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, 1997
[ ] 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 NOVEMBER 11, 1997
----- ----------------------------
Common Stock, $ .001 Par Value 11,790,125
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 September 30, 1997
and December 31, 1996
Consolidated Statements of Operations for
the three months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Operations for
the nine months ended September 30, 1997 and
September 30, 1996
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and
September 30, 1996
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, 1997 and
September 30, 1996
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
- 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, 1996, filed with the Securities and Exchange Commission on
March 28, 1997.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents................................................$ 404,916 $ 561,219
Accounts receivable, net of allowance
for doubtful accounts of $126,000 and $99,000 3,917,465 1,430,057
Costs and estimated earnings in excess of
billings............................................................. 268,402 424,753
Inventory................................................................ 3,489,274 1,903,583
Current maturities of notes receivable................................... 94,800 94,800
Prepaids and other....................................................... 91,700 179,658
--------------- --------------
Total current assets.......................................................... 8,266,557 4,594,070
Property, plant and equipment, net............................................ 4,944,712 1,539,486
Intangible assets, net........................................................ 3,835,770 4,067,208
Notes receivable, less current maturities..................................... 100,000 129,150
Other assets.................................................................. 73,051 90,230
--------------- --------------
Total assets..................................................................$ 17,220,090 $ 10,420,144
=============== ==============
LIABILITIES
Current
Accounts payable.........................................................$ 1,845,554 $ 1,447,324
Accrued expenses......................................................... 1,072,399 478,984
Current maturities of long-term debt..................................... 2,448,599 271,156
Indebtedness to related party............................................ 125,000 125,000
--------------- --------------
Total current liabilities..................................................... 5,491,552 2,322,464
Long-term debt, less current maturities....................................... 4,042,312 781,873
--------------- --------------
Total liabilities............................................................. 9,533,864 3,104,337
--------------- --------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 11,745,586 and 11,697,554 shares
issued and outstanding............................................... 11,746 11,698
Additional paid-in capital............................................... 16,650,689 16,636,805
Deficit.................................................................. (8,976,209) (9,332,696)
---------------- ---------------
Total stockholders' equity.................................................... 7,686,226 7,315,807
--------------- --------------
Total liabilities and stockholders' equity....................................$ 17,220,090 $ 10,420,144
=============== ==============
</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
SEPTEMBER 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 7,372,988 $ 4,212,958
Cost of revenues............................................ 4,684,269 2,895,949
--------------- ---------------
Gross profit................................................ 2,688,719 1,317,009
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 2,156,455 1,319,579
Depreciation and amortization.......................... 185,003 140,772
Provision for doubtful accounts and notes.............. 9,000 8,492
--------------- ---------------
Total operating expenses.................................... 2,350,458 1,468,843
--------------- ---------------
Income (loss) from operations............................... 338,261 (151,834)
Interest expense............................................ (217,097) (27,559)
Other income (expense)...................................... 4,339 (35)
--------------- ----------------
Net income (loss)...........................................$ 125,503 $ (179,428)
=============== ===============
Net income (loss) per common share..........................$ 0.01 $ (0.02)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 10,770,586 10,655,716
=============== ===============
</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 NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 16,668,691 $ 12,683,274
Cost of revenues............................................ 10,936,342 8,543,283
--------------- ---------------
Gross profit................................................ 5,732,349 4,139,991
--------------- ---------------
Operating expenses:
Selling, general and administrative 4,693,926 3,854,103
Depreciation and amortization.......................... 471,676 403,717
Provision for doubtful accounts and notes 27,000 28,563
--------------- ---------------
Total operating expenses.................................... 5,192,602 4,286,383
--------------- ---------------
Income (loss) from operations............................... 539,747 (146,392)
Interest expense............................................ (310,105) (64,053)
Other income................................................ 126,845 53,206
--------------- ---------------
Net income (loss)...........................................$ 356,487 $ (157,239)
=============== ===============
Net income (loss) per common share..........................$ 0.03 $ (0.02)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 10,756,632 9,070,010
=============== ===============
</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 NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...........................................$ 356,487 $ (157,239)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on disposal of property and plant................. (123,518) --
Property and plant disposed of in conjunction
with Settlement Agreement............................ 150,000 --
Provision for doubtful accounts and notes ............. 27,000 28,563
Depreciation and amortization.......................... 471,676 403,717
Pension contribution paid through issuance of
common stock......................................... 13,884 16,275
Changes in assets and liabilities,
net of effects of acquired business:
Increase in accounts receivable..................... (2,514,408) (279,102)
Decrease (increase) in costs and estimated earnings
in excess of billings............................ 156,351 (183,711)
Decrease in inventory............................... 1,287,635 28,737
Decrease (increase) in prepaids and other........... 87,958 (114,070)
Decrease in other assets............................ 17,179 4,911
Decrease in accounts payable and accrued
expenses......................................... (531,330) (77,637)
--------------- ---------------
Net cash used in operating activities....................... (601,086) (329,556)
--------------- ---------------
INVESTING ACTIVITIES:
Payments received on notes receivable.................. 29,150 562,100
Capital expenditures................................... (30,618) (860,267)
Addition to intangible assets.......................... (14,846) (10,528)
--------------- ---------------
Net cash used in investing activities....................... (16,314) (308,695)
--------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from issuance of notes payable and
long-term debt...................................... 4,631,638 450,000
Repayment of notes payable and long-term debt.......... (4,170,541) (131,129)
--------------- ---------------
Net cash provided by financing activities................... 461,097 318,871
--------------- ---------------
Net decrease in cash and cash equivalents.................. (156,303) (319,380)
Cash and cash equivalents, beginning of period............. 561,219 721,763
--------------- ---------------
Cash and cash equivalents, end of period................... $ 404,916 $ 402,383
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
- 7 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
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 filtration and
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.
INVENTORY
Inventory consists principally of purchased parts and supplies.
Inventory is valued at the lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets, ranging from five to thirty years.
INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill and is amortized on a straight-line basis
over 15 years. The cost of other intangibles is amortized on a straight-line
basis over their estimated useful lives, ranging from seven to fifteen years.
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.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
-8-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued expenses and long-term debt. The carrying amounts of such financial
instruments as reflected in the consolidated balance sheets approximate their
estimated fair value as of September 30, 1997 and December 31, 1996. The
estimated fair value is not necessarily indicative of the amounts the Company
could realize in a current market exchange or of future earnings or cash flows.
NET INCOME (LOSS) PER COMMON SHARE
Net income (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 income (loss) per share is not presented as the effects of
potentially dilutive securities would be anti-dilutive.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.
2. LIQUIDITY
The Company has experienced negative cash flows from operating
activities for the nine months ended September 30, 1997 and the year ended
December 31, 1996. To date, the Company has funded its growth and operations
from the net proceeds of its initial public offering, bank financing and several
private sales of Common Stock completed through 1996. If the Company continues
to experience negative cash flows from operating activities and additional
proceeds from financing are not obtained, the Company may need to further reduce
its level of operating expenditures.
-9-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
3. ACQUISITION
In June 1997, the Company, pursuant to an Asset Purchase Agreement,
acquired certain assets and assumed certain liabilities of the Filtration
Systems Division, ("FSDA"), of Durco International, Inc., formerly known as the
Duriron Company, Inc., ("DURCO"). The purchase price for the acquisition of FSDA
consisted of the sum of (i) approximately $5,000,000 (being the remainder of
$7,120,000 being the total assets minus the amount of accounts receivable and
other assets remaining with DURCO), plus (ii) approximately $1,400,000 in
assumed obligations, plus (iii) 400,000 warrants to purchase Common Stock,
(250,000 warrants having an exercise price of $1.00 each and 150,000 having an
exercise price approximating fair market value as of the closing date, ($0.50),
valued at $5,000). In conjunction with this acquisition, the Company issued
200,000 warrants to purchase Common Stock to Fidelity Funding Financial Group
having an exercise price of $0.50 each. The Company assumed operational control
of FSDA on June 1, 1997. FSDA operations include manufacturing and systems
integration of water filtration and waste water treatment systems and
components.
4. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS SEPTEMBER 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Costs and estimated earnings.........................................$ 2,246,460 $ 1,114,418
Less billings........................................................ (1,978,058) (689,665)
-------------- --------------
Total................................................................$ 268,402 $ 424,753
============= =============
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $128,289 and
$170,444 are included in accounts receivable at September 30, 1997 and December
31, 1996, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Land and building......................$ 2,745,427 $ 894,633
Machinery and equipment................ 2,059,874 883,239
Furniture and fixtures................. 754,222 284,754
Leasehold improvements................. 51,313 50,732
Autos and trucks....................... -- 17,906
------------- -------------
5,610,836 2,131,264
Less accumulated depreciation.......... (666,124) (591,778)
------------- -------------
Net property, plant and equipment......$ 4,944,712 $ 1,539,486
============= =============
-10-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
6. INTANGIBLE ASSETS
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Goodwill....................................$ 4,791,251 $ 4,776,405
License agreement and other................. 149,169 149,169
------------- -------------
4,940,420 4,925,574
Less accumulated amortization............... (1,104,650) (858,366)
------------- -------------
Net intangible assets.......................$ 3,835,770 $ 4,067,208
============= =============
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Prime plus 2.50%, (11% at September 30,
1997), revolving credit lines, providing
for borrowings, subject to certain
collateral requirements and loan
covenants, of up to $3,500,000 through
June 2000, principally collateralized by
accounts receivable and inventory of
FSDA................................................ $1,375,047 --
Prime plus 3%, (11.50% at September 30,
1997), note payable, principal and
interest payable monthly with an
estimated balloon payment of
approximately $600,000 due June 2000,
principally collateralized by property
and plant of FSDA................................... 1,206,200 --
Prime plus 3%, (11.50% at September 30,
1997), note payable, principal and
interest payable monthly with an
estimated balloon payment of
approximately $200,000 due June 2000,
principally collateralized by machinery
and equipment of FSDA............................... 433,800 --
18% note payable, interest only due
monthly through July 1997, principal and
interest due thereafter through June
1998, collateralized by certain of the
assets of FSDA...................................... 400,000 --
11% note payable, principal and interest
payable monthly with an estimated
balloon payment of approximately
$1,300,000 due June 1, 2000,
collateralized by all the assets of FSDA............ 2,284,006 --
</TABLE>
-11-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
7. LONG-TERM DEBT - (Continued)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
9.25% mortgage note payable, principal
and interest payable monthly with an
estimated balloon payment of
approximately $360,000 due June 2001,
collateralized by land and building...... 431,763 $ 444,231
Prime plus 1%, (9.50% at September 30,
1997), notes payable, issued in
connection with the acquisition of CWES,
payable in equal quarterly principal
payments of $40,000, plus interest
through April 1999, principally
collateralized by the accounts
receivable, inventory and property and
equipment of CWES........................ 280,000 400,000
Prime plus 2%, (10.50% at September 30,
1997), note payable, principal and
interest payable monthly through June
2002 collateralized by substantially all
of the assets of GFSI.................... 80,095 84,084
Prime plus 2%, mortgage note payable,
principal and interest payable monthly
through January 2004, collateralized by
land and building, retired March 1997
pursuant to the Settlement Agreement
detailed at Note 14 (d)................... -- 124,714
-------------- ------------
6,490,911 1,053,029
Less current maturities................... (2,448,599) (271,156)
-------------- ------------
Total long-term debt......................$ 4,042,312 $ 781,873
============== ============
</TABLE>
8. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
INDEBTEDNESS TO RELATED PARTY SEPTEMBER 30, 1997 DECEMBER 31, 1996
- ----------------------------- ------------------ -----------------
<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 $9,375 for
each of the nine months ended September 30, 1997 and 1996, respectively.
-12-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
9. INCOME TAXES
At December 31, 1996, the Company has approximately $7,100,000 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 have
occurred 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 $2,750,000 deferred tax
asset at December 31, 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.
10. EQUITY TRANSACTIONS
(a) 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 escrow shares will be contributed to the capital of the Company and
the escrow options will be cancelled without consideration to the holders
thereof. Release of the escrow shares would be compensatory and would 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) At September 30, 1997 the Company has two stock option plans, which
are described below. The Company applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations in accounting for options
granted to employees. Under APB Opinion 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost is recognized.
Under the 1991 Performance Equity Plan, the Company may grant options
to its employees and certain consultants for up to 2,000,000 shares of Common
Stock. Under the 1994 Outside Directors' Plan, the Company may grant options to
its directors for up to 400,000 shares of Common Stock. For both plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant and an option's maximum term is 10 years.
(c) On January 24, 1997, based upon the approval of the Board of
Directors, the Company repriced all granted and outstanding options to purchase
Common Stock issued through such date pursuant to the 1991 Performance Equity
Plan at $0.41 per share, the market price per share of the Company's Common
Stock on such date.
(d) During 1997, certain employees, Directors and a Consultant of the
Company were granted options to purchase a total of 1,120,000 shares of Common
Stock at between $0.41 and $0.66 per share (market value or higher at the dates
of grant). The above options expire ten years from the dates of grant, and are
exercisable at various intervals beginning one year from the dates of grant.
-13-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
11. BUSINESS SEGMENTS
The Company's operations by business segments for the nine months ended
September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
WATER FILTRATION
AND PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
TREATMENT SALES AND SERVICE CORPORATE TOTAL
---------------- ------------------ --------- -----
<S> <C> <C> <C> <C>
REVENUES
- --------
1997 $ 13,971,929 $ 2,696,762 -- $ 16,668,691
1996 $ 9,799,969 $ 2,883,305 -- $ 12,683,274
OPERATING INCOME (LOSS)
- -----------------------
1997 $ 999,818 $ 215,222 $ (675,293) $ 539,747
1996 $ 579,067 $ 25,203 $ (750,662) $ (146,392)
IDENTIFIABLE ASSETS
- -------------------
1997 $ 14,633,882 $ 1,903,760 $ 682,448 $ 17,220,090
1996 $ 7,928,665 $ 1,861,260 $ 1,203,830 $ 10,993,755
DEPRECIATION AND AMORTIZATION
- -----------------------------
1997 $ 341,698 $ 93,042 $ 36,936 $ 471,676
1996 $ 287,617 $ 83,700 $ 32,400 $ 403,717
CAPITAL EXPENDITURES
- --------------------
1997 $ 8,990 $ 8,830 $ 12,798 $ 30,618
1996 $ 66,173 $ 32,149 $ 761,945 $ 860,267
</TABLE>
12. FINANCING FEES
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, 1997 and 1996
aggregated approximately $523,000 and $490,000, respectively, and are included
in revenues.
-14-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 30, 1997 and 1996, the Company paid
$243,987 and $54,678, respectively, for interest. Non-cash financing activity
was as follows:
During March 1997, the Company retired $123,518 in a mortgage payable
in conjunction with the Settlement Agreement further described in Note 14 (d).
14. COMMITMENTS AND CONTINGENCIES
(a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2000. Total rent expense aggregated
approximately $148,000 and $295,000, for the nine months ended September 30,
1997 and 1996, respectively.
Approximate future annual minimum lease payments under operating leases
at December 31, 1996 are as follows:
1997 $ 187,797
1998 181,297
1999 118,483
2000 29,397
-------------
$ 516,974
=============
(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 two year
agreement was renewed in July 1997 and remains in place through July 1999.
(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. During the nine months ended September 30, 1997,
the Company contributed 29,033 shares of restricted Common Stock valued at
approximately $14,000.
(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. The complaint alleged, 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. During January 1997,
the Company agreed to a Settlement Agreement which, among other things, provided
for the payment of $150,000 in cash to the Company along with the transfer of
land and building and a mortgage note payable to the Defendants having carrying
values of $150,000 and $124,714, respectively, as of December 31, 1996. The
result of the above transaction was a net gain of approximately $124,000
recognized in March 1997.
-15-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1996)
(e) The Company is or may become involved in various lawsuits, claims
and proceedings in the normal course of its business including those pertaining
to product liability, environmental, safety and health, and employment matters.
The Company records liabilities when loss amounts are determined to be probable
and reasonably estimatable. Insurance recoveries are recorded only when claims
for recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims will not
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations.
15. SUBSEQUENT EVENT
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. In October 1997, the Company contributed 44,539
shares of restricted Common Stock valued at approximately $10,000.
-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, 1996.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Presented below are the consolidated results of operations for the
Company for the nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
==========================================================================================================================
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1997 ENDED SEPTEMBER 30, 1996
==========================================================================================================================
<S> <C> <C>
Revenues $ 16,668,691 $ 12,683,274
- --------------------------------------------------------------------------------------------------------------------------
Cost of revenues 10,936,342 8,543,283
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 5,732,349 4,139,991
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses (including other
income and expenses) 5,375,862 4,297,230
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 356,487 $ (157,239)
==========================================================================================================================
</TABLE>
Revenues increased by $3,985,417, or 31.4%, from $12,683,274 for the
nine months ended September 30, 1996, to $16,668,691 for the nine months ended
September 30, 1997. Of this increase, $55,656 was attributable to an increase in
sales of commercial and residential water purification products and financing
fees earned from KISS International, Inc., Midwest Water Technologies, Inc. and
Di-tech Systems, Inc., and the addition of $5,756,071 in sales of filtration
systems and metering pumps generated by the Filtration Systems Division of Aqua
Care Systems, Inc., recently acquired from Durco International, Inc., during the
period from June through September 1997; offset by a $186,543 decrease in sales
of car wash machines and ancillary equipment of Car Wash Equipment and Supply,
Ryko of South Florida, Inc., and a $1,639,767 decrease 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.
Cost of revenues increased by $2,393,059 or 28%, from $8,543,283 for
the nine months ended September 30, 1996, to $10,936,342 for the nine months
ended September 30, 1997. As a percentage of revenues, these amounts represented
67.4% for 1996 as compared to 65.6% for 1997. The decrease in cost of revenues
as a percentage of revenues primarily was due to the addition of the sales of
the Filtration Systems Division in June 1997. The cost of revenues of such
entity is comprised of lower materials and components costs than the aggregate
cost of revenues of the Company's other subsidiaries.
- 17 -
<PAGE>
Gross profit increased $1,592,358 or 38.5% from $4,139,991 for the nine
months ended September 30, 1996 to $5,732,349 for the nine months ended
September 30, 1997, which, as a percentage of revenues, represented an increase
from 32.6% to 34.4%, respectively, for such periods.
The Company's operating expenses (including other income and expenses)
increased $1,078,632, or 25.1%, from $4,297,230 for the nine months ended
September 30, 1996 to $5,375,862 for the nine months ended September 30, 1997.
As a percentage of revenues, these expenses decreased from 33.9% for 1996 to
32.3% for 1997. The $1,078,632 increase was attributable mainly to the addition
of $1,598,200 in operating, interest and other expenses, net due to the
acquisition of the Filtration Systems Division purchased June 1, 1997. This
increase was partially offset by the elimination of certain operating expenses,
including other income and expenses of the Company's other subsidiaries, mainly
in the expense categories of payroll and related expenses ($292,412), occupancy
and related expenses ($147,302) and an increase in other income ($73,639).
Principally as a result of the factors described above, the Company
achieved net income of $356,487 for the nine months ended September 30, 1997 as
opposed to a net loss of $(157,239) realized for the nine months ended September
30, 1996, an increase of $513,726.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1997, the Company had $404,916 of cash and cash
equivalents, working capital of $2,775,005, assets of $17,220,090, long-term
debt, net of current maturities, of $4,042,312 and stockholders' equity of
$7,686,226. The Company's operating activities used $601,086 of cash,
principally as a result of an increase in accounts receivable ($2,514,408) and a
decrease in accounts payable and accrued expenses ($531,330); partially offset
by a decrease in prepaids and other ($87,958), a decrease in costs and estimated
earnings in excess of billings ($156,351), a decrease in inventory ($1,287,635),
depreciation and amortization ($471,676) and net income ($356,487). The increase
in accounts receivable and decrease in inventory noted above occurred primarily
as a result of the business activity of the Filtration Systems Division from
June 1, 1997 through September 30, 1997. Investing activities used $16,314
principally from payments received on notes receivable ($29,150); offset by
capital expenditures ($30,618) and intangible asset recognition ($14,846).
Financing activities provided $461,097 of cash, due to net proceeds from
issuance of notes payable and long-term debt $4,631,638; offset by repayments of
notes payable and long-term debt ($4,170,541).
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.
- 18 -
<PAGE>
INFLATION
The Company has not been materially affected by the impact of
inflation.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF SHARES FROM ESCROW
The Securities and Exchange 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. The Company does not presently
believe that it is probable that the Company will achieve any of the earnings
thresholds noted above. Accordingly, it is not likely that any of the escrow
shares will be released.
- 19 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 9, 1997 Long Trail Brewing Company filed a complaint
against EnviroSystems Supply, Inc., a wholly owned subsidiary
of the Company, in Windsor Superior Court in the County of
Windsor in the State of Vermont; Docket number S216-5-97Wrcv.
The complaint alleges, among other matters, breach of express
warranty and specific performance of certain of the parameters
of the written agreement for the purchase of a wastewater
treatment plant designed to treat the industrial wastewater
generated at the Plaintiff's brewing facility. Management
believes, based on facts presently known, that the outcome of
such legal proceeding will not have a material adverse effect
on the Company's financial position, liquidity, or future
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 12, 1997, the Annual Meeting of Stockholders of
Aqua Care Systems, Inc. was held, at which the following
actions were taken:
1. The following shares of Common Stock represented at
the Annual Meeting were voted in the election of
Directors as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
NUMBER VOTING FOR WITHHOLD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William K. Mackey 11,745,586 10,941,446 804,140
- ------------------------------------------------------------------------------------------------------------------------------------
Norman J. Hoskin 11,745,586 11,069,346 676,240
- ------------------------------------------------------------------------------------------------------------------------------------
James P. Cefaratti 11,745,586 11,076,446 669,140
- ------------------------------------------------------------------------------------------------------------------------------------
David K. Lucas 11,745,586 11,026,346 719,240
====================================================================================================================================
</TABLE>
2. The following shares of Common Stock represented at
the Annual meeting were voted on a proposal to
authorize the Company to effect a four to one reverse
common stock split of all of the authorized and
outstanding common stock of the Company.
<TABLE>
<CAPTION>
====================================================================================================================================
NUMBER VOTING FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11,745,586 10,592,618 1,044,570 108,398
====================================================================================================================================
</TABLE>
- 20 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed the following Report on Form 8-K
during or for the period covered by this Quarterly
Report on Form 10-QSB:
1) 8-K/A, containing the financial statements
required as a result of the acquisition of
the Filtration Systems Division of Durco
International, Inc., formerly known as the
Duriron Company, Inc. filed with the
Securities and Exchange Commission on August
25, 1997.
No other Items of Part II are applicable to the Registrant for
the period covered by this Quarterly Report on Form 10-QSB.
- 21 -
<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: November 11, 1997 /S/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: November 11, 1997 /S/ GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
- 22 -
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 404,916
<SECURITIES> 0
<RECEIVABLES> 4,043,465
<ALLOWANCES> 126,000
<INVENTORY> 3,489,274
<CURRENT-ASSETS> 8,266,557
<PP&E> 5,610,836
<DEPRECIATION> 666,124
<TOTAL-ASSETS> 17,220,090
<CURRENT-LIABILITIES> 5,491,552
<BONDS> 6,615,911
0
0
<COMMON> 11,746
<OTHER-SE> 7,674,480
<TOTAL-LIABILITY-AND-EQUITY> 7,686,226
<SALES> 16,668,691
<TOTAL-REVENUES> 16,668,691
<CGS> 10,936,342
<TOTAL-COSTS> 10,936,342
<OTHER-EXPENSES> 5,038,757
<LOSS-PROVISION> 27,000
<INTEREST-EXPENSE> 310,105
<INCOME-PRETAX> 356,487
<INCOME-TAX> 0
<INCOME-CONTINUING> 356,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 356,487
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
