AQUA CARE SYSTEMS INC /DE/, SB-2/A, 1996-06-18

AQUA CARE SYSTEMS INC /DE/
SB-2/A, 1996-06-18
MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT

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As filed with the Securities and Exchange Commission on June 18, 1996
REGISTRATION NO. 333-2504

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

AQUA CARE SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
-------------------------------------------------
DELAWARE 3589 13-3615311
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization)(Industrial Code Number) Identification Number)

3806 NORTH 29TH AVENUE
HOLLYWOOD, FLORIDA 33020
TELEPHONE: (305) 925-9993
(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)

WILLIAM K. MACKEY
CHIEF EXECUTIVE OFFICER
AQUA CARE SYSTEMS, INC.
3806 NORTH 29TH AVENUE
HOLLYWOOD, FLORIDA 33020
TELEPHONE: (305) 925-9993 - FACSIMILE: (305) 925-9996
(Name, Address and Telephone Number
of Agent for Service)

Copies to:

F. HAMPTON McFADDEN, JR., ESQ.
Haskell Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza

1901 Sixth Avenue North
Birmingham, Alabama 35203
Telephone: (205) 251-1000 - Facsimile: (205) 324-1133

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box.[X]

<PAGE>

CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT PRICE FEE
- --------------------------------------------------------------------------------
1,100,000
Class A Warrants... Warrants (1) $7.17 (2) $ 7,887,000.00 (2) $2,719.66
- -------------------------------------------------------------------------------
1,100,000 $11,836,000.00
Class B Warrants... Warrants (1) $10.76 (3) (3) $4,081.38
- -------------------------------------------------------------------------------

Common Stock,
par value $.001 2,200,000
per share......... Shares (1) (4) (4) (4)

- -------------------------------------------------------------------------------

Common Stock, par
value $.001 734,467 Shares
per share......... (5) $2.39 (6) $ 1,755,376.13 $ 605.31

===============================================================================
Total -- -- $21,478,376.13 $7,406.35(7)
================================================================================
(1) The Registration fee for the Class A Warrants and the shares of Common
Stock and Class B Warrants underlying the Class A Warrants and the Common
Stock underlying the Class B Warrants is computed in accordance with Rule
457(i) and has been divided into three parts for clarity.

(2) Computed in accordance with Rule 457(i), solely for the purpose of
calculating the registration fee, based upon the exercise price of the Class
A Warrants.

(3) Computed in accordance with Rule 457(i), solely for the purpose of
calculating the registration fee, based upon the exercise price of the Class
B Warrants.

(4) No separate registration fee is required as provided in Rule 457(i).

(5) Shares of Common Stock being registered underlying outstanding Bridge
Warrants.

(6) Computed in accordance with Rule 457(i), solely for the purpose of
calculating the registration fee, based upon the exercise price of the
Bridge Warrants.

(7) The entire amount of the registration fee was paid at the time of the
original filing

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>

AQUA CARE SYSTEMS INC.
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF INFORMATION REQUIRED
BY ITEMS 1 THROUGH 23 OF PART I OF FORM SB-2

REGISTRATION STATEMENT LOCATION OR CAPTION
ITEM NUMBER AND CAPTION IN PROSPECTUS
----------------------- -------------------
1. Front of Registration Statement and
Outside Front Cover Page
of Prospectus........................ Outside Front Cover Page

2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside
Back Cover Pages; Avail-
able Information

3. Summary Information and Risk Factors... Prospectus Summary; Risk
Factors; The Company

4. Use of Proceeds........................ Use of Proceeds

5. Determination of Offering Price........ Not Applicable

6. Dilution............................... Not Applicable

7. Selling Securityholders................ Selling Securityholders

8. Plan of Distribution................... Outside Front Cover Page;
Plan of Distribution

9. Legal Proceedings...................... Legal Matters

10. Directors, Executive Officers,
Promoters and Control Persons........ Management

11. Security Ownership of Certain
Beneficial Owners and Management .... Principal Stockholders

12. Description of Securities.............. Prospectus Summary;
Risk Factors; The Company;
Description of
Securities

13. Interests of Named Experts and Counsel. Not Applicable

14. Disclosure of Commission Position and
Indemnification for Securities
Act Liabilities...................... Not Applicable

15. Organization Within Last Five Years.... Not Applicable

16. Description of Business................ Prospectus Summary; The
Company; Business

17. Management's Discussion and Analysis or
Plan of Operation ................... Management's Discussion
and Analysis of Financial
Condition and Results of
Operations

18. Description of Property................ The Company; Business

19. Certain Relationships and Related
Transactions........................... Certain Transactions

20. Market for Common Equity and Related
Stockholder Matters.................... Market Price for Common
Stock; Dividend Policy;
Description of Securities

21. Executive Compensation................. Management

22. Financial Statements................... Consolidated Financial
Statements

23. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure................... Not Applicable

<PAGE>

PROSPECTUS
AQUA CARE SYSTEMS, INC.

OFFERING CONSISTING OF
1,100,000 CLASS A WARRANTS
1,100,000 SHARES OF COMMON STOCK
UNDERLYING THE CLASS A WARRANTS
1,100,000 CLASS B WARRANTS
UNDERLYING THE CLASS A WARRANTS
1,100,000 SHARES OF COMMON STOCK
UNDERLYING THE CLASS B WARRANTS
734,467 SHARES OF COMMON STOCK
UNDERLYING BRIDGE WARRANTS
-------------------------

This Prospectus relates to 1,100,000 Class A redeemable warrants (the
"Class A Warrants") and 1,100,000 Class B redeemable Warrants (the "Class B
Warrants") and 2,200,000 shares of Common Stock, par value $.001 per share (the
"Common Stock") of Aqua Care Systems, Inc., a Delaware corporation (the
"Company" or "ACS") underlying the Class A Warrants and the Class B Warrants.
Each Class A Warrant entitles the holder thereof to purchase one share of the
Common Stock of the Company and one Class B Warrant of the Company at an
exercise price of $7.17, subject to anti-dilution adjustments. Each Class B
Warrant entitles the holder thereof to purchase one share of Common Stock of the
Company at an exercise price of $10.76, subject to anti-dilution adjustments.
The Class A Warrants and Class B Warrants may be exercised at any time prior to
their expiration dates. See "Description of Securities". The Company has entered
into a consulting agreement with First United Equities Corporation ("First
United") whereby the Company has agreed to register and issue up to 1,100,000
Class A Warrants to First United subject to the terms of a consulting agreement.
See "Plan of Distribution".

This Prospectus also relates to 734,467 shares of Common Stock
underlying currently outstanding Warrants to Purchase Common Stock which were
issued by the Company in a series of private placements prior to the Company's
initial public offering (the "Bridge Warrants") and entitle the holder to
purchase one share of Common Stock of the Company at an exercise price of $2.39,
subject to anti-dilution adjustments. The Registration Statement of which this
Prospectus forms a part covers the offering of the above securities for the
account of certain non-affiliated persons, hereinafter collectively referred to
as the "Selling Securityholders", that desire to sell the Common Stock of the
Company underlying the Bridge Warrants. Securities held by the Selling
Securityholders may be sold on the date of this Prospectus and thereafter while
this Registration Statement continues to be effective and the resale of such
securities are subject to Prospectus delivery and other requirements of the
Securities Act of 1933, as amended (the "Securities Act"). Sales of such
securities or the potential of such sales at any time may have an adverse effect
on the market prices of the Common Stock of the Company and thus, the securities
offered hereby. See "Description of Securities" and "Selling Securityholders".

The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq"). On
June 6, 1996, the closing sale price per share of the Common Stock, as reported
on Nasdaq, was $ See "Price Range of Common Stock".
---------

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY
SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS,
PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH
OTHER MATTERS REFERRED TO HEREIN, THE RISK FACTORS FOUND ON PAGE 9. SEE "RISK
FACTORS" ON PAGE 9.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------

The date of this Prospectus is June , 1996

<PAGE>

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission") relating to its
business, financial statements and other matters. The Registration Statement, as
well as such reports, proxy statements and other information, may be inspected
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. and should be
available for inspection and copying at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York and Suite
1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of
such material can be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Common Stock is listed on Nasdaq, and the reports, proxy statements and certain
other information filed by ACS may be obtained by calling the Nasdaq Public
Reference Room Disclosure Information Group at (800) 638-8241 or (202) 728-8298.

The Company has filed a Registration Statement (the "Registration
Statement") on Form SB-2 under the Securities Act with the Commission covering
the securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any agreement or other document referred to are
not necessarily complete. The material terms of such documents are described
herein. With respect to each such agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in all respects by such reference.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. When
used in the Prospectus, the words "estimate," "project," "intend," "expect," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially. For a discussion of such risks, see "Risk
Factors". Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

<PAGE>

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
CIRCUMSTANCES OF THE COMPANY OR THE FACTS HEREIN SET FORTH SINCE THE DATE
HEREOF.

TABLE OF CONTENTS

PAGE
----
AVAILABLE INFORMATION...................................................... 4

PROSPECTUS SUMMARY......................................................... 6

RISK FACTORS............................................................... 8

THE COMPANY................................................................. 16

PLAN OF DISTRIBUTION........................................................ 16

USE OF PROCEEDS............................................................. 17

MARKET PRICE FOR COMMON STOCK............................................... 18

DIVIDEND POLICY............................................................. 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 19

BUSINESS.................................................................... 25

MANAGEMENT.................................................................. 34

CERTAIN TRANSACTIONS........................................................ 39

PRINCIPAL STOCKHOLDERS...................................................... 40

SELLING SECURITYHOLDERS..................................................... 42

DESCRIPTION OF SECURITIES................................................... 46

EXPERTS .................................................................. . 49

LEGAL MATTERS............................................................... 49

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE
IN THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS.

THE COMPANY

Aqua Care Systems, Inc., a Delaware Corporation ("ACS" or the
"Company"), was formed for the purpose of pursuing acquisitions, primarily in
the non-chemical waste water treatment and water filtration and purification
industries. ACS is a holding company which, through its subsidiaries, operates
businesses which it has acquired. In connection therewith, The Company provides
management services and, when practicable, financing for its subsidiaries.
Through additional acquisitions, ACS intends to build an integrated,
non-chemical waste water treatment and water filtration and purification
company. ACS desires to offer a variety of products and technologies through its
acquisitions of companies, assets or businesses which will provide a one-stop
source for its customers' water filtration and purification and waste water
treatment needs, in order to address what it believes to be the fragmented
nature of the water filtration and purification and waste water treatment
industries. See "Business".

At December 31, 1995, ACS had consolidated assets of approximately $11
million and consolidated stockholders' equity of approximately $8 million, and
employed approximately 90 persons.

ACS was incorporated under the laws of Delaware in 1990. The principal
executive offices of ACS are located at 3806 North 29th Avenue, Hollywood,
Florida 33020.

The terms the "ACS" or the "Company", as used in this Prospectus, refers
to Aqua Care Systems, Inc. and its subsidiaries, unless the context otherwise
requires.

THE OFFERING

Class A Warrants................... 1,100,000 redeemable Class A Warrants. Each
Class A Warrant entitles the holder thereof
to purchase, on or before its expiration
date, one share of Common Stock and one
Class B Warrant at an exercise price of
$7.17.

Common Stock underlying
the Class A Warrants............... Up to 1,100,000 shares of Common
Stock upon exercise of the Class A
Warrants.
Class B Warrants underlying
the Class A Warrants............... Up to 1,100,000 Class B Warrants upon
exercise of the Class A Warrants. Each
Class B Warrant entitles the holder thereof
to purchase, on or before its expiration
date, one share of Common Stock at an
exercise price of $10.76.
Common Stock underlying
the Class B Warrants.............. Up to 1,100,000 shares of Common Stock
underlying the Class B Warrants.

<PAGE>

Common Stock underlying
the Bridge Warrants...................Up to 734,467 shares of Common Stock upon
exercise of the Bridge Warrants.

See "Plan of Distribution" and "Description of Securities".

SHARES OUTSTANDING PRIOR TO
THE OFFERING....................9,248,961 shares of Common Stock (1)(2)

SHARES OUTSTANDING ASSUMING
EXERCISE OF ALL THE WARRANTS
OFFERED HEREBY..................12,183,428 shares of Common Stock (1)

USE OF PROCEEDS......................The proceeds, if any, to be received by
the Company upon the exercise of the
Class A Warrants or Class B Warrants on or
after the date of this Prospectus will be
utilized by the Company for working capital
and general corporate purposes. There can
be no assurance that any of the Class A
Warrants or Class B Warrants will be
exercised as the current market price of
the Common Stock is below the amounts of
the exercise price for the Class A Warrants
or Class B Warrants. The Company will
receive no proceeds from the sale of shares
of Common Stock acquired upon the exercise
of the Class A Warrants or Class B
Warrants. See "Use of Proceeds".

RISK FACTORS.........................The securities offered hereby involve
substantial risks, including, but not
limited to, lack of profitability,
financing issues, dependence on delivery
orders under certain contracts,
competition, government regulation,
reliance on management, lack of dividends,
possible inability to register shares
underlying Class A Warrants or Class B
Warrants in certain jurisdictions and the
lack of a public market for certain
securities. See "Risk Factors".
NASDAQ SYMBOL:

Common Stock............................. AQCR

Class A Warrants......................... AQCRW

Class B Warrants......................... AQCRZ
- --------------------
(1) Does not include the 734,467 shares of Common Stock that may be issued upon
conversion of the Bridge Warrants; the 1,310,582 shares of Common Stock that may
be issued pursuant to the exercise of outstanding stock options; the 2,250,597
shares of Common Stock that may be issued pursuant to the exercise of the
previously outstanding Class A Warrants other than the 1,100,000 Class A
Warrants offered hereby; or the 2,250,597 shares of Common Stock that may be
issued pursuant to previously outstanding Class B Warrants other than the
1,100,000 Class B Warrants offered hereby; or the shares of Common Stock that
may be issued pursuant to the exercise of Class B Warrants that may be issued
pursuant to the exercise of Class A Warrants or Bridge Warrants.

(2) Includes 268,818 shares issued subsequent to December 31, 1995.

<PAGE>

RISK FACTORS

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:

1. LACK OF PROFITABILITY SINCE INCEPTION; ACCUMULATED DEFICIT AND NET
TANGIBLE BOOK VALUE. While the Company's revenues have increased significantly
during 1994 and 1995, it was in large part because of acquisitions. The
Company's revenues increased from $7,871,457 for the year ended December 31,
1994 to $14,500,501 for the year ended December 31, 1995. This increase was due,
in large part, to acquisitions consummated during 1994 and 1995. The Company has
experienced net losses since inception and management expects that the Company
will continue to experience losses for at least the near term. The Company's
statements of operations for the years ended December 31, 1995, and December 31,
1994, reflect net losses of $(4,273,759) and $(821,308), respectively, or $(.68)
and $(.25) per share, respectively. The Company's balance sheets as of December
31, 1995, and December 31, 1994, reflect net tangible book values of $3,474,584
and $1,184,171, respectively, and accumulated deficits of $(8,574,224) and
$(4,300,465), respectively. There can be no assurance that future significant
revenues will be generated, that the Company's operations will be profitable, or
that the Company will have sufficient funds available to continue its planned
activities. See "--Need for Additional Financing", "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Company's Consolidated Financial Statements and notes related
thereto included herein.

2. LACK OF LIQUIDITY; INSUFFICIENT WORKING CAPITAL. At December 31,
1995, and December 31, 1994, the Company had working capital, current assets
less current liabilities, of $3,101,555 and $415,213, respectively. As a result
of the continued operating losses incurred by the Company since inception, the
Company has operated with insufficient working capital for an extended period of
time. This has caused the Company to be unable to pay its expenses on a timely
basis from time to time, which has contributed to a number of problems,
including poor vendor relationships, with the result of the Company being placed
on cash terms with some of its regular vendors in the past. Substantially all of
the Company's regular vendors now provide the Company with net 30 day terms,
though there can be no assurance that these terms will continue to be granted to
the Company. This lack of working capital has caused additional problems in the
past, including, sales which were not able to be consummated when available to
the Company, poor employee morale and a tarnished reputation within the
industry. There can be no assurance that the Company can maintain its improved
reputation or reach profitability so that negative cash flow will not adversely
affects its operations.

3. BUSINESS PLAN. The Company was formed for the purpose of pursuing
acquisitions primarily in the non-chemical waste water treatment and water
filtration and purification industries. Under its Business Plan, the Company has
acquired nine companies in its field, however, not necessarily in a manner which
is totally consistent with its Business Plan. The Business Plan, as originally
conceived, contemplated the utilization of the Company's equity securities as
the "currency" to make these acquisitions. However, these acquisitions have been
made in many instances for cash and debt securities as well as the assumption of
significant liabilities, some of which have turned out to be greater than
originally contemplated. Moreover, the Company's Common Stock has often not been
at a level which made it an attractive security to various sellers of the
businesses acquired by the Company and therefore, could not be used when needed.
As a result of this, the acquisitions made by the Company have been more
expensive than contemplated by management, which has slowed the growth of the
Company and adversely affected the market for its Common Stock.

<PAGE>

4. LIMITED EXPERIENCE OF MANAGEMENT. While the Company has been in
business since September 1991, there have been several changes in management
during that period and the present executive management is not experienced in
the waste water treatment and water purification industries, although, it has a
number of technical support personnel to help operate the Company's business.

5. NEED FOR ADDITIONAL FINANCING; NEGATIVE CASH FLOW. Although the
Company expects that operating cash receipts anticipated to be generated will be
sufficient to fund the Company's operations for at least 12 months following the
date of this Prospectus, this estimate is based on certain assumptions and there
can be no assurances that a sufficient level of sales and cash flows will be
attained to fund operations or that unbudgeted costs will not be incurred. The
Company has since its inception experienced negative cash flow from operations,
which is expected to continue in the foreseeable future. Since inception, the
Company has been dependent upon the capital financings to fund its continuing
operations. Future events, including the problems, delays, expenses and
difficulties frequently encountered by similarly situated companies, as well as
changes in economic, regulatory or competitive conditions, may lead to cost
increases that could make the operating cash receipts insufficient to fund the
Company's proposed operations for the next 12 months or beyond. In addition, the
Company may seek to acquire one or more similar businesses, the purchase price
of which may substantially exceed the amount allocated to such purpose. In such
event, the Company will seek to obtain additional financing from various
sources, including, but not limited to, bank financing or the issuance of its
equity securities. There can be no assurance that the Company will be able to
obtain any required additional financing on terms acceptable to the Company, if
at all, from such sources or otherwise. The Company has no established borrowing
arrangements and generally purchases components and supplies on terms, usually
net 30 days and to a lesser extent, a cash on delivery basis. As of February 29,
1996, the Company had approximately $870,000 of accounts payable of which
approximately 13% were more than 60 days past due. The inability to obtain any
needed financing could have a material adverse effect on the Company's financial
condition, operations and business prospects. See "Use of Proceeds" and
"Management Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".

6. FUTURE LEGISLATION AND GOVERNMENTAL REGULATION. The Company believes
that the demand for its products is directly related to the responses of
governmental authorities to, and public concern with, water contamination. If
there were to be a lessening of public concern with such contamination or of
governmental pressure to remedy such problems, there could be substantially
reduced demand for the products offered by the Company. Although the Company's
customers utilize the Company's products and services in response to regulatory
requirements affecting their businesses, the Company believes, as a provider of
such products and services, the Federal or state environmental rules or
regulations potentially applicable to the Company's customers do not directly
govern its operations as they currently are being conducted. While the Company
is not aware of any pending or proposed Federal legislation or regulation that
could adversely affect its products or services, any such legislation or
regulation in the future that limits the sale of the Company's products or
components or limits the methods in which those products are manufactured,
installed or serviced, could have a material adverse impact on the Company.
Certain states other than Florida, where substantially all of the Company's
assets are located, have enacted legislation which requires licensing, testing
and labeling of water purification products, including those offered by the
Company. The Company believes that none of the Company's products are currently
offered for sale in such states. Although the Company will endeavor to comply
with all applicable laws and regulations prior to making sales in such states,
there can be no assurances that such state authorities will ultimately approve
the Company's products. Compliance with any of such regulatory requirements may
be time-consuming and costly, and there can be no assurances that the Company
will have the resources to satisfy any such requirements or that additional
restrictive legislation will not be enacted in the future by other
jurisdictions. Such compliance or additional legislation could have the effect
of significantly limiting the Company's proposed expansion. See
"Business--Governmental Regulation".

<PAGE>

7. RELIANCE ON KEY EMPLOYEES, ATTRACTION AND RETENTION OF QUALIFIED
PROFESSIONALS. The Company is substantially dependent upon the services of
William K. Mackey, Chairman of the Board, President and Chief Executive Officer.
The Company's future success depends largely on its ability to retain and expand
its staff of qualified personnel, including seasoned executives, filtration
specialists, sales personnel, equipment installers, process and civil engineers
and computer drafting technicians. While there are no known shortages of such
qualified persons, there can be no assurance that the Company will be successful
in its efforts to attract and retain such personnel. See "Management".

8. DEPENDENCE ON SUPPLIERS AND OTHERS. The Company purchases its
components and supplies from a variety of sources. The Company believes that it
is generally not significantly dependent on any sole supplier for components and
supplies. There can be no assurance that components and systems utilized by the
Company will continue to be available at reasonable prices. While the Company
believes that it generally is not dependent on any one supplier for products or
components utilized by the subsidiaries mentioned above, CWES is dependent on a
single supplier, Ryko Manufacturing Company ("Ryko"). CWES is the exclusive
distributor in South Florida for the sale, installation and service of Ryko's
rollover car wash equipment. Such exclusive distributorship prohibits CWES from
selling, installing and/or servicing any car wash equipment from another
manufacturer or supplier. The distributor agreement provides that CWES sells
directly or receives a commission on all Ryko equipment sold within its region.
The agreement is due to expire in July 1997, however, it provides for automatic
renewal upon the achievement of certain sales goals. The Company has no
established borrowing arrangements or available lines of credit, but generally
purchases supplies on terms, usually net 30 days and, to a lesser extent, a cash
on delivery basis. Such lack of credit may have a material adverse effect on the
Company's business and may limit the ability of the Company to expand. See
"Business--Suppliers".

The Company's wholly-owned subsidiary, PFW, is a Florida distributor or
dealer for four independent manufacturers of water purification products. These
distributor agreements may be canceled at any time without notice or penalty.
Pursuant to a written agreement, such subsidiary is also the exclusive national
distributor for another company's water purification product for application in
car washes. Such agreement is subject to cancellation in the event agreed upon
annual sales quotas are not met. Cancellation of any of such distributor
agreements could have an adverse effect on the Company's business. See
"Business--Products and Services".

9. LIABILITY INSURANCE. The Company currently has in place $1,000,000 of
primary general liability insurance coverage, plus $1,000,000 of excess general
liability insurance coverage. The Company does not have any errors and omissions
liability insurance coverage. There can be no assurances that such insurance
will be adequate to meet the needs of the Company or that the Company will be
able to continue to obtain or maintain adequate or required insurance coverage
at reasonable rates. Under the Company's insurance policies, there are various
exclusions, and accordingly there can be no assurances that liabilities that may
be incurred by the Company will be covered by its insurance or that the dollar
amount of such liabilities which are covered will not exceed the Company's
policy limits. See "Business Insurance".

10. COMPETITION; LACK OF PROPRIETARY RIGHTS; POSSIBLE TECHNOLOGICAL
OBSOLESCENCE. There are many manufacturers and distributors of waste water
treatment and water purification equipment and systems for the residential,
commercial, industrial, medical and municipal markets. In addition, there are
other companies (such as those engaged in the bottled water industry) whose
existing product lines indirectly compete with the Company's products and who
may respond competitively to increased marketing of the Company's products. Many
of these competitors are larger and more established, with substantially greater
marketing, financial, human and other resources than the Company and may provide
significant

<PAGE>

short- and long-term competition. The Company expects competition to intensify
as advances are made in the water purification and waste water treatment fields
and as public awareness of the water contamination problem increases. As
competition intensifies, prices for goods and services will become an
increasingly important factor. As a result, the revenues generated from, and the
profitability of, certain of the Company's products and services may be reduced,
possibly substantially, in order to effectively compete in the market and such
reductions could have a material adverse effect on the business and financial
condition of the Company. There are no significant barriers to competitors
adopting a similar or identical approach to that being followed by the Company
or otherwise entering the market. See "Business--Competition".

The Company assembles certain of its own water filtration and
purification products and waste water treatment systems. The Company has only
limited capability in assembling such products, and there are many competitors
who the Company believes could acquire the component parts and assemble such
products more efficiently and at a lower cost than the Company. See
"Business--Assembly and Operations".

Other than the Company's anaerobic packaged waste water treatment system
which is covered by a patent owned by the University of Arkansas and licensed to
the Company, none of the Company's product lines, or any of the basic technology
embodied therein, is presently covered by any patent or confidential or
proprietary process. Therefore, a competitor may market a competing product
(which could be identical to the Company's product) without significant
technological or legal restrictions. Furthermore, the technology upon which the
Company's water treatment systems rely may undergo rapid development and change.
The Company has not, and does not intend for the foreseeable future, to spend
any significant amounts, if any, towards research and development. Therefore,
there can be no assurances that the technology utilized by the Company will
remain competitive, or not become obsolete or obsolescent, in light of possible
future technological developments. See "Business--Competition".

11. ACQUISITION PROGRAM. The Company intends to continue to engage in an
acquisition program which could result in a substantial change in the Company's
business operations and financial condition. The Company's acquisition program
will be directed by William K. Mackey, Chairman of the Board, President and
Chief Executive Officer of the Company, in conjunction with other members of the
Company's Board of Directors. As consideration for any acquisition, in addition
to the payment of cash (if any), the Company may issue notes, Common Stock,
Preferred Stock or other securities. Key employees of acquired companies may
become employees of the Company and may hold management positions in the
Company. The Company does not intend to seek stockholder approval for any such
acquisitions unless required by applicable law or regulations. Accordingly,
investors will be substantially dependent upon the business judgment of the
Company's management in making such acquisitions. The Company intends to engage
in a program to seek acquisitions in business areas related or complementary to
the present business of the Company and may include transactions with affiliates
of the Company. The Company has not formulated a description of businesses which
might be acquired or the criteria to be used in selecting acquisition
candidates.

Although the Company has, from time to time, had preliminary discussions
concerning a number of possible acquisitions, there have been no discussions of
specific terms and no acquisition is currently being negotiated. There can be no
assurance that the acquisition program will be successful.

12. RISK OF LOW-PRICED STOCKS; "PENNY STOCK" REGULATIONS. If the
Company's securities were delisted from Nasdaq (see "--Possible Delisting of
Securities from the Nasdaq Stock Market"), they may become subject to Rule
15c2-6 under the Securities Exchange Act of 1934 (the "Exchange Act"), which
imposes additional sales practice requirements on broker-dealers which sell such
securities to persons other

<PAGE>

than established customers and "accredited investors" (generally, individuals
with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by this Rule,
a broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the Rule may affect the ability and/or willingness of
broker-dealers to sell the Company's securities and may affect the ability of
purchasers in this Offering to sell any of the securities acquired hereby in the
secondary market.

The Commission has also adopted regulations which define a "penny stock"
to be any equity security that has a market price (as therein defined) of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require the delivery, prior to any transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure also has to be made about commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.

The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on the Nasdaq National Market, are
otherwise listed on Nasdaq and have certain price and volume information
provided on a current and continuing basis or meet certain minimum net tangible
assets or average revenue criteria. There can be no assurance that the Company's
securities will qualify for exemption from these restrictions. In any event,
even if the Company were exempt from such restrictions, it would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Commission the
authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of penny stock from associating with a
broker-dealer or participating in a distribution of penny stock, if the
Commission finds that such a restriction would be in the public interest.

If the Company's securities were subject to the rules on penny stocks,
the prices of and market liquidity for the Company's securities could be
severely adversely affected.

13. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL
DILUTIVE EFFECT OF OUTSTANDING SECURITIES AND FUTURE ACQUISITIONS AND POSSIBLE
NEGATIVE IMPACT ON FUTURE FINANCINGS. 1,154,470 shares of Common Stock currently
outstanding are "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act and may, under certain circumstances, be
sold without registration pursuant to Rule 144. These restricted securities,
which represent approximately 12.5% of the outstanding shares of Common Stock of
the Company are eligible for sale under Rule 144 or otherwise, without
registration under the Securities Act. Joel Edison, a principal stockholder of
the Company, holds 533,333 shares of Common Stock of the Company acquired by him
in connection with the Company's acquisition of KISS. Mr. Edison has the right
to demand the registration of all or a portion of such shares commencing on July
1, 1996, and the right to require the Company to issue additional shares to him
in the event that the market price for such shares is less than $3.75 at the
time Mr. Edison sells such shares subsequent to July 1, 1996, subject to certain
adjustments. Demand for such registration, if any per share, may occur at an
inopportune time for the Company and will result in substantial expense. If the
market price for the Company's Common Stock does not increase to at least $3.75
per share, the issuance of additional shares to Mr. Edison may result in
dilution to the other stockholders of the Company. The holder(s) of the Unit
Purchase Option have certain demand registration rights with respect to the
securities underlying such option which expire on October 14, 1998. Holders of
the Bridge Warrants also have certain demand and piggyback registration rights.
Exercise of one or more of these registration rights may involve substantial
expense to the Company and may adversely affect the terms

<PAGE>

upon which the Company may obtain additional financing. See "Description of
Securities--Registration Rights". Additionally, any shares of Common Stock
purchased upon exercise of the Class A and Class B Warrants, the Bridge Warrants
or the Unit Purchase Option may be tradeable without restriction, provided that
the Company satisfies certain securities registration and qualification
requirements. The sale, or availability for sale, of substantial amounts of
Common Stock and/or Warrants in the public market pursuant to Rule 144 or
otherwise could adversely affect the market price of the Common Stock and the
Company's other securities and could impair the Company's ability to raise
additional capital through the sale of its equity securities or debt financing.
Further, if the price of the Common Stock or the Company's earnings or the price
of its Common Stock exceed certain levels during specified periods, the 975,000
Escrow Shares (as defined below) held in escrow may be released and may also
then be sold in compliance with Federal and state securities laws. See "Escrow
Shares and Escrow Options". Any substantial sale of such Escrow Shares may have
an adverse effect on the market price of the Company's securities and its
ability to raise additional capital. Also, to the extent that the Class A
Warrants, the Class B Warrants, any options granted under the 1991 Plan, the
1994 Outside Directors Plan, the Escrow Shares, the Bridge Warrants, or any
other rights, warrants and options are exercised, the ownership interest of the
Company's stockholders will be diluted correspondingly. If, and to the extent,
that the Company in the future reduces the exercise price(s) of outstanding
warrants and/or options, the Company's stockholders could experience additional
dilution. See "Escrow Shares and Escrow Options" and "Description of
Securities". In addition, the Company is contemplating making acquisitions of
similar or complementary businesses which may include one or more such
transactions with affiliates or related parties of the Company. The Company
intends, to the extent practicable, to issue its equity securities in order to
pay a substantial portion of the purchase price(s) for any such acquisitions.
While there can be no assurances that the Company will be able to consummate any
acquisitions, or to pay the purchase prices thereof in its securities, if it
were to do so, stockholders of the Company could experience dilution of their
equity interest in the Company as a result.

14. POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. There
can be no assurance that the Company will meet the criteria for continued
listing of securities on Nasdaq adopted by the Commission. In order to maintain
its listing on Nasdaq, a company must, among other things, have a minimum of
$2,000,000 in total assets and a minimum bid price of $1.00 per share of Common
Stock. If an issuer does not meet the $1.00 minimum bid price standard, it may,
however, remain on Nasdaq if the market value of its public float is at least
$1,000,000 and the issuer has capital and surplus of at least $2,000,000. if the
Company became unable to meet the continued listing criteria of the Nasdaq,
because of continued operating losses or otherwise, and became delisted
therefrom, trading, if any, in the Common Stock and the Warrants would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or, if available, the NASD's "Electronic Bulletin Board". As a result,
an investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the value of, the Company's securities.

15. POTENTIAL ANTI-TAKEOVER EFFECTS. The Company is governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware, an anti-takeover law enacted in 1988. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and certain other transactions
resulting in a financial benefit to the stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. As a result of the application of Section 203,
potential acquirers of the Company may be discouraged from attempting to effect
an acquisition transaction with the Company, thereby possibly depriving holders
of the Company's securities of certain opportunities to sell or otherwise

<PAGE>

dispose of such securities at above-market prices pursuant to such transactions.
See "Description of Securities--Delaware Anti-Takeover Law". In addition,
certain provisions contained in the employment agreements of certain officers of
the Company contain provisions which obligate the Company to make certain salary
and bonus payments to such employees if their employment is terminated upon a
"change of control" (as defined therein). Further, the Company's 1991
Performance Equity Plan provides for the acceleration of, and removal of
restrictions from, options and other awards under the Plan upon a "change of
control" (as defined therein). Such provisions may also have the effect of
discouraging acquisitions of the Company. See "Management--Employment
Arrangements" and "--1991 Performance Equity Plan".

16. POSSIBLE ADVERSE AND ANTI-TAKEOVER EFFECTS OF AUTHORIZATION OF
PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the
issuance of a maximum of 5,000,000 shares of Preferred Stock on terms which may
fixed by the Company's Board of Directors without further stockholder action.
The terms of any series of Preferred Stock, which may include priority claims to
assets and dividends, and special voting rights, could adversely affect the
rights of holders of the Common Stock being offered hereby. The Company has no
current plans to issue additional Preferred Stock. The issuance of such
Preferred Stock could make the possible takeover of the Company or the removal
of management of the Company more difficult, discourage hostile bids for control
of the Company in which stockholders may receive premiums for their shares of
Common Stock, otherwise dilute or subordinate the rights of holders of Common
Stock and adversely affect the market price of the Common Stock. See
"Description of Securities--Preferred Stock".

17. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS; ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants which
are offered hereby will not knowingly be sold to purchasers in jurisdictions in
which the Warrants are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket or may move to jurisdictions in
which the shares of Common Stock and/or the Class B Warrants, as the case may
be, underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In this event, the Company would be unable to
issue shares of Common Stock and/or Class B Warrants, as the case may be, to
those persons desiring to exercise their Warrants unless and until the shares
and/or Class B Warrants could be qualified for sale in jurisdictions in which
such purchasers reside, or an exemption to such qualification exists in such
jurisdiction. No assurance can be given that the Company will be able to effect
any required registration or qualification.

Additionally, purchasers of the Warrants will be able to exercise the
Warrants included therein only if a current prospectus relating to the
securities underlying the Warrants is then in effect under the Securities Act
and such securities are qualified for sale or exempt from qualification under
the applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to use
reasonable efforts to maintain the effectiveness of a current prospectus
covering the securities underlying the Warrants, there can be no assurance that
the Company will be able to do so. The value of the Warrants may be greatly
reduced if a current prospectus covering the securities issuable upon the
exercise of the Warrants is not kept effective or if such securities are not
qualified or exempt from qualification in the states in which the holders of the
Warrants then reside. See "Description of Securities--The Warrants".

In addition, the Warrants are subject to redemption by the Company,
commencing on the date one year from the date of this Prospectus, on at least 30
days' prior written notice if the average of the closing bid prices (or last
sales prices) of the Common Stock for 30 consecutive business days ending within
15 business days of the date on which the notice of redemption is given exceeds
$10.76 per share with respect to the Class A Warrants and $15.54 per share with
respect to the Class B Warrants. If the

<PAGE>

Warrants are redeemed, holders of Warrants will lose their right to exercise the
Warrants, except during such 30-day notice of redemption period. Upon the
receipt of a notice of redemption of the Warrants, the holders thereof would be
required to: exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for them to do so; sell the Warrants at the then market
price (if any) when they might otherwise wish to hold the Warrants; or accept
the redemption price, which is likely to be substantially less than the market
value of the Warrants at the time of redemption. See "Description of
Securities--The Warrants".

18. CHARGE TO INCOME IN THE EVENT OF RELEASE OF SHARES FROM ESCROW. The
staff of the Commission has adopted a position with respect to escrow
arrangements such as the one entered into among the Company and certain of its
stockholders as described under "Escrow Shares and Escrow Options". This
position provides that in the event any shares are released from escrow to
persons who are directors, consultants, officers and other employees of the
Company, compensation expense would be recorded for financial reporting purposes
based on the fair market value of the released shares. Therefore, in the event
the Company attains any of the earnings thresholds or the Company's Common Stock
meets certain minimum bid prices required for the release of the Escrow Shares,
any release would be deemed additional compensation expense of the Company.
Accordingly, the Company would, in the event of the release of the Escrow Shares
from escrow, recognize during the periods in which the earnings thresholds are
met or are probable of being met or such minimum bid prices attained, what would
likely be one or more substantial charges which would have the effect of
substantially reducing earnings, if any, at such time. Although the amount of
compensation expense recognized by the Company would not affect the Company's
total stockholders' equity, it could likely have a depressive, perhaps
significant, effect on the market price of the Company's securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Principal Stockholders", "Escrow Shares and Escrow Options" and
Note 10 of "Notes to Consolidated Financial Statements".

19. DIVIDEND POLICY. Since its inception, the Company has not paid
any dividends on its Common Stock. The Company intends to retain future
earnings, if any, to provide funds for the operation of its business and,
accordingly, does not anticipate paying any cash dividends on its Common Stock
in the reasonably foreseeable future. See "Dividend Policy".

20. POSSIBLE DILUTION. The Company currently has outstanding Warrants to
Purchase Common Stock covering a total of 7,726,258 shares of its Common Stock
at exercise prices ranging from $2.39 to $10.76 per share. Such securities are
exercisable at varying times and at varying prices and expire on either April
17, 1997, or October 14, 1998. In addition, there are outstanding stock options
to purchase a total of 1,310,582 shares of the Company's Common Stock at
exercise prices ranging from $1.25 to $5.00 per share. Such stock options have
expiration dates ranging from July 11, 1996, to February 2, 2006. The Company is
permitted under its existing stock option plans to grant to certain of its
employees, officers and directors options to purchase an aggregate of 1,900,000
additional shares of Common Stock. To the extent that such options are
exercised, the holders thereof are given an opportunity to profit from a rise in
the market price of the Company's Common Stock with a resultant dilution of the
interest of the then existing stockholders. The holders of such options are
likely to exercise them when, in all likelihood, the Company could obtain funds
from the sale of its securities on terms more favorable than those provided by
the options. See "Management--Stock Options", "Plan of Distribution" and
"Description of Securities".

<PAGE>

THE COMPANY

The Company was formed for the purpose of pursuing acquisitions,
primarily in the non-chemical waste water treatment and water filtration and
purification industries. ACS is a holding company which, through its
subsidiaries, operates businesses that it has acquired. In connection therewith,
ACS provides management services and, when practicable, financing for its
subsidiaries. Through additional acquisitions, ACS intends to build an
integrated, non-chemical waste water treatment and water filtration and
purification company. ACS desires to offer a variety of products and
technologies through its acquisitions of companies, assets or businesses which
will provide a one-stop source for its customers' water filtration and
purification and waste water treatment needs, in order to address what it
believes to be a highly fragmented industry segment in the water filtration and
purification and waste water treatment industries, which is at least a $30
billion dollar market.

The Company was incorporated under the laws of Delaware in 1990. The
principal executive offices of ACS are located at 3806 North 29th Avenue,
Hollywood, Florida 33020.

PLAN OF DISTRIBUTION

The Company hereby offers: (i) 1,100,000 Class A Warrants; (ii)
1,100,000 shares of Common Stock issuable upon the exercise of the Class A
Warrants; (iii) 1,100,000 Class B Warrants issuable upon the exercise of the
Class A Warrants; (iv) 1,100,000 shares of Common Stock issuable upon the
exercise of the Class B Warrants; and (v) 734,467 shares of Common Stock
issuable upon the exercise of the Bridge Warrants. The 2,200,000 shares of
Common Stock that are issuable upon exercise of the Class A Warrants and Class B
Warrants and the 734,467 shares of Common Stock that are issuable upon exercise
of the Bridge Warrants are identical in all respects to the Company's
outstanding Common Stock. See "Description of Securities".

The holder of each Class A Warrant is entitled to purchase one share of
Common Stock and one Class B Warrant at an aggregate exercise price of $7.17.
The Class A Warrants are exercisable at any time until October 14, 1998,
provided that at such time a current prospectus under the Securities Act
relating to the Common Stock and the Class B Warrants is then in effect and the
Common Stock and the

<PAGE>

Class B Warrants are qualified for sale or exempt from qualification under
applicable state securities laws. The Class A Warrants are subject to
redemption, as described below.

The holder of each Class B Warrant is entitled to purchase one share of
Common Stock at an aggregate exercise price of $10.76. The Class B Warrants are
exercisable at any time until October 14, 1998, provided that at such time a
current prospectus under the Securities Act relating to the Common Stock is then
in effect and the Common Stock are qualified for sale or exempt from
qualification under applicable state securities laws. The Class B Warrants are
subject to redemption, as described below.

The Company has engaged First United as a financial advisor to the
Company. Pursuant to the terms of the consulting agreement between the Company
and First United dated October 5, 1995, as amended January 23, 1996 (the
"Consulting Agreement"), the Company has agreed to register and issue to First
United up to 1,100,000 Class A Warrants. Of the 1,100,000 Class A Warrants,
550,000 will be issued to First United at the earlier of the Effective Date of
this Registration Statement or June 30, 1996. Therefore, of the 1,100,000 Class
A Warrants, 550,000 will be immediately tradeable by First United as of the
Effective Date of the Registration Statement and the other 550,000 of those
Class A Warrants will be held in escrow for First United until the completion of
a financial transaction for which First United acts as an advisor, placement
agent or underwriter as defined in the Consulting Agreement. The Class A
Warrants to be issued to First United are identical in their terms to the
outstanding Class A Warrants of the Company. See "Description of Securities."

The sale of the shares by Selling Securityholders maybe offered from
time to time in transactions on the Nasdaq SmallCap Market, in negotiated
transactions or through a combination of such methods of sale, at prices related
to such prevailing market prices prevailing at the time of sale, or at
negotiated prices. The Selling Securityholders may effect such transactions by
selling the shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholder and/or the purchasers of the shares of which such
broker-dealer may act as agent or to whom they sell as principal, or both (which
compensation as to a particular broker-dealer maybe in excess of customary
commissions).

The Selling Securityholders and any broker-dealers who act in connection
with the sale of the shares hereunder may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by them and profit on any resale of the shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.

USE OF PROCEEDS

The offering made hereby is for the account of the Selling
Securityholders and unless certain of the securities offered hereby, which are
convertible into Common Stock, are so exercised, there will be no proceeds to
the Company from this offering. If all of such convertible securities are
exercised, a total of approximately $23,600,000 would be received by the
Company. There can be no assurance, however, that any of such rights to purchase
will be so exercised as the current market price of the Common Stock is
generally below the amount of the exercise prices of the Class A Warrants and
Class B Warrants offered hereby. The current market price of the Company's
Common Stock fluctuates in the range of the exercise price of the Bridge
Warrants. Thus, there is not currently an incentive on the part of the Selling
Securityholders to exercise their rights to purchase such shares, pursuant to
the Class A Warrants and Class B Warrants, but depending on the current market
price of the Common Stock, an incentive might

<PAGE>

exist on the part of the Selling Securityholders to exercise their rights to
purchase such shares pursuant to the Bridge Warrants. Any proceeds received
would be reduced by the expenses of this offering, estimated to be approximately
$50,000. See "Plan of Distribution" and "Description of Securities".

MARKET PRICE FOR COMMON STOCK

The Company's Common Stock, par value $.001 per share is traded in the
over-the-counter market and quoted on the National Association of Securities
Dealers ("Nasdaq") SmallCap Market System (Symbol: AQCR).

The following table sets forth for the fiscal periods indicated the high
and low bid prices for the Company's Common Stock as reported to the Company by
Nasdaq, the principal market on which the Company's Common Stock is traded.

BID
------------------
HIGH LOW
---- ---
1994
----
First Quarter ................................ 4-1/16 3-1/4
Second Quarter ............................... 3-3/8 1-1/2
Third Quarter ................................ 4 2-7/8
Fourth Quarter ............................... 3-1/2 2-3/4

1995
----
First Quarter ................................ 3-3/4 2
Second Quarter ............................... 5-1/8 2-7/8
Third Quarter ................................ 3-1/2 1-1/8
Fourth Quarter ............................... 2-3/8 1-1/8

1996
----

First Quarter ................................ 2 1/2 1 3/8
Second Quarter (through June 14) .............. 1 27/32 31/32

DIVIDEND POLICY

ACS has never paid dividends on its Common Stock and does not anticipate
the payment of cash dividends in the future. ACS anticipates that any future
earnings will be retained to finance ACS's operations and expansion, and
accordingly, does not plan, for the reasonably foreseeable future, to pay cash
dividends to holders of its Common Stock. Any decision as to the future payment
of dividends will depend on the results of operations and financial position of
ACS and such other factors as the Board of Directors, in its discretion, may
determine.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.

BUSINESS PLAN

The Company was formed for the purpose of pursuing acquisitions,
primarily in the non-chemical waste water treatment and water filtration and
purification industries. The Company is a holding company which, through its
subsidiaries, operates businesses that it has acquired with the intent to build
an integrated, water-related equipment manufacturing company. The Company
desires to offer a variety of products and technologies through its acquisitions
of companies, assets or businesses, which will provide a one-stop source for its
customers' water filtration and purification and waste water treatment needs,
from residential through commercial, medical, industrial and small
municipalities, in order to address what it believes to be the fragmented nature
of this industry. This industry is driven by increasing consumer awareness and
desire for safer drinking water and a cleaner environment and by the related
enforcement of various legislation, such as the Safe Drinking Water Act and the
Clean Water Act.

The Company has diligently pursued its business plan and since July of
1991, has acquired nine companies in its chosen field. As a result of these
acquisitions, the Company's revenues have gradually increased. In achieving this
growth, the Company has expended significant cash in making the acquisitions and
developing the operations of its wholly-owned subsidiaries. In this connection,
see "Financial Condition and Liquidity" below.

RESULTS OF OPERATIONS.

THREE MONTHS ENDED MARCH 31, 1996, AND 1995

Presented below are the consolidated results of the operations for the
Company for the three months ended March 31, 1996, and 1995:

THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
Revenues $ 3,855,336 $ 3,714,973
Cost of revenues 2,610,832 2,403,433
------------- --------------
Gross profit 1,244,504 1,311,540
Operating expenses (including other
income and expenses) 1,290,717 1,617,986
------------- --------------
Net loss (46,213) $ (306,446)
============= ==============

Revenues increased by $140,363, or 3.8%, from $3,714, 973 for the three
months ended March 31, 1995, to $3,855,336 for the three months ended March 31,
1996. Of this increase, $345,880 was attributable to an increase in sales and
service of car wash machines and ancillary equipment of CWES; $48,761 was
attributable to an increase in sales of municipal, industrial and commercial
waste water treatment equipment and waste water treatment plants of GFS and ESSI
and $(254,278) was realized

<PAGE>

from an overall decrease in sales of commercial and residential water
purification products of KISS, MWT, DTS, and PFW.

Costs of revenues increased by $207,399, or 8.6%, from $2,403,433 for
the three months ended March 31, 1995, to $2,610,832 for the three months ended
March 31, 1996. As a percentage of revenues, these amounts represented 67.7% for
1996 as compared to 64.7% for 1995. The increase in cost of revenues as a
percentage of revenues primarily was due to the continuing shift in the mix of
the Company's overall business from service-related business to
manufacturing/distribution business, which requires higher materials, components
and direct labor costs.

Gross profit decreased $(67,036) or 5.1% from $1,311,540 for the three
months ended March 31, 1995, to $1,244,504 for the three months ended March 31,
1996, which, as a percentage of revenues, represented a decrease from 35.3% to
32.3%, respectively, for such periods.

The Company's operating expenses (including other income and expenses)
decreased $(327,269), or 20.2%, from $1,617,986 for the three months ended March
31, 1995, to $1,290,717 for the three months ended March 31, 1996. As a
percentage of revenues, these expenses decreased from 43.6% for 1995 to 33.5%
for 1996. The $(327,269) decrease was attributable mainly to the paring of
certain operating expenses, including other income and expenses, mainly in the
expenses categories of personnel and related expenses ($210,087) and
advertising, selling and shows ($67,218) and an increase in financing fees
earned ($45,657).

Principally, as a result of the factors described above, the net loss
experienced by the Company decreased $260,233 from $(306,446) for the three
months ended March 31, 1995, to $(46,213) for the three months ended March 31,
1996.

FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994

Presented below are the consolidated results of operations for the
Company for the fiscal years ended December 31, 1995, and 1994:

FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------

Revenues $ 14,500,501 $ 7,871,457
Cost of revenues 9,559,559 4,281,214
------------ ------------
Gross profit 4,940,942 3,590,243
Operating expenses (including other
income and expenses) 9,214,701 4,411,551
------------ ------------
Net loss $ (4,273,759) $ (821,308)
============ ============

Revenues increased by $6,629,044, or 84.2%, from $7,871,457 for the year
ended December 31, 1994, to $14,500,501 for the year ended December 31, 1995. Of
this increase, $2,659,212 was derived from revenues from companies acquired by
the Company in 1995, as follows: $2,184,468 from sales of commercial and
residential water purification products resulting from the acquisition of MWT
effective January 1, 1995; and $474,744 from sales of water purification
products resulting from the acquisition of DTS, effective March 1, 1995.
$4,348,872 of the increase was attributable to revenues derived from companies
acquired by the Company during 1994, as follows: $1,619,564 attributable to the
sales and

<PAGE>

service of car wash machines and ancillary equipment of CWES, acquired effective
April 1, 1994; $1,604,628 attributable to sales of commercial and residential
water purification products of KISS, which was acquired effective July 1, 1994;
and $1,124,680 attributable to the sales of municipal, industrial and commercial
waste water treatment equipment of GFS, which became a wholly owned subsidiary
of the Company effective July 1, 1994. The balance of the change in revenues
resulted from higher volumes of packaged waste water treatment plants and
equipment sold by ESSI and lower volumes of water purification equipment and
related services sold by PFW.

Cost of revenues increased by $5,278,345, or 123.3%, from $4,281,214 for
the year ended December 31, 1994, to $9,559,559 for the year ended December 31,
1995. As a percentage of revenues, these amounts represented 54.4% for 1994 as
compared to 65.9% for 1995. The increase in cost of revenues as a percentage of
revenues primarily was due to the continuing shift in the mix of the Company's
overall business from service-related business to manufacturing/distribution
business, which requires higher materials, components and direct labor costs. In
addition, the Company experienced production and assembly inefficiencies caused
by the inadequate and untimely flow of raw materials and components because of
the Company's inadequate cash position throughout 1995.

Gross profit increased $1,350,699 or 37.6% from $3,590,243 for the year
ended December 31, 1994, to $4,940,942 for the year ended December 31, 1995,
which, as a percentage of revenues, represented a decrease from 45.6% to 34.1%,
respectively, for such periods.

The Company's operating expenses (including other income and expenses)
increased $4,803,150, or 108.9%, from $4,411,551 for 1994 to $9,214,701 for
1995. As a percentage of revenues, these expenses increased from 56.0% for 1994
to 63.5% for 1995. The $4,803,150 increase was attributable mainly to the
addition of operating expenses, including other income and expenses, of entities
acquired subsequent to June 30, 1994, KISS, GFS, MWT and DTS, mainly in the form
of higher personnel and related expenses ($1,508,380); selling expenses,
including, but not limited to, advertising and shows ($335,913); rent and
utilities ($227,260); amortization ($182,376); insurance ($128,360); interest
expense, net ($113,086); the impairment of goodwill recognized by GFS and DTS in
1995 ($1,094,167); a provision to reduce property, plant and equipment and other
intangible assets to realizable value recorded in 1995 ($792,709); and an
increase in the provision for doubtful accounts and notes ($343,541). Such
increase in the above-noted provision relates mainly to certain notes incurred
by GFS to its previous stockholders and the write off of certain of the accounts
of PRF which relates to customers with which the Company no longer does
business. The Company has taken remedial steps to prevent significant future
doubtful accounts and notes by implementing more stringent credit policies and
procedures and adding additional levels of credit review wherein subsidiary
company management and Company management must approve customers which are
deemed questionable as to the extension of credit.

The Company recognizes revenue on waste water treatment system
construction contracts on the percentage of completion method, based generally
on the ratio of costs incurred to date on the contract to the total estimated
contract cost. Costs incurred and revenues recognized in excess of amounts
billed are classified under current assets as costs and estimated earnings in
excess of billings. Amounts billed in excess of revenues recognized are
classified under current liabilities as billings in excess of costs and
estimated earnings. Losses on construction contracts are recognized at the time
they become estimatable. The majority of such construction contracts are fixed
price contracts which allow for change orders based upon bilateral agreement
between the Company and its customers.

The Company controls the costs incurred during the construction process
through a budgeting system and compares budgeted to actual results at various
stages throughout the lives of such contracts. The Company's experience level in
the waste water treatment system construction contract business

<PAGE>

enables it to manage its contracts to within an immaterial amount of error from
budget to actual. There have been no significant contract cost overruns on the
Company's fixed price contracts and, to date, the Company has not incurred a
material amount of bad debt related to these construction contracts.

Included in the revenues for the fiscal years ended December 31, 1995,
and 1994, are $1,636,679 and $1,295,863, respectively, relating to waste water
treatment system construction contracts. Included in the cost of revenues for
the fiscal years ended December 31, 1995, and 1994, are $1,295,346 and $781,841,
respectively, relating to waste water treatment system construction contracts.
Therefore, the gross profit realized on such contracts for the years ended
December 31, 1995, and 1994 are $341,333 (20.9%), and $514,022 (39.7%). The
overall decrease in gross profit from 1994 to 1995 is a result of increased
competition and a temporary shift in the Company's waste water treatment system
construction contract business from international to domestic.

Principally as a result of the factors described above, the net loss
experienced by the Company increased by $3,452,451 from ($821,308) for the year
ended December 31, 1994, to ($4,273,759) for the year ended December 31, 1995.

FINANCIAL CONDITION AND LIQUIDITY

The Company's working capital from inception has been derived from the
issuance of certain interim notes in the principal amount of $200,000, net
proceeds of approximately $3,115,000 from the five bridge financings effected
through August 1993, net proceeds of approximately $5,700,000 from its initial
public offering in October 1993, proceeds of approximately $2,900,000 from the
private sales of Common Stock during the first six months of 1995, and proceeds
of approximately $2,800,000 from the issuance of certain convertible
subordinated debentures from August 1995 through September 1995, as more fully
described in Note 10 of "Notes to December 31, 1995, Consolidated Financial
Statements".

At March 31, 1996, the Company had $512,898 of cash and cash
equivalents, working capital of $3,071,727, assets of $10,468,597, long-term
debt, net of current maturities, of $482,156 and stockholders' equity of
$8,003,504. The Company's operating activities used $625,376 of cash,
principally as a result of an increase in accounts receivable ($548,890), a
decrease in accounts payable and accrued expenses ($335,999) and the net loss
($46,213); partially offset by a decrease in inventory ($178,580), and
depreciation and amortization ($128,469). Investing activities provided
$458,353, principally from payments received on notes receivable ($520,700);
partially offset by capital expenditures ($49,767). Financing activities used
$41,842 of cash, due to repayments of notes payable and long-term debt.

At December 31, 1995, the Company had $721,763 of cash and cash
equivalents, working capital of $3,101,555, assets of $10,892,651, long-term
debt, net of current maturities, of $523,998 and stockholders' equity of
$7,801,758. The Company's operating activities used $3,294,927 of cash,
principally as a result of increases in accounts receivable ($391,286) and
inventory ($648,189), decreases in accounts payable and accrued expenses
($1,485,729) and the bank overdraft ($63,884) and the net loss ($4,273,759);
partially offset by decreases in costs and estimated earnings in excess of
billings ($450,173) and prepaids and other assets ($200,278), and depreciation
and amortization ($628,628); provision for impairment of goodwill ($1,094,167),
provision for doubtful accounts and notes ($370,541) and provision to reduce
property, plant and equipment and other intangibles to realizable value
($792,708). Investing activities used $1,172,589, principally due to payments
for acquisition of businesses, net of cash acquired ($333,995), issuance of
notes receivable ($500,000), (repaid in February 1996), and capital expenditures
($453,238); partially offset by payments received on notes receivable
($116,696). Financing activities provided $5,189,279 of cash, primarily from net
proceeds from issuance of notes payable ($747,959), net

<PAGE>

proceeds from issuance of Common Stock ($5,496,435); partially offset by
repayments of notes payable and long-term debt ($1,055,115).

The Company has experienced negative cash flows from operating
activities for the years ended December 31, 1995, and 1994. To date, the Company
has funded its growth and operations from the net proceeds of its initial public
offering, bank financing and several private sales of Common Stock completed
throughout 1995. If the Company continues to experience negative cash flows from
operating activities and additional proceeds from financing are not obtained,
the Company may need to further reduce its level of operating expenditures.

The acquisition and development of companies in the water equipment
industry consumed a substantial amount of the Company's cash through December
31, 1995. However, in order to continue its on-going acquisition program,
including the two acquisitions completed during the first quarter of 1995 and
fund its on-going operations and to infuse the capital needed by newly acquired
businesses, the Company completed private sales of 1,400,000 shares of its
Common Stock from January through June 1995, which resulted in net proceeds to
the Company of approximately $2,900,000. In January 1995, the Company also
entered into a loan agreement with a bank and borrowed $250,000, which amount
was repaid during 1995. In August and September 1995, the Company issued
$750,000 and $2,500,000, respectively, of Convertible Subordinated Notes for net
proceeds of approximately $2,800,000. Through December 31, 1995, approximately
$3,000,000 of these Notes were converted into 2,574,029 shares of the Company's
Common Stock. In January 1996, the remainder of such Notes was converted into
268,818 shares of the Company's Common Stock.

During the second quarter of 1995, at which time the executive
management changed, the Company enacted a consolidation and restructuring plan.
As a result of such plan the Company shut down the operations of FLS,
terminating its entire staff; removed an entire level of management within GFS;
and closed the DTS manufacturing facility at Brea, California, terminating the
majority of DTS' employees which resulted in a provision for impairment of
goodwill totalling $1,094,167. Subsequent to the consolidation and restructuring
plan GFS continues to operate but subcontracts out the manufacture of its
product line and DTS continues to manufacture water purification and filtration
equipment at the KISS facility in Vista, California. Additionally, as a result
of the Company closing the KISS distribution center in Palmetto, Florida, the
downsizing of operations of PFW and the impairment of goodwill noted above, the
Company recognized $792,708 in provisions to reduce property, plant and
equipment and other tangible assets to realizable value and $370,541 in
provisions for doubtful accounts and notes.

During July 1995, in accordance with its overall plan to optimize the
use of its cash resources through economies of scale, created by expansion, the
Company's management implemented a plan to reduce operating expenses by an
annualized rate of approximately $1,700,000 throughout the remainder of 1995.
Pursuant to this plan, the Company realized the majority of its savings in
payroll and related expenses, insurance, rent and utilities through a reduction
of its overall employee base and the consolidation of the manufacturing,
distribution and administrative functions into centrally located, more efficient
and effective facilities. Management does not expect sales levels to be
adversely affected by the implementation of this plan.

Management expects to continue to make acquisitions in its industry, and
several are in various stages of discussion; however, none of these discussions
have progressed to the negotiation of specific terms of an acquisition and no
acquisition is being negotiated as of the date of this Prospectus. As
consideration for an acquisition, the Company may issue Common Stock, Preferred
Stock, or other securities, notes or cash. Since cash will be required either to
consummate acquisitions, or to fund the operations of new or existing
businesses, including approximately $380,000 of current maturities of long-

<PAGE>

term debt and indebtedness to related parties, management is investigating and
pursuing various types of financing that are available to the Company. These
include, but are not limited to, private placements, conversion of warrants,
secondary offerings, bridge financing, debentures, lines of credit and
asset-based loans. While there can be no assurances, management believes that
sufficient financing will be available to be secured for the Company to not only
fund its current operations, but also to fund its acquisition program.

A portion of the revenues of the Company, particularly through ESSI,
have been, and are expected to continue to be, generated from foreign countries.
As a result of this fact and, notwithstanding the fact that the Company expects
its foreign contracts to be denominated in U.S. dollars, the Company is subject
to the risks associated with fluctuations in the U.S. and foreign currencies and
political instability. In particular, if the U.S. dollar increases significantly
as compared to foreign currencies, this could adversely impact the ability of
the Company to secure orders and generate revenues in foreign countries.

INFLATION

The Company has not been materially affected by the impact of inflation.

OTHER

In 1996, the Company will be required to apply the provisions of
Statements of Financial Accounting Standards ("SFAS"), No. 121 and 123,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed" and "Accounting for Stock-based Compensation". The Company does not
expect the application of those Statements to have a material adverse effect on
its financial statements.

CHARGE TO INCOME IN THE EVENT OF RELEASE OF SHARES FROM ESCROW

The staff of the Commission has adopted a position with respect to
escrow arrangements such as the one entered into among the Company and certain
stockholders of the Company. This position provides that in the event any shares
are released from escrow to persons who are directors, consultants, officers and
other employees of the Company, compensation expense will be recorded for
financial reporting purposes based on the fair market value of the released
shares. Therefore, in the event the Company attains any of the earnings
thresholds or the Company's Common Stock meets certain minimum bid prices
required for the release of shares from escrow, any release would be deemed
additional compensation expense of the Company. Accordingly, the Company will,
in the event of the release of shares from escrow, recognize during the periods
in which the earnings thresholds are met or are probable of being met or such
minimum bid prices are attained, what would likely be one or more substantial
charges which would have the effect of substantially reducing earnings, if any,
at such time, in an amount equal to the fair market value of the escrow shares
as of the date on which they are released.

<PAGE>

BUSINESS

GENERAL

The Company has pursued its Business Plan and since July 1991 has
acquired nine companies in its chosen field. As a result of these acquisitions,
the Company's revenues have gradually increased, with the most significant
increase occurring in the year ended December 31, 1995. In achieving this
growth, the Company has expended significant cash in making the acquisitions and
developing the operations of its wholly owned subsidiaries. In June 1995, at
which time the executive management of the Company changed, the Company
implemented a consolidation and restructuring plan designed to save the Company
$1.7 million on an accrual basis. The restructuring has not reduced revenues for
the Company but should lend to more consistent revenues. Management believes
that the Company currently needs to experience significant improvement in its
business and further strategic acquisition program. In order to improve its
business, management has emphasized, among other things, revenue growth and
customer base development through a more organized approach wherein, for
example, certain synergies which exist among KISS, DTS and MWT (water filtration
and purification industry) and ESSI and GFS (waste water treatment industry)
will be exploited so that complimentary and ancillary products and systems will
be offered to existing and prospective customers. In order to further its
strategic acquisition program as part of attaining a profitable one-stop source
for its customers' needs, the Company intends to pursue entities which will
provide complimentary and ancillary products, systems or services to its
existing businesses and expertise. The Company may also venture into a niche of
the water filtration and purification or waste water treatment industries in
which it has no current presence in order to enhance its offerings to its
existing customer base and attract additional new customers.

ACQUIRED SUBSIDIARIES

As the first step in its business strategy and prior to its initial
public offering in October, 1993, the Company acquired Pure Flow Water Co., Inc.
("PFW"), on July 1, 1991. PFW was a distributor of a variety of water filtration
and purification products through its sales center in Hollywood, Florida. The
Company's second acquisition was the purchase of EnviroSystems Supply,
Incorporated ("ESSI"), on August 29, 1991. ESSI designs and assembles aerobic
and, under its exclusive license agreement with the patent holder, anaerobic
packaged waste water treatment systems, and markets and installs them in

<PAGE>

North America, the Caribbean, South America, Europe and the Mid-East. ESSI also
designs volative organic air stripping towers for the removal of volatile
organic compounds from ground water.

ESSI also designs, manufacturers, markets and installs VOSTRIP(TM)
Volatile Organic Air Stripping Towers for the removal of volatile organic
compounds from ground water. Other wastewater treatment technologies that were
added to the product offering in January 1994 include AQUATREAT(TM) Sequencing
Batch Reactors (SBR) that are used where specialized controlled biological
treatment is required and where flow rates vary from day to day. Also acquired
in 1994 was the TOPCO(TM) name, design and systems for treatment of municipal
wastewater up to 3 million gallons per day.

On May 12, 1994, the Company acquired all of the Common Stock of Car
Wash Equipment & Supply Ryko of South Florida, Inc. ("CWES"). The purchase price
consisted of 26,667 shares of Common Stock of ACS valued at $50,000, $300,000 in
cash, aggregate payments of $200,000 pursuant to a consulting/non-compete
agreement, and notes in the initial principal amount of $900,000. The Company
assumed operational control of CWES, a distributor in South Florida for the
sale, distribution and service of rollover car wash equipment, on April 1, 1994.

On July 7, 1994, the Company acquired all of the Common Stock of Joel C.
Edison, Ltd., dba KISS International ("KISS"). The purchase price consisted of
533,333 shares of Common Stock of ACS valued at $1,000,000 and aggregate
payments of $150,000 pursuant to a consulting/non-compete agreement. The Company
assumed operational control of KISS on July 1, 1994. KISS is a manufacturer and
distributor of water purification products for commercial and residential
applications.

On August 2, 1994, the Company acquired all of the Common Stock of
Gravity Flow Systems, Inc. ("GFS"), FLS Specialty Manufacturing, Inc. ("FLS"),
and the name and certain of the assets of TOPCO International, Inc. ("TOPCO"), a
maker of packaged wastewater treatment plants, for 533,333 shares of Common
Stock of ACS valued at $1,000,000. Upon consummation of the acquisition, FLS was
merged into GFS and the product line and operations of TOPCO were merged into
ESSI. The Company assumed operational control of these entities on July 1, 1994.
GFS is a manufacturer and distributor of various types of wastewater treatment
equipment mainly for municipal and industrial applications.

On January 23, 1995, the Company acquired all of the assets and assumed
certain liabilities of Midwest Water Technologies, Inc. ("MWT"). The purchase
price consisted of 20,740 shares of Common Stock of ACS valued at $35,000 and
$290,000 in cash. In connection with this acquisition, ACS issued options to
purchase 63,100 shares of Common Stock at an exercise price of $2.30 per share.
Pursuant to this acquisition, the Company agreed to issue additional shares
semi-annually to a former shareholder based upon the attainment of certain sales
levels. The Company assumed operational control of MWT on January 1, 1995. MWT
is an assembler and wholesaler of water conditioning equipment, parts and
components.

On March 17, 1995, the Company acquired all of the assets and assumed
all of the liabilities of the Di-tech division of Coast Filter Media Supply Co.,
Inc., dba Systamatix ("DTS"), a maker of water filtration cartridges. The
purchase price consisted of 5,000 shares of Common Stock of ACS valued at
$8,550. The Company assumed operational control of DTS on March 1, 1995.

The Company acquired PFW, ESSI, CWES, KISS, GFS, FLS, TOPCO, MWT and DTS
because of their added product, technical and distribution capabilities and
their perceived growth potential. Management believes, although there can be no
assurance, that with additional financial resources and more aggressive,
comprehensive marketing, additional personnel, affiliation with a broader
product line and expansion into new territories, the Company's present
businesses can achieve significant growth. In

<PAGE>

the short-term, ACS intends to focus on implementing this plan for its current
subsidiaries, while seeking other suitable acquisition candidates. See Note 3 of
"Notes to Consolidated Financial Statements."

The Company will continue to engage in an acquisition program which
could result in a substantial change in ACS's business operations and financial
condition. The Company's acquisition program has been and will continue to be
directed by William K. Mackey, Chairman of the Board, President and Chief
Executive Officer of ACS, in conjunction with the Company's Board of Directors.
As consideration for any acquisition, in addition to the payment of cash (if
any), ACS may issue notes, Common Stock, Preferred Stock or other securities.
Key employees of acquired companies generally will become employees of the
subsidiaries and, as such, will hold management positions in such subsidiaries.
ACS does not intend to seek stockholder approval for any such acquisitions
unless required by applicable law or regulations. See "Risk Factors".

OPERATIONS

The Company has organized its fully owned subsidiaries into three
loosely organized divisions, these being car wash operations, waste water
treatment and water purification and filtration products. ACS, the holding
company (the "HC"), manages and directs each subsidiary. The HC provides support
in the form of management, accounting and marketing for the subsidiaries.

CWES is a stand alone company and does not interact generally with any
other of the subsidiaries.

KISS, DTS and MWT are products companies. KISS, DTS and MWT assemble the
majority of their product lines. All of the water purification equipment and
systems assembled are installed by the Company's dealers or shipped as finished
goods to wholesalers and retailers. KISS manufactures and sells its products to
dealers who in turn resell the products to consumers. In most cases KISS and MWT
bundle their respective products into a package and sell them as a whole house
water solution. When dealers get to the consumer, ACS offers financing of the
purchase to the consumer. In the years ended December 31, 1995, ACS recognized
some $300,000 in margins from this financing activity and prospects $500,000 in
margins for 1996. The bundling of products ties KISS, MWT and DTS together
because of customer needs or requirements. The companies enjoy a shared synergy
which allows the separate companies to sell related company products within
their territory and have their products sold by others. As future products are
added this synergy will continue and multiply the effects of the synergy between
the products companies.

ESSI and GFS sell through exclusive manufacturers representatives and in
a number of cases representatives represent both companies. Since both companies
as with the products companies are in the same industry types advertising can be
done together since the target customers, end users or engineers equate to the
services or products provided.

ESSI has no real products of its own. Because of this, it is not
required to expend funds on research and development nor will it experience
product obsolescence. ESSI is a system integrator. It reviews customer
specifications or requirements and designs and engineers plants, systems or
processes that will meet the customer needs. By being a system integrator, it is
tied not to only supplying a product but finding the right solution. In many
cases, there are general product solutions available and ESSI can negotiate for
the best product, service and price. ESSI's systems are individually designed,
assembled and generally installed by ACS personnel. Sub-assembled systems and
other purchased components are transported to the container fabricator's
facility and assembled there by ACS personnel. The entire treatment system is
then transported to the customer's site for installation and initial start-up.

<PAGE>

GFS is in the wastewater treatment business arena that has a product
offering for a niche market. The market only has three competitors with GFS
having the largest installed base of customers. GFS operates by subcontracting
out the manufacture of its product line. This includes individually designed
equipment, as well as its standardized product line. GFS's product line is
installed entirely by its customers or external installation entities. At times
the GFS product may be a solution for an ESSI customer. Installation and
start-up of plants can be performed by personnel of either ESSI or GFS for each
other.

In June 1995, at which time the executive management of the Company
changed, the Company implemented a consolidation and restructuring plan.
Salaries at the holding company were cut by 10%. The Company downsized the staff
of ESSI by 50%. It closed the KISS distribution center in Palmetto, Florida. It
shut down the operations of FLS, terminating its entire staff and removed an
entire level of management at GFS. It closed its underutilized facility at Brea,
California, terminating all but three of the staff of Ditech and moving the
manufacturing function into its under utilized facility at KISS in Vista,
California. This consolidation was designed to save the Company $1.7 million on
an annual basis. This reorganization has not reduced revenues for the Company
but should lead to more consistent revenues. Further, management has written off
$370,541 of doubtful accounts and notes receivable, $792,708 of property, plant
and equipment and other intangibles and $1,094,167 of "good will" from previous
underperforming acquisitions. The restructuring has positioned the Company to
move forward and on the short term to become cash flow positive and the longer
term to achieve profitability.

CAR WASH OPERATIONS. CWES was formed in 1970 and, since 1979, it has
been the exclusive distributorship in the seven southern counties of Florida
for the sale, service, installation of Ryko Manufacturing Company's rollover car
wash equipment. CWES's customers include but are not limited to the major
national oil companies and independently owned and operating gasoline
distributorships and car wash companies. CWES has approximately installed 350
car washes in its territory and commands some 85% of the market share. CWES not
only sells new car washes but offers programs that allow the owner to either
lease equipment or revenue share equipment with CWES. The Company has
aggressively pursued the revenue share program such that it may share on a
long-term basis the profits generated by the car wash equipment with the owner.
CWES has recently initiated a program called "Fleet Wash". The Fleet Wash
program is designed to solicit from municipalities, cities and government
agencies the washing of their vehicles. Contracts have been obtained whereas
clients can send their vehicles to designated car washes in the area and have
the vehicles washed on a daily, weekly or monthly basis over a determined
period, i.e., one year for a fixed price. CWES and the participating stations
share in the revenue generated by these contracts.

CWES enjoys its market position not only because of the leading
equipment it supplies but because of the extensive service and maintenance it
provides its customers.

CWES is also the exclusive distributor for PFW's patent pending
AQUOZONE(TM) system in the same southern counties of Florida, which is used to
treat the reclaim water generated in the car wash.

WATER PRODUCTS. KISS is a manufacturer and distributor of water
purification products for commercial and residential applications. KISS was
established in southern California in 1985 to penetrate the residential and
commercial drinking water systems market with proprietary manufactured products
based on Reverse Osmosis (R/O) technology. KISS is one of eight manufacturers of
R/O membranes in the United States that are utilized in their own systems, as
well as sold to other equipment assemblers. It also owns its own molds for
various major components, such as filter housings, membrane housings and control
valves. KISS distributes its products through over 400 active dealers,
distributors and wholesalers in the United States and internationally. In 1991,
as the first step in its plans to increase penetration

<PAGE>

of key regional markets, KISS opened an assembly and distribution center in
Florida. It also recently has expanded its product offering to include larger
industrial R/O systems and products that incorporate ozone and ultraviolet
technologies.

MWT, through a predecessor entity, was formed in 1990 in Fort Wayne,
Indiana as an assembler and wholesaler of various water conditioning equipment,
parts and components and, to a lesser extent, reverse osmosis drinking water
systems. It sells to water conditioning dealers, plumbing wholesalers and
plumbing and mechanical contractors throughout Indiana, Michigan and Ohio.

DTS is located in Brea, California and commenced operations in 1989. It
participates in the growing world-wide drinking water point-of-use (POU) market
that is driven in the U.S. and other developed countries by a much higher public
awareness of drinking water quality problems and in underdeveloped countries by
the recognition on the part of many governments of their responsibility to
provide safe water for their people to drink. DTS produces a complete line of
blow-molded water purification and ion-exchange cartridges that it markets under
the Di-tech(R) brand name through dealers and distributors and O.E.M.'s.
Di-tech(R) cartridges employ a variety of granular carbons, resins and filter
media to address the removal of such contaminants as bacteria, chlorine, lead,
heavy metals and pesticides. All components of the Di-tech(R) cartridge body are
FDA grade. Its iodinated resin version is marketed outside of the U.S. under the
brand name Halox(R) as a disinfection system for residential use and, in larger
models, for communities that are not served by suitable municipally-treated
water. Certified test have shown that the Halox(R) system will treat water
contaminated with high levels of E. Coli bacteria and provide water that is
completely disinfected. The Di-tech(R) Travel Filter(TM), which is designed for
personal use and travel safety, has been certified for complete bacteria kill
and is the only such device currently offered with that status.

PFW is currently the sales and marketing arm for the proprietary
ELITE(TM) and FUTURE-TEK(TM) dealer programs, as well as generic water
filtration and purification equipment all manufactured by the subsidiaries of
Aqua Care Systems, Inc., i.e., KISS International and Midwest Water
Technologies. PFW ELITE(TM) water filtration and purification equipment is
proprietary and exclusive to ELITE(TM) dealers only and is validated by the
Water Quality Association. PFW markets through its exclusive dealer network,
currently numbering in excess of 24, its Custom National Food Service Water
Treatment program to such accounts as Kenny Rogers Roasters, Outback Steakhouse,
and Brinker Corp. PFW also sells its patent pending AQUOZONE(TM) car wash
reclaim water treatment system, to end users as well as through exclusive car
wash wholesale equipment dealers throughout the United States. PFW on a project
by project basis designs water treatment systems under the AQUAKLEEN(TM)
tradename for the circuit board manufacturing industry, bottling industry and
potable water plants. PFW has begun to develop an international network of
distributors and commercial and industrial customers, specifically in Central
and South America.

PFW also assembled and distributed a proprietary line of bottleless
water coolers and water conditioners for commercial and residential uses and
various water filtration systems for commercial, industrial and medical
applications. Concurrent with a change in overall business strategies in 1994,
ACS sold, to former employees, the assets used in PFW's Water Cooler Rental and
De-Ionized Plant and Tank Exchange operations. ACS realized a net gain of
approximately $152,000 from the sales of these divisions of PFW.

WASTEWATER TREATMENT. ESSI designs and assembles aerobic and anaerobic
packaged and larger field-erected waste water treatment plants. These systems
incorporate either aerobic or anaerobic biological treatment technologies. Such
technologies generally involve the conversion of organics in waste water into
carbon dioxide, water and new organics through the introduction of
microorganisms. The aerobic

<PAGE>

system (which functions in the presence of oxygen) marketed under the trademark
CONTREAT(R), is used primarily for pretreatment of industrial waste water before
such waste water is discharged into a municipal sewage system or reused.
CONTREAT(R) aerobic systems are used for waste water treatment in small
municipal applications as well as in institutions, shopping centers, resorts and
camp grounds. ESSI also designs and assembles STAR(TM), an organic system (which
functions in the absence of oxygen), pursuant to an exclusive world-wide written
license agreement with the patent holder (the University of Arkansas). This
system is used to treat high strength or industrial organic effluents. The
systems can be transported as standard shipping containers (either 20 feet or 40
feet in length), which makes them particularly adaptable to hard to reach
locations and enclosed areas, or can be field erected where mandated by larger
volumes of effluent.

TOPCO was formed in 1958 as The Ohio Pump Company, Inc. Its product line
and focus evolved to packaged wastewater treatment plants and much larger
field-erected plants (up to 3 million gallons per day). At one time it was a $15
million division of Kady Industries. It was acquired by the previous owners in
1990 with the plan to reactivate the marketing of its product line to attempt to
achieve its past position in the wastewater industry. This now will be performed
within ESSI.

GFS was founded in 1986 in Northeast Pennsylvania and purchased its
assets from another company that manufactured and marketed various wastewater
treatment equipment. Its product line is comprised of Wedgewater(TM) filter bed
systems for sludge de-watering, lateral flow sludge thickener systems and
Wedgewater(TM) sieve systems. The patented Wedgewater(TM) filter bed system,
which is licensed by GFS, generally is utilized by municipalities servicing
populations of 30,000 or more and utilizes one-sixth the space and requires
one-sixth the time to de-water sludge as compared with conventional sand/gravel
filter beds. It has sold and installed over 300 systems through 46 U.S. and
international representatives.

MARKETING AND SALES

The focal point of the Company's marketing is on ACS's ability to
be a one-stop source for "Total Water Quality Management". Through direct
targeted mailings, as well as advertising in industry publications, the
Company's focus is to attract dealers, distributors and end-user customers.
Individual subsidiary marketing is focused on building domestic dealer and
international distribution networks and identifying specific customers needing
the products and services as provided by each of the subsidiaries that provide
various systems within this one-stop-source for "Total Water Quality
Management".

Subsidiaries participate in local, national and international shows that
are target niche-market specific, as well as showing as a group in the major
trade shows where multiple subsidiary representation is possible. PFW, KISS, MWT
and DTS all market each others programs, products, and services to their
existing customer base. ESSI and GFS also employ synergies in selling their
services and products to an end user or through each other's industrial and
municipal manufacturers representative networks.

<PAGE>

SUPPLIERS

There are several manufacturers and suppliers of the water treatment and
filtration components used in the assembling of KISS's, MWT's and DTS's
products. ESSI and GFS have relied upon single suppliers for certain of their
purchases, however, the Company does not believe that the loss of any single
supplier would have a material adverse effect on its operations, the loss of any
major suppliers could cause delays in fulfilling commitments. While the Company
believes that it generally is not dependent on any one supplier for products or
components utilized by the subsidiaries mentioned above, CWES is dependent on a
single supplier, Ryko Manufacturing Company ("Ryko"). CWES is the exclusive
distributor in South Florida for the sale, installation and service of Ryko's
rollover car wash equipment. Such exclusive distributorship prohibits CWES from
selling, installing and/or servicing any car wash equipment from another
manufacturer or supplier. The distributor agreement provides that CWES sells
directly or receives a commission on all Ryko equipment sold within its region.
The agreement is due to expire in July 1997, however, it provides for automatic
renewal upon the achievement of certain sales goals. ACS, through its
subsidiaries, purchases raw materials and supplies on terms, usually net 30
days, and, to a lesser extent, on a cash on delivery basis.

INSURANCE

The Company maintains limited product liability insurance. ACS has not
had a product liability claim asserted against it since inception in October
1990, except one which was successfully defended and settled in a manner
satisfactory to ACS with no financial cost to it. A substantial successful
products liability claim could have a material adverse effect on the Company's
operations and financial condition.

BUSINESS SEGMENT INFORMATION

ACS's operations consist of two business segments, water purification
and waste water treatment and car wash equipment sales and service. See Note 11
of "Notes to December 31, 1995 Consolidated Financial Statements" for a summary
of selected consolidated information for such business segments for the years
ended December 31, 1995, and 1994.

LICENSE AND TRADEMARKS

The University of Arkansas (the "Licensor") holds a United States patent
on the anaerobic, modular, factory-built, cyclic, multi-stage biological reactor
for waste water treatment. On June 30, 1991, ESSI entered into a license
agreement with the Licensor to be the exclusive worldwide licensee under this
patent. Prior thereto, ESSI had been the sole marketer, designer, assembler and
installer of these systems for several years. This license agreement continues
until the expiration of the licensed patent in 2007, provided that ESSI
continues to make royalty payments of at least $5,000 per year, and at least
$20,000 in the aggregate prior to the third anniversary of the agreement and is
not otherwise in breach of its obligations under the license agreement. From
August 29, 1991 through December 31, 1995, ACS paid $21,074 in royalties under
such agreement. Prior to such period, ESSI paid the Licensor in excess of
$20,000 in royalties. Royalty payments are based on 5% of the net selling price
of the system, as defined in the license agreement, and 40% of any sublicensing
fees received by ACS in respect of the licensed patent.

<PAGE>

ESSI is the owner of the registered trademark CONTREAT(R) for use in
conjunction with its aerobics containerized waste water treatment system. PFW is
the owner of the registered trademark REVOS(R) for use in conjunction with its
reverse osmosis water purification systems that it markets to the medical
industry. DTS is the owner of the registered marks Di-teck(R) and Halox(R) for
the sale of various water purification and ion-exchange cartridges and
disinfection systems. ACS has applied for registration of the trademarks
STAR(TM), VOSTRIP(TM), AQUOZONE(TM), AQUAKLEEN(TM), LIFELINE(TM),
ENVIROZONE(TM), OZOKLEEN(TM), ELITE(TM) and FUTURE-TEK(TM).

GOVERNMENTAL REGULATION

The enactment and enforcement of Federal, state and local laws relating
to water quality standards may materially influence the level of sales of some
or of all of the Company's products. Because the Company's sales may increase
with the enactment and enforcement of stricter water quality standards, ACS's
business is, to a large extent, linked to certain water quality control
standards imposed by the United States Environmental Protection Agency and state
and local governments. For example, amendments to the Safe Drinking Water Act in
1986 and the Clean Water Act in 1987 established more comprehensive and, in some
cases, more stringent guidelines for the control of toxic pollutants, renewed
the governments' financial commitment to assist with water pollution control and
increased the enforcement penalties for violations of water quality control
standards. Both the Safe Drinking Water Act and the Clean Water Act were
reauthorized in 1993. Although the Company's customers utilize ACS's products
and services in response to regulatory requirements affecting their businesses,
ACS believes that, as a provider of such products and services, the Federal or
state environmental rules or regulations potentially applicable to the Company's
customers are not directly applicable to ACS. While the Company is not aware of
any pending or proposed Federal legislation or regulation that would adversely
affect its products or services, any such legislation or regulation in the
future that limits the sale of the Company's products or components or limits
the methods in which those products are manufactured, installed or serviced,
could have a material adverse impact on the Company. Certain states have enacted
legislation which requires licensing, testing and labeling of water purification
products, including those offered by ACS. Some of the systems and components
currently offered by MWT and KISS already have achieved NSF certification.

COMPETITION

The Company believes that there are thousands of companies involved in
various aspects of the waste water treatment and water filtration and
purification industries, with the majority focusing on residential use. Such
industries are highly competitive. The market is served by an array of products
that are either "off-the-shelf" or custom-designed. These products range from
small carbon filtration systems to de-ionization systems, reverse osmosis
systems, de-gasifiers, scrubbers, ozone systems, ultraviolet systems and
bio-remediation systems. Many of the residential systems generally are marketed
by local operators across the country. A number of these operations have
expanded into the light commercial, industrial and medical fields. Customers
range from restaurants, hotels, laundries, car washes and hospitals, to
companies involved in manufacturing or processing that require treatment of
waste water before discharging, or filtration and purification before reuse, and
also pharmaceutical and medical applications (such as dialysis) where ultra-pure
water is required.

In the commercial and industrial area of the waste water treatment and
water filtration and purification markets, the Company's management believes
that there is a fragmented specialized approach to satisfying customers needs
and that, within each of the separate market areas, there are no companies

<PAGE>

dominating any of such markets. ACS believes that no other firm appears to be
offering an integrated, one-stop source approach for all user needs. There are
at least three larger, public companies that are growing by means of acquiring
companies in the water industry that are more narrowly focused in their
acquisition strategy, namely, U.S. Filter Corp., Ionics, Inc. and Osmonics, Inc.

EMPLOYEES

As of February 29, 1996, ACS had 94 full-time employees, including two
executive officers, 19 managerial and administrative personnel, six design and
engineering personnel, 51 assembly, installation and service personnel, and 16
sales and telemarketing personnel. The Company's employees are not covered by
any collective bargaining agreements. In the past, under a different management
team, the Company has experienced poor employee morale. The Company's present
management team has worked to improve employee morale and the Company believes
its employee relations to be satisfactory.

PROPERTIES

ACS's headquarters is in Hollywood, Florida, occupying approximately
20,000 square feet under leases expiring on June 30, 1996. Such facility also
houses ESSI's, PFW's and CWES's offices and warehouses. Certain leased
facilities contain the offices, warehouses and manufacturing/assembly facilities
of KISS and DTS, Vista, California, GFS in Scranton, Pennsylvania and MWT in Ft.
Wayne, Indiana. Total leased space for these facilities is approximately 100,000
square feet. Such space is leased at various terms through July 2000. The
Company's aggregate monthly lease expense is approximately $40,000.

ACS purchased land and a building in Jermyn, Pennsylvania in conjunction
with the acquisition of GFS. Certain debt was assumed by ACS totalling
approximately $150,000 collateralized by the land and building upon consummation
of the acquisition of GFS. All operations of GFS are planned to be combined in
this building by the second quarter of 1996, and the month to month leases which
currently exist will be canceled. The land and building are valued at $150,000.

The Company believes that its premises are adequate to permit it and its
subsidiaries to conduct their business as they are currently conducted for the
reasonably foreseeable future.

LEGAL PROCEEDINGS

The Company is not involved in any legal proceedings which management
views as likely to result in any material adverse effect on the Company.

<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information about the executive officers and
directors of the Company as of June 3, 1996:

NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
William K. Mackey 44 Chairman of the Board, President
and Chief Executive Officer
and Treasurer

James P. Cefaratti 52 Director

William F. Silvia 62 Director

Norman J. Hoskin 60 Director and Secretary

William K. Mackey has served as a Director of the Company since July
1993. Mr. Mackey was elected Chairman of the Board of Directors, President and
Chief Executive Officer and Treasurer of the Company on May 26, 1995, after a
period commencing in 1993 of acting as an entrepreneur and investor in and a
consultant to several public and private companies. From December 1988 to March
1991, Mr. Mackey served as President of Avondale Specialty Products, an ink
manufacturer. From August 1989 to May 1993, Mr. Mackey served as a director of
Infonow Corporation, a publicly-held software distribution company. From March
1991 to November 1992, Mr. Mackey served as President and a director of Docucon,
Incorporated, a publicly-held company engaged in the document conversion
business.

James P. Cefaratti has served as a Director of the Company since January
1992. Since August 1993, Mr. Cefaratti has been Vice Chairman of Gynesis Health
Care Services, Inc., a women's health care company. From December 1989 to June
1993, Mr. Cefaratti served as President, Chief Executive Officer and a director
of Home Intensive Care, Inc., which was a national public company specializing
in home infusion therapy and dialysis services prior to being acquired by W.R.
Grace and Company. From May 1989 to December 1989 he served as Senior Executive
Vice President of that company.

William F. Silvia served as Chairman of the Board of Directors of the
Company from November 1, 1991 through February 3, 1995. Mr. Silvia has been a
private investor and business consultant from December 1989 to the present. From
June 1988 to July 1989, Mr. Silvia was President and Chief Operating Officer of
Batts, Inc., a privately-owned, 500 employee, manufacturer of garment hangers.
From July 1986 to June 1988, Mr. Silvia operated Silvia Associates, a general
management consulting entity. Prior to that time, Mr. Silvia spent 30 years at
Union Carbide Corporation, where he

<PAGE>

held several positions, including President of the Catalysts and Services
Division; President of the Catalysts and Process Systems Division; President of
the Engineering Products Division; Senior Vice President of the Linde Division;
Vice President/General Manager, U.C. Europe-Engineering Products (Geneva);
General Manager-Gas Products, Union Carbide Canada, LTD; and various middle
management positions. Mr. Silvia holds his B.S. in Civil Engineering from the
University of Rhode Island and his M.B.A. from the State University of New York
at Buffalo.

Norman J. Hoskin has acted as Chairman of Atlantic Capital Group, a
venture capital company based in Boca Raton, Florida, since 1989. Mr. Hoskin
previously served in a number of positions for Rentar Industries, a large
transportation, warehousing and banking conglomerate. He currently sits on the
Boards of Directors of Consolidated Technologiesand its subsidiary companies.
Mr. Hoskin received his degree from the University of Pennsylvania. Mr. Hoskin
became Secretary of the Company effective May 31, 1996.

Directors of the Company are elected to serve for a term of one year or
until their successors are elected and qualified, or until their earlier death,
resignation or removal. The Company's officers are elected annually by, and
serve at the pleasure of, the Board of Directors, subject to the terms of any
employment agreements. Mr. Mackey and Mr. Schultz have entered into employment
agreements with the Company. See "Cash Compensation--Employment Agreements".

DIRECTOR COMPENSATION

Each Director of the Company is remunerated at the rate of $2,000 per
meeting attended in person and $500 per meeting attended telephonically. In
addition, each Director is granted options to purchase 10,000 shares of Common
Stock on the date of the first Board of Directors meeting of each new calendar
year at the then current bid price, subsequent to serving one full calendar year
as a Director. Such options are exercisable over the subsequent ten years and
fully vest over a one-year period from the date of grant. Pursuant to this
program, the Company granted two Directors and an advisor to the Company options
to purchase 30,000 shares of the Company's Common Stock at $3.75 per share on
March 11, 1994. The Company also granted three Directors and an advisor to the
Company options to purchase a total of 80,000 shares of the Company's Common
Stock at the then market price per share in each of January and December 1995.
See "1994 Outside Directors' Stock Option Plan".

Until May 1994, Mr. Silvia, former Chairman of the Board and now a
Director of the Company, had been receiving a consulting fee of $1,500 for each
day he provided consulting services to the Company. The Company paid $11,250
during 1994 in consulting fees pursuant to the aforementioned arrangement.
Concurrent with the cancellation of this arrangement, the Company granted
options to Mr. Silvia to purchase 25,000 shares of Common Stock at an exercise
price of $3.75 per share. Such options vested over a one year period from the
date of grant and are exercisable at any time during the subsequent ten years.
Mr. Cefaratti, a Director, was also granted options to purchase 35,000 shares of
Common Stock at an exercise price of $3.75 per share on May 2, 1994, all of
which have now vested. Mr. Schultz, formerly Vice President, Secretary and a
Director, has been granted options to purchase 50,000 shares of Common Stock at
an exercise price of $1.50 per share, and options to purchase an additional
100,000 shares at an exercise price of $3.00 per share. One-half of the
aforementioned options are subject to the escrow agreement. See "Principal
Stockholders--Escrow Shares and Escrow Options". Additionally, the Company
granted Mr. Schultz options to purchase 50,000 shares of Common Stock at an
exercise price of $3.75 per share in March 1994. Such options vest over a
three-year period from the

<PAGE>

date of grant, are exercisable over a ten-year period from the grant date and
are not subject to the escrow agreement.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information for the years ended December
31, 1995, 1994 and 1993, representing compensation earned by all individuals
serving as the Chief Executive Officer of the Company during fiscal year 1995
(the "Named Executives"), in all capacities in which they served. No other
executive officer of the Company earned over $100,000 in any of such fiscal
years. Mr. Fifer resigned from all of his positions with the Company in May
1995.

<TABLE>
<CAPTION>
LONT-TERM
ANNUAL COMPENSATIONS COMPENSATION
--------------------------------------------- ---------------
NAME AND PRINCIPAL OTHER ANNUAL NUMBER OF
POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS GRANTED
- ------------------ ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
R. Brian Fifer(2) 1995 $142,326 $ -0- $ 2,903(1) 100,000
Chairman of the Board, 1994 $133,531 $38,750 $ 7,200(1) 200,000
President, Chief Executive 1993 $104,000 $ -0- $ 7,200(1) -0-
Officer and Treasurer

William K. Mackey(3) 1995 $ 81,673 $ -0- $ 107,379(4) 310,000
Chairman of the Board,
President, Chief Executive
Officer and Treasurer
<FN>
- --------------------
(1) Represents a monthly auto expense allowance of $600 for the fiscal years
ended 1995, 1994 and 1993.
(2) Mr. Fifer resigned from all positions held with the Company in May 1995,
thus vested options had to be exercised prior to August 26, 1995. All
options granted to Mr. Fifer were forfeited on such date.
(3) Mr. Mackey was elected by the Board of Directors to replace Mr. Fifer in
May 1995.
(4) Represents finders fees paid to Mr. Mackey by the Company during fiscal
year 1995 in connection with a series of offshore private placements
undertaken by the Company. All of these fees were paid to Mr. Mackey
prior to him becoming Chief Executive Officer of the Company in May,
1995.
</FN>
</TABLE>

STOCK OPTION GRANTS IN 1995

The following table contains information concerning the grant of stock
options to the Named Executive Officers in 1995:

<PAGE>

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION
NAME UNDERLYING OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
- ---- -------------------------- ------------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
R. Brian Fifer (2) 100,000 11.0% $3.25 February 3, 2005
William K. Mackey (3) 10,000 1.1% $3.25 February 3, 2005
William K. Mackey (3) 50,000 5.5% $3.00 July 27, 2005
William K. Mackey (3) 250,000 27.4% $1.25 September 8, 2005
<FN>
- --------------------
(1) Mr. Fifer resigned from all positions held with the Company in May 1995,
thus vested options had to be exercised prior to August 26, 1995. All
options granted to Mr. Fifer were forfeited on such date.
(2) Mr. Mackey was elected by the Board of Directors to replace Mr. Fifer in
May 1995
</FN>
</TABLE>

STOCK OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995

The following table provides information with respect to options
exercised by the Named Executive Officers during 1995 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1995:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995
ACQUIRED VALUE ------------------------------ ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
R. Brian Fifer(2) - - - - $ - $ -
William K. Mackey(3) - - 100,000 310,000 $ $312,500
<FN>
- --------------------
(1) Represents a monthly auto expense allowance of $600 for the fiscal years
ended 1995, 1994 and 1993.
(2) Mr. Fifer resigned from all positions held with the Company in May 1995,
thus vested options had to be exercised prior to August 26, 1995. All
options granted to Mr. Fifer were forfeited on such date.
(3) Mr. Mackey was elected by the Board of Directors to replace Mr. Fifer in
May 1995.
</FN>
</TABLE>

EMPLOYMENT AGREEMENTS

On September 8, 1995, the Company entered into a five-year employment
agreement with William K. Mackey, Chairman of the Board, President and Chief
Executive Officer. The agreement provides that Mr. Mackey will receive an annual
base salary of $155,000, plus a bonus, if any, as determined by the Board of
Directors. Pursuant to the terms of the employment agreement, Mr. Mackey was
granted options to purchase an aggregate of 250,000 shares of the Company's
Common Stock at an exercise price of $1.25 per share. Such options vest over a
two-year period and have a term of ten years from the date of the grant. The
employment agreement entitles Mr. Mackey to terminate the agreement in the event
of a change of control of the Company and receive severance payments equal to
the greater of the Base Salary payments due for the remaining term of the
employment agreement or an amount equal to three times his Base Salary then in
effect, plus bonus. If Mr. Mackey is terminated without cause he is entitled to
receive a severance payment equal to the greater of the remaining Base Salary
payments due for the remaining term of the employment agreement or one year's
Base Salary. If Mr. Mackey terminates the employment agreement because of a
material default by the Company, he is entitled to receive a severance payment
equal to the greater of the Base Salary payments due under the remaining term of
the employment agreement or three times the sum of the Base Salary then in
effect and his last bonus.

<PAGE>

On July 1, 1993, the Company entered into a three-year employment
agreement with Jeffrey L. Schultz, then Vice President of Marketing and Business
Development. On February 3, 1995, Mr. Schultz's annual base salary was increased
to $100,000 per year. He is eligible to receive an annual bonus equal to
one-half the annualized then current salary level at the time of payment based
upon the attainment of certain corporate goals, which have been established by
the Company's Board of Directors. Pursuant to the Company's Performance Equity
Plan, Mr. Schultz also has received options to purchase 50,000 shares of Common
Stock at $1.50 per share and options to purchase an additional 100,000 shares at
$3.00 per share. Such options vest over two and three-year periods,
respectively, from the date such options were granted. On March 11, 1994, Mr.
Schultz was granted options to purchase 50,000 shares of Common Stock at $3.75
per share. On February 3, 1995, Mr. Schultz was granted options to purchase
50,000 shares of Common Stock at $3.25 per share. Such options vest over the
three year period from the date of grant and may be exercised at any time up to
ten years from the date of grant. The employment agreement provides for a
severance payment in the event of termination without cause. Such payment
includes all accrued and unpaid salary and bonus up to the effective date of
termination, and six months' base salary. Mr. Schultz also received a car
expense allowance from the Company of $600 per month. Mr. Schultz resigned from
his position as Secretary and director of the Company as of March 31, 1996.

Each of the above-described employment agreements contain certain
non-disclosure and non-compete provisions.

OUTSIDE DIRECTORS' PLAN AND PERFORMANCE EQUITY PLAN

OUTSIDE DIRECTORS' PLAN. The Company's Board of Directors has adopted
the 1994 Outside Directors' Stock Option Plan (the "Outside Directors' Plan")
for the Company's Directors who are not employees or officers of the Company or
its subsidiaries ("Eligible Directors") and for consultants rendering advisory
services to the Board of Directors. The Outside Directors' Plan provides for the
grant of non-qualified stock options ("NQSOs") which have an exercise period
extending for ten years from the date of the grant. The purchase price of the
shares of Common Stock covered by each option granted under the Outside
Directors' Plan will be the fair market value of the shares as of the date of
grant. Each Eligible Director who is newly-elected after the effective date of
the Outside Directors' Plan shall be granted an option to purchase not less than
10,000 and not more than 50,000 shares of the Common Stock of the Company on the
date such Director is initially elected or otherwise selected to the Board of
Directors. The exact amount will be determined by the Directors serving prior to
the effective date of the Outside Directors' Plan and who are therefore
ineligible for a discretionary grant of options under the Outside Directors'
Plan. All Eligible Directors (including those serving on the Board of Directors
prior to the effective date of the Outside Directors' Plan) will be granted an
option to purchase 10,000 shares of the Common Stock of the Company on each
January 1, commencing after the effective date of the Outside Directors' Plan,
on which an Eligible Director has completed a full year of service as a member
of the Board of Directors of the Company.

PERFORMANCE EQUITY PLAN. On May 13, 1991, the Board of Directors of the
Company adopted and the stockholders of the Company approved the 1991
Performance Equity Plan (the "Performance Equity Plan"), which covers an
aggregate of 1,500,000 shares of Common Stock. The Performance Equity Plan
provides for the grant of a variety of incentive awards to officers, key
employees, consultants and independent contractors of the Company.

The Performance Equity Plan authorizes the grant of incentive awards for
up to 1,500,000 shares of Common Stock subject to adjustment in certain events.
Incentive awards consist of stock options,

<PAGE>
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. The Performance Equity Plan will expire at the close
of business on May 13, 2001, unless sooner terminated. Officers, directors and
other key employees and prospective employees and consultants and independent
contractors who perform services for the Company or any of its subsidiaries (but
excluding members of the stock option committee and any person who serves as a
director only) ("Eligible Persons") will be eligible to receive awards under the
Plan. The Performance Equity Plan is administered by a stock option committee
(the "Committee") appointed by the Board of Directors, which determines the
persons to whom awards will be granted, the number of awards to be granted and
the specific terms of each grant, subject to the provisions of the Performance
Equity Plan.

401(K) PLAN

In January 1994, the Company adopted a 401(k) employee savings ad
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two-year
period on a quarterly basis. During 1995 and 1994, the Company contributed
24,103 and 5,983 shares of restricted Common Stock valued at $31,425 and $9,790,
respectively.

CERTAIN TRANSACTIONS

It is the Company's policy that all transactions with affiliates will be
on terms comparable to those available from unrelated third parties.

ACQUISITION OF KISS

On July 7, 1994, the Company acquired all of the Common Stock of Joel C.
Edison, Ltd., dba KISS International and in connection with such transaction
issued 533,333 restricted shares of Common Stock of the Company valued at
$1,000,000 to Joel C. Edison, an unrelated party and the former President and
CEO of KISS International. As part of that acquisition, Mr. Edison entered into
a consulting agreement, which includes a non-competition clause, pursuant to
which Mr. Edison is to receive a consulting fee of $50,000 per annum through
June 30, 1997. See "Principal Stockholders".

FINDERS FEES

William K. Mackey received a total of $107,379 in finders fees from the
Company during fiscal year 1995 in connection with a series of private
placements of the Company's securitiescarried out by the Company during 1995.
All of these fees were paid to Mr. Mackey prior to him becoming an officer of
the Company in May, 1995.

Norman Hoskin, a director and Secretary of the Company, is the principal
of Atlantic International Capital Ltd. Atlantic International Capital Ltd. and
its affiliates received fees aggregating approximately $870,000, during fiscal
year 1995, in connection with private placements of the Company's securities
carried out by the Company during 1995.

<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information as to the number of shares of
Common Stock beneficially owned as of May 31, 1996, by (i) each person who is
believed by the Company to be a beneficial owner of more than 5% of the
outstanding Common Stock of the Company; (ii) each director and Named Executive
Officer of the Company; and (iii) all directors and executive officers of the
Company as a group. Beneficial ownership has been determined in accordance with
the rules promulgated under Section 13(d) of the Securities and Exchange Act of
1934. All shares of Common Stock are owned both of record and beneficially
unless otherwise indicated.

PERCENTAGE
NAME AND ADDRESS NUMBER OF SHARES OF
OF BENEFICIAL OWNER(1) OWNED COMMON STOCK
---------------------- ---------------- ------------
Joel C. Edison (2) ................... 533,333 5.8%

Jeffrey L. Schultz (3) ............... 168,334 1.8%

William F. Silvia (4) ................ 95,000 1.0%

James P. Cefaratti (5) ............... 105,000 1.1%

William K. Mackey (6) ................ 160,000 1.7%

Norman J. Hoskin ..................... ------ *

Directors and executive officers
as a group (five persons) ......... 528,334 5.7%

- ---------------
(1) The address for all of these persons is the same as the Company's.
(2) Mr. Edison is the former owner of Joel C. Edison, Ltd., dba KISS
International. 533,333 shares of Common Stock were issued to him in
conjunction with the acquisition of said entity effective July 1, 1994.
(3) Reflects options to purchase 168,334 shares of Common stock which are
presently exercisable.
(4) Includes options to purchase 45,000 shares of Common Stock which are
presently exercisable.
(5) Includes options to purchase 105,000 shares of Common Stock which are
presently exercisable.
(6) Includes options to purchase 110,000 shares of Common stock granted by the
Company and additional options to purchase an aggregate of 50,000 shares
of Common stock granted by Kinder Investments, P.L. and Peter N. Christos
which are exercisable within the next 60 days.
* Less than 1%.

ESCROW SHARES AND ESCROW OPTIONS

In connection with the Company's initial public offering, substantially
all of the common stockholders and option holders of the Company at the date of
the offering agreed to place into escrow 50% of their shares of Common Stock and
50% of their options to purchase Common Stock. A total of 975,000 shares of
Common Stock (the "Escrow Shares") and options to purchase 116,250 shares of
Common Stock (the "Escrow Options") were put into escrow pursuant to this
agreement. Shares issued upon exercise of the Escrow Options will be held in
escrow as Escrow Shares. Such stockholders (and option holders to the extent
they have exercised such options) may continue to vote the Escrow Shares;
however, the Escrow Shares and Escrow Options are not assignable or
transferable. The following sets forth the number of Escrow Shares and Escrow
Options owned by the Directors and officers listed below.

<PAGE>

NUMBER OF NUMBER OF
HOLDER ESCROW SHARES ESCROW OPTIONS
------ ------------- --------------
William F. Silvia...................... 25,000 0
James P. Cefaratti..................... 0 25,000
Jeffrey L. Schultz..................... 0 75,000

All of the Escrow Shares and the Escrow Options will be released in the event
that:

(a) The Minimum Pretax Income amounts to at least $5,200,000 for the
fiscal year ending December 31, 1996, provided that if additional shares are
issued, Minimum Pretax Income shall be increased proportionately; or

(b) The Minimum Pretax Income amounts to at least $6,300,000 for the
fiscal year ending December 31, 1997, provided that if additional shares are
issued, Minimum Pretax Income shall be increased proportionately; or

(c) The closing price of the Company's Common Stock for any 20
consecutive trading days shall average in excess of $25 during the period
commencing January 1, 1996, and ending December 31, 1996; or

(d) The closing price of the Company's Common Stock for any 20
consecutive trading days shall average in excess of $30 during the period
commencing January 1, 1997, and ending December 31, 1997.

Any money, securities, rights or property distributed in respect of the
Escrow Shares or Escrow Options, including any property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, shall be held in escrow until the
release, if any, of the Escrow Shares and Escrow Options.

The Minimum Pretax Income shall be calculated exclusive of any
extraordinary earnings and charges to income resulting from the release of the
Escrow Shares or Escrow Options. For purposes of calculating Minimum Pretax
Income, if additional shares of Common Stock are issued, then the foregoing
Minimum Pretax Income levels for any year would increase proportionately. Based
on a position taken by the Commission staff, the Company expects that the
release of the Escrow Shares and Escrow Options will be deemed compensatory and,
accordingly, will result in substantial charges to earnings equal to the fair
market value of the Escrow Shares as of the date on which they are released.
Such charges could substantially increase the loss or reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the periods
in which the Escrow Shares or Escrow Options are released or are probable of
being released. If none of the foregoing earnings or market price levels are
attained by December 31, 1997, the Escrow Shares and Escrow Options, as well as
any dividends or other distributions made with respect thereto, will be
contributed to the capital of the Company and all Escrow Options shall be
canceled without consideration to the holders thereof.

<PAGE>
SELLING SECURITYHOLDERS

The following table shows the names of the Selling Securityholders, the
number of shares of the Company's Common Stock beneficially owned by them and
eligible to be sold by them under this Prospectus as of the date hereof. The
listing for the number of shares beneficially owned after the Offering assumes
the exercise of all of the Bridge Warrants and the sale of all Common Stock
received thereby. In the event such Bridge Warrants are not exercised or the
Common Stock underlying such Bridge Warrants is not sold, the number of shares
beneficially owned after the Offering by such Selling Securityholder will be
greater than shown below. None of the Selling Securityholders are affiliated
with the Company apart from their security holdings. Unless otherwise indicated,
to the Company's knowledge, the persons listed have sole voting or dispositive
power with respect to the shares listed. Certain of such shares held by such
Selling Securityholders not sold during the effective period of the Registration
Statement of which this Prospectus forms a part may be or become eligible for
sale under the provisions of Rule 144 adopted by the Commission under the
Securities Act. Any such shares may be sold either under the Registration
Statement of which this Prospectus forms a part or under Rule 144.

<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------ --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES PERCENT OF
SELLING BENEFICIALLY COVERED BY BENEFICIALLY OUTSTANDING
SECURITYHOLDERS OWNED THIS PROSPECTUS OWNED SHARES
--------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Charles Beach and
Elizabeth M. Beach 3,750 3,750 0 *

Anna F. Fifer 3,750 3,750 0 *

Prudential Securities
c/f Joseph W. Garra
IRA dated 09/24/86 3,750 3,750 0 *

Donald L. Garret 3,750 3,750 0 *

Goldstein Family
Loving Trust
Dated 11/26/90 3,750 3,750 0 *

Barbara Goldstein 3,750 3,750 0 *

Roy A. Gomes 3,750 3,750 0 *

Cecil Forbes Hanna 11,250 11,250 0 *

Arthur C. Madresh 3,750 3,750 0 *

Ronald A. Manzo 3,750 3,750 0 *
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------ --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES PERCENT OF
SELLING BENEFICIALLY COVERED BY BENEFICIALLY OUTSTANDING
SECURITYHOLDERS OWNED THIS PROSPECTUS OWNED SHARES
--------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Prudential Securities
c/f Charles T. McManus
IRA Account 3,750 3,750 0 *

Stuart C. Nathan 3,750 3,750 0 *

Jack Perry 3,750 3,750 0 *

Edward E. Renfro III
Revocable Trust
Dated 08/20/91 3,750 3,750 0 *

Electramark, Inc. 3,750 3,750 0 *

William A. Schneider 3,750 3,750 0 *

Leonard A. Solomon 3,750 3,750 0 *

A. Robert Tantleff and
Lenore Tantleff 7,500 7,500 0 *

Terrence J. Winkler 3,750 3,750 0 *

August J. Saccoccio 7,500 7,500 0 *

Casimer Zaremba 3,750 3,750 0 *

Richard Bayard 3,750 3,750 0 *

Jerry Luckman 3,750 3,750 0 *

Delaware Charter Guarantee
Trustee FBO Victor Molinsky
IRA dated 09/29/83 3,750 3,750 0 *

Barry J. Paley 3,750 3,750 0 *

Shirley Schultz 3,750 3,750 0 *
</TABLE>

43
<PAGE>

Brian E. Charnick and Joanna
Charnick, Tenants in Common 3,750 3,750 0 *

Stuart W. Gold 7,500 7,500 0 *

Mark Soltz and Carol
Soltz, JTWROS 3,750 3,750 0 *

Paul R. Alter 3,750 3,750 0 *

John R. and Judith P.
Davies, JTWROS 3,750 3,750 0 *

Appu Kuttan 4,500 4,500 0 *

Nathaniel L. Orme 3,750 3,750 0 *

Christopher C. Dee and
Maude R. Dee, JTWROS 7,500 7,500 0 *

Gilman R. King 3,750 3,750 0 *

Money Purchase Keogh Trust
for Stephen Posovsky,
Trustee, dated 02/17/84 3,750 3,750 0 *

Stan Sech and Kathy Sech
JTWROS 3,750 3,750 0 *
</TABLE>
44

<PAGE>

<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------ --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES PERCENT OF
SELLING BENEFICIALLY COVERED BY BENEFICIALLY OUTSTANDING
SECURITYHOLDERS OWNED THIS PROSPECTUS OWNED SHARES
--------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Pierre F. and Clair T.
Pype, JTWROS 3,750 3,750 0 *

Barry Shemaria 3,750 3,750 0 *

Clair J. Read and
Sherrie Ann Read JTWROS 3,750 3,750 0 *

Robert Juranek and
Carole Juranek JTWROS 3,750 3,750 0 *

Candee B. Chusid Profit
Sharing Plan 3,750 3,750 0 *

Edmund B. Manger 3,750 3,750 0 *

Allen R. Sklerov, M.D. 3,750 3,750 0 *

Herman L. Zeller 3,750 3,750 0 *

Felix Bernstein 3,750 3,750 0 *

Floyd M. Smith 3,750 3,750 0 *

Vernon W. McComb 3,750 3,750 0 *

Horace F. Barger and
Jean B. Barger, JTWROS 3,750 3,750 0 *

Theodore I. Botter 3,750 3,750 0 *

Myron M. Teitelbaum, M.D. 7,500 7,500 0 *

Alan Harris 3,750 3,750 0 *

Prudential Securities, Inc.,
C/F Terrence Hutton IRA Dated
11/01/91 A/C OXT - 818378 7,500 7,500 0 *
<FN>
*Less than one percent
</FN>
</TABLE>
45

<PAGE>
DESCRIPTION OF SECURITIES

AUTHORIZED STOCK

The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, par value $.001 per share, and 5,000,000 shares of
Preferred Stock, par value $.001 per share.

COMMON STOCK

Subject to the prior rights of the holders of any shares of Preferred
Stock which may be issued in the future, the holders of the Common Stock are
entitled to receive dividends from funds of the Company legally available
therefor when, as and if declared by the Board of Directors of the Company, and
are entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon the liquidation, dissolution or
winding-up of the affairs of the Company subject to the liquidation preference,
if any, of any then outstanding shares of Preferred Stock of the Company. At
March 15, 1996, there were 141 record holders of the Common Stock. Holders of
the Common Stock do not have any preemptive, subscription, redemption or
conversion rights. Holders of the Common Stock are entitled to one vote per
share on all matters which they are entitled to vote upon at meetings of
stockholders or upon actions taken by written consent pursuant to Delaware
corporate law. The holders of Common Stock do not have cumulative voting rights,
which means that the holders of a plurality of the outstanding shares can elect
all of the directors of the Company. All of the shares of the Common Stock
currently issued and outstanding are, and the shares of the Common Stock to be
issued upon the consummation of the offering made hereby, when paid for in
accordance with the terms hereof will be, fully paid and nonassessable. See
"Dividend Policy".

PREFERRED STOCK

The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Stock, to issue Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company has no present plans to issue any other series or class of Preferred
Stock.

BRIDGE WARRANTS

There are currently outstanding Bridge Warrants to purchase an aggregate
of 734,467 shares of Common Stock. Each Bridge Warrant entitles the holder to
purchase one share of Common Stock at $2.39 per share of Common Stock. The
Bridge Warrants are all immediately exercisable and expire on April 17, 1997.
The Bridge Warrants contain provisions that protect holders thereof from
dilution by adjustment of the exercise price and rate in the event of a merger,
acquisition, recapitalization or split-up of shares of the Company, the issuance
by the Company of a stock dividend, sales of stock below current market price
and other unusual events. The Bridge Warrants were issued to various investors
in connection with a total of five bridge financings carried out by the Company
during the period December, 1991 and August, 1993 in which it raised a total of
approximately $3,115,000 in capital,

<PAGE>

enabling it to carry out its business pending the completion of its initial
public offering in October 1993.The holders of a majority of the shares of
Common Stock underlying the Bridge Warrants in the first three and the fifth
Bridge Financings (treating, for this purpose, all Warrants as having been
exercised) (the "Majority Holders") have the right, until October 14, 1998, to
require the Company to file one post-effective amendment to the registration
statement related to the Company's initial public offering or one new
registration statement, if required under the Securities Act, at the Company's
expense and one additional such amendment or registration statement at their own
expense. The Company may delay the filing of such registration statement if the
ability to consummate a pending acquisition, significant sale or assets or other
significant transaction would be adversely affected by such filing. In addition,
until April 17, 1997, the holders of the Bridge Warrants have certain
"piggy-back" registration rights with respect to the shares of Common Stock
underlying the Bridge Warrants. The "piggy-back" registration rights may be
limited by the underwriter of an offering for which "piggy-back" registration is
requested.

CLASS A WARRANTS AND CLASS B WARRANTS

The following discussion of the terms and provisions of the Class A and
Class B Warrants is qualified in its entirety by reference to that certain
warrant agreement (the "Warrant Agreement") between the Company, the Underwriter
and American Stock Transfer and Trust Company as the warrant agent (the "Warrant
Agent"). The Warrants will be evidenced by warrant certificates in registered
form.

CLASS A WARRANTS. The Company has outstanding a total of Class A
Warrants issued and outstanding, to purchase a total of 3,350,597 shares of
Common Stock and 3,350,597 Class B Warrants. 2,250,597 of these Warrants,
adjusted for dilution were issued in connection with the Company's initial
public offering and the balance of up to 1,100,000 Class A Warrants are to be
issued to First United as described under "Plan of Distribution". The holder of
each Class A Warrant is entitled to purchase one share of Common Stock and one
Class B Warrant at an aggregate exercise price of $7.17. The Class A Warrants
are exercisable at any time until October 14, 1998, provided that at such time a
current prospectus under the Securities Act relating to the Common Stock and the
Class B Warrants is then in effect and the Common Stock and the Class B Warrants
are qualified for sale or exempt from qualification under applicable state
securities laws. The Class A Warrants are subject to redemption, as described
below.

CLASS B WARRANTS. The Company has outstanding Class B Warrants entitling
the holders thereof to purchase a total of 2,250,597 shares of the Common Stock
of the Company. The holder of each Class B Warrant is entitled to purchase one
share of Common Stock at an exercise price of $10.76. The Class B Warrants are
exercisable at any time after issuance until October 14, 1998, provided that at
such time a current prospectus under the Securities Act relating to the Common
Stock is then in effect and the Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws. The Class B Warrants
issuable upon exercise of the Class A Warrants are, upon issuance, transferable
separately from the Common Stock and Class A Warrants. The Class B Warrants are
subject to redemption, as described below.

REDEMPTION. The Class A and Class B Warrants are subject to redemption
by the Company, on not less than 30 days' prior written notice, at a price of
$.05 per Warrant, if the average of the closing bid prices of the Common Stock
for any period of 30 consecutive business days ending within 15 business days of
the date on which the notice of redemption is given shall have exceeded $10.76
per share (subject to adjustment) with respect to the Class A Warrants and
$15.54 per share (subject to adjustment) with respect to the Class B Warrants.
For these purposes, the closing bid price of the Common Stock shall

<PAGE>

be determined by the closing bid price, as reported by Nasdaq, so long as the
Common Stock is quoted on the Nasdaq System or if the Common Stock is a National
Market System ("NMS") security or listed on a securities exchange, shall be
determined by the last reported sales price. The Company's redemption rights
will be in effect only if the Common Stock is either quoted on the Nasdaq System
or listed on a securities exchange. Holders of Warrants will automatically
forfeit their rights to purchase the shares of Common Stock issuable upon
exercise of such Warrants unless the Warrants are exercised before they are
redeemed. All of the outstanding Class A and Class B Warrants of each class,
except for those underlying the Unit Purchase Option, must be redeemed if any
portion of that class are to be redeemed. A notice of redemption will be mailed
to each of the registered holders of the Warrants no later than 30 days before
the date fixed for redemption. The notice of redemption shall specify the
redemption price, the date fixed for redemption, the place where the Warrant
certificates shall be delivered and the date of expiration of the right to
exercise the Warrants.

GENERAL. The Class A and Class B Warrants may be exercised upon
surrender of the certificate therefor on or prior to the expiration or
redemption date (as explained above) at the offices of the Company's Warrant
Agent with the form of "Election to Purchase" on the reverse side of the
certificate filled out and executed as indicated, accompanied by payment (in the
form of a certified or cashier's check payable to the order of the Company) of
the full exercise price for the number of Warrants being exercised. The Company,
in its discretion, has the right to reduce the exercise price of either or both
classes of Warrants.

The Class A and Class B Warrants contain provisions that protect the
holders thereof against dilution by adjustment of the exercise price and rate in
certain events, such as stock dividends, stock splits, mergers, sales of all or
substantially all of the Company's assets at less than market value, sales of
stock at below market price and other unusual events.

The Company is not required to issue fractional shares and in lieu
thereof will make a cash payment based upon the current market value of such
fractional shares (determined as the mean between the last reported bid and
asked prices reported or, if the Common Stock is an NMS security or traded on a
securities exchange, the last reported sales price, in each case as of the last
business day prior to the date of exercise). The holder of a Warrant will not
have any rights as a stockholder of the Company unless and until the Warrant is
exercised.

DELAWARE ANTI-TAKEOVER LAW

The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware. In general, this law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and other transactions resulting in a
financial benefit to the stockholder. An "interested stockholder" is defined as
a person who, together with affiliates and associates, owns (or, within the
prior three years, did own) 15% or more of the corporation's voting stock.

<PAGE>

REGISTRATION RIGHTS

Investors in the Bridge Financings have been granted certain demand and
piggy-back registration rights with respect to the shares of Common Stock
underlying the Bridge Warrants issued in connection with such Bridge Financings.
Joel C. Edison has been granted certain demand and piggyback registration rights
in connection with 533,333 shares of Common stock of the Company issued to him
in conjunction with the acquisition of KISS. D. H. Blair Holdings, the parent
and sole stockholder of the Underwriter of the Company's 1993 initial public
offering, has been granted certain demand and piggyback registration rights with
respect to Unit Purchase Options issued in conjunction with the Company's
initial public offering. See "Bridge Warrants".

TRANSFER AGENT AND WARRANT AGENT

American Stock Transfer and Trust Company serves as the transfer agent
for the Common Stock and Warrants and warrant agent for the Class A Warrants and
Class B Warrants.

EXPERTS

The financial statements included in this Prospectus have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere herein, and are
herein in reliance upon such reports given upon the authority of said firm as
experts in auditing and accounting.

LEGAL MATTERS

Certain legal matters related to the shares of Common Stock offered
hereby will be passed upon by Haskell Slaughter & Young, L.L.C.

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
NUMBER
------

Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets as of December 31, 1995
and 1994 F-3

Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 F-4

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995 and 1994 F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 F-6

Notes to Consolidated Financial Statements F-7

Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996 (Unaudited with respect to
March 31, 1996) F-20

Consolidated Statements of Operations for the three months
ended March 31, 1996 and March 31, 1995 (Unaudited) F-21

Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and March 31, 1995 (Unaudited) F-22

Notes to Unaudited Consolidated Financial Statements F-23

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
Aqua Care Systems, Inc.

We have audited the accompanying consolidated balance sheets of Aqua
Care Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aqua Care
Systems, Inc. and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.

Miami, Florida BDO Seidman, LLP
March 5, 1996
F-2
<PAGE>
<TABLE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 2)
<CAPTION>

DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents................................................ $ 721,763 --
Accounts receivable, net of allowance
for doubtful accounts of $85,000 and $151,000........................ 2,016,117 $ 1,790,974
Costs and estimated earnings in excess of
billings............................................................. 67,974 518,147
Inventory................................................................ 1,950,098 1,491,022
Current maturities of notes receivable................................... 589,050 101,614
Prepaids and other....................................................... 75,489 238,326
------------- ------------

Total current assets.......................................................... 5,420,491 4,140,083

Property, plant and equipment, net............................................ 818,378 879,007
Intangible assets, net........................................................ 4,327,174 5,155,313
Notes receivable, less current maturities..................................... 225,492 449,624
Other assets.................................................................. 101,116 138,557
------------- ------------

Total assets.................................................................. 10,892,651 $ 10,762,584
============= ============

LIABILITIES
Current
Bank overdraft........................................................... -- $ 63,884
Accounts payable......................................................... $ 1,354,799 1,927,982
Accrued expenses......................................................... 584,212 972,196
Current maturities of long-term debt..................................... 254,925 635,808
Indebtedness to related party............................................ 125,000 125,000
------------- -----------

Total current liabilities..................................................... 2,318,936 3,724,870

Long-term debt, less current maturities....................................... 523,998 698,230
Convertible subordinated notes, net of discounts 247,959 --

Total liabilities............................................................. 3,090,893 4,423,100
------------- ------------

COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.001 par; 20,000,000 shares
authorized, 8,980,143 and 4,847,442 shares
issued and outstanding............................................... 8,980 4,847
Additional paid-in capital............................................... 16,367,002 10,635,102
Deficit.................................................................. (8,574,224) (4,300,465)
------------- ------------
Total stockholders' equity.................................................... 7,801,758 6,339,484
------------- ------------
Total liabilities and stockholders' equity.................................... $ 10,892,651 $ 10,762,584
============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
<TABLE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

FOR THE YEAR ENDED
DECEMBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>

Revenues....................................................$ 14,500,501 $ 7,871,457

Cost of revenues............................................ 9,559,559 4,281,214
--------------- ---------------

Gross profit................................................ 4,940,942 3,590,243
--------------- ---------------

Operating expenses:
Selling, general and administrative 7,301,056 4,311,522
Depreciation and amortization.......................... 628,628 427,887
Provision for doubtful accounts and notes 370,541 27,000
Provision for impairment of intangible assets......... 1,094,167 --
--------------- ---------------
Total operating expenses.................................... 9,394,392 4,766,409
--------------- ---------------

Loss from operations........................................ (4,453,450) (1,176,166)

Interest expense, net....................................... (141,283) (28,197)

Other income, net........................................... 320,974 383,055
--------------- ---------------

Net loss.................................................... (4,273,759) (821,308)
=============== ===============

Net loss per common share...................................$ (0.68) $ (0.25)
=============== ===============

Weighted average number of outstanding
shares of common stock................................. 6,307,714 3,327,697
=============== ===============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<CAPTION>
COMMON STOCK
------------------- ADDTIONAL
PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C>
Amounts at January 1, 1994 3,723,792 $ 3,724 $ 8,478,923 $(3,479,157) $ 5,003,490

Conversion of related party debt
to Common Stock: 24,334 24 97,488 -- 97,512

Common Stock issued in connection
with the acquisition of Car Wash
Equipment and Supply Ryko
of South Florida, Inc.: 26,667 27 49,973 -- 50,000

Common Stock issued in connection
with the acquisition of Joel C.
Edison, Ltd. dba KISS International: 533,333 533 999,467 -- 1,000,000

Common Stock issued in connection
with the acquisition of
Gravity Flow Systems, Inc.: 533,333 533 999,467 -- 1,000,000

Contribution to Employee Benefit Plan: 5,983 6 9,784 -- 9,790

Net loss: -- -- -- (821,308) (821,308)
------------ ----------- ------------ ----------- -----------

Amounts at December 31, 1994 4,847,442 4,847 10,635,102 (4,300,465) 6,339,484

Common Stock issued in connection
with the acquisition of
Midwest Water Technologies, Inc.: 89,151 89 191,627 -- 191,716

Common Stock issued in connection
with the acquisition of Coast Filter
Media Supply, Inc. dba Systematix: 5,000 5 8,545 -- 8,550

Proceeds from issuance
of Common Stock: 3,974,029 3,974 5,375,258 -- 5,379,232

Exercise of options to purchase
Common Stock under the 1991 Plan: 40,418 41 125,069 -- 125,110

Contribution to Employee Benefit Plan: 24,103 24 31,401 -- 31,425

Net loss: -- -- -- (4,273,759) (4,273,759)
------------ -------- ------------ ----------- -----------

Amounts at December 31, 1995 8,980,143 $ 8,980 $ 16,367,002 $(8,574,224) $ 7,801,758
============ ======== ============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-5

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

FOR THE YEAR ENDED
DECEMBER 31,
1995 1994
--------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... (4,273,759) (821,308)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts and notes.............. 370,541 27,000
Depreciation and amortization.......................... 628,628 427,887
Provision for impairment of goodwill................... 1,094,167 --
Provision to reduce property, plant and
equipment and other intangibles to
realizable value.................................... 792,708 --
Gain on sale of equipment.............................. -- (151,932)
Pension contribution paid through
issuance of Common Stock............................ 31,425 9,790
Changes in assets and liabilities
net of effects of acquired businesses:
Increase in accounts receivable..................... (391,286) (997,460)
Decrease (increase) in costs and estimated
earnings in excess of billings................... 450,173 (326,612)
Increase in inventory............................... (648,189) (420,031)
Decrease (increase) in prepaids and other........... 162,837 (179,238)
Decrease (increase) in other assets................. 37,441 (7,917)
(Decrease) increase in bank overdraft............... (63,884) 63,884
(Decrease) increase in accounts payable and
accrued expenses................................. (1,485,729) 522,122
Decrease in billings in excess of
costs and estimated earnings..................... -- (29,440)

Net cash used in operating activities....................... (3,294,927) (1,853,255)
----------- -----------
INVESTING ACTIVITIES:
Payment for acquisition of businesses,
net of cash acquired................................ (333,995) (813,026)
Advances on notes receivable........................... (500,000) (120,000)
Payments received on notes receivable.................. 116,696 32,762
Capital expenditures................................... (453,238) (236,410)
Addition to intangible assets.......................... (2,052) (11,232)
----------- -----------

Net cash used in investing activities....................... (1,172,589) (1,147,906)
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............. 5,496,435 --
Net proceeds from issuance of notes payable............ 747,959 --
Repayment of notes payable and
long-term debt...................................... (1,055,115) (1,318,588)
----------- -----------

Net cash provided by (used in) financing activities ........ 5,189,279 (1,318,588)
----------- -----------

Net increase (decrease) in cash and cash equivalents........ 721,763 (4,319,749)
Cash and cash equivalents, beginning of year................ 0 4,319,749
----------- -----------
Cash and cash equivalents, end of year...................... $ 721,763 $ 0
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Aqua Care Systems, Inc. and subsidiaries (the "Company") is engaged in
the design, assembly, marketing and distribution of water purification products
and waste water treatment systems and car wash equipment sales and service.
Currently, it provides services and equipment sales and construction and
installation of waste water treatment plants for clients in the United States
and abroad. For the years ended December 31, 1995 and 1994, export sales,
principally to South America and Asia, aggregated approximately $705,000 and
$460,000, respectively. At December 31, 1995, substantially all accounts
receivable were due from customers within the United States.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of all subsidiaries. All material intercompany transactions and accounts have
been eliminated in consolidation.

PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 period. Actual results could differ from those estimates.

In 1996, the Company will be required to apply the provisions of
Statements of Financial Accounting Standards ("SFAS") Nos. 121 and 123,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed" and "Accounting for Stock-based Compensation". The Company does not
expect the application of these Statements to have a material adverse effect on
its financial statements.

INVENTORY

Inventory consists principally of purchased parts and supplies.
Inventory is valued at the lower of cost (first-in, first-out method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is
provided using the straight- line method over the estimated useful lives of the
assets, ranging from five to thirty years.

F-7

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS

The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill and is amortized on a straight-line basis
over 15 years. The cost of other intangibles is amortized on a straight-line
basis over their estimated useful lives, ranging from seven to fifteen years.
The Company continually evaluates the carrying value of goodwill and other
intangible assets. Impairments are recognized when the expected future
undiscounted operating cash flows to be derived from such intangible assets are
less than their carrying values.

REVENUE RECOGNITION

The Company recognizes revenue on waste water treatment system
construction contracts on the percentage of completion method, based generally
on the ratio of costs incurred to date on the contract to the total estimated
contract cost. Costs incurred and revenues recognized in excess of amounts
billed are classified under current assets as costs and estimated earnings in
excess of billings. Amounts billed in excess of revenues recognized are
classified under current liabilities as billings in excess of costs and
estimated earnings. Losses on construction contracts are recognized at the time
they become estimatable. Equipment and parts sales and rental and service
revenues are accounted for on the accrual method.

INCOME TAXES

Income taxes are accounted for using the liability approach
under the provisions of Financial Accounting Standards No. 109.

NET LOSS PER COMMON SHARE

Net loss per common share is based on the weighted average number of
shares of Common Stock outstanding. Additionally, the 975,000 shares of the
Company's Common Stock and options to acquire 116,250 shares of the Company's
Common Stock placed in escrow in connection with the Company's initial public
offering have not been included in the weighted average number of outstanding
shares as their release from escrow is not considered probable. Fully diluted
loss per share is not presented as the effects of potentially dilutive
securities would be anti-dilutive.

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.

2. LIQUIDITY

The Company has experienced negative cash flows from operating
activities for the years ended December 31, 1995 and 1994. To date, the Company
has funded its growth and operations from the net proceeds of its initial public
offering, bank financing and several private sales of Common Stock

F-8
<PAGE>

completed throughout 1995. If the Company continues to experience negative cash
flows from operating activities and additional proceeds from financing are not
obtained, the Company may need to further reduce its level of operating
expenditures.

The Company has no established borrowing arrangements and generally
purchases components and supplies on terms, usually net 30 days and to a lesser
extent, a cash on delivery basis. The ability to obtain any needed financing
could have a material adverse effect on the Company's financial condition,
operations and business prospects.

3. ACQUISITIONS

On May 12, 1994, the Company acquired all of the Common Stock of Car
Wash Equipment & Supply Ryko of South Florida, Inc. ("CWES"). The purchase price
consisted of 26,667 restricted shares of Common Stock of the Company valued at
$50,000, cash of $300,000, aggregate payments of $200,000 pursuant to a
consulting/non-compete agreement, and notes amounting to $900,000 (see Note 7).
In connection with this acquisition, the Company recorded goodwill of
approximately $1,300,000. The Company assumed operational control of CWES on
April 1, 1994. CWES is the exclusive distributor for sale, installation, and
service of Ryko Manufacturing Company's rollover car wash equipment for South
Florida.

On July 7, 1994, the Company acquired all of the Common Stock of Joel
C. Edison, Ltd., dba KISS International ("KISS"). The purchase price consisted
of 533,333 restricted shares of Common Stock of the Company valued at $1,000,000
and aggregate payments of $150,000 pursuant to a consulting/non- compete
agreement. In connection with this acquisition, the Company recorded goodwill of
approximately $2,100,000. The Company assumed operational control of KISS on
July 1, 1994. KISS is a manufacturer and distributor of water purification
products for commercial and residential applications.

On August 2, 1994, the Company acquired all of the Common Stock of
Gravity Flow Systems, Inc. ("GFS") and FLS Specialty Manufacturing, Inc. ("FLS")
and the name and certain assets of TOPCO International, Inc. for 533,333
restricted shares of Common Stock of the Company valued at $1,000,000. In
connection with this acquisition, the Company recorded goodwill of approximately
$1,700,000. Upon consummation of the acquisition, FLS was merged into GFS and
the acquired assets of TOPCO International, Inc. were merged into ESSI. The
Company assumed operational control of these entities and assets on July 1,
1994. GFS is a manufacturer and distributor of various types of wastewater
treatment equipment mainly for municipal and industrial applications. During
1995, GFS recognized a partial impairment of goodwill previously recorded,
amounting to approximately $800,000, due mainly to the cessation of operations
of its manufacturing division during the third quarter of 1995.

goodwill of approximately $400,000. Pursuant to this acquisition, the Company
agreed to issue additional shares semi-annually to a former shareholder
amounting to 10% of the net sales from MWT to the former shareholder for each
six month period commencing January 1, 1995. Pursuant to this agreement, 5,311
additional shares of Common Stock were issued through December 31, 1995. The
Company assumed operational control of MWT on January 1, 1995. MWT operations
include manufacturing, assembly, marketing and distribution of water
purification products for commercial as well as residential applications.

On March 17, 1995, the Company acquired all of the Common Stock of the
Di-tech division of Coast Filter Media Supply Co., Inc. dba Systamatix ("DTS").
The purchase price consisted of 5,000 restricted shares of Common Stock of the
Company valued at $8,550. In connection with this acquisition the Company
recorded goodwill of approximately $300,000, principally as a result of acquired
liabilities. The Company assumed operational control of DTS on March 1, 1995.
DTS operations include assembly, marketing and distribution of water
purification products for commercial as well as residential applications. During
1995, DTS recognized impairment of goodwill previously recorded, amounting to
approximately $300,000, due mainly to the cessation of operations at its
manufacturing facility during the third quarter of 1995.

Adjustments made in the fourth quarter of 1995 had the effect of
increasing the net loss for the quarter by approximately $1,000,000. The
adjustments resulted from impairment of goodwill and reductions of property,
plant and equipment and other intangibles to net realizable value due to the
reasons described above.

All of the acquisitions were accounted for by the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the accompanying consolidated financial statements from the dates
the Company assumed operational control of each acquired entity.

Summarized below are the unaudited pro forma combined results of
operations for the years ended December 31, 1995 and 1994 assuming the
acquisitions of CWES, KISS, GFS, MWT and DTS had been consummated as of the
beginning of each period presented. The following table gives effect to
appropriate adjustments for the fair value of net assets acquired, amortization
of goodwill, interest expense and issuance of Common Stock and debt.

1995 1994
------------- -------------

Net sales.............................$ 14,562,886 $ 13,481,542
Net loss..............................$ (4,278,592) $ (1,287,668)
Net loss per share....................$ (.68) $ (.33)

F-10
<PAGE>
<TABLE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>

4. CONTRACTS IN PROGRESS

COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS DECEMBER 31, 1995 DECEMBER 31, 1994
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Costs and estimated earnings.........................................$ 1,649,035 $ 986,008
Less billings........................................................ 1,581,061 467,861
----------- -----------
Total................................................................$ 67,974 $ 518,147
=========== ===========
</TABLE>

All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $54,513 and
$13,964 are included in accounts receivable at December 31, 1995 and 1994,
respectively.

<TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<CAPTION>

DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Land and building....................................................$ 150,000 $ 150,000
Machinery and equipment.............................................. 688,841 584,047
Furniture and fixtures............................................... 279,624 238,087
Leasehold improvements............................................... 50,732 172,026
Autos and trucks..................................................... 17,906 17,906
------------- -------------
1,187,103 1,162,066
Less accumulated depreciation........................................ (368,725) (283,059)
------------- -------------
Net property, plant and equipment....................................$ 818,378 $ 879,007
============= =============
</TABLE>

6. INTANGIBLE ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Goodwill.............................................................$ 4,759,029 $ 5,112,983
License agreement, customer list and other........................... 151,218 334,333
------------- -------------
4,910,247 5,447,316
Less accumulated amortization........................................ 583,073 (292,003)
------------- -------------
Net intangible assets................................................$ 4,327,174 $ 5,155,313
============= =============
</TABLE>

F-11
<PAGE>
<TABLE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LONG-TERM DEBT

DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Prime plus 1% (9.75% at December 31, 1995), notes
payable, issued in connection with acquisition of
CWES, payable in equal quarterly principal payments
of $40,000, plus interest, through April 1999,
principally collateralized by certain accounts
receivable, inventory, property and equipment with
a book value at December 31, 1995 of approximately
$900,000............................................................. 560,000 $ 820,000

Variable rate note (with a floor of 8.25% and a
ceiling of 12.75%), $6,350 payable monthly with a
balloon payment, paid in October 1995................................ -- 171,142

10.75% mortgage note payable, principal and interest
payable monthly through January 2004, collateralized
by land and building with a book value at December 31,
1995 of approximately $150,000....................................... 134,839 147,786

Prime plus 2% (10.75% at December 31, 1995), note
payable, interest only payable monthly, principal
due upon demand, collateralized by all business assets
with a book value at December 31, 1995 of approximately
$1,300,000........................................................... 84,084 84,114

Unsecured prime plus 1% note payable, principal and
interest payable monthly, paid in October 1995....................... $ -- 81,559
----------- ----------
7.14% installment loan, principal and interest payable
monthly through October 1995, paid in October 1995................... -- 29,437
----------- ----------

778,923 1,334,038

Less current maturities.............................................. (254,925) (635,808)
------------- -------------

Total long-term debt.................................................$ 523,998 $ 698,230
============= =============

</TABLE>

F-12

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1995, maturities of long-term debt, are:

1996 $ 254,925
1997 171,983
1998 173,205
1999 94,551
2000 16,014
Thereafter 68,245
-------------
$ 778,923
=============

8. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>

INDEBTEDNESS TO RELATED PARTIES DECEMBER 31, 1995 DECEMBER 31, 1994
- ------------------------------- ----------------- -----------------
<S> <C> <C>
10% unsecured notes payable to a former affiliated
entity, matured October 1994.........................................$ 125,000 $ 125,000
============= =============
</TABLE>

Interest expense on related party indebtedness aggregated approximately
$13,000 and $14,000 for the years ended December 31, 1995 and 1994,
respectively.

In connection with the private sales of 1,400,000 shares of Common
Stock (see Note 10), the Company paid finders fees aggregating approximately
$107,000 to a member of the Company's Board of Directors during the year ended
December 31, 1995.

9. INCOME TAXES

At December 31, 1995, the Company has approximately $7,500,000 of net
operating loss carryforwards expiring through 2010, for both financial reporting
and income tax purposes. Changes in ownership of greater than 50% which may
occur as a result of the Company's issuances of Common and Preferred Stock may
result in a substantial annual limitation being imposed upon the future
utilization of the net operating losses for tax purposes. The amount of such
limitation has not yet been determined.

Realization of any portion of the approximate $2,900,000 and $1,500,000
deferred tax asset at December 31, 1995 and 1994, respectively, resulting mainly
from the available net operating loss carryforward, is not considered more
likely than not and accordingly, a valuation allowance has been recorded for the
full amount of such asset.

F-13

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. EQUITY TRANSACTIONS

(a) In connection with the Company's issuance of 10% unsecured notes
payable in 1992 and a prior year, the Company issued warrants to acquire an
aggregate of 195,000 shares of the Company's Common Stock, exercisable at $2.39
per share, expiring April 17, 1997. The warrants issued during 1992 were valued
at $15,500. No warrants have been exercised.

In connection with the Company's issuance of Series B Convertible
Redeemable Preferred Stock in 1992, the Company issued such stockholders
warrants to acquire an aggregate 162,000 shares of the Company's Common Stock,
exercisable at $2.39 per share, expiring April 17, 1997. No warrants have been
exercised.

(b) In connection with a May 1993 conversion of a note payable to
shares of the Company's Common Stock, the Company issued warrants to acquire
35,000 shares of the Company's Common Stock, exercisable at $2.39 per share,
expiring April 17, 1997. No warrants have been exercised.

In connection with the May 1993 issuance of 10% unsecured noted
payable, the Company also issued, to the note holders, warrants to acquire an
aggregate of 30,000 shares of the Company's Common Stock, exercisable at $2.39
per share, expiring April 17, 1997. No warrants have been exercised.

(c) In connection with the Company's issuance of Series C Convertible
Redeemable Preferred Stock and conversion of the shares into Common Stock in
1993, the Company issued such stockholders, (a) warrants to acquire an aggregate
163,125 shares of the Company's Common Stock, exercisable at $2.39 per share,
(b) 163,125 warrants to purchase for $7.17 per share, (i) one share of Common
Stock and (ii) one warrant to purchase one share of Common Stock for $10.76 per
share, and (c) 163,125 warrants to purchase one share of Common Stock for $10.76
per share, each warrant expiring April 17, 1997. No warrants have been
exercised.

(d) On October 14, 1993, the Company completed its initial public
offering with the sale of 1,050,000 units at a price of $6.00 per unit and an
additional 157,500 units, by means of the overallotment, at the same price on
November 19, 1993. In addition to one share of the Company's Common Stock, each
unit included (a) one warrant to purchase for $7.17 per share, (i) one share of
Common Stock and (ii) one warrant to purchase one share of Common Stock for
$10.76 per share, and (b) one warrant to purchase one share of Common Stock for
$10.76 per share. No warrants have been exercised.

(e) In connection with the Company's initial public offering, all then
holders of shares of the Company's Common Stock and substantially all holders of
options to acquire such shares agreed to place into escrow 50% of their Common
Stock (975,000 shares) and options to purchase Common Stock (116,250 options)
(the "escrow shares"). Such stockholders (and option holders to the extent they
have exercised such options) shall continue to vote the escrow shares; however,
the escrow shares are not assignable or transferable. The escrow shares are to
be released from escrow upon the attainment of specified net income or Common
Stock price levels through 1997. If such levels are not obtained by December 31,
1997, the shares will be contributed to the Company. Release of the escrow
shares will
F-14
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

be compensatory and will result in adjustments to earnings to record such shares
at fair market value. The Company does not presently believe that it is probable
that any of the escrow shares will be released.

(f) On March 31, 1994, Peter N. Christos, a principal stockholder of
the Company, and former employee of the Underwriter, exercised his option to
convert certain notes and accrued interest on such notes into 24,334 of the
Company's Units based upon an agreed price, which approximated the market price
at March 31, 1994, of $4.00 per Unit.

(g) During 1995, the Company completed private sales of 1,400,000
shares of Common Stock. The net proceeds of approximately $2,900,000 from these
sales was used primarily for acquisitions and working capital.

(h) During 1995, the Company issued $3,250,000 of Subordinated
Convertible Notes, of which, approximately $3,000,000 were converted into
2,574,029 shares of the Company's Common Stock. The balance of such Notes,
approximating $250,000, were converted into 268,818 shares of the Company's
Common Stock in January 1996 (see Note 15). The net proceeds of approximately
$2,800,000 from these sales is to be used primarily for acquisitions and working
capital.

(i) The Company maintains stock incentive plans for executives,
employees, Directors and non-employees. The 1991 Performance Equity Plan and the
Directors' Stock Option Plan (the "Plans") are administered by the Board of
Directors with respect to executive officers and by the executive officers with
respect to all other eligible employees and eligible non-employees. A total of
1,900,000 shares of the Company's Common Stock are reserved for issuance under
the Plans. Options granted through December 31, 1995, have been granted at
prices which were not less than fair market at the dates of grant, ranging from
$1.25 per share to $5.00 per share, and expire through 2005.

Data for outstanding options under the Plans are summarized as follows:

NUMBER OF SHARES OPTION PRICE RANGE
---------------- ------------------

OUTSTANDING JANUARY 1, 1994 340,000 $1.50 - $4.13
Granted 556,000 $3.41 - $3.75
Cancelled (28,000) $3.41 - $4.00
----------

OUTSTANDING DECEMBER 31, 1994 868,000 $1.50 - $4.13
Granted 911,100 $1.25 - $5.00
Exercised (103,518) $1.50 - $4.13
Cancelled (470,000) $3.25 - $4.13
----------

OUTSTANDING DECEMBER 31, 1995 1,205,582 $1.25 - $5.00
Granted 106,000 $2.25
Cancelled (1,000) $3.41
----------

OUTSTANDING FEBRUARY 29, 1996 1,310,582 $1.25 - $5.00
==========

F-15

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1995 and 1994, respectively, 193,761 and 245,835
options with an average option price of $2.98 and $2.04 were exercisable.

(j) In October 1995, the Company entered into a consulting agreement
with an investment banking company. In connection with this agreement, the
Company issued 1,100,000 warrants to purchase for $7.17 per share, (i) one share
of Common Stock and (ii) one warrant to purchase one share of Common Stock for
$10.76 per share. Consulting expense will be amortized as services are rendered.

As of December 31, 1995 and 1994, respectively, the Company has
reserved an aggregate 9,282,740 and 7,864,503 shares of Common Stock for
issuance upon exercise of outstanding warrants and pursuant to the Plans.

11. BUSINESS SEGMENTS

The Company's operations by business segments were as follows:
<TABLE>
<CAPTION>

WATER PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- -------- ------------------ ------------------ --------- -----
<S> <C> <C> <C> <C>
1995 $ 10,883,071 $ 3,617,430 -- $ 14,500,501
1994 $ 5,873,591 $ 1,997,866 -- $ 7,871,457

OPERATING (LOSS) INCOME

1995 $ (3,911,487) $ 362,132 $ (904,095) $ (4,453,450)
1994 $ (623,005) $ 236,785 $ (789,946) $ (1,176,166)

IDENTIFIABLE ASSETS

1995 $ 7,859,159 $ 2,109,783 $ 923,709 $ 10,892,651
1994 $ 8,648,490 $ 1,934,792 $ 179,302 $ 10,762,584

DEPRECIATION AND AMORTIZATION

1995 $ 473,669 $ 120,159 $ 34,800 $ 628,628
1994 $ 332,731 $ 65,924 $ 29,232 $ 427,887

CAPITAL EXPENDITURES

1995 $ 408,260 $ 23,007 $ 21,971 $ 453,238
1994 $ 197,731 $ 6,858 $ 31,821 $ 236,410
</TABLE>

F-16

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. OTHER INCOME

(a) Included in other income in 1994, is a gain of approximately
$152,000 from the sale to former employees of assets used in the Company's Water
Cooler Rental and De-Ionized Plant and Tank Exchange operations. The aggregate
sales price of $470,000 consisted of $6,000 in cash and $464,000 in 8% notes,
receivable in monthly installments through 1999, of which, approximately
$117,000 and $39,000 has been collected through December 31, 1995 and 1994,
respectively.

(b) The Company offers a retail financing program for the purpose of
assisting its subsidiaries' water purification customers (dealers) in obtaining
financing through an arrangement with an unrelated lending company. As
compensation for its services, the Company receives fees based on amounts
financed. Net fees for the years ended December 31, 1995 and 1994 aggregated
approximately $321,000 and $118,000, respectively, and are included in other
income.

13. SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended December 31, 1995 and 1994, the Company paid
$137,026 and $97,138, respectively, for interest. Non-cash investing and
financing activities are as follows:

The Company purchased the net assets of MWT and all of the capital
stock of DTS and all of the capital stock of CWES, KISS and GFS during the years
ended December 31, 1995 and 1994, respectively. In conjunction with these
acquisitions, liabilities were assumed as follows:

DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------

Fair value of assets acquired $ 1,052,107 $ 6,905,710

Cash paid for the capital stock/net
assets, net of cash acquired (333,995) (813,026)

Common Stock issued in connection with
acquisitions (193,550) (2,050,000)

Debt and obligations under acquisition
agreements -- (1,250,000)
---------------- ---------------

Liabilities assumed $ 524,562 $ 2,792,684
=============== ==============

During 1994, the Company received $464,000 in notes receivable in
connection with the sale of certain assets.

During 1994, $97,512 of notes payable and accrued interest were
converted to Common Stock and warrants to purchase Common Stock.

F-17
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. COMMITMENTS AND CONTINGENCIES

(a) On September 18, 1995, the Company and one of its subsidiaries,
Gravity Flow Systems, Inc. ("GFS"), received a complaint from Robert L. Wood, a
former employee of GFS, filed in the Superior Court of Cobb County in the State
of Georgia. The complaint alleges breach of employment agreement and seeks
damages which are indeterminate as of the date of this report. The Company
believes that there is no merit to the aforementioned complaint and intends to
vigorously defend its position. The Company believes that this complaint will
not have a material adverse impact on its financial position or results of
operations.

(b) The Company leases vehicles and office/warehouse space under
operating leases which expire through 1996. Total rent expense aggregated
approximately $443,000 and $244,000, including approximately $152,000 and
$90,000 to related parties, for the years ended December 31, 1995 and 1994,
respectively.

Approximate future annual minimum lease payments under operating leases
at December 31, 1995 are as follows:

1996 $ 338,925
1997 57,169
1998 51,549
1999 51,549
2000 28,488
-------------
$ 527,680

(c) The Company has entered into a distribution agreement with Ryko
Manufacturing Company ("Ryko"). Under the terms of the agreement, the Company is
the exclusive distributor of Ryko car wash equipment in the South Florida
region. The distribution agreement provides that the Company sells directly or
receives a commission on all Ryko equipment sold within its region. The
distribution agreement is due to expire in July 1997. However, it provides for
automatic renewal upon achievement of certain sales goals which aggregate
approximately $1,700,000 and $1,900,000 for 1996 and 1997, respectively.

(d) In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two year
period on a quarterly basis. During 1995 and 1994, the Company contributed
24,103 and 5,983 shares of restricted Common Stock valued at $31,425 and $9,790,
respectively.

(e) The Company's wholly-owned subsidiary, PFW, is a Florida
distributor or dealer for four independent manufacturers of water purification
equipment. These distributor agreements may be cancelled at any time without
notice or penalty. Pursuant to a written agreement, such subsidiary is also the
exclusive national distributor for another company's water purification product
for application in car washes. Such agreement is subject to cancellation in the
event agreed upon annual sales quotas are not
F-18
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

met. Cancellation of any of such distributor agreements could have a material
adverse effect on the Company's business.

15. SUBSEQUENT EVENTS

(a) In January 1996, $247,959 of Convertible Subordinated Notes were
converted into 268,818 shares of the Company's Common Stock.

(b) In February 1996, certain employees of the Company were granted
options to purchase a total of 106,000 shares of Common Stock at $2.25 per share
(market value at the date of grant). The above options expire ten years from the
date of grant, and are exercisable one-third each year beginning one year from
the date of grant.

F-19
<PAGE>
<TABLE>
<CAPTION>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO MARCH 31, 1996)

MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents.....................................$ 512,898 $ 721,763
Accounts receivable, net of allowance
for doubtful accounts of $91,000 and $85,000 2,559,007 2,016,117
Costs and estimated earnings in excess of
billings.................................................. 29,987 67,974
Inventory..................................................... 1,771,518 1,950,098
Current maturities of notes receivable........................ 89,050 589,050
Prepaids and other............................................ 92,204 75,489
--------------- --------------

Total current assets............................................... 5,054,664 5,420,491

Property, plant and equipment, net................................. 819,547 818,378
Intangible assets, net............................................. 4,259,883 4,327,174
Notes receivable, less current maturities.......................... 204,792 225,492
Other assets....................................................... 129,711 101,116
--------------- --------------

Total assets.......................................................$ 10,468,597 $ 10,892,651
=============== ==============

LIABILITIES
Current
Accounts payable..............................................$ 808,835 $ 1,354,799
Accrued expenses.............................................. 794,177 584,212
Current maturities of long-term debt.......................... 254,925 254,925
Indebtedness to related party................................. 125,000 125,000
--------------- --------------

Total current liabilities.......................................... 1,982,937 2,318,936

Long-term debt, less current maturities............................ 482,156 523,998
Convertible subordinated notes, net of discounts................... -- 247,959
--------------- --------------

Total liabilities.................................................. 2,465,093 3,090,893
--------------- --------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding.............................. -- --
Common stock, $.001 par; 20,000,000 shares
authorized, 9,248,961 and 8,980,143 shares
issued and outstanding.................................... 9,249 8,980
Additional paid-in capital.................................... 16,614,692 16,367,002
Deficit....................................................... (8,620,437) (8,574,224)
--------------- --------------
Total stockholders' equity......................................... 8,003,504 7,801,758
--------------- --------------
Total liabilities and stockholders' equity.........................$ 10,468,597 $ 10,892,651
=============== ==============
</TABLE>

See accompanying notes to consolidated financial statements.

F-20

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

FOR THE THREE MONTHS ENDED
MARCH 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 3,855,336 $ 3,714,973

Cost of revenues............................................ 2,610,832 2,403,433
--------------- ---------------

Gross profit................................................ 1,244,504 1,311,540
--------------- ---------------

Operating expenses:
Selling, general and administrative 1,308,140 1,490,754
Depreciation and amortization.......................... 128,469 155,933
Provision for doubtful accounts and notes 6,000 10,469
--------------- ---------------
Total operating expenses.................................... 1,442,609 1,657,156
--------------- ---------------

Loss from operations........................................ (198,105) (345,616)

Interest expense, net....................................... (12,154) (42,300)

Other income, net........................................... 164,046 81,470
--------------- ---------------

Net loss.................................................... (46,213) (306,446)
=============== ===============

Net loss per common share...................................$ (0.01) $ (0.07)
=============== ===============

Weighted average number of outstanding
shares of common stock................................. 8,256,237 4,103,922
=============== ===============
</TABLE>

See accompanying notes to consolidated financial statements.

F-21
<PAGE>
<TABLE>
<CAPTION>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Note 12)

FOR THE THREE MONTHS ENDED
MARCH 31,
1996 1995
--------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................................$ (46,213) $(306,446)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for doubtful accounts and notes.............. 6,000 10,469
Depreciation and amortization.......................... 128,469 155,933
Pension contribution paid through
issuance of Common Stock............................ -- 6,576
Changes in assets and liabilities
net of effects of acquired businesses:
Increase in accounts receivable..................... (548,890) (450,636)
Decrease in costs and estimated earnings
in excess of billings............................ 37,987 394,890
Decrease (increase) in inventory.................... 178,580 (78,032)
Increase in prepaids and other...................... (16,715) (33,198)
(Increase) decrease in other assets (28,595) 36,323
Increase in bank overdraft.......................... -- 523,258
Decrease in accounts payable and accrued
expenses......................................... (335,999) (220,890)
Increase in billings in excess of
costs and estimated earnings..................... -- 25,006

Net cash (used in) provided by operating activities......... (625,376) 63,253

INVESTING ACTIVITIES:
Payment for acquisition of businesses,
net of cash acquired................................ -- (524,209)
Payments received on notes receivable.................. 520,700 30,610
Capital expenditures................................... (49,767) (67,489)
Addition to intangible assets.......................... (12,580) --
------------ -----------

Net cash provided by (used in) investing activities 458,353 (561,088)

FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............. -- 340,000
Net proceeds from issuance of notes payable............ -- 500,000
Repayment of notes payable and
long-term debt...................................... (41,842) (342,165)
------------- -----------

Net cash (used in) provided by financing activities......... (41,842) 497,835

Net decrease in cash and cash equivalents................... (208,865) 0
Cash and cash equivalents, beginning of period.............. 721,763 0
------------- -----------

Cash and cash equivalents, end of period.................... $ 512,898 $ 0
============= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-22

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1996, AND 1995)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of all subsidiaries. All material intercompany transactions and accounts have
been eliminated in consolidation.

PREPARATION OF FINANCIAL STATEMENTS

INVENTORY

Inventory consists principally of purchased parts and supplies.
Inventory is valued at the lower of cost (first-in, first-out method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is
provided using the straight- line method over the estimated useful lives of the
assets, ranging from five to thirty years.

INTANGIBLE ASSETS

The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill and is amortized on a straight-line basis
over 15 years. The cost of other intangibles is amortized on a straight-line
basis over their estimated useful lives, ranging from seven to fifteen years.
F-23
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company continually evaluates the carrying value of goodwill and other
intangible assets. Impairments are recognized when the expected future
undiscounted operating cash flows to be derived from such intangible assets are
less than their carrying values.

REVENUE RECOGNITION

The Company recognizes revenue on waste water treatment system
construction contracts on the percentage of completion method, based generally
on the ratio of costs incurred to date on the contract to the total estimated
contract cost. Costs incurred and revenues recognized in excess of amounts
billed are classified under current assets as costs and estimated earnings in
excess of billings. Amounts billed in excess of revenues recognized are
classified under current liabilities as billings in excess of costs and
estimated earnings. Losses on construction contracts are recognized at the time
they become estimatable. Equipment and parts sales and rental and service
revenues are accounted for on the accrual method.

INCOME TAXES

Income taxes are accounted for using the liability approach
under the provisions of Financial Accounting Standards No. 109.

NET LOSS PER COMMON SHARE

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.

2. ACQUISITIONS

On January 23, 1995, the Company acquired all of the assets and assumed
certain liabilities of Midwest Water Technologies, Inc. ("MWT"). The purchase
price consisted of 20,740 restricted shares of Common Stock of the Company
valued at $35,000 and $290,000 in cash. In connection with this acquisition, the
Company issued options to purchase 63,100 shares of Common Stock of the Company
at an exercise price of $2.30 per share. In connection with this acquisition,
the Company recorded goodwill of approximately $400,000. Pursuant to this
acquisition, the Company agreed to issue additional shares semi-annually to a
former shareholder amounting to 10% of the net sales from MWT to the former
shareholder for each six month period commencing
F-24

<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

January 1, 1995. Pursuant to this agreement, 5,311 additional shares of Common
Stock were issued through December 31, 1995. Pursuant to this acquisition, the
Company agreed to issue additional shares semi-annually to a former shareholder
based upon the attainment of certain sales levels. The Company assumed
operational control of MWT on January 1, 1995. MWT operations include
manufacturing, assembly, marketing and distribution of water purification
products for commercial as well as residential applications.

3. CONTRACTS IN PROGRESS

COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS MARCH 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------- -------------- -----------------
<S> <C> <C>
Costs and estimated earnings.............................$ 940,389 $ 1,649,035
Less billings............................................ 910,402 1,581,061
------------- -------------
Total....................................................$ 29,987 $ 67,974
============= =============
</TABLE>

All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $38,205 and
$54,513 are included in accounts receivable at March 31, 1996, and December 31,
1995, respectively.

F-25
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. PROPERTY, PLANT AND EQUIPMENT

MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------

Land and building.............................$ 150,000 $ 150,000
Machinery and equipment....................... 734,797 688,841
Furniture and fixtures........................ 283,435 279,624
Leasehold improvements........................ 50,732 50,732
Autos and trucks.............................. 17,906 17,906
------------- -------------
1,236,870 1,187,103
Less accumulated depreciation................. 417,323 368,725
------------- -------------
Net property, plant and equipment.............$ 819,547 $ 818,378
============= =============

5. INTANGIBLE ASSETS

MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------

Goodwill......................................$ 4,759,029 $ 4,759,029
License agreement, customer list and other 163,798 151,218
------------- -------------
4,922,827 4,910,247
Less accumulated amortization................. 662,944 583,073
------------- -------------
Net intangible assets.........................$ 4,259,883 $ 4,327,174
============= =============

6. LONG-TERM DEBT

MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Prime plus 1% (9.25% at March 31, 1996), notes
payable, issued in connection with acquisition of
CWES, payable in equal quarterly principal payments
of $40,000, plus interest, through April 1999,
principally collateralized by certain accounts
receivable, inventory, property and equipment with
a book value at March 31, 1996 of approximately
$900,000.......................................................$ 520,000 $ 560,000

Prime plus 2% (10.25% at March 31, 1996) mortgage
note payable, principal and interest payable monthly
through January 2004, collateralized by land and
building with a book value at March 31, 1996 of
approximately $150,000......................................... 132,997 134,839

F-26
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prime plus 2% (10.25% at March 31, 1996), note
payable, interest only payable monthly, principal
due upon demand, collateralized by all business assets
with a book value at March 31, 1996 of approximately
$1,300,000..................................................... 84,084 84,084
------------- -------------

737,081 778,923

Less current maturities........................................ 254,925 (254,925)
------------- -------------

Total long-term debt...........................................$ 482,156 $ 523,998
============= =============
</TABLE>

At December 31, 1995, maturities of long-term debt, are:

1996 $ 254,925
1997 171,983
1998 173,205
1999 94,551
2000 16,014
Thereafter 68,245
-------------
$ 778,923
=============
<TABLE>
<CAPTION>

7. RELATED PARTY BALANCES AND TRANSACTIONS

INDEBTEDNESS TO RELATED PARTIES MARCH 31, 1996 DECEMBER 31, 1995
- ------------------------------- -------------- -----------------
<S> <C> <C>
10% unsecured notes payable to a former affiliated
entity, matured October 1994.........................................$ 125,000 $ 125,000
============= =============
</TABLE>

Interest expense on related party indebtedness aggregated approximately
$3,125 and $3,125 for the years ended March 31, 1995 and 1995, respectively.

8. INCOME TAXES

At March 31, 1996, the Company has approximately $7,500,000 of net
operating loss carryforwards expiring through 2011, for both financial reporting
and income tax purposes. Changes in ownership of greater than 50% which may
occur as a result of the Company's issuances of Common and Preferred Stock may
result in a substantial annual limitation being imposed upon the future
utilization of the net operating losses for tax purposes. The amount of such
limitation has not yet been determined.

F-27
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Realization of any portion of the approximate $2,900,000 deferred tax
asset at March 31, 1996, resulting mainly from the available net operating loss
carryforward, is not considered more likely than not and accordingly, a
valuation allowance has been recorded for the full amount of such asset.

9. EQUITY TRANSACTIONS

(a) On October 14, 1993, the Company completed its initial public
offering with the sale of 1,050,000 units at a price of $6.00 per unit and an
additional 157,500 units, by means of the overallotment, at the same price on
November 19, 1993. In addition to one share of the Company's Common Stock, each
unit included (a) one warrant to purchase for $7.17 per share, (i) one share of
Common Stock and (ii) one warrant to purchase one share of Common Stock for
$10.76 per share, and (b) one warrant to purchase one share of Common Stock for
$10.76 per share. No warrants have been exercised. In connection with the
Company's initial public offering, all then holders of shares of the Company's
Common Stock and substantially all holders of options to acquire such shares
agreed to place into escrow 50% of their Common Stock (975,000 shares) and
options to purchase Common Stock (116,250 options) (the "escrow shares"). Such
stockholders (and option holders to the extent they have exercised such options)
shall continue to vote the escrow shares; however, the escrow shares are not
assignable or transferable. The escrow shares are to be released from escrow
upon the attainment of specified net income or Common Stock price levels through
1997. If such levels are not obtained by December 31, 1997, the shares will be
contributed to the Company. Release of the escrow shares will be compensatory
and will result in adjustments to earnings to record such shares at fair market
value. The Company does not presently believe that it is probable that any of
the escrow shares will be released.

(b) The Company maintains stock incentive plans for executives,
employees, Directors and non-employees. The 1991 Performance Equity Plan and the
Directors' Stock Option Plan (the "Plans") are administered by the Board of
Directors with respect to executive officers and by the executive officers with
respect to all other eligible employees and eligible non-employees. A total of
1,900,000 shares of the Company's Common Stock are reserved for issuance under
the Plans. Options granted through December 31, 1995, have been granted at
prices which were not less than fair market at the dates of grant, ranging from
$1.25 per share to $5.00 per share, and expire through 2006.

Data for outstanding options under the Plans are summarized as follows:

NUMBER OF SHARES OPTION PRICE RANGE
---------------- ------------------

OUTSTANDING JANUARY 1, 1995 868,000 $1.50 - $4.13
Granted 911,100 $1.25 - $5.00
Exercised (103,518) $1.50 - $4.13
Cancelled (470,000) $3.25 - $4.13
----------

F-28
<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OUTSTANDING DECEMBER 31, 1995 1,205,582 $1.25 - $5.00
Granted 106,000 $2.25
Cancelled (1,000) $3.41
----------

OUTSTANDING MARCH 31, 1996 1,310,582 $1.25 - $5.00
==========

At December 31, 1995, 193,761 options with an average option price of
$2.98 were exercisable.

(c) In October 1995, the Company entered into a consulting
agreement with an investment banking company. In connection with this agreement,
the Company issued 1,100,000 warrants to purchase for $7.17 per share, (i) one
share of Common Stock and (ii) one warrant to purchase one share of Common Stock
for $10.76 per share. Consulting expense will be amortized as services are
rendered.

As of December 31, 1995, the Company reserved an aggregate 9,282,740
shares of Common Stock for issuance upon exercise of outstanding warrants and
pursuant to the Plans.

(d) In January 1996, $247,959 of Convertible Subordinated Notes
were converted into 268,818 shares of the Company's Common Stock.

10. BUSINESS SEGMENTS

The Company's operations by business segments were as follows:
<TABLE>
<CAPTION>

WATER PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- ------- ------------------ ------------------ --------- -----
<S> <C> <C> <C> <C>
1996 $ 2,734,363 $ 1,120,973 -- $ 3,855,336
1995 $ 2,939,880 $ 775,093 -- $ 3,714,973

OPERATING (LOSS) INCOME

1996 $ (10,439) $ 47,917 $ (235,583) $ (198,105)
1995 $ (194,258) $ 17,717 $ (169,075) $ (345,616)

IDENTIFIABLE ASSETS

1996 $ 7,934,321 $ 2,178,085 $ 356,191 $ 10,468,597
1995 $ 9,969,341 $ 1,886,605 $ 84,195 $ 11,940,141

F-29

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEPRECIATION AND AMORTIZATION

1996 $ 91,869 $ 27,900 $ 8,700 $ 128,469
1995 $ 120,274 $ 26,959 $ 8,700 $ 155,933

CAPITAL EXPENDITURES

1996 $ 27,594 $ 17,246 $ 4,927 $ 49,767
1995 $ 59,742 $ 1,706 $ 6,041 $ 67,489
</TABLE>

11. OTHER INCOME

(a) During 1994, the Company sold assets used in the Company's Water
Cooler Rental and De-Ionized Plant and Tank Exchange operations. The aggregate
sales price of $470,000 consisted of $6,000 in cash and $464,000 in 8% notes,
receivable in monthly installments through 1999, of which, approximately
$117,000 has been collected through March 31, 1996.

(b) The Company offers a retail financing program for the purpose of
assisting its subsidiaries' water purification customers (dealers) in obtaining
financing through an arrangement with an unrelated lending company. As
compensation for its services, the Company receives fees based on amounts
financed. Net fees for the years ended March 31, 1996, and 1995 aggregated
approximately $126,000 and $80,000, respectively, and are included in other
income.

12. SUPPLEMENTAL CASH FLOW INFORMATION

For the three months ended March 31, 1996, and 1995, the Company paid
$17,552 and $38,554, respectively, for interest. Non-cash investing and
financing activities are as follows:

The Company purchased the net assets of MWT and all of the capital
stock of DTS during the three months ended March 31, 1995. In conjunction with
these acquisitions, liabilities were assumed as follows:

F-30

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995
-----------------

Fair value of assets acquired $ 1,052,107

Cash paid for the capital stock/net
assets, net of cash acquired (333,995)

Common Stock issued in connection with
acquisitions (193,550)
---------------
Liabilities assumed $ 524,562
===============

13. COMMITMENTS AND CONTINGENCIES

(a) On September 18, 1995, the Company and one of its subsidiaries,
Gravity Flow Systems, Inc. ("GFS") received a complaint from Robert L. Wood, a
former employee of GFS, filed in the Superior Court of Cobb County in the State
of Georgia (Civil Action Number 951705524). The complaint alleged breach of
employment agreement and sought indeterminate damages. This proceeding has been
settled without material adverse impact on the Company's financial position or
results of operations.

(b) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2000. Total rent expense aggregated
approximately $104,000 and $102,000, for the three months ended March 31, 1996
and 1995, respectively.

Approximate future annual minimum lease payments under operating leases
at December 31, 1995 are as follows:

1996 $ 338,925
1997 57,169
1998 51,549
1999 51,549
2000 28,488
-------------
$ 527,680
=============

F-31

<PAGE>

AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(c) The Company has entered into a distribution agreement with Ryko
Manufacturing Company ("Ryko"). Under the terms of the agreement, the Company is
the exclusive distributor of Ryko car wash equipment in the South Florida
region. The distribution agreement provides that the Company sells directly or
receives a commission on all Ryko equipment sold within its region. The
distribution agreement is due to expire in July 1997. However, it provides for
automatic renewal upon achievement of certain sales goals, which aggregate
approximately $1,700,000 and $1,900,000 for 1996 and 1997, respectively.

(d) In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two year
period on a quarterly basis. For the three months ended March 31, 1996, and
1995, the Company contributed 6,765 and 4,384 shares of restricted Common Stock
valued at $5,602 and $6,570, respectively.

F-32

<PAGE>

PART II

INFORMATION NOT REQUIRED I PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Restated Certificate of Incorporation contains a provision
eliminating or limiting director liability to the Company and its stockholders
for monetary damages arising from acts or omissions in the director's capacity
as a director. The provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
the Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of the Company protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of the Company or a stockholder thereto to
successfully prosecute an action against a director for a breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The Securities and Exchange Commission has taken the
position that the provision will have no effect on claims arising under the
Federal securities laws.

In addition, the Company's Restated Certificate of Incorporation and
Amended and Restated By-Laws provide for mandatory indemnification rights,
subject to limited exceptions, to any directors, officer, employee, or agent of
the Registrant who by reason of the fact that he or she is a director, officer,
employee or agent of the Company, is involved in a legal proceeding of any
nature. Such indemnification rights include reimbursement for expenses incurred
by such director, officer, employee or agent in advance of the final disposition
of such proceeding in accordance with the applicable provisions of the DGCL.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting commissions and a non-accountable expense allowance to be paid by
the Registrant) are as follows:

AMOUNT

SEC Registration Fee............................ $ 7,406.35*
Printing and Engraving Costs....................
Accounting Fees and Expenses.................... 5,000.00
Legal Fees and Expenses......................... 20,000.00
Blue Sky Fees and Expenses (including legal fees) 10,000.00
Transfer Agent's Fees and Expenses..............
Miscellaneous Expenses.......................... 5,000.00
-----------
Total.................................... $47,406.35
===========

- -----------------
*Actual amount
II-1

<PAGE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

The Registrant has sold the following unregistered securities during the
three years preceding the filing of this Registration Statement.

The Company, in a private placement bridge financing, issued to 34
investors 13 units in two stages. Each unit consisted of a 10% Bridge Note in
the principal amount $100,000 due on the earlier of one year from the date of
issuance or consummation of the Registrant's initial public offering ("IPO") and
15,000 Bridge Warrants to purchase 15,000 shares of Common Stock, at an exercise
price equal to $2.39 per share of Common Stock (the fair market of a shares of
Common Stock as determined by the Company's Board of Directors). The Bridge
Warrants are currently exercisable and expire on April 17, 1997. In the first
stage, on May 13, 1993, the Company issued to four investors two Units, each
Unit consisting of a 10% Bridge Note in the principal amount of $100,000 due on
the earlier of six months from the date of issuance of consummation of the IPO
and 15,000 immediately exercisable Bridge Warrants to purchase 15,000 shares of
Common Stock. In the second stage, on August 6 and 9, 1993, the Company issued
10.875 Units to 39 investors, each Unit consisting of 100,000 shares of Series C
Preferred Stock and 15,000 Bridge Warrants. The above transactions were made in
reliance upon the exemptions provided in Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The Company believed that each purchaser
had access and an opportunity to review all relevant information concerning the
Company and has sufficient knowledge and experience in business and financial
matters to evaluate the merits and risks of such investment.

On May 13, 1993, the Company consummated an exchange with a prior Bridge
Financing investor of $200,000 principal amount of Bridge Notes for 200,000
shares of Series A Preferred and 35,000 Bridge Warrants to purchase 35,000
shares of Common Stock at an exercise price of $2.39 per share. On such date,
the Company also exchanged with a second previous investor a $25,000 principal
amount Bridge Note for 25,000 shares of Series A Preferred Stock. The above
transactions were made in reliance upon the exemptions provided in Section 4(2)
of the Securities Act and Regulation D promulgated thereunder. The Company
believed that each investor had an opportunity to review all relevant
information concerning the Company and the Exchange and had sufficient knowledge
and experience in business and financial matters to evaluate the merits and
risks of such investment.

During 1995, the Company completed private placements of a total of
4,242,847 shares of its Common Stock outside of the United States pursuant to
Regulation S, as follows:

II-2

<PAGE>

NUMBER OF
CLOSING SHARES OF COMMON NET PROCEEDS
DATE STOCK SOLD RECEIVED
------- ---------------- ------------
1/26/95 200,000 343,750
4/14/95 400,000 620,975
5/8/95 350,000 653,635
5/19/95 200,000 611,775
6/6/95 100,000 305,875
6/15/95 150,000 468,748
8/3/95 (1) 539,080 637,475
9/29/95 (1) 2,303,767 2,125,000
--------- ----------
4,242,847 $5,767,233

(1) In this transaction the Company issued Convertible Notes, which have
been converted into shares of Common Stock of the Companyat a 15%
discount, totaling $487,525 in discounts.

The purchaser, which in each transaction was a foreign company, made
certain representations and warranties concerning Regulation S compliance. In
each transaction, those representations and warranties included that the
purchaser: was not a U.S. person as defined in Regulation S; had not offered the
Common Stock purchased in the U.S. or to any U.S. person as defined in
Regulation S; had not engaged in any "directed selling efforts", as defined in
Regulation S; had not conducted any general solicitation relating to the
transaction in the U.S. or to any U.S. person; and would comply with the
applicable holding period under Regulation S. All of such transactions were
carried out pursuant to the exemption provided by Regulation S promulgated by
the Commission under the Securities Act. In connection with all of the sales,
the Company paid commissions and fees totaling approximately $977,379 to various
persons and entities for facilitating the sales. . Of these fees, approximately
$870,000 were paid to Atlantic International Capital Ltd. and its affiliates.
Norman J. Hoskin, a director and Secretary of the Company, is the Chairman and
CEO of Atlantic International Capital Ltd. Of the remaining fees, $107,379 were
paid to William K. Mackey, Chairman of the Board, President, Chief Executive
Officer and Treasurer.

With the exception of the sale by the Registrant in connection with the
Bridge Financings, wherein the Underwriter acted as placement agent for the
Registrant, no underwriters were involved in the foregoing sale of securities.
All of the foregoing securities are deemed to be restricted securities for the
purposes of the Securities Act.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS:

(3)-1 Certificate of Incorporation of the Registrant filed as Exhibit
(3)-1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-67252) is hereby incorporated herein by
reference.

(3)-2 By-laws of the Registrant filed as Exhibit (3)-2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-67252) is
hereby incorporated herein by reference.

II-3

<PAGE>

(4)-1 Form of Warrant Agreement (with Warrant Certificates) filed as
Exhibit 4.2 to the Company's Registration Statement on Form SB-2
(Registration No. 33-67252) is hereby incorporated by reference.

(4)-2 Form of Supplemental Warrant Agreement.

(5) Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the securities being registered.

(10)-1 Distribution Agreement between the Company and Ryko Manufacturing
Company dated July 1, 1995.*

(10)-2 Agreement between First United Equities Corporation and the Company,
dated October 5, 1995, as amended.

(10)-3 Stock Purchase Agreement dated March 17, 1995, by and among the
Company and Brindenderg Securities A/S.*

(10)-4 Stock Purchase Agreement dated as of May 8, 1995, by and among the
Company and M & M Capital Mgmt. LDC.*

(10)-5 Stock Purchase Agreement dated May 31, 1995, by and among the
Company and The Gifford Fund, Ltd.*

(10)-6 Stock Purchase Agreement dated May 24, 1995, by and among the
Company and Amadeus Offshore Fund, LTD. Fund, Ltd.*

(10)-7 Stock Purchase Agreement dated June 7, 1995, by and among the
Company and Wood Gundy.*

(10)-8 Securities Purchase Agreement dated January 20, 1995, between the
Company and Capital International Limited.*

(10)-9 Securities Purchase Agreement dated January 20, 1995, between the
Company and Monarch Development.*

(10)-10 Loan Agreement dated January 20, 1995, by and among the Company
BellFlower Investments, Inc.*

(10)-11 Subordinated Convertible Note of the Company dated August 1, 1995.*

(10)-12 Subordinated Convertible Note of the Company dated September 27,
1995.*

(10)-13 Form of Subordinated Convertible Note of the Company dated September
27, 1995.*

II-4

<PAGE>

(10)-15 Employment Agreement dated September 8, 1995, by and between the
Company and William K. Mackey.*

(11) Statement re: Computation of Per Share Earnings.*

(21) Subsidiaries of the Registrant.*

(23)-1 Consent of BDO Seidman. See pages immediately following signature
pages to the Registration Statement.

(23)-2 Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinion filed as Exhibit (5)).

(24) Powers of Attorney. See the signature page to original filing of
this Registration Statement.

(27) Financial Data Schedule

- --------------------
*Filed with the initial filing of the Registration Statement.

ITEM 28. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

i. Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

ii. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information set forth in the Registration
Statement; and

iii. Include any additional or changed material information on
the plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial BONA
FIDE Offering.

(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the Offering.

II-5

<PAGE>

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to any arrangement, provision or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (for or 497(h))
under the Securities Act as part of this Registration Statement as of the time
it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement for the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering of these securities.

II-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Hollywood, State of Florida, on June 18, 1996

AQUA CARE SYSTEMS, INC.

By: /s/ WILLIAM K. MACKEY
William K. Mackey
Chairman of the Board, President,
Chief Executive Officer and Treasurer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ WILLIAM K.MACKEY Chairman of the Board, President,
William K. Mackey Chief Executive Officer and Treasurer June 18, 1996
(Principal Financial Officer)

* Corporate Controller June 18, 1996
George J. Overmeyer

* Director June 18, 1996
James P. Cefaratti

* Director June 18, 1996
William F. Silvia

* Secretary and Director June 18, 1996
Norman J. Hoskin

*By /s/ WILLIAM K.MACKEY
William K. Mackey
Attorney-in-Fact
</TABLE>

II-7
<PAGE>

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Aqua Care Systems, Inc.

We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report, dated March 5, 1996, relating to the
consolidated financial statements of Aqua Care Systems, Inc. and subsidiaries,
which is contained in that Prospectus.

We also consent to the reference to us under the caption "Experts" in
the Prospectus.

BDO Seidman, LLP

Miami, Florida
June 14, 1996

II-8

Exhibit 4.2

SUPPLEMENTAL WARRANT AGREEMENT

AGREEMENT, dated as of this 14th day of June, 1996, by and among AQUA
CARE SYSTEMS, INC., a Delaware corporation ("Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent").

W I T N E S S E T H:

WHEREAS, in connection with a Registration Statement on Form SB-2,
relating to 1,100,000 redeemable Class A Warrants (the "Class A Warrants" and
individually, a "Class A Warrant") and 1,100,000 redeemable Class B Warrants
(the "Class B Warrants" and individually, a "Class B Warrant"), the Company will
register and may issue up to 1,100,000 Class A Warrants; and

WHEREAS, each Class A Warrant entitles the Registered Holder thereof to
purchase one share of Common Stock and one Class B Warrant, and accordingly, the
Company may issue up to an aggregate of 1,100,000 Class B Warrants (the Class A
Warrants and the Class B Warrants being sometimes collectively referred to
herein as the "Warrants"); and

WHEREAS, each Class B Warrant entitles the Registered Holder thereof to
purchase one share of Common Stock; and

<PAGE>
WHEREAS, the Company and the Warrant Agent have previously entered into
that certain Warrant Agreement dated October 14, 1993, which remains in full
force and effect; and

WHEREAS, the Company and the Warrant Agent wish to enter into this
supplemental warrant agreement (the "Supplemental Warrant Agreement") with
respect to the Warrants covered by the Registration Statement; and

WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;

NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the warrants and the Warrant Agent, the parties hereto
agree as follows:

SECTION 1. DEFINITIONS. As used herein, the following
terms shall have the following meanings, unless the context
shall otherwise require:

- 2 -

<PAGE>
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of earnings and asset of the Company without limit as to amount or
percentage, which at the date hereof consists of 20,000,000 authorized shares of
Common Stock, $.001 par value.

(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 40 Wall Street, New
York, Ne York 10005.

(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.

(d) "Initial Warrant Exercise Date" shall mean as to each Class A
Warrant, and as to each Class B Warrant, the date of issuance of such Warrant.

(e) "Purchase Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price shall
be $7.17 per share as to each Class A Warrant, and $10.76 per share as to each
Class B Warrant, subject to adjustment from

-3-
<PAGE>

time to time pursuant to the provisions of Section 9 hereof, and subject to the
Company's right to reduce the Purchase Price upon notice to all warrant holders.

(f) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $0.05 per Warrant.

(g) "Registered Holder" shall mean as to any Class A or Class B Warrant
and as of any particular date, the person in whose name the certificate
representing the Warrant shall be registered on that date on the books
maintained by the Warrant Agent pursuant to Section 6.

(h) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.

(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
October 13, 1998, or with respect to the Class A and Class B Warrants, the
Redemption Date as defined in Section 8, whichever is earlier; provided that if
such date shall in the State of New York be a holiday or a day on which banks
are authorized or required to close, then 5:00 P.M. (New York time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorizes, or required to close. Notwithstanding the foregoing, upon
notice to all warrant holders the Company shall have the right to extend the
Warrant Expiration Date.

- 4 -

<PAGE>

SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES. (a) A Class A
Warrant initially shall entitle the Registered Holder of the Warrant Certificate
representing such Class A Warrant to purchase one share of Common Stock and one
Class B Warrant upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.

(b) A Class B Warrant initially shall entitle the Registered Holder of
the Warrant Certificate representing such Class B Warrant to purchase one share
of Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.

(c) The Class B Warrants issuable upon the exercise of Class A Warrants
will be detachable and separately transferable immediately from the shares of
Common Stock when issued upon exercise of the Class A Warrants.

(d) Upon execution of this Agreement, Warrant Certificates representing
the number of Class A Warrants and Class B Warrants covered by the Supplemental
Warrant Agreement shall be executed by the Company and delivered to the Warrant
Agent. Upon written order of the Company signed by its President or Chairman or
a Vice President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued and delivered by the Warrant Agent.

- 5 -

<PAGE>

(e) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 2,200,000 shares of Common
Stock, subject to adjustment as described herein, upon the exercise of Class A
Warrants and Class B Warrants in accordance with this Agreement.

(f) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder; (ii)
those issued on or after the Initial Warrant Exercise Date, upon the exercise of
fewer than all Warrants represented by any Warrant Certificate, to evidence any
unexercised Warrants held by the exercising Registered Holder; (iii) those
issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 7; and (v) at the option of the Company, in such form as may
be approved by its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of shares of Common Stock purchasable upon
exercise of the Class A or Class B Warrants or the Redemption Price therefor
made pursuant to Section 9 hereof.

SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES. (a) The Warrant
Certificates shall be substantially in the form annexed hereto as Exhibit A as
to the Class A Warrants and

-6-

<PAGE>

Exhibit B as to the Class B Warrants (the provisions of which Exhibits are
hereby incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage or to the requirements of Section
2(b). The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered form.
Warrant Certificates shall be numbered serially with the letters AW on the Class
A Warrant Certificates of all denominations and the letters BW on the Class B
Warrant Certificates of all denominations.

(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, President or any Vice President and by its Secretary
or an Assistant Secretary, by manual signatures or by facsimile signatures
printed thereon, and shall have imprinted thereon a facsimile of the Company's
seal. Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. In case any
officer of the Company who shall have signed any of the Warrant Certificates
shall cease to be an officer of the Company or to hold the particular office
referenced in the Warrant Certificate before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates may nevertheless be
-7-
<PAGE>

countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificates had not ceased
to be an officer of the Company or to hold such office. After countersignature
by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant
Agent to the Registered Holder without further action by the Company, except as
otherwise provided by Section 4(a) hereof.

SECTION 4. EXERCISE. Each Class A and Class B Warrant may be exercised
by the Registered Holder thereof at any time,on or after the initial Exercise
Date, but not after the warrant Expiration Date, upon the terms and subject to
the conditions set forth herein and in the applicable Warrant Certificate. A
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date and the person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the holder
of those securities upon the exercise of the Warrant as of the close of business
on the Exercise Date. As soon as practicable on or after the Exercise Date the
Warrant Agent shall deposit the proceeds received from the exercise of a Warrant
and shall notify the Company in writing of the exercise of the Warrants.
Promptly following, and in any event within five days after the date of such
notice from the Warrant Agent, the Warrant Agent, on behalf of the Company,
shall cause to be issued and delivered by the Transfer Agent, to the person or
persons entitled to receive the same, a certificate or certificates for the
securities deliverable upon such exercise, (plus a certificate for any remaining
unexercised Warrants of the Registered Holder) unless prior to the date of
issuance of such certificates the Company shall instruct the Warrant Agent to
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the
-8-
<PAGE>

Purchase Price pursuant to such Warrants. Notwithstanding the foregoing, in the
case of payment made in the form of a check drawn on an account of investment
banks and brokerage houses as the Company shall approve in writing to the
Warrant Agent, certificates shall immediately be issued without prior notice to
the Company or any delay. Upon the exercise of any Warrant and clearance of the
funds received, the Warrant Agent shall promptly remit the payment received for
the Warrant (the "Warrant Proceeds") to the Company or as the Company may direct
in writing.

SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC. (a)
The Company covenants that it will at all times reserve and keep available out
of its authorized Common Stock, solely for the purpose of issue upon exercise of
Class A and Class B Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Class A and Class B
Warrants. The Company covenants that all shares of Common Stock which shall be
issuable upon exercise of the Class A and Class B Warrants shall, at the time of
delivery, be duly and validly issued, fully paid, nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, (other than
those which the Company shall promptly pay or discharge) and that upon issuance
such shares shall be listed on each national securities exchange or eligible for
inclusion in each automated quotation system, if any, on which the other shares
of outstanding Common Stock of the Company are then listed or eligible for
inclusion.

(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or approval
of, any governmental]
-9-
<PAGE>

authority under any federal securities law before such securities may be validly
issued or delivered upon such exercise, then the Company will in good faith and
as expeditiously as reasonably possible, endeavor to secure such registration or
approval. The Company will use reasonable efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws. With respect
to any such securities, however, Warrants may not be exercised by, or shares of
Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.

(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares or Class B Warrants upon
exercise of the Class A Warrants, or the issuance or delivery of any shares upon
exercise of the Class B Warrants; provided, however, that if the shares of
Common Stock or Class B Warrants, as the case may be, are to be delivered in a
name other than the name of the Registered Holder of the Warrant Certificate
representing any Warrant being exercised, then no such delivery shall be made
unless the person requesting the same has paid to the Warrant Agent the amount
of transfer taxes or charges incident thereto, if any.

(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Common Stock issuable upon exercise of the Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
The Warrant Agent is hereby irrevocably authorized to issue
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<PAGE>

from time to time certificates representing Class B Warrants issuable upon
exercise of the Class A Warrants. The Company will file with the Warrant Agent a
statement setting forth the name and address of the Transfer Agent of the
Company for shares of Common Stock issuable upon exercise of the Warrants.

SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER. (a) Warrant
Certificates may be exchanged for other Warrant Certificates representing an
equal aggregate number of Warrants of the same class or may be transferred in
whole or in part. Warrant Certificates to be exchanged shall be surrendered to
the Warrant Agent at its Corporate Office, and upon satisfaction of the terms
and provisions hereof, the Company shall execute and the Warrant Agent shall
countersign, issue and deliver in exchange therefor the Warrant Certificate or
Certificates which the Registered Holder making the exchange shall be entitled
to receive.

(b) The Warrant Agent shall keep at its office books in which, subject
to such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Class A or Class B
Warrants, as the case may be.

(c) With respect to all Warrant Certificates presented for registration
or transfer, or for exchange or exercise, the subscription form on the reverse
thereof shall be duly endorsed,
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<PAGE>

or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder or his attorney-in-fact duly authorized in
writing.

(d) A reasonable service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.

(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement or resignation as Warrant Agent, or, with the prior written
consent of Blair, disposed of or destroyed, at the direction of the Company.

(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Class A Warrants and Class B Warrants which are being publicly
offered in Units with shares of Common Stock pursuant to the Underwriting
Agreement, will be immediately
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<PAGE>

detachable from the Common Stock and transferable separately therefrom. The
Class B Warrants issuable upon exercise of the Class A Warrants will be
immediately detachable from the shares of Common Stock issuable upon exercise of
the Class A Warrants and transferable separately therefrom.

SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Class A or Class B Warrants, as the case may be. Applicants for a substitute
Warrant Certificate shall comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.

SECTION 8. REDEMPTION. (a) Subject to the provisions of paragraph 2(g)
hereof, on not less than thirty (30) days notice given at any time after October
13, 1994, the Class A Warrants Class B Warrants may be redeemed, at the option
of the Company at a redemption price of $0.05 per Warrant, provided, Price of
the Common Stock receivable i) on exercise Warrant shall exceed $10.76 for the
Class A Warrants and $15.54 for the Class B Warrants (the "Target Price"),
subject to adjustment as set forth in Section 8(f), below. Market Price for the
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<PAGE>

purpose of this Section 8 shall mean the average of the (i) closing bid price,
for thirty (30) consecutive business days ending within fifteen (15) days of the
date of the notice of redemption, which notice shall be mailed no later five
days thereafter, of the Common Stock as reported by National Association of
Securities Dealers, Inc. Automatic Quotation System or (ii) the last reported
sale price, for thirty (30) consecutive business days ending within (15) days of
the date of the notice of redemption, which notice shall be mailed no later than
five days thereafter, on the primary exchange on which the Common Stock is
traded, if the Common Stock is traded on a national securities exchange. All
Warrants of a class, except those comprising the Unit Purchase Option, must be
redeemed if any of that class are redeemed.

(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right redeem the Class A Warrants and/or the
Class B Warrants, it shall mail a notice of redemption to each of the Registered
Holders of the Class A Warrants and/or the Class B Warrants to be redeemed,
first class, postage prepaid, not later than the thirtieth day before the date
fixed for redemption, at their last address as shall appear on the records
maintained pursuant to Section 6(b). Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice.

(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on
the business day immediately preceding the date fixed for redemption. The
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<PAGE>

date fixed for the redemption of the Warrants shall be the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or the Company that notice of
redemption has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.

(d) Any right to exercise a Class A or Class B Warrant shall terminate
at 5:00 P.M. (New York time) on the business day immediately preceding the
Redemption Date. On and after the Redemption Date, Holders of the Warrants shall
have no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.

(e) From and after the date specified for redemption, the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the date
fixed for redemption and upon the deposit or setting aside by the Company of a
sum sufficient to redeem all the Warrants called for redemption, such Warrants
shall expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the redemption price, shall
cease.

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<PAGE>
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall he proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.

SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON
STOCK OR WARRANTS. (a) Subject to the exceptions referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the Market Price of the Common Stock (as defined in Section 8) on the
date of the sale or issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Purchase Price in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received (determined as
provided in subsection 9(f)(F) below) for the issuance of such additional shares
would purchase at such current market price per share of Common Stock, and the
denominator of which shall be the sum of the number of shares of
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<PAGE>

Common Stock outstanding immediately after the issuance of such additional
shares. Such adjustment shall be made successively Whenever such an issuance is
made.

Upon each adjustment of the Purchase Price pursuant to this Section 9,
the total number of shares of Common Stock purchasable upon the exercise of each
Class A or Class B Warrant shall (subject to the provisions contained in Section
9(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price in effect immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.

(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Class A or Class B Warrants outstanding, in
lieu of the adjustment in the number of shares of Common Stock purchasable upon
the exercise of each Class A or Class B Warrant as hereinabove provided, so that
each Class A or Class B Warrant outstanding after such adjustment shall
represent the right to purchase one share of Common Stock. Each Class A or Class
B Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Class A or Class B Warrants (calculated to the
nearest tenth) determined by multiplying the number one by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment. Upon each adjustment of the number of
Class A or Class B Warrants pursuant to this Section 9, the Company shall, as
promptly as
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<PAGE>

practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10 hereof, the number of additional Class A or Class B
Warrants to which such Holder shall be entitled as a result of such adjustment
or, at the option of the Company, cause to be distributed to such Holder in
substitution and replacement for the Warrant Certificates held by him prior to
the date of adjustment (and upon surrender thereof, if required by the Company)
new Warrant Certificates evidencing the number of Class A or Class B Warrants to
which such Holder shall be entitled after such adjustment.

(c) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a Class A or Class B Warrant then outstanding shall have
the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change,
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<PAGE>

consolidation, merger, sale or conveyance. Any such provision shall include
provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations under this Agreement. The
foregoing provisions shall similarly apply to successive reclassifications,
capital reorganizations and other changes of outstanding shares of Common Stock
and to successive consolidations, mergers, sales or conveyances.

(d) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the Class A or
Class B Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(d) hereof, continue to express the Purchase
Price per share, the number of shares purchasable thereunder and the Redemption
Price therefor as the Purchase Price per share, and the number of shares
purchasable and the Redemption Price therefore were expressed in the Warrant
Certificates when the same were originally issued.

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<PAGE>
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such certificate with the Warrant Agent and cause a brief summary thereof
to be sent by ordinary first class mail to Blair and to each registered holder
of Warrants at his last address as it shall appear on the registry books of the
Warrant Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the holder to
whom the Company failed to mail such notice, or except as to the holder whose
notice was detective. The affidavit of an officer of the Warrant Agent or the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.

(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (A) to (F) shall also be applicable:

(A) The number of shares of Common Stock outstanding at any
given time shall include shares of Common Stock owned or held by or for
the account of the Company and the sale or issuance of such treasury
shares or the distribution of any such treasury shares shall not be
considered a Change of Shares for purposes of said sections.

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<PAGE>

(B) No adjustment of the Purchase Price shall be made unless
such adjustment would require an increase or decrease of at least $.10
in such price; provided that any adjustments which by reason of this
clause (B) are not required to be made shall be carried forward and
shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustments) so carried forward,
shall require an increase or decrease of at least $.10 in the Purchase
Price then in effect hereunder.

(C) In case of (1) the sale by the Company for cash of any
rights or warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or any securities convertible into or
exchangeable for Common Stock without the payment of any further
consideration other than cash, if any (such convertible or exchangeable
securities being herein called "Convertible Securities"), or (2) the
issuance by the Company, without the receipt by the Company of any
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of such rights,
warrants or options shall consist of cash, whether or not such rights,
warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the exercise of
such rights, warrants or options, plus the consideration received by
the Company for the issuance or sale of such rights, warrants or
options, plus, in the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities issuable upon
the exercise of such rights, warrants or options) is less than the fair
market value of the Common Stock on the date of the issuance or sale of
such rights, warrants or options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such
rights, warrants or options) shall be deemed to be outstanding shares
of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall
be deemed to have been sold for cash in an amount equal to such price
per share.

(D) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share
for which Common Stock is issuable upon the conversion or exchange of
such Convertible Securities
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<PAGE>

(determined by dividing (x) the total amount of consideration received
by the Company for the sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, other
than such Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of such Convertible
Securities) is less than the fair market value or the Common Stock on
the date of the sale of such Convertible Securities, then the total
maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the date of the sale
of such Convertible Securities) shall be deemed to be outstanding
shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof
and shall be deemed to have been sold for cash in an amount equal to
such price per share.

(E) In case the Company shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in (C) above
or any other securities of the Company convertible, exchangeable or
exercisable for shares of Common Stock, for any reason other than an
event that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification
is less than the market price on the date prior to such modification,
the Purchase Price to be in effect after such modification shall be
determined by multiplying the Purchase Price in effect immediately
prior to such event by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding multiplied by the market
price on the date prior to the modification plus the number of shares
of Common Stock which the aggregate consideration receivable by the
Company for the securities affected by the modification would purchase
at the market price and of which the denominator shall be the number of
shares of Common Stock outstanding on such date plus the number of
shares of Common Stock to be issued upon conversion, exchange or
exercise of the modified securities at the modified rate. Such
adjustment shall become effective as of the date upon which such
modification shall take effect. On the expiration of any such right,
warrant or option or the termination of any such right to convert or
exchange any such Convertible Securities, the Purchase Price then in
effect hereunder shall forthwith be readjusted to such Purchase Price
as would have obtained (a) had the adjustments made upon the issuance
or sale of such rights, warrants, options or Convertible Securities
been made upon the basis of the issuance of only the number of shares
of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities and (b) had adjustments been made on the basis
of the Purchase Price as adjusted under clause (a) for all transactions
(which would have affected such adjusted Purchase Price) made after the
issuance or sale of such rights, warrants, options or Convertible
Securities.

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<PAGE>

(F) In case of the sale for cash of any shares of Common
Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company
therefore shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed by
the Company in connection therewith.

(G) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of
each Warrant will be made, however,

(i) upon the exercise of any of the options presently
outstanding under the Company's Performance Equity Plan (the "Plan")
for officers, directors and certain other key personnel of the Company;
or

(ii) upon the issuance or exercise of any other securities
which may hereafter be granted or exercised under the Plan or under any
other employee benefit plan of the Company; or

(iii) upon the sale or exercise of the Warrants, including
without limitation the sale or exercise of any of the Warrants
comprising the Unit Purchase Option; or

(iv) upon the sale of any shares of Common Stock in the
Company's initial public offering, including, without limitation,
shares sold upon the exercise of any overallotment option granted to
the Underwriters in connection with such offering;

(v) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for
or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not such rights, warrants or options
were outstanding on the date of the original sale of the Warrants or
were thereafter issued or sold; or

(vi) upon the issuance or sale of Common Stock upon conversion
or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon
the issuance or sale of such Convertible Securities and whether or not
such Convertible Securities were outstanding on the date of the
original sale of the Warrants or were thereafter issued or sold.

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<PAGE>

(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting or a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.

(i) Any determination as to whether an adjustment in the Purchase Price
in effect hereunder is required pursuant to Section 9, or as to the amount of
any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.

(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of,
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<PAGE>

Common Stock or securities convertible into or exchangeable for or carrying a
right, warrant or option to purchase Common Stock, the Company shall
concurrently therewith grant to each Registered Holder as of the record date for
such transaction of the Warrants then outstanding, the rights, warrants or
options to which each Registered Holder would have been entitled if, on the
record date used to determine the stockholders entitled to the rights, warrants
or options being granted by the Company, the Registered Holder were the holder
of record of the number of whole shares of Common Stock then issuable upon
exercise (assuming, for purposes of this Section 9(j), that exercise of Warrants
is permissible during periods prior to the Initial Warrant Exercise Date) of his
Warrants. Such grant by the Company to the holders of the Warrants shall be in
lieu of any adjustment which otherwise might be called for pursuant to this
Section 9.

SECTION 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. (a) If the
number of shares of Common Stock purchasable upon the exercise of each Class A
or Class B Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Class A or Class B Warrants or otherwise, or to distribute certificates
that evidence fractional shares. With respect to any fraction of a share called
for upon any exercise hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current market value of such
share, determined as follows:

(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the National Market System of NASDAQ or traded on
NASDAQ, the current
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<PAGE>

value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, the average of the
closing bid and asked prices for such day on such exchange or system;
or

(2) If the Common Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the mean of the last
reported bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise
of this Warrant; or

(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company.

SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue or
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<PAGE>

reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger or conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights, until such Holder
shall have exercised such Warrants and been issued shares of Common Stock in
accordance with the provisions hereof.

SECTION 12. RIGHTS OF ACTION. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.

SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Class A or
Class B Warrant, by his acceptance thereof, consents and agrees with the
Company, the Warrant Agent and every other holder of a Warrant that:

(a) The Class A or Class B Warrants are transferable only on
the registry books of the Warrant Agent by the Registered Holder
thereof in person or by his attorney duly authorized in writing and
only if the Warrant Certificates representing such Warrants are
surrendered at the office of the Warrant Agent, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to
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<PAGE>

the Warrant Agent and the Company in their sole discretion, together
with payment of any applicable transfer taxes; and

(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the
holder and as the absolute, true and lawful owner of the Warrants
represented thereby for all purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice or knowledge to the
contrary, except as otherwise expressly provided in Section 7 hereof.

SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel
Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, split up, combination or exchange.

SECTION 15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby
-28-
<PAGE>

or of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any warrant is fully paid and
nonassessable.

The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence or wilful misconduct.

The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel. Any notice, statement,
instruction, request, direction, order or demand of the Company shall be
sufficiently evidenced by an instrument signed by the Chairman of the Board,
President, any Vice President, its Secretary, or Assistant Secretary, (unless
other evidence in respect thereof is herein
-29-
<PAGE>

specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.

The Company agrees to pay the Warrant Agent the fees set forth on
Schedule A attached hereto for its services hereunder and to reimburse it for
its reasonable expenses hereunder; it further agrees to indemnify the Warrant
Agent and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.

The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own negligence or wilful misconduct), after giving 30
days' prior written notice to the Company. At least 15 days prior to the date
such resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fail to make such appointment
within a period of 15 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then the Registered Holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
-30-
<PAGE>

appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.

Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or any corporation resulting from any consolidation
to which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the .provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.

-31-
<PAGE>
The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.

SECTION 16. MODIFICATION OF AGREEMENT. The Warrant Agent and the
Company may by supplemental agreement make any changes or corrections in this
Agreement (i) that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; or (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Warrant Certificates;
provided, however, that this Agreement shall not otherwise be modified,
supplemented or altered in any respect except with the consent in writing of the
Registered Holders of Warrant Certificates representing more than 50% of the
Warrants then outstanding; and provided, further, that no change in the number
or nature of the securities purchasable upon the exercise of any Warrant, or the
Purchase Price therefor, or the acceleration of the Warrant Expiration Date,
shall be made without the consent in writing of the Registered Holder of the
Warrant Certificate representing such Warrant, other than such chances as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.

-32-
<PAGE>
SECTION 17. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, at 3806 N. 29th Avenue, Hollywood, Florida 33020,
Attention: William K. Mackey, or at such other address as may have been
furnished to the Warrant Agent in writing by the Company; if to the Warrant
Agent, at its Corporate Office.

SECTION 18. GOVERNING LAW. This Agreement shall begoverned by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.

SECTION 19. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and, the Warrant Agent and their respective
successors and assigns, and the holders from time to time of warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.

SECTION 20. TERMINATION. This Agreement shall terminate at the close of
business on the Expiration Date of all the warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.

-33-

<PAGE>

SECTION 21. COUNTERPARTS. This Agreement may be executedin several
counterparts, which taken together shall constitute a single document.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.

AQUA CARE SYSTEMS, INC.

By
William K. Mackey, Chairman
of the Board, President, Chief Executive
Officer and Treasurer

AMERICAN STOCK TRANSFER &
TRUST COMPANY

By
Authorized Officer

-34-

Exhibit 5
[LETTERHEAD]

June 17, 1996

Aqua Care Systems, Inc.
3806 North 29th Avenue
Hollywood, Florida 33020

RE: AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM SB-2
(COMMISSION NO. 333-2504)
OUR FILE NO. 03046-009

Ladies and Gentlemen:

We have served as counsel for Aqua Care Systems, Inc., a corporation
organized and existing under the laws of the State of Delaware (the "Company"),
in connection with the registration under the Securities Act of 1933, as
amended, pursuant to the Company's Registration Statement on Form SB-2 (the
"Registration Statement"), of up to 1,100,000 Class A Warrants (the "Class A
Warrants"), 1,100,000 Class B Warrants (the "Class B Warrants"), 2,200,000
shares of Common Stock, par value $.001 per share, that underlie the Class A and
Class B Warrants, and 734,467 shares of Common Stock, par value $.001 per share,
that underlie outstanding Bridge Warrants of the Company (collectively, the
"Shares"). This opinion is furnished to you pursuant to the requirements of
Form SB-2.

In connection with this opinion, we have examined and are familiar with
originals or copies (certified or otherwise identified to our satisfaction) of
such documents, corporate records and other instruments relating to the
incorporation of the Company and to the authorization and issuance of the Class
A Warrants, the Class B Warrants and the Shares, as we have deemed necessary and
appropriate.

<PAGE>

Aqua Care Systems, Inc.
June 17, 1996
Page 2

Based upon the foregoing, and having regard for such legal considerations
as we have deemed relevant, it is our opinion that:

(i) the Class A Warrants, the Class B Warrants and the Shares have
been duly authorized; and

(ii) upon the issuance, sale and delivery of the Shares as
contemplated in the Registration Statement, the Shares will be legally issued,
fully paid and nonassessable shares of Common Stock of the Company.

We do hereby consent to the reference to our Firm under the heading "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
Exhibit thereto.

Very truly yours,

HASKELL SLAUGHTER & YOUNG, L.L.C.

By /s/ Mark E. Ezell
-----------------
Mark E. Ezell

EXHIBIT 10.2

FIRST UNITED EQUITIES CORPORATION
[LETTERHEAD]

5 October 1995

Mr. William K. Mackey
President
Aquacare Systems, Inc.
3806 North 29th Avenue
Hollywood, FL 33020

Dear Bill:

This will confirm the understanding and agreement (the "Agreement") between
First United Equities Corporation and its affiliates ("First United") and
Aquacare Systems, Inc. and its affiliates (the "Company") as follows:

1. The Company hereby engages First United as its financial advisor in
connection with the exploration of certain strategic and financial alternatives
available to the Company.

2. First United hereby accepts the engagement and in that connection agrees
to:

(a) become familiar to the extent we deem appropriate with the business
operations, properties, financial condition, prospects and management
philosophy of the Company; and

(b) advise and assist management of the Company in evaluating certain
strategic and financial alternatives availabe to the Company.

3. The Company hereby agrees that in the event the Company proposes, during
the term of First United's engagement hereunder or within eighteen (18) months
thereafter, to engage a third party to act as (i) placement agent or underwriter
in connection with the issuance and sale of any of the Company's debt or equity
securities, or (ii) financial advisor in connection with a Transaction (as
hereinafter defined), the Company shall engage First United as sole placement
agent, lead underwriter, or financial advisor, as the case may be, unless First
United shall notify the Company in writing that it declines to be so engaged.
In connection therewith, the Company shall pay First United its customary fees
for similar services and shall enter into documentation in First United's
customary form including without limitation any necessary or appropriate
engagement letters, placement or underwriting agreements.

A "Transaction" means any transaction or a series of transactions which results,
directly or indirectly in (i) the transfer of control to the Company (whether by
merger, business combination, acquisitions of assets or securities, tender or
exchange offer, lease of assets, partnership, joint venture or otherwise) of all
or a material portion of the assets or securities or another company or any
material businesses; (ii) the sale of the Company (whether or not the proposal
therefore is solicited or unsolicited) of all or a material portion of its
assets or securities or any of its material businesses (whether by merger,
business combination, sale of assets or securities, tender or exchange offer,
lease of assets, partnership, joint venture or otherwise); (iii) the redemption
or repurchase by the Company of any of its outstanding securities; (iv) a
recapitalization or

<PAGE>
restructuring of the Company it its businesses (including divestitures,
spin-offs, split-off and similar transactions); (v) a liquidation of the
Company; or (vi) such other form of transaction that First United, after
completing the process provided for in paragraph 2(a), believes may be of
possible interest to the Company.

4. The Company shall furnish, or cause to be furnished, to First United all
information requested by First United for the purpose of rendering services
hereunder (all such information being "Information"). In addition, the Company
agrees to make available to First United upon request from time to time the
Company's officers, directors, accountants, counsel and other advisors. The
Company recognizes and confirms that First United: (a) will use and rely on the
Information and on information available from generally recognized public
sources in performing the services contemplated by this Letter Agreement without
having independently verified the same; (b) does not assume responsibility for
the accuracy or completeness of the Information and such other information; and
(c) will not make an appraisal of any of the assets or liabilities (contingent
or otherwise) of the Company.

5. The term of First United's engagement hereunder as the Company's financial
advisor shall extend from the date hereof through October 31, 1996. It is
understood that this engagement is an initial engagement and is renewable with
the consent of both the Company and First United. Subject to the provisions of
paragraphs 3 and 4 and 6 through 13, which shall survive any termination of this
Agreement, either party may terminate First United's engagement hereunder at any
time, with or without cause, by given the other party at least ten (10) days'
prior written notice.

6. In partial consideration for its services hereunder, the Company shall, on
the date hereof, issue to First United or its designee One Million One Hundred
Thousand (1,100,000) Class A Warrants (the "Warrants"), one half of these
Warrants will be held in escrow for First United and released to First United,
in full or in part, as a component of compensation due to First United pursuant
to paragraph 3 hereof. The Company shall file within Sixty (60) days of the date
hereof (the "Filing Date") and have declared effective within One Hundred Five
(105) days of the date hereof (the "Target Effective Date") a registration
statement covering all of the warrants. In the event that the Company fails to
file such registration statement on or before the Filing Date or fails to have a
registration statement declared effective for all of the Warrants on or before
the Target Effective Date, then the Company shall pay First United a cash fee of
Ten Thousand Dollars ($10,000) per month until such time that such failure is
remedied. The company shall maintain effectiveness of such registration
statement until such time that all of the Warrants covered by such registration
statement have been sold pursuant thereto.

7. In addition to any fees payable hereunder, the Company shall reimburse
First United and its affiliates promptly upon request for their respective
out-of-pocket and incidental expenses, incurred during the term of its
engagement hereunder, including the fees and expenses of legal counsel and
those of any advisor, or consultant or other professional retained by First
United. First United will bill the Company monthly for such expenses.

8. Since First United will be acting on behalf of the Company in connection
with this engagement, the Company agrees to indemnify First United as set forth
in the separate letter agreement, dated the date hereof, between First United
and the Company.

9. The Company agrees that First United has the right to place advertisements
in financial and other newspapers and journals at its own expense describing
its services to the Company hereunder.

10. Any advice provided by First United under this Agreement shall be treated
as confidential by the Company and shall not be disclosed or made available to
third parties without First United's prior written comment.

11. The Company represents and warrants to First United that there are no
brokers, agents,

<PAGE>

representatives or other persons which have an interest in compensation paid or
payable to First United hereunder.

12. The benefits of this Agreement shall, together with the separate indemnity
letter, inure to the benefit of respective successors and assigns of the
parties hereto and of the indemnified parties hereunder and their successors and
assigns and representatives, and the obligations and liabilities assumed in this
Agreement by the parties hereto shall be binding upon their respective
successors and assigns.

13. This Agreement may not be amended or modified except in writing executed
by the Company and First United and shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws.

First United is delighted to accept this engagement and looks forward to working
with you on this assignment. Please confirm that the foregoing correctly sets
forth our agreement by signing the enclosed duplicates of this letter in the
space provided and returning it, whereupon this letter shall constitute a
binding agreement as of the date first above written.

FIRST UNITED EQUITIES CORPORATION

By: /s/ K. Ivan F. Gothner
------------------------------

Title: Managing Director
------------------------------

AGREED

By: /s/ William K. Mackey
------------------------
Title: Chairman and CEO
----------------------
Aquacare Systems, Inc.
10/12/95

<PAGE>

January 23, 1996

Mr. William K. Mackey, President
Aqua Care Systems, Inc.
3806 North 29th Avenue
Hollywood, Florida 33020

Dear Mr: Mackey:

This letter will serve to amend our consulting agreement, dated
October 5, 1995, (the "Consulting Agreement") reflecting the fact that one half
of the warrants to be issued to First United (550,000 Class A Warrants)
pursuant to paragraph 6 of the consulting Agreement have not been issued to
date and are the subject of a registration statement pending at the Securities
and Exchange Commission. Accordingly, you agree that such warrants will be
issued to First United at the earlier of the effective date of the registration
statement or June 30, 1996.

If the foregoing confirms our understanding, kindly execute this letter
at the appropriate space provided below.

Very truly yours,

First United Equities Corporation

By: /s/ K. Ivan F. Gothner
---------------------------
Managing Director

Agreed and Accepted:

Aqua Care Systems, Inc.

By: /s/ William Mackey
--------------------
William Mackey
Its: President

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 MAR-31-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> $721,763 $512,898
<SECURITIES> 0 0
<RECEIVABLES> 2,101,117 2,650,007
<ALLOWANCES> (85,000) (91,000)
<INVENTORY> 1,950,098 1,771,518
<CURRENT-ASSETS> 5,420,491 5,054,664
<PP&E> 1,187,103 1,236,870
<DEPRECIATION> (368,725) (417,323)
<TOTAL-ASSETS> 10,892,651 10,468,597
<CURRENT-LIABILITIES> 2,318,936 1,982,937
<BONDS> 0 0
0 0
0 0
<COMMON> 8,980 9,249
<OTHER-SE> 7,792,778 7,994,255
<TOTAL-LIABILITY-AND-EQUITY> 10,892,651 10,468,597
<SALES> 14,500,501 3,855,336
<TOTAL-REVENUES> 14,500,501 3,855,336
<CGS> 9,559,559 2,610,832
<TOTAL-COSTS> 9,559,559 2,610,832
<OTHER-EXPENSES> 9,214,701 1,290,717
<LOSS-PROVISION> 370,541 6,000
<INTEREST-EXPENSE> 141,283 12,154
<INCOME-PRETAX> (4,273,759) (46,213)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,273,759) (46,213)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> ($0.68) ($0.01)
<EPS-DILUTED> ($0.68) ($0.01)

</TABLE>