U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR (15d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-22434
AQUA CARE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3615311
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11820 N.W. 37TH STREET, CORAL SPRINGS, FL 33065
(Address of principal executive offices)
(954) 796-3338
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
NUMBER OF SHARES OUTSTANDING
CLASS ON JULY 31, 1996
----- ----------------------------
Common Stock, $ .001 Par Value 11,656,815
Transitional small business disclosure format:
Yes [ ] No [X]
<PAGE>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of June 30,
1996 and December 31, 1995
Consolidated Statements of Operations for
the three months ended June 30, 1996 and
June 30, 1995
Consolidated Statements of Operations for
the six months ended June 30, 1996 and
June 30, 1995
Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and June
30, 1995
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the six months ended
June 30, 1996 and June 30, 1995
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of
Security Holders
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim consolidated financial statements presented in
this report are unaudited, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of
such information. Results for interim periods should not be
considered indicative of results for a full year.
These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Form 10-KSB for the fiscal year ended December
31, 1995, filed with the Securities and Exchange Commission on
March 29, 1996.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996)
JUNE 30, DECEMBER 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents................................................$ 439,217 $ 721,763
Accounts receivable, net of allowance
for doubtful accounts of $87,000 and $85,000......................... 2,196,511 2,016,117
Costs and estimated earnings in excess of
billings............................................................. 290,978 67,974
Inventory................................................................ 2,053,088 1,950,098
Current maturities of notes receivable................................... 89,050 589,050
Prepaids and other....................................................... 110,932 75,489
--------------- --------------
Total current assets.......................................................... 5,179,776 5,420,491
Property, plant and equipment, net............................................ 1,465,673 818,378
Intangible assets, net........................................................ 4,179,665 4,327,174
Notes receivable, less current maturities..................................... 184,092 225,492
Other assets.................................................................. 114,003 101,116
--------------- --------------
Total assets..................................................................$ 11,123,209 $ 10,892,651
=============== ==============
LIABILITIES
Current
Accounts payable.........................................................$ 1,261,167 $ 1,354,799
Accrued expenses......................................................... 516,915 584,212
Current maturities of long-term debt..................................... 269,491 254,925
Indebtedness to related party............................................ 125,000 125,000
--------------- --------------
Total current liabilities..................................................... 2,172,573 2,318,936
Long-term debt, less current maturities....................................... 873,127 523,998
Convertible subordinated notes, net of discounts.............................. -- 247,959
--------------- --------------
Total liabilities............................................................. 3,045,700 3,090,893
--------------- --------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.001 par; 20,000,000 shares
authorized, 9,255,726 and 8,980,143 shares
issued and outstanding............................................... 9,256 8,980
Additional paid-in capital............................................... 16,620,288 16,367,002
Deficit.................................................................. (8,552,035) (8,574,224)
--------------- --------------
Total stockholders' equity.................................................... 8,077,509 7,801,758
--------------- --------------
Total liabilities and stockholders' equity....................................$ 11,123,209 $ 10,892,651
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 4,319,980 $ 3,765,351
Cost of revenues............................................ 3,036,502 2,408,950
--------------- ---------------
Gross profit................................................ 1,283,478 1,356,401
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 1,226,384 1,698,447
Depreciation and amortization.......................... 134,476 171,157
Provision for doubtful accounts and notes.............. 14,071 10,531
--------------- ---------------
Total operating expenses.................................... 1,374,931 1,880,135
--------------- ---------------
Loss from operations........................................ (91,453) (523,734)
Interest expense, net....................................... (24,340) (40,013)
Other income (expenses), net................................ 184,195 (4,659)
--------------- ---------------
Net income (loss)...........................................$ 68,402 $ (568,406)
=============== ===============
Net income (loss) per common share..........................$ 0.01 $ (0.12)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 8,280,652 4,919,005
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the six months ended
June 30,
1996 1995
--------------- ----------
<S> <C> <C>
Revenues....................................................$ 8,175,316 $ 7,480,324
Cost of revenues............................................ 5,647,334 4,812,383
--------------- ---------------
Gross profit................................................ 2,527,982 2,667,941
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 2,534,524 3,189,201
Depreciation and amortization.......................... 262,945 327,090
Provision for doubtful accounts and notes.............. 20,071 21,000
--------------- ---------------
Total operating expenses.................................... 2,817,540 3,537,291
--------------- ---------------
Loss from operations........................................ (289,558) (869,350)
Interest expense, net....................................... (36,494) (82,313)
Other income, net........................................... 348,241 76,811
--------------- ---------------
Net income (loss)...........................................$ 22,189 $ (874,852)
=============== ===============
Net income (loss) per common share..........................$ 0.00 $ (0.19)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 8,268,444 4,513,715
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...........................................$ 22,189 $ (874,852)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for doubtful accounts and notes.............. 20,071 21,000
Depreciation and amortization.......................... 262,945 327,090
Pension contribution paid through
issuance of common stock............................ 10,736 14,290
Changes in assets and liabilities
net of effects of acquired businesses:
Increase in accounts receivable..................... (200,465) (468,713)
(Increase) decrease in costs and estimated
earnings in excess of billings................... (223,004) 216,041
Increase in inventory............................... (102,990) (498,925)
(Increase) decrease in prepaids and other........... (35,443) 69,858
(Increase) decrease in other assets................. (12,887) 7,914
Increase in bank overdraft.......................... -- (63,884)
Decrease in accounts payable and accrued
expenses......................................... (166,062) (719,830)
--------------- ---------------
Net cash used in operating activities....................... (424,910) (1,970,011)
--------------- ---------------
INVESTING ACTIVITIES:
Payment for acquisition of businesses,
net of cash acquired................................ -- (524,209)
Payments received on notes receivable.................. 541,400 72,352
Capital expenditures................................... (747,495) (241,814)
Addition to intangible assets.......................... (15,236) --
--------------- ---------------
Net cash used in investing activities....................... (221,331) (693,671)
--------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............. -- 3,001,008
Net proceeds from issuance of notes payable
and long-term debt.................................. 450,000 500,000
Net proceeds from employee exercise of options
to purchase common stock............................ -- 104,484
Repayment of notes payable and
long-term debt...................................... (86,305) (530,898)
--------------- ---------------
Net cash provided by financing activities................... 363,695 3,074,594
--------------- ---------------
Net decrease in cash and cash equivalents................... (282,546) 410,912
Cash and cash equivalents, beginning of period.............. 721,763 --
--------------- ---------------
Cash and cash equivalents, end of period....................$ 439,217 $ 410,912
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
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.
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.
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 fifteen 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.
- 8 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
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. 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 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.
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 $300,000, due mainly to the cessation of operations at its
manufacturing facility during the third quarter of 1995.
- 9 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
All of the acquisitions were accounted for by the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the accompanying consolidated financial statements from the dates
the Company assumed operational control of each acquired entity.
3. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS JUNE 30, 1996 DECEMBER 31, 1995
- -------------------------------------------------- ------------- -----------------
<S> <C> <C>
Costs and estimated earnings...........................$ 480,372 $ 1,649,035
Less billings.......................................... 189,394 1,581,061
------------- -------------
Total..................................................$ 290,978 $ 67,974
============= =============
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $40,088 and
$54,513 are included in accounts receivable at June 30, 1996 and December 31,
1995, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Land and building.......................$ 825,263 $ 150,000
Machinery and equipment................. 755,271 688,841
Furniture and fixtures.................. 285,426 279,624
Leasehold improvements.................. 50,732 50,732
Autos and trucks........................ 17,906 17,906
------------- -------------
1,934,598 1,187,103
Less accumulated depreciation........... 468,925 368,725
------------- -------------
Net property, plant and equipment.......$ 1,465,673 $ 818,378
============= =============
5. INTANGIBLE ASSETS
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Goodwill................................$ 4,759,029 $ 4,759,029
License agreements and other............ 166,454 151,218
------------- -------------
4,925,483 4,910,247
Less accumulated amortization........... 745,818 583,073
------------- -------------
Net intangible assets...................$ 4,179,665 $ 4,327,174
============= =============
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Prime plus 1% (9.25% at June 30, 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 June
30, 1996 of approximately $900,000.............................................. $ 480,000 $ 560,000
9.25% mortgage note payable, principal and interest payable monthly with an
estimated balloon payment of $360,000 due June 2001, collateralized by land and
building with a book value at June 30, 1996 of
approximately $675,000.......................................................... 450,000 --
Prime plus 2% (10.25% at June 30, 1996), mortgage note payable, principal and
interest payable monthly through January 2004, collateralized by land and
building with a book value at June 30, 1996 of approximately $150,000........... 128,534 134,839
Prime plus 2% (10.25% at June 30, 1996), note payable, interest only payable
monthly, principal due upon demand, collateralized by all business assets with a
book value at June 30, 1996 of approximately $1,000,000......................... 84,084 84,084
------------- -------------
1,142,618 778,923
Less current maturities......................................................... 269,491 254,925
------------- -------------
Total long-term debt............................................................ $ 873,127 $ 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
=============
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
7. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
INDEBTEDNESS TO RELATED PARTIES JUNE 30, 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
$6,250 and $6,250 for the six months ended June 30, 1996 and 1995, respectively.
8. INCOME TAXES
At June 30, 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.
Realization of any portion of the approximate $2,900,000 deferred tax
asset at June 30, 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
2,400,000 shares of the Company's Common Stock are reserved for issuance under
the Plans. Options granted through June 30, 1996, have been granted at prices
which were not less than fair market at the dates of grant, ranging from $0.75
per share to $5.00 per share, and expire through 2006.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
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
----------
OUTSTANDING DECEMBER 31, 1995 1,205,582 $1.25 - $5.00
Granted 296,000 $0.75 - $1.66
Cancelled (1,000) $3.41
----------
OUTSTANDING JUNE 30, 1996 1,500,582 $0.75 - $5.00
==========
At December 31, 1995, 193,761 options with an average option price of
$2.98 were exercisable.
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.
(c) In January 1996, $247,959 of Convertible Subordinated Notes were
converted into 268,818 shares of the Company's Common Stock.
- 13 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
10. BUSINESS SEGMENTS
The Company's operations by business segments for the six months ended
June 30, 1996 and 1995 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 $ 5,987,241 $ 2,188,075 -- $ 8,175,316
1995 $ 5,584,769 $ 1,895,555 -- $ 7,480,324
OPERATING INCOME (LOSS)
1996 $ 81,806 $ 96,677 $ (468,041) $ (289,558)
1995 $ (660,941) $ 188,657 $ (397,066) $ (869,350)
IDENTIFIABLE ASSETS
1996 $ 8,053,177 $ 2,115,152 $ 954,880 $ 11,123,209
1995 $ 10,339,329 $ 1,988,457 $ 187,656 $ 12,515,442
DEPRECIATION AND AMORTIZATION
1996 $ 189,745 $ 55,800 $ 17,400 $ 262,945
1995 $ 251,331 $ 58,359 $ 17,400 $ 327,090
CAPITAL EXPENDITURES
1996 $ 41,928 $ 20,140 $ 685,427 $ 747,495
1995 $ 217,072 $ 5,448 $ 19,294 $ 241,814
</TABLE>
11. OTHER INCOME
(a) During 1994, the Company sold assets used in its 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
$191,000 has been collected through June 30, 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 six months ended June 30, 1996 and 1995 aggregated
approximately $295,000 and $151,000, respectively, and are included in other
income.
- 14 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
12. SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended June 30, 1996 and 1995, the Company paid
$30,242 and $87,498, 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 six months ended June 30, 1995. In conjunction with
these acquisitions, liabilities were assumed as follows:
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) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2000. Total rent expense aggregated
approximately $213,000 and $208,000, for the six months ended June 30, 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
=============
(b) 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.
(c) 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 six months ended June 30, 1996, and 1995,
the Company contributed 21,048 and 9,750 shares of restricted Common Stock
valued at $10,736 and $14,290, respectively.
- 15 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND 1995)
14. SUBSEQUENT EVENTS
(a) Effective July 1, 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 agreed to issued additional shares of its Common Stock in the event that
the per share value of such Common Stock was not at least $3.75 per share on
July 1, 1996. During July 1996, the Company issued 2,375,758 additional shares
of Common Stock pursuant to such agreement.
(b) On July 22, 1996, the Company filed a complaint against Vincent
Spaulding, Robert Langman and Robert Farry, former employees of one of the
Company's subsidiaries, in the United States District Court for the Southern
District of Florida, Case Number pending. The complaint alleges, among other
matters, breach of express warranty and specific performance of certain of the
parameters of the Stock Purchase Agreement effective July 1994 entered into by
the Company for the purchase of Gravity Flow Systems, Inc., FLS Specialty
Manufacturing, Inc. and the name and certain assets of TOPCO International, Inc.
- 16 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. 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 Quarterly Report on Form 10-QSB, as well as, the Company's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Presented below are the consolidated results of operations for the
Company for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
==========================================================================================================================
SIX MONTHS SIX MONTHS
ENDED JUNE 30, 1996 ENDED JUNE 30, 1995
==========================================================================================================================
<S> <C> <C>
Revenues $ 8,175,316 $ 7,480,324
- --------------------------------------------------------------------------------------------------------------------------
Cost of revenues 5,647,334 4,812,383
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 2,527,982 2,667,941
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses (including other
income and expenses) 2,505,793 3,542,793
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 22,189 $ (874,852)
==========================================================================================================================
</TABLE>
Revenues increased by $694,992, or 9.3%, from $7,480,324 for the six
months ended June 30, 1995, to $8,175,316 for the six months ended June 30,
1996. Of this increase, $292,520 was attributable to an increase in sales and
service of car wash machines and ancillary equipment of CWES; $502,539 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 $(100,067) was realized from an overall decrease in sales of commercial and
residential water purification products of KISS, MWT, DTS and PFW.
Cost of revenues increased by $834,951, or 17.4%, from $4,812,383 for
the six months ended June 30, 1995, to $5,647,334 for the six months ended June
30, 1996. As a percentage of revenues, these amounts represented 69.1% for 1996
as compared to 64.3% 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.
- 17 -
<PAGE>
Gross profit decreased $(139,959) or 5.2% from $2,667,941 for the six
months ended June 30, 1995 to $2,527,982 for the six months ended June 30, 1996,
which, as a percentage of revenues, represented a decrease from 35.7% to 30.9%,
respectively, for such periods.
The Company's operating expenses (including other income and expenses)
decreased $(1,037,000), or 29.3%, from $3,542,793 for the six months ended June
30, 1995 to $2,505,793 for the six months ended June 30, 1996. As a percentage
of revenues, these expenses decreased from 47.4% for 1995 to 30.7% for 1996. The
$(1,037,000) decrease was attributable mainly to the paring of certain operating
expenses, including other income and expenses, mainly in the expense categories
of personnel and related expenses ($565,151) and advertising, selling and shows
($323,687) and an increase in financing fees earned ($144,389).
Principally as a result of the factors described above, the Company
earned net income of $22,189 for the six months ended June 30, 1996 as opposed
to incurring a net loss of $(874,852) for the six months ended June 30, 1995, an
improvement of $897,041.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1996, the Company had $439,217 of cash and cash
equivalents, working capital of $3,007,203, assets of $11,123,209, long-term
debt, net of current maturities, of $873,127 and stockholders' equity of
$8,007,509. The Company's operating activities used $424,910 of cash,
principally as a result of an increase in accounts receivable and costs and
estimated earnings in excess of billings ($423,469), an increase in inventory
($102,990) and a decrease in accounts payable and accrued expenses ($166,062);
partially offset by depreciation and amortization ($262,945). Investing
activities used $221,331, principally from capital expenditures ($747,495);
partially offset by payments received on notes receivable ($541,400). Financing
activities provided $363,695 of cash, due to long-term debt incurred as part of
a property and plant purchase ($450,000); partially offset by repayments of
notes payable and long-term debt ($86,305).
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.
- 18 -
<PAGE>
CHARGE TO INCOME IN THE EVENT OF RELEASE OF SHARES FROM ESCROW
The staff of the Commission 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.
- 19 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 22, 1996, the Company filed a complaint against
Vincent Spaulding, Robert Langman and Robert Farry, former
employees of one of the Company's subsidiaries, in the United
States District Court for the Southern District of Florida,
Case Number pending. The complaint alleges, among other
matters, breach of express warranty and specific performance
of certain of the parameters of the Stock Purchase Agreement
effective July 1994 entered into by the Company for the
purchase of Gravity Flow Systems, Inc., FLS Specialty
Manufacturing, Inc. and the name and certain assets of TOPCO
International, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 26, 1996, the Annual Meeting of Stockholders of
Aqua Care Systems, Inc. was held, at which the following
actions were taken:
1. The shares of Common Stock represented at the
Annual Meeting were voted for the election of
Directors as follows:
<TABLE>
<CAPTION>
==================================================================================================================================
NUMBER VOTING FOR WITHHOLD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William K. Mackey 9,255,726 8,578,258 677,468
- ----------------------------------------------------------------------------------------------------------------------------------
Norman J. Hoskin 9,255,726 8,578,258 677,468
- ----------------------------------------------------------------------------------------------------------------------------------
James P. Cefaratti 9,255,726 8,578,258 677,468
- ----------------------------------------------------------------------------------------------------------------------------------
William F. Silvia 9,255,726 8,578,258 677,468
==================================================================================================================================
</TABLE>
2. The shares of Common Stock represented at the Annual
Meeting were voted for the approval of the increase
in the number of shares of Common Stock authorized to
30,000,000 shares of Common Stock as follows:
<TABLE>
<CAPTION>
==================================================================================================================================
NUMBER VOTING FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9,255,726 7,691,846 1,511,196 52,684
==================================================================================================================================
</TABLE>
3. The shares of Common Stock represented at the Annual
Meeting were voted for the approval of an Amendment
to the 1991 Performance Equity Plan of the Company to
increase the number of shares of Common Stock of the
Company covered by such Plan to 2,000,000 shares of
Common Stock as follows:
<TABLE>
<CAPTION>
==================================================================================================================================
NUMBER VOTING FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9,255,726 8,185,763 1,044,347 25,616
==================================================================================================================================
</TABLE>
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
AQUA CARE SYSTEMS, INC.
Registrant
Dated: August 5, 1996 /S/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: August 5, 1996 /S/ GEORGE J. OVERMEYER
----------------------
George J. Overmeyer
Corporate Controller
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 439,217
<SECURITIES> 0
<RECEIVABLES> 2,283,511
<ALLOWANCES> (87,000)
<INVENTORY> 2,053,088
<CURRENT-ASSETS> 5,179,776
<PP&E> 1,934,598
<DEPRECIATION> (468,925)
<TOTAL-ASSETS> 11,123,209
<CURRENT-LIABILITIES> 2,172,573
<BONDS> 0
0
0
<COMMON> 9,256
<OTHER-SE> 8,068,253
<TOTAL-LIABILITY-AND-EQUITY> 11,123,209
<SALES> 8,175,316
<TOTAL-REVENUES> 8,175,316
<CGS> 5,647,334
<TOTAL-COSTS> 5,647,334
<OTHER-EXPENSES> 2,505,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,494
<INCOME-PRETAX> 22,189
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,189
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
