SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-22434
AQUA CARE SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 13-3615311
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11820 NW 37 STREET, CORAL SPRINGS, FL 33065
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Issuers's telephone number: (954) 796-3338
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
TITLE OF CLASSES
----------------
Common Stock, $.001 par value
Class A Redeemable Warrants
Class B Redeemable Warrants
Units (consisting of one share of
Common Stock, one Class A Warrant
and one Class B Warrant)
Page 1 of 44, (including pages F-1 through F-17)
Index to Exhibits Page 26
<PAGE>
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 ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $15,987,147
The aggregate market value of the voting stock held by non-affiliates
of the Registrant (computed by reference to the average bid and asked prices of
such stock) as of March 24, 1997 was approximately $5,763,992.
There were 11,697,554 shares of Common Stock, $.001 par value,
outstanding at March 24, 1997.
Transitional Small Business Disclosure Format (check one):
Yes ___; No X
DOCUMENTS INCORPORATED BY REFERENCE: See Item 13, Exhibits and Reports
on Form 8-K, for items incorporated by reference into this Annual Report on Form
10-KSB.
- 2 -
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Aqua Care Systems, Inc., (the "Company" or "ACSI"), is a Florida-based
Delaware corporation that was formed in 1990 and which became operational in May
1991. It was formed for the purpose of pursuing acquisitions, primarily in the
non-chemical waste water treatment and water filtration and purification
industries. ACSI is a holding company which, through its subsidiaries, operates
businesses that it has acquired. In connection therewith, ACSI provides
management services and, when practicable; financing for its subsidiaries.
Through additional acquisitions, ACSI intends to build an integrated
non-chemical waste water treatment and water filtration and purification
company. ACSI desires to offer a variety of products and technologies through
its acquisitions of companies, assets or businesses which will endeavor to
provide a one-stop source for its customers' water filtration and purification
and waste water treatment needs in order to address what it believes to be
highly fragmented industry segments in the water filtration and purification and
waste water treatment industries.
The Company has pursued its Business Plan since July 1991 and has
acquired nine companies. As a result of these acquisitions, the Company's
revenues have gradually increased with revenues for the year ended December 31,
1996 aggregating approximately $16 million. In achieving this growth, the
Company has expended significant cash in making acquisitions and developing the
operations of its wholly-owned subsidiaries. In June 1995, the Company replaced
executive management and implemented a consolidation and restructuring plan
designed to save the Company approximately $1.7 million. Pursuant to this
restructuring, the management of ACSI was actually able to reduce operating
expenses by in excess of $2 million without hindering the consolidated entity's
ability to increase revenues and grow each individual subsidiary. Revenues
increased modestly by approximately 8% from 1995 to 1996. Management believes
that the Company currently needs to further its strategic acquisition program in
order to further utilize the infrastructure that it has formed.
The Company has organized its wholly-owned subsidiaries into three
divisions; (a) waste water treatment, (b) water filtration and purification and
(c) car wash equipment and supplies. The entities involved in waste water
treatment applications are EnviroSystems Supply, Inc., ("ESSI"), Gravity Flow
Systems, Inc., ("GFSI"), and Integrated Process Automation Systems, Inc.,
("IPAS"). The companies addressing the water filtration and purification markets
are KISS International, Inc., ("KISS"), Di-tech Systems, Inc., ("DTSI"), Midwest
Water Technologies, Inc., ("MWTI") and Pure Flow Water Company, Inc., ("PFWC").
The Company's car wash equipment and supplies business is operated through Car
Wash Equipment & Supply, Ryko of South Florida, Inc., ("CWES").
ACQUIRED SUBSIDIARIES
The Company acquired PFWC, ESSI, CWES, KISS, GFSI, including its former
manufacturing entity, FLS Specialty Manufacturing, Inc., ("FLSI"), and certain
assets of TOPCO International, Inc., ("TOPCO"), MWTI and DTSI because of their
added product, technical and distribution capabilities and their perceived
growth potential. Management believes that with additional financial resources
and more aggressive, comprehensive marketing, additional personnel, affiliation
with a broader product line
- 3 -
<PAGE>
and expansion into new territories, the Company's present businesses can achieve
significant growth. However, there can be no assurance that significant growth
can actually be achieved. In the short-term, ACSI intends to focus on
implementing this plan for its current subsidiaries, while seeking other
suitable acquisition candidates. See Note 3 of the "Notes to Consolidated
Financial Statements."
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.
During February 1997, ACSI perfected an alliance with Sernagiotto
S.P.A., ("SERNA"), of Casteggio, Italy wherein SERNA granted to ACSI the
exclusive rights to sell, install, service, manufacture and assemble its
products within the United States, (including all possessions), Canada and the
Caribbean. SERNA sells technology, equipment and services for a broad range of
application in solids processing and primary treatment of waste water.
The Company will continue to engage in an acquisition program which
could result in a substantial change in ACSI's business operations and financial
condition. The Company's acquisition program has been and will continue to be
directed by William K. Mackey, Chairman of the Board, President and Chief
Executive Officer, in conjunction with the Company's Board of Directors. As
consideration for any acquisition, in addition to the payment of cash (if any),
ACSI may issue notes, Common Stock, Preferred Stock or other securities. It is
intended that key employees of acquired companies generally will become
employees of the subsidiaries and, as such, will hold management positions in
such subsidiaries. ACSI does not intend to seek stockholder approval for any
such acquisitions unless required by applicable laws or regulations.
OPERATIONS
In June 1995, the Company implemented a consolidation and restructuring
plan to reduce management and operating expenses. In connection therewith, it
closed the KISS distribution center in Palmetto, Florida and shut down the
operations of FLSI, the manufacturing division of GFSI. It closed its under
utilized facility at Brea, California, moving the manufacturing and
administrative functions of DTSI into another previously under utilized facility
in Vista, California. The restructuring has positioned the Company to move
forward and in the short term to become cash flow positive and in the longer
term to achieve profitability.
WASTE WATER TREATMENT. ESSI designs and assembles aerobic and anaerobic
packaged and larger field-erected waste water treatment plants. These systems
incorporate either aerobic or anaerobic biological treatment technologies. Such
technologies generally involve the conversion of organics in waste water into
carbon dioxide, water and new organics through the introduction of
microorganisms. The aerobic system (which functions in the presence of oxygen)
is marketed under the trademark CONTREAT/registered trademark/, and is used
primarily for pretreatment of industrial waste water before such waste water is
discharged into a municipal sewage system or reused. CONTREAT/registered
trademark/ aerobic systems are used for waste water treatment in small municipal
applications as well as in institutions, shopping centers, resorts and camp
grounds. ESSI also designs and assembles STAR/trademark/, an organic system
(which functions in the absence of oxygen), pursuant to an exclusive worldwide
written license agreement with the patent holder (the University of Arkansas).
This system is used to treat high strength or industrial organic effluents. The
above noted systems can be transported in standard shipping containers (either
20 feet or 40 feet in length), which make them particularly adaptable for hard
to reach locations and enclosed areas, or can be field erected where mandated by
larger volumes of effluent.
- 4 -
<PAGE>
ESSI was formed to provide a one-point source for supply of domestic
and industrial waste water treatment services and equipment needed by the small
industrial plant and the land developer outside the reach of municipal waste
water treatment service. Since its inception, it has expanded its capabilities
to include physical/chemical treatment systems and turnkey/field-erected water
and waste water treatment plants. The treatment systems equipment is engineered,
fabricated and assembled by ESSI personnel using products manufactured by a
variety of proprietary equipment companies which have developed, and in many
cases patented, the equipment selected by ESSI for a particular task in the
systems. ESSI conducts treatment studies and then designs the equipment to the
user's specifications. It then supervises installation in the customer's plant.
Upon completion of construction, ESSI provides start-up assistance and training
to the user and continues monitoring for satisfactory operating results until
the user demonstrates capability to meet environmentally desired requirements in
its operations.
TOPCO was formed in 1958 as The Ohio Pump Company, Inc. Its product
line and focus evolved to packaged waste water treatment plants and much larger
field-erected plants (up to 3 million gallons per day). At one time it was a $15
million division of Kady Industries. It was acquired by the previous owners in
1990 with the plan to reactivate the marketing of its product line to attempt to
achieve its past position in the waste water industry. Marketing for TOPCO is
performed by ESSI.
GFSI was founded in 1986 in Northeast Pennsylvania and purchased its
assets from another company that manufactured and marketed various waste water
treatment equipment. Its product line is comprised of Wedgewater/trademark/
filter bed systems for sludge de-watering, lateral flow sludge thickener systems
and Wedgewater/trademark/ sieve systems. The patented Wedgewater/trademark/
filter bed system, which is licensed by GFSI, generally is utilized by
municipalities servicing populations of 30,000 or more and utilizes one-sixth to
one-tenth the space and requires significantly less time to de-water sludge as
compared with conventional sand/gravel filter beds. Several other advantages to
this technology include, but are not limited to, lower operating and maintenance
costs, exceptional reliability and improved operating environments. GFSI has
sold and installed over 300 systems through 26 domestic and international
representatives.
GFSI is in the waste water treatment business arena that has a product
offering for a niche market. The market only has three competitors with GFSI
having the largest base of customers. GFSI currently subcontracts the
manufacture of its entire product line. This includes individually designed
equipment, as well as its standardized product line. GFSI's product line is
installed entirely by its customers or external installation entities. At times,
the GFSI product may be a solution for an ESSI customer. Certain installation
and start-up procedures for plants can be performed by personnel of either ESSI
or GFSI for each other.
IPAS is a hardware/software process engineering firm devoted to
cost-effective automated industrial process solutions. Autosoft/trademark/,
IPAS' proprietary PC based automation software, permits the customer to combine
Autocad process drawings with a wide range of PLC I/O systems to create graphic
automated simulations. Process automation, virtual control panels, and process
data collection systems are then developed to exactly match the process
requirements. In addition, with Intranet and Internet capabilities, all
automation systems automatically permit remote process monitoring, control and
data collection. IPAS was formed as a start-up entity in July 1996.
- 5 -
<PAGE>
ESSI and GFSI sell their products through exclusive manufacturers'
representatives, and in a number of cases, representatives attempt to sell both
companies' product lines. Since both companies are in the same industry type,
advertising can be done together as the target customers, end users or engineers
equate the services or products provided.
WATER FILTRATION AND PURIFICATION. KISS is a manufacturer and
distributor of water purification products for commercial and residential
applications. KISS was established in southern California in 1985 to penetrate
the residential and commercial drinking water systems market with proprietary
manufactured products based on Reverse Osmosis ("R/O") technology. KISS is one
of eight manufacturers of R/O membranes in the United States that are utilized
in their own systems, as well as sold to other equipment assemblers. It also
owns its own molds for various major components, such as filter housings,
membrane housings and control valves. KISS distributes its products through over
400 active dealers, distributors and wholesalers in the United States and
internationally.
MWTI, through a predecessor entity, was formed in 1990 in Fort Wayne,
Indiana as an assembler and wholesaler of various water conditioning equipment,
parts and components and, to a lesser extent, reverse osmosis drinking water
systems. It sells to water conditioning dealers, plumbing wholesalers and
plumbing and mechanical contractors throughout the Midwestern and Southeastern
United States.
DTSI participates in the growing world-wide drinking water point-of-use
market that is driven in the United States and other developed countries by a
much higher public awareness of drinking water quality problems and in
underdeveloped countries by the recognition on the part of many governments of
their responsibility to provide safe water for their people to drink. DTSI
produces a complete line of blow-molded water purification and ion-exchange
cartridges that it markets under the Di-tech/registered trademark/ brand name
through dealers and distributors. Di-tech/registered trademark/ cartridges
employ a variety of granular carbons, resins and filter media to address the
removal of such contaminants as bacteria, chlorine, lead, heavy metals and
pesticides. All components of Di-tech/registered trademark/ cartridge bodies are
FDA grade and have received NSF listing. Its iodinated resin version is marketed
outside of the United States under the brand name Halox(R) as a disinfection
system for residential use and, in larger models, for communities that are not
served by suitable municipally-treated water.
KISS, MWTI and DTSI assemble the majority of their product lines. All
of the water filtration and purification equipment and systems assembled are
installed by the Company's dealers or shipped as finished goods to wholesalers
and retailers. KISS manufactures and sells its products to dealers who in turn
re-sell the products to customers. In most cases KISS and MWTI bundle their
respective products into a package and sell such packages as whole house water
solutions. ACSI offers consumers financing of their purchases from ACSI's
dealers. In the years ended December 31, 1996, and 1995, ACSI recognized
approximately $691,000 and $321,000, respectively, in revenues from this
financing activity. The bundling of products ties KISS, MWTI and DTSI together
because of customer needs or requirements. The companies enjoy a shared synergy
which allows the separate entities to sell related company products within their
territories and have their products sold by others. As future products are
added, the common bonds will continue and multiply the effects of such synergy
between these products companies.
- 6 -
<PAGE>
CAR WASH EQUIPMENT AND SUPPLIES. CWES has been the exclusive
distributorship in the seven southern counties of Florida for the sale, service
and installation of Ryko Manufacturing Company's rollover car wash equipment.
CWES' customers include, but are not limited to, certain major national oil
companies, independently owned and operated gasoline distributorships and car
wash companies. CWES not only sells new and used car washes, but offers programs
that allow the owner to either lease equipment or revenue share with CWES. It
has aggressively pursued the revenue share program such that it may share on a
long-term basis in the profits generated by the car wash equipment with the
owner. CWES has recently initiated a fleet wash program. Such program is
designed to solicit from municipalities and government agencies the washing of
their vehicles. Contracts have been obtained wherein clients may send their
vehicles to designated car washes in the area and have the vehicles washed on a
daily, weekly or monthly basis over a determined period. CWES and the
participating stations share in the revenue generated by these contracts.
CWES enjoys its market position not only because of the leading
equipment it supplies but because of the extensive service and maintenance it
provides its customers.
CWES is also the exclusive distributor for PFWC's patent pending
AQUOZONE/trademark/ system in the same southern counties of Florida, which it
uses to treat the reclaim water generated by car wash systems.
MARKETING AND SALES
The Company's marketing and sales activities are directed and
supervised by Mr. William K. Mackey, President and Chief Executive Officer.
The focal point of the Company's marketing is on the Company's ability
to be a one-stop source for "Total Water Quality Management". Through direct
targeted mailings, as well as advertising in industry publications, the
Company's focus is to attract dealers, distributors and end-user customers.
Individual subsidiary marketing is focused on building domestic dealer and
international distribution networks and identifying specific customers needing
the products and services as provided by each of the subsidiaries that provide
various systems within this one-stop source for "Total Water Quality
Management".
Subsidiaries participate in local, national and international shows
that are target niche-market specific, as well as showing as a group in the
major trade shows where multiple subsidiary representation is possible. KISS,
DTSI, MWTI and PFWC all market each others programs, products, and services to
their existing customer bases. ESSI and GFSI also employ synergies in selling
their services and products to end users or through each other's industrial and
municipal manufacturers representative networks.
SUPPLIERS
There are several manufacturers and suppliers of the water treatment
and filtration components used in the assembling of KISS's, DTSI's and MWTI's
products. ESSI and GFSI have, in the past, relied upon single suppliers for
certain of their purchases, however, the Company does not believe that the loss
of any single supplier would have a material adverse effect on its operations.
However, the loss of any major suppliers could cause delays in fulfilling
commitments. While the Company believes
- 7 -
<PAGE>
that it generally is not dependent on any one supplier for products or
components utilized by the subsidiaries mentioned above, CWES is dependent on a
single supplier, Ryko Manufacturing Company ("Ryko"). CWES is the exclusive
distributor in South Florida for the sale, installation and service of Ryko's
rollover car wash equipment. Such exclusive distributorship prohibits CWES from
selling, installing and/or servicing any car wash equipment from another
manufacturer or supplier. The distributor agreement provides that CWES sells
directly or receives a commission on all Ryko equipment sold within its region.
The agreement is scheduled to expire in July 1997, however, it provides for
automatic renewal upon the achievement of certain sales goals. CWES expects to
meet such goals. ACSI, through its subsidiaries, purchases raw materials and
supplies on terms, usually net 30 days, and to a lesser extent, on a cash on
delivery basis.
INSURANCE
The Company maintains limited product liability insurance. ACSI has not
had a significant product liability claim asserted against it since inception in
October 1990, except one which was successfully defended and settled in a manner
satisfactory to ACSI with no financial cost to it. A substantial successful
products liability claim could have a material adverse effect on the Company's
operations and financial condition.
BUSINESS SEGMENT INFORMATION
ACSI's operations consist of two business segments; a) water filtration
and purification and waste water treatment and b) car wash equipment sales and
service. See Note 11 of "Notes to Consolidated Financial Statements" for a
summary of selected consolidated information for such business segments for the
years ended December 31, 1996 and 1995.
LICENSE AND TRADEMARKS
The University of Arkansas (the "Licensor") holds a United States
patent on the anaerobic, modular, factory-built, cyclic, multi-stage biological
reactor for waste water treatment. On June 30, 1991, ESSI entered into a license
agreement with the Licensor to be the exclusive worldwide licensee under this
patent. Prior thereto, ESSI had been the sole marketer, designer, assembler and
installer of these systems for several years. The license agreement continues
until the expiration of the licensed patent in 2007, provided that ESSI
continues to make royalty payments of at least $5,000 per year, and at least
$20,000 in the aggregate prior to the third anniversary of the agreement and is
not otherwise in breach of its obligations under the license agreement. From
inception through December 31, 1996, ACSI paid $21,074 in royalties under such
agreement. Royalty payments are based on 5% of the net selling price of the
system, as defined in the license agreement, and 40% of any sublicensing fees
received by ACSI in respect of the licensed patent.
ESSI is the owner of the registered trademark CONTREAT/registered
trademark/ for use in conjunction with its aerobic containerized waste water
treatment systems. PFWC is the owner of the registered trademark
REVOS/registered trademark/ for use in conjunction with its reverse osmosis
water purification systems that it markets to the medical industry. DTSI is the
owner of the registered marks Di-tech/registered trademark/ and Halox/registered
trademark/ for the sale of various water purification and ion-exchange
cartridges and disinfection systems. ACSI has applied for registration of the
trademarks STAR/trademark/, VOSTRIP/trademark/, AQUOZONE/trademark/,
AQUAKLEEN/trademark/, LIFELINE/trademark/, ENVIROZONE/trademark/,
OZOKLEEN/trademark/, ELITE/trademark/ and FUTURE-TEK/trademark/.
- 8 -
<PAGE>
GOVERNMENTAL REGULATION
The enactment and enforcement of Federal, state and local laws relating
to water quality standards may materially influence the level of sales of some
or of all the Company's products. Because the Company's sales may increase with
the enactment and enforcement of stricter water quality standards, ACSI's
business is, to a large extent, linked to certain water quality control
standards imposed by the United States Environmental Protection Agency and state
and local governments. For example, amendments to the Safe Drinking Water Act in
1986 and the Clean Water Act in 1987 established more comprehensive and, in some
cases, more stringent guidelines for the control of toxic pollutants, renewed
the governments' financial commitment to assist with water pollution control and
increased the enforcement penalties for violations of water quality control
standards. Both the Safe Drinking Water Act and the Clean Water Act were
reauthorized in 1993. Although the Company's customers utilize ACSI's products
and services in response to regulatory requirements affecting their businesses,
ACSI believes that, as a provider of such products and services, the Federal or
state environmental rules or regulations potentially applicable to the Company's
customers are not directly applicable to ACSI. While the Company is not aware of
any pending or proposed Federal legislation or regulation that would adversely
affect its products or components or limits the methods in which those products
are manufactured, installed or serviced, any such legislation or regulation
could have a material adverse impact on the Company. Certain states have enacted
legislation which requires licensing, testing and labeling of water purification
products, including those offered by ACSI. Some of the systems and components
currently offered by KISS and MWTI already have achieved NSF certification.
COMPETITION
The Company believes that there are thousands of companies involved in
various aspects of the waste water treatment and water filtration and
purification industries, with the majority focusing on residential use. Such
industries are highly competitive. The market is served by an array of products
that are either "off-the-shelf" or custom-designed. These products range from
small carbon filtration systems to de-ionization systems, reverse osmosis
systems, de-gasifiers, scrubbers, ozone systems, ultraviolet systems and
bio-remediation systems. Many of the residential systems generally are marketed
by local operators across the country. A number of these operations have
expanded into the light commercial, industrial and medical fields. Customers
range from restaurants, hotels, laundries, car washes and hospitals, to
companies involved in manufacturing or processing that require treatment of
waste water before discharging, or filtration and purification before reuse, and
also pharmaceutical and medical applications (such as dialysis) where ultra-pure
water is required.
In the commercial and industrial areas of the waste water treatment and
water filtration and purification markets, the Company's management believes
that there is a fragmented specialized approach to satisfying customers needs
and that, within each of the separate market areas, there are no companies
dominating any of such markets. ACSI believes that no other firm appears to be
offering an integrated, one-stop source approach for all user needs. There are
at least three larger, public companies that are growing by means of acquiring
companies in the water industry that are more narrowly focused in their
acquisition strategy, namely, U.S. Filter Corp., Ionics, Inc. and Osmonics, Inc.
- 9 -
<PAGE>
EMPLOYEES
As of March 24, 1997, ACSI and its subsidiaries had 89 full-time
employees, including one executive officer, 18 managerial and administrative
personnel, 7 design and engineering personnel, 51 assembly, installation and
service personnel, and 12 sales and telemarketing personnel. The Company's
employees are not covered by any collective bargaining agreements and ACSI
believes its employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
In order to reduce overall occupancy costs, increase the Company's
ability to better serve its customers and to provide a more effective and
efficient atmosphere within which to perform for its employees, ACSI purchased
land and a building in Coral Springs, Florida in July 1996. Such facility
encompasses approximately 18,000 square feet of office and warehouse area and
houses ACSI's headquarters as well as the entire operations and administration
of CWES and ESSI and a Southeastern office and warehouse space for the water
filtration and purification entities, KISS, DTSI, MWTI and PFWC. The property is
encumbered by a first mortgage lien covering the land and building. Such
mortgage note payable bears interest at the fixed rate of 9.25% and is payable,
principal and interest, monthly with an estimated balloon payment of
approximately $360,000 due June 2001. The mortgage balance at December 31, 1996
was $444,231. Certain leased facilities contain the offices, warehouse and
manufacturing/assembly facilities of KISS and DTSI in Vista, California, GFSI in
Scranton, Pennsylvania, MWTI in Ft. Wayne, Indiana and IPAS in Madison, WI.
Total leased space for these facilities is approximately 35,000 square feet.
Such space is leased at various terms through July 2000. The Company's aggregate
monthly lease expense is approximately $16,000.
ACSI purchased land and a building in Jermyn, Pennsylvania in
conjunction with the acquisition of GFSI. Certain debt was assumed by ACSI
totalling approximately $150,000 collateralized by the land and building upon
consummation of the acquisition of GFSI. Such mortgage note payable bears
interest at prime plus 2%, (10.25% at December 31, 1996), and is payable,
principal and interest, monthly through January 2004. See Item 3., "Legal
Proceedings", below for the disposition of this facility as of January 1997.
The Company believes that its premises are adequate to permit it and
its subsidiaries to conduct their businesses as they are currently conducted for
the reasonably foreseeable future.
ITEM 3. 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 Unites States District Court for the Southern
District of Florida. The complaint alleges, among other matters, breach of
express warranty and specific performance of certain of the parameters of the
Stock Purchase Agreement entered into in July 1994 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.
- 10 -
<PAGE>
During January 1997, the Company agreed to a Settlement Agreement which, among
other things, provides 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 a carrying value of $150,000 and $124,714, respectively, as of
December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1996 to a vote of security holders of the Company, through
the solicitation of proxies, or otherwise.
- 11 -
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded and quoted under the symbol AQCR
on The Nasdaq SmallCap Market ("Nasdaq"). The Company's Units, Class A Warrants
and Class B Warrants are also traded and quoted on Nasdaq under the symbols
AQCRU, AQCRW and AQCRZ, respectively. Each Unit consists of one share of Common
Stock, one Class A Warrant and one Class B Warrant. Each Class A Warrant
entitles the holder thereof to purchase one share of Common Stock and one Class
B Warrant for an aggregate price of $7.17 (subject to adjustment) until October
14, 1998. Each Class B Warrant entitles the holder thereof to purchase one share
of Common Stock for $10.76 (subject to adjustment) until October 14, 1998. The
following table sets forth the high and low bid prices for the Units, Common
Stock, Class A Warrants and Class B Warrants, as quoted on Nasdaq, for the
periods indicated. Quotations are interdealer prices without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK CLASS A WARRANTS CLASS B WARRANTS UNITS
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
--------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended
March 31, 1995 $3-3/4 $2 $1-1/2 $13/16 $1-1/8 $3/8 $6-1/2 $3-1/4
June 30, 1995 $5-1/8 $2-7/8 $3-1/4 $7/8 $3-1/4 $9/16 $10-7/8 $4-3/8
September 30, 1995 $3-1/2 $1-1/8 $3-1/8 $5/8 $3-1/4 $5/8 $9-1/4 $2-1/2
December 31, 1995 $2-3/8 $1-1/8 $1-7/8 $1/2 $1-3/4 $1/2 $5-5/8 $2-1/2
March 31, 1996 $2-1/2 $1-3/8 $2 $1 $1-7/8 $3/4 $6-1/4 $2-3/4
June 30, 1996 $11/16 $1-27/32 $1-7/16 $5/32 $3/4 $1/8 $2-5/8 $1
September 30, 1996 $1 $19/32 $3/16 $1/32 $1/16 $1/32 $3/4 $1/2
December 31, 1996 $11/16 $3/8 $3/32 $1/32 DNT* DNT* $1/2 $5/16
Period ended
February 28, 1997 $19/32 $3/8 $1/32 $1/32 DNT* DNT* $1/2 $9/32
<FN>
* DNT: Did not trade
</FN>
</TABLE>
The Company had 154 owners of record and, it believes, in excess of
2,000 beneficial owners of its Common Stock as of March 24, 1997.
DIVIDENDS
Since its inception, the Company has not paid any cash dividends on
its Common Stock. The Company intends to retain future earnings, if any,
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan, for the reasonably
foreseeable future, to pay cash dividends to holders of the Common Stock. Any
decisions as to the future payment of dividends will depend on the earnings and
financial position of the Company and such other factors as the Company's Board
of Directors deems relevant.
- 12 -
<PAGE>
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 Annual Report on Form 10-KSB.
BUSINESS PLAN
The Company was formed for the purpose of pursuing acquisitions,
primarily in the non-chemical waste water treatment and water filtration and
purification industries. The Company is a holding company which, through its
subsidiaries, operates an integrated, water-related equipment manufacturing,
distribution and service company. The Company offers a variety of products and
technologies through its subsidiaries in an effort to provide a one-stop source
for its customers' water filtration and purification and waste water treatment
needs, from residential through commercial, medical, industrial and small
municipalities, in order to address what it believes to be the fragmented nature
of these industries. Such industries are driven by increasing consumer awareness
and desire for safer drinking water and a cleaner environment and by the related
enforcement of various legislation, such as the Safe Drinking Water Act and the
Clean Water Act.
The Company has diligently pursued its business plan since July of
1991 and has acquired nine companies in its chosen field. As a result of these
acquisitions, the Company's revenues have gradually increased. In achieving this
growth, the Company has expended significant cash in making the acquisitions and
developing the operations of its wholly-owned subsidiaries. In this connection,
see "Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996 AND 1995
Presented below are the condensed consolidated results of operations
for the Company for the years ended December 31, 1996 and 1995:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Revenues $15,987,147 $ 14,821,475
Cost of revenues 11,062,494 9,559,559
----------- ------------
Gross profit 4,924,653 5,261,916
Operating expenses (including interest
expense, net) 5,683,125 9,535,675
----------- ------------
Net loss $ (758,472) $(4,273,759)
=========== ============
- 13 -
<PAGE>
Revenues increased by $1,165,672, or 7.9%, from $14,821,475 for the
year ended December 31, 1995, to $15,987,147 for the year ended December 31,
1996. Of such increase, $589,112 was derived from waste water treatment
entities, ESSI and GFSI. The water filtration and purification subsidiaries,
KISS, MWTI, DTSI and PFWC, accounted for another $616,686 of the overall
increase. The car wash equipment and supplies division, CWES, experienced a
$40,126 decrease in sales from 1995 to 1996.
The waste water treatment group's increase in revenues was comprised
of a higher volume of packaged waste water treatment plants and equipment sold
by ESSI; an increase in revenues of $2,141,253 from 1995 to 1996, and a decline
in sales of municipal, industrial and commercial waste water treatment equipment
of GFSI due mainly to the cessation of operations of its unprofitable
manufacturing division during the third quarter of 1995 and the implementation
of a more selective process of customer purchase order acceptance. GFSI revenues
decreased by $1,552,141 from 1995 to 1996.
The $616,686 increase in revenues experienced by the water filtration
and purification entities was largely attributable to the overall augmentation
of the Company's financing programs which it offers to its dealers' customers.
Net financing fees earned through these programs rose $370,936 mainly due to
increased dealer activity created by KISS and, to a lesser extent, MWTI through
a combined sales and marketing effort. Furthermore, revenues derived from sales
of commercial and residential water filtration and purification products of
MWTI/PFWC and KISS/DTSI increased by $199,646 and $46,104, respectively, from
1995 to 1996.
Cost of revenues increased by $1,502,935, or 15.7%, from $9,559,559
for the year ended December 31, 1995, to $11,062,494 for the year ended December
31, 1996. As a percentage of revenues, these amounts represented 64.5% for 1995
as compared to 69.2% 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.
Gross profit decreased $337,263 or 6.4% from $5,261,916 for the year
ended December 31, 1995 to $4,924,653 for the year ended December 31, 1996,
which, as a percentage of revenues, represented a decrease from 35.5% to 30.8%,
respectively, for such periods.
The Company's operating expenses (including interest expense, net)
decreased $3,852,550, or 40.4%, from $9,535,675 for 1995 to $5,683,125 for 1996.
As a percentage of revenues, these expenses decreased from 64.3% for 1995 to
35.5% for 1996. The $3,852,550 decrease was attributable mainly to the reduction
of various operating expenses through a plan implemented by management designed
to optimize the use of the Company's cash resources and realize certain
economies of scale through the consolidation of the operations of KISS and DTSI
into one facility, the cessation of operations of the unprofitable manufacturing
division of GFSI and the purchase of a multipurpose facility which houses the
entire operations of ESSI, CWES and the holding company and provides a
Southeastern warehouse and office for KISS, DTSI, MWTI and PFWC. Pursuant to the
aforementioned actions, personnel and related expenses decreased by $823,979,
selling expenses, including but not limited to, advertising and shows were
lowered by $431,324 and rent, utilities and other office and occupancy related
expenses declined by $314,927. In addition to the aforementioned items, certain
non-recurring provisions and
- 14 -
<PAGE>
impairments to various assets were recognized during the fiscal year ended
December 31, 1995. As a result of these charges, operating expenses (including
interest expense, net) decreased from 1995 to 1996 by $2,257,417. The $2,257,417
recognized in 1995 was comprised of an impairment of goodwill recognized by GFSI
and DTSI ($1,094,167), a provision to reduce property, plant and equipment and
other intangible assets to realizable value ($792,709) and a provision for
doubtful accounts and notes ($370,541).
Principally as a result of the factors described above, the net loss
experienced by the Company decreased by $3,515,287 from ($4,273,759) for the
year ended December 31, 1995 to ($758,472) for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital from inception has been derived from the
issuance of certain interim notes in the principal amount of $200,000, net
proceeds of approximately $3,115,000 from the five bridge financings effected
through August 1993, net proceeds of approximately $5,700,000 from its initial
public offering in October 1993, proceeds of approximately $2,900,000 from the
private sales of Common Stock during the first six months of 1995, and proceeds
of approximately $2,800,000 from the issuance of certain convertible
subordinated debentures from August 1995 through September 1995, as more fully
described in Note 10 of "Notes to Consolidated Financial Statements".
At December 31, 1996, the Company had $561,219 of cash and cash
equivalents, working capital of $2,271,606, assets of $10,420,144, long-term
debt, net of current maturities, of $781,873 and stockholders' equity of
$7,315,807. The Company's operating activities used $65,754 of cash, principally
as a result of increases in costs and estimated earnings in excess of billings
($356,779) and prepaids and other ($104,169) and the net loss ($758,472);
partially offset by decreases in accounts receivable ($526,906) and inventory
($46,515) and the provision for doubtful accounts and notes ($59,154) and
depreciation and amortization ($498,346). Investing activities used $368,896,
principally due to capital expenditures ($944,161); partially offset by payments
received on notes receivable ($590,592). Financing activities provided $274,106,
primarily from net proceeds from issuance of notes payable and long-term debt
($725,855); offset by repayment of notes payable and long-term debt ($451,749).
During the second quarter of 1995, at which time the executive
management changed, the Company enacted a consolidation and restructuring plan.
As a result of such plan, the Company shut down the manufacturing operations of
GFSI, terminating its entire staff; removed an entire level of management within
GFSI; and closed the DTSI manufacturing facility at Brea, California,
terminating the majority of DTSI's employees, resulting in a provision for
impairment of goodwill totalling $1,094,167. Additionally, as a result of the
Company closing the KISS distribution center in Palmetto, Florida, the
downsizing of operations of PFWC and the impairment of goodwill noted above, the
Company recognized $792,708 in provisions to reduce property, plant and
equipment and other intangible assets to realizable value and $370,541 in
provisions for doubtful accounts and notes.
During July 1995, in accordance with its overall plan to optimize the
use of its cash resources through economies of scale, the Company's management
implemented a plan to reduce operating
- 15 -
<PAGE>
expenses by an annualized rate of approximately $1,700,000 throughout the
remainder of 1995. Pursuant to this plan, the Company realized the majority of
its savings in payroll and related expenses, insurance, rent and utilities
through a reduction in its overall employee base and the consolidation of the
manufacturing, distribution and administrative functions into centrally located,
more efficient and effective facilities.
Management expects to continue to make acquisitions in the Company's
industry, and several are in various stages of discussion as of the date hereof.
As consideration for an acquisition, the Company may issue Common Stock,
Preferred Stock, or other securities, notes or cash. Since cash will be required
either to consummate acquisitions, or to fund the operations of new or existing
businesses, including approximately $400,000 of current maturities of long-term
debt and indebtedness to related parties, management is investigating and
pursuing various types of financing that are available to the Company. These
include, but are not limited to, private placements, conversion of warrants,
secondary offerings, bridge financing, debentures, lines of credit and
asset-based loans. While there can be no assurances, management believes that
sufficient financing will be available for the Company to not only fund its
current operations, but also to fund its acquisition program. The Company has
experienced negative cash flows from operating activities for the years ended
December 31, 1996 and 1995. 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.
A portion of the revenues of the Company, particularly through ESSI,
have been, and are expected to continue to be, generated from foreign countries.
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.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF SHARES FROM ESCROW
The staff of the Commission has 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
- 16 -
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS.
See the consolidated financial statements and notes related
thereto, beginning on page F-1, included prior to the signature page of this
Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed accountants within the two fiscal
years ended December 31, 1996 and 1995.
- 17 -
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The names and ages, along with certain biographical information (based
solely on information supplied by them), of the directors and executive officers
of the Company are as follows:
NAME AGE POSITION
---- --- --------
William K. Mackey(1)(3)(4) 46 Chairman of the Board of Directors,
President, Chief Executive Officer
and Treasurer
James P. Cefaratti(2)(3) 54 Director
Norman J. Hoskin(1)(2)(3)(4) 62 Director
William F. Silvia(2)(3) 63 Director
- ----------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.
Directors of the Company are elected to serve for a term of one year or
until their successors are elected and qualify, or until their earlier death,
resignation or removal. The Company's officers are appointed annually by, and
serve at the pleasure of, the Board of Directors, subject to the terms of any
employment agreements. Mr. Mackey has entered into an employment agreement with
the Company (See Item 10, "Executive Compensation").
William K. Mackey has served as a Director of the Company since July
1993. Mr. Mackey was elected Chairman of the Board, President and Chief
Executive Officer and Treasurer of the Company in May 1995. From 1993 to May
1995, he was an entrepreneur and investor in and a consultant to several public
and private companies. From August 1989 to May 1993, Mr. Mackey served as a
director of Infonow Corporation a publicly-held software distribution company.
From March 1991 to November 1992, Mr. Mackey served as President and a director
of Docucon, Incorporated, a publicly-held company engaged in the document
conversion business. From December 1988 to March 1991, Mr. Mackey served as
President of Avondale Specialty Products, an ink manufacturer.
James P. Cefaratti has been a Director of the Company since January
1992. He served as President, CEO and Director of Home Intensive Care, Inc., a
home infusion and dialysis company, from December 1989 to June 1993. From May
1989 to December 1989, he served as Senior Executive Vice President of Home
Intensive Care, Inc. From July 1993 until June 1995, he was a private investor.
From June 1995 to December 1996, Mr. Cefaratti was President of Globalvision,
Inc., a provider of laser radial keratotomy.
- 18 -
<PAGE>
Norman J. Hoskin has served as Director of the Company since June 1995.
He has acted as Chairman of Atlantic Capital Group, a venture capital company
based in Boca Raton, Florida, since 1989. Mr. Hoskin previously served as Senior
Vice President of Rentar Industries, a large transportation, warehousing and
banking conglomerate and currently sits on the Boards of Directors of
Consolidated Technologies, Trinitech Systems, JHS Group, Expandez Canada
International Ltd./Shanghai, P.R.C. and JF Hotels of Florida.
William F. Silvia served as Chairman of the Board of Directors of the
Company from November 1, 1991 through February 3, 1995 and continues to serve as
a Director. Mr. Silvia has been a private investor and business consultant from
December 1989 to the present. From June 1988 to July 1989, Mr. Silvia was
President and Chief Operating Officer of Batts, Inc., a privately owned
manufacturer of garment hangers. From July 1986 to June 1988, Mr. Silvia
operated Silvia Associates, a general management consulting entity. Prior to
that time, Mr. Silvia spent 30 years at Union Carbide Corporation, where he held
several positions, including President of the Catalysts and Services Division;
President of the Catalysts and Process Systems Division; President of the
Engineering Products Division; Senior Vice President of the Linde Division; Vice
President/General Manager, U.C. Europe-Engineering Products (Geneva); General
Manager -Gas Products, Union Carbide Canada, LTD; and various middle management
positions.
Each Director of the Company is currently remunerated at the rate of
$2,000 per meeting attended in person and $500 per meeting attended
telephonically. In addition, each Director is granted options under the terms of
the 1994 Outside Directors' Stock Option Plan to purchase 10,000 shares of
Common Stock on the last business day of the year preceding the first Board of
Directors meeting of each new calendar year at the then current bid price,
subsequent to serving one full calendar year as a Director. Such options are
exercisable over the subsequent ten years and fully vest over a one-year period
from the date of grant. Pursuant to this program, the Company has granted
options under the aforementioned Plan as follows:
NUMBER OF SHARES OPTION PRICE RANGE
Outstanding at January 1, 1995 190,000 $2.00 - $3.75
Granted 115,000 $3.25 - $5.00
-------
Outstanding at December 31, 1995 305,000 $2.00 - $5.00
Granted 40,000 $0.44
-------
Outstanding at December 31, 1996 345,000 $0.44 - $5.00
=======
- 19 -
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information for the years ended December
31, 1996, 1995 and 1994, representing compensation earned by the Chief Executive
Officer of the Company as of the end of the fiscal year 1996 (the "Named
Executive Officer"), in all capacities in which he served.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
- ------------------- OTHER ANNUAL OTHER NUMBER OF
NAME AND PRINCIPAL POSITIONS YEAR SALARY COMPENSATION COMPENSATION OPTIONS GRANTED
- ---------------------------- ---- ------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
William K. Mackey(1) 1996 $147,250 $4,200(2) - 50,000
Chairman of the Board, President 1995 81,673 - $107,379(3) 310,000
Chief Executive Officer and Treasurer
</TABLE>
STOCK OPTION GRANTS IN 1996
The following table contains information concerning the grant of stock
options to the Named Executive Officer in 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION
NAME UNDERLYING OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
---- -------------------------- -------------------- -------------- -------------
<S> <C> <C> <C> <C>
William K. Mackey(1) 50,000 14.5% $0.75 July 27, 2006
</TABLE>
STOCK OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
The following table provides information with respect to options
exercised by the Named Executive Officer during 1996 and the number and value of
securities underlying unexercised options held by the Named Executive Officer at
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1996 AT DECEMBER 31, 1996
ACQUIRED VALUE ------------------------------ ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William K. Mackey(1) - - 285,000 175,000 - -
<FN>
- -----------------------------
(1) Mr. Mackey was appointed as President, Chief Executive Officer and
Treasurer by the Board of Directors in May 1995.
(2) Represents a monthly auto expense allowance of $600 for the period from
June 1996 through December 1996 for William K. Mackey.
(3) Represents finders fees paid to Mr. Mackey by the Company during fiscal
year 1995 in connection with a series of offshore private placements
undertaken by the Company. All of these fees were paid to Mr. Mackey
prior to him becoming Chief Executive Officer of the Company in May
1995.
</FN>
</TABLE>
- 20 -
<PAGE>
EMPLOYMENT ARRANGEMENTS
On September 8, 1995, the Company entered into a five-year employment
agreement with William K. Mackey, Chairman of the Board, President, Chief
Executive Officer and Treasurer. The Agreement provides that Mr. Mackey will
receive an annual base salary of $155,000, plus a bonus, if any, as determined
by the Board of Directors. Pursuant to the terms of the employment agreement,
Mr. Mackey was granted options to purchase an aggregate of 250,000 shares of the
Company's Common Stock at an exercise price of $1.25 per share. Such options
vest over a two-year period and have a term of ten years from the date of the
grant. The employment agreement entitles Mr. Mackey to terminate the agreement
in the event of a change of control of the Company and receive severance
payments equal to the greater of the base salary due for the remaining term of
the employment agreement or an amount equal to three times his base salary then
in effect, plus bonus. If Mr. Mackey is terminated without cause, he is entitled
to receive a severance payment equal to the greater of the remaining base salary
payments due for the remaining term of the employment agreement or one year's
base salary. If Mr. Mackey terminates the employment agreement because of a
material default by the Company, he is entitled to receive a severance payment
equal to the greater of the base salary payments due under the remaining term of
the employment agreement or three times the sum of the base salary then in
effect and his last bonus.
The above-described employment agreement contains certain
non-disclosure and non-compete provisions.
OUTSIDE DIRECTORS' PLAN AND PERFORMANCE EQUITY PLAN
At December 31, 1996 the Company has two stock option plans, which are
described below.
OUTSIDE DIRECTORS' PLAN. The Company's shareholders have adopted the
1994 Outside Directors' Stock Option Plan (the "Outside Directors' Plan") for
the Company's Directors who are not employees or officers of the Company or its
subsidiaries ("Eligible Directors") and for consultants rendering advisory
service to the Board of Directors. The Outside Directors' Plan reserves an
aggregate of 400,000 shares of Common Stock and provides for the grant of
non-qualified stock options ("NQSOs") which have an exercise period extending
for ten years from the date of the grant. The purchase price of the shares of
Common Stock covered by each option granted under the Outside Directors' Plan
will be the fair market value of the shares as of the date of grant. Each
Eligible Director who is newly-elected after the effective date of the Outside
Directors' Plan shall be granted an option to purchase not less than 10,000 and
not more than 50,000 shares of the Common Stock of the Company on the date such
Director is initially elected or otherwise selected to the Board of Directors.
The exact amount is determined by the Directors serving prior to the effective
date of the Outside Directors' Plan. All Eligible Directors (including those
serving on the Board of Directors prior to the effective date of the Outside
Directors' Plan) are granted options to purchase 10,000 shares of the Common
Stock of the Company on each December 31, on which an Eligible Director has
completed a full year of service as a member of the Board of Directors of the
Company.
PERFORMANCE EQUITY PLAN. On May 13, 1991, the Company's stockholders
adopted the 1991 Performance Equity Plan (the "Performance Equity Plan"), which
covers an aggregate of 2,000,000
- 21 -
<PAGE>
shares of Common Stock. The Performance Equity Plan provides for the grant of a
variety of incentive awards to officers, key employees, consultants and
independent contractors of the Company.
The Performance Equity Plan authorizes the grant of incentive awards
for up to 2,000,000 shares of Common Stock subject to adjustment in certain
events. Incentive awards consist of stock options, restricted stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards.
The Performance Equity Plan will expire at the close of business on May 13,
2001, unless sooner terminated. Officers, directors, and other key employees and
prospective employees and consultants and independent contractors who perform
services for the Company or any of its subsidiaries, (but excluding members of
the stock option committee and any person who serves as a director only),
("Eligible Persons"), will be eligible to receive awards under the Plan. The
Performance Equity Plan is administered by the Board of Directors or the
Compensation and Stock Option Committee (the "Committee") appointed by the Board
of Directors, which determines the persons to whom awards will be granted, the
number of awards to be granted and the specific terms of each grant, subject to
the provisions of the Performance Equity Plan.
OUTSTANDING AWARDS. Options to purchase an aggregate of 1,281,582
shares have been granted and are outstanding as of March 24, 1997, under the
Outside Directors' Plan and Performance Equity Plan as follows:
NUMBER OF SHARES OPTION PRICE RANGE
---------------- ------------------
OUTSTANDING AT JANUARY 1, 1995 868,000 $1.50 - $4.13
Granted 911,100 $1.25 - $5.00
Exercised (103,518) $1.50 - $4.13
Cancelled (470,000) $3.25 - $4.13
---------
OUTSTANDING AT DECEMBER 31, 1995 1,205,582 $1.25 - $5.00
Granted 386,000 $0.44 - $2.25
Cancelled (313,500) $0.75 - $3.75
---------
OUTSTANDING AT DECEMBER 31, 1996 1,278,082 $0.44 - $5.00
Granted 100,500 $0.41
Cancelled (97,000) $0.41 - $3.25
---------
OUTSTANDING AT MARCH 24, 1997 1,281,582 $0.41 - $5.00
=========
At December 31, 1996 and 1995, respectively, 724,590 and 193,761
options with an average option price of $3.09 and $2.98 were exercisable.
In January 1997, the Company's Board of Directors approved a repricing
of all granted and outstanding options to purchase Common Stock issued pursuant
to the 1991 Performance Equity Plan. On January 24, 1997, all issued and
outstanding options were repriced at approximately $0.44 per share, the market
price per share of the Company's Common Stock on such date.
- 22 -
<PAGE>
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.
401(K) PLAN
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 1996 and 1995, the Company contributed
61,787 and 24,103 shares of restricted Common Stock valued at $20,592 and
$31,425, respectively.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information as to the number of shares
of Common Stock beneficially owned as of March 24, 1997, by (i) each person who
is believed by the Company to be a beneficial owner of more than 5% of the
outstanding Common Stock of the Company; (ii) each Director of the Company;
(iii) the Named Executive; and (iv) all Directors and executive officers of the
Company as a group. Beneficial ownership has been determined in accordance with
the rules promulgated under Section 13(d) of the Securities and Exchange Act of
1934. All shares of Common Stock are owned both of record and beneficially
unless otherwise indicated.
<TABLE>
<CAPTION>
================================================================================================
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED COMMON STOCK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Joel C. Edison (2) 1,987,778 17.0%
- ------------------------------------------------------------------------------------------------
William K. Mackey (3) 286,000 2.4%
- ------------------------------------------------------------------------------------------------
James P. Cefaratti (4) 115,000 *
- ------------------------------------------------------------------------------------------------
Norman J. Hoskin (5) 46,000 *
- ------------------------------------------------------------------------------------------------
William F. Silvia (6) 105,000 *
- ------------------------------------------------------------------------------------------------
Directors and executive officers as a group (four persons) 552,000 4.5%
================================================================================================
<FN>
(1) The address for all of these persons is the same as the Company's.
(2) Mr. Edison is the former owner of Joel C. Edison, Ltd., dba KISS International which the
Company acquired effective July 1, 1994.
(3) Includes options to purchase 235,000 shares of Common Stock granted by the Company and
additional options to purchase an aggregate of 50,000 shares of Common Stock granted by
Kinder Investments, L.P. and Peter N. Christos.
(4) Includes options to purchase 115,000 shares of Common Stock which are presently exercisable.
(5) Includes options to purchase 45,000 shares of Common Stock granted by the Company which
are presently exercisable.
(6) Includes options to purchase 55,000 shares of Common Stock which are presently exercisable.
(*) Less than 1%.
</FN>
</TABLE>
- 23 -
<PAGE>
ESCROW SHARES AND ESCROW OPTIONS
In connection with the Company's initial public offering, substantially
all of the common stockholders and option holders of the Company at the date of
the offering, agreed to place into escrow 50% of their shares of Common Stock
and 50% of their options to purchase Common Stock equalling 975,000 shares of
Common Stock (the "Escrow Shares") and options to purchase 116,250 shares of
Common Stock (the "Escrow Options"). Shares issued upon exercise of the Escrow
Options will be held in escrow as Escrow Shares. Such stockholders (and option
holders to the extent they have exercised such options) may continue to vote the
Escrow Shares; however, the Escrow Shares and Escrow Options are not assignable
or transferable. The following sets forth the number of Escrow Shares and Escrow
Options owned by the Directors listed below.
NUMBER OF NUMBER OF
HOLDER ESCROW SHARES ESCROW OPTIONS
------ ------------- --------------
William F. Silvia............................ 25,000 0
James P. Cefaratti........................... 0 25,000
All of the Escrow Shares and the Escrow Options will be released in the event
that:
(a) The Minimum Pretax Income amounts to at least $6,300,000 for the
fiscal year ending December 31, 1997, provided that if additional shares are
issued, Minimum Pretax Income shall be increased proportionately; or
(b) The closing price of the Company's Common Stock for any 20
consecutive trading days shall average in excess of $30.00 during the period
commencing January 1, 1997 and ending December 31, 1997.
If such levels are not attained in 1997, the Escrow shares and Options
will be contributed to the Company.
Any money, securities, rights or property distributed in respect of the
Escrow Shares or Escrow Options, including any property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, shall be held in escrow until the
release, if any, of the Escrow Shares and Escrow Options.
The Minimum Pretax Income shall be calculated exclusive of any
extraordinary earnings and charges to income resulting from the release of the
Escrow Shares or Escrow Options. For purposes of calculating Minimum Pretax
Income, if additional shares of Common Stock are issued, then the foregoing
Minimum Pretax Income levels for any year would increase proportionately. Based
on a position taken by the Securities and Exchange Commission staff, the Company
expects that the release of the Escrow Shares and Escrow Options will be deemed
compensatory and, accordingly, will result in substantial charges to earnings
equal to the fair market value of the Escrow Shares as of the date on which they
are released. Such charges could substantially increase the loss or reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the periods in which the
- 24 -
<PAGE>
Escrow Shares or Escrow Options are released or are probable of being released.
If none of the foregoing earnings or market price levels are attained by
December 31, 1997, the Escrow Shares and Escrow Options, as well as any
dividends or other distributions made with respect thereto, will be contributed
to the capital of the Company and all Escrow Options shall be cancelled without
consideration to the holders thereof.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF KISS
Effective July 1, 1994, the Company acquired all of the Common Stock of
Joel C. Edison, Ltd., dba KISS International, Inc., ("KISS"), from Joel C.
Edison. The purchase price consisted of 533,333 restricted shares of Common
Stock of the Company valued at $1,000,000 and aggregate payments of $150,000
pursuant to a consulting/non-compete agreement. In connection with this
acquisition, the Company agreed to issue additional shares of its Common Stock
in the event that the per share value of such Common Stock was not at least
$3.75 per share on July 1, 1996. During July 1996, the Company issued 2,375,758
additional shares of Common Stock to Mr. Edison pursuant to such agreement.
FINDERS FEES
William K. Mackey, President and Chief Executive Officer of the
Company, received a total of $107,379 in finders fees from the Company during
fiscal year 1995 in connection with a series of foreign private placements
undertaken by the Company pursuant to Regulation S. All of these fees were paid
to Mr. Mackey prior to him becoming an officer of the Company in May 1995.
- 25 -
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Certificate of Incorporation of the Registrant filed as Exhibit
(3)-1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-67252) is hereby incorporated herein by
reference.
3.2 By-laws of the Registrant filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-67252) is
hereby incorporated by reference.
4.1 Form of Warrant Agreement (with Warrant Certificates) filed as
Exhibit 4.2 to the Company's Registration Statement on Form SB-2
(Registration No. 33-67252) is hereby incorporated by reference.
*10.1 Distribution Agreement between the Company and Ryko Manufacturing
Company dated July 1, 1995.
*10.2 Agreement between First United Equities Corporation and the Company,
dated October 5, 1995.
*10.3 Stock Purchase Agreement dated March 17, 1995 by and among the
Company and Brindenberg Securities A/S.
*10.4 Stock Purchase Agreement dated as of May 8, 1995 by and among the
Company and M & M Capital Mgmt. LDC.
*10.5 Stock Purchase Agreement dated May 31, 1995 by and among the Company
and The Gifford Fund, Ltd.
*10.6 Stock Purchase Agreement dated May 24, 1995 by and among the Company
and Amadeus Offshore Fund, LTD. Fund, Ltd.
*10.7 Stock Purchase Agreement dated June 7, 1995 by and among the Company
and Wood Gundy.
*10.8 Securities Purchase Agreement dated January 20, 1995 between the
Company and Capital International Limited.
*10.9 Securities Purchase Agreement dated January 20, 1995 between the
Company and Monarch Development.
*10.10 Loan Agreement dated January 20, 1995 by and among the Company
BellFlower Investments, Inc.
*10.11 Subordinated Convertible Note of the Company dated August 1, 1995.
*10.12 Subordinated Convertible Note of the Company dated September 27,
1995.
*10.13 Form of Subordinated Convertible Note of the Company dated September
27, 1995.
*10.14 Stock Purchase Agreement dated May 12, 1995 by and among the Company
and Galapaco Holdings Ltd.
*10.15 Employment Agreement dated September 8, 1995 by and between the
Company and William K. Mackey.
*11.1 Statement re: Computation of Per Share Earnings.
*21.1 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP for Form S-8 (Registration
No. 33-88660).
*24.1 Powers of Attorney.
27.1 Financial Data Schedule.
*: Previously filed with, and incorporated herein by reference to, the
Registrant's Form SB-2 (Registration No. 333-2504) as filed on March 19, 1996.
- 26 -
<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 duly authorized, in the City of Coral Springs, State of
Florida, on March 24, 1997.
AQUA CARE SYSTEMS, INC.
/s/ WILLIAM K. MACKEY
-------------------------------------
William K. Mackey
Chairman of the Board, President,
Chief Executive Officer and Treasurer
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William K. Mackey and George J.
Overmeyer, and each of them, his attorney-in-fact with power of substitution for
him in any and all capacities, to sign any amendments and supplements relating
to this Annual Report on Form 10-KSB, or other instructions he deems necessary
or appropriate, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ WILLIAM K. MACKEY Chairman of the Board, President March 24, 1997
- ----------------------- Chief Executive Officer, Treasurer
William K. Mackey and Principal Accounting Officer
/S/ GEORGE J. OVERMEYER Corporate Controller March 24, 1997
- -----------------------
George J. Overmeyer
/S/ JAMES P. CEFARATTI Director March 24, 1997
- ----------------------
James P. Cefaratti
/S/ NORMAN J. HOSKIN Director March 24, 1997
- ----------------------
Norman J. Hoskin
/S/ WILLIAM F. SILVIA Director March 24, 1997
- ----------------------
William F. Silvia
- 27 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets
as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations
for the years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Aqua Care Systems, Inc.
We have audited the accompanying consolidated balance sheets of Aqua
Care Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aqua Care
Systems, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Miami, Florida BDO Seidman, LLP
February 21, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 2)
DECEMBER 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents...............................$ 561,219 $ 721,763
Accounts receivable, net of allowance
for doubtful accounts of $99,000 and $85,000........ 1,430,057 2,016,117
Costs and estimated earnings in excess of billings...... 424,753 67,974
Inventory............................................... 1,903,583 1,950,098
Current maturities of notes receivable.................. 94,800 589,050
Prepaids and other...................................... 179,658 75,489
--------------- --------------
Total current assets......................................... 4,594,070 5,420,491
Property, plant and equipment, net........................... 1,539,486 818,378
Intangible assets, net....................................... 4,067,208 4,327,174
Notes receivable, less current maturities.................... 129,150 225,492
Other assets................................................. 90,230 101,116
--------------- --------------
Total assets.................................................$ 10,420,144 $ 10,892,651
=============== ==============
LIABILITIES
Current
Accounts payable........................................$ 1,447,324 $ 1,354,799
Accrued expenses........................................ 478,984 584,212
Current maturities of long-term debt.................... 271,156 254,925
Indebtedness to related party........................... 125,000 125,000
--------------- --------------
Total current liabilities.................................... 2,322,464 2,318,936
Long-term debt, less current maturities...................... 781,873 523,998
Convertible subordinated notes, net of discounts -- 247,959
--------------- --------------
Total liabilities............................................ 3,104,337 3,090,893
--------------- --------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding........................ -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 11,697,554 and 8,980,143 shares
issued and outstanding.............................. 11,698 8,980
Additional paid-in capital.............................. 16,636,805 16,367,002
Deficit................................................. (9,332,696) (8,574,224)
--------------- --------------
Total stockholders' equity................................... 7,315,807 7,801,758
--------------- --------------
Total liabilities and stockholders' equity...................$ 10,420,144 $ 10,892,651
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended
December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 15,987,147 $ 14,821,475
Cost of revenues............................................ 11,062,494 9,559,559
--------------- ---------------
Gross profit................................................ 4,924,653 5,261,916
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 5,032,940 7,301,056
Depreciation and amortization.......................... 498,346 628,628
Provision for doubtful accounts and notes.............. 59,154 370,541
Provision for impairment of intangible assets.......... -- 1,094,167
--------------- ---------------
Total operating expenses.................................... 5,590,440 9,394,392
--------------- ---------------
Loss from operations........................................ (665,787) (4,132,476)
Interest expense, net....................................... (92,685) (141,283)
--------------- ---------------
Net loss.................................................... (758,472) (4,273,759)
--------------- ---------------
Net loss per common share...................................$ (0.08) $ (0.68)
=============== ===============
Weighted average number of outstanding
shares of common stock................................. 9,477,354 6,307,714
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ -------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Amounts at January 1, 1995 4,847,442 $ 4,847 $ 10,635,102 $ (4,300,465) $ 6,339,484
Common Stock issued in connection
with the acquisition of
Midwest Water Technologies, Inc.: 89,151 89 191,627 -- 191,716
Common Stock issued in connection
with the acquisition of Coast Filter
Media Supply, Inc. dba Systematix: 5,000 5 8,545 -- 8,550
Proceeds from issuance
of Common Stock: 3,974,029 3,974 5,375,258 -- 5,379,232
Exercise of options to purchase
Common Stock under the 1991 Plan: 40,418 41 125,069 -- 125,110
Contribution to Employee Benefit Plan: 24,103 24 31,401 -- 31,425
Net loss: -- -- -- (4,273,759) (4,273,759)
------------ -------- --------------- -------------- --------------
Amounts at December 31, 1995 8,980,143 8,980 16,367,002 (8,574,224) 7,801,758
Common Stock issued in connection
with the acquisition of KISS
International, Inc.: 2,375,758 2,376 (2,376) -- --
Common Stock issued in connection
with the acquisition of
Midwest Water Technologies, Inc.: 11,048 11 3,959 -- 3,970
Conversion of convertible subordinated
notes to Common Stock: 268,818 269 247,690 -- 247,959
Contribution to Employee Benefit Plan: 61,787 62 20,530 -- 20,592
Net loss: -- -- -- (758,472) (758,472)
------------ -------- --------------- -------------- --------------
Amounts at December 31, 1996 11,697,554 $ 11,698 $ 16,636,805 $ (9,332,696) $ 7,315,807
============ ======== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31,
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................................$ (758,472) $ (4,273,759)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts and notes.............. 59,154 370,541
Depreciation and amortization.......................... 498,346 628,628
Provision for impairment of goodwill................... -- 1,094,167
Provision to reduce property, plant and equipment
and other intangibles to realizable value........... -- 792,708
Purchase price adjustments for acquisitions expensed... 3,970 --
Pension contribution paid through
issuance of Common Stock............................ 20,592 31,425
Changes in assets and liabilities
net of effects of acquired businesses:
Decrease (increase) in accounts receivable............. 526,906 (391,286)
(Increase) decrease in costs and estimated
earnings in excess of billings...................... (356,779) 450,173
Decrease (increase) in inventory....................... 46,515 (648,189)
(Increase) decrease in prepaids and other.............. (104,169) 162,837
Decrease in other assets............................... 10,886 37,441
Decrease in bank overdraft............................. -- (63,884)
Decrease in accounts payable and accrued
expenses............................................ (12,703) (1,485,729)
--------------- ---------------
Net cash used in operating activities....................... (65,754) (3,294,927)
--------------- ---------------
INVESTING ACTIVITIES:
Payment for acquisition of businesses,
net of cash acquired................................ -- (333,995)
Advances on notes receivable........................... -- (500,000)
Payments received on notes receivable.................. 590,592 116,696
Capital expenditures................................... (944,161) (453,238)
Addition to intangible assets.......................... (15,327) (2,052)
--------------- ---------------
Net cash used in investing activities....................... (368,896) (1,172,589)
--------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............. -- 5,496,435
Net proceeds from issuance of notes payable and
long-term debt...................................... 725,855 747,959
Repayment of notes payable and
long-term debt...................................... (451,749) (1,055,115)
--------------- ---------------
Net cash provided by financing activities................... 274,106 5,189,279
--------------- ---------------
Net (decrease) increase in cash and cash equivalents........ (160,544) 721,763
Cash and cash equivalents, beginning of year................ 721,763 0
--------------- ---------------
Cash and cash equivalents, end of year......................$ 561,219 $ 721,763
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. For the years ended December 31, 1996 and 1995, export
sales, principally to South America and Asia, aggregated approximately
$1,100,000 and $700,000, respectively. At December 31, 1996, substantially all
accounts receivable were due from customers within the United States.
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 1995 amounts have been reclassified to conform to the 1996
presentation.
F-7
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1996 and 1995. 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 years ended December 31, 1996 and 1995. 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.
F-8
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
(a) Effective July 1, 1994, the Company acquired all of the Common
Stock of Joel C. Edison, Ltd., dba KISS International, ("KISS"). The purchase
price consisted of 533,333 restricted shares of Common Stock of the Company
valued at $1,000,000 and aggregate payments of $150,000 pursuant to a
consulting/non-compete agreement. In connection with this acquisition, the
Company agreed to issue additional shares of its Common Stock in the event that
the per share value of such Common Stock was not at least $3.75 per share on
July 1, 1996. During July 1996, the Company issued 2,375,758 additional shares
of Common Stock pursuant to such agreement.
(b) On January 23, 1995, the Company acquired all of the assets and
assumed certain liabilities of Midwest Water Technologies, Inc. ("MWT"). The
purchase price consisted of 20,740 restricted shares of Common Stock of the
Company valued at $35,000 and $290,000 in cash. In connection with this
acquisition, the Company issued options to purchase 63,100 shares of Common
Stock of the Company at an exercise price of $2.30 per share. In connection with
this acquisition, the Company recorded goodwill of approximately $400,000.
Pursuant to this acquisition, the Company agreed to issue additional shares
semi-annually to a former shareholder amounting to 10% of the net sales from MWT
to the former stockholder for each six month period commencing January 1, 1995.
Pursuant to this agreement, 11,048 and 5,311 additional shares of Common Stock
were issued during the years ended December 31, 1996 and 1995, respectively. The
Company assumed operational control of MWT on January 1, 1995. MWT operations
include manufacturing, assembly, marketing and distribution of water
purification products for commercial as well as residential applications.
(c) On March 17, 1995, the Company acquired all of the Common Stock of
the Di-tech division of Coast Filter Media Supply Co., Inc. dba Systematix
("DTS"). The purchase price consisted of 5,000 restricted shares of Common Stock
of the Company valued at $8,550. In connection with this acquisition the Company
recorded goodwill of approximately $300,000, principally as a result of acquired
liabilities. The Company assumed operational control of DTS on March 1, 1995.
DTS operations include assembly, marketing and distribution of water
purification products for commercial as well as residential applications. During
1995, DTS recognized impairment of goodwill previously recorded, amounting to
approximately $300,000, due mainly to the cessation of operations at its
manufacturing facility during the third quarter of 1995.
All of the acquisitions were accounted for by the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the accompanying consolidated financial statements from the dates
the Company assumed operational control of each acquired entity.
(d) In November 1996, the Company entered into a non-binding letter of
intent in which it endeavors to purchase all the assets and assume certain of
the liabilities of the Filtration Systems Division of The Duriron Company, Inc.
The acquisition is subject to, among other things, the completion of due
diligence procedures on the part of both parties and the completion of the
definitive purchase agreement and financing arrangements.
F-9
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS DECEMBER 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Costs and estimated earnings...........................$ 1,114,418 $ 1,649,035
Less billings.......................................... (689,665) (1,581,061)
-------------- --------------
Total..................................................$ 424,753 $ 67,974
============= =============
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $170,444 and
$54,513 are included in accounts receivable at December 31, 1996 and 1995,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Land and buildings........................$ 894,633 $ 150,000
Machinery and equipment................... 883,239 688,841
Furniture and fixtures.................... 284,754 279,624
Leasehold improvements.................... 50,732 50,732
Autos and trucks.......................... 17,906 17,906
------------- -------------
2,131,264 1,187,103
Less accumulated depreciation............. (591,778) (368,725)
------------- -------------
Net property, plant and equipment.........$ 1,539,486 $ 818,378
============= =============
6. INTANGIBLE ASSETS
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Goodwill...................................$ 4,776,405 $ 4,759,029
License agreement, customer list and other. 149,169 151,218
------------- -------------
4,925,574 4,910,247
Less accumulated amortization.............. (858,366) (583,073)
------------- -------------
Net intangible assets......................$ 4,067,208 $ 4,327,174
============= =============
F-10
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
9.25% mortgage note payable, principal and interest
payable monthly with an estimated balloon payment
of approximately $360,000 due June 2001,
collateralized by land and building ........................$ 444,231 --
Prime plus 1%, (9.25% at December 31, 1996), 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.... 400,000 $ 560,000
Prime plus 2%, (10.25% at December 31, 1996),
mortgage note payable, principal and interest payable
monthly through January 2004, collateralized
by land and building........................................ 124,714 134,839
Prime plus 2%, (10.25% at December 31, 1996), note
payable, interest only payable monthly, principal due
upon demand, collateralized by certain of the assets
of GFSI..................................................... 84,084 84,084
------------- -------------
1,053,029 778,923
Less current maturities..................................... (271,156) (254,925)
------------- -------------
Total long-term debt........................................$ 781,873 $ 523,998
============= =============
</TABLE>
At December 31, 1996, maturities of long-term debt, are:
1997 $ 271,156
1998 189,324
1999 112,227
2000 35,395
2001 393,032
Thereafter 51,895
-------------
$ 1,053,029
=============
F-11
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
INDEBTEDNESS TO RELATED PARTIES DECEMBER 31, 1996 DECEMBER 31, 1995
- ------------------------------- ----------------- -----------------
<S> <C> <C>
10% unsecured notes payable to a former affiliated
entity, matured October 1994...........................$ 125,000 $ 125,000
============= =============
</TABLE>
Interest expense on related party indebtedness aggregated approximately
$13,000 for each of the years ended December 31, 1996 and 1995, respectively.
In connection with the private sales of 1,400,000 shares of Common
Stock (see Note 10), the Company paid finders fees aggregating approximately
$107,000 to a member of the Company's Board of Directors during the year ended
December 31, 1995.
9. INCOME TAXES
At December 31, 1996 and 1995, the Company has approximately $7,100,000
and $6,600,000, respectively, 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 and $2,500,000
deferred tax asset at December 31, 1996 and 1995, respectively, 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 assets.
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 will be compensatory and will result in adjustments to earnings to record
such shares at fair market value. The Company does not presently believe that it
is probable that any of the escrow shares will be released.
(b) During 1995, the Company completed private sales of 1,400,000
shares of Common Stock. The net proceeds of approximately $2,900,000 from these
sales was used primarily for acquisitions and working capital.
F-12
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) During 1995, the Company issued $3,250,000 of Subordinated
Convertible Notes, of which, approximately $3,000,000 were converted into
2,574,029 shares of the Company's Common Stock. The balance of such Notes,
approximating $250,000, were converted into 268,818 shares of the Company's
Common Stock in January 1996. The net proceeds of approximately $2,800,000 from
these sales was used primarily for acquisitions and working capital.
(d) At December 31, 1996 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.
FASB Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans has been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively: no
dividend yield for all years; expected volatility from 57 to 60 and 46 to 62
percent, respectively; risk-free interest rates of 5.5 - 6.7 and 5.8 - 7.4
percent for the 1991 Plan options and 6.1 and 5.5 - 7.2 percent in 1996 and
1995, respectively, for the 1994 Plan options; and expected lives of 10 years in
1996 and 5 - 10 years in 1995 for the 1991 Plan options and 10 years for the
1994 Plan options.
Under the accounting provisions of FASB Statement 123, the Company's
net loss and net loss per common share would have been as follows:
1996 1995
---- ----
Net loss As reported $(758,472) $(4,273,759)
Proforma $(1,650,558) $(4,273,759)
Net loss per As reported $(.08) $(.68)
common share Proforma $(.17) $(.68)
A summary of the status of the Company's two fixed stock option plans
as of December 31, 1996 and 1995, and changes during the years ending on those
dates is presented below:
F-13
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,205,582 $2.85 868,000 $3.33
Granted 386,000 1.37 911,100 2.77
Exercised -- -- (103,518) 2.61
Forfeited (313,500) 2.75 (470,000) 3.56
--------- ---------
Outstanding at end of year 1,278,082 $2.49 1,205,582 $2.85
========= =========
Options exercisable at year-end 724,590 $3.09 193,761 $2.98
Weighted-average fair value of options
granted during the year $1.01 $1.89
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.44-2.00 585,000 9.4 years $1.28 215,000 $1.54
2.25-3.00 187,500 8.8 2.65 100,000 3.00
3.25-4.00 312,249 6.5 3.54 216,257 3.61
4.13-5.00 193,333 2.9 4.29 193,333 4.29
--------- ---------
$0.44-5.00 1,278,082 7.6 $2.49 724,590 $3.09
========= =========
</TABLE>
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 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.
(e) As of December 31, 1996 and 1995, respectively, the Company has
reserved an aggregate 9,782,740 and 9,282,740 shares of Common Stock for
issuance upon exercise of outstanding options and warrants.
F-14
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BUSINESS SEGMENTS
The Company's operations by business segments were as follows:
<TABLE>
<CAPTION>
WATER FILTRATION
AND PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- -------- ---------------- ------------------ --------- -----
<C> <C> <C> <C> <C>
1996 $ 12,409,843 $ 3,577,304 -- $ 15,987,147
1995 $ 11,204,045 $ 3,617,430 -- $ 14,821,475
OPERATING INCOME (LOSS)
- -----------------------
1996 $ 240,405 $ 82,163 $ (988,355) $ (665,787)
1995 $ (3,590,513) $ 362,132 $ (904,095) $ (4,132,476)
IDENTIFIABLE ASSETS
- -------------------
1996 $ 7,132,469 $ 1,989,343 $ 1,298,332 $ 10,420,144
1995 $ 7,859,159 $ 2,109,783 $ 923,709 $ 10,892,651
DEPRECIATION AND AMORTIZATION
- -----------------------------
1996 $ 332,932 $ 118,014 $ 47,400 $ 498,346
1995 $ 473,669 $ 120,159 $ 34,800 $ 628,628
CAPITAL EXPENDITURES
- --------------------
1996 $ 90,173 $ 67,132 $ 786,856 $ 944,161
1995 $ 408,260 $ 23,007 $ 21,971 $ 453,238
</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 years ended December 31, 1996 and 1995 aggregated
approximately $691,000 and $321,000, respectively, and are included in revenues.
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1996 and 1995, the Company paid
$89,319 and $137,026, respectively, for interest. Non-cash investing and
financing activities are as follows:
F-15
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company purchased the net assets of MWT and all of the capital
stock of DTS during the year ended December 31, 1995. In conjunction with these
acquisitions, liabilities were assumed as follows:
DECEMBER 31, 1995
-----------------
Fair value of assets acquired $ 1,052,107
Cash paid for the capital stock/net
assets, net of cash acquired (333,995)
Common Stock issued in connection with
acquisitions (193,550)
Debt and obligations under acquisition
agreements --
---------------
Liabilities assumed $ 524,562
===============
During January 1996, $247,959 of subordinated convertible notes were
converted into 268,818 shares of the Company's Common Stock (See Note 10).
During 1996 and 1995, the Company contributed 61,787 and 24,103 shares
of restricted Common Stock pursuant to the terms of the Company's 401(k)
employee savings and retirement plan valued at $20,592 and $31,425,
respectively.
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 $349,000 and $443,000, including approximately $145,000 and
$152,000 to related parties, for the years ended December 31, 1996 and 1995,
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.
F-16
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 1996 and 1995, the Company contributed
61,787 and 24,103 shares of restricted Common Stock valued at $20,592 and
$31,425, respectively.
15. SUBSEQUENT EVENTS
(a) 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 alleges, among other matters, breach of
express warranty and specific performance of certain of the parameters of the
Stock Purchase Agreement effective July 1994 entered into by the Company for the
purchase of Gravity Flow Systems, Inc., FLS Specialty Manufacturing, Inc. and
the name and certain assets of TOPCO International, Inc. During January 1997,
the Company agreed to a Settlement Agreement which, among other things, provides
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 a
carrying value of $150,000 and $124,714, respectively, as of December 31, 1996.
The result of the above transaction will be a net gain of approximately $125,000
in 1997.
(b) 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.
F-17
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Acqua Care Systems, Inc.
Miami, Florida
We hereby consent to the incorporation by reference in Registration
Statement No. 33-88660 on Form S-8 of our report dated February 21, 1997
relating to the consolidated financial statements of Aqua Care Systems, Inc. and
subsidiaries appearing in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996.
/s/ BDO SEIDMAN, LLP
---------------------
BDO SEIDMAN, LLP
Miami, Florida
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 561,219
<SECURITIES> 0
<RECEIVABLES> 1,529,057
<ALLOWANCES> (99,000)
<INVENTORY> 1,903,583
<CURRENT-ASSETS> 4,594,070
<PP&E> 2,131,264
<DEPRECIATION> (591,778)
<TOTAL-ASSETS> 10,420,144
<CURRENT-LIABILITIES> 2,322,464
<BONDS> 0
0
0
<COMMON> 11,698
<OTHER-SE> 7,304,109
<TOTAL-LIABILITY-AND-EQUITY> 10,420,144
<SALES> 15,987,147
<TOTAL-REVENUES> 15,987,147
<CGS> 11,062,494
<TOTAL-COSTS> 11,062,494
<OTHER-EXPENSES> 5,531,286
<LOSS-PROVISION> 59,154
<INTEREST-EXPENSE> 92,685
<INCOME-PRETAX> (758,472)
<INCOME-TAX> 0
<INCOME-CONTINUING> (758,472)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (758,472)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
