and increase operating leverage and efficiency so that the
Company can pursue larger contracts from the 70% of the industry that
traditionally sources contracts in-house. The proceeds of the IPO and various
private equity placements have enabled the Company to make significant
investments in its personnel and information system infrastructure so as to
accommodate its expansion strategy for the next three years. It has also enabled
the Company to establish substantial bonding and insurance capabilities, thereby
permitting the Company to bid on and secure larger contracts, especially
government and utility work.
The Company intends to aggressively apply its growth strategy in
several stages in the following geographic markets which it perceives to have
significant growth potential: (i) Georgia,
- 12 -
<PAGE>
South Carolina and North Carolina; (ii) California, Arizona and Nevada; and
(iii) Texas, Louisiana and the remainder of the Southern United States.
The GPI, ADI, ARC, AmerAquatic, and L&L Acquisitions (see below -
"Recent Acquisitions") were consummated as part of the Company's goal of
expanding its operations. Consistent with its strategy of growth, the Company
will seek to expand its operations through further acquisitions including the
proposed acquisition of Lewis Tree Service, Inc. (see below "Proposed
Acquisition of Lewis"). The Company believes that the aquatic and industrial
vegetation management industry is highly fragmented, consisting principally of
small privately-owned companies with limited capital resources, bonding
capabilities and documentation systems. The Company believes that with further
additions to its existing infrastructure, including improvements to its
information and documentation systems, coupled with increased bonding
capabilities, this will enable the Company to out-bid its smaller competitors
and position the Company to acquire smaller service providers in new geographic
markets. However, there can be no assurance that the Company will be able to
obtain the required financing to fund the costs of purchasing capital equipment
and to build its infrastructure or to make the acquisitions to expand its
operations or that the Company will be able to successfully integrate into its
operations any acquired business.
RECENT ACQUISITIONS
On December 31, 1996, the Company acquired 100% of the common stock
of Good Shepherd, Inc. d/b/a Green Pastures, Inc. ("GPI Acquisition"), now known
as Aquagenix Land-Water Technologies of Georgia, Inc., pursuant to a Stock
Exchange Agreement, dated as of December 31, 1996, by and among the Company, GPI
and Garry Seitz and Jan Seitz (the "Selling Shareholders"), the shareholders of
GPI. The aggregate purchase price was $600,000 which was paid by the issuance of
96,000 shares of the Company's common stock to the Selling Shareholders. The
assets acquired from GPI comprised mainly of high-tech roadside application
equipment and recurring service contracts.
GPI, a Georgia-based private company founded in 1988, is a provider
of roadside vegetation management services throughout the state of Georgia using
high-tech computer controlled application systems along roadsides with annual
revenues of approximately $960,000. This acquisition was accounted for as a
pooling of interests. The Company has continued operating the existing business
of GPI under ALWT and is further developing the industrial vegetation and
utility right of way management business previously conducted by GPI.
On December 7, 1996, the Company, through its wholly owned
subsidiary, merged with Aquatic Dynamics, Inc. (the "ADI Acquisition") with the
Company becoming the surviving entity, pursuant to the terms of a Stock Exchange
Agreement and Plan of Merger, dated as of December 7, 1996, by and among the
Company, Aquagenix Land-Water Technologies of Arizona, Inc., ADI and Pat Church
and Stephen Church, the shareholders of ADI. The aggregate purchase price was
$1,000,000, of which (i) $750,000 was paid by the issuance of 133,333 shares of
the Company's common stock to the former shareholders of ADI; (ii) $200,000 was
paid by the issuance of an installment note due on January 15, 1997, bearing
interest at 7% and (iii) $50,000 was paid in cash.
- 13 -
<PAGE>
The installment note of $200,000 has since been paid in full. The cash portion
was funded out of the proceeds of certain private equity placements which took
place in June 1996. The assets acquired from ADI comprised mainly of vehicles
and equipment, accounts receivable, marketable securities and recurring service
contracts.
In connection with the ADI Acquisition, the Company entered into a
two-year employment agreement with a former shareholder of ADI who is
participating in the management of the Company's western operations.
ADI, an Arizona-based private company founded in 1974, was a
full-service aquatic vegetation management firm whose experience and services
span the gamut of surface water management needs, including residential,
commercial, industrial and governmental projects, irrigation and effluent reuse
water systems, lake and pond management and ongoing waterway maintenance. ADI
was a leading provider of aquatic vegetation management services throughout
Arizona and the southwestern United States with annual revenues of approximately
$1,600,000. The ADI Acquisition has established the Company's market presence in
the southwestern United States with ADI serving as the hub of operations in that
region. The Company has continued operating the existing business of ADI under
Aquagenix Land-Water Technologies of Arizona, Inc.
On June 7, 1996, the Company acquired 100% of the voting common
stock of Aquatic and Right of Way Control, Inc. ("ARC Acquisition") pursuant to
the terms of a Stock Exchange Agreement, dated as of June 7, 1996, by and among
the Company, ARC and Ray A. Spirnock and Shirley J. Spirnock, the shareholders
of ARC. The aggregate purchase price was $1,500,000, of which $1,350,000 was
paid by the issuance of 270,000 shares of the common stock of the Company to the
former shareholders of ARC and $150,000 was paid in cash. The cash portion was
funded out of cash flows from operations. The assets acquired from ARC consisted
mainly of recurring service contracts, accounts receivable and industrial
vegetation application equipment. In connection with the ARC Acquisition, the
Company entered into a two-year employment agreement with Ray A.
Spirnock.
With annual revenues of approximately $1,350,000, 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 continued operating the existing business of ARC as part of
ALWT and is further developing the industrial vegetation and utility right of
way management business previously conducted by ARC.
On November 17, 1995, ALWT acquired (the "L&L Acquisition") certain
of the equipment and customer contracts of L&L Mosquito & Pest Control, Inc., a
South Carolina corporation ("L&L"), used in its aquatic weed and algae control
business, pursuant to the terms of an Asset Purchase Agreement, dated as of
November 17, 1995, by and among ALWT, L&L and the sole shareholder of L&L. The
aggregate purchase price paid by ALWT for the assets of L&L was $150,000 in
cash. The Company is continuing to operate the aquatic weed and algae control
- 14 -
<PAGE>
business previously conducted by L&L. The L&L Acquisition has provided an
established foothold for the Company in Hilton Head, South Carolina.
On October 31, 1995, ALWT acquired ("the AmerAquatic Acquisition")
substantially all of the assets and assumed certain of the liabilities, of
AmerAquatic, Inc., a Florida corporation ("AmerAquatic"), pursuant to the terms
of an Asset Purchase Agreement, dated as of October 19, 1995, by and among ALWT,
the Company, AmerAquatic and Thomas Latta and C. Elroy Timer, the principal
shareholders of AmerAquatic. The aggregate purchase price paid by ALWT for the
assets of AmerAquatic was $4,291,084, subject to adjustment under certain
circumstances, of which (i) $3,791,084 was paid in cash and (ii) $500,000 was
paid through the issuance by ALWT of a seven-month promissory note bearing
interest at a rate of 9.75% per annum, which note was guaranteed by the Company
and subsequently paid in full. AmerAquatic was engaged in the business of
providing lake management services, including aquatic and terrestrial weed and
algae control, melaleuca and other exotic plant control, wetland and upland
restoration and other related services. They were the Company's largest
competitor in this business in Florida with over 1,000 customers. The
AmerAquatic Acquisition expanded the Company's geographic reach into northern
Georgia, North Carolina and South Carolina and initiated the Company's
penetration into its second strategic market, the South Atlantic states. The
Company is continuing to operate the lake and wetland management business
previously conducted by AmerAquatic as part of ALWT.
The Company funded the cash portion of the purchase price for the
assets of AmerAquatic from the proceeds of the issuance and sale of (i) the
Company's 12.50% Senior Secured Note due February 28, 1996 (the "Bridge Note")
in the principal amount of $5,000,000, and (ii) warrants (the "Bridge Warrants")
to purchase an aggregate of 168,166 shares of the Company's Common Stock,
pursuant to a Senior Secured Note and Warrant Purchase Agreement, dated as of
October 31, 1995 (the "Bridge Note Purchase Agreement"), between the Company and
The Equitable Life Assurance Society of the United States ("Equitable"). In
December 1995, the Company issued to Equitable the Company's 12.50% Senior
Secured Note due October 31, 2003 (the "Senior Secured Note") in the principal
amount of $5,000,000 and warrants (the "Warrants") to purchase an aggregate of
351,197 shares of the Company's Common Stock, subject to adjustment under
certain circumstances, in substitution for the Bridge Note and the Bridge
Warrants, respectively, pursuant to an Amended and Restated Senior Secured Note
and Warrant Purchase Agreement, dated as of December 15, 1995 (the "Note
Purchase Agreement"), between the Company and Equitable. The Senior Secured Note
is subordinated to all indebtedness of the Company to its bank lender and is
secured by substantially all of the Company's assets. The Warrants are
exercisable at any time until December 31, 2000 at an exercise price of $7.38
per share, subject to adjustment under certain circumstances.
PROPOSED ACQUISITION OF LEWIS TREE SERVICE, INC.
On November 30, 1997, the Company entered into a stock purchase
agreement ("Stock Purchase Agreement") with the owner of Lewis to acquire all of
the issued and outstanding stock of Lewis Tree Service, Inc. ("Lewis"), a
privately-owned business located in Rochester, New York (the "Lewis
Acquisition"). The purchase price ("Purchase Price") for the stock will be
$25,000,000 and
- 15 -
<PAGE>
issuance of shares of the common stock of the Company based on the applicable
percentage ("Applicable Percentage") of Lewis' net income before depreciation,
amortization, interest and income taxes ("EBITDA") for the twelve months ended
October 31, 1998. EBITDA, as used herein, is neither a measurement pursuant to
generally accepted accounting principles (GAAP) nor a measurement of operating
results and is included for informative purposes only. The Applicable Percentage
shall be as follows: (i) if EBITDA is less than $4,500,000, the Applicable
Percentage shall be 25%, (ii) if EBITDA is at least $4,500,000 but less than
$5,250,000, the Applicable Percentage shall be 40%, (iii) if EBITDA is at least
$5,250,000 but less than $6,000,000, the Applicable Percentage shall be 50%, and
(iv) if EBITDA is at least $6,000,000, the Applicable Percentage shall be 60%.
The proposed acquisition of Lewis is primarily subject to the Company obtaining
the required financing for the Purchase Price and the necessary credit
facilities to finance the working capital and current debt obligations of Lewis.
In January 1998, the Company entered into an Amended Stock Purchase Agreement
with the owner of Lewis which provides for an extension of the closing date to
May 15, 1998 and the increase in the Purchase Price by $6,945 times the number
of days that elapse from March 31, 1998 to the closing date. Under the terms of
the Amended Escrow Agreement, the Company has since increased the deposit for
the acquisition of Lewis in the escrow account from $670,000 at December 31,
1997 to $2,500,000 at February 4, 1998. If the acquisition of Lewis has not
occurred by May 15, 1998, the escrow agent shall pay the $2,500,000 to the owner
of Lewis and the Stock Purchase Agreement shall terminate, provided that certain
conditions have been met including, but not limited to, the accuracy in all
material aspects of all representations and warranties made in the Stock
Purchase Agreement, no prohibition on the sale of the stock by the owner of
Lewis to the Company and no material adverse change in the assets, business,
financial condition or prospects of Lewis since the date of the Stock Purchase
Agreement.
Founded in 1938, Lewis, also known as Monroe Tree Service, is one of
the oldest and largest tree trimming and vegetation management companies in the
United States with approximately 1,000 employees. It provides vegetation
management services to utilities and government entities in 18 states throughout
the eastern United States. For the fiscal year ended October 25, 1997, Lewis
generated total revenues of approximately $50 million and EBITDA of
approximately $4.9 million. Lewis does not have separate sales personnel and all
competitive bidding is carried out through its executive officers and division
managers. The management of Lewis believes that its ability to increase revenues
is limited only by its financial constraints in purchasing additional equipment.
Substantially all of the revenues of Lewis (approximately 92%) are derived from
utilities.
The business combination of Aquagenix and Lewis is expected to
further expand the Company's operations throughout the eastern United States.
With the established customer base of Lewis and its reputation for quality
service, combined with the Company's technology and infrastructure, this
acquisition will expand the range of vegetation management services to include
tree trimming capabilities and enable the combined company to provide integrated
vegetation management solutions to the utility and governmental customers.
Members of the executive management team of Lewis are expected to remain with
the Company to ensure a seamless transition for its customers with the added
benefits of expanded service capabilities and significantly broader insurance
and bonding coverages. The Company anticipates that it will also enter into a
consulting agreement with the owner of Lewis.
- 16 -
<PAGE>
The Company is evaluating various proposed private equity and debt
financings to fund the acquisition of Lewis. There can be no assurance that
financing can be obtained to finance the acquisition of Lewis on acceptable
terms or that the Company can successfully integrate the operations of Lewis
into its existing operations. The costs of additional financing, together with
its inability to integrate the operations of Lewis into its existing business,
would have a material adverse effect on the financial performance of the Company
principally due to the significance of the capital investment.
GOVERNMENT REGULATION
The aquatic and industrial vegetation management services business
is subject to extensive and frequently changing federal, state and local laws
and substantial regulation under these laws by governmental agencies, including
the United States Environmental Protection Agency (the "EPA") and the United
States Occupational Safety and Health Administration ("OSHA"). Among other
things, these regulatory authorities impose requirements which regulate the
handling, transportation and disposal of hazardous and non-hazardous materials
and the health and safety of workers, and require the Company and, in certain
instances, its employees, to obtain and maintain licenses and permits in
connection with its operations. This extensive regulatory framework imposes
significant compliance burdens and risks on the Company. The Company is
currently subject to the requirements of the Resource Conservation and Recovery
Act of 1976, as amended, the Federal Water Pollution Control Act, as amended,
the Federal Insecticide, Fungicide, and Rodenticide Act, the Florida Weed
Control Act and the Occupational Safety and Health Act of 1970. The following is
a summary of these regulations and other material governmental regulations which
may be applicable to the Company.
The Federal Water Pollution Control Act, as amended by the Federal
Water Pollution Control Act Amendments of 1979 and the Clear Water Act of 1977
(collectively "CWA"), create the federal statutory scheme for water pollution
control and management. The principal objective of the CWA is to restore and
maintain the integrity of the nation's waters. In addition, the CWA provides
for: (i) the development of pollutant discharge standards and limitations; (ii)
a permit and licensing system to enforce these discharge standards; (iii)
federal funding to assist in the construction of publicly owned and privately
owned treatment works; and (iv) research and development of pollution control
technologies and strategies.
Congress also created the federal Safe Drinking Water Act ("SDWA")
to ensure the quality and safety of drinking water supplies. To protect
underground sources of drinking water from contamination, SDWA regulates
underground injection wells used for waste disposal and establishes a permit
program for such practices. The SDWA also establishes procedures for the
development source aquifers for drinking water.
Even though the EPA has nationwide authority to implement CWA,
authorized states may implement various aspects of the National Pollutant
Discharge Elimination System ("NPDES") and pretreatment programs, among other
areas of responsibility. In addition to the option of administering the CWA
under authority delegated by the EPA, states may develop their own regulations
for water pollution control, which generally parallel federal CWA requirements.
- 17 -
<PAGE>
As a complement to the regular NPDES program, the United States Army
Corps of Engineers must issue a special permit (commonly referred to as a
Section 404 permit) prior to the discharge of dredge-and-fill material into
navigable waters of the United States, including "wetlands" as defined under the
CWA. As a condition of obtaining such dredge-and-fill permits, the permittee is
required to mitigate the impacts of such dredge-and-fill activities (often times
by creating new wetlands), resulting in "no net loss" of wetlands or an increase
in wetlands areas. As is the case in Florida, many states implement the
dredge-and-fill permit criteria under a consolidated federal and state program.
The Company from time to time may be engaged in wetlands mitigation projects,
which may subject the Company to the provisions of the CWA and its permitting
programs.
Originally adopted in 1947, the Federal Insecticide, Fungicide, and
Rodenticide Act ("FIFRA") constitutes the federal regulatory framework governing
pesticides, including algicides and herbicides. FIFRA imposes a variety of
licensing, permitting, classification, and registration requirements, along
with various constraints imposed upon the application, use, and handling of
pesticides. FIFRA mandates that all restricted use of pesticides be applied by
or under the direct supervision of an applicator certified only under FIFRA.
Although FIFRA dictates certification for applications of restricted use of
pesticides, many states, including Florida, require the certification and/or
registration of commercial applicators for applications of both general and
restricted use pesticides.
FIFRA expressly authorizes states to regulate the sale or use of a
federally registered pesticide or device under certain circumstances, but defers
to state regulations employing stricter standards. A state may also require the
registration of federally registered pesticides for additional uses consistent
with special local needs. As a general rule, state laws regulating pesticides
parallel the federal scheme. Many states supplement the federal requirements
with their own regulations.
The Toxic Substance Control Act of 1975 ("TSCA") gives the EPA broad
authority to regulate the manufacture, processing, distribution in commerce, use
and disposal of chemical substances and mixtures. The EPA may require testing of
chemical substances that may present an unreasonable risk to health or the
environment. If testing reveals an unreasonable risk, the EPA must take steps to
reduce the risk. Options available to the EPA range from labeling requirements
prohibiting manufacture of the harmful chemical to mandating the manner in which
it must be disposed. The Company from time to time may be engaged in the future
to remediate certain contaminated sites, which may involve the use or disposal
of chemical substances and mixtures. To the extent that the Company handles in
the future those chemical substances and mixtures regulated by TSCA, the Company
could be subject to liability under TSCA. The Company does not anticipate that a
material portion of its environmental remediation activities in the future will
consist of the remediation of sites requiring the use or disposal of chemical
substances or materials regulated by TSCA.
The Florida Aquatic Weed Control Act ("FAWCA") creates a state
regulatory framework for the preservation and maintenance of the state's
waterways. Under FAWCA, no person or public agency shall eradicate, remove or
otherwise alter any aquatic weeds or plants in waters of the state unless the
Department of Environmental Protection ("DEP") or its designee issues a permit
or the
- 18 -
<PAGE>
activity is exempted. The Florida Legislature also established the Florida
Nonindigenous Aquatic Control Act, which is designed to control nonindigenous
aquatic plants primarily by means of maintenance programs. In connection with
its aquatic management activities, the Company is subject to the permitting
criteria of FAWCA and the Florida Nonindigenous Aquatic Control Act, which the
Company does not anticipate will have a material impact on its aquatic
management business.
The Company may also be subject to a variety of environment-related
worker and community safety laws. The Occupational Safety and Health Act of 1970
("OSHA") mandates general requirements for safe work places for all employees.
In particular, OSHA calls for special procedures and measures for the handling
of certain hazardous and toxic substances. In addition, specific safety
standards have been promulgated for workplaces engaged in the treatment,
disposal or storage of hazardous waste. Moreover, under the Federal Emergency
Planning and Right-to-Know Act of 1986, facilities handling specified extremely
hazardous materials must notify local emergency planning committees of their
activities and comply with the provisions of local emergency plans. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling specified extremely dangerous materials.
The Company believes that it is in substantial compliance with all
material federal, state and local laws and regulations governing its operations
and has obtained all material licenses and permits necessary for the operation
of its business. However, amendments to existing statutes and regulations,
adoption of new statutes and regulations and the Company's expansion into new
jurisdictions and aquatic and vegetation management services could require the
Company to continually alter methods of operations at costs that could be
substantial. There can be no assurance that the Company will be able, for
financial or other reasons, to comply with applicable laws, regulations and
permitting requirements, particularly as it seeks to enter into new markets.
Failure to comply with applicable laws, rules or regulations or permitting
requirements could subject the Company to civil remedies, including fines and
injunctions, as well as possible criminal sanctions, which would have a material
adverse effect on the Company.
Notwithstanding the burdens of compliance, the Company believes that
its business prospects are significantly enhanced by the continuing stringent
enforcement of the comprehensive regulatory framework by government agencies.
Any significant relaxation of the regulatory requirements governing the aquatic
and vegetation management services industry could also adversely affect the
Company.
EMPLOYEES
As of February 4, 1998, the Company had approximately 145 employees
other than executives, all of whom are full-time employees, which includes 20
administrative staff, 10 branch managers, 5 production supervisors, 18 sales
personnel, 75 applicators and 17 laborers. The Company is not currently a party
to any collective bargaining agreement. The Company believes that its employee
relations are satisfactory.
- 19 -
<PAGE>
DISCONTINUED OPERATIONS
The Company's Board of Directors in November 1995 approved a plan to
dispose of the environmental remediation business segment in view of the
continued losses of the environmental remediation services division and
operational problems associated with it. The Company's remediation services
which were discontinued include remediation of petroleum contaminated soil and
ground water and the removal, disposal and installation of underground petroleum
storage tanks and fuel dispensing systems.
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
consideration comprises (i) $681,000 in cash, (ii) a three-year promissory note
of $600,000 (the " Promissory Note") 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. The Company originally incurred these obligations in connection with
the HES acquisition in February 1995. 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. All of the above items have been
satisfied with the exception of (ii) pertaining to the Promissory Note. As of
December 31, 1996, the Company determined that there may be a collectibility
problem in relation to the Promissory Note and as a result, a full valuation
allowance has been made.
In relation to FUPTC, the Company has not been successful in finding
a buyer for it and the net book values of the remaining assets of FUPTC have
been written down to its net realizable values. As at December 31, 1996, FUPTC
has fulfilled all of its remaining contractual obligations. All equipment has
been sold on a piece-meal basis and the net liabilities of the discontinued
environmental remediation entities currently consist mainly of accounts payable
and amounts payable to Robert Radler, the former President of the Company, under
a settlement agreement ("Settlement Agreement") entered into in 1996 with the
Company. (See Part III, Item 10: Employment Agreements). The net liabilities of
the discontinued operations decreased from $350,076 at December 31, 1996 to
$176,448 at December 31, 1997. The decrease was mainly due to the settlement of
outstanding accounts payable from collections of accounts receivable and the
utilization of the provision for phase-out losses for legal fees relating to the
collection of certain accounts receivable of the discontinued operations and
payments made to Robert Radler pursuant to the Settlement Agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains corporate headquarters for its aquatic
management and environmental remediation businesses, consisting of approximately
17,350 square feet, located in Fort Lauderdale, Florida, under a five-year
four-month lease which commenced on January 1, 1994. The Company has the option
to extend the term of the lease for an additional five years. The
- 20 -
<PAGE>
Company's annual lease payments for the remaining year of the lease will be
approximately $93,370. In addition to its lease payments, the Company is
required to pay a proportionate share of the operating expenses, as defined in
the lease to include, among other things, property taxes, hazard insurance and
all public utility services aside from electric, incurred by the lessor in
connection with its management and maintenance of the property subject to the
lease. Under the terms of the lease, the Company's operating expenses may not
increase by more than 5% each year.
In addition to its corporate headquarters, the Company conducts its
aquatic and industrial vegetation management business out of the following
branch offices:
The Company's office in West Palm Beach, Florida consists of
approximately 4,608 square feet, under a one-year lease which commenced on
November 1, 1997. Annual lease payment is approximately $42,000 which amount
includes the cost of property taxes, hazard insurance, and public utility
services.
The Company rents an approximately 3,200 square foot office in
Orlando, Florida under a two-year lease which commenced on July 1, 1997. The
Company's annual lease payments for the two years of the lease are approximately
$22,500 and $24,300.
The Company's office in Sarasota, Florida consists of approximately
4,000 square feet. The Company leases this office under a one-year lease which
commenced on January 1, 1997. The Company has the option to renew the lease for
four additional one-year terms. The annual lease payment is $24,000.
The Company rents an approximately 4,500 square foot office in
Tampa, Florida under a five-year lease effective May 1, 1995. The Company has
the option to extend the term of the lease for an additional two years. The
Company's annual lease payment is approximately $24,000.
The Company's office in Fort Myers, Florida is approximately 4,200
square foot in size and is under a two-year lease which commenced on December 1,
1995. The annual lease payment is approximately $25,000. The Company has the
option to renew the lease for three additional one-year terms.
The Company has a lease for approximately 2,625 square feet of space
in Jacksonville, Florida, with a term of one year effective April 1, 1996. The
Company has the option to renew the lease for three additional one-year terms.
The lease has been extended for an additional year. The Company's annual lease
payment is approximately $15,000.
The Company's office in Myrtle Beach, South Carolina consists of
approximately 2,000 square feet and is leased on a month to month basis for
approximately $600 per month.
The Company's office in Tempe, Arizona, is approximately 5,900
square feet in size and is under a three-year lease which commenced May 1, 1997.
The monthly lease payment is $3,250 in addition to all expenses borne by triple
net lease terms, including, but not limited to, real estate
- 21 -
<PAGE>
taxes. The Company has the option to renew the lease for one additional
three-year term and then subsequently for four additional two-year terms.
In connection with the GPI Acquisition, the Company entered into a
month to month lease for approximately 2,800 square feet of space in Athens,
Georgia at a monthly lease payment of $1,000.
The Company rents an office in Alabaster, Alabama of approximately
5,000 square foot in size under a three-year lease which commenced on June 15,
1997. The annual lease payment is approximately $19,000 which includes the cost
of property taxes, hazard insurance and utilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
- 22 -
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are quoted on the NASDAQ
National Market System under the symbols "AQUX" and "AQUXW", respectively. The
following table sets forth, for the period since the first quarter ended March
31, 1996, the high and low closing sales prices for the Common Stock and the
Warrants as reported by NASDAQ.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------- ----------
HIGH LOW HIGH LOW
------ ----- ------ -----
1996
<S> <C> <C> <C> <C>
First Quarter ........................................ 6-7/8 3-1/4 2 11/16
Second Quarter ....................................... 5-1/4 4-1/4 1-1/8 11/16
Third Quarter ........................................ 5-13/16 4-1/2 1 1/2
Fourth Quarter ....................................... 6-3/8 4-11/16 1-1/8 1/2
1997
First Quarter ........................................ 8-1/8 4-7/8 2-1/2 15/16
Second Quarter ....................................... 7-5/8 6 2-3/8 1-1/4
Third Quarter ........................................ 7-1/2 6-3/8 1-29/32 1-3/8
Fourth Quarter ....................................... 7-3/4 6-3/8 2-7/16 1-9/16
</TABLE>
As of March 6, 1998, there were 53 record holders of the Company's
Common Stock. There were approximately 1,355 beneficial owners of the Company's
Common Stock at March 6, 1998.
The Company has not paid any cash dividends on its Common Stock
other than S corporation dividends prior to the IPO and does not currently
intend to declare or pay cash dividends in the foreseeable future. The Company
intends to retain any earnings that may be generated to provide funds for the
operation and expansion of its business. In addition, certain of the Company's
loan agreements with its lenders prohibit the Company from paying dividends.
- 23 -
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 1997, the Company concentrated on positioning itself to capture
a meaningful share of the outsourcing market for vegetation management services,
particularly utilities and government agencies, by making significant
investments in personnel and information system infrastructure. Most utilities
use in-house mechanical cutting programs to maintain their right-of-ways
exclusively. As deregulation of the electric utility industry takes place, these
electric utilities must seek the most efficient and cost-effective methods of
delivering their core services in a competitive rate environment, thereby making
outsourcing becomes an attractive option. The Company has taken steps to ensure
that it is well positioned to take advantage of the deregulation trend in the
electric utility industry and governmental sector. During 1997, the Company
invested significantly in its personnel and information system infrastructure so
as to accommodate its expansion strategy for the next three years. This included
the recruitment of a President and Chief Executive Officer, Mr. John P. Hart,
for the Company's main operating subsidiary and the formation of a specialized
marketing team managed by Mr. Hart (the "Team"). The Team of the Company targets
governmental agencies and utility and power companies which have more demand
potential for the Company's vegetation management services as a result of the
active deregulation and increased competition, leading to outsourcing of their
in-house services. The Team is marketing an integrated vegetation management
approach using mechanical, chemical and biological methods to these customers
which should improve vegetation management results and reduce long-term
maintenance costs. This investment in the marketing infrastructure of the
Company is expected to yield positive results over the next 6-18 months as the
average selling cycle ranges from 12-18 months for governmental contracts and
6-12 months for utility contracts.
The Company's investment in personnel also included the employment of a
chief compliance officer who made further improvements in the Company's in-house
training program to more effectively address the training and safety needs of
employees and to ensure continual compliance with environmental regulations. The
Company has also recruited a management information system manager to assist in
the upgrade of its information systems in terms of both hardware and systems
software which included the establishment of a wide area network for more
effective internal communication between the corporate and branch offices and
more timely management information for job costing, quality control and task
scheduling.
During 1997, the Company continued its geographic expansion and opened
two additional branch offices, bringing the total number of branch offices to
twelve. In April 1997, the Company established a new branch office in
Birmingham, Alabama. The expansion of its network of branches into Alabama
should help further develop alliances with the utility companies in that area
and increase the Company's ability to capitalize on the beginning of large-scale
outsourcing of non-core utility services by utility companies throughout the
United States. In September 1997, the Company opened its twelfth branch office
in San Francisco, California managed by a new branch manager with
- 24 -
<PAGE>
over 20 years of experience in surface water management and ecosystem
restoration. The addition of this member to the Company's management team
represents the Company's first strategic move in the California market to take
advantage of the significant business opportunities relating to surface water
management and environmentally-sensitive land management issues currently faced
by the entire western United States. During 1997, the Company also focused on
assimilating the operations of the three businesses acquired in 1996 which
resulted in two branch offices being opened in Arizona and Georgia in December
1996.
RESULTS OF OPERATIONS
Continuing Operations - Aquatic & Industrial Vegetation Management Business
Revenues
Total service revenue increased by $1,720,436, or 15.0%, from
$11,467,830 in 1996 to $13,188,266 in 1997. The increase in revenues was
primarily attributable to an increase in revenues of approximately $1,390,000
from recurring and non-recurring aquatic vegetation management contracts
resulting primarily from the acquisition of Aquatic Dynamics, Inc. in December
1996. The two new branch offices in Alabama and California contributed
approximately $926,000 in revenues for 1997. The increase in revenues was
partially offset by a reduction in revenues attributable to one-time contracts
secured in 1996 and the cancellation of an industrial vegetation management
contract in 1997.
Costs of Services and Gross Margins
Costs of services increased by $1,961,598, or 30.26%, from $6,482,852
in 1996 to $8,444,450 in 1997. The increase in costs of services was mainly
attributable to increased chemical, labor, materials and subcontracting costs as
a result of the increased revenues and the establishment of three additional
branch offices in Arizona, Alabama and California. The increase in
subcontracting costs accounted for 29.0% of the overall increase in costs of
services and they related primarily to contracts for Alabama and California and
two non-recurring contracts in Florida which commenced work in 1997. As a
percentage of revenues, cost of services have increased from 56.5% for 1996 to
64.0% for 1997. The reduced gross margin was due primarily to the lower margins
obtained for vegetation management contracts in Arizona and Alabama and losses
incurred for certain fixed price contracts in Florida and California.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2,295,540,
or 67.6%, from $3,398,152 in 1996 to $5,693,692 in 1997. This increase was
mainly attributable to increased staffing and staff-related expenditures which
included employee benefits, relocation expenses and recruitment, increased
executive compensation, increased sales and marketing activities, consulting
fees for the upgrade and design of the Company's information systems and
expenses incurred in
- 25 -
<PAGE>
conjunction with due diligence activities for proposed financing arrangements,
private placements and acquisitions that management subsequently elected to
forego. Due diligence costs included legal and professional fees and travel
expenses. The selling, general and administrative expenses of the
newly-established branch offices in Arizona, Alabama and California accounted
for 32.5% of the overall increase for 1997.
As a percentage of revenues, such expenses have increased from 29.6% in
1996 to 43.2% in 1997 due to the costs associated with the expanded personnel
and systems infrastructure and increased sales and marketing activities. The
Company is continuing to invest in its business development, marketing and
proposal resources through the addition of six sales representatives in 1997 and
the engagement of business development consultants for utility and federal and
state governmental service contracts. The Company expects that absolute levels
of selling, general and administrative expenses will continue to increase in
1998.
Depreciation and amortization
Depreciation and amortization expenses increased from $721,144 in 1996
to $981,748 in 1997. As a percentage of revenues, depreciation and amortization
expenses have increased from 6.3% in 1996 to 7.4% in 1997. This increase
reflected the additional depreciation of application and computer equipment
purchased during 1997 and a full year's amortization of intangibles resulting
from the acquisitions made in 1996.
Interest Expense
Interest expense increased by $118,255 from $683,049 in 1996 to
$801,304 in 1997, primarily as a result of increased bank borrowing and
equipment loans.
Income Taxes
There was no income tax benefit for the year ended December 31, 1997 as
a full valuation allowance has been provided against deferred tax assets arising
mainly from the Company's net operating loss carryforward of approximately $10
million.
Seasonality
The Company's cost of services for aquatic and industrial
vegetation management services are higher during the spring and summer months
when aquatic weeds, algae and exotic plants grow at a much faster rate than
during the fall and winter months. As a result of such higher growth rates, the
Company is required to use increased amounts of chemicals to control weeds,
algae and exotic plants and to incur additional overtime for hourly employees.
To date, the Company's results of operations have not been materially affected
by seasonal trends. However, the Company believes that in the future, the higher
costs during the summer months could adversely affect the Company's profit
margins and results of operations during such periods and that the Company's
- 26 -
<PAGE>
results may reflect quarterly fluctuations resulting from the different climatic
conditions of the locations of its customers.
Outlook
On November 30, 1997, the Company entered into a stock purchase
agreement ("Stock Purchase Agreement") with the owner of Lewis to acquire all of
the issued and outstanding stock of Lewis Tree Service, Inc. ("Lewis"), a
privately-owned business located in Rochester, New York (the "Lewis
Acquisition"). The purchase price ("Purchase Price") for the stock will be
$25,000,000 and issuance of shares of the common stock of the Company based on
the applicable percentage ("Applicable Percentage") of Lewis' net income before
depreciation, amortization, interest and income taxes ("EBITDA") for the twelve
months ended October 31, 1998. EBITDA, as used herein, is neither a measurement
pursuant to generally accepted accounting principles (GAAP) nor a measurement of
operating results and is included for informative purposes only. The Applicable
Percentage shall be as follows: (i) if EBITDA is less than $4,500,000, the
Applicable Percentage shall be 25%, (ii) if EBITDA is at least $4,500,000 but
less than $5,250,000, the Applicable Percentage shall be 40%, (iii) if EBITDA is
at least $5,250,000 but less than $6,000,000, the Applicable Percentage shall be
50%, and (iv) if EBITDA is at least $6,000,000, the Applicable Percentage shall
be 60%. The proposed acquisition of Lewis is primarily subject to the Company
obtaining the required financing for the Purchase Price and the necessary credit
facilities to finance the working capital and current debt obligations of Lewis.
In January 1998, the Company entered into an Amended Stock Purchase Agreement
with the owner of Lewis which provides for an extension of the closing date to
May 15, 1998 and the increase in the Purchase Price by $6,945 times the number
of days that elapse from March 31, 1998 to the closing date. The Company has
since increased the deposit for the acquisition of Lewis in the escrow account
from $670,000 at December 31, 1997 to $2,500,000 at February 4, 1998. If the
acquisition of Lewis has not occurred by May 15, 1998, the escrow agent shall
pay the $2,500,000 to the owner of Lewis and the Stock Purchase Agreement shall
terminate, provided that certain conditions have been met including, but not
limited to, the accuracy in all material aspects of all representations and
warranties made in the Stock Purchase Agreement, no prohibition on the sale of
the stock by the owner of Lewis and no material adverse change in the assets,
business, financial condition or prospects of Lewis since the date of the Stock
Purchase Agreement.
Founded in 1938, Lewis, also known as Monroe Tree Service, is one of
the oldest and largest tree trimming and vegetation management companies in the
United States with approximately 1,000 employees. It provides vegetation
management services to utilities and government entities in 18 states throughout
the eastern United States. For the fiscal year ended October 25, 1997, Lewis
generated total revenues of approximately $50 million and EBITDA of
approximately $4.9 million.
The business combination of Aquagenix and Lewis is expected to further
expand the Company's operations throughout the eastern United States. With the
established customer base of Lewis and its reputation for quality service,
combined with the Company's technology and infrastructure, the Company believes
the Lewis Acquisition will expand the range of vegetation management services
and enable the combined company to provide integrated vegetation
- 27 -
<PAGE>
management solutions to the utility and governmental customers. Members of the
executive management team of Lewis are expected to remain with the Company to
ensure a seamless transition for Lewis customers with the added benefits of
expanded service capabilities and significantly broader insurance and bonding
coverages.
There can be no assurance that financing can be obtained to finance
the acquisition of Lewis or any future acquisitions or that the Company can
successfully integrate the operations of Lewis or any future acquisitions into
its existing operations. The costs of additional financing, together with its
inability to integrate future acquisitions into its existing business, would
have a material adverse effect on the financial performance of the Company,
especially when the capital investment is significant.
Although the Company believes that there is significant demand for its
vegetation management services, the industry is emerging with a relatively
limited operating history. As such, demand and market acceptance for the
Company's services are subject to a high level of uncertainty. In 1997, the
Company sustained a net loss of $2,697,938 due mainly to significant investments
in building middle and senior management in order to provide the appropriate
infrastructure to accelerate and manage its internal growth and to integrate the
acquisitions planned for under its growth strategy which includes the
acquisition of Lewis. The Company's operating results for 1998 will be largely
dependent on its sales and marketing team achieving greater penetration in
existing markets and new markets and also on continued favorable regulatory
environments. A significant portion of the Company's expenses is relatively
fixed and the timing of its investment in the infrastructure of the Company is
based largely on its forecast of future revenues. If the growth in revenues does
not meet the Company's expectations in 1998, it may be unable to quickly adjust
its expenses to levels in line with actual revenues and this could have a
material adverse impact on the Company's business and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
its IPO, borrowings and equity placements with private investors. Cash and cash
equivalents have increased slightly from $785,731 at December 31, 1996 to
$799,286 at December 31, 1997.
Working Capital
Working capital was $1,613,672 at December 31, 1997 as compared to
$685,117 at December 31, 1996. The increase in working capital was primarily
attributable to the reclassification from long-term to short-term of an account
receivable (the "Riverfront Receivable") of $1,269,431 for which payment is
expected to be received within the next 12 months.
The Riverfront Receivable related to a contract with Riverfront
Associates ("Riverfront") for remediation and clean-up services for which a
reimbursement application for work completed has
- 28 -
<PAGE>
been filed with the State of Florida Department of Environmental Protection
("DEP") under the Abandoned Tank Restoration Program. The contract was entered
into in 1994 by Florida Underground Petroleum Tank Contractors, Inc. ("FUPTC"),
a wholly-owned subsidiary of the Company whose operations have since been
discontinued. During 1996, the Company reclassified this receivable from
discontinued operations in partial settlement of funds extended to FUPTC for the
repayment of loans and working capital requirements. In 1997, the DEP has
determined that $1,097,777 of the total reimbursement application is allowable
for reimbursement for which actual payment is expected within the next 12
months. The Company believes that it can successfully negotiate with Riverfront
in relation to the payment of the shortfall as provided for in the contract.
Accounts receivable decreased from $1,064,151 at December 31, 1996 to
$842,741 at December 31, 1997 due to the improved collection period for the
accounts receivable from 32 days at December 31, 1996 to 26 days at December 31,
1997. Of the Company's total accounts receivable at December 31, 1996 and 1997,
approximately $336,000 (31.6%) and $311,000 (37.0%) were due from five
customers, respectively. Delays in collection or uncollectibility of accounts
receivable could have an adverse impact on the Company's liquidity and working
capital position.
Inventories increased from $339,114 at December 31, 1996 to $640,225 at
December 31, 1997 primarily as a result of the increase in revenues and the
number of branch offices.
During 1997 pursuant to the Lewis Acquisition, the Company deposited
$670,000 in escrow ("escrow deposit") pending the closing of the purchase of
Lewis. In accordance with terms of the agreement for the Lewis Acquisition, the
Company increased the escrow deposit to $2,500,000 on February 4, 1998. The
entire escrow deposit will be paid to the owner of Lewis if the acquisition of
Lewis has not occurred by May 15, 1998 and provided that certain conditions in
the Stock Purchase Agreement have been met as discussed in the above "Outlook"
section.
The Company is evaluating various proposed private equity and debt
financings to fund the acquisition of Lewis. There can be no assurance that
financing can be obtained to finance the acquisition of Lewis on acceptable
terms or that the Company can successfully integrate the operations of Lewis
into its existing operations. The costs of additional financing, together with
the Company's inability to integrate the operations of Lewis into its existing
business, would have a material adverse affect on the financial performance of
the Company principally due to the significance of the capital investment.
At December 31,1997, the Company has loan agreements with Capital Bank
(now known as Union Planters Bank) which provide for borrowings under a
revolving line of credit of up to $1,000,000, a three-year term loan in the
principal amount of $250,000, a three-year term loan of $200,000 for computer
equipment and a $270,000 equipment financing line. At December 31, 1997, an
aggregate of $961,344 was outstanding under the loan agreements with Capital
Bank, of which $550,000 was outstanding under the line of credit, $222,455 was
outstanding under the three-year term loan collaterized by the long-term
receivable and $188,889 was outstanding under the computer equipment loan.
Advances under the line of credit are based on certain borrowing formulas
relating to eligible accounts receivable and inventories. Interest accrues at
1-1/4% above prime for the line of credit.
In addition to the increased borrowings with Capital Bank, the Company
has entered into capital lease agreements in 1997 totaling $584,304. Other
current liabilities were higher at December 31, 1997 compared to the prior year
primarily due to increased accrued expenses for payroll and purchases of
application equipment.
- 29 -
<PAGE>
With respect to its 12.5% Senior Secured Note with Equitable in the
principal amount of $5,000,000, the Company entered into amended agreements with
Equitable on March 31, 1998 ("Amendment No. 4") and during the fourth quarter of
1997 ("Amendment No. 3"). Amendment No. 3, effective through March 30, 1998,
provides a modification to certain financial covenants and specifies that a
quarterly consent fee equal to 0.25% (or 1.0% per annum) of the principal
balance of the Note is payable (quarterly in arrears) effective from the quarter
ending January 1998 if the Company fails to comply with certain financial ratios
set forth in the Note Purchase Agreement dated December 15, 1995 between the
Company and Equitable. Amendment No. 4 further modifies the terms of the
agreement with Equitable, including an extension of and modification to certain
financial covenants included in Amendment No. 3. The consent fee pursuant to
Amendment No. 4 maintains the consent fee for Amendment No. 3 through April 30,
1998 (or 0.25% of $5,000,000 for the three-month period then ended) and,
subsequent thereto, is $5,000 each month (beginning May 1998) the Company fails
to comply with certain financial ratios set forth in the Note Purchase Agreement
dated December 15, 1995 between the Company and Equitable. The consent fee for
Amendment No. 4 is payable monthly in arrears, as applicable.
Cash Flows from Operating Activities
The Company used $2,034,809 in cash from operating activities for the
year ended December 31, 1997 as compared to cash provided of $349,047 for the
year ended December 31, 1996. The net loss incurred for the year ended December
31, 1997 was a major contributor to this change which was partially offset by an
increase in accrued liabilities.
Cash Flows from Investing Activities
The Company's investing activities used cash of $1,131,580 in 1997
primarily for capital expenditures. Net cash provided by investing activities in
1996 of $2,842,942 was derived mainly from the sale of marketable securities and
certain assets of the discontinued operations.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December
31, 1997 of $3,179,944 was derived primarily from the proceeds of the issuance
of common stock resulting from private equity placements and the exercise of
stock options by employees, directors and financial consultants. Proceeds from
such issuances amounted to $2,650,991. The Company also had additional
borrowings of $1,809,883 during 1997 which included term loans in the principal
amount of $450,000 from Capital Bank and a capital lease of $500,000 from a
commercial equipment financing company. The proceeds from the additional
borrowings have been partially offset by payment of debts which amounted to
$1,198,931 in 1997. In 1996, the net cash used in financing activities of
$3,127,146 was mainly attributable to the settlement of debt obligations of the
discontinued operations which amounted to $3,949,451.
The Company does not have any material commitments for capital
expenditures at December 31, 1997 except as relates to the design and
implementation of an upgraded job costing system. Based on current plans, the
Company anticipates that funds generated from operations, available borrowings
and the payment of the Riverfront Receivable of approximately $1,200,000
together with the proceeds from the conversion of outstanding redeemable
warrants from the initial public offering and certain pending private equity
placements will be sufficient to meet the Company's cash requirements for at
least the next 12 months. The Company is currently evaluating various proposed
private equity and/or debt offerings with potential investors and increases in
credit facilities with financial institutions in order to fund the operations
and continued expansion of its vegetation management business in 1998 both
through internal growth and acquisitions. To the extent that the
- 30 -
<PAGE>
Company is unable to obtain such financing on satisfactory terms or financing
available through the conversion of outstanding redeemable warrants from the
initial public offering, the Company may be required to curtail its expansion
activities.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128. This pronouncement requires, among other things, the
calculation and presentation of "basic" and "diluted" earnings per share (EPS).
Basic EPS is computed by dividing income available to common stockholders (the
numerator) by the weighted-average number of common shares outstanding (the
denominator) during the period. The computation of diluted EPS is similar to the
computation of basic EPS except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been used. The numerator is adjusted for
any changes in income or loss that would result from the assumed conversion of
these potential common shares. Common shares equivalents resulting from stock
options and warrants to purchase common stock have not been included in the loss
per common share computation for 1997 as their effect would be anti-dilutive,
however, they were included in the computation for 1996 but they did not affect
the computation.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This pronouncement becomes effective for fiscal years
beginning after December 15, 1997. Under the current operating performance
income concept, extraordinary and nonrecurring gains and losses are excluded
from income. SFAS 130 will require entities to report "comprehensive income"
which will be divided into two components, "net income" and "comprehensive
income". Net income will include income from continuing operations, discontinued
operations, extraordinary items and cumulative effects of changes in accounting
principle. Other comprehensive income will include all other changes in the
equity of an enterprise that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. SFAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company has not yet determined the impact,
if any, that adoption of SFAS 130 will have on the Company's financial
statements.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a description of
the financial statements included in this Form 10-KSB.
- 31 -
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
The executive officers, directors and significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ------ ------------------------------------------------
<S> <C> <C>
Andrew P. Chesler.................... 31 Chairman of the Board, Chief Executive Officer,
President and Treasurer
John P. Hart......................... 51 Executive Vice President
Helen Chia(1)........................ 34 Chief Financial Officer and Secretary
Abraham S. Fischler.................. 70 Director
Fred S. Katz......................... 59 Director from November 1994 to November 1997
Allen H. Stern....................... 39 Director
Jeffrey T. Katz...................... 30 Director
Garry Seitz.......................... 52 Chief Compliance Officer of ALWT
Joseph J. Campolong.................. 31 Vice President, Production of ALWT
Robert Craig Smith................... 33 Vice President, Sales of ALWT
- ----------------
(1) Effective March 6, 1998 Ms. Chia resigned from the Company due to
relocation.
</TABLE>
Andrew P. Chesler has served as Chairman of the Board, Chief
Executive Officer, President and Treasurer since February 1996. Mr. Chesler
co-founded the Company and has been Executive Vice President of the Company
since June 1993. Mr. Chesler also co-founded ALWT and has been President, Chief
Operating Officer and a director since October 1990. From 1990 to present, Mr.
Chesler has also served as the Company's Chief Information Officer.
John P. Hart joined the Company in April 1997 as the President and
Chief Executive Officer of ALWT. He was appointed as Executive Vice President of
the Company in May 1997. Mr. Hart was previously the Senior Vice President and
director of Metcalf & Eddy's southern region, an environmental engineering and
consulting firm, where he led the firm through significant growth in Florida,
Georgia and Texas. From 1983 to 1995, he served as an elected city and county
official of various civic and political associations, including Chairman of the
Board of County Commissioners, Broward County, Florida and Council Member and
Mayor of City of North Lauderdale, Florida, where he directed and managed policy
and budget operations for the regional governments in southern Florida.
- 32 -
<PAGE>
Helen Chia served as the Company's Chief Financial Officer from
January 1996 through March 6, 1998. Ms. Chia was appointed as Secretary for the
Company in February 1996. She joined the Company in April 1995 as Corporate
Controller for the Company. From February 1992 to December 1994, she served as
Corporate Controller for Milk Products Holdings (SEA) Pte Ltd, a Singapore-based
company with annual sales of approximately $500 million, whose principal
business is in the trading of dairy products through its eight subsidiaries and
nine associates operating throughout Southeast Asia, South Africa and the Indian
subcontinent. From January 1986 to December 1991, she was with the public
accounting firm of KPMG Peat Marwick.
Abraham S. Fischler has been a director of the Company since
September 1994. Since July 1992, Mr. Fischler has been President Emeritus of
Nova University, Fort Lauderdale, Florida. From July 1970 to July 1992, Mr.
Fischler served as President of Nova University.
Allen H. Stern was appointed as director of the Company in February
1996. Mr. Stern is currently a Senior Vice President with the Corporate Finance
Department of Dabney Resnick, Inc., a Beverly Hills, California-based investment
bank and has been with Dabney Resnick, Inc. since 1993. From 1987 to 1993, Mr.
Stern was Senior Vice President in Binswanger Company, where he was the founder
of the Corporate Finance Real Estate Department. From 1980 to 1986, Mr. Stern
was in leveraged leasing and equipment project finance with First NH Resources
and Bank New England Leasing.
Jeffrey T. Katz was appointed as director of the Company in March
1996. Mr. Katz is currently the President, Chief Executive Officer and founder
of Blueberry Intermodal Inc., a chassis leasing company founded in 1995 which
leases chassis for newly designed "large-spec" containers for international
shipping and has operations in the Continental United States. In 1991, Mr. Katz
was the co-founder of Porter Capital Management, a hedge fund based in
Sausalito, California and continues currently as a limited partner. Between 1989
to 1991, Mr. Katz was in the securities industry on the Pacific Stock Options
Exchange with Adler, Coleman & Co. and Casey Securities, Inc.
Garry Seitz joined the Company in January 1997 as Chief Compliance
Officer of ALWT. Dr. Seitz was the owner of Green Pastures, Inc., the
Georgia-based vegetation management firm acquired by the Company in December
1996. Prior to forming Green Pastures in 1980, Dr. Seitz held a variety of
research and agronomist positions with Chemlawn Corp. of Atlanta, a national
landscape organization. He holds a Ph.D. in Agronomy from the University of
Florida.
Joseph J. Campolong, Vice President, Production, has been with the
Company since June 1990 and has been instrumental in the expansion of the
Company's production unit. His current responsibility is the management of all
production activities in the Southeastern United States.
Robert Craig Smith has been with the Company since 1990. Mr. Smith
has been and is directly involved in the sales growth of the Company's aquatic
and vegetation management operations throughout Florida and the South Eastern
United States. Mr. Smith is currently
- 33 -
<PAGE>
responsible for developing new client business, maintaining existing
customer relations and overseeing all sales representatives of the branch
offices.
ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company's officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors. The Company's
directors hold office until the next annual meeting of stockholders and until
their successors have been duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has four committees, an Audit Committee, a Compensation
Committee, an Employee Stock Option Committee and a Directors Stock Option
Committee. The members of the Audit Committee consist of Andrew P. Chesler,
Abraham S. Fischler and Jeffrey T. Katz. The principal functions of the Audit
Committee are to recommend the annual appointment of the Company's independent
auditors, to consult and review with the Company's auditors concerning the scope
of the audit and the results of their examination, to review and approve any
material accounting policy changes affecting the Company's operating results and
to review the Company's internal control procedures.
The Compensation Committee, comprising Abraham S. Fischler, Alan H.
Stern and Jeffrey T. Katz, reviews and recommends compensation and benefits for
the executives of the Company. The Directors Stock Option Committee, which
consists solely of Andrew P. Chesler, administers the Company's Directors Stock
Option Plans.
The Employee Stock Option Committee, which consists solely of
outside directors ineligible to participate in the Company's discretionary
employee stock programs, namely Alan H. Stern and Jeffrey T. Katz, has the
function of administering the grant of stock options to employees, including
officers and directors who are also employees of the Company, under the
Company's Employee Stock Option Plan.
COMPENSATION OF DIRECTORS
The Company pays directors who are not employees of the Company a
fee of $250 per meeting of the Board, and reimburses all directors for their
expenses in connection with their activities as directors of the Company.
Directors of the Company who are not employees of the Company receive options
under the Company's Amended and Restated Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for the issuance of 250,000
shares thereunder and requires that all options granted be exercisable in two
equal instalments each on the first and second anniversary dates following the
date of the grants. Any options granted pursuant to the Directors Plan have a
term of five years and have an option price equal to the fair market value of
the Company's Common Stock on the date of grant.
- 34 -
<PAGE>
During 1996, under the Amended and Restated Directors Stock Option
Plan, a total of 85,000 options to purchase 85,000 shares of the Company's
Common Stock at an exercise price of $3.88 were granted to the four non-employee
directors of the Company. There were no options granted to the directors in
1997.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.
Based solely on its review of the copies of such reports furnished
to the Company or written representations that no other reports were required,
the Company believes that all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten percent beneficial owners were
complied with during the year ended December 31, 1997, except for Andrew Chesler
who inadvertently filed a late Form 4 for the purchase of common stock in
December 1997 and Abraham Fischler who inadvertently is late in filing a Form 4
for the purchase of common stock in March 1997.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following compensation table sets forth, for the three fiscal
years ended December 31, 1995, 1996 and 1997, the cash and certain other
compensation paid by the Company to Andrew P. Chesler, the Company's Chief
Executive Officer, John P. Hart, the Company's Executive Vice President
(collectively, the "Named Executive Officers") and the Company's previous two
executive officers whose compensation exceeded $100,000. No other executive
officer had an annual salary and bonus in excess of $100,000 during such years.
- 35 -
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------------------------------
Other Annual
Salary Bonus Compensation Option/SARS
Name and Principal Position Year ($) ($) ($) (#)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andrew P. Chesler
Chairman of the Board 1995 $170,000 - (1) -
Chief Executive Officer 1996 $176,000 $ 20,000 (1) 60,000(2)
President and Treasurer 100,000(3)
50,000(4)
1997 $174,080 $131,913 (1) 100,000(5)
John P. Hart
Executive Vice President 1997 $103,846 $ 10,000 (1) 100,000(5)
Alan H. Chesler 1995 $170,000 - (1) -
Former Chairman, 1996 - - - -
Secretary and Treasurer 1997 - - - -
Robert Radler 1995 $170,000 - (1) -
Former President 1996 - - - -
1997 - - - -
</TABLE>
- ----------------------
(1) Represents certain perquisites, the value of which did not exceed the
lesser of $50,000 or ten percent of the Named Executive Officer's cash
compensation.
(2) Represents options granted in 1996 under the Company's Employee Stock
Option Plan at an exercise price of $3.88 per share, the closing market
price of the Company's common stock on the date of the grant.
(3) Represents options granted in 1996 under the Company's Employee Stock
Option Plan at an exercise price of $4.75 per share, the closing market
price of the Company's common stock on the date of the grant.
(4) Represents options granted in 1996 under the Company's Employee Stock
Option Plan at an exercise price of $5.00 per share, the closing market
price of the Company's common stock on the date of the grant.
(5) Represents options granted in 1997 under the Company's Employee Stock
Option Plan at an exercise price of $5.31 per share, the closing market
price of the Company's common stock on the date of the grant.
- 36 -
<PAGE>
EMPLOYMENT AGREEMENTS
In June 1993, the Company entered into five-year employment agreements
with each of Alan H. Chesler, Robert A. Radler and Andrew P. Chesler, which are
automatically renewable and provide for initial annual base compensation of
$94,000, $150,000 and $150,000, respectively, and such increases in such base
compensation and bonuses as the Board of Directors may from time to time
determine. The employment agreements provide for employment on a full-time basis
(except for the Company's agreement with Alan H. Chesler, which requires him to
devote at least 75% of his business time to the Company), and contain a
provision that the employee will not compete or engage in a business competitive
with the current or anticipated business of the Company for the term of the
agreement and for one year thereafter if the executive is terminated for cause
or the executive terminates his employment. The employment agreements also
provide that the executive or the Company can terminate the employment
agreement, without cause, upon sixty days notice. If the executive is terminated
for cause, as defined in each employment agreement, the executive is not
entitled to receive severance pay. If the executive is terminated without cause,
he is entitled to receive his then current salary for the remaining term of the
employment agreement.
In February 1996, the annual base salaries for Alan H. Chesler and
Robert A. Radler were reduced to $127,500 and $158,000, respectively. In the
same month, both Alan H. Chesler and Robert A. Radler resigned as executive
officers of the Company. It was mutually agreed with Mr. Alan H. Chesler that
his employment agreement with the Company was terminated. However, in order to
maintain the base compensation for Mr. Radler at the current level, the Company
entered into a settlement agreement with him to continue his compensation until
June 1998 subject to certain conditions and obligations by Mr. Radler.
OPTIONS GRANTS TABLE
The following table sets forth information concerning the grant of
stock options to the Named Executive Officers during the year ended December 31,
1997. No stock appreciation rights were granted.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF GRANTED TO EMPLOYEES EXERCISE
OPTIONS IN THE YEAR ENDED PRICE PER EXPIRATION
NAME GRANTED(1) DECEMBER 31, 1997 SHARE(2) DATE
- ------------------------------------ --------------- ------------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Andrew P. Chesler................... 100,000 42.6 $5.31 3/26/07
John P. Hart........................ 100,000 42.6 $5.31 3/26/07
- -------------------------
</TABLE>
(1) Total number of options granted during the year ended December 31, 1997
was 234,500.
- 37 -
<PAGE>
(2) Options granted in 1997 are pursuant to the Company's Employee Stock
Option Plan. Options granted under the Employee Stock Option Plan have a
term of ten years and vest over a five-year period at the rate of 20% each
year. However, the Employee Stock Option Committee may in its sole
discretion, accelerate the exercise of any employee options.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning
unexercised stock options held by the Named Executive Officers as of December
31, 1997. During the year ended December 31, 1997, Andrew P. Chesler exercised
60,000 of his stock options at $3.88 per share. No stock appreciation rights
were granted or are outstanding.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-the Money
Held at December 31, 1997 Options at December 31, 1997
Shares Acquired Value ----------------------------- ---------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Chesler... 60,000 $213,600 270,000 - $652,800 -
John P. Hart ...... - - - 100,000 - $213,000
</TABLE>
- ------------------------
(1) The closing sale price of the Common Stock on December 31, 1997 as reported
by NASDAQ was $7.44 per share. Value is calculated by multiplying (a) the
difference between $7.44 and the option exercise price by (b) the number of
shares of Common Stock underlying the option.
LONG-TERM INCENTIVE AND PENSION PLANS
The Company does not have any long-term incentive or pension plans
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 6, 1998, the number of
shares of Common Stock which were owned beneficially by (i) each person who is
known by the Company to own beneficially more than 5% of its Common Stock, (ii)
each director, (iii) each executive officer and (iv) all directors and executive
officers as a group:
- 38 -
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OUTSTANDING SHARES
BENEFICIAL OWNER(1) OWNERSHIP(2) OWNED(2)
- ---------------------------------------------------------------- -------------------- -------------------------
DIRECTORS
<S> <C> <C>
Andrew P. Chesler............................................... 1,207,988(3) 22.7%
Jeffrey T. Katz................................................. 228,800(4) 4.3
Abraham S. Fischler............................................. 32,500(5) 0.6
Allen H. Stern.................................................. 5,000(6) 0.1
OTHER EXECUTIVE OFFICERS
John P. Hart.................................................... 117,000(7) 2.2
Helen Chia...................................................... 10,000(8) 0.2
All directors and executive officers
as a group (six persons)..................................... 1,601,288(3)-(8) 30.1
BENEFICIAL STOCKHOLDERS (5%)
Nicolas Berggruen............................................... 543,241(9) 10.2
The Equitable Life Assurance Society of
the United States........................................... 351,197(10) 6.6
Dabney Resnick Imperial, L.L.C.................................. 336,349(11) 6.3
</TABLE>
- -------------------------------------
(1) Unless otherwise indicated, the address of each beneficial owner is
Aquagenix, Inc., 6500 N.W. 15th Avenue, Fort Lauderdale, Florida 33309.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon exercise
of options and warrants. Each beneficial owner's percentage ownership is
determined by assuming that options and warrants that are held by such
person (but not those held by any other person) and that are exercisable
within 60 days from the date hereof have been exercised.
(3) Includes 230,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Chesler under the Company's Employee Stock Option
Plan.
(4) Represents (i) 183,800 shares of Common Stock, (ii) 45,000 shares
issuable upon the exercise of Warrants of the Company.
(5) Represents 32,500 shares of Common Stock.
(6) Represents 5,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Stern under the Company's Amended and Restated
Directors Stock Option Plan. Does not include 5,000 shares of Common
- 39 -
<PAGE>
Stock issuable upon the exercise of stock options granted under the same
Plan, which options are presently not exercisable.
(7) Represents 117,000 shares of Common Stock held.
(8) Represents 10,000 shares of Common Stock held.
(9) Represents 132,500 shares of Common Stock held by Alpha Atlas Holdings,
LDC and 300,741 shares of Common Stock and 110,000 warrants held by
Alexander Enterprise Holdings Corp., companies which are beneficially
owned by Mr. Berggruen.
(10) Represents warrants to purchase an aggregate of 351,197 shares of the
Company's Common Stock pursuant to an Amended and Restated Senior Secured
Note and Warrant Purchase Agreement, dated as of December 15, 1995 in
relation to the funding of the acquisition of AmerAquatic, Inc. in
October 1995.
(11) Represents warrants to purchase an aggregate of 336,349 shares of the
Company's Common Stock pursuant to certain warrant agreements in relation
to the provision of financial consulting services.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each
of its executive officers and directors pursuant to which the Company has agreed
to indemnify each such person for all expenses and liabilities, including
criminal monetary judgments, penalties and fines, incurred by such person in
connection with any criminal or civil action brought or threatened against such
person by reason of such person being or having been an officer, director or
employee of the Company or its subsidiaries. In order to be entitled to
indemnification by the Company, such person must have acted in good faith and in
a manner such person believed to be in the best interests of the Company and,
with respect to criminal actions, such person must have had no reasonable cause
to believe his conduct was unlawful.
TRANSACTIONS WITH AFFILIATES
In March 1996, Alan H. Chesler granted Andrew P. Chesler an option
until April 9, 1996, to purchase 435,000 shares of Common Stock. The option was
exercised by Andrew P. Chesler. Alan H. Chesler is the father of Andrew P.
Chesler.
During the year ended December 31, 1996, the Company obtained
investment banking services from Dabney Resnick Imperial L.L.C. Allen H. Stern
is the Senior Vice President with the corporation. In November 1996, the Board
of Directors approved the issuance of 100,000 warrants and a cash payment of
$125,000 to Dabney Resnick Imperial L.L.C. as compensation for future investment
banking services rendered by the corporation. These warrants have a term of five
years and are exercisable at $4.88 per share. The compensation expense of
$200,000 in relation to these warrants have been computed based on the fair
value of these warrants on the date of the grant and is being amortized over
three years.
- 40 -
<PAGE>
The Board of Directors also approved the issuance of 100,000 stock
options to First Taconic Capital as compensation for investment banking and
staffing services rendered for the year ended December 31, 1996. Fred S. Katz,
former director of the Company, is a partner of the firm. These options were
exercised on May 2, 1997 at an exercise price of $5.00 per share. The
compensation expense of $56,000 in relation to these warrants has been computed
based on the fair value of these warrants on the date of the grant.
On June 12, 1996, Mr. Jeffrey T. Katz, one of the directors of the
Company, purchased 125,000 shares of common stock of the Company at $4.00 per
share pursuant to the terms of a Subscription Agreement. The aggregate purchase
price was $500,000, all of which was received in cash.
Nicolas Berggruen is the Chief Executive Officer, President and
sole shareholder and director of Alpha Investment Management, Inc. which is a
registered investment adviser ("Alpha"). Alpha acts as an investment adviser to
Alpha Atlas Holdings, LDC ("Alpha Atlas"). Mr. Berggruen also acts as an
investment adviser to Alexander Enterprise Holding Corp. ("Alexander"). Of the
543,241 shares of common stock of the Company deemed beneficially held by Mr.
Berggruen, 410,741 shares of common stock were purchased by Alexander and
132,500 shares of common stock were purchased by Alpha Atlas. Mr. Berggruen has
sole voting and dispositive power with respect to 543,241 shares of common stock
of the Company.
The Company believes that all of the foregoing transactions were in
its best interest. All future transactions by the Company with officers,
directors, 5% stockholders and their affiliates will be entered into only if the
Company believes that such transactions are reasonably expected to benefit the
Company and the terms of such transactions are no less favorable to the Company
than could be obtained from unaffiliated parties.
- 41 -
<PAGE>
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
(I) GENERAL
EXHIBIT DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 Bylaws of the Company(1)
4.1 Form of Common Stock Certificate(1)
4.2 Revised Form of Warrant Agreement between the Company
and American Stock Transfer & Trust Company(1)
4.3 Revised Form of Warrant Agreement between the Company and
the Underwriter (including the form of Underwriters
Warrant Certificate)(1)
10.1 Employee Stock Option Plan of the Company(1)(2)
10.2 Directors Stock Option Plan of the Company(1)(2)
10.3 Employment Agreement, dated June 1, 1993, between the
Company and Alan H. Chesler, and form of amendment
thereto(1)(2)
10.4 Employment Agreement, dated June 1, 1993, between the
Company and Robert A. Radler, and form of amendment
thereto(1)(2)
10.5 Employment Agreement, dated June 1, 1993, between the
Company and Andrew P. Chesler, and form of amendment
thereto(1)(2)
10.24 Lease, dated November 30, 1993, between Franklin S.
Davis and the Company(1)
10.25 Assignment of Mortgage Note and Security Agreement,
dated October 19, 1990, between Alan H. Chesler and
ALWT(1)
10.26 Bill of Sale, dated October 19, 1990, between Florida
Waterway Management, Inc. ("FWM") and ALWT(1)
10.27 Assumption Agreement, dated October 19, 1990, between
ALWT and FWM(1)
- 42 -
<PAGE>
10.35 Stock Acquisition Agreement, dated June 2, 1993, between
the Company and the shareholders of ALWT(1)
10.38 Waterway restoration contract, dated July 13, 1992,
between Greater Orlando Aviation Authority and ALWT(1)
10.39 Waterway/wetlands maintenance contract, dated August
1992, between Northern Palm Beach County Water Control
District and ALWT(1)
10.53 Asset Purchase Agreement, dated as of November 23, 1994,
by and between ALWT and Mitigation Services, Inc. (4)
10.54 Senior Secured Note and Warrant Purchase Agreement dated
as of October 31, 1995, between The Equitable Life
Assurance Society of the United States (the "Purchaser")
and the Company (7)
10.60 Warrant Agreement dated as of October 31, 1995, between
the Purchaser and the Company (7)
10.63 Compliance Agreement, dated as of September 12, 1995,
between the U.S. Environmental Protection Agency, ALWT,
Alan H. Chesler and Andrew P. Chesler (7)
10.64 Asset Purchase Agreement, dated as of October 19, 1995,
among the Company, ALWT, AmerAquatic, Inc., Thomas Latta
and C. Elroy Timmer (7)
10.65 Lake and canal aquatic weed control and marsh
maintenance contract, dated April 1995, between Northern
Palm Beach County Water Control District and
ALWT/AmerAquatic, Inc. (8)
10.66 Lease, dated April 10, 1995, between Tampa Industrial
Developers, Ltd. and the Company d/b/a ALWT and FUPTC (8)
10.67 Lease, dated November 1, 1995, between Manny Schwartz ,
Steve Schwartz and ALWT (8)
10.68 Lease, dated December 1, 1995, between Charles C.
Souders, Shirley A. Souders and ALWT (8)
10.69 Asset Purchase Agreement, dated as of November 17, 1995,
by and between ALWT and L&L Mosquito & Pest Control,
Inc. (8)
10.70 Amended and Restated Senior Secured Note and Warrant
Purchase Agreement dated as of December 15, 1995 between
the Purchaser and the Company (8)
- 43 -
<PAGE>
10.71 Warrant Agreement dated as of December 15, 1995, between
the Purchaser and the Company (8)
10.72 Security Agreement dated as of December 15, 1995,
between the Purchaser and the Company (8)
10.76 Asset Purchase Agreement, dated as of April 25, 1996, by
and between Heart Environmental Services, Inc., H&H
Investment Corporation, Eugene M. Haas, Robert E. Haas,
Haas Sand and Gravel, Inc. HES and the Company (9)
10.77 First Amendment to Credit Agreement, Revolving Credit
Note and Reaffirmation and Ratification of Guaranty
Agreements, dated March 29, 1996 between SunTrust Bank,
Miami, N.A. and the Company (9)
10.78 Amendment to Loan Agreement, Amended Promissory Note and
Reaffirmation and Ratification of Guaranty Agreements,
dated as of March 29, 1996 between SunTrust Bank, Miami,
N.A. and FUPTC (9)
10.79 Contract between South Florida Water Management District
and ALWT, dated as of February 6, 1996 (9)
10.80 Amendment to Senior Secured Note and Warrant Purchase
Agreement between the Company and The Equitable Life
Assurance Society of the United States, dated as of
December 15, 1995 (9)
10.81 Stock Exchange Agreement, dated as of June 7, 1996, by
and among the Company, ARC and Ray Spirnock and Shirley
Spirnock, the shareholders of ARC (10)
10.82 Subscription Agreement, dated June 12, 1996, between the
Company and Mr. Jeffrey T. Katz (11)
10.83 Subscription Agreement, dated June 27, 1996, between the
Company and Tarragona Fund, Inc. (11)
10.84 Subscription Agreement, dated June 27, 1996, between the
Company and Alpha Atlas Fund, Ltd. (11)
10.85 Agreement and Plan of Merger, dated as of December 7,
1996, by and among the Company, Aquagenix Governmental
Services, Inc., ADI and Pat Church and Stephen Church,
the shareholders of ADI (12)
10.86 Stock Exchange Agreement, dated as of December 31, 1996,
by and among the Company, GPI and Garry Seitz and Jan P.
Seitz, the Selling Shareholders (13)
10.87 Option Agreement, dated as of November 1, 1996, between
the Company and Mr. Jon Kilik (14)
- 44 -
<PAGE>
10.88 Option Agreement, dated as of November 1, 1996, between
the Company and Mr. Perry Trebatch (14)
10.89 Option Agreement, dated as of November 1, 1996, between
the Company and First Taconic CapitalCorporation (14)
10.90 Option Agreement, dated as of November 1, 1996, between
the Company and Pat Guadagno (14)
10.91 Warrant Agreement, dated as of October 15, 1996, between
the Company, Dabney Resnick, Inc. and Aquagenix Warrant
Holdings II (14)
10.93 Subscription Agreement, dated as of May 19, 1997,
between the Company and Tarragona Fund, Inc. (15)
10.94 Restated Option Agreement, dated as of April 1, 1997,
between the Company and Pat Guadagno (16)
10.95 Loan Agreement, dated April 10, 1997, between the
Company and Capital Bank (17)
10.96 Promissory Note in the principal amount of $750,000,
dated April 10, 1997, between the Company and Capital
Bank (17)
10.97 Promissory Note in the principal amount of $250,000,
dated April 10, 1997, between the Company and Capital
Bank (17)
10.98 Security Agreement, dated April 10, 1997, between the
Company and Capital Bank (17)
10.99 Continuing Guaranty, dated April 10, 1997, between the
Company and Capital Bank (17)
10.100 Subordination Agreement, dated April 18, 1997, between
the Company and The Equitable Life Assurance Society of
the United States in favor of Capital Bank re: Exhibits
10.96 and 10.97 (17)
10.101 Consolidated Promissory Note in the principal amount of
$1,000,000, dated October 3, 1997, between the Company
and Capital Bank (17)
10.102 Term Promissory Note in the principal amount of
$200,000, dated October 3, 1997, between the Company and
Capital Bank (17)
10.103 Guidance Equipment Line Promissory Note in the principal
amount of $270,000, dated October 3, 1997, between the
Company and Capital Bank (17)
- 45 -
<PAGE>
10.104 Reaffirmation of Guaranty Agreement, dated October 3,
1997, between the Company and Capital Bank (17)
10.105 First Amendment to Subordination Agreement, dated
October 6, 1997, between the Company and The Equitable
Life Assurance Society of the United States in favor of
Capital Bank re: Exhibits 10.101, 10.102 and 10.103 (17)
10.106 Subscription Agreement, dated as of October 27, 1997,
between the Company and Alexander Enterprise Holdings
Corp. (17)
10.107 Stock Purchase Agreement, dated November 30, 1997,
between the Company and Thomas Terry, Jr. (18)
10.108 Amendment to Stock Purchase Agreement, dated January 29,
1998, between the Company and Thomas Terry, Jr. (19)
10.109 Second Amendment to Senior Secured Note and Warrant
Purchase Agreement between the Company and The Equitable
Life Assurance Society of the United States, dated as of
April 1, 1997 (20)
10.110 Third Amendment to Senior Secured Note and Warrant
Purchase Agreement between the Company and The Equitable
Life Assurance Society of the United States, dated as of
June 30, 1997 (20)
10.111 Fourth Amendment to Senior Secured Note and Warrant
Purchase Agreement between the Company and The Equitable
Life Assurance Society of the United States, dated as of
March 31, 1998 (20)
16.1 Letter from Bernstein, Patchen, Gold & Wolfson, P.A.
regarding change in independent auditors (1)
21.1 Subsidiaries of the Company (14)
27.1 Financial Data Schedule (20)
- --------------------
(1) Incorporated by reference to the exhibit of the same number filed
with the Company's Registration Statement on Form SB-2 (No.
33-78956-A).
(2) Management contract or compensation plan.
(3) Incorporated by reference to Exhibit 2 filed with the Company's
Report on Form 8-K dated February 28, 1995.
(4) Incorporated by reference to the exhibit of the same number filed
with the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994.
(5) Incorporated by reference to the exhibit of the same number filed
with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1995.
- 46 -
<PAGE>
(6) Incorporated by reference to the exhibit as indicated which was filed
with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1995.
(7) Incorporated by reference to the exhibit as indicated which was filed
with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1995.
(8) Incorporated by reference to the exhibit of the same number filed with
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
(9) Incorporated by reference to the exhibit of the same number filed with
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended March 31, 1996.
(10) Incorporated by reference to the exhibit of the same number which was
filed with the Company's Report on Form 8-K dated June 7, 1996.
(11) Incorporated by reference to the exhibit of the same number which was
filed with the Company's Report on Form 8-K dated June 12, 1996.
(12) Incorporated by reference to exhibit 2 which was filed with the
Company's Report on Form 8-K dated December 7, 1996.
(13) Incorporated by reference to exhibit 2 which was filed with the
Company's Report on Form 8-K dated December 31, 1996.
(14) Incorporated by reference to the exhibit of the same number filed with
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.
(15) Incorporated by reference to the exhibit of the same number which was
filed with the Company's Report on Form 8-K dated May 20, 1997.
(16) Incorporated by reference to the exhibit of the same number filed with
the Company's Registration Statement on Form S-3 on June 9, 1997.
(17) Incorporated by reference to the exhibit as indicated filed with the
Company's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1997
(18) Incorporated by reference to the exhibit as indicated which was filed
with the Company's Report on Form 8-K dated November 30, 1997.
(19) Incorporated by reference to the exhibit as indicated which was filed
with the Company's Report on Form 8-K dated January 29, 1998.
(20) Filed herewith.
(B) REPORTS ON FORM 8-K:
During the last quarter of the 1997 fiscal year, the Company filed
the following report on Form 8-K:
(i) Current Report on Form 8-K dated November 30, 1997 which
reported the Company's proposed acquisition of Lewis.
- 47 -
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
10.109 Second Amendment to Senior Secured Note and
Warrant Purchase Agreement between the
Company and The Equitable Life Assurance
Society of the United States, dated as of April 1,
1997
10.110 Third Amendment to Senior Secured Note and
Warrant Purchase Agreement between the Company
and The Equitable Life Assurance Society of the
United States, dated as of June 30, 1997
10.111 Fourth Amendment to Senior Secured Note and Warrant
Purchase Agreement between the Company and The
Equitable Life Assurance Society of the United
States, dated as of March 31, 1998
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AQUAGENIX, INC.
DATE: April 14, 1998 By: /s/ Andrew P. Chesler
-----------------------
Andrew P. Chesler, Chairman of the
Board, Chief Executive Officer,
Chief Financial Officer, President
and Treasurer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
DATE: April 14, 1998 /s/ Andrew P. Chesler
-----------------------
Andrew P. Chesler, Chairman of the Board,
Chief Executive Officer, President and
Treasurer (Principal Executive, Financial and
Accounting Officer)
DATE: April 14, 1998 /s/ Abraham S. Fischler
-------------------------
Abraham S. Fischler, Director
DATE: April 14, 1998 /s/ Allen H. Stern
--------------------
Allen H. Stern, Director
DATE: April 14, 1998 /s/ Jeffrey T. Katz
---------------------
Jeffrey T. Katz, Director
- 48 -
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Accountants F-1
Aquagenix, Inc. and Subsidiaries Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Directors of Aquagenix, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aquagenix, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aquagenix, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the consolidated result
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Coopers & Lybrand L.L.P.
Fort Lauderdale, Florida
February 25, 1998, except as to the
information in Note 19, for which the date is April 14, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
AQUAGENIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1996
----------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 799,286 $ 785,731
Marketable securities 0 158,492
Accounts receivable, net of allowance for doubtful
accounts of $182,809 and $88,541, respectively 842,741 1,064,151
Inventories 640,225 339,114
Receivable - remediation services 1,269,431 0
Prepaid expenses and other 560,082 490,740
----------------- ----------------
Total current assets 4,111,765 2,838,228
Restricted cash 105,000 105,000
Deposit - acquisition 670,000 0
Receivable - remediation services, non-current 0 1,269,909
Property and equipment, net 3,006,877 2,450,154
Intangible assets, net 4,876,815 4,946,027
Deferred financing costs, net 158,860 154,276
Other assets 221,358 267,233
----------------- ----------------
Total assets $ 13,150,675 $ 12,030,827
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings - acquisitions $ 0 $ 200,000
Borrowings under credit agreement 550,000 404,415
Current maturities of long-term debt 393,164 166,168
Accounts payable 825,927 709,870
Net liabilities of discontinued operations 176,448 350,076
Other current liabilities 552,554 322,582
----------------- ----------------
Total current liabilities 2,498,093 2,153,111
Long-term debt, net of current maturities 5,850,018 5,326,769
----------------- ----------------
Total liabilities 8,348,111 7,479,880
----------------- ----------------
Loss contingencies (Note 17)
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, 4,724,617 and 4,163,391 shares issued
and outstanding, respectively 47,246 41,634
Additional paid-in capital 15,539,235 12,671,620
Accumulated deficit (10,636,268) (7,938,330)
Unearned compensation (147,649) (230,058)
Unrealized gain on securities 0 6,081
----------------- ----------------
Total stockholders' equity 4,802,564 4,550,947
----------------- ----------------
Total liabilities and stockholders' equity $ 13,150,675 $ 12,030,827
================= ================
The accompanying notes are an integral part of the Consolidated Financial
Statements
F-2
</TABLE>
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Revenues - continuing operations $ 13,188,266 $ 11,467,830
------------------ ------------------
Costs and expenses:
Costs of services 8,444,450 6,482,852
Selling, general and administrative 5,695,327 3,398,152
Depreciation and amortization 981,748 721,144
------------------ ------------------
Total costs and expenses 15,121,525 10,602,148
------------------ ------------------
Operating (loss) income (1,933,259) 865,682
Interest income 36,625 61,065
Interest expense (801,304) (683,049)
------------------ ------------------
(Loss) income from continuing operations (2,697,938) 243,698
Discontinued operations:
Change in allowance for estimated phase-out losses
from environmental remediation segment 0 (758,332)
------------------- --------------------
Net loss $ (2,697,938) $ (514,634)
=================== ====================
Basic and diluted loss per weighted average common share:
Continuing operations $ (0.61) $ 0.06
Discontinued operations 0.00 (0.20)
------------------- --------------------
Net loss $ (0.61) $ (0.14)
=================== ====================
=================== ====================
Weighted average common shares outstanding 4,388,543 3,701,144
=================== ====================
The accompanying notes are an integral part of the Consolidated Financial
Statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AQUAGENIX, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Retained
Common Stock Additional Earnings
------------------------- Paid-In (Accumulated
Shares Amount Capital Deficit)
------------------------- ---------- -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 3,306,367 $ 33,064 $ 8,438,035 $(7,332,385)
Issuance of common stock for cash 437,500 4,375 1,745,625 0
Issuance of common stock for acquisitions 403,333 4,033 2,095,967 0
Common stock, stock options and warrants
issued in connection with financial consulting
services 16,191 162 391,993 0
Amortization of unearned compensation 0 0 0 0
Change in unrealized gain on securities 0 0 0 0
Dividends paid to "S" corporation 0 0 0 (91,311)
Net loss 0 0 0 (514,634)
--------- ---------- ----------- -------------
Balances, December 31, 1996 4,163,391 41,634 12,671,620 (7,938,330)
Exercise of employee and directors stock
options 152,680 1,527 626,013 0
Issuance of common stock for cash 403,546 4,035 2,205,402 0
Common stock issued in connection with
professional services 5,000 50 36,200 0
Amortization of unearned compensation 0 0 0 0
Change in unrealized gain on securities 0 0 0 0
Net loss 0 0 0 (2,697,938)
--------- ---------- ----------- -------------
Balances, December 31, 1997 4,724,617 $ 47,246 $15,539,235 $(10,636,268)
========= ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Total
Unearned Gain on Stockholders'
Compensation Securities Equity
------------ ---------- ------------
<S> <C> <C> <C>
Balances, January 1, 1996 $ 0 $ 49,197 $ 1,187,911
Issuance of common stock for cash 0 0 1,750,000
Issuance of common stock for acquisitions 0 0 2,100,000
Common stock, stock options and warrants
issued in connection with financial consulting
services (392,155) 0 0
Amortization of unearned compensation 162,097 0 162,097
Change in unrealized gain on securities 0 (43,116) (43,116)
Dividends paid to "S" corporation 0 0 (91,311)
Net loss 0 0 (514,634)
----------- ----------- ------------
Balances, December 31, 1996 (230,058) 6,081 4,550,947
Exercise of employee and directors stock
options 0 0 627,540
Issuance of common stock for cash 0 0 2,209,437
Common stock issued in connection with
professional services 0 0 36,250
Amortization of unearned compensation 82,409 0 82,409
Change in unrealized gain on securities 0 (6,081) (6,081)
Net loss 0 0 (2,697,938)
----------- ----------- ------------
Balances, December 31, 1997 $ (147,649) $ - $ 4,802,564
=========== =========== ============
</TABLE>
F-4
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,697,938) (514,634)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 981,748 721,144
Loss (gain) on sale of property and equipment 22,405 (3,933)
(Gain) loss on sale of securities (9,785) 55
Provision for doubtful accounts 132,250 107,433
Consulting fees 36,250 0
Discontinued operations (173,628) (115,386)
Net change in operating assets and liabilities (326,111) 154,368
----------- ----------
Net cash (used in) provided by operating activities (2,034,809) 349,047
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 162,196 651,685
Restricted cash - compensating balance 0 (105,000)
Proceeds from sale of property and equipment 106,577 336,096
Proceeds from sale of assets of discontinued operations 0 2,916,663
Cash paid for acquisitions, net of cash acquired (201,132) (82,798)
Purchase of property and equipment (1,199,221) (873,704)
----------- ----------
Net cash (used in) provided by investing activities (1,131,580) 2,842,942
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under credit agreements 841,141 0
Proceeds from other borrowings 968,742 41,453
Payment of credit agreements (695,556) (147,902)
Payment of notes payable and long-term debt (503,375) (699,319)
Payment of debt obligations of discontinued operations 0 (3,949,451)
Payment of financing costs (81,999) (30,616)
Distribution to stockholder 0 (91,311)
Issuance of common stock 2,650,991 1,750,000
----------- ----------
Net cash provided by (used in) financing activities 3,179,944 (3,127,146)
----------- ----------
CASH AND CASH EQUIVALENTS:
Increase 13,555 64,843
Beginning balance 785,731 720,888
----------- ----------
Ending balance $ 799,286 $ 785,731
=========== ==========
Supplemental disclosures of cash flow information:
Interest paid $ 691,436 $ 575,487
=========== ==========
Income taxes refunded $ 0 $ 605,951
=========== ==========
The accompanying notes are an integral part of the Consolidated Financial
Statements
F-5
</TABLE>
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Business:
Aquagenix, Inc. and subsidiaries (the "Company") provide a variety of
aquatic and industrial vegetation management services to both
governmental and commercial customers in Florida, Arizona, Alabama,
Georgia, California, Tennessee, North Carolina and South Carolina. The
Company's customers consist primarily of utilities, golf courses, country
clubs, real estate owners and developers, homeowner/condominium
associations, municipalities, state government and taxing districts. The
majority of its customers have annual contracts which provide for monthly
payments. In 1997 and 1996, revenues from governmental customers were
approximately 23% and 19%, respectively. During 1997 and 1996, five
customers with whom the Company has annual contracts represented
approximately 11% and 19% of revenues, respectively.
In November 1995, the Company's Board of Directors approved a plan to
discontinue the environmental remediation business segment conducted by
certain subsidiaries in view of continued operating losses and in order
to focus future resources on the expansion of the Company's aquatic and
vegetation segment. Accordingly, the environmental remediation segment
has been reflected as discontinued operations, see Note 16.
The aquatic and industrial vegetation management business is subject to
extensive and frequently changing federal, state and local laws.
2. Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the operations, assets and
liabilities of Aquagenix, Inc. and subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company maintains its cash in demand deposit and overnight repurchase
accounts which, at times, may exceed federally insured limits.
F-6
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Marketable Securities
Marketable securities are classified as available for sale and are
carried at fair value, with unrealized gains and losses, reported as a
separate component of stockholders' equity. Fair value is determined by
the most recently traded price of the security at the balance sheet date.
Realized gains and losses are included in earnings using the specific
identification method for determining the cost of securities sold.
There are no marketable securities as of December 31, 1997. Marketable
securities consist of corporate stocks, mutual funds, and mortgage-backed
securities as of December 31, 1996.
Revenue Recognition
Revenue from the aquatic and industrial vegetation management services
are generally billed monthly and recognized in the same month services
are provided. Progress billings in accounts receivable exclude retentions
until such amounts are due in accordance with contract terms. Revenue
from certain aquatic and industrial vegetation management contracts are
recognized on the percentage of completion method, measured by the
percentage that costs incurred to date bear to estimated total costs for
each contract. This method is used because management considers expended
costs to be the best available measure of progress on these contracts.
The length of the Company's contracts varies but is typically less than
three months. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
Inventories
Inventories, consisting primarily of chemicals, parts and supplies, are
valued at the lower of cost or market. Cost is determined by the first
in, first out (FIFO) method.
Restricted Cash
The Company is required to maintain a $105,000 certificate of deposit as
a compensating balance for a letter of credit in accordance with an
equipment lease agreement.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Depreciation is calculated using the straight-line
method over the estimated useful lives of the property and equipment or
over the lease term for leasehold improvements. Depreciation expense
includes depreciation for assets under capital lease. The depreciable
lives of asset categories are as follows: machinery and equipment, 7 and
10 years; vehicles, 5 years; office equipment, 5 and 7 years; and
leasehold improvements, primarily 5 and 10 years. Upon sale or
retirement, the cost of the property and equipment, and related
accumulated depreciation, are eliminated from the accounts. Any resulting
gains or losses are reflected in earnings for the period.
F-7
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Intangible Assets
Intangible assets consist principally of contract rights and goodwill
arising from business acquisitions. Contract rights, which represent the
value associated with recurring service contracts, are amortized over 15
years. Goodwill, which represents the excess of the purchase price over
the estimated fair value of net assets acquired, is amortized on a
straight-line basis over a period of primarily 25 years. Other intangible
assets include covenants not to compete, deferred acquisition and
organization costs, which are being amortized on a straight line basis
over their estimated useful lives, ranging from 7 to 25 years.
The Company periodically reviews the carrying values of the intangible
assets and impairments are recognized in operating results when the
undiscounted value of expected future operating cash flows to be derived
from such intangible assets is less than their carrying value. Based on
its review, the Company does not believe that an impairment has occurred
or that an adjustment to its estimated recovery periods is required at
December 31, 1997.
Deferred Financing Costs
Deferred financing costs are amortized over the life of the related
indebtedness using the straight-line method which approximates the
effective interest method.
Income Taxes
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are also
established for the future tax benefits of operating loss carryforwards.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, and investments in
marketable securities approximates fair value due to the short term
maturities of these items. The carrying amounts of the long-term debt
approximates fair value because the interest rates on the instruments are
comparable to current market rates.
F-8
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Stock Options
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
This pronouncement establishes financial accounting and reporting
standards for stock-based compensation. It encourages, but does not
require, companies to recognize compensation expense for grants of stock,
stock options and other equity instruments to employees based on new fair
value accounting rules. Such treatment is required for non-employee
stock-based compensation. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, compensation expense for
employee stock options or warrants is measured as the difference between
the quoted market price of the Company's stock at the date of grant and
the amount the employee must pay to acquire the stock. SFAS 123 requires
companies electing to continue using the intrinsic value method to make
certain pro forma disclosures (see Note 11).
Recoverability of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Assets are grouped and evaluated at the lowest level for
which there are identifiable cash flows that are largely independent of
the cash flows of the other groups of assets. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset
to the estimated future cash flows expected to result from the use of the
asset. If the carrying amount of the asset exceeds estimated expected
undiscounted future cash flows, the Company measures the amount of the
impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows at discount rates commensurate with the risk
involved. The Company estimates fair value based on the best information
available making whatever estimates, judgments and projections are
considered necessary. The effect of adopting this pronouncement on the
consolidated financial statements of the Company was not material.
Reclassification of Financial Statement Presentation
Certain reclassifications have been made to the 1996 financial statements
and related notes to conform with the 1997 presentation.
F-9
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
New Accounting Standards
During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128. This pronouncement requires, among other
things, the calculation and presentation of "basic" and "diluted"
earnings per share (EPS). Basic EPS is computed by dividing income
available to common stockholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) during the period.
The computation of diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The numerator is adjusted for
any changes in income or loss that would result from the assumed
conversion of those potential common shares. Common shares equivalents
resulting from stock options and warrants to purchase common stock have
not been included in the loss per common share computation for 1997 as
their effect would be anti-dilutive, however, they were included in the
computation for 1996, but they did not affect the computation.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This pronouncement becomes effective for fiscal
years beginning after December 15, 1997. Under the current operating
performance income concept, extraordinary and nonrecurring gains and
losses are excluded from income. SFAS 130 will require entities to report
"comprehensive income" which will be divided into two components, "net
income" and "other comprehensive income". Net income will include income
from continuing operations, discontinued operations, extraordinary items,
and cumulative effects of changes in accounting principle. Other
comprehensive income will include all other changes in the equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their
capacity as owners. SFAS 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. The Company
has not yet determined the impact, if any, that adoption of SFAS 130 will
have on the Company's financial statements.
F-10
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisitions:
On December 31, 1996, the Company acquired 100% of the common stock of
Good Shepherd, Inc. d/b/a Green Pastures, Inc. ("GPI") in exchange for
96,000 shares of the Company's common stock with an aggregate value of
$600,000. The merger was accounted for as a pooling of interests and
accordingly, the accompanying financial statements have been restated to
include the accounts of GPI for all periods prior to the merger. Separate
results for the combining entities for the year ended December 31, 1996
are as follows:
Revenues:
Company $ 10,507,890
GPI 959,940
----------------
$ 11,467,830
================
Net loss:
Company $ (642,663)
GPI 128,029
----------------
$ (514,634)
================
On December 7, 1996, the Company acquired 100% of the common stock of
Aquatic Dynamics, Inc. ("ADI") for $1,000,000. The purchase price
consisted of (i) 133,333 shares of the Company's common stock with an
aggregate value of $750,000; (ii) $200,000 promissory note payable on
January 15, 1997 bearing interest at 7%; and (iii) $50,000 in cash. The
promissory note has since been fully paid. The Company has accounted for
the transaction using the purchase method of accounting and accordingly,
the operating results of ADI have been included in the consolidated
results of operations since the date of acquisition. In connection with
the transactions, the Company recorded intangible contracts rights and
goodwill of approximately $450,000 and $166,000, respectively.
On June 7, 1996, the Company acquired 100% of the common stock of Aquatic
and Right of Way Control, Inc. ("ARC") for $1,500,000. The purchase price
consisted of 270,000 shares of the Company's common stock with an
aggregate value of $1,350,000 and $150,000 in cash. The Company has
accounted for the transaction using the purchase method of accounting and
accordingly, the operating results of ARC have been included in the
consolidated results of operations since the date of acquisition. In
connection with the transaction, the Company recorded intangible
contracts rights and goodwill of approximately $1,000,000 and $346,000,
respectively.
F-11
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Receivable - Remediation Services:
In August 1994, Florida Underground Petroleum Tank Contractors, Inc.
("FUPTC"), a wholly-owned subsidiary of the Company presently classified
as a discontinued operation (see Note 16), entered into a contract with
Riverfront Associates ("Riverfront") for remediation and clean-up
services (the "Riverfront Project") relative to an abandoned petroleum
storage tank system at Riverfront's property. The work was fully
completed in 1996 and the Company had filed a reimbursement application
with the State of Florida Department of Environmental Protection ("DEP")
under the Abandoned Tank Restoration Program.
The contract with Riverfront provides that if funds of DEP are
insufficient to reimburse FUPTC for a period of twenty-four months after
submittal of the reimbursement application to DEP, Riverfront shall be
responsible for the payment of the outstanding balance in ten monthly
installments, subject to certain conditions.
During 1996, the Company reclassified this receivable from discontinued
operations in partial settlement of funds extended to FUPTC for the
repayment of loans and working capital requirements. During 1997, the DEP
approved a reimbursement of approximately $1,100,000 of the reimbursement
application for which payment is expected within the next 12 months. The
difference between the total receivable and the approved reimbursement is
expected to be collected from Riverfront.
5. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Condominium $ 126,802 $ 126,802
Machinery and equipment 1,643,559 1,934,489
Machinery and equipment under capital lease 1,130,396 300,000
Vehicles 626,727 527,095
Office equipment 914,535 542,327
Leasehold improvements 228,780 206,443
--------------- ---------------
4,670,799 3,637,156
Accumulated depreciation and amortization (1,663,922) (1,187,002)
--------------- ---------------
$ 3,006,877 $ 2,450,154
=============== ===============
</TABLE>
F-12
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Goodwill $ 3,404,379 $ 3,338,697
Covenants Not to compete 180,000 339,000
Deferred acquisition costs 255,694 120,262
Intangible contract rights 1,526,000 1,526,000
Organization costs 26,724 26,724
---------------- ----------------
5,392,797 5,350,665
Accumulated amortization (515,982) (404,638)
---------------- ----------------
$ 4,876,815 $ 4,946,027
================ ================
</TABLE>
7. Short-term Borrowings - Acquisitions:
Short-term borrowings - acquisitions as of December 31, 1996, represent a
note payable issued as part of the purchase price for the ADI acquisition
which had an interest rate of 7% and matured January 15, 1997 (see Note 3
- Acquisitions).
8. Credit Agreement:
The Company has credit agreements which provide for aggregate borrowings
in 1997 and 1996 of up to $1,000,000 and $750,000, respectively. Interest
is payable on the outstanding balance at the bank's prime rate plus 1.25%
(9.75%) and 1.5% (9.75%) at December 31, 1997 and 1996, respectively. Any
unpaid principal and accrued interest is due upon demand. This agreement
is collateralized by substantially all of the Company's assets. The terms
of the agreement contain certain covenants which, among other provisions,
restrict the payment of dividends.
F-13
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Note payable - bearing interest at 1% above the prime rate, interest is
payable monthly, the principal matures February 13, 2010, collateralized
by a condominium. $ 87,065 $ 87,065
Note payable in connection with the purchases of assets, bearing interest
at 7%, requiring monthly payments of principal and interest through
December 1, 1999 50,427 75,641
$5,000,000, net of discount, 12.5% senior secured note due October 31,
2003. Interest is payable quarterly. The note is collateralized by a
second security interest in all of the Company's assets. 4,887,324 4,868,008
Vehicle and equipment notes to banks and financial institutions, bearing
interest at rates ranging from 7.50% to 12.95%, principal payable in
varying installments through 1998 73,154 173,897
Term notes bearing interest at 9.75% and 9.5%. Principal and interest
payable monthly. Term notes mature April 10 and October 3, 2000.
Collateralized by substantially all of the Company's assets. 411,344 0
Equipment obligations under capital leases bearing interest ranging from
10.8% to 12.1%, expiring December 1999 through May 2001. 733,868 288,326
------------ ------------
6,243,182 5,492,937
Less current maturities (393,164) (166,168)
------------ -------------
Total long-term debt $ 5,850,018 $ 5,326,769
============ =============
Aggregate maturities of long-term debt are as follows:
December 31
-----------
1998 $ 393,164
1999 412,286
2000 414,182
2001 1,069,071
2002 2,005,581
Thereafter 1,948,898
------------
$ 6,243,182
============
F-14
</TABLE>
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Long-Term Debt, Continued:
In December 1995, the Company issued 12.5% senior secured notes due
October 31, 2003 with a principal of $5,000,000 and warrants to purchase
an aggregate of 351,197 shares of the Company's common stock, subject to
adjustment under certain circumstances, 'in order to fund the cash portion
of the purchase price for the assets of AmerAquatic, Inc. The Company has
allocated a portion of the proceeds from the 12.5% senior secured note
between the note and the 351,197 warrants issued based on their relative
fair value, at the time of issuance. The amount attributable to the
warrants was $154,527 which has been reflected as additional paid-in
capital. The original issue discount of $154,527 is being amortized over
the term of the note. As of December 31, 1997 and 1996, the unamortized
discount amounts to $112,676 and $131,992, respectively.
The senior secured note and warrant purchase agreement (the "Senior Debt")
contain various covenants which provide for, among other things,
established levels of net worth, debt coverage, and capital expenditures
(see note 19).
The Company's 12.5% senior secured notes are subordinated to both the term
notes (see Note 9) with a total of $411,344 outstanding as of December 31,
1997, and the credit agreement.
Future minimum lease payments under capital lease obligations are as
follows:
December 31,
-----------
1998 $ 282,690
1999 282,690
2000 247,588
2001 66,000
-------------
878,968
Less amounts representing interest (145,100)
-------------
733,868
Capital lease obligations included on current maturities (208,700)
-------------
Long-term capital lease obligations $ 525,168
=============
F- 15
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Lease and 0ther Commitments:
The Company is obligated under noncancelable operating leases for various
branch locations, vehicles and equipment. Total rent expense was
approximately $786,933 and $473,600 for the years ended December 31, 1997
and 1996, respectively. As of December 31, 1997, future minimum annual
lease payments under the operating leases were as follows:
December 31
-----------
1998 $ 704,333
1999 533,810
2000 343,068
2001 95,388
-------------
$ 1,676,599
=============
In connection with the AmerAquatic, Inc. acquisition, the Company agreed
to purchase a minimum of sixty specialized vehicles known as
"Spra-Buggies", over a period of three years commencing on October 31,
1995 for an original purchase price of $25,000 each. During 1997, the
Company amended the terms of the agreement. Under the amended terms, the
Company purchased 35 Spra-Buggies for approximately $32,000 each. The
Company has no remaining capital commitments to purchase Spra-Buggies at
December 31, 1997.
11. Employee Stock-Based Compensation:
The Company has a Stock Option Plan (the "Stock Option Plan") and a
Directors Stock Option Plan (the "Director's Plan") (collectively, the
"Plans"). The Plans were amended in May 1996 to increase the number of
shares available for issuance thereunder from 550,000 to 1,250,000 shares.
The Plans are designed to serve as an incentive for retaining qualified
and competent employees and directors.
The Company's Board of Directors, or a committee thereof, administers and
interprets the Stock Option Plan and is authorized, in its discretion, to
grant options thereunder to all eligible employees of the Company,
including officers and directors (whether or not employees) of the
Company. The Stock Option Plan provides for the granting of both
"incentive stock options" and "nonstatutory stock options". Options can be
granted under the Stock Option Plan on such terms and at such prices as
determined by the Board of Directors, or a committee thereof, except that,
in the case of incentive stock options, the per share exercise price of
options will not be less than the fair market value of the common stock on
the date of grant. In the case of an incentive stock option granted to a
10% stockholder, the per share exercise price will not be less than 110%
of such fair market value. The aggregate fair market value of the shares
covered by incentive stock options granted under the Plans that become
exercisable by a grantee for the first time in any calendar year is
subject to a $100,000 limit.
F-16
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Employee Stock-Based Compensation, Continued:
Only nonemployee directors are eligible to receive options under the
Director's Plan. The Director's Plan provides for the Directors Stock
Option Committee to determine the annual amount of stock options to be
granted to each nonemployee director.
Options granted under the Stock Option Plan will be exercisable after the
period or periods specified in the option agreement. The Committee may in
its sole discretion accelerate the date on which any option may be
exercised. Options granted under the Director's Plan are exercisable
commencing one year after date of grant. Options granted under the Plans
are not exercisable after the expiration of ten years from the date of
grant and are nontransferable other than by will or by the laws of
descent and distribution. The Plans also authorize the Company to make
loans to optionees to enable them to exercise their options.
The Company recognizes compensation expense for options granted under the
Plans based on the difference between the quoted market price of the
Company's stock at the date of grant and the amount the employee must pay
to acquire the stock. No compensation cost has been recognized for
employee stock options. Had compensation cost for the Plans been
determined based on the fair value at the date of grant for awards under
those Plans, consistent with the method prescribed by SFAS 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
December 31
------------------------------
1997 1996
------------ ------------
Proforma net loss:
As reported $ (2,697,938) $ (514,634)
Pro forma (3,380,593) (1,206,057)
Pro forma net loss per share:
As reported $ (0.61) $ (0.14)
Pro forma (0.77) (0.33)
The fair value of each option grant under the Plans is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1997 and 1996,
respectively: no dividend yield for both years; expected volatility of the
underlying stock of 35%; risk-free interest rates ranging from 5.43% to
6.41% covering the related option periods; and expected lives of the
options of 8 to 10 years based on the related option periods.
F-17
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Employee Stock-Based Compensation, Continued:
A summary of the status of the Plans as of December 31, 1997 and 1996, and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 721,730 $ 4.60 234,350 $ 5.17
Granted 233,250 5.51 655,000 4.18
Exercised (152,680) 4.11 0
Cancelled (33,900) 4.40 (167,620) 4.82
---------- ----------
Outstanding at end of year 768,400 4.99 721,730 4.60
========== ==========
Options exercisable at year-end 365,270 53,820
Weighted-average fair value of
options granted during the year $ 3.27 $ 2.44
</TABLE>
12. Non-Employee Stock-Based Compensation:
During 1997, the Company issued 5,000 shares of stock as consideration for
consulting services. In addition, the Company also issued a total of
150,000 shares of common stock in 1997 to two financial consultants
resulting from the exercise of stock options granted to them in 1996 and
1994. The Company received total cash proceeds of $806,250 from the
exercise of these stock options.
During 1996, the Company issued 16,191 shares of common stock, 100,000
options to purchase common stock, and 131,484 warrants to purchase common
stock to various parties affiliated with certain Company directors, as
consideration for financial consulting services. The stock options were
immediately exercisable at an exercise price of $5 per option with a term
of one year. These options were exercised in 1997 (see preceding
paragraph). The warrants were also immediately exercisable at $4.88 -
$6.50 per warrant with a term of 5 - 6 years. At December 31, 1997, the
warrants were still outstanding.
F-18
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Non-Employee Stock-Based Compensation, Continued:
During 1996, the Company recognized unearned compensation for the common
stock issued based upon the fair value of the Company's common stock and
for the options and warrants based upon the fair value methodologies of
SFAS 123, see Note 2. The fair value of each option or warrant grant was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend yield;
expected volatility of the underlying stock 35%; risk-free interest rate
of 6.2% covering the related option or warrant periods; and expected lives
of the options or warrants of 5-6 years. Total unearned compensation
amounted to $392,155, of which $82,409 and $162,097 were amortized during
1997 and 1996, respectively, and included in depreciation and
amortization.
As of December 31, 1997, a total of 737,546 warrants are outstanding at
exercise prices ranging from $4.88 to $7.50 per share. Of this total,
386,349 warrants were issued to consultants and 351,197 warrants related
to the Company's senior secured note which were valued at $154,527, see
Note 9. These warrants have expiration dates ranging from December 2000 to
December 2001.
As of December 31, 1997, a total of 40,000 options are outstanding to
consultants at a weighted average exercise price of $6.19 and have
expiration dates ranging from May 2000 to October 2002.
13. Stockholders'Equity:
During 1997, the Company completed two private placements totaling 83,333
and 120,213 shares of common stock at prices of $6.00 and $5.82 per share
for a total cash consideration of $1,200,000.
During 1997, the Company issued 60,000 warrants to an investor for the
purchase of common stock which were immediately exercisable at $8 per
warrant with a term of two years.
During 1996, the Company completed four equity private placements totaling
437,500 shares of common stock at a price of $4 per share for a total cash
consideration of $1,750,000. Of the total, 125,000 were issued to a
director of the Company.
During November 1996, the Company also issued stock subscriptions, in the
form of stock options, to issue 350,000 shares of common stock at $5 per
share, the then fair market value of the Company's common stock. During
1997, 50,000 of these options were exercised and 100,000 expired. The
remaining stock options expire on October 31, 1998.
F-19
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Stockholders' Equity, Continued:
In connection with its initial public offering in September 1994, the
Company issued 1,250,000 redeemable warrants which entitle the registered
holders to purchase one share of common stock at a price of $6.00, subject
to adjustment in certain circumstances, until September 12, 1999. The
warrants are redeemable by the Company, upon notice of not less than 30
days, at a price of $.10 per warrant, provided that the closing bid price
of the common stock on all 20 trading days ending on the third day prior
to the day the Company gives notice has been at least 130% ($7.80) of the
then effective exercise price of, the warrants. All remained outstanding
as of December 31, 1997.
Also, in connection with the initial public offering, the Company issued
437,500 warrants immediately exercisable for the purchase of common stock
to the underwriter at an exercise price ranging from $.17 to $8.25 per
share. All remained outstanding as of December 31, 1997.
14. Cash Flow Information:
The net changes in operating assets and liabilities, net of effects of
acquisitions, in the accompanying statements of cash flows are as follows:
Years Ended December 31
---------------------------
1997 1996
--------- -----------
(Increase) decrease in:
Accounts receivable $ 89,160 $ 45,851
Income tax receivable 0 618,003
Inventories (301,111) 43,642
Prepaid expenses and other (1,775,973) (161,393)
Accounts receivable, non-current 1,269,909 (221,987)
Other assets 45,875 (167,885)
Increase (decrease) in:
Accounts payable 116,057 17,620
Other current liabilities 229,972 (19,483)
--------------- --------------
$ (326,111) $ 154,368
=============== ==============
During 1996, the Company issued notes payable for $200,000, respectively,
as payment of part of the purchase price for the acquisition of ADI (see
Note 3).
During 1997 and 1996, the Company recorded equipment under capital leases
in the amount of $830,396 and $300,000, respectively.
F-20
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Income Taxes:
The following table summarizes the differences between the Company's
effective tax rate for financial statement purposes and the Federal
statutory rate for continuing operations:
1997 1996
------------ -------------
Income tax benefit at Federal statutory rate $ (1,033,040) $ (180,122)
Change in valuation allowance 1,056,038 111,933
Permanent and other differences, net (22,998) 68,189
------------ -------------
Income tax benefit $ 0 $ 0
============ =============
The components of the net deferred tax assets (liabilities) are as follows:
1997 1996
------------- --------------
Deferred tax assets:
Allowance for doubtful assets $ 69,998 $ 69,282
Estimated loss from discontinued operations 38,000 121,873
Net operating losses 3,963,741 2,722,818
Other, net 90,304 136,477
------------- -------------
Total deferred tax assets 4,162,043 3,050,450
------------- -------------
Deferred tax liabilities:
Property and equipment (227,919) (103,526)
Customer contracts (502,343) (571,181)
------------- -------------
Total deferred tax liabilities (730,262) (674,707)
------------- -------------
Net deferred tax assets 3,431,781 2,375,743
Valuation allowance (3,431,781) (2,375,743)
------------- -------------
Net deferred tax liabilities $ 0 $ 0
============= =============
The Company has a net operating loss carryforward of approximately $10.3
million which expires from 2010 to 2013. The Company has determined, based
on the Company's earnings, that it is more likely than not that deferred
tax assets will not be realized and therefore, a full valuation allowance
has been provided.
F-21
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Discontinued Operations:
In November 1995, the Company's Board of Directors approved a plan to
dispose of the environmental remediation business segment which comprised
the activities of two subsidiaries, FUPTC and Haas Environmental Services,
Inc. ("HES"). The results of the environmental remediation segment have
been reported separately as discontinued operations in the accompanying
consolidated statements of operations.
Operating results of the discontinued operations include allocations of
overhead and interest expense from the parent company. For 1996, overhead
expense of approximately $770,000 was allocated based on specific
identification of those costs incurred by the parent company on behalf of
its remediation subsidiaries which are not expected to be incurred by
continuing operations after the disposal of the remediation segment. For
1996, interest expense of approximately $60,000 was also allocated based
on debt incurred to finance the discontinued operations and to acquire
HES.
The net liabilities of the discontinued operations as of December 31, 1997
and 1996, have been segregated in the accompanying consolidated balance
sheets. The components of the net liabilities of discontinued operations
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Assets:
Cash $ 5,538 $ 0
Accounts receivable, net of allowance for doubtful accounts 3,200 217,182
Prepaid expenses and deposits 0 6,480
Property and equipment, net 0 42,924
---------- ------------
Total assets 8,738 266,586
---------- ------------
Liabilities:
Notes and loans payable 0 25,000
Accounts payable 85,944 226,402
Accrued expenses 0 46,970
Provision for phase-out losses and discontinuation expenses 99,242 318,290
---------- ------------
Total liabilities 185,186 616,662
---------- ------------
Net liabilities of discontinued operations $ (176,448) $ (350,076)
========== ============
</TABLE>
F-22
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Loss Contingencies:
On November 30, 1997, the Company entered into a Stock Purchase Agreement
with the owner of Lewis Tree Service, Inc. ("Lewis"), a New York
Corporation, to acquire all of the issued and outstanding stock of Lewis.
The purchase price will be $25,000,000 in cash and shares of the common
stock of Aquagenix having a fair market value equal to a percentage of
Lewis's earnings before interest, taxes, depreciation and amortization
("EBITA") for the twelve months ending October 31, 1998. Pursuant to the
Stock Purchase Agreement, an escrow agreement was also entered into on
November 30, 1997 to require the Company to place $670,000 in escrow
pending the closing of the purchase of Lewis by January 31, 1998. As of
January 29, 1998, the Company entered into Amended Stock Purchase and
Escrow Agreements to extend the closing date to May 15, 1998 and to place
an additional $1,830,000 in the escrow account. The Company increased the
deposit to the escrow agent to $2,500,000 on February 4, 1998. The proposed
acquisition of Lewis is primarily subject to the Company obtaining the
required financing of the purchase price and the necessary credit
facilities to finance the working capital and current debt obligations of
Lewis. If the closing has not occurred by May 15, 1998, the deposit of
$2,500,000 is to be remitted to the owner of Lewis and the Stock Purchase
Agreement shall terminate, provided that certain conditions have been met
including, but not limited to, the accuracy in an material aspects of all
representations and warranties made in the Stock Purchase Agreement, no
prohibition on the sale of the stock by the owner of Lewis to the Company
and no material adverse changes in the assets, business, financial
condition or prospects of Lewis since the date of the Stock Purchase
Agreement.
There can be no assurance that financing can be obtained to finance the
acquisition of Lewis or any future acquisitions or that the company can
successfully integrate the operations of Lewis or any future acquisitions
into its existing operations. The costs of additional financing, together
with its inability to integrate future acquisitions into its existing
business, would have a material adverse effect on the financial
performance of the company, especially when the capital investment is
significant.
The Company has certain other contingent liabilities resulting from
litigation and claims incident to the ordinary course of business.
Management believes that the probable resolution of such contingencies
will not materially affect the financial position or results of operations
of the Company.
18. Related Party Transactions:
During December 1997, the Chief Executive Officer exercised 60,000 options
for the purchase of common stock for $3.88 per share and a $232,800
receivable was recorded and classified under prepaid expenses and other at
December 31, 1997. The Company received full payment for the receivable on
February 2, 1998.
F-23
<PAGE>
AQUAGENIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
19. Subsequent Event:
The Company was in compliance with the covenants for the Senior Debt as of
December 31, 1997 pursuant to an amendment thereto obtained during April 1997
modifying the terms relative to certain financial covenants through June 30,
1998. The covenants were further modified effective March 31, 1998 to waive all
interest expense coverage requirements for the Senior Debt through March 31,
1999 and modify the minimum consolidated net worth requirement wherein such
minimum consolidated net worth requirement is measurable only at December 31,
1998 and March 31, 1999, at a reduced level.
F-24
EXHIBIT 10.109
Aquagenix, Inc.
Amendment No. 2 Dated as of April 1, 1997
12.50% Senior Secured Notes Due October 31, 2003
AMENDMENT NO. 2 (this "Amendment"), dated as of April 1, 1997, by and
among AQUAGENIX, INC. (the "Company"), a Delaware corporation and THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES (the "Noteholder").
1. PRELIMINARY STATEMENT
1.1 The Company entered into an Amended and Restated Senior Secured
Note and Warrant Purchase Agreement (as in effect immediately prior to the date
hereof, the "Existing Note Purchase Agreement" and as amended hereby, the
"Amended Note Purchase Agreement"), dated as of December 15, 1995, with the
Noteholder, pursuant to which the Company issued and sold to the Noteholder
$5,000,000 in principal amount of the Company's 12.50% Senior Secured Notes due
October 31, 2003 (the "Notes").
1.2 The Company has requested an amendment to Section 5.2(a), Section
7.4 and Section 7.5 of the Existing Note Purchase Agreement.
1.3 Capitalized terms used herein and not defined herein have the
meanings specified by the Existing Note Purchase Agreement.
2. AMENDMENTS
Subject to Section 4.6 hereof, the Existing Note Purchase Agreement is
hereby amended as follows:
2.1 Optional Prepayments with Premium (Section 5.2 of the Note
Purchase Agreement).
Section 5.2(a) of the Existing Note Purchase Agreement is amended to
read in its entirety as follows:
"(a) Optional Prepayments. The Company may prepay the Note in
whole or in part, on the last day of each January, April, July or
October, together with interest on the principal amount then being
prepaid accrued and unpaid to the prepayment date, and together with an
amount equal to the Premium at such time in respect of the principal
amount of the Notes being so prepaid; provided, however, that the
Company may, at its option, prepay up to an aggregate principal amount
of Five Hundred Thousand Dollars ($500,000) without Premium but
together with interest accrued and unpaid on the principal amount then
being prepaid, at any time after the Effective Date."
2.2 Interest Expense Coverage Ratio (Section 7.4 of the Note
Purchase Agreement.)
The requirement in Section 7.4 of the Existing Note Purchase Agreement
that the Company maintain an Interest Expense Coverage Ratio of not less than
1.25 for the period from and including January 1, 1997 to and including December
31, 1997 is hereby amended to permit the Interest Expense Coverage Ratio for the
period from and including April 1, 1997 to and including December 31, 1997 to be
not less than 0.10.
AQUAGENIX, INC. 1 AMENDMENT NO. 2 DATED AS OF APRIL 1, 1997
<PAGE>
2.3 Minimum Consolidated Net Worth (Section 7.5 of the Note
Purchase Agreement).
The requirement in Section 7.5 of the Existing Note Purchase Agreement
that the Company maintain a Consolidated Net Worth of not less than $6,000,000
for the 1997 fiscal year is hereby amended to permit the Consolidated Net Worth
for the 1997 fiscal year to be not less than $4,000,000.
3. WARRANTIES AND REPRESENTATIONS
To induce the Noteholder to enter into this Amendment, the Company
warrants and represents to the Noteholder that as of the date hereof the
representations set forth in this Section 3 are true and correct in all material
respects.
3.1 Authorization, Execution and Enforceability.
The execution and delivery of this Amendment by the Company and the
Subsidiaries set forth below has been duly authorized by all necessary action on
the part of the Company and such Subsidiaries. The Amended Note Purchase
Agreement constitutes a valid and binding obligation of the Company, enforceable
in accordance with its terms.
3.2 Existence of Defaults.
After giving effect to this Amendment, no Default or Event of Default
will exist under the Amended Note Purchase Agreement.
3.3 Governmental Consent.
Neither the execution and delivery by the Company of this Amendment nor
the performance by the Company of its obligations under the Amended Note
Purchase Agreement is such as to require a consent, approval or authorization
of, or filing, registration or qualification with, any Governmental Authority on
the part of the Company as a condition thereto.
4. MISCELLANEOUS
4.1. Scope of Amendment.
Except as expressly provided herein,
(a) no other terms and provisions of the Existing Note
Purchase Agreement are modified or changed by this Amendment,
(b) the Interest Expense Coverage Ratio and the Consolidated
Net Worth requirements set forth in Section 7.4 and Section 7.5 of the
Existing Note Purchase Agreement, for the periods other than those set
forth in Section 2.2 and Section 2.3 hereof, shall remain as set forth
in the Existing Note Purchase Agreement, and
(c) the terms and provisions of the Existing Note Purchase
Agreement shall continue in full force and effect.
The Company hereby acknowledges, confirms, reaffirms and ratifies all of its
obligations and duties under the Amended Note Purchase Agreement and all
agreements related thereto. This Amendment is not a limitation on the ability of
the Noteholder to exercise any of its rights and remedies due to any Default or
Event of Default under the Amended Note Purchase Agreement.
AQUAGENIX, INC. 2 AMENDMENT NO. 2 DATED AS OF APRIL 1, 1997
<PAGE>
4.2 References to Note Purchase Agreements.
Upon the effectiveness of this Amendment, each reference to the "Note
Purchase Agreement" in the Amended Note Purchase Agreement and each agreement or
document referring thereto shall mean and be a reference to the Amended Note
Purchase Agreement.
4.3 Successors Bound.
This Amendment shall inure to the benefit of, be enforceable by, and be
binding upon the successors and assigns of each of the parties hereto,
including, without limitation, subsequent holders of Notes.
4.4 Governing Law.
This Amendment shall be construed and enforced in accordance with and
governed by the laws of the State of New York, including Section 5-1401 of the
New York General Obligations Law but excluding all other choice-of-law and
conflicts-of-law rules.
4.5 Final Written Expression.
This Amendment may not be contradicted by evidence of any actual or
alleged prior, contemporaneous or subsequent understandings or agreements of the
parties, written or oral, express or implied, other than a writing which
expressly amends or supersedes this Amendment or the Amended Note Purchase
Agreement, and there are no unwritten oral understandings or agreements between
the parties concerning the subject matter of this Amendment.
4.6 Effectiveness.
This Amendment may be executed in one or more counterparts and each set
of counterparts which, collectively, show execution by the Company, each of the
Subsidiaries and the Noteholder shall constitute one duplicate original. This
Amendment shall be deemed to have become effective on the date hereof, upon
(a) the execution of a counterpart hereof by the Company, each
of the Subsidiaries and the Noteholder, and
(b) the delivery of such counterparts to special counsel for
the Noteholder, William E. Kelly, Esq., Hebb & Gitlin, One
State Street, Hartford, CT 06104, Fax: (860) 278-8968
(regardless of whether any or all of such executions and
deliveries occur before or after the date hereof).
[Remainder of page intentionally blank. Next page is the
signature page]
AQUAGENIX, INC. 3 AMENDMENT NO. 2 DATED AS OF APRIL 1, 1997
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 2 has been duly executed as of
the date first written above.
AQUAGENIX, INC.
By /s/ Andrew Chesler
-----------------------
Name: Andrew Chesler
Title: President
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By /s/ William Gobbo, Jr.
- ---------------------------
Name: William Gobbo
Title: Investment Officer
Aquagenix Land-Water Technologies, Inc. (f/k/a Environmental Waterway
Management, Inc.) Florida Underground Petroleum Tank Contractors, Inc., and
AmerAquatic, Inc (f/k/a Haas Environmental Services, Inc.) Each consent to the
foregoing amendments and reaffirm their respective obligations under the
Subsidiary Guaranties and the Subsidiary Security Agreements.
AQUAGENIX LAND-WATER
TECHNOLOGIES, INC. (f/k/a Environmental
Waterway Management, Inc.
By /s/ Andrew Chesler
----------------------------
Name: Andrew Chesler
Title: CEO
FLORIDA UNDERGROUND PETROLEUM
TANK CONTRACTORS, INC.
By /s/ Andrew Chesler
----------------------------
Name: Andrew Chesler
Title: CEO
AMERAQUATIC, INC.(f/k/a Haas
Environmental Services, Inc.)
By /s/ Andrew Chesler
----------------------------
Name: Andrew Chesler
Title: CEO
AQUAGENIX, INC. 4 AMENDMENT NO. 2 DATED AS OF APRIL 1, 1997
EXHIBIT 10.110
Aquagenix, Inc.
Amendment No. 3
12.50% Senior Secured Notes Due October 31, 2003
AMENDMENT NO. 3 (this "Amendment"), dated as of June 30, 1997, by and
among AQUAGENIX, INC. (the "Company"), a Delaware corporation and THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES (the "Noteholder").
1. PRELIMINARY STATEMENT
1.1 The Company entered into an Amended and Restated Senior Secured
Note and Warrant Purchase Agreement (the "Original Note Purchase Agreement", as
in effect immediately prior to the date hereof, the "Existing Note Purchase
Agreement" and as amended hereby, the "Amended Note Purchase Agreement"), dated
as of December 15, 1995, with the Noteholder, pursuant to which the Company
issued and sold to the Noteholder $5,000,000 in principal amount of the
Company's 12.50% Senior Secured Notes due October 31, 2003 (the "Notes").
1.2 The Company has requested an amendment to Sections 7.4 and 7.5 of
the Existing Note Purchase Agreement.
1.3 Capitalized terms used herein and not defined herein have the
meanings specified by the Existing Note Purchase Agreement.
2. AMENDMENTS
Subject to Section 4.7 hereof, the Existing Note Purchase Agreement is
hereby amended as follows:
2.1 Interest Expense Coverage Ratio (Section 7.4 of the Note
Purchase Agreement.)
The requirement in Section 7.4 of the Existing Note Purchase Agreement
that the Company maintain a minimum Interest Expense Coverage Ratio is hereby
suspended during the period July 1, 1997 through June 30, 1998.
2.2 Minimum Consolidated Net Worth (Section 7.5 of the Note
Purchase Agreement).
Section 7.5 of the Existing Note Purchase Agreement is hereby amended
to permit Consolidated Net Worth for the period from and including January 1,
1997 to and including June 30, 1998 to be not less than $4,000,000.
3. WARRANTIES AND REPRESENTATIONS
To induce the Noteholder to enter into this Amendment, the Company
warrants and represents to the Noteholder that as of the date hereof the
representations set forth in this Section 3 are true and correct in all material
respects.
3.1 Authorization, Execution and Enforceability.
The execution and delivery of this Amendment by the Company and the
Subsidiaries set forth below has been duly authorized by all necessary action on
the part of the Company and such
<PAGE>
Subsidiaries. The Amended Note Purchase Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms.
3.2 Existence of Defaults.
After giving effect to this Amendment, no Default or Event of Default
will exist under the Amended Note Purchase Agreement or any other agreement of
the Company evidencing or governing Debt.
3.3 Governmental Consent.
Neither the execution and delivery by the Company of this Amendment nor
the performance by the Company of its obligations under the Amended Note
Purchase Agreement is such as to require a consent, approval or authorization
of, or filing, registration or qualification with, any Governmental Authority on
the part of the Company as a condition thereto.
4. MISCELLANEOUS
4.1. Scope of Amendment.
Except as expressly provided herein,
(a) no other terms and provisions of the Existing Note
Purchase Agreement are modified or changed by this Amendment,
(b) the Interest Expense Coverage Ratio and the Consolidated
Net Worth requirements set forth in Section 7.4 and Section 7.5 of the
Existing Note Purchase Agreement, for the periods other than those set
forth in Section 2.1 and Section 2.2 hereof, shall remain as set forth
in the Existing Note Purchase Agreement, and
(c) the terms and provisions of the Existing Note Purchase
Agreement shall continue in full force and effect.
The Company hereby acknowledges, confirms, reaffirms and ratifies all of its
obligations and duties under the Amended Note Purchase Agreement and all
agreements related thereto. This Amendment is not a limitation on the ability of
the Noteholder to exercise any of its rights and remedies due to any Default or
Event of Default under the Amended Note Purchase Agreement.
4.2 Payment of Consent Fee.
The Company hereby agrees to pay to the Noteholder a quarterly consent
fee equal to one quarter of one percent (0.25%) of the outstanding principal
balance of the Notes as of the final day of the most recently ended fiscal
quarter prior to the due date of such payment (the "Consent Fee"). The Consent
Fee, if any, shall be due on or before January 31, 1998, April 30, 1998 and July
31, 1998 if the Company has failed to comply with the Interest Expense Coverage
Ratio and the Consolidated Net Worth requirements set forth in Sections 7.4 and
7.5, respectively, of the Original Note Purchase Agreement for the most recently
ended fiscal quarter prior to such date. Failure of the Company to pay the
Consent Fee when due shall result in an Event of Default under Section 9.1(b) of
the Existing Note Purchase Agreement.
AQUAGENIX, INC. 2 AMENDMENT NO. 3
<PAGE>
4.3 References to Note Purchase Agreements.
Upon the effectiveness of this Amendment, each reference to the "Note
Purchase Agreement" in the Amended Note Purchase Agreement and each agreement or
document referring thereto shall mean and be a reference to the Amended Note
Purchase Agreement.
4.4 Successors Bound.
This Amendment shall inure to the benefit of, be enforceable by, and be
binding upon the successors and assigns of each of the parties hereto,
including, without limitation, subsequent holders of Notes.
4.5 Governing Law.
This Amendment shall be construed and enforced in accordance with and
governed by the laws of the State of New York, including Section 5-1401 of the
New York General Obligations Law but excluding all other choice-of-law and
conflicts-of-law rules.
4.6 Final Written Expression.
This Amendment may not be contradicted by evidence of any actual or
alleged prior, contemporaneous or subsequent understandings or agreements of the
parties, written or oral, express or implied, other than a writing which
expressly amends or supersedes this Amendment or the Amended Note Purchase
Agreement, and there are no unwritten oral understandings or agreements between
the parties concerning the subject matter of this Amendment.
4.7 Effectiveness.
This Amendment may be executed in one or more counterparts and each set
of counterparts which, collectively, show execution by the Company, each of the
Subsidiaries and the Noteholder shall constitute one duplicate original. This
Amendment shall be deemed to have become effective on the date hereof, upon
(a) the execution of a counterpart hereof by the Company, each
of the Subsidiaries and the Noteholder, and
(b) the delivery of such counterparts to special counsel for
the Noteholder, William E. Kelly, Esq., Hebb & Gitlin, One
State Street, Hartford, CT 06104, Fax: (860) 278-8968
(regardless of whether any or all of such executions and
deliveries occur before or after the date hereof).
[Remainder of page intentionally blank. Next page is the
signature page.]
AQUAGENIX, INC. 3 AMENDMENT NO. 3
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 3 has been duly executed as of
the date first written above.
AQUAGENIX, INC.
By /s/ Helen Chia
------------------------------
Name: Helen Chia
Title: Chief Financial Officer
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By /s/ William Gobbo, Jr.
- --------------------------
Name: William Gobbo, Jr.
Title: Investment Officer
Aquagenix Land-Water Technologies, Inc. (f/k/a Environmental Waterway
Management, Inc.) Florida Underground Petroleum Tank Contractors, Inc., and
AmerAquatic, Inc (f/k/a Haas Environmental Services, Inc.) Each consent to the
foregoing amendments and reaffirm their respective obligations under the
Subsidiary Guaranties and the Subsidiary Security Agreements.
AQUAGENIX LAND-WATER
TECHNOLOGIES, INC. (f/k/a Environmental
Waterway Management, Inc.
By /s/ Helen Chia
-----------------------------------
Name: Helen Chia
Title: Chief Financial Officer
FLORIDA UNDERGROUND PETROLEUM
TANK CONTRACTORS, INC.
By /s/ Helen Chia
-----------------------------------
Name: Helen Chia
Title: Chief Financial Officer
AMERAQUATIC, INC.(f/k/a Haas
Environmental Services, Inc.)
By /s/ Helen Chia
-----------------------------------
Name: Helen Chia
Title: Chief Financial Officer
AQUAGENIX, INC. 4 AMENDMENT NO. 3
Exhibit 10.111
AQUAGENIX, INC.
AMENDMENT NO. 4
12.50% Senior Secured Notes due October 31, 2003
AMENDMENT NO. 4 (this "Amendment"), dated as of March 31, 1998, by and
among AQUAGENIX, INC. (the "Company"), a Delaware corporation and THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES (the "Noteholder").
1. PRELIMINARY STATEMENT
1.1 The Company entered into an Amended and Restated Senior Secured
Note and Warrant Purchase Agreement (the "Original Note Purchase Agreement," as
in effect immediately prior to the date hereof, the "Existing Note Purchase
Agreement" and as amended hereby, the "Amended Note Purchase Agreement"), dated
as of December 15, 1995, with the Noteholder, pursuant to which the Company
issued and sold to the Noteholder $5,000,000 in principal amount of the
Company's 12.50% Senior Secured Notes due October 31, 2003 (as in effect
immediately prior to the date hereof, the "Original Notes" and as amended
hereby, the "Amended Notes").
1.2 The Company has requested further amendment to Sections 7.4 and 7.5
of the Existing Note Purchase Agreement and the Original Notes.
1.3 Capitalized terms used herein and not defined herein have the
meanings specified by the Existing Note Purchase Agreement.
2. AMENDMENTS
2.1 Amendments to the Existing Notes Purchase Agreement.
Subject to Section 4.7 hereof, the Existing Note Purchase Agreement is
hereby amended as follows:
(a) Interest Expense Coverage Ratio (Section 7.4 of the Note
Purchase Agreement)
The requirement in Section 7.4 of the Existing Note Purchase
Agreement that the Company maintain a minimum Interest Expense Coverage Ratio is
hereby suspended during the period July 1, 1997 through March 31, 1999.
(b) Minimum Consolidated Net Worth (Section 7.5 of the Note
Purchase Agreement)
Section 7.5 of the Existing Note Purchase Agreement is hereby
amended to permit Consolidated Net Worth for the period from and including
January 1, 1997 to and including March 31, 1999, calculated at the end of each
fiscal period of the Company set forth in the chart below, to be not less than
the amount set forth opposite such period:
<PAGE>
Fiscal Quarter Ending Amount
===================== ==========
March 31, 1997 $4,000,000
--------------------- ----------
June 30, 1997 $4,000,000
--------------------- ----------
September 30, 1997 $4,000,000
--------------------- ----------
December 31, 1997 $4,000,000
--------------------- ----------
December 31, 1998 $1,500,000
--------------------- ----------
March 31, 1999 $1,500,000
===================== ==========
There shall be no minimum Consolidated Net Worth requirement for each of the
fiscal quarters ending March 31, 1998, June 30, 1998 and September 30, 1998.
2.2 Amendments to the Original Notes.
(a) The first paragraph of the Original Notes is hereby amended as
follows:
"AQUAGENIX, INC. (together with its successors and assigns, the
"Company"), a Delaware corporation, for value received, hereby promises to pay
to THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES or registered
assigns the principal sum of FIVE MILLION DOLLARS ($5,000,000) on October 31,
2003 and to pay interest (computed on the basis of a 360-day year of twelve
30-day months) on the unpaid principal balance thereof from the date of this
Note at the rate of twelve and one-half percent (12.50%) per annum, payable (i)
quarterly on the last day of each January, April, July and October in each year,
commencing on January 31, 1996 and ending on April 30, 1998 and (ii) monthly on
the last day of each month commencing May 31, 1998, until the principal amount
hereof shall be due and payable; and to pay on demand interest on any overdue
principal (including any overdue payment of principal) and (to the extent
permitted by applicable law) on any overdue installment of interest, at a rate
equal to the lesser of (i) the highest rate allowed by applicable law or (ii)
fourteen and one-half percent (14.50%) per annum."
(b) All Original Notes outstanding as of the date hereof, without
any further action being required on the part of the Company or the Noteholder
(or on the part of any other Person), are deemed to be conformed to the form of
Amended Note as set forth in Section 2.2(a) hereof. The outstanding Amended
Notes shall be and are entitled to all the rights and benefits provided therefor
in the Amended Note Purchase Agreement.
3. WARRANTIES AND REPRESENTATIONS
To induce the Noteholder to enter into this Amendment, the Company
warrants and represents to the Noteholder that as of the date hereof the
representations set forth in this Section 3 are true and correct in all material
respects.
AQUAGENIX, INC. 2 AMENDMENT N0. 4
<PAGE>
3.1 Authorization, Execution and Enforceability.
The execution and delivery of this Amendment by the Company and the
Subsidiaries set forth below has been duly authorized by all necessary action on
the part of the Company and such Subsidiaries. The Amended Note Purchase
Agreement constitutes a valid and binding obligation of the Company, enforceable
in accordance with its terms.
3.2 Existence of Defaults.
After giving effect to this Amendment, no Default or Event of Default
will exist under the Amended Note Purchase Agreement or any other agreement of
the Company evidencing or governing Debt.
3.3 Governmental Consent.
Neither the execution and delivery by the Company of this Amendment nor
the performance by the Company of its obligations under the Amended Note
Purchase Agreement is such as to require a consent, approval or authorization
of, or filing, registration or qualification with, any Governmental Authority on
the part of the Company as a condition thereto.
4. MISCELLANEOUS
4.1 Scope of Amendment.
Except as expressly provided herein,
(a) no other terms and provisions of the Existing Note Purchase
Agreement or the Original Notes are modified or changed by this Amendment,
(b) the Interest Expense Coverage Ratio and the Consolidated Net
Worth requirements set forth in Section 7.4 and Section 7.5 of the Original Note
Purchase Agreement, for the periods other than those set forth in Section 2.1(a)
and Section 2.1(b) hereof, shall remain as set forth in the Original Note
Purchase Agreement, and
(c) the terms and provisions of the Existing Note Purchase
Agreement and the Original Notes shall continue in full force and effect.
The Company hereby acknowledges, confirms, reaffirms and ratifies all of its
obligations and duties under the Amended Note Purchase Agreement, the Amended
Notes and all agreements related thereto. This Amendment is not a limitation on
the ability of the Noteholder to exercise any of its rights and remedies due to
any Default or Event or Default under the Amended Note Purchase Agreement.
4.2 Payment of Consent Fee.
In the event that the Company has failed to comply with the Interest
Expense Coverage Ratio and the Consolidated Net Worth requirements set forth in
Sections 7.4 and 7.5, respectively, of the Original Note Purchase Agreement for
the most recently ended fiscal quarter prior to such date, the Company hereby
agrees to pay to the Noteholder by wire transfer of
AQUAGENIX, INC. 3 AMENDMENT N0. 4
<PAGE>
immediately available funds as directed by the Noteholder on Schedule 4.2 hereto
(i) a quarterly consent fee equal to one quarter of one percent (0.25%) of the
outstanding principal balance of the Amended Notes as of the final day of the
most recently ended fiscal quarter prior to the due date of such payment (the
"Quarterly Consent Fee"), such Quarterly Consent Fee, if any, shall be due on or
before January 31, 1998 and April 30, 1998 and (ii) a monthly consent fee equal
to Five Thousand Dollars ($5,000) (the "Monthly Consent Fee" and together with
the Quarterly Consent Fee, the "Consent Fees"), such Monthly Consent Fee, if
any, shall be due on the last day of each month beginning May 31, 1998 through
and including March 31, 1999. Failure of the Company to pay the Consent Fees
when due shall result in an Event of Default under Section 9.1(b) of the
Existing Note Purchase Agreement.
4.3 References to Note Purchase Agreements.
Upon the effectiveness of this Amendment, each reference to the "Note
Purchase Agreement" and the "Notes" in the Amended Note Purchase Agreement and
each agreement or document referring thereto shall mean and be a reference to
the Amended Note Purchase Agreement and the Amended Notes.
4.4 Successors Bound.
This Amendment shall inure to the benefit of, be enforceable by, and be
binding upon the successors and assigns of each of the parties hereto,
including, without limitation, subsequent holders of the Amended Notes.
4.5 Governing Law.
This Amendment shall be construed and enforced in accordance with and
governed by the laws of the State of New York, including Section 5-1401 of the
New York General Obligations Law, but excluding all other choice-of-law and
conflicts-of-law rules.
4.6 Final Written Expression.
This Amendment may not be contradicted by evidence of any actual or
alleged prior, contemporaneous or subsequent understandings or agreements of the
parties, written or oral, expressed or implied, other than a writing which
expressly amends or supersedes this Amendment or the Amended Note Purchase
Agreement, and there are no unwritten oral understandings or agreements between
the parties concerning the subject matter of this Amendment.
4.7 Effectiveness.
This Amendment may be executed in one or more counterparts and each set
of counterparts which, collectively, show execution by the Company, each of the
Subsidiaries and the Noteholder shall constitute one duplicate original. This
Amendment shall be deemed to have become effective on the date hereof, upon
(a) the execution of a counterpart hereof by the Company, each of
the Subsidiaries and the Noteholder, and
AQUAGENIX, INC. 4 AMENDMENT N0. 4
<PAGE>
(b) the delivery of such counterparts to special counsel for the
Noteholder, William E. Kelly, Esq., Hebb & Gitlin, One State Street, Hartford,
CT 06104, Fax: (860) 278-8968, (regardless of whether any or all of such
executions and deliveries occur before or after the date hereof).
[REMAINDER OF PAGE INTENTIONALLY BLANK. NEXT PAGE IS THE SIGNATURE PAGE.]
AQUAGENIX, INC. 5 AMENDMENT N0. 4
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 4 has been duly executed as of
the date first written above.
AQUAGENIX, INC.
By /s/ Andrew Chesler
------------------
Name: Andrew Chesler
Title: Chairman and Chief Executive Officer
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By /s/ William Gobbo, Jr.
- -------------------------
Name: William Gobbo, Jr.
Title: Investment Officer
Aquagenix Land-Water Technologies, Inc. (f/k/a Environmental Waterway
Management, Inc.), Florida Underground Petroleum Tank Contractors, Inc. and
AmerAquatic, Inc. (f/k/a Haas Environmental Services, Inc.) each consent to the
foregoing amendments and reaffirm their respective obligations under the
Subsidiary Guaranties and the Subsidiary Security Agreements.
AQUAGENIX LAND-WATER
TECHNOLOGIES, INC. (f/k/a Environmental
Waterway Management, Inc.)
By /s/ Andrew Chesler
------------------
Name: Andrew Chesler
Title: Chairman
FLORIDA UNDERGROUND PETROLEUM
TANK CONTRACTORS, INC.
By /s/ Andrew Chesler
------------------
Name: Andrew Chesler
Title: President
AMERAQUATIC, INC. (f/k/a Haas
Environmental Services, Inc.)
By /s/ Andrew Chesler
------------------
Name: Andrew Chesler
Title: President
AQUAGENIX, INC. 6 AMENDMENT N0. 4
<PAGE>
Schedule 4.2
Citibank, N.A.
399 Park Avenue
New York, NY 10021
ABA # 021-000089
Credit: Alliance Corporate Finance Group Inc.
Account #: 3026-3303
Reference: Aquagenix, Inc. Consent Fee
AQUAGENIX, INC. Schedule 4.2-1 AMENDMENT N0. 4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF AQUAGENIX, INC. AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND RELATED FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 799,286
<SECURITIES> 0
<RECEIVABLES> 1,025,550
<ALLOWANCES> 182,809
<INVENTORY> 640,225
<CURRENT-ASSETS> 4,111,765
<PP&E> 4,670,799
<DEPRECIATION> 1,663,922
<TOTAL-ASSETS> 13,150,675
<CURRENT-LIABILITIES> 2,498,093
<BONDS> 0
0
0
<COMMON> 47,246
<OTHER-SE> 4,755,318
<TOTAL-LIABILITY-AND-EQUITY> 13,150,675
<SALES> 0
<TOTAL-REVENUES> 13,188,266
<CGS> 8,444,450
<TOTAL-COSTS> 15,121,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 764,679
<INCOME-PRETAX> (2,697,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,697,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,697,938)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
