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 SEPTEMBER 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
ON OCTOBER 30, 1996
CLASS -------------------
-----
Common Stock, $ .001 Par Value 11,656,815
----------
Transitional small business disclosure format:
Yes [ ] No [X]
<PAGE>
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<CAPTION>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995
Consolidated Statements of Operations for
the three months ended September 30, 1996
and September 30, 1995
Consolidated Statements of Operations for
the nine months ended September 30, 1996 and
September 30, 1995
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and
September 30, 1995
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the nine months ended September 30,
1996 and September 30, 1995
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
</TABLE>
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<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.
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<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996)
September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents................................................$ 402,383 $ 721,763
Accounts receivable, net of allowance
for doubtful accounts of $93,000 and $85,000......................... 2,266,656 2,016,117
Costs and estimated earnings in excess of
billings............................................................. 251,685 67,974
Inventory................................................................ 1,921,361 1,950,098
Current maturities of notes receivable................................... 89,050 589,050
Prepaids and other....................................................... 189,559 75,489
--------------- --------------
Total current assets.......................................................... 5,120,694 5,420,491
Property, plant and equipment, net............................................ 1,521,379 818,378
Intangible assets, net........................................................ 4,092,085 4,327,174
Notes receivable, less current maturities..................................... 163,392 225,492
Other assets.................................................................. 96,205 101,116
--------------- --------------
Total assets..................................................................$ 10,993,755 $ 10,892,651
=============== ==============
LIABILITIES
Current
Accounts payable.........................................................$ 1,548,859 $ 1,354,799
Accrued expenses......................................................... 312,515 584,212
Current maturities of long-term debt..................................... 269,925 254,925
Indebtedness to related party............................................ 125,000 125,000
--------------- --------------
Total current liabilities..................................................... 2,256,299 2,318,936
Long-term debt, less current maturities....................................... 827,869 523,998
Convertible subordinated notes, net of discounts.............................. -- 247,959
--------------- --------------
Total liabilities............................................................. 3,084,168 3,090,893
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 11,656,815 and 8,980,143 shares
issued and outstanding............................................... 11,657 8,980
Additional paid-in capital............................................... 16,629,391 16,367,002
Deficit.................................................................. (8,731,461) (8,574,224)
--------------- --------------
Total stockholders' equity.................................................... 7,909,587 7,801,758
--------------- --------------
Total liabilities and stockholders' equity....................................$ 10,993,755 $ 10,892,651
=============== ==============
</TABLE>
See accompanying notes to consolidated financial atements.
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<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------- --------------
<S> <C> <C>
Revenues....................................................$ 4,017,845 $ 2,975,851
Cost of revenues............................................ 2,895,949 1,907,811
--------------- ---------------
Gross profit................................................ 1,121,896 1,068,040
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 1,319,579 1,439,463
Depreciation and amortization.......................... 140,772 168,799
Provision for doubtful accounts and notes.............. 8,492 230,426
Provision for impairment of intangible assets.......... -- 1,329,858
--------------- ---------------
Total operating expenses.................................... 1,468,843 3,168,546
--------------- ---------------
Loss from operations........................................ (346,947) (2,100,506)
Interest expense, net....................................... (27,559) (31,813)
Other income, net........................................... 195,078 144,204
--------------- ---------------
Net loss....................................................$ (179,428) $ (1,988,115)
=============== ===============
Net loss per common share...................................$ (0.02) $ (0.36)
================ ===============
Weighted average number of outstanding
shares of common stock................................. 10,655,716 5,469,905
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------- ----------------
<S> <C> <C>
Revenues....................................................$ 12,193,161 $ 10,456,175
Cost of revenues............................................ 8,543,283 6,720,194
--------------- ---------------
Gross profit................................................ 3,649,878 3,735,981
--------------- ---------------
Operating expenses:
Selling, general and administrative 3,854,103 4,628,664
Depreciation and amortization.......................... 403,717 495,889
Provision for doubtful accounts and notes 28,563 251,426
Provision for impairment of intangible assets -- 1,329,858
--------------- ----------------
Total operating expenses.................................... 4,286,383 6,705,837
--------------- ---------------
Loss from operations........................................ (636,505) (2,969,856)
Interest expense, net....................................... (64,053) (114,126)
Other income, net........................................... 543,319 221,015
--------------- ---------------
Net loss....................................................$ (157,239) $ (2,862,967)
=============== ===============
Net loss per common share...................................$ (0.02) $ (0.59)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 9,070,010 4,835,947
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................. $ (157,239) $(2,862,967)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts and notes ....................... 28,563 251,426
Provision for impairment of intangible assets ................... -- 1,329,858
Depreciation and amortization ................................... 403,717 495,889
Pension contribution paid through
issuance of common stock ..................................... 16,275 20,220
Changes in assets and liabilities
net of effects of acquired businesses:
Increase in accounts receivable .............................. (279,102) (310,441)
(Increase) decrease in costs and estimated
earnings in excess of billings ............................ (183,711) 294,653
Decrease (increase) in inventory ............................. 28,737 (431,053)
(Increase) decrease in prepaids and other .................... (114,070) 54,782
Decrease in other assets ..................................... 4,911 33,059
Increase in bank overdraft ................................... -- (63,884)
Decrease in accounts payable and accrued
expenses .................................................. (77,637) (1,122,196)
--------------- -------------
Net cash used in operating activities ................................ (329,556) (2,310,654)
--------------- -------------
INVESTING ACTIVITIES:
Payment for acquisition of businesses,
net of cash acquired ......................................... -- (694,884)
Payments received on notes receivable ........................... 562,100 97,927
Issuance of notes receivable .................................... -- (100,000)
Capital expenditures ............................................ (860,267) (360,716)
Addition to intangible assets ................................... (10,528) --
--------------- -------------
Net cash used in investing activities ................................ (308,695) (1,057,673)
--------------- -------------
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 issuance of subordinated debt ................. -- 2,762,475
Net proceeds from employee exercise of options
to purchase common stock ..................................... -- 104,484
Repayment of notes payable and long-term debt ................... (131,129) (663,363)
--------------- -------------
Net cash provided by financing activities ............................ 318,871 5,704,604
--------------- -------------
Net (decrease) increase in cash and cash equivalents ................. (319,380) 2,336,277
Cash and cash equivalents, beginning of period ....................... 721,763 --
--------------- -------------
Cash and cash equivalents, end of period ............................. $ 402,383 $ 2,336,277
=============== =============
</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 SEPTEMBER 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 is 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.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 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 $300,000, due mainly to the cessation of operations at its
manufacturing facility during the third quarter of 1995.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995)
All of the acquisitions were accounted for by the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the accompanying consolidated financial statements from the dates
the Company assumed operational control of each acquired entity.
3. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS SEPTEMBER 30, 1996 DECEMBER 31, 1995
- -------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Costs and estimated earnings.........................................$ 869,379 $ 1,649,035
Less billings........................................................ 617,694 1,581,061
------------- -------------
Total................................................................$ 251,685 $ 67,974
============= =============
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $33,935 and
$54,513 are included in accounts receivable at September 30, 1996 and December
31, 1995, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
Land and building....................................................$ 893,256 $ 150,000
Machinery and equipment.............................................. 792,126 706,747
Furniture and fixtures............................................... 294,184 279,624
Leasehold improvements............................................... 50,732 50,732
------------- -------------
2,030,298 1,187,103
Less accumulated depreciation........................................ 508,919 368,725
------------- -------------
Net property, plant and equipment....................................$ 1,521,379 $ 818,378
============= =============
5. INTANGIBLE ASSETS
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
Goodwill.............................................................$ 4,759,029 $ 4,759,029
License agreements and other......................................... 161,746 151,218
------------- -------------
4,920,775 4,910,247
Less accumulated amortization........................................ 828,690 583,073
------------- -------------
Net intangible assets................................................$ 4,092,085 $ 4,327,174
============= =============
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995)
6. LONG-TERM DEBT
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
Prime plus 1% (9.25% at September 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 September 30, 1996 of
approximately $700,000...............................................$ 440,000 $ 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 September 30, 1996 of
approximately $730,000............................................... 447,811 --
Prime plus 2% (10.25% at September 30, 1996), mortgage note
payable, principal and interest payable monthly through
January 2004, collateralized by land and building with a
book value at September 30, 1996 of approximately $150,000........... 125,899 134,839
Prime plus 2% (10.25% at September 30, 1996), note
payable, interest only payable monthly, principal
due upon demand, collateralized by certain business
assets with a book value at September 30, 1996 of approximately
$1,000,000........................................................... 84,084 84,084
------------- -------------
1,097,794 778,923
Less current maturities.............................................. 269,925 254,925
------------- -------------
Total long-term debt.................................................$ 827,869 $ 523,998
============= =============
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 SEPTEMBER 30, 1996 AND 1995)
7. RELATED PARTY BALANCES AND TRANSACTIONS
INDEBTEDNESS TO RELATED PARTY SEPTEMBER 30, 1996 DECEMBER 31, 1995
- ----------------------------- ------------------ -----------------
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
$9,375 and $9,375 for the nine months ended September 30, 1996 and 1995,
respectively.
8. INCOME TAXES
At September 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 September 30, 1996, resulting mainly from the available net operating
loss carryforwards, 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 nor 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 September 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 SEPTEMBER 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 346,000 $0.75 - $1.66
Cancelled (237,500) $1.50 - $3.75
----------
OUTSTANDING SEPTEMBER 30, 1996 1,314,082 $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.
(d) 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.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995)
10. BUSINESS SEGMENTS
The Company's operations by business segments for the nine months ended
September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
WATER PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- -------- ------------------ ------------------ --------- -----
<C> <C> <C> <C> <C>
1996 $ 9,309,856 $ 2,883,305 -- $ 12,193,161
1995 $ 8,045,316 $ 2,410,859 -- $ 10,456,175
OPERATING INCOME (LOSS)
- -----------------------
1996 $ 88,954 $ 25,203 $ (750,662) $ (636,505)
1995 $ (2,555,954) $ 219,551 $ (633,453) $ (2,969,856)
IDENTIFIABLE ASSETS
- -------------------
1996 $ 7,928,665 $ 1,861,260 $ 1,203,830 $ 10,993,755
1995 $ 8,928,217 $ 1,953,135 $ 2,211,971 $ 13,093,323
DEPRECIATION AND AMORTIZATION
- -----------------------------
1996 $ 287,617 $ 83,700 $ 32,400 $ 403,717
1995 $ 380,530 $ 89,259 $ 26,100 $ 495,889
CAPITAL EXPENDITURES
- --------------------
1996 $ 66,173 $ 32,149 $ 761,945 $ 860,267
1995 $ 330,722 $ 8,442 $ 21,552 $ 360,716
</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
$212,000 has been collected through September 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 nine months ended September 30, 1996 and 1995
aggregated approximately $490,000 and $221,000, respectively, and are included
in other income.
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<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995)
12. SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 30, 1996 and 1995, the Company paid
$54,678 and $111,229 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 nine months ended September 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 $295,000 and $320,000, for the nine months ended September 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 nine months ended September 30, 1996, and
1995, the Company contributed 38,774 and 13,545 shares of restricted Common
Stock valued at $16,275 and $20,220, respectively.
- 15 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995)
(d) 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 - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Presented below are the consolidated results of operations for the
Company for the nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
==========================================================================================================================
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1996 ENDED SEPTEMBER 30, 1995
==========================================================================================================================
<S> <C> <C>
Revenues $ 12,193,161 $ 10,456,175
- --------------------------------------------------------------------------------------------------------------------------
Cost of revenues 8,543,283 6,720,194
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 3,649,878 3,735,981
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses (including other
income and expenses) 3,807,117 6,598,948
- --------------------------------------------------------------------------------------------------------------------------
Net loss $ (157,239) $ (2,862,967)
==========================================================================================================================
</TABLE>
Revenues increased by $1,736,986, or 16.6%, from $10,456,175 for the
nine months ended September 30, 1995, to $12,193,161 for the nine months ended
September 30, 1996. Of this increase, $472,446 was attributable to an increase
in sales and service of car wash machines and ancillary equipment of Car Wash
Equipment & Supply, Ryko of South Florida, Inc.; $998,572 was attributable to an
increase in sales of municipal, industrial and commercial waste water treatment
equipment and waste water treatment plants of Gravity Flow Systems, Inc. and
EnviroSystems Supply, Inc., ("ESSI"), and $265,968 was realized from an overall
increase in sales of commercial and residential water purification products of
KISS International, Inc., Midwest Water Technologies, Inc., Di-tech Systems,
Inc. and Pure Flow Water Company, Inc.
Cost of revenues increased by $1,823,089, or 27.1%, from $6,720,194 for
the nine months ended September 30, 1995, to $8,543,283 for the nine months
ended September 30, 1996. As a percentage of revenues, these amounts represented
70.1% 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 $86,103 or 2.3% from $3,735,981 for the nine
months ended September 30, 1995 to $3,649,878 for the nine months ended
September 30, 1996, which, as a percentage of revenues, represented a decrease
from 35.7% to 29.9%, respectively, for such periods.
The Company's operating expenses (including other income and expenses)
decreased $2,791,831, or 42.3%, from $6,598,948 for the nine months ended
September 30, 1995 to $3,807,117 for the nine months ended September 30, 1996.
As a percentage of revenues, these expenses decreased from 63.1% for 1995 to
31.2% for 1996. The $2,791,831 decrease was attributable mainly to the
recognition of a provision for the impairment of intangible assets ($1,329,858)
in 1995 with no corresponding charge recognized in 1996, a decrease in bad debt
expense ($222,863), the paring of certain operating expenses, including other
income and expenses, mainly in the expense categories of personnel and related
expenses ($660,795) and advertising, selling and shows ($305,453) and an
increase in financing fees earned ($269,098).
Principally as a result of the factors described above, the Company
incurred a net loss of $(157,239) for the nine months ended September 30, 1996
as opposed to having incurred a net loss of $(2,862,967) for the nine months
ended September 30, 1995, an improvement of $2,705,728.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1996, the Company had $402,383 of cash and cash
equivalents, working capital of $2,864,395, assets of $10,993,755, long-term
debt, net of current maturities, of $827,869 and stockholders' equity of
$7,909,587. For the nine months ended September 30, 1996, the Company's
operating activities used $329,556 of cash, principally as a result of an
increase in accounts receivable and costs and estimated earnings in excess of
billings ($462,813), an increase in prepaids and other ($114,070) and the net
loss ($157,239); partially offset by depreciation and amortization ($403,717).
Investing activities used $308,695, principally from capital expenditures
($860,267); partially offset by payments received on notes receivable
($562,100). Financing activities provided $318,871 of cash, due to long-term
debt incurred as part of planned Capital expenditures ($450,000); offset by
repayments of notes payable and long-term debt ($131,129).
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
==============================================================================================================================
2. The shares of Common Stock represented at the Annual
Meeting were voted for the approval of an amendment
to the Company's certificate of incorporation to
increase the number of shares of Common Stock
authorized from 20,000,000 to 30,000,000 shares of
Common Stock as follows:
==============================================================================================================================
NUMBER VOTING FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------------------------------------------------
9,255,726 7,691,846 1,511,196 52,684
==============================================================================================================================
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:
==============================================================================================================================
NUMBER VOTING FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------------------------------------------------
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: October 30, 1996 /S/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: October 30, 1996 /S/ GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 402,383
<SECURITIES> 0
<RECEIVABLES> 2,359,656
<ALLOWANCES> (93,000)
<INVENTORY> 1,921,361
<CURRENT-ASSETS> 5,120,694
<PP&E> 2,030,298
<DEPRECIATION> (508,919)
<TOTAL-ASSETS> 10,993,755
<CURRENT-LIABILITIES> 2,256,299
<BONDS> 0
0
0
<COMMON> 11,657
<OTHER-SE> 7,897,930
<TOTAL-LIABILITY-AND-EQUITY> 10,993,755
<SALES> 12,193,161
<TOTAL-REVENUES> 12,193,161
<CGS> 8,543,283
<TOTAL-COSTS> 8,543,283
<OTHER-EXPENSES> 3,807,117
<LOSS-PROVISION> 28,563
<INTEREST-EXPENSE> 64,053
<INCOME-PRETAX> (157,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (157,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (157,239)
<EPS-PRIMARY> ($0.02)
<EPS-DILUTED> ($0.02)
</TABLE>
