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, 1998
[ ] 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)
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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:
$16,346,480.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on March 18, 1999, computed by reference to the
closing sale price on that date: $4,662,335.
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 18, 1999, was 5,532,725.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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,
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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 $16 million for 1998, 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.
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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 mosquitoes
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 algaecides and herbicides and
special spraying equipment to disperse algaecides 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 algaecides 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
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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, 1998 and 1997, aquatic weed, algae and
exotic plant control services accounted for approximately 57% and 73%,
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
21% and 17% respectively of the Company's total revenues for the years ended
December 31, 1998 and 1997.
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
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engages in wetland planting utilizing its personnel and equipment and, to the
extent necessary, third-party equipment. For the years ended December 31, 1998
and 1997, wetland planting restoration services accounted for approximately 5%
and 3%, respectively, of the Company's total revenues.
Fountains/Aeration Systems. The Company distributes and installs an
extensive line of decorative floating fountains 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 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 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 2% and 5% of total revenues for the years ended December 31, 1998 and
1997, respectively.
Environmental Construction. During 1998 the Company entered into
certain long-term contracts in the State of California relating to roadside
landscaping and irrigation systems. These contracts accounted for 15% of total
revenues for the year ended December 31, 1998.
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 242 customers in
the public sector. Substantially all of the Company's contracts for aquatic and
industrial vegetation management services are recurring in nature and totaled
approximately 3,200 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, 1998, 29% of the Company's revenues
were derived from governmental customers as compared to 23% for 1997. It is
anticipated that a substantial portion of the
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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, 1998 and 1997, the Company's five largest customers accounted for
approximately 15% and 11%, respectively, 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 $3 million of pollution and professional 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.
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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 ten people, who are
responsible for securing potential customers in their respective geographic
markets, receive base salaries plus a commission. 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.
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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.
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.
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
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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 algaecides 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
algaecides 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.
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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.
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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.
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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 algaecides 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
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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 March 1, 1999, the Company had approximately 133 employees other
than executives, all of whom are full-time employees, which includes 13
administrative staff, 9 branch managers, 10 sales personnel, 54 applicators and
47 laborers. The Company is not currently a party to any collective bargaining
agreement. The Company believes that its employee relations are satisfactory.
FACILITY CLOSINGS
In December, 1998, the Company made a decision to close two
facilities, the Alabama and Arizona branches; in January of 1999 the Company
sold the related assets for approximately $172,000.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains corporate headquarters 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 and the
Company has done so. The
15
<PAGE>
Company's annual lease payments for the remaining year of the lease will be
approximately $95,000. 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.
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 3,456 square feet, under a two-year lease which commenced on
November 1, 1998. Annual lease payment is approximately $33,000 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, 1998. The Company's
annual lease payments for the two years of the lease are approximately $24,300
annually.
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, 1999. The Company has the option to renew the lease for
two 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 $27,000.
The Company's office in Fort Myers, Florida is approximately 4,200
square foot in size and is under a one-year lease which commenced on December 1,
1998. The annual lease payment is approximately $25,000. The Company has the
option to renew the lease for two additional one-year terms.
The Company has a lease for approximately 3,500 square feet of space in
Jacksonville, Florida, with a term of two years effective April 1, 1999. The
Company has the option to renew the lease for three additional one-year terms.
The Company's annual lease payment is approximately $16,000.
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.
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 $1,800.
ITEM 3. Legal Proceedings
-----------------
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.
ITEM 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
None.
16
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
The Company's Common Stock and Warrants are quoted on the OTC Bulletin
Board under the symbols "AQUX" and "AQUXW", respectively. The following table
sets forth, for the period since the first quarter ended March 31, 1997, the
high and low closing sales prices for the Common Stock and the Warrants as
reported by OTC.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
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
1998
First Quarter........................................................... 8-3/8 5 2-3/4 7/8
Second Quarter.......................................................... 5-7/16 1 1-3/8 1/8
Third Quarter........................................................... 1-9/16 9/16 5/16 1/8
Fourth Quarter.......................................................... 15/16 1/8 3/16 1/16
</TABLE>
As of March 18, 1999, there were 47 record holders of the Company's
Common Stock. There were approximately 1,182 beneficial owners of the Company's
Common Stock at March 18, 1999.
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.
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General
- -------
The unsuccessful effort to acquire the Lewis Tree Company, unrelated
construction projects in California and other failed investments and business
opportunities of the former Chief Executive Officer caused the Company to
generate significant losses and spiral into a negative working capital position.
As a result the Company has been unable to pay interest and other related
consent fees on its 12.5% Senior Secured Notes since July 31, 1998, causing the
holder of those notes to notify the Company of an Existing Event of Default.
That default in turn created defaults under the Company's various credit
agreements with Union Planters Bank and the bank informed the Company of its
unwillingness to remain a creditor.
Removal of Chief Executive Officer
- ----------------------------------
On June 2, 1998, the Board of Directors removed Andrew Chesler as Chief
Executive Officer from his executive management position and his capacity as
Chairman of the Board of Directors. In a series of transactions commencing in
the fourth quarter of 1997 and through his termination date, the Company
disbursed cash either directly to or for the benefit of the former Chief
Executive Officer totaling $682,000. The Company has made demand for repayment
of these amounts. The demand has not been met. Based upon facts and
circumstances available to management at this time, the ultimate recovery of
these advances remains uncertain. The Company has recorded a loss allowance of
$682,000 relative to this claim.
Unauthorized Financing Advances
- -------------------------------
At the direction of the former Chief Executive Officer, and without the
approval of the Board of Directors, the Company transferred funds totaling
$225,000 to two different entities to secure financing for the Company. Such
funds were transferred prior to performance by the entities and financing never
occurred. Although there is no assurance that these deposits can be recovered,
the Company intends to actively attempt obtaining refunds. A loss provision of
$225,000 is included in the 1998 Consolidated Financial Statements.
Restructuring Plan
- ------------------
The Board of Directors approved a plan to restructure and consolidate
the Company's mission, refocusing it on the core aquatic businesses, an area of
business that has historically proven to be profitable for the Company. A
restructuring plan, to reduce costs and increase future operating efficiency,
was implemented late in the third quarter of 1998. The Company has significantly
reduced head counts and administrative costs, closed two branch operations and
sold off under performing assets. The Company has successfully negotiated
favorable payment arrangements with vendors and renegotiated its bank debt.
Effective March 31, 1999, the Company's Senior Secured Note holder amended the
terms of the Amended and Restated Senior Note and Warrant Purchase Agreement
taking it out of default. This should give the Company the time needed to
restructure its debt.
Onetime Nonrecurring Charges
- ----------------------------
Restructuring charges of $755,798 (see note 10 to the Notes to
Consolidated Financial Statements), impairment losses on certain intangible
assets of $1,251,163 (see note 9 to the Notes to Consolidated Financial
Statements), loss relating to the Lewis Tree termination agreement of $2,346,192
(see note 11 to the Notes to Consolidated Financial Statements), loss related to
California contracts of $1,636,000 (see note 18 to the Notes to Consolidated
Financial Statements), termination of consulting relationship of $932,000 ,
claims relating to former Chief Executive Officer of $682,000 (see Removal of
Chief Executive Officer above),
18
<PAGE>
loss related to facility closings of $656,956 (see note 17 to the Notes to
Consolidated Financial Statements), adjustment for change in useful life of
spray equipment of $523,781 (see note 2 to the Notes to Consolidated Financial
Statements) and a loss provision of $225,000 relating the financing advances
(see Unauthorized Financing Advances above) total $9,008,890 and accounts for
approximately 69% of the 1998 loss.
Outlook
- -------
The Company will continue to consolidate its operations into the core
aquatic business segment. The non-core business segments will be phased out. In
particular, the California construction operation will be discontinued in 1999.
As a result the Company is projecting a decline in revenue for 1999 as
management works to generate a more predictable revenue stream and improve
margins.
As of December 31, 1998, the Company is in a working capital deficit
position. During 1999, the Company will be required to raise additional capital
to fund continuing operations. The vehicle used to raise these funds may take a
variety of forms, including public or private placement of its equity
securities, credit agreements, or inducements to current warrant and option
holders encouraging exercise. However, there can be no assurance that the
Company will be successful in its attempts to raise additional capital.
Results of Operations
Revenues
Total service revenue increased by $3,158,214, or 23.9%, from
$13,188,266 in 1997 to $16,346,480 in 1998. The increase in revenues was
primarily attributable to an increase in revenues of approximately $2,504,425
from construction contracts resulting from the new branch office in California.
Costs of Services and Gross Margins
Costs of services increased by $5,253,192, or 62%, from $8,444,450 in
1997 to $13,697,642 in 1998. The increase in costs of services was mainly
attributable to lower margins obtained for vegetation management contracts in
Arizona and Alabama and losses incurred for fixed price construction contracts
in California.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$1,737,661, or 30%, from $5,695,327 in 1997 to $7,432,988 in 1998. This increase
was mainly attributable to increased sales and marketing activities, consulting
fees for the upgrade and design of the Company's information systems and
expenses incurred in 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.
As a percentage of revenues, such expenses have remained at
approximately 45% when comparing 1997 to 1998. The Company is continuing to
invest in its business development, marketing and proposal resources through the
addition of sales representatives and increased advertising.
Depreciation and amortization
Depreciation and amortization expenses increased from $981,748 in 1997
to $1,501,911 in 1998. As a percentage of revenues, depreciation and
amortization expenses have increased from 7.4% in 1997 to 9.2% in 1998. This
increase reflected additional depreciation in the amount of $523,781 resulting
from adjusting the useful life of spray equipment from 7 or 10 years to 4 years.
19
<PAGE>
Interest Expense
Interest expense increased by $130,933 from $801,304 in 1997 to
$932,237 in 1998, 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, 1998 as
a full valuation allowance has been provided against deferred tax assets arising
mainly from the Company's net operating loss carryforward of approximately $23.1
million which expires from 2010 to 2013.
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
results may reflect quarterly fluctuations resulting from the different climatic
conditions of the locations of its customers.
Liquidity and Capital Resources
Working Capital
On December 31, 1998, the Company is in a working capital deficit
position. Net operating losses for the year from the California construction
business have caused cash balances to decrease and accounts payable balances and
other current liabilities to increase. Additionally, cash outlay during the year
resulting from one-time nonrecurring charges had a major negative influence on
working capital. (See page 18, Management's Overview).
20
<PAGE>
The Company's accounts receivable have increased by $810,149 since
December 31, 1997. The increase was primarily due to the higher volume of
revenues in the fourth quarter compared to the fourth quarter of 1997. At
December 31, 1998, the Company's allowance for doubtful receivables approximated
$210,000, which the Company believes is currently adequate to cover anticipated
losses.
Inventories have been reduced from $640,225 on December 31, 1997 to
$319,606 at December 31, 1998 primarily as a result of more efficient management
of material costs.
At December 31,1998, 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, 1998, an
aggregate of $1,154,748 was outstanding under the loan agreements with Capital
Bank, of which $640,000 was outstanding under the line of credit, $178,776 was
outstanding under the three-year term loan collaterized by the long-term
receivable and $122,222 was outstanding under the computer equipment loan, and
213,750 outstanding under our equipment financing loan.
21
<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. The Company was in
compliance with the covenants for the Senior Debt as of December 31, 1998
pursuant to an amendment thereto obtained during March, 1998 modifying the terms
relative to certain financial covenants through March 31, 1999. The covenants
were further modified effective April 1, 1999 ("Amendment No. 5") to waive all
interest expense coverage requirements for the Senior Debt through March 31,
2000 and exclude the minimum consolidated net worth requirement for the period
from and including September 30, 1998 to and including March 31, 2000. To induce
the Noteholder to, and as consideration for, entering into Amendment No. 5,
dated April 1, 1999, the Company extended the expiration date from December 31,
2000 to December 31, 2004 and reduced the exercise price from $7.38 per share to
$0.75 per share for certain 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.
Cash Flows from Operating Activities
For the year ended December 31, 1998, the Company's cash flows used in
Operations were ($987,056) compared to ($2,034,809) used in Operations for the
year ended December 31, 1997. See F-6, Consolidated Statements of Cash Flows,
for the detail of the adjustments to reconcile net loss to net cash.
Cash Flows from Investing Activities
The Company's investing activities used cash of $1,077,169 in 1998
primarily for acquisition escrow fund deposits and advances to former officers.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December
31, 1998 of $1,434,523 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 $1,767,976.
The Company does not have any material commitments for capital
expenditures at December 31, 1998. Based on current plans, the Company
anticipates that funds generated from operations will not be sufficient to meet
the Company's cash requirements for at least the next 12 months. Additionally,
the Company is unlikely to attract capital investment on favorable terms in its
current financial position. In the absence of capital investment, the Company
must enter into deferred credit arrangements with its vendors, negotiate
extended forbearance agreements or replace holders of its major debt securities
and return to profitable operations. While vendors currently are continuing to
supply the Company with needed chemicals and materials and debt holders have not
pursued default remedies, there can be no assurance that the current
arrangements will continue. 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.
To the extent that the Company is unable to obtain such financing on
satisfactory terms or financing available through the conversion of outstanding
redeemable warrants, currently exercisable at $7.20 per share, from the initial
public offering, the Company may be required to curtail its operations.
22
<PAGE>
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 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 1998 or 1997 as their effect would be
anti-dilutive.
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.
In February 1998 the FASB issued SFAS No. 132, "Employer's Disclosure
about Pensions and Other Postretirement Benefits." Among other provisions, it
standardizes certain disclosure requirements for pension and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets, and eliminates certain other
disclosures. The standard is effective for fiscal years beginning after December
15, 1997. Since the standard applies only to the presentation of pension and
other postretirement benefit information and the Company does not currently
offer such plans, the statement should not have any impact on the Company's
financial position, results of operation or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. Implementation of this standard should
not have an impact on its financial position, results of operations, or cash
flows.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a description of
the financial statements included in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None. On this engagement Durland & Company employed, on a per diem type
basis, certain staff personnel from another CPA firm. The other firm is a
member of an alternative practice structure unit.
23
<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>
Abraham S. Fischler(1)........................ 71 Acting Chairman of the Board, Director and
Secretary
Andrew P. Chesler(2).......................... 32 Chairman of the Board, Chief Executive Officer,
President and Treasurer
John P. Hart(3)............................... 52 Executive Vice President
Helen Chia(4)................................. 35 Chief Financial Officer and Secretary
Frederick E. Barone........................... 54 Chief Financial Officer April 1998 to November 1998
Dean D. Marotta (5)........................... 36 Director and Chief Financial Officer
Michael J. Baratta............................ 40 Director
Allen H. Stern................................ 40 Director from February 1996 to June 1998
Jeffrey T. Katz(6)............................ 31 Director from March 1996 to October 1998
Garry Seitz................................... 53 Chief Compliance Officer of ALWT until March 1999
Joseph J. Campolong........................... 32 Vice President, Production of ALWT until
November 1998
Robert Craig Smith............................ 34 Vice President, Sales of ALWT
</TABLE>
(1) Dr. Fischler served as Acting President from October 23, 1998 until
February 1, 1999.
(2) Mr. Chesler served as Chairman from February 1996 until his removal on
June 2, 1998. He continued to serve as CEO, President and Treasurer
until June 10, 1998.
(3) Mr. Hart served as Chief Operating Officer from April 15, 1997 until
his resignation on October 23, 1998. Mr. Hart also served as Chief
Executive Officer and President from June 10, 1998 until his
resignation on October 23, 1998. He also served as a director from
April 2, 1998 to October 22, 1998.
(4) Effective March 6, 1998, Ms. Chia resigned from the Company due to
relocation.
(5) Mr. Marotta served as a Board Member from October 22, 1998 until his
resignation from the Board effective February 24, 1999. Mr. Marotta
also served as Chief Financial Officer from November 30, 1998 until his
resignation from the Company effective March 26, 1999.
(6) Mr. Katz served as a Director from March 1996 until his resignation on
May 21, 1998. In June 1998 Mr. Katz was re-elected to the Board of
Directors and served until October 7, 1998.
Abraham S. Fischler, Ed.D. , was elected Acting Chairman of the Board
and Secretary in June 1998 and has been a director of the Company since
September 1994. Since July, 1992, Dr. Fischler has been President Emeritus of
Nova University, Fort Lauderdale, Florida. From July 1970 to July 1992, Dr.
Fischler served as President of Nova University.
Andrew P. Chesler has served as Chairman of the Board, Chief Executive
Officer, President and Treasurer from February 1996 until June 2, 1998. 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 June 2, 1998, 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.
24
<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.
Frederick E. Barone joined the Company in April 1998 as Chief Financial
Officer. Mr. Barone is also a limited partner in the firm of Tatum CFO Partners,
LLP, an intellectual capital organization of Chief Financial Officers. Mr.
Barone joined the Tatum organization in June 1997 and has performed several
consulting engagements through that organization. Currently he devotes 100% of
his time to Aquagenix, Inc. From 1994 to 1997, Mr. Barone operated his own
financing consulting firm. Prior to 1994, Mr. Barone was Executive Vice
President and Chief Financial Officer of Eric Plastics Company located in Corry,
Pennsylvania.
Dean D. Marotta joined the Company in December 1996 as controller of
ALWT; he also served as Corporate Controller and Chief Financial Officer. Prior
to joining the Company, Mr. Marotta held the position of Controller at Novatek
International, a publicly held company, since 1992.
Michael J. Baratta, a partner with Vector Consulting, L.L.C., has been
a consultant to the Company since September of 1998 and has played an integral
part in the restructuring of the Company. Approximately two years ago, Mr.
Baratta founded Vector Consulting, L.L.C.; three years prior to that he was an
independent consultant, holding various operational positions. Five years ago he
left his position as a principal at Heller Investments, Inc. in Chicago, a
subsidiary of Fuji Bank.
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.
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 responsible for developing new client business,
maintaining existing customer relations and overseeing all sales representatives
of the branch offices.
25
<PAGE>
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
As of December 31, 1998 there were two members and no committees on the
Board of Directors.
COMPENSATION OF DIRECTORS
The Company pays directors who are not employees of the Company a fee
of $500 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 installments 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.
26
<PAGE>
During 1998, under the Amended and Restated Directors Stock Option
Plan, a total of 30,000 options to purchase 30,000 shares of the Company's
Common Stock were exercised at a price of $3.88. There was a total of 75,000
options granted to the directors in 1998.
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, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following compensation table sets forth, for the three fiscal years
ended December 31, 1996, 1997 and 1998, the cash and certain other compensation
paid by the Company to Andrew P. Chesler, the Company's former Chief Executive
Officer, John P. Hart, the Company's former Executive Vice President and Chief
Executive Officer (collectively, the "Named Executive Officers"). No other
executive officer had an annual salary and bonus in excess of $100,000 during
such years.
27
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------- Other Annual Compensation
Salary Bonus Compensation Awards
Name and Principal Position Year ($) ($) (#) Option/SARS(8)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andrew P. Chesler
Chairman of the Board -
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)
1998 $162,960 - $632,550(7) 77,500(6)
John P. Hart
Executive Vice President 1997 $103,846 $10,000 (1) 100,000(5)
1998 $189,423 - $418,700(7) 90,000(6)
</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.
(6) Represents options granted in 1998 under the Company's Employee Stock
Option Plan at an exercise price of $7.56 per share, the closing market
price of the Company's common stock on the date of the grant.
(7) The Company entered into a Stock Purchase Agreement (the "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. In order to raise the deposit required by the Amended Stock
Purchase and Escrow Agreement, the Company restructured stock options
previously granted to certain officers, directors, employees and former
employees of the Company. Such restructuring involved the resetting of
option exercise prices to amounts below the current market at that time
and the acceleration of the date on which certain options could be
exercised. Accordingly, the Company recognized compensation expense for
options restructured based on the difference between the quoted market
price of the Company's stock at the date of grant and the amount the
grantees paid to acquire the stock.
(8) Any unexercised options of the above two former executives have
terminated.
28
<PAGE>
EMPLOYMENT AGREEMENTS
In February 1996, the annual base salary for Robert A. Radler was
reduced to $158,000. In the same month, Robert A. Radler resigned as an
executive officer of the Company. 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,
1998. No stock appreciation rights were granted.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------
% 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...................... 67,500 19.1 $7.50 1/27/08
....................................... 10,000 2.8 $6.38 1/27/08
John P. Hart........................... 15,000 4.2 $6.38 1/27/08
....................................... 75,000 21.2 $7.38 6/24/08
</TABLE>
(1) Total number of options granted during the year ended December 31, 1998
was 354,000.
(2) Options granted in 1998 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.
29
<PAGE>
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, 1998. During the year ended December 31, 1998, Andrew P. Chesler exercised
77,500 of his stock options at $1.00 per share and 40,000 of his stock options
at $4.00 per share. John P. Hart exercised 15,000 of his stock options at $1.00
per share and 100,000 of his stock options at $4.00 per share.
<TABLE>
<CAPTION>
Number of Unexercised Options
In-the Money Value of Unexercised
Held at December 31, 1998 Options at December 31, 1998
---------------------------- ----------------------------
Shares Acquired Value
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Chesler.(2).. 77,500 ($ 39,959) 0 0 0 0
40,000 ($ 140,624) 0 0 0 0
John P. Hart(3)...... 15,000 ($ 7,734) 0 0 0 0
100,000 ($351,560) 0 0 0 0
</TABLE>
(1) The closing sale price of the Common Stock on December 31, 1998 as
reported by OTC Bulletin Board was $.4844 per share. Value is
calculated by multiplying (a) the difference between $.4844 and the
option exercise price by (b) the number of shares of Common Stock
underlying the option.
(2) In June 1998 the Company cancelled the remaining stock options of Mr.
Chesler.
(3) In January 1999 the Company cancelled the remaining stock options of
Mr. Hart.
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 18, 1999, 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:
30
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OUTSTANDING SHARES
BENEFICIAL OWNER(1) OWNERSHIP(2) OWNED(2)
------------------- ------------ --------
<S> <C> <C>
Directors and Executive Officers
- --------------------------------
Abraham S. Fischler.................................................... 52,500(3) 1.0
Russell M. Thompson.................................................... 6,667 0.01
All directors and executive officers
as a group (two persons)........................................... 34,167 0.6
Beneficial Stockholders (5%)
- ----------------------------
Steel Partners II, L.P................................................. 790,650(4) 14.3
Nicolas Berggruen...................................................... 515,041(5) 9.3
Jane and Pasquale Guadagno............................................. 354,000(6) 6.4
The Equitable Life Assurance Society of
the United States................................................. 351,197(7) 6.3
Imperial Capital, L.L.C................................................ 336,349(8) 6.1
</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 25,000 options currently exercisable under the Company's
Amended and Restated Directors Stock Option Plan, and does not include
25,000 options which are not currently exercisable.
(4) Steel Partners II, L.P. address is 150 E. 52nd Street, 21st Floor,
New York, NY 10022
(5) Includes 382,541 shares of Common Stock and 132,500 shares of Common
Stock held by Alexander Enterprise Holdings, Inc. and Alpha Atlas
Holdings, LDC, respectively, both companies of which are beneficially
owned by Mr. Berggruen, and warrants to purchase 110,000 shares of the
Company's Common Stock pursuant to certain warrant agreements issued to
Alexander Enterprise Holdings, Inc. Alexander Enterprise Holdings,
Inc.'s address is: c/o Alpha Asset Management, Paseo de la Habana 140,
28036 Madrid, Spain. Alpha Atlas Holdings, LDC's address is: c/o Alpha
Investment Management, Inc., 499 Park Avenue, 24th Floor, New York, NY
10022, Attn: Doug Siekierski.
(6) The address for these shareholders is: 16 Muncy Drive, W. Long
Branch, NJ 07746-1148.
(7) 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. The address for this shareholder is: Alliance
Corporate Financial Group, Inc., 1290 Avenue of the Americas, New York,
NY 10104.
(8) 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. The address
for this shareholder is: 150 S. Rodeo Drive, Suite 100, Beverly Hills,
CA 90212.
(9) Mr. Guadagno has entered into an Agreement dated May 12, 1998 with the
Company in connection with certain consulting services wherein Mr.
Guadagno agreed that he will not directly or indirectly (1) acquire or
agree, offer, seek or propose to acquire ownership of any securities
issued by the Company, or any rights or options to acquire such
ownership; (2) seek or propose to influence or control by proxy or
otherwise the management or policies of the Company; (3) contact or
otherwise communicate with the officers, directors or counsel to the
Company with respect to the business or affairs of the Company; and (4)
enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to any of the
foregoing. In connection with this Agreement, Mr. Guadagno also entered
into a separate Agreement dated May 12, 1998 wherein he irrevocably
granted to the Company's President his Proxy, with full power of
substition, to attend all meetings of shareholders of the Company and
to vote all shares of Common Stock, including shares of Common Stock
owned directly or indirectly and all shares of Common Stock
subsequently acquired by Mr. Guadagno.
31
<PAGE>
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
None.
32
<PAGE>
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
(I) GENERAL
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
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)
33
<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)
34
<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)
35
<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)
36
<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)
10.112 Fifth 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, 1999 (21)
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 (21)
</TABLE>
(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.
37
<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) 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, 1997.
(21) Filed herewith.
(B) REPORTS ON FORM 8-K:
During the last quarter of the 1998 fiscal year, the Company filed the
following reports on Form 8-K:
(i) Current Report on Form 8-K dated October 22, 1998 which reported the
postponement of the 1998 Shareholders meeting, the resignation of
Jeffrey Katz from the Board of Directors, the resignation of John P.
Hart from all offices and the Board of Directors, the appointment of
Dean Marotta to fill the vacancy on the Board of Directors, and the
notice of default under our Company's Senior Secured Notes.
(ii) November 20, 1998 which reported the appointment of Abraham S. Fischler
as Acting CEO and President and the promotion of Dean Marotta to Chief
Financial Officer.
(iii) December 28, 1998 which reported the change in independent auditors of
the Company for the fiscal year ended December 31, 1998 from
PricewaterhouseCoopers L.L.P. to Durland & Company, C.P.A.'s, P.A.
38
<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.
<TABLE>
<CAPTION>
AQUAGENIX, INC.
<S> <C>
DATE: June 22, 1999 By: /s/ Russell M. Thompson
----------------------------
Russell M. Thompson
Chief Executive Officer and President
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: June 22, 1999 /s/ Abraham S. Fischler, Ed.D.
------------------------------
Abraham S. Fischler, Acting Chairman of the Board,
DATE: June 22, 1999 /s/ Michael J. Baratta
----------------------
Michael J. Baratta, Director
DATE: June 22, 1999 /s/ Russell M. Thompson
-----------------------
Russell M. Thompson, Director
</TABLE>
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report ...................................................................................F-2
Report of Independent Accountants ..............................................................................F-3
Consolidated Balance Sheet......................................................................................F-4
Consolidated Statements of Operations...........................................................................F-5
Consolidated Statements of Stockholders' Deficiency.............................................................F-6
Consolidated Statements of Cash Flows...........................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Aquagenix, Inc.
We have audited the accompanying consolidated balance sheet of Aquagenix, Inc.
as of December 31, 1998 and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and the consolidated results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 19 to
the consolidated financial statements, the Company has sustained recurring
operating losses and negative cash flows from operating activities that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 19. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
March 12, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Directors of Aquagenix, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and of cash flows of Aquagenix, Inc. and Subsidiaries (the
Company), for the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Aquagenix, Inc. and Subsidiaries for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers and 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-3
<PAGE>
Aquagenix, Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1998
-------------------
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 169,582
Accounts receivable, net of allowance for doubtful accounts of
approximately $210,000 1,652,890
Inventories 319,606
Prepaid expenses and other 368,705
Net assets held for sale 171,811
-------------------
Total current assets 2,682,594
-------------------
OTHER ASSETS
Restricted cash 105,000
Property and equipment, net 1,508,161
Intangible assets, net 2,755,455
Deferred financing costs, net 115,174
Other assets 121,363
-------------------
Total other assets 4,605,153
-------------------
Total Assets $ 7,287,747
===================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Borrowings under credit agreement $ 640,000
Current maturities of long-term debt 732,890
Accounts payable 2,019,489
Estimated loss on uncompleted contracts 949,336
Other current liabilities 1,565,308
-------------------
Total current liabilities 5,907,023
-------------------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities 5,311,840
Other long-term liabilities 210,000
-------------------
Total long-term liabilities 5,521,840
-------------------
Total Liabilities 11,428,863
-------------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding 0
Common stock, $.01 par value, 10,000,000 shares authorized
5,326,058 issued and outstanding 53,261
Additional paid-in capital 19,586,942
Accumulated deficit (23,716,079)
Unearned compensation (65,240)
-------------------
Total Stockholders' Deficiency (4,141,116)
-------------------
Total Liabilities and Stockholders' Deficiency $ 7,287,747
===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
Aquagenix, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
------------------ --------------------
<S> <C> <C>
Revenues $ 16,346,480 $ 13,188,266
------------------ --------------------
Costs and expenses
Costs of services 13,697,638 8,444,450
Selling, general and administrative 7,432,988 5,695,327
Impairment losses of long-lived assets 1,251,163 0
Restructuring of consultant relationship 755,798 0
Termination of consultant relationship 932,000 0
Depreciation and amortization 1,501,911 981,748
Loss on assets held for sale 607,812 0
------------------ --------------------
Total costs and expenses 26,179,310 15,121,525
------------------ --------------------
Operating loss (9,832,830) (1,933,259)
------------------ --------------------
Other income (expenses)
Interest income 31,448 36,625
Interest expense (932,237) (801,304)
------------------ --------------------
Total other income (expenses) (900,789) (764,679)
------------------ --------------------
Loss before unusual item (10,733,619) (2,697,938)
Loss on termination of business acquisition (2,346,192) 0
Net Loss (13,079,811) (2,697,938)
================== ====================
Basic and diluted loss per weighted average common share $ (2.48) $ ( 0.61)
================== ====================
Weighted average common shares outstanding $ 5,273,292 $ 4,388,543
================== ====================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
Aquagenix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficiency
<TABLE>
<CAPTION>
Additional
Paid-in Accum.
Common Stock Capital Deficit
--------------------- ------------- -------------
Shares Amount
----------- ---------
<S> <C> <C> <C> <C>
BEGINNING BALANCE, January 1, 1997 4,163,391 41,634 12,671,620 (7,938,330)
Exercise of employees' 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 gains on securities 0 0 0 0
Net loss 0 0 0 (2,697,938)
---------- -------- ------------- -------------
BALANCE, December 31, 1997 4,724,617 47,246 15,539,235 (10,636,268)
----------- -------- ------------- -------------
Exercise of employees' and directors' stock
options 346,650 3,467 2,467,017 0
Common stock issued in connection with
professional services 113,333 1,133 799,867 0
Common stock issued as employee compensation
for relocation 5,000 50 32,188 0
Common stock issued in connection with initial
public offering, net 11,458 115 (115) 0
Exercise of warrants 125,000 1,250 748,750 0
Amortization of unearned compensation 0 0 0 0
Net loss 0 0 0 (13,079,811)
------------ -------- ------------- -------------
BALANCE, December 31, 1998 5,326,058 53,261 19,586,942 (23,716,079)
============ ======== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Total
Unearned gains on Stockholders'
Comp. securities Deficiency
------------ ------------ ---------------
<S> <C> <C> <C>
BEGINNING BALANCE, January 1, 1997 (230,058) 6,081 4,550,947
Exercise of employees' 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 gains on securities 0 (6,081) (6,081)
Net loss 0 0 (2,697,938)
------------ ------------ ---------------
BALANCE, December 31, 1997 (147,649) 0 4,802,564
------------ ------------ ---------------
Exercise of employees' and directors' stock
options 0 0 2,470,484
Common stock issued in connection with
professional services 0 0 801,000
Common stock issued as employee compensation
for relocation 0 0 32,238
Common stock issued in connection with initial
public offering, net 0 0 0
Exercise of warrants 0 0 750,000
Amortization of unearned compensation 82,409 0 82,409
Net loss 0 0 (13,079,811)
------------ ------------ ---------------
BALANCE, December 31, 1998 (65,240) 0 (4,141,116)
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
Aquagenix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,079,811) $ (2,697,938)
Adjustments to reconcile net loss to net cash provided by
(used in)operating activities:
Compensation expense for options granted and restructured 2,285,744 0
Provision for forfeited acquisition deposits 1,216,298 0
Depreciation and amortization 1,356,622 981,748
Provision for impairment losses of long-lived assets 1,395,067 0
Unearned compensation 82,409 0
(Gain) loss on sale of property and equipment 37,688 22,405
(Gain) loss on sale of securities 0 (9,785)
Assets held for sale (171,810) 0
Provision for losses on claims, receivables and advances 1,252,345 132,250
Deferred financing costs 43,686 0
Consulting fees 104,511 36,250
Estimated loss on uncompleted contracts 949,336 0
Net change in operating assets and liabilities 3,540,859 (499,739)
------------------- -------------------
Net cash provided by (used in) operating activities (987,056) (2,034,809)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition escrow fund deposits (1,830,000) 0
Refund from acquisition escrow fund 1,283,702 0
Proceeds from sale of property and equipment 242,107 106,577
Proceeds from sale of marketable securities 0 162,196
Advances to officers (609,346) 0
Cash paid for acquisitions, net of cash acquired 0 (201,132)
Purchase of property and equipment (163,632) (1,199,221)
------------------- -------------------
Net cash provided by (used in) investing activities (1,077,169) (1,131,580)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds under credit agreements 540,000 841,141
Proceeds from other borrowings 370,000 968,742
Payment of credit agreements (450,000) (695,556)
Payment of notes payable and long-term debt (568,453) (503,375)
Advances for financing arrangements (225,000) 0
Payment of financing costs 0 (81,999)
Issuance of common stock and exercise of options and warrants 1,767,976 2,650,991
------------------- -------------------
Net cash provided by (used in) financing activities 1,434,523 3,179,944
------------------- -------------------
Net increase (decrease) in cash (629,702) 13,555
CASH, beginning of period 799,286 785,731
------------------- -------------------
CASH, end of period $ 169,582 $ 799,286
=================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash $ 747,729 $ 691,436
=================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-7
<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 1998 and 1997,
revenues from governmental customers were approximately 29% and 23%,
respectively. During 1998 and 1997, five customers with whom the Company
has annual contracts represented approximately 15% and 11% of revenues,
respectively.
In December 1998, the Company made a decision to close the Arizona and
Alabama branches and sell certain related assets, see Note 17(b).
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.
Revenue Recognition Revenue from the aquatic and industrial vegetation
management services are generally billed monthly and are 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 is recognized on the percentage of
completion method, measured by the percentage that costs incurred to date
bear on 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 years. 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
F-8
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Property and Equipment (continued) 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.
The Company found that the estimated remaining useful life of a portion
of vehicles required adjustment. The Company had traditionally
established estimated useful lives ranging from seven to ten years for
its vehicles. During the quarter ended December 31, 1998, the Company
changed its estimate of the useful life on this equipment purchased prior
to December 31, 1998 to a four-year original life. This change in
estimate caused a $523,781 increase to depreciation expense, or $.09 per
share, which was recognized during the quarter ended December 31, 1998.
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 has identified an impairment as of December 31,
1998, see Note 9.
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 approximate fair
value, due to the short-term maturities of these items. The carrying
amounts of the long-term debt approximate fair value because the interest
rates on the instruments are comparable to current market rates.
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 12).
F-9
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Reclassification of Financial Statement Presentation Certain
reclassifications have been made to the 1997 financial statements and
related notes to conform with the 1998 presentation.
Recently Issued 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 1998 or 1997, as their effect would be
anti-dilutive.
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.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosure
about Pensions and Other Postretirement Benefits." Among other
provisions, it standardizes certain disclosure requirements for pension
and other postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan assets, and
eliminates certain other disclosures. The standard is effective for
fiscal years beginning after December 15, 1997. Since the standard
applies only to the presentation of pension and other postretirement
F-10
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Recently Issued Accounting Standards (continued) benefit information and
the Company does not currently offer such plans, the statement should not
have any impact on the Company's financial position, results of operation
or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires
that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and those instruments must be
measured at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for, depending on the
use of the derivative and whether it qualifies for hedge accounting. This
standard is effective for fiscal years beginning after June 15, 1999,
though earlier adoption is encouraged and retroactive application is
prohibited. Implementation of this standard should not have an impact on
its financial position, results of operations, or cash flows.
(3) Property and Equipment Property and equipment consist of the following at
December 31, 1998:
Machinery and equipment $ 2,494,079
Vehicles 501,996
Office equipment 784,435
Leasehold improvements 123,743
-----------
$ 3,904,253
Accumulated depreciation and amortization (2,396,092)
$ 1,508,161
===========
(4) Intangible Assets Intangible assets consist of the following at December 31,
1998:
Goodwill $ 2,892,651
Covenants not to compete 180,000
Deferred acquisition costs 79,046
Intangible contract rights 76,000
Organization costs 26,724
-----------
$ 3,254,421
Accumulated amortization (498,966)
$ 2,755,455
===========
(5) Other Current Liabilities Other current liabilities consist of the following
at December 31, 1998:
Billings in excess of costs $ 317,860
Accrued interest 294,376
Accrued restructuring costs 191,914
Liability on stock price guarantee 200,000
Other 561,158
-----------
$ 1,565,308
===========
(6) Credit Agreement The Company has credit agreements which provide for
aggregate borrowings in 1998 of up to $1,000,000. Interest is payable on
the outstanding balance at the bank's prime rate plus 1.25% (9.00%) at
December 31, 1998. 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-11
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(7) Long-Term Debt Long-term debt consists of the following at December 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
Note payable, bearing interest at 7%, requiring monthly payments of
principal only. Interest is payable annually calculated on December 31
each year. Promissory note is due and payable on demand. $ 100,000
Note payable in connection with the purchases of assets, bearing interest
at 7%, requiring monthly payments of principal and interest through
December 1, 1999. 25,214
$5,000,000, net of discount, 12.5% senior secured note due October 31,
2003. Interest is payable monthly. The note is collateralized by a
second security interest in all of the Company's assets. 4,906,640
Vehicle and equipment notes to banks and financial institutions, bearing
interest at rates ranging from 7.50% to 9.75%, principal payable in
varying installments through 2002. 25,414
Term notes bearing interest at 9.75% and 9.5%. Principal and interest
payable monthly. Term notes mature April 10 and October 3, 2000, with
the remaining note maturing February 3, 2002. Collateralized by
substantially all of the Company's assets. 514,749
Equipment obligations under capital leases bearing interest ranging from
10.8% to 12.1%, expiring December 1999 through May 2001. 472,713
-----------
6,044,730
Less current maturities (732,890)
-----------
Total long-term debt $ 5,311,840
===========
Aggregate maturities of long-term debt are as follows at December 31, 1998:
1999 $ 732,890
2000 336,273
2001 57,677
2002 11,250
2003 4,906,640
-----------
$ 6,044,730
===========
</TABLE>
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, 1998 and 1997, the unamortized
discount amounts to $93,360 and $112,676, 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
20).
F-12
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(7) Long-Term Debt (continued) The Company's 12.5% senior secured notes are
subordinated to the term notes with a total of $514,749 outstanding as of
December 31, 1998, and the credit agreement (see Note 6).
Future minimum lease payments under capital lease obligations are as
follows at December 31:
<TABLE>
<CAPTION>
<S> <C>
1999 $310,556
2000 224,373
2001 2,386
---------
537,315
Less amounts representing interest (64,602)
---------
472,713
Capital lease obligations included on current maturities (269,319)
Long-term capital lease obligations ---------
$ 203,394
=========
</TABLE>
(8) Lease and Other Commitments The Company is obligated, under noncancelable
operating leases, for various branch locations, vehicles and equipment.
Total rent expense was approximately $1,191,115 and $786,933 for the
years ended December 31, 1998 and 1997, respectively. Future minimum
annual lease payments under the operating leases are as follows at
December 31:
1999 $ 674,502
2000 431,996
2001 225,264
2002 1,657
----------
$1,311,578
==========
(9) Impairment Losses During 1998, the Company experienced a significant loss
of revenues relating to ongoing operations of certain business
acquisitions completed in prior years. Accordingly, the Company evaluated
the ongoing value of certain intangible assets recorded in connection
with those acquisitions, namely Recurring Service Contracts and Goodwill.
Based on the evaluation, the Company determined that assets with a
carrying value of $1,431,000 were impaired and wrote them down by
$1,251,163 to their fair value. Fair value was based on estimated future
cash flows to be generated from recurring revenues of the businesses
acquired, discounted at an appropriate rate of interest.
(10) Restructuring Charges During the third quarter of 1998, the Company
initiated a restructuring plan to reduce costs and increase future
operating efficiency. The plan consists primarily of reducing management
and administrative costs, negotiating favorable payment arrangements with
the Company's vendors and creditors, and consolidating a portion of the
operation. In connection with this plan, approximately 16 employees (8%
of the Company's workforce) have been terminated. Restructuring charges
of $755,798 include employee termination benefits, estimated fees of
outside consultants engaged by the Company to implement the
restructuring, estimated legal fees in connection with the restructuring,
and estimated charges related to auto lease terminations. Restructuring
charges include the dissolution of $155,000 of notes receivable from the
Company's former Chief Executive Officer, appointed June 2, 1998, who
resigned on October 23, 1998. In connection with this resignation, the
Company entered into a Severance, General Release and Separation
Agreement which provides for the future dissolution of the notes,
provided the former officer complies with the terms of the agreement.
(11) Termination of Business Acquisition On November 30, 1997, the Company
entered into a Stock Purchase Agreement (the "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. Pursuant to the Stock
Purchase Agreement, an Escrow Agreement was also entered into on November
30, 1997 requiring the Company to place $670,000 in
F-13
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(11) Termination of Business Acquisition (continued) escrow pending the
closing of the purchase of Lewis by January 31, 1998. On January 29,
1998, the Company entered into an Amended Stock Purchase Agreement and
Escrow Agreement 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 account to $2,500,000 on February 4, 1998. On April
17, 1998, the Company entered into a Termination Agreement with the owner
of Lewis. The Termination Agreement provided for (i) the termination of
the original Agreement and Amended Stock Purchase Agreement, (ii) the
termination of the original and amended Escrow Agreement and (iii) the
distribution of $1,250,000 of the funds held in escrow to the Lewis owner
with the balance, including interest earned, distributed to the Company.
In order to raise the deposit required by the Amended Stock Purchase and
Escrow Agreement, the Company restructured stock options previously
granted to certain officers, directors, employees and former employees of
the Company. Such restructuring involved the resetting of option exercise
prices to amounts below the current market at that time and the
acceleration of the date on which certain options could be exercised.
Accordingly, the Company recognized compensation expense for options
restructured, based on the difference between the quoted market price of
the Company's stock at the date of grant and the amount the grantees paid
to acquire the stock. In connection with the Lewis transaction, the
Company recognized $752,225 of compensation expense.
The following summary presents the nature of the loss recognized pursuant
to the Lewis termination agreement:
Provision for forfeited acquisition escrow deposits $1,216,298
Compensation expense related to the restructuring
of stock options 752,226
Professional and consulting fees 377,668
----------
$2,346,192
==========
(12) 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. Only employee
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.
F-14
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(12) Employee Stock-Based Compensation (continued) 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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Pro forma net loss:
As reported $ (13,079,811) $(2,697,938)
Pro forma $ (13,347,351) $(3,380,593)
Pro forma net loss per share:
As reported $ (2.48) $ (0.61)
Pro forma $ (2.53) $ (0.77)
</TABLE>
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 1998 and 1997,
respectively: no dividend yield for both years; expected volatility of
the underlying stock of from 250% to 1,467%; risk-free interest rate of
5.50% covering the related option periods; and expected lives of the
options of 8 to 10 years based on the related option periods.
A summary of the status of the Plans as of December 31, 1998 and 1997,
and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 768,400 $4.99 721,730 $4.60
Granted 354,000 1.29 233,250 5.51
Exercised (346,650) 3.28 (152,680) 4.11
Cancelled (427,950) 4.27 (33,900) 4.40
--------
Outstanding at end of year 347,800 2.89 768,400 4.99
======= ========
Options exercisable at year-end 130,270 365,270
Weighted-average fair value
of options granted during the year $2.80 $3.27
</TABLE>
(13) Non-Employee Stock-Based Compensation During 1998, the Company issued
200,000 warrants and 50,000 options for its common stock as consideration
for consulting services. The Company used the Black-Scholes pricing model
to compute related consulting expense. An amount of $195,000 was recorded
as consulting expense during 1998. The Company also issued a total of
136,458 shares of common stock in 1998 to three
F-15
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(13) Non-Employee Stock-Based Compensation (continued) financial consultants
resulting from the exercise of warrants issued to them in 1994. The
Company received total cash proceeds of $750,000 from the exercise of
these warrants. An additional 118,333 shares of common stock were issued
during 1998 related to consulting and legal services. There was
approximately $833,238 in expense recorded during 1998 related to the
shares issued.
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 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 $82,409 were
amortized during 1998 and 1997, respectively, and were included in
depreciation and amortization.
As of December 31, 1998, a total of 2,465,046 warrants were outstanding
at exercise prices ranging from $.50 to $7.50 per share. Of this total,
586,349 warrants were granted to consultants, 200,000 of which were
described above, and 351,197 warrants granted to the Company's senior
secured note, see Note 7. The remaining 60,000, 1,125,000 and 342,500
blocks of warrants are described in Note 14.
As of December 31, 1998, a total of 90,000 options were outstanding to
consultants at a weighted average exercise price of $3.19 and have
expiration dates ranging from May 2000 to December 2003.
(14) Stockholders' Equity During 1997, the Company issued 60,000 warrants with
a term of two years to an investor for the purchase of common stock which
were immediately exercisable at $5.79 per warrant.
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 under 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 that the Company gives notice has been at least 130%
($7.80) of the then effective exercise price of the warrants. 125,000 of
these warrants were exercised during 1998, leaving 1,125,000 outstanding
as of December 31, 1998.
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 $6.00
per share, which expire September 12, 1999. 95,000 of these warrants were
exercised during 1998, in exchange for 11,458 shares of common stock,
leaving approximately 342,500 warrants outstanding as of December 31,
1998.
(15) Cash Flow Information The net changes in operating assets and
liabilities, net of effects of acquisitions, in the accompanying
statements of cash flows for the year ended December 31, 1998 are as
follows:
F-16
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(15) Cash Flow Information (continued)
(Increase) decrease in:
Accounts receivable $ (810,149)
Inventories 397,158
Prepaid expenses and other 233,712
Accounts receivable, non-current 1,269,431
Other assets 852,222
Increase (decrease) in:
Accounts payable 1,193,562
Other current liabilities 404,923
-----------
$ 3,540,859
===========
During 1998, the Company did not enter into any capital leases; during
1997, the Company recorded equipment under capital leases in the amount
of $830,396
(16) 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:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Income tax benefit at Federal statutory rate $( 1,445,678) $(1,033,040)
Change in valuation allowance 4,789,264 1,056,038
Permanent and other differences, net $ (3,343,586) (22,998)
------------ -----------
Income tax benefit $ 0 $ 0
============ ===========
</TABLE>
The components of the net deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful assets $ 80,382 $ 69,998
Estimated loss from discontinued operations 38,000 38,000
Net operating losses 8,850,240 3,963,741
Other, net 273,753 90,304
------------- -----------
Total deferred tax assets 9,242,375 4,162,043
------------- -----------
Deferred tax liabilities:
Property and equipment (45,284) (227,919)
Customer contracts (976,046) (502,343)
------------- -----------
Total deferred tax liabilities (1,021,330) (730,262)
------------- -----------
Net deferred tax assets (8,221,045) 3,431,781
Valuation allowance $ (8,221,045) (3,431,781)
------------- -----------
Net deferred tax liabilities $ 0 $ 0
============= ===========
</TABLE>
The Company has a net operating loss carryforward of approximately $23.1
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.
As a result of certain ownership changes, the Company may be subject to
an annual limitation on the utilization of its net operating loss
carryforward pursuant to section 382 of the Internal Revenue Code.
F-17
<PAGE>
Aquagenix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(17) Facility Closings
A. 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 net liabilities relating to these facilities
aggregated to $92,447 at December, 1998.
B. In December, 1998, the Company made a decision to close two
facilities, the Alabama and Arizona branches, that operate in its core
environmental business and in January of 1999, the Company sold the
related assets for approximately $172,000. The following represents the
assets held for sale and the related provision for losses.
Assets:
Inventory $ 76,539
Property and equipment, net 265,733
Intangibles, net 486,495
---------
Total Assets 828,767
---------
Liabilities:
Provision for Assets held for sale 656,956
---------
Total Liabilities 656,956
---------
Net assets held for sale $ 171,811
=========
(18) Loss Contingencies During 1998, the Company entered into certain
long-term contracts in the State of California. Based on the provisions
of these contracts, the Company's remaining costs exceed potential
revenues by approximately $1,636,000, which was charged to income.
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.
(19) Going Concern The Company has incurred losses from operations since
inception, which have resulted in negative cash flows from operating
activities and the continuing need for additional financing. In addition,
the Company has negative working capital and negative net worth. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. In order to continue as a going concern, the Company
must obtain additional financing, which it is endeavoring to do through
the issuance of additional securities.
Subsequent to year end, the Company closed two facilities (see note 17B),
and - has continued to phase out its California operations.
The Company is currently seeking additional funding via a Private
Placement. There is no assurance that the Company can complete these
financings or that profitable operations can be achieved. The inability
to obtain adequate additional financing when needed, would have a
material adverse effect on the Company, including requiring the Company
to significantly curtail or cease its operations. The financial
statements do not include any adjustments relating to the recoverability
or classification of recorded asset amounts or the amounts or
classification of liabilities that might be necessary as a result of the
above uncertainty.
F-18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
10.112 Fifth 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, 1999.
27.1 Financial Data Schedule
AQUAGENIX, INC.
Amendment No. 5
12.50% Senior Secured Notes Due October 31, 2003
AMENDMENT NO. 5 (this "Amendment"), dated as of March 31, 1999, by and among
AQUAGENIX, INC. (the "Company"), a Delaware corporation and THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES (the "Note holder").
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 amendments to the Existing Note Purchase
Agreement, the Warrant Agreement and the Warrant Certificates.
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 Note Purchase Agreement.
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 April 1, 1999 through
March 31, 2000.
(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 exclude a Consolidated Net Worth requirement for the period
from and including September 30, 1998 through March 31, 2000.
1
<PAGE>
(c) Capital Expenditure (Section 7.6 of the Note Purchase
Agreement)
Section 7.6 of the Existing Note Purchase Agreement hereby
amended by substituting "Five Hundred Thousand Dollars ($500,000)" in
place of "One Million Two Hundred Fifty Thousand Dollars" in each place
where the latter language appears.
(d) Debt Restructure (Section 7.7 of the Note Purchase
Agreement). Section 7.7 of the Existing Note Purchase Agreement is
hereby amended to read in its entirety as follows.
7.7 Debt Restrictions.
The Company will not, and will not permit any Subsidiary to,
directly or indirectly, create, incur, issue, assume, guarantee or
otherwise be or become liable with respect to any Debt, except:
(a) the Notes;
(b) Debt owing to Union Planter Bank on April 1, 1999, and any
refinancing of such Debt in an aggregate amount not exceeding One
Million Five Hundred Thousand Dollars ($1,500,000); and
(c) Other Debt outstanding on April 1, 1999 not exceeding Six
Hundred Twenty Three Thousand Dollars ($623,000) in the aggregate.
2.2 Waiver of Defaults; Amendments to Payment Requirements.
The Noteholder hereby waives all existing payment defaults and all
existing covenant defaults occasioned by failure to comply with Section 7.4 and
7.5 of the Existing Note Purchase Agreement. All interest and consent fees
presently accrued and unpaid shall be due and payable in full March 31, 2000.
The Company hereby reaffirms its obligation to pay interest on the
Notes on the final day of each month. The Company also agrees to pay a consent
fee (the "Consent Fee") of $5,000 on the final day of each month beginning April
30, 1999 through and including March 31, 2000. Interest and the Consent Fee
shall be paid by wire transfer of immediately available funds each month in a
single payment. If on four occasions during said period the Company fails to
make such payment in full when due, an Event of Default shall exist under
Section 9.1 (b) of the Existing Note Purchase Agreement.
2
<PAGE>
2.3 Amendments to the Warrants.
(a) The defined terms "Expiration Date" and "Initial Purchase
Price" set out in Section 7.1 of the Warrant Agreement are hereby
amended and restated to read in their entirety as follows:
"Expiration Date" - means 5:00 p.m. (Eastern Standard Time) on
March 31, 2004.
"Initial Purchase Price" - means $0.75 per share."
The Warrant Certificates and the form of Warrant Certificates
attached to the Warrant Agreement as Attachment as Attachment A are also
amended to be consistent with the foregoing amendments.
(b) The Company will at the request of the Noteholder execute
and deliver new Warrant Certificates reflecting the foregoing
amendments.
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 Enforceablility.
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 and the Warrant Agreement and Warrant Certificates as amended hereby
constitute valid and binding obligations fo the Company, enforceable in
accordance with their 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 Government 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 or the Warrant Agreement or Warrant Certificates as amended
hereby 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.
3
<PAGE>
3.4 Subsidiaries and Affiliates.
Attached hereto a Schedule 3.4 is a true and correct listing of the
Company's Subsidiaries and Affiliates, indicating (in the case of Subsidiaries)
the percentage of the Company's ownership therein.
4. MISCELLANEOUS
4.1 Scope of Amendment.
Except as expressly provided herein,
(a) no other provisions of the Existing Note Purchase
Agreement, the Warrant Agreement or the Warrant Certificates 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 provisions of the Existing Note Purchase Agreement, the
Warrant Agreement and the Warrant Certificates 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 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 of Default under the Amended Note Purchase Agreement.
4.2 References to Note Purchase Agreements.
Upon the effectiveness of this Amendment, each reference to the "Note
Purchase Agreement" the "Warrant Agreement" and the "Warrant Certificates" 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,
the Warrant Agreement and the Warrant Certificates as amended hereby.
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.
4
<PAGE>
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, 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 as of the date hereof, only
when all of the following have occurred:
(a) the execution of a counterpart hereof by the Company, each
of the Subsidiaries and the Noteholder,
(b) the execution by the Company of one or more new Warrant
Certificates evidencing the amendments made by Section 2.3 hereof, and
(c) the delivery of such counterpart and such Warrant
Certificates to special counsel for the Noteholder, William E. Kelly,
Esq., Hebb & Gitlin, One State Street, Hartford, CT 06104, Fax:
(860) 240-2800, (regardless of whether any or all of such executions
and deliveries occur before or after the date hereof).
5
<PAGE>
Schedule 3.4
Affiliates and Subsidiaries
---------------------------
I. Affiliates
----------
The following own the approximate percentage of the Company's Common
Stock set opposite its name:
Steel Partners, II, L.P. 14.3%
Nicholas Berggnuen 9.3%
Jane and Pasquale Guadagno 6.4%
Imperial Capital, L.L.C. 6.1%
II Subsidiaries
------------
<TABLE>
<CAPTION>
Jurisdiction of %Owned by
Name of Subsidiary Incorporation Company
------------------ --------------- ---------
<S> <C> <C>
Aquagenix Land Water Technologies, Inc. Florida 100%
Florida Underground Petroleum Tank Florida 100%
Contractors, Inc.
Haas Environmental Services, Inc. New Jersey 100%
</TABLE>
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 5 has been duly executed as of the date
first written above.
AQUAGENIX, INC.
By : /s/Russell M. Thompson
---------------------------
Name: Russell M. Thompson
Title:President & CEO
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By:/s/James C. Pendergast
- -------------------------
Name: James C. Pendergast
Title: Investment Officer
Aquagenix Land-Water Technologies, Inc. (f/k/a Environmental Waterway
Management, Inc.) Florida Underground Petroleum Tank Contractors, Inc. and Haas
Environmental Services, Inc. each consent to eh 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/ Russell M. Thompson
Name:Russell M. Thompson
Title: President
FLORIDA UNDERGROUND PETROLEUM
TANK CONTRACTORS, INC.
By: /s/ Russell M. Thompson
Name:Russell M. Thompson
Title:President
HAAS ENVIRONMENTAL SERVICES, INC.
By: /s/ Russell M. Thompson
Name: Russell M. Thompson
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the Financial
Statements of Aquagenix, Inc. as of December 31, 1998 and is qualified in its
entirety by reference to such financial statements and related footnotes.
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