U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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
ON JULY 25, 1997
CLASS
Common Stock, $ .001 Par Value 11,745,586
----------
Transitional small business disclosure format:
Yes [ ] No [X]
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996
Consolidated Statements of Operations for
the three months ended June 30, 1997 and
June 30, 1996
Consolidated Statements of Operations for the six months ended
June 30, 1997 and June 30, 1996
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and June
30, 1996
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the six months ended June 30, 1997 and
June 30, 1996
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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 JUNE 30, 1997)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents........................................ $ 503,661 $ 561,219
Accounts receivable, net of allowance
for doubtful accounts of $117,000 and $99,000................ 3,735,657 1,430,057
Costs and estimated earnings in excess of
billings..................................................... 383,376 424,753
Inventory........................................................ 3,532,491 1,903,583
Current maturities of notes receivable........................... 94,800 94,800
Prepaids and other............................................... 52,005 179,658
------------ ------------
Total current assets.................................................. 8,301,990 4,594,070
Property, plant and equipment, net.................................... 5,049,284 1,539,486
Intangible assets, net................................................ 3,917,866 4,067,208
Notes receivable, less current maturities............................. 117,150 129,150
Other assets.......................................................... 73,569 90,230
------------ ------------
Total assets.......................................................... $ 17,459,859 $ 10,420,144
============ ============
LIABILITIES
Current
Accounts payable................................................. $ 2,334,822 $ 1,447,324
Accrued expenses................................................. 954,379 478,984
Current maturities of long-term debt............................. 2,278,902 271,156
Indebtedness to related party.................................... 125,000 125,000
------------ ------------
Total current liabilities............................................. 5,693,103 2,322,464
Long-term debt, less current maturities............................... 4,209,549 781,873
------------ ------------
Total liabilities..................................................... 9,902,652 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, 11,731,522 shares
issued and outstanding....................................... 11,732 11,698
Additional paid-in capital....................................... 16,647,187 16,636,805
Deficit.......................................................... (9,101,712) (9,332,696)
------------- -------------
Total stockholdlers' equity........................................... 7,557,207 7,315,807
------------ ------------
Total liabilities and stockholders' equity............................ $ 17,459,859 $ 10,420,144
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
1997 1996
------------ -----------
Revenues.........................................$ 5,664,002 $ 4,489,184
Cost of revenues................................. 3,816,900 3,036,502
------------ -----------
Gross profit..................................... 1,847,102 1,452,682
------------ -----------
Operating expenses:
Selling, general and administrative......... 1,384,613 1,265,788
Depreciation and amortization............... 151,670 134,476
Provision for doubtful accounts and notes... 10,000 14,071
------------ ----------
Total operating expenses......................... 1,546,283 1,414,335
------------ -----------
Income from operations........................... 300,819 38,347
Interest expense................................. (69,079) (24,340)
Other (expense) income........................... (10,982) 54,395
------------- -----------
Net income.......................................$ 220,758 $ 68,402
============ ===========
Net income per common share......................$ 0.02 $ 0.01
============ ===========
Weighted average number of outstanding
shares of common stock...................... 10,756,522 8,280,652
============ ===========
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenues..........................................$ 9,295,703 $ 8,470,316
Cost of revenues.................................. 6,252,073 5,647,334
------------ ------------
Gross profit...................................... 3,043,630 2,822,982
------------ ------------
Operating expenses:
Selling, general and administrative 2,537,471 2,534,524
Depreciation and amortization................ 286,673 262,945
Provision for doubtful accounts and notes 18,000 20,071
------------ -----------
Total operating expenses.......................... 2,842,144 2,817,540
------------ ------------
Income from operations............................ 201,486 5,442
Interest expense.................................. (93,008) (36,494)
Other income...................................... 122,506 53,241
------------ ------------
Net income........................................$ 230,984 $ 22,189
============ ============
Net income per common share.......................$ 0.02 $ 0.00
============ ============
Weighted average number of outstanding
shares of common stock....................... 10,749,038 8,268,444
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 230,984 $ 22,189
Adjustments to reconcile net income 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 .............. 18,000 20,071
Depreciation and amortization .......................... 286,673 262,945
Pension contribution paid through issuance of
common stock ......................................... 10,416 10,736
Changes in assets and liabilities,
net of effects of acquired business:
Increase in accounts receivable ..................... (2,323,600) (200,465)
Decrease (increase) in costs and estimated earnings
in excess of billings ............................ 41,377 (223,004)
Decrease (increase) in inventory .................... 1,244,418 (102,990)
Decrease (increase) in prepaids and other ........... 127,653 (35,443)
Decrease (increase) in other assets ................. 16,661 (12,887)
Decrease in accounts payable and accrued
expenses ......................................... (160,130) (166,062)
------------ -----------
Net cash used in operating activities ....................... (481,066) (424,910)
------------ -----------
INVESTING ACTIVITIES:
Payments received on notes receivable .................. 12,000 541,400
Capital expenditures ................................... (32,283) (747,495)
Addition to intangible assets .......................... (14,846) (15,236)
------------ -----------
Net cash used in investing activities ....................... (35,129) (221,331)
------------ -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of notes payable and
long-term debt ...................................... 546,756 450,000
Repayment of notes payable and long-term debt .......... (88,119) (86,305)
------------ -----------
Net cash provided by financing activities ................... 458,637 363,695
------------ -----------
Net decrease in cash and cash equivalents ................... (57,558) (282,546)
Cash and cash equivalents, beginning of period .............. 561,219 721,763
------------ -----------
Cash and cash equivalents, end of period .................... $ 503,661 $ 439,217
============ ===========
</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 JUNE 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 JUNE 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 June 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 LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of
shares of Common Stock outstanding. Additionally, the 975,000 shares of the
Company's Common Stock and options to acquire 116,250 shares of the Company's
Common Stock placed in escrow in connection with the Company's initial public
offering have not been included in the weighted average number of outstanding
shares as their release from escrow is not considered probable. Fully diluted
loss per share is not presented as the effects of potentially dilutive
securities would be anti-dilutive.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.
2. LIQUIDITY
The Company has experienced negative cash flows from operating
activities for the six months ended June 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 JUNE 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 $0.50 each. The Company assumed operational control
of FSDA on June 1, 1997. FSDA operations include manufacturing and systems
integration of water filtration and waste water treatment systems and
components.
4. CONTRACTS IN PROGRESS
<TABLE>
<S> <C> <C>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS JUNE 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------- -------------- -----------------
Costs and estimated earnings................................$ 1,492,779 $ 1,114,418
Less billings............................................... (1,109,403) (689,665)
-------------- --------------
Total.......................................................$ 383,376 $ 424,753
============= =============
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $134,935 and
$170,444 are included in accounts receivable at June 30, 1997 and December 31,
1996, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Land and building......................................$ 2,745,427 $ 894,633
Machinery and equipment................................ 2,061,536 883,239
Furniture and fixtures................................. 754,222 284,754
Leasehold improvements................................. 51,313 50,732
Autos and trucks....................................... -- 17,906
------------- -------------
5,612,498 2,131,264
Less accumulated depreciation.......................... (563,214) (591,778)
-------------- --------------
Net property, plant and equipment......................$ 5,049,284 $ 1,539,486
============= =============
</TABLE>
-10-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND 1996)
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Goodwill.............................................$ 4,791,251 $ 4,776,405
License agreement and other.......................... 149,169 149,169
------------- -------------
4,940,420 4,925,574
Less accumulated amortization........................ (1,022,554) (858,366)
-------------- --------------
Net intangible assets................................$ 3,917,866 $ 4,067,208
============= =============
</TABLE>
<TABLE>
<CAPTION>
7. LONG-TERM DEBT
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Prime plus 2.50%, (11% at June 30, 1997), revolving credit
lines, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $3,500,000 through
June 2000, principally collateralized by accounts receivable
and inventory of FSDA................................................$ 1,104,249 --
Prime plus 3%, (11.50% at June 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........................................... 1,250,000 --
Prime plus 3%, (11.50% at June 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...................................... 450,000 --
18% note payable, interest only due monthly through August 1997,
principal and interest due thereafter through June 1998, collateralized
by certain of the assets of FSDA..................................... 500,000 --
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........... 2,344,006 --
-11-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND 1996)
7. LONG-TERM DEBT - (Continued)
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
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 ................................. 436,820 $ 444,231
Prime plus 1%, (9.50% at June 30, 1997), notes
payable, issued in connection with the acquisition of
CWES, payable in equal quarterly principal payments
of $40,000, plus interest through April 1999,
principally collateralized by the accounts receivable,
inventory and property and equipment of CWES......................... 320,000 400,000
Prime plus 2%, (10.50% at June 30, 1997), note payable,
principal and interest payable monthly through June 2002
collateralized by substantially all of the assets of GFSI............ 83,376 84,084
Prime plus 2%, mortgage note payable, principal and interest
payable monthly through January 2004, collateralized by land
and building, retired March 1997 pursuant to the Settlement
Agreement detailed at Note 14 (c).................................... -- 124,714
------------- -------------
6,488,451 1,053,029
Less current maturities.............................................. (2,278,902) (271,156)
------------- -------------
Total long-term debt.................................................$ 4,209,549 $ 781,873
============= =============
8. RELATED PARTY BALANCES AND TRANSACTIONS
INDEBTEDNESS TO RELATED PARTY JUNE 30, 1997 DECEMBER 31, 1996
- ----------------------------- ------------- -----------------
10% unsecured notes payable to a former affiliated
entity, matured October 1994.........................................$ 125,000 $ 125,000
============= =============
</TABLE>
Interest expense on related party indebtedness aggregated $6,250 for
each of the six months ended June 30, 1997 and 1996, respectively.
-12-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 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 June 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 of the Company were granted options
to purchase a total of 325,500 shares of Common Stock at between $0.41 and $0.50
per share (market value at the date of grant). The above options expire ten
years from the date of grant, and are exercisable one-third each year beginning
one year from the date of grant.
-13-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND 1996)
11. BUSINESS SEGMENTS
The Company's operations by business segments for the six months ended
June 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
REVENUES ----------------- ------------------ --------- -----
- --------
<C> <C> <C> <C> <C>
1997 $ 7,465,110 $ 1,830,593 -- $ 9,295,703
1996 $ 6,282,241 $ 2,188,075 -- $ 8,470,316
OPERATING INCOME
- ----------------
1997 $ 496,087 $ 154,744 $ (449,345) $ 201,486
1996 $ 376,806 $ 96,677 $ (468,041) $ 5,442
IDENTIFIABLE ASSETS
- -------------------
1997 $ 14,382,798 $ 1,882,897 $ 1,194,164 $ 17,459,859
1996 $ 8,053,177 $ 2,115,152 $ 954,880 $ 11,123,209
DEPRECIATION AND AMORTIZATION
- -----------------------------
1997 $ 200,021 $ 62,028 $ 24,624 $ 286,673
1996 $ 189,745 $ 55,800 $ 17,400 $ 262,945
CAPITAL EXPENDITURES
- --------------------
1997 $ 22,288 $ 7,497 $ 2,498 $ 32,283
1996 $ 41,928 $ 20,140 $ 685,427 $ 747,495
</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 six months ended June 30, 1997 and 1996 aggregated
approximately $328,000 and $295,000, respectively, and are included in revenues.
-14-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND 1996)
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30, 1997 and 1996, the Company paid
$44,539 and $30,242, 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 (c).
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 $93,000 and $213,000, for the six months ended June 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) 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.
(d) In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two year
period on a quarterly basis. In April 1997, the Company contributed 14,969
shares of restricted Common Stock valued at $4,210, respectively.
-15-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND 1996)
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 July 1997, the Company contributed 14,064 shares
of restricted Common Stock valued at $3,516.
-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 - SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Presented below are the consolidated results of operations for the
Company for the six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
===============================================================================================
SIX MONTHS SIX MONTHS
ENDED JUNE 30, 1997 ENDED JUNE 30, 1996
===============================================================================================
<S> <C> <C>
Revenues $ 9,295,703 $ 8,470,316
- -----------------------------------------------------------------------------------------------
Cost of revenues 6,252,073 5,647,334
- -----------------------------------------------------------------------------------------------
Gross profit 3,043,630 2,822,982
- -----------------------------------------------------------------------------------------------
Operating expenses (including other
income and expenses) 2,812,646 2,800,793
- -----------------------------------------------------------------------------------------------
Net income $ 230,984 $ 22,189
===============================================================================================
</TABLE>
Revenues increased by $825,387, or 9.7%, from $8,470,316 for the six
months ended June 30, 1996, to $9,295,703 for the six months ended June 30,
1997. Of this increase, $251,301 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 $1,958,920 in sales of filtration systems and
metering pumps generated by the newly acquired Filtration Systems Division of
Aqua Care Systems, Inc., ("FSDA"), during June 1997; offset by a $357,482
decrease in sales of car wash machines and ancillary equipment of Car Wash
Equipment and Supply, Ryko of South Florida, Inc., ("CWES"), and a $1,027,352
decrease in sales of municipal, industrial and commercial waste water treatment
equipment and waste water treatment plants of Gravity Flow Systems, Inc.,
("GFSI") and EnviroSystems Supply Inc.
Cost of revenues increased by $604,739 or 10.7%, from $5,647,334 for
the six months ended June 30, 1996, to $6,252,073 for the six months ended June
30, 1997. As a percentage of revenues, these amounts represented 67.3% for 1997
as compared to 66.7% for 1996. 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 increased $220,648 or 7.8% from $2,822,982 for the six
months ended June 30, 1996 to $3,043,630 for the six months ended June 30, 1997,
which, as a percentage of revenues, represented a decrease from 33.3% to 32.7%,
respectively, for such periods.
The Company's operating expenses (including other income and expenses)
increased $11,853, or 0.4%, from $2,800,793 for the six months ended June 30,
1996 to $2,812,646 for the six months ended June 30, 1997. As a percentage of
revenues, these expenses decreased from 33.1% for 1996 to 30.3% for 1997. The
$11,853 increase was attributable mainly to the paring of certain operating
expenses, including other income and expenses, mainly in the expense categories
of occupancy and related expenses ($193,054) and an increase in other income
($69,265); partially offset by increases in personnel and related expenses
($167,897) and selling and related expenses ($88,450).
Principally as a result of the factors described above, the Company
achieved net income of $230,984 for the six months ended June 30, 1997 as
opposed to net income $22,189 for the six months ended June 30, 1996, an
increase of $208,795.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1997, the Company had $503,661 of cash and cash
equivalents, working capital of $2,608,887, assets of $17,459,859, long-term
debt, net of current maturities, of $4,209,549 and stockholders' equity of
$7,557,207. The Company's operating activities used $481,066 of cash,
principally as a result of an increase in accounts receivable ($2,323,600) and a
decrease in accounts payable and accrued expenses ($160,130); partially offset
by a decrease in prepaids and other ($127,653), a decrease in costs and
estimated earnings in excess of billings ($41,377), a decrease in inventory
($1,244,418), depreciation and amortization ($286,673) and net income
($230,984). Investing activities used $35,129 principally from payments received
on notes receivable ($12,000); offset by capital expenditures ($32,283) and
intangible asset recognition ($14,846). Financing activities provided $458,637
of cash, due to net proceeds from issuance of notes payable and long-term debt
($546,756); offset by repayments of notes payable and long-term debt ($88,119).
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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 - 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 dated June 11, 1997, concerning the acquisition of the
Filtration Systems Division of Durco International, Inc.,
formerly known as the Duriron Company, Inc.
No other Items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-QSB.
- 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: July 30, 1997 /S/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: July 30, 1997 /S/ GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
- 21 -
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
INFORMATION FOR INCLUSION IN THE 10-QSB, FINANCIAL DATA SCHEDULE BALANCE
SHEET DATA ONLY AS OF JUNE 30, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 503,661
<SECURITIES> 0
<RECEIVABLES> 3,852,657
<ALLOWANCES> (117,000)
<INVENTORY> 3,532,491
<CURRENT-ASSETS> 8,301,990
<PP&E> 5,612,498
<DEPRECIATION> (563,214)
<TOTAL-ASSETS> 17,459,859
<CURRENT-LIABILITIES> 5,693,103
<BONDS> 6,613,451
0
0
<COMMON> 11,732
<OTHER-SE> 7,545,475
<TOTAL-LIABILITY-AND-EQUITY> 17,459,859
<SALES> 9,295,703
<TOTAL-REVENUES> 9,295,703
<CGS> 6,252,073
<TOTAL-COSTS> 6,252,073
<OTHER-EXPENSES> 2,701,638
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 93,008
<INCOME-PRETAX> 230,984
<INCOME-TAX> 0
<INCOME-CONTINUING> 230,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,984
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
