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UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 0 - 29258
AQUAPRO CORPORATION
(Exact name of Registrant as specified in its charter)
Tennessee 62 - 1598919
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
1100 Highway 3, Sunflower, Mississippi 38778
(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (662) 569-3331
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of February 12, 2003, Registrant had outstanding 4,941,273 shares of common
stock, its only class of common equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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INDEX
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at
December 31, 2002 (unaudited) and
June 30, 2002 3
Condensed Consolidated Statements of
Operations for the Three and Six Months ended
December 31, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Three Months ended
December 31, 2002 and 2001 (unaudited) 7
Notes to Unaudited Condensed Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AquaPro Corporation
Condensed Consolidated Balance Sheets
December 31, June 30,
2002 2002
----------- -----------
(Unaudited) (Note 1)
Current Assets:
Cash and Cash equivalents $ 16,394 $ 8,246
Trade accounts receivable -- --
Other receivables -- 2,232
Live Fish Inventories -- --
Notes receivable -- 1,037,309
Prepaid expenses -- 2,205
Deferred production & cultivating costs -- --
----------- -----------
Total current assets 16,394 1,049,992
Property, buildings and equipment, net 1,979,410 4,365,777
Investment in cooperatives 169,240 169,240
Other investments 44,440 44,440
Other assets -- 81,092
----------- -----------
Total assets $ 2,209,484 $ 5,710,541
=========== ===========
3
December 31, June 30,
2002 2002
----------- -----------
(Unaudited) (Note 1)
Liabilities and Stockholders' equity
Current liabilities:
Notes payable $ 4,527,361 $ 3,672,925
Accounts payable 677,689 1,436,363
Accrued expenses 976,456 750,187
Current maturities of long-term debt 1,555,408 1,429,327
----------- -----------
Total current liabilities 7,736,914 7,288,802
Long-term debt, less current maturities 2,637,078 2,706,365
----------- -----------
Total liabilities 10,373,992 9,995,167
Stockholders' equity:
Common stock, no par value - authorized
100,000,000 shares, issued and outstanding
4,941,273 at December 31, 2002 and
4,935,273 at June 30, 2002 15,394,044 15,393,714
Unearned compensation -- --
Retained earnings (deficit) (23,558,552) (19,678,340)
----------- -----------
Total Stockholders' equity (8,164,508) (4,284,626)
----------- -----------
Total liabilities and stockholders' equity $ 2,209,484 $ 5,710,541
=========== ===========
4
AquaPro Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months ended
December 31
2002 2001
----------- -----------
Net Sales $ -- $ 1,326,239
Cost of products sold -- 1,658,158
----------- -----------
Gross profit -- (331,919)
Cost of contract farming 940,779 --
Selling, general and administrative 281,862 387,992
----------- -----------
Operating (loss) (1,222,641) (719,911)
Interest expense (254,448) (220,205)
Loss on impairment (1,930,025) --
Loss on disposal 10,000 --
Other, net (1,760) 7,091
----------- -----------
(2,412,528) (213,114)
Net (loss) $(2,176,233) $ (933,025)
=========== ===========
Basic and diluted net (loss) per share $ (.09) $ (.19)
Basic and diluted weighted average common
Shares outstanding 4,941,273 4,923,273
5
AquaPro Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months ended
December 31
2002 2001
----------- -----------
Net Sales $ -- $ 2,208,139
Cost of products sold -- 2,674,130
----------- -----------
Gross profit -- (465,991)
Cost of contract farming 940,779 --
Selling, general and administrative 526,905 612,601
----------- -----------
Operating (loss) (1,467,684) (1,078,592)
Interest expense (495,330) (429,010)
Loss on impairment (1,930,025) --
Loss on disposal (54,400) --
Other, net 67,227 101,218
----------- -----------
(2,412,528) (327,792)
Net (loss) $(3,880,212) $(1,406,384)
=========== ===========
Basic and diluted net (loss) per share $ (.09) $ (.29)
Basic and diluted weighted average common
Shares outstanding 4,941,273 4,923,273
6
AquaPro Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2002 2001
----------- -----------
Net cash used in operating activities $(1,037,751) $ 174,736
Cash flows from investing activities:
Purchases of property and equipment (33,426) (1,136)
Proceeds from disposal of equipment 175,355 1,200
(Investment in) sale of joint venture -- 40,000
----------- -----------
141,929 40,064
Cash flows from financing activities:
Net increase (decrease) in notes payable (949,626) 168,464
Proceeds from long-term borrowings 2,041,326 --
Principal payments on long-term borrowings (188,060) (382,522)
Net increase (decease) in common stock and
unearned compensation and consulting fees 330 --
----------- -----------
Net cash provided by (used in) financing activities 903,970 (214,058)
----------- -----------
Net increase/ (decrease)
in cash and cash equivalents 8,148 742
Cash and cash equivalents at beginning
of period 8,246 810
----------- -----------
Cash and cash equivalents at end
of period $ 16,394 $ 1,552
=========== ===========
7
AquaPro Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 2002
BASIS OF PRESENTATION. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for three and six-month periods ended December 31, 2002 is not
necessarily indicative of the results that may be expected for year ended June
30, 2003.
The consolidated balance sheet at June 30, 2002 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended June 30, 2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of certain factors including those set
forth in this Item 2 and elsewhere in, or incorporated by reference into, this
report. The Registrant has attempted to identify forward-looking in this report
by placing an asterisk (*) following each sentence containing such statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31,2002 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 2001
REVENUE. The character of the Company's potential revenue changed dramatically
between the quarters ended December 31, 2001 and 2002. Prior to the quarter
beginning July 1, 2002, the Company maintained an inventory of catfish, which it
sold for its own account. In the quarter ending June 30, 2002, the company sold
its entire inventory to International Holdings, Inc. (IHI). Simultaneously with
the sale of the inventory, the Company entered into a custom farming arrangement
whereby the Company leases its catfish ponds to IHI, and provides the manpower,
equipment, and expenses related to the care, growth, and sale of IHI's catfish.
IHI provides the funds for the feed for the catfish, as well as making advances
to the Company to cover other production costs.
Under the Contract, AquaPro is to receive a share of the net proceeds from
sales, but only after IHI receives the cost of the fish purchased, feed
purchased, and financing costs as well as the amounts advanced to AquaPro for
its costs of custom farming and ongoing debt service. (The details of the
Contract are hereby incorporated by reference from Exhibit 10.21 of the Form
10-KSB, filed October 11, 2002.)
The Company did not have any revenues for the three-month period ended
12/31/2002. For the same period ended 12/31/2001, the Company sold $1,326,239 in
fish. The Company had no fish of its own to sell during the quarter ended
December 31, 2002. The Company's revenues depend upon obtaining sufficient fish
sales at high enough prices to surpass the costs incurred by IHI in the growing
of its fish, i.e., fish, feed, and financing costs. Management's forward-looking
budgets, based upon the realized and
8
expected continuation of low prices for fish, indicated that the forecasted
revenues expected to be received by IHI for sale of its fish will most likely be
insufficient to surpass IHI's costs. * Therefore it is not expected that the
Company will have any revenues for the 2003 fiscal year and as a result will be
unable to meet its financial obligations and will go out of business. *
COST OF PRODUCTS SOLD; CAPITALIZED COSTS; NEGATIVE GROSS MARGIN. No current
amount was reported as costs of products sold for the quarter ended December 31,
2002. For the previous quarter ended September 30, 2002, the Company capitalized
costs associated with future revenues from the future selling of catfish by
International Holdings, Inc. in the amount of $613,305. The deferred production
and cultivating costs were to be expensed with future revenues for proper
matching, and were evaluated on a monthly basis so that the estimated value
reflected its future benefits.
Evaluation of these deferred production and cultivating costs, along with fish
sale budgets, now indicate that it is most likely that revenues for the Company
will not be forthcoming. Therefore the Company has reclassified the capitalized
costs as Costs of Contract Farming for the quarter ended December 31, 2002 in
the amount of $940,779. Of that amount, $613,305 was for the quarter ended
September 30, 2002 and $327,474 for the quarter ended December 31, 2002.
Gross Margin for the three month period ended December 31, 2002 was a negative
$1,467,684, compared to a negative gross margin of $331,919 for the three months
ended December 31, 2001, due to the costs of contract farming and sales,
general, and administrative expenses without revenues.
SELLING, GENERAL AND ADMINISTRATIVE. For the quarter ended December 31, 2002,
selling, general and administrative costs totaled $254,448 compared to $387,9992
for the quarter ended December 31, 2001. Administrative labor expenses continued
to be lower than previous years as a result of dramatic cuts in manpower.
Seining costs increased as a result of the Company's increased seining efforts
aimed at restocking the catfish ponds with catfish purchased from farmers going
out of business.
INTEREST EXPENSE. Interest expense increased to $240,822 in the quarter ended
December 31, 2002, from $220,205 for the quarter ended December 31, 2001. Total
liabilities reduced from $10,638,064, for the quarter ended December 31, 2001,
to $10,373,992 for the period ended December 31, 2002.
LOSS ON IMPAIRMENT AND NET LOSS. The Company has reduced the carrying value of
its catfish ponds and equipment to reflect the current depressed values in the
catfish industry. For the quarter ended December 31, 2002 the Company took a
charge to income of $1,930,025. When combined with the Operating loss for the
quarter, the total net loss was $2,176,233.
LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 2002 the Company had a
current ratio of 0.002 to one compared to a current ratio of 1.32 to one as of
December 31, 2001. Current liabilities exceeded current assets by $7,720,520 for
the quarter ended December 31, 2002. For the quarter ended December 31, 2001,
current assets exceeded current liabilities by $1,874,625. On December 31, 2001
the cost basis of the Company's catfish inventory was $7,587,142. The sale of
the Company's live fish inventory in the quarter ended June 30, 2002, removed
the value of the fish inventory from current assets. Proceeds from the sale of
inventory were used to fund the costs of being in business since that time.
The Company is totally dependent upon advances from IHI to cover its payroll,
operating expenses, and scheduled secured debt repayments. * The Company has no
cash except that which has been advanced by IHI. Most unsecured vendors and
creditors have agreed to wait for payments on their accounts until after the
crop can be sold by the end of the fiscal year June 30, 2003. * However, it can
not be certain that the unsecured creditors would not attempt to force the
Company into involuntary bankruptcy. The creditors in the Kroeker farm
foreclosure have sued the Company and its President, George Hastings as
Guarantor, for the difference between the mortgage debt and the amount the
property brought at auction, an amount calculated by them to be in excess of
$2,000,000 plus interest and fifteen percent attorney's fees. The Company has
made a counter claim against the Kroekers, however success by the plaintiffs
could be expected to place the Company and Mr. Hastings in bankruptcy and has
already negatively impacted IHI's desire to make additional loans to the
Company.
9
As discussed more fully in the section titled Subsequent Events below, IHI has
terminated its contract with AquaPro and, as a result, AquaPro has laid off all
of its employees and ceased business effective January 31, 2003. Mr. Hastings
has been forced to file for Chapter 7 bankruptcy protection.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31,2002 COMPARED TO THE
SIX MONTHS ENDED DECEMBER 31, 2001
REVENUE. The character of the Company's potential revenue changed dramatically
between the periods ended December 31, 2001 and 2002. Prior to the period
beginning July 1, 2002, the Company maintained an inventory of catfish, which it
sold for its own account. In the quarter ending June 30, 2002, the company sold
its entire inventory to International Holdings, Inc. (IHI). Simultaneously with
the sale of the inventory, the Company entered into a custom farming arrangement
whereby the Company leases its catfish ponds to IHI, and provides the manpower,
equipment, and expenses related to the care, growth, and sale of IHI's catfish.
IHI provides the funds for the feed for the catfish, as well as making advances
to the Company to cover other production costs.
Under the Contract, AquaPro was to receive a share of the net proceeds from fish
sales, but only after IHI received the cost of the fish purchased, feed
purchased, and financing costs. Any share of net proceeds in excess of the
aforementioned costs were first to be used to repay AquaPro's production loans
from IHI and then would have been available for the Company to make payments on
its long term debt. (The details of the Contract are hereby incorporated by
reference from Exhibit 10.21 of the Form 10-KSB, filed October 11, 2002.)
The Company did not have any revenues for the six-month period ended 12/31/2002.
For the same period ended 12/31/2001, the Company sold $2,208,139 in fish. The
Company had no fish of its own to sell during the quarter ended December 31,
2002. The Company's revenues depend upon obtaining sufficient fish sales at high
enough prices to surpass the costs incurred by IHI in the growing of its fish,
i.e., fish, feed, and financing costs. Management's forward-looking budgets,
based upon the realized and expected continuation of low prices for fish,
indicated that the forecasted revenues expected to be received by IHI for sale
of its fish will most likely be insufficient to surpass IHI's costs. * Therefore
it is not expected that the Company will have any revenues for the 2003 fiscal
year and as a result will be unable to meet its financial obligations and will
go out of business. *
COST OF PRODUCTS SOLD; CAPITALIZED COSTS; NEGATIVE GROSS MARGIN. No current
amount was reported as costs of products sold for the six months ended December
31, 2002. For the previous quarter ended September 30, 2002, the Company
capitalized costs associated with future revenues from the future selling of
catfish by International Holdings, Inc. in the amount of $613,305. The deferred
production and cultivating costs were to be expensed with future revenues for
proper matching, and were evaluated on a monthly basis so that the estimated
value reflects its future benefits.
Evaluation of these deferred production and cultivating costs, along with fish
sale budgets, now indicate that it is most likely that revenues for the Company
will not be forthcoming. * Therefore the Company has reclassified the
capitalized costs as Costs of Contract Farming for the six months ended December
31, 2002 in the amount of $940,779. Of that amount, $613,305 was for the three
months ended September 30, 2002 and $327,474 for the quarter ended December 31,
2002.
Gross Margin for the six month period ended December 31, 2002 was a negative
$1,467,684 due to the costs of contract farming, sales, general, and
administrative expenses without revenues. Negative gross margin for the six
months ended December 31, 2001 was $465,991.
SELLING, GENERAL AND ADMINISTRATIVE. For the six months ended December 31, 2002,
selling, general and administrative costs totaled $526,905 compared to $612,601
for the six months ended December 31, 2001. Administrative labor expenses
continued to be lower than previous years as a result of dramatic cuts in the
manpower. Seining costs increased as a result of the Company's increased seining
efforts aimed at restocking the catfish ponds with catfish purchased from
farmers going out of business.
INTEREST EXPENSE. Interest expense increased to $495,330 for the six months
ended December 31, 2002, from $449,010 for the six months ended December 31,
2001.
10
LOSS ON IMPAIRMENT AND NET LOSS. The Company has reduced the carrying value of
its catfish ponds and equipment to reflect the current depressed values in the
catfish industry. For the six months ended December 31, 2002 the Company took a
charge to income of $1,930,025. When combined with the Operating loss for the
six month period, the total net loss was $3,880,212.
LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 2002 the Company had a
current ratio of 0.002 to one compared to a current ratio of 1.32 to one as of
December 31, 2001. Current liabilities exceeded current assets by $7,720,520 for
the quarter ended December 31, 2002. For the quarter ended December 31, 2001,
current assets exceeded current liabilities by $1,874,625. On December 31, 2001
the cost basis of the Company's catfish inventory was $7,587,142. The sale of
the Company's live fish inventory in the quarter ended June 30, 2002, removed
the value of the fish inventory from current assets. Proceeds from the sale of
inventory were used to fund the costs of being in business since that time.
The Company is totally dependent upon advances from IHI to cover its payroll,
operating expenses, and scheduled secured debt repayments. * The Company has no
cash except that which has been advanced by IHI. Most unsecured vendors and
creditors have agreed to wait for payments on their accounts until after the
crop can be sold by the end of the fiscal year June 30, 2003. * However, it can
not be certain that the unsecured creditors would not attempt to force the
Company into involuntary bankruptcy.
The creditors in the Kroeker farm foreclosure have sued the Company and its
President, George Hastings as Guarantor, for the difference between the mortgage
debt and the amount the property brought at auction, an amount in excess of
$2,000,000 plus interest and attorney's fees. The Company has made a counter
claim against the Kroekers, however success by the plaintiffs could be expected
to place the Company and Mr. Hastings in bankruptcy and has already negatively
impacted IHI's desire to make additional loans to the Company.
As discussed more fully in the section titled Subsequent Events below, IHI has
terminated its contract with AquaPro and, as a result, AquaPro has laid off all
of its employees and ceased business effective January 31, 2003. Mr. Hastings
has been forced to file for Chapter 7 bankruptcy protection.
SUBSEQUENT EVENTS.
Subsequent to the period ended December 31,2002, IHI instructed the Company to
use every effort to increase sales of its fish. By the end of the second week in
January 2003, the Company had sold more than 1,000,000 pounds of fish. The
number of remaining food-sized fish was estimated by the individual farm
managers as between two and four million pounds of fish. In addition to these
market-sized fish, the farm managers estimated another three to four million
pounds of fish that would become market-sized by the end of June 2003 and more
fish that would be market-sized by the end of the feeding season fall of 2003.
Officials of IHI shared with the Company their concern that there would not be
enough fish sales by June 30, 2003 to totally repay the credit line that it had
incurred for its investment in the business. Additionally, IHI had purchased the
previous credit line the Company had with Community Bank. The collateral of that
loan was all of the equipment owned by AquaPro. If AquaPro were to fail, IHI
would own all of its equipment.
Effective January 31, 2003 and subsequent to the six month period ending
December 31, 2002, the Company notified IHI that AquaPro had determined that IHI
had breached and improperly taken steps to terminate its contract with the
Company. While the Company had entered into an agreement that specified the
conditions whereby AquaPro's services could be terminated by IHI, IHI
unilaterally took different steps that would and did force the resignation of
the Company, without following those steps. Specifically identified among these
steps were: refusal to advance funds to the Company to make the minimum monthly
payments on loans obtained by AquaPro to operate and remain in business and care
for IHI's fish; retroactively, and without notice, cutting the salary of
AquaPro's senior manager by 60% and eliminating one hundred percent of the pay
for that position effective February 15, 2003; and knowingly refusing to advance
the funds AquaPro incurred for the care and selling of IHI's fish, such as
seining, hauling, and other ordinary operating costs.
11
The effect of the non-payment of monthly payments was to make AquaPro in default
under these obligations and without other outside funds, to force it out of
business. The effect of the retroactive reduction and total termination of the
President's salary was to make it impossible for the President to have funds,
from his own salary, to advance the minimum payments on AquaPro's scheduled debt
service. And, since the President had guaranteed these loans for AquaPro, to
force him into personal bankruptcy. Further, AquaPro's management perceived the
non-payment of outside vendors as an attempt by IHI to avoid its financial
responsibility for items related to its fish by placing the burden on AquaPro as
it was going out of business and unable to pay.
Effective January 31, 2003, the Company laid off all of its workforce and closed
the doors. The Company does not have the funds to employ a bankruptcy attorney.
It is expected that secured creditors will either negotiate a sale or lease of
assets with IHI or repossess/foreclose the assets. IHI has hired the entire
workforce of AquaPro with the exception of its President, Mr. Hastings. Mr.
Hastings has sought bankruptcy protection under Chapter 7.
The Company owes over $8,000,000 more than the value of its assets. The present
market value of the Company's assets reflects the depressed conditions in values
prevalent in the catfish industry as the Company and other farmers go out of
business. * Sadly, it is expected that there will be no funds available for any
unsecured judgment creditors or for the Company's stockholders.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The family that sold the Kroeker farm to AquaPro and foreclosed upon
the property has sued the Company, George Hastings, IHI, and Community Bank for
over $2,000,000 plus interest and 15% attorney's fees. The Company has filed a
counter claim. However, the Company has no funds with which to defend this suit.
Item 2. Changes in Securities
During the quarter ending December 31, 2002 the Company issued 3,000
shares of restricted Common stock to senior management. The stock has a two-year
vesting period.
Item 3. Defaults upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AquaPro Corporation
(Registrant)
Dated February 12, 2003 By: /s/ George S. Hastings, Jr.
--------------------------------
Chief Executive Officer, President,
and Chairman of the Board
12