U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996. TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ . Commission File No. 0-24490 AQUAGENIX, INC. (Exact name of small business issuer as specified in its charter) Delaware 65-0419263 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6500 Northwest 15th Avenue, Fort Lauderdale, Florida 33309 (Address of principal executive offices) (305) 975-7771 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No The number of shares outstanding of the issuer's Common Stock, $.01 Par Value, as of October 31, 1996 was 3,934,058. Transitional Small Business Disclosure Format: Yes No AQUAGENIX, INC. FORM 10-QSB INDEX PART I. FINANCIAL INFORMATION PAGE Item 1: Financial Statements Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited) 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 1995 and September 30, 1996 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and September 30, 1996 (unaudited) 5 Notes to Consolidated Financial Statements 6-8 Item 2: Management's Discussion and Analysis or Plan of Operation 9-15 PART II. OTHER INFORMATION 16 SIGNATURES 17 AQUAGENIX, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, September 30, Assets 1995 1996 (Unaudited) Current assets: Cash and cash equivalents $ 687,183 $ 1,342,237 Marketable securities 639,095 0 Accounts receivable, net of allowance for doubtful accounts of $40,632 and $67,449, respectively 997,567 955,985 Income tax receivable 618,003 0 Inventories 370,497 391,063 Net assets of discontinued operations 0 141,682 Prepaid expenses and other 254,575 557,713 Total current assets 3,566,920 3,388,680 Property and equipment, net 1,746,016 1,968,863 Intangible assets, net 3,222,013 4,421,168 Deferred financing costs, net 146,875 220,977 Other assets 93,239 2,126,862 Total assets $ 8,775,063 $ 12,126,550 Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 628,578 $ 116,375 Borrowings under credit agreements 522,317 404,415 Accounts payable 562,712 963,952 Net liabilities of discontinued operations 449,550 0 Other current liabilities 411,438 207,549 Total current liabilities 2,574,595 1,692,291 Long-term debt, net of current maturities 5,032,388 5,228,936 Total liabilities 7,606,983 6,921,227 Stockholders' equity: Preferred stock, par value $.01, 1,000,000 shares authorized, no shares issued and outstanding 0 0 Common stock, par value $.01, 10,000,000 shares authorized, 3,210,367 and 3,934,058 shares issued and outstanding, respectively 32,104 39,341 Additional paid-in capital 8,419,164 11,600,856 Retained earnings (deficit) (7,332,385) (6,434,874) Unrealized gain on securities 49,197 0 Total stockholders' equity 1,168,080 5,205,323 Total liabilities and stockholders' equity $ 8,775,063 $ 12,126,550 AQUAGENIX, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months End Sept 30, Sept 30 1995 1996 1995 1996 Revenues - Aquatic management operations $ 1,423,540 $ 3,073,286 $ 4,278,884 $ 7,805,398 Costs and expenses: Costs of services 805,647 1,948,556 2,210,327 4,352,527 Selling, general and administrative 802,419 799,960 2,130,171 2,203,008 Depreciation and amortization 49,997 150,966 139,585 429,998 Total costs and expenses 1,658,063 2,899,482 4,480,083 6,985,533 Operating (loss) income (234,523) 173,804 (201,199) 819,865 Interest income 53,992 10,552 165,072 53,845 Interest expenses (7,995) (167,676) (25,604) (490,085) (Loss) income from continuing operations before income taxes (188,526) 16,680 (61,731) 383,625 Income tax (benefit) provision (64,099) 0 50,011) 0 (Loss) income from continuing operations (124,427) 16,680 (11,720) 383,625 Discontinued operations: Loss from environmental remediation business segment net of income taxe (1,598,493) 0 (1,877,043) 0 Change in allowance for estimated phase-out losses from environmental remediation segment 0 0 0 464,689 Net (loss) income $ (1,722,920) $ 16,680 $ (1,888,763) $ 848,314 Earnings (loss) per common and common equivalent shares: Continuing operations - primary $ (0.04) $ 0.00 $ (0.00) $ 0.11 Continuing operations - assuming full dilution (0.04) 0.00 (0.00) 0.11 Discontinued operations (0.51) 0.00 (0.56) 0.13 Net (loss) income per common share (0.55) 0.00 (0.56) 0.24 Weighted average common and common equivalent shares outstanding: Primary 3,126,887 4,009,739 3,342,194 3,551,489 Assuming full dilution 3,126,887 4,015,43 3,342,194 3,555,277 AQUAGENIX, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1995 1996 Cash flows from operating activities: Net (loss) income $ (1,888,763) $ 848,314 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 139,585 429,998 (Gain) loss on sale of property and equipment 7,516 (5,031) Gain on sale of securities (24,961) 0 Provision for doubtful accounts 18,625 80,595 Consulting fees 0 88,930 Discontinued operations 1,207,324 (550,939) Net change in operating assets and liabilities (936,675) (1,597,270) Net cash used in by operating activities (1,477,349) (705,403) Cash flows from investing activities: Proceeds from sale of marketable securities 1,855,972 624,187 Proceeds from sale of property and equipment 16,315 280,896 Cash paid for acquisitions (16,724) (51,221) Purchase of marketable securities (7,583) 0 Purchase of property and equipment (231,859) (717,773) Net cash provided by investing activities 1,616,121 136,089 Cash flows from financing activities: Repayments of credit agreements 357,394 (117,902) Payments of notes payable and long-term debt (166,203) (662,730) Proceeds from other borrowings 9,885 255,000 Issuance of common stock 0 1,750,000 Net cash provided by financing activities 201,076 1,224,368 Cash and cash equivalents: Increase 339,848 655,054 Beginning balance 270,847 687,183 Ending balance $ 610,695 $ 1,342,237 AQUAGENIX, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements, which are for interim periods, do not include all disclosures provided in the audited annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 of Aquagenix, Inc. (the "Company"), as filed with the Securities and Exchange Commission. The December 31, 1995 financial statements were derived from audited consolidated financial statements, but do not include all disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 2. Business Combination On June 7, 1996, the Company issued 270,000 shares of common stock and paid $150,000 in cash for all the outstanding common stock of Aquatic and Right of Way Control, Inc. ("ARC"). The Company entered into a two -year employment agreement with one of the former shareholders of ARC. The Company has accounted for the acquisition using the purchase method of accounting and the excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over 10-25 years. The results of operations of the acquired company have been included in the consolidated financial statements from the date of acquisition. The following unaudited pro forma information combines the consolidated results of operations of the Company and ARC as if the acquisition had occurred on January 1, 1995: Nine Months Ended September 30, 1995 1996 Revenues - Aquatic management operations $ 5,192,969 $ 8,201,028 Income from continuing operations $ 118,203 $ 424,301 Earnings per common and common equivalent share - assuming full dilution $ 0.03 $ 0.11 The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place at the beginning of the period, nor are they indicative of the results of future combined operations. ARC was a leading provider of industrial vegetation and utility right of way management services in Florida, Georgia and Alabama. These services include the control of noxious weeds in the right of way areas adjacent to distribution and transmission power lines. The Company intends to continue the existing business and to further develop the industrial vegetation and utility right of way management services previously conducted by ARC. 3. Discontinued Operations On April 25, 1996, the Company sold certain assets and liabilites of Haas Environmental Services, Inc. ("HES") to Heart Environmental Services (the "Buyer"), a New Jersey corporation for a total consideration of $1,907,021. The aggregate consideration comprises (i) $681,000 in cash, (ii) a three- year promissory note of $600,000 issued by the Buyer, bearing interest at 9% per annum and collaterized by the pledge of 499 shares of the Buyer's Common Stock pursuant to a Stock Pledge Agreement, (iii) the cancellation of total obligations due to H&H Investments Corporation, Mr. Eugene Haas and Mr. Robert E. Haas (collectively known as the "Haas Shareholders") which amounted to $626,021. No pro forma information has been provided for the disposal of HES since the disposal of this subsidiary were treated as discontinued operations in 1995. The gain realized from the sale of HES was partly offset by the additional provision made by the Company during the nine months ended September 30, 1996, for estimated phase-out losses relating to the discontinuation of the remaining remediation subsidiary, Florida Underground Petroleum Tank Contractors, Inc. ("FUPTC"), which includes anticipated operating losses from December 1995 to the expected date of disposal ("the phase-out period").The phase-out period has been extended to allow more time to complete the outstanding contractual obligations and to locate a buyer for its remediation assets. Management currently estimates that the net realizable value of its remaining remediation business approximates the net book value of its net assets. However, higher than anticipated losses from the completion of the remaining contractual obligations and higher discontinuation expenses during the phase-out period combined with the inability to locate a buyer for FUPTC may result in higher than anticipated phase-out losses which may negatively year-to-date results. 4. Earnings Per Share Both primary and fully diluted earnings per common and common equivalent shares were computed by dividing net income by the weighted average number of shares outstanding after giving effect to dilutive stock options and warrants to purchase common stock. 5. Income Taxes No income taxes have been provided for the three months and nine months ended September 30, 1996 since the Company has a net operating loss carryforward which is available to offset taxable income. 6. Capital Lease During April 1996, the Company entered into a sale and leaseback agreement, for a principal amount of $300,000, with a commercial equipment financing company to refinance the capital expenditures for application equipment. 7. Private Placements During June 1996, the Company completed three equity private placements totaling 375,000 shares of the common stock of the Company at a price of $4 per share for a total cash consideration of $1,500,000. Of the total, 125,000 shares were issued to Mr. Jeffrey T. Katz, a director of the Company. On July 23, 1996, the Company completed a private placement of 62,500 shares of common stock at a purchase price of $4 per share for an aggregate amount of $250,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION General Aquagenix, Inc. (the "Company"), through its wholly-owned subsidaries, provides aquatic and industrial vegetation management services to both governmental and commercial customers in Florida, Georgia, North and South Carolina, Alabama and Tennessee. The Company's operations have grown substantially since 1994 as a result of internal growth and the selective acquisition of privately held waterway and vegetation management companies in Florida, Georgia and the Carolinas. The Company has adopted a growth strategy which includes the acquisition of companies offering similar services, eliminating duplicative expenses and integrating the acquired operations into the Company's existing business. The acquisition of Aquatic & Right of Way Control, Inc. ("ARC Acquisition") in June 1996 has contributed $581,866 of revenues from right of way contracts in the current quarter. ARC is a leading provider of industrial vegetation and utility right of way management services in Florida, Georgia and Alabama. These services include weed control and growth regulation in right of way areas adjacent to distribution and transmission power lines. The Company has entered into a two-year employment agreement with ARC's former shareholder/president and he will continue to develop the industrial right of way business as well as to ensure continuity and goodwill. In addition to the typical aquatic vegetation management customers, the Company has begun targeting its marketing efforts at utilities and transportation authorities throughout the Southeast and Sunbelt states to secure right of way contracts for the regions' extensive network of power lines and highways. There has been a growing trend in the outsourcing of work traditionally performed in-house by these governmental and quasi- governmental agencies and private utility companies. In July 1996, the Company secured a $1 million three-year contract with Florida Power & Light Company, Florida's largest electric utility company, for the provision of industrial vegetation management services to their various power substations throughout Florida. Results of Operations Three Months Ended September 30, 1995 Compared to Three Months Ended September 30, 1996 Revenues. The Company's revenues increased by $1,649,746, or 115.9%, from $1,423,540 during the three months ended September 30, 1995 to $3,073,286 during the three months ended September 30, 1996. The increase in revenues was primarily attributable to an increase in the number of recurring waterway and industrial vegetation management contracts as well as wetland planting contracts. This was mainly brought about by expansion of its customer base in Florida, Georgia, North and South Carolina, Alabama and Tennessee as a result of intensive marketing efforts and acquisitions. Cost of services. Cost of services increased by $1,142,909, or 141.9%, from $805,647 during the three months ended September 30, 1995 to $1,948,556 during the three months ended September 30, 1996. The increase in cost of services was mainly attributable to increased chemicals, insurance, fuel and labor costs which was directly a result of the Company's expanding operations. As a percentage of revenues, cost of services have increased from 56.6% in the third quarter of 1995 to 63.4% in the third quarter of 1996. The reduced gross margin was mainly attributable to higher chemical and labor costs as a result of the particularly hot summer aggravated by a lower than normal rainfall experienced in Florida during the third quarter of 1996. This caused an exceptionally rapid growth of algae and aquatic weeds. In addition, a higher mix of industrial vegetation management contracts in the third quarter of 1996 as compared to the corresponding quarter of 1995 also contributed to the lower gross margins. Gross margins from industrial vegetation management contracts are generally lower than the aquatic vegetation management contracts as they involve a higher usage of chemicals. Selling, general and administrative. Selling, general and administrative expense decreased by $2,459, or 0.3%, from $802,419 during the three months ended September 30, 1995 to $799,960 during the three months ended September 30, 1996. The decrease in selling, general and administrative expenses was due mainly to on-going cost control measures taken in relation to general corporate expenses which have significantly offset the higher operating expenses associated with the expanding operations and the assimilation of the ARC's operations. As a percentage of revenues, such expenses have decreased from 56.4% in 1995 to 26.0% in 1996. This was attributable to operating efficiencies and economies of scale achieved following the ARC, AmerAquatic and L&L acquisitions and internal growth experienced by the Company. The main factors contributing to the decrease in selling, general and administrative expenses as a percentage of revenues as compared to 1995 include reduced consulting and professional fees, and lower public relations and travel expenses resulting from the streamlining of corporate operations. Depreciation and amortization. Depreciation and amortization expense increased from $49,997 in the third quarter of 1995 to $150,966 in the third quarter of 1996. Such expense as a percentage of revenues increased from 3.5% for the quarter ended September 30, 1995 to 4.9% for the corresponding quarter in 1996. This increase reflected the depreciation of the additional equipment acquired in connection with the AmerAquatic acquisition and the purchase of application equipment for the nine months ended September 30, 1996. In addition, there was an increase in amortization relating to intangibles acquired from the AmerAquatic and L&L acquisitions. Interest income. Interest income decreased by $43,440 from $53,992 for the third quarter of 1995 to $10,552 for the corresponding quarter of 1996. The decrease in interest income was consistent with the lower average balance of marketable securities in 1996 as compared to 1995. Interest expense. Interest expense increased by $159,681 from $7,995 during the three months ended September 30, 1995 to $167,676 during the three months ended September 30, 1996 primarily as a result of the 12.5% Senior Secured Note of $5,000,000 issued in October 1995 to finance the AmerAquatic acquisition. Discontinued operations. In November 1995, the Company approved a plan to dispose of the environmental remediation segment which comprises the Company's other two subsidiaries, Florida Underground Petroleum Tank Contractors, Inc. ("FUPTC") and Haas Environmental Services, Inc. ("HES"). Accordingly, the operations of the environmental remediation segment have been accounted for as discontinued operations and the operating losses and discontinuation expenses during the phase-out period have been provided for in 1995. The operating results for 1996 for continuing operations relate only to the aquatic and industrial vegetation management business. Quarterly results. Income from continuing operations increased by $141,107 from a loss of $124,427 during the three months ended September 30, 1995 to a net income of $16,680 during the three months ended September 30, 1996. There was no provision for income taxes for the three months ended September 30, 1996 in view of the net operating loss carryforward. The third quarter's results continue to indicate significant growth potential of the Company's aquatic and industrial vegetation management business, especially in its industrial vegetation management business, where the Company has begun to create a niche for itself, with the ARC Acquisition providing the springboard from which marketing efforts are being targeted at electric and power utilities, telephone and railroad companies, transportation departments and industrial sites . Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1996 Revenues. The Company's revenues increased by $3,526,514, or 82.4%, from $4,278,884 during the nine months ended September 30, 1995 to $7,805,398 during the nine months ended September 30, 1996. The increase in revenues was primarily attributable to an increase in the number of recurring waterway and industrial vegetation management contracts as well as wetland planting contracts. Much of the growth in revenues resulted from more intensive marketing efforts combined with an increasing trend toward governmental and private outsourcing and the growing need to comply with environmental laws and regulations. The acquisitions of AmerAquatic and L&L in last quarter of 1995 have also contributed to this growth by enabling the Company to further expand its customer base in Florida, Georgia, North Carolina and South Carolina. In addition, the acquisition of ARC, which was completed on June 7, 1996, contributed $682,289 of revenues from right of way contracts for the nine months ended September 30, 1996. ARC is a leading provider of industrial vegetation and utility right of way management services in Florida, Georgia and Alabama. These services include the control of weeds and undergrowth in right of way areas adjacent to distribution and transmission power lines. Cost of services. Cost of services increased by $2,142,200, or 96.9%, from $2,210,327 during the nine months ended September 30, 1995 to $4,352,527 during the nine months ended September 30, 1996. The increase in cost of services was mainly attributable to increased chemicals, insurance, fuel and labor costs which was directly a result of the Company's expanding operations. As a percentage of revenues, cost of services have increased from 51.7% for the nine months ended September 30, 1995 to 55.8% for the nine months ended September 30, 1996. The reduced gross margin was mainly attributable to higher chemical and labor costs as a result of the particularly hot summer aggravated by a lower than normal rainfall experienced in Florida during the third quarter of 1996. This caused an exceptionally rapid growth of algae and aquatic weeds. In addition, a higher mix of industrial vegetation management contracts for the nine months ended September 30, 1996 as compared to the corresponding period of 1995 also contributed to the lower gross margins. Gross margins from industrial vegetation management contracts are generally lower than the aquatic vegetation management contracts as they involve a higher usage of chemicals. Selling, general and administrative. Selling, general and administrative expense increased by $72,837, or 3.4%, from $2,130,171 during the nine months ended September 30, 1995 to $2,203,008 during the nine months ended September 30, 1996. The increase in selling, general and administrative expenses was due mainly to higher insurance and travel expenses, personnel and facility costs associated with the expanding operations and expenditures to support the Company's infrastructure. This has been partly offset by on-going cost control measures taken in relation to general corporate expenses. As a percentage of revenues, such expenses have decreased from 49.8% in 1995 to 28.2% in 1996. This was attributable to operating efficiencies and economies of scale achieved following the ARC, AmerAquatic and L&L acquisitions and internal growth experienced by the Company. In addition, reduced consulting and professional fees and lower public relations and travel expenses resulting from the streamlining of corporate operations also contributed to the lower percentage of selling, general and administrative expenses to revenues for the nine months ended September 30, 1996 as compared to the previous corresponding period. Depreciation and amortization. Depreciation and amortization expense increased from $139,585 for the first nine months of 1995 to $429,998 for the first nine months of 1996. Such expense as a percentage of revenues increased from 3.3% for the nine months ended September 30, 1995 to 5.5% for the corresponding period in 1996. This increase reflected the depreciation of the additional equipment acquired in connection with the AmerAquatic acquisition and the purchase of application equipment during the nine months ended September 30, 1996. In addition, there was an increase in amortization relating to intangibles acquired from the AmerAquatic and L&L acquisitions. Interest income. Interest income decreased by $111,227, from $165,072 for the nine months ended September 30, 1995 to $53,845 for the nine months ended September 30, 1996. The decrease in interest income was consistent with the lower average balance of marketable securities in 1996 as compared to 1995. Interest expense. Interest expense increased by $464,481 from $25,604 during the nine months ended September 30, 1995 to $490,085 during the nine months ended September 30, 1996, primarily as a result of the 12.5% Senior Secured Note of $5,000,000 issued in October 1995 to finance the AmerAquatic acquisition. Discontinued operations. The change in the allowance for estimated phase-out losses from discontinued operations for the nine months ended September 30, 1996 related principally to the gain on sale of certain assets of HES which has been partly offset by an increase in allowance for estimated phase-out losses for the remaining remediation subsidiary, FUPTC. The phase- out period for FUPTC has been extended to allow more time to complete the outstanding contractual obligations and to locate a buyer for its remediation assets. Management currently estimates that the net realizable value of its remaining environmental business approximates the net book value of its net assets. However, the inability to locate a buyer for the assets of FUPTC, higher than anticipated operating losses from the completion of the remaining contractual obligations and higher discontinuation expenses during the remaining phase-out period may result in higher than anticipated phase-out losses which may negatively impact the year-to-date results. Liquidity and Capital Resources Working capital. Working capital (excluding net assets/liabilities of discontinued operations), which consists principally of cash and accounts receivable , was $1,441,875 at December 31, 1995, compared to $1,554,707 at September 30, 1996. The increase in working capital was mainly attributable to the cash proceeds from the issuance of common stock in connection with certain private placements undertaken in June 1996. Of the Company's accounts receivable outstanding at December 31, 1995 and September 30 ,1996, $239,017 (23.5%) and $263,375 (27.6%) were due from five customers, respectively. The Company secured larger non-recurring contracts for the nine months ended September 30, 1996 as compared to 1995. The collection period for accounts receivable improved from 39 days at December 31, 1995 to 34 days at September 30, 1996. At September 30, 1996, the Company's allowance for doubtful debts was $67,449 which the Company believes is currently adequate to cover anticipated losses based on prior experience. At September 30, 1996, the Company has loan agreements with SunTrust Bank, Miami, N.A. ("SunTrust") which provided for borrowings under a revolving line of credit of up to $750,000, a 15-year loan in the principal amount of $94,144 collaterized by certain real property and equipment loans in the principal amounts of $90,624. At September 30, 1996, an aggregate of $520,696 was outstanding under the loan agreements, of which $404,415 was outstanding under the line of credit, $87,203 was outstanding under the 15-year loan and $29,078 was outstanding under equipment loans. Advances under the line of credit are based on certain borrowing formulas relating to eligible accounts receivable of EWM. The receivables of the discontinued operations remain as pledged collateral to this line of credit but cannot be used as part of the borrowing base under the line. Interest accrues at 1.5% above prime for the line. This line of credit expires in March 1997. Capital Commitments As of September 30, 1996, the Company has capital commitments to purchase fifty specialized application equipment known as "Spra-Buggies" over the next 25 months at a purchase price of $25,000 per equipment. The Company anticipates that these capital expenditures will be funded by a combination of cash flows from operations and loans from equipment financing companies. Cash flows from operating activities. For the nine months ended September 30, 1995, the Company's cash flows used in operations was $1,477,349 as compared to $705,403 for the nine months ended September 30, 1996. Of the net cash used in operating activities for the nine months ended September 30, 1995, $807,630 were used in continuing operations as compared to $619,153 for the nine months ended September 30, 1996. The decrease in cash flows used in continuing operations was primarily attributable to the increased cash flows generated from internal growth and from acquired operations. Cash flows from investing activities. Cash provided by investing activities in the nine months ended September 30, 1996 of $136,089 was derived primarily from the liquidation of marketable securities. This was partly offset by capital expenditures of $717,773 for the nine months ended September 30, 1996 which related mainly to the purchase of application equipment. Cash flows from financing activities. The Company repaid a total of $780,632 of its borrowings during the nine months ended September 30, 1996 which included the repayment of the promissory note of $500,000 issued in connection with the AmerAquatic Acquisition in October 1995. In April 1996, the Company entered into a sale and leaseback capital lease agreement, for a principal amount of $300,000, with a commercial equipment financing company to refinance the capital expenditures for application equipment. In June 1996, the Company completed three equity private placements totaling 375,000 shares of the common stock of the Company at a price of $4 per share for a total cash consideration of $1,500,000. Of the total, 125,000 shares were issued to Mr. Jeffrey T. Katz, a director of the Company. On July 23, 1996, the Company completed another private placement of 62,500 shares of the common stock of the Company at a purchase price of $4 per share for an aggregate amount of $250,000. The proceeds from these equity placements will primarily be used to finance working capital and future acquisitions. The Company continues to pursue potential acquisitions and to seek financing alternatives such as private debt or equity offerings with potential investors or an increase in credit facilities with banking institutions. Discontinued operations. During the nine months ended September 30, 1996, the Company repaid all advances made to the discontinued operations under the previous revolving line of credit with SunTrust which amounted to approximately $818,000 and the long-term loan of $1,975,000 to SunTrust which was used to finance the acquisition of HES in 1995. The repayments were funded primarily from the proceeds of the liquidation of marketable securities and the loan from USL Capital Corporation. The repayments of these liabilities combined with net income from discontinued operations for the nine months ended September 30, 1996 resulted in net assets of discontinued operations of $141,682 at September 30, 1996 compared to net liabilities of $449,550 at December 31, 1995. In March 1996, the Company entered into an agreement with SunTrust for a one-year extension to February 10, 1997 of the loan of $760,000 (the "FUPTC Loan") advanced under a revolving line of credit for FUPTC relating to a specific remediation project. The new terms included a monthly principal repayment of $5,000 and interest at 1-1/2% above prime. In July 1996, the entire outstanding loan was repaid, so as to reduce interest expenses, using primarily the proceeds from the refund of income taxes. On April 25, 1996, the Company sold substantially all of the assets and liabilities of HES to Heart Environmental Services, Inc. (the "Buyer"), a New Jersey corporation for a total consideration of $1,907,021. The total consideration comprises (i) $681,000 in cash, (ii) a three-year promissory note of $600,000 issued by the Buyer, bearing interest at 9% per annum and collaterized by the pledge of 499 shares of the Buyer's Common Stock pursuant to a Stock Pledge Agreement, (iii) the cancellation of total obligations due to H&H Investments Corporation, Mr. Eugene M. Haas and Mr. Robert E. Haas (collectively known as the "Haas Shareholders") which amounted to $626,021. In connection with the HES Sale, the Company and the Haas Shareholders entered into a lock-up agreement relating to the 219,000 shares of the Company's common stock (the "Shares") owned by the Haas Shareholders. The lock-up agreement provides that any sale or transfer of the Shares by the Haas Shareholders will be restricted to an amount of not greater than 20,000 Shares for every three-month period. As a result of the HES sale, the Company has agreed not to pursue any claims against the Haas Shareholders in connection with the Haas acquisition in February 1995. The proceeds from the HES sale have been used to repay a portion of the loan from USL Capital which amounted to $405,722 which includes $391,044 principal and $14,678 interest payments. The proceeds were also used for a principal repayment of the FUPTC Loan in the amount of $100,000 in May 1996 and to settle certain remaining liabilities of HES. The Company has been vigorously continuing its collection efforts in order to improve the cash flows of its remediation segment until disposal. Gross accounts receivable for the remediation segment, excluding a long-term receivable of $1,048,222 at December 31, 1995 and $1,269,909 at September 30, 1996, has decreased by $2,988,350 from $3,661,354 at December 31, 1995 to $673,004 at September 30, 1996. Collections accounted for approximately $1,200,000. The remainder of the decrease was mainly due to the transfer of the uncollected portion of the accounts receivable of HES which amounted to approximately $1,188,000 back to Mr. Eugene M. Haas and Mr. Robert E. Haas, pursuant to the Haas Purchase Agreement dated as of February 28, 1995 and the sale of the receivables of HES in April 1996 which amounted to $565,909. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information On July 30, 1996, the Company's subsidiary, Environmental Waterway Management, Inc. changed its name to Aquagenix Land-Water Technologies, Inc. which better describes the full scope of services currently provided by the company and allows the company to market one logo. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Description 27.1 Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AQUAGENIX, INC. Date: November 14, 1996 By: /s/ Andrew P. Chesler Andrew P. Chesler, Chairman of the Board, Chief Executive Officer, President and Treasurer (Principal Executive Officer) Date: November 14 , 1996 By: /s/ Helen Chia Helen Chia, Chief Financial Officer (Principal Financial and Accounting Officer)