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 MARCH 31, 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 MAY 5, 1997
--------------
CLASS
-----
Common Stock, $ .001 Par Value 11,712,523
----------
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 March 31, 1997 and
------- December 31, 1996
Consolidated Statements of Operations for
the three months ended March 31, 1997 and
March 31, 1996
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and
March 31, 1996
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations for the three months ended March
31, 1997 and March 31, 1996
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-------
- 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 MARCH 31, 1997)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents .................. $ 398,362 $ 561,219
Accounts receivable, net of allowance
for doubtful accounts of $107,000
and $99,000 ............................ 1,730,918 1,430,057
Costs and estimated earnings in excess of
billings ............................... 296,517 424,753
Inventory .................................. 1,813,340 1,903,583
Current maturities of notes receivable ..... 94,800 94,800
Prepaids and other ......................... 254,960 179,658
------------ ------------
Total current assets ............................ 4,588,897 4,594,070
Property, plant and equipment, net .............. 1,352,697 1,539,486
Intangible assets, net .......................... 3,999,958 4,067,208
Notes receivable, less current maturities ....... 117,150 129,150
Other assets .................................... 73,106 90,230
------------ ------------
Total assets .................................... $ 10,131,808 $ 10,420,144
============ ============
LIABILITIES
Current
Accounts payable ........................... $ 1,432,845 $ 1,447,324
Accrued expenses ........................... 364,098 478,984
Current maturities of long-term debt ....... 258,563 271,156
Indebtedness to related party .............. 125,000 125,000
------------ ------------
Total current liabilities ....................... 2,180,506 2,322,464
Long-term debt, less current maturities ......... 625,269 781,873
------------ ------------
Total liabilities ............................... 2,805,775 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; 20,000,000 shares
authorized, 11,697,554 shares
issued and outstanding ................. 11,698 11,698
Additional paid-in capital ................. 16,636,805 16,636,805
Deficit .................................... (9,322,470) (9,332,696)
------------ ------------
Total stockholdlers' equity ..................... 7,326,033 7,315,807
------------ ------------
Total liabilities and stockholders' equity ...... $ 10,131,808 $ 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
MARCH 31,
1997 1996
------------ ------------
Revenues ....................................... $ 3,631,701 $ 3,981,132
Cost of revenues ............................... 2,435,173 2,610,832
------------ ------------
Gross profit ................................... 1,196,528 1,370,300
------------ ------------
Operating expenses:
Selling, general and administrative ....... 1,152,858 1,269,890
Depreciation and amortization ............. 135,003 128,469
Provision for doubtful accounts and notes . 8,000 6,000
------------ ------------
Total operating expenses ....................... 1,295,861 1,404,359
------------ ------------
Loss from operations ........................... (99,333) (34,059)
Interest expense ............................... (23,774) (12,154)
Other income ................................... 133,333 --
------------ ------------
Net income/(loss) .............................. $ 10,226 $ (46,213)
============ ============
Net income/(loss) per common share ............. $ 0.00 $ (0.01)
============ ============
Weighted average number of outstanding
shares of common stock .................... 10,722,554 8,256,237
============ ============
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss)........................................... $ 10,226 $ (46,213)
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 .............. 8,000 6,000
Depreciation and amortization .......................... 135,003 128,469
Changes in assets and liabilities:
Increase in accounts receivable ..................... (308,861) (548,890)
Decrease in costs and estimated earnings in
excess of billings ............................... 128,236 37,987
Decrease in inventory ............................... 90,243 178,580
Increase in prepaids and other ...................... (75,302) (16,715)
Decrease (increase) in other assets ................. 17,124 (28,595)
Decrease in accounts payable and accrued
expenses ......................................... (129,365) (335,999)
--------- ---------
Net cash used in operating activities ....................... (98,214) (625,376)
--------- ---------
INVESTING ACTIVITIES:
Payments received on notes receivable .................. 12,000 520,700
Capital expenditures ................................... (16,119) (49,767)
Addition to intangible assets .......................... (14,845) (12,580)
--------- ---------
Net cash (used in) provided by investing activities ......... (18,964) 458,353
--------- ---------
FINANCING ACTIVITIES:
Repayment of notes payable and
long-term debt ...................................... (45,679) (41,842)
--------- ---------
Net cash used in financing activities ....................... (45,679) (41,842)
--------- ---------
Net decrease in cash and cash equivalents ................... (162,857) (208,865)
Cash and cash equivalents, beginning of period .............. 561,219 721,763
--------- ---------
Cash and cash equivalents, end of period .................... $ 398,362 $ 512,898
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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.
-7-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 March 31, 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 three months ended March 31, 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.
-8-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
3. PROSPECTIVE ACQUISITION
In November 1996, the Company entered into a non-binding letter of intent
in which it endeavors to purchase all the assets and assume certain of the
liabilities of the Filtration Systems Division of The Duriron Company, Inc. The
acquisition is subject to, among other things, the completion of due diligence
procedures on the part of both parties and the completion of the definitive
purchase agreement and financing arrangements.
4. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS MARCH 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------- -------------- -----------------
<S> <C> <C>
Costs and estimated earnings ..................... $ 1,449,425 $ 1,114,418
Less billings .................................... (1,152,908) (689,665)
----------- -----------
Total ............................................ $ 296,517 $ 424,753
=========== ===========
</TABLE>
All receivables on contracts in progress are considered to be collectible
within twelve months. Retainages receivable totalling $140,171 and $170,444 are
included in accounts receivable at March 31, 1997 and December 31, 1996,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Land and building ................................ $ 745,427 $ 894,633
Machinery and equipment .......................... 795,375 883,239
Furniture and fixtures ........................... 254,220 284,754
Leasehold improvements ........................... 51,313 50,732
Autos and trucks ................................. -- 17,906
----------- -----------
1,846,335 2,131,264
Less accumulated depreciation .................... (493,638) (591,778)
----------- -----------
Net property, plant and equipment $ 1,352,697 $ 1,539,486
=========== ===========
</TABLE>
-9-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
<TABLE>
<CAPTION>
6. INTANGIBLE ASSETS
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Goodwill ............................................................... $ 4,791,250 $ 4,776,405
License agreement, customer list and other ............................. 149,169 149,169
----------- -----------
4,940,419 4,925,574
Less accumulated amortization .......................................... (940,461) (858,366)
----------- -----------
Net intangible assets .................................................. $ 3,999,958 $ 4,067,208
=========== ===========
<CAPTION>
7. LONG-TERM DEBT
MARCH 31, 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 .................................... $ 440,456 $ 444,231
Prime plus 1%, (9.25% at March 31, 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 ........................... 360,000 400,000
Prime plus 2%, (10.25% at March 31, 1997),
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
Prime plus 2%, (10.25% at March 31, 1997), note
payable, interest only payable monthly, principal due upon
demand, collateralized by certain of the assets of GFSI ................ 83,376 84,084
----------- -----------
883,832 1,053,029
Less current maturities ................................................ (258,563) (271,156)
----------- -----------
Total long-term debt ................................................... $ 625,269 $ 781,873
=========== ===========
</TABLE>
-10-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
<TABLE>
<CAPTION>
8. RELATED PARTY BALANCES AND TRANSACTIONS
INDEBTEDNESS TO RELATED PARTY MARCH 31, 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 $3,125 for each
of the three months ended March 31, 1997 and 1996, respectively.
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 shares will be contributed to the Company. 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 March 31, 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.
-11-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
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
$0.44 per share, the market price per share of the Company's Common Stock on
such date.
(d) In February 1997, certain employees of the Company were granted options
to purchase a total of 100,500 shares of Common Stock at $0.41 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.
11. BUSINESS SEGMENTS
The Company's operations by business segments for the three months ended
March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
WATER FILTRATION
AND PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- -------- ---------------- ------------------ ----------- -------------
<S> <C> <C> <C> <C>
1997 $ 2,657,523 $ 974,178 -- $ 3,631,701
1996 $ 2,860,159 $ 1,120,973 -- $ 3,981,132
OPERATING INCOME (LOSS)
- -----------------------
1997 $ 73,980 $ 68,435 $ (241,748) $ (99,333)
1996 $ 153,607 $ 47,917 $ (235,583) $ (34,059)
IDENTIFIABLE ASSETS
- -------------------
1997 $ 7,022,030 $ 1,835,887 $ 1,273,891 $ 10,131,808
1996 $ 7,934,321 $ 2,178,085 $ 356,191 $ 10,468,597
DEPRECIATION AND AMORTIZATION
- -----------------------------
1997 $ 91,677 $ 31,014 $ 12,312 $ 135,003
1996 $ 91,869 $ 27,900 $ 8,700 $ 128,469
</TABLE>
-12-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
- --------------------
<S> <C> <C> <C> <C>
1997 $ 11,671 $ 2,429 $ 2,019 $ 16,119
1996 $ 27,594 $ 17,246 $ 4,927 $ 49,767
</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 three months ended March 31, 1997 and 1996 aggregated approximately $140,000
and $126,000, respectively, and are included in revenues.
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended March 31, 1997 and 1996, the Company paid
$24,694 and $17,552, 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
$48,000 and $104,000, for the three months ended March 31, 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
distribution agreement is due to expire in July 1997. However, it provides for
automatic renewal upon achievement of certain sales goals which aggregate
approximately $1,700,000 and $1,900,000 for 1996 and 1997, respectively. The
Company expects to meet such goals.
-13-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1996)
(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.
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 April 1997, the Company contributed 14,969
shares of restricted Common Stock valued at $4,210.
-14-
<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 - THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Presented below are the consolidated results of operations for the
Company for the three months ended March 31, 1997 and 1996:
===============================================================================
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 1997 ENDED MARCH 31, 1996
===============================================================================
Revenues $ 3,631,701 $ 3,981,132
- -------------------------------------------------------------------------------
Cost of revenues 2,435,173 2,610,832
- -------------------------------------------------------------------------------
Gross profit 1,196,528 1,370,300
- -------------------------------------------------------------------------------
Operating expenses (including
other income and expenses) 1,186,302 1,416,513
- -------------------------------------------------------------------------------
Net income/(loss) $ 10,226 $ (46,213)
===============================================================================
Revenues decreased by $349,431, or 8.8%, from $3,981,132 for the three
months ended March 31, 1996, to $3,631,701 for the three months ended March 31,
1997. Of this decrease, $146,795 was attributable to a decrease in sales of car
wash machines and ancillary equipment of CWES; $227,335 was attributable to a
decrease in sales of municipal, industrial and commercial waste water treatment
equipment and waste water treatment plants of GFS and ESSI; offset by a $24,699
increase in sales of commercial and residential water purification products and
financing fees earned from KISS, MWT, DTS and PFW.
Cost of revenues decreased by $175,659 or 6.7%, from $2,610,832 for the
three months ended March 31, 1996, to $2,435,173 for the three months ended
March 31, 1997. As a percentage of revenues, these amounts represented 67.1% for
1997 as compared to 65.6% 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.
- 15 -
<PAGE>
Gross profit decreased $173,772 or 12.7% from $1,370,300 for the three
months ended March 31, 1996 to $1,196,528 for the three months ended March 31,
1997, which, as a percentage of revenues, represented a decrease from 34.4% to
32.9%, respectively, for such periods.
The Company's operating expenses (including other income and expenses)
decreased $230,211, or 16.3%, from $1,416,513 for the three months ended March
31, 1996 to $1,186,302 for the three months ended March 31, 1997. As a
percentage of revenues, these expenses decreased from 35.6% for 1996 to 32.7%
for 1997. The $230,211 decrease was attributable mainly to the paring of certain
operating expenses, including other income and expenses, mainly in the expense
categories of personnel and related expenses ($43,296) and occupancy and related
expenses ($55,658) and an increase in other income ($133,333).
Principally as a result of the factors described above, the Company
achieved net income of $10,226 for the three months ended March 31, 1997 as
opposed to having incurred a net loss of $(46,213) for the three months ended
March 31, 1996.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1997, the Company had $398,362 of cash and cash
equivalents, working capital of $2,408,391, assets of $10,131,808, long-term
debt, net of current maturities, of $625,269 and stockholders' equity of
$7,326,033. The Company's operating activities used $98,214 of cash, principally
as a result of an increase in accounts receivable ($308,861), an increase in
prepaids and other ($75,302) and a decrease in accounts payable and accrued
expenses ($129,365); partially offset by a decrease in costs and estimated
earnings in excess of billings ($128,236), a decrease in inventory ($90,243),
and depreciation and amortization ($135,003). Investing activities used $18,964
principally from payments received on notes receivable ($12,000); offset by
capital expenditures ($16,119) and intangible asset recognition ($14,845).
Financing activities used $45,679 of cash, due to repayments of notes payable
and long-term debt.
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.
- 16 -
<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.
- 17 -
<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.
- 18 -
<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: May 5, 1997 /s/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: May 5, 1997 /s/ GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
- 19 -
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 398,362
<SECURITIES> 0
<RECEIVABLES> 1,837,918
<ALLOWANCES> (107,000)
<INVENTORY> 1,813,340
<CURRENT-ASSETS> 4,588,897
<PP&E> 1,846,335
<DEPRECIATION> (493,638)
<TOTAL-ASSETS> 10,131,808
<CURRENT-LIABILITIES> 2,180,506
<BONDS> 0
0
0
<COMMON> 11,698
<OTHER-SE> 7,314,335
<TOTAL-LIABILITY-AND-EQUITY> 10,131,808
<SALES> 3,631,701
<TOTAL-REVENUES> 3,631,701
<CGS> 2,435,173
<TOTAL-COSTS> 2,435,173
<OTHER-EXPENSES> 1,186,302
<LOSS-PROVISION> 8,000
<INTEREST-EXPENSE> 23,774
<INCOME-PRETAX> 10,226
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,226
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
