U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR (15d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-22434
AQUA CARE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3615311
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11820 N.W. 37TH STREET, CORAL SPRINGS, FL 33065
(Address of principal executive offices)
(954) 796-3338
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Number of shares outstanding
CLASS ON NOVEMBER 6, 1998
----- ----------------------------
Common Stock, $ .001 Par Value 2,800,373
Transitional small business disclosure format:
Yes No X
---- -----
<PAGE>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997
Consolidated Statements of Operations for the three months
ended September 30, 1998 and September 30, 1997
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and September 30, 1997
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and September 30, 1997
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the nine months ended September
30, 1998 and September 30, 1997
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim consolidated financial statements presented in this report
are unaudited, but in the opinion of management, reflect all
adjustments necessary for a fair presentation of such information.
Results for interim periods should not be considered indicative of
results for a full year.
These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Form
10-KSB for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30, 1998.
- 3 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................... $ 776,862 $ 654,932
Accounts receivable, net of allowance
for doubtful accounts of $190,500 and $135,000 4,100,754 3,398,593
Costs and estimated earnings in excess of billings.......... 29,199 153,443
Inventory................................................... 2,525,285 3,007,468
Current maturities of notes receivable...................... 67,050 77,175
Prepaids and other.......................................... 188,538 109,736
--------------- --------------
Total current assets............................................. 7,687,688 7,401,347
Property, plant and equipment, net............................... 4,908,804 4,939,202
Intangible assets, net........................................... 3,075,026 4,452,916
Notes receivable, less current maturities........................ -- 51,975
Other assets..................................................... 217,943 243,169
--------------- --------------
Total assets..................................................... $ 15,889,461 $ 17,088,609
=============== ==============
LIABILITIES
Current liabilities
Accounts payable............................................ $ 1,762,873 $ 1,788,140
Accrued expenses............................................ 1,057,915 843,486
Current maturities of long-term debt........................ 2,844,410 2,773,716
Indebtedness to related party............................... 125,000 125,000
--------------- --------------
Total current liabilities........................................ 5,790,198 5,530,342
Long-term debt, less current maturities.......................... 4,123,917 3,733,665
--------------- --------------
Total liabilities................................................ 9,914,115 9,264,007
--------------- --------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding............................ -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 2,800,373 and 2,703,782 shares
issued and outstanding.................................. 2,800 2,704
Additional paid-in capital.................................. 16,850,486 16,787,794
Deficit..................................................... (10,877,940) (8,965,896)
--------------- --------------
Total stockholders' equity....................................... 5,975,346 7,824,602
--------------- --------------
Total liabilities and stockholders' equity....................... $ 15,889,461 $ 17,088,609
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues................................................... $ 6,848,610 $ 7,372,988
Cost of revenues........................................... 4,261,270 4,684,269
--------------- ---------------
Gross profit............................................... 2,587,340 2,688,719
--------------- ---------------
Operating expenses:
Selling, general and administrative................... 2,005,992 2,156,455
Depreciation and amortization......................... 163,947 185,003
Provision for doubtful accounts and notes............. 41,609 9,000
--------------- -------------
Total operating expenses................................... 2,211,548 2,350,458
--------------- ---------------
Income from operations..................................... 375,792 338,261
Interest expense, net...................................... (214,971) (217,097)
Other income, net.......................................... -- 4,339
--------------- ---------------
Comprehensive net income................................... $ 160,821 $ 125,503
=============== ===============
Earnings per common share - basic.......................... $ 0.06 $ 0.05
=============== ===============
Earnings per common share - diluted........................ $ 0.06 $ 0.05
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues................................................... $ 20,290,975 $ 16,668,691
Cost of revenues........................................... 12,421,953 10,936,342
--------------- ---------------
Gross profit............................................... 7,869,022 5,732,349
--------------- ---------------
Operating expenses:
Selling, general and administrative 7,407,176 4,693,926
Depreciation and amortization......................... 540,357 471,676
Provision for doubtful accounts and notes 183,423 27,000
Provision for impairment of intangible assets 1,052,039 --
--------------- ---------------
Total operating expenses................................... 9,182,995 5,192,602
--------------- ---------------
(Loss) income from operations.............................. (1,313,973) 539,747
Interest expense, net...................................... (598,071) (310,105)
Other income, net, principally settlement of litigation.... -- 126,845
--------------- ---------------
Comprehensive net (loss) income............................ $ (1,912,044) $ 356,487
=============== ===============
(Loss) earnings per common share - basic................... $ (0.70) $ 0.13
=============== ===============
(Loss) earnings per common share - diluted................. $ (0.70) $ 0.13
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.......................................... $ (1,912,044) $ 356,487
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Gain on disposal of property and plant................ -- (123,518)
Provision for doubtful accounts and notes............. 183,423 27,000
Provision for impairment of intangible assets......... 1,052,039 --
Depreciation and amortization......................... 540,357 471,676
Pension contribution paid through issuance of
Common Stock....................................... 62,788 13,884
Changes in assets and liabilities
net of effects of acquired business:
Increase in accounts receivable....................... (885,584) (2,514,408)
Decrease in costs and estimated
earnings in excess of billings..................... 124,244 156,351
Decrease in inventory................................. 482,183 1,287,635
(Increase) decrease in prepaids and other (78,802) 87,958
Decrease in other assets.............................. 25,226 17,179
Increase (decrease) in accounts payable and accrued
expenses........................................... 189,162 (531,330)
--------------- ---------------
Net cash used in operating activities...................... (217,008) (751,086)
--------------- ---------------
INVESTING ACTIVITIES:
Payments received on notes receivable................. 62,100 29,150
Property and plant disposed of in conjunction with
Settlement Agreement............................... -- 150,000
Capital expenditures.................................. (251,005) (30,618)
Addition to intangible assets......................... -- (14,846)
--------------- ---------------
Net cash (used in) provided by investing activities........ (188,905) 133,686
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
long-term debt..................................... 11,957,374 4,631,638
Repayment of notes payable and
long-term debt..................................... (11,429,531) (4,170,541)
--------------- ---------------
Net cash provided by financing activities.................. 527,843 461,097
--------------- ---------------
Net increase (decrease) in cash and cash equivalents....... 121,930 (156,303)
Cash and cash equivalents, beginning of period............. 654,932 561,219
--------------- ---------------
Cash and cash equivalents, end of period................... $ 776,862 $ 404,916
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Aqua Care Systems, Inc. and subsidiaries (the "Company") is engaged in
the design, manufacturing, assembly, sales, marketing and distribution of
filtration systems and products, flow control systems and products, water
filtration and purification products, waste water treatment systems and car wash
equipment sales and service. Currently, it provides services and equipment sales
and construction and installation of waste water treatment plants for clients in
the United States and abroad.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of all subsidiaries. All material intercompany transactions and accounts have
been eliminated in consolidation.
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY
Inventory consists principally of materials, purchased parts and work
in process. 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.
F-5
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
REVENUE RECOGNITION
The Company recognizes revenue on waste water treatment system
construction contracts on the percentage of completion method, based generally
on the ratio of costs incurred to date on the contract to the total estimated
contract cost. Costs incurred and revenues recognized in excess of amounts
billed are classified under current assets as costs and estimated earnings in
excess of billings. Amounts billed in excess of revenues recognized are
classified under current liabilities as billings in excess of costs and
estimated earnings. Losses on construction contracts are recognized at the time
they become estimatable. Equipment and parts sales and rental and service
revenues are accounted for on the accrual method.
INCOME TAXES
Income taxes are accounted for using the liability approach under the
provisions of Financial Accounting Standards No. 109.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued expenses and long-term debt. The carrying amounts of such financial
instruments as reflected in the consolidated balance sheets approximate their
estimated fair value as of September 30, 1998 and December 31, 1997. 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.
EARNINGS (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which simplifies the computation
of earnings per share and requires the restatement of all prior periods
presented.
Basic earnings per share are computed on the basis of the weighted
average number of common shares outstanding during each year.
Diluted earnings per share are computed on the basis of the weighted
average number of common shares and dilutive securities outstanding. Dilutive
securities having an antidilutive effect on diluted earnings per share are
excluded from the calculation.
The weighted average number of common shares outstanding for all
periods presented retroactively reflects the effects of the Company's
one-for-four reverse stock split which was effected as of February 10, 1998.
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.
F-6
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
These new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative financial information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
2. ACQUISITION
(a) In June 1997, the Company acquired certain assets and assumed
certain liabilities of the Filtration Systems Division, ("FSDA"), of Durco
International, Inc., formerly known as the Duriron Company, Inc., ("DURCO"). The
purchase price for the acquisition of FSDA consisted of the sum of (i)
approximately $4,800,000 in cash and notes payable; (ii) approximately
$1,200,000 in assumed obligations; and (iii) 100,000 warrants to purchase Common
Stock, (62,500 warrants having an exercise price of $4.00 each and 37,500 having
an exercise price approximating fair market value of the Company's Common Stock
as of the closing date, $2.00, valued at fair value of $61,000). In conjunction
with this acquisition, the Company issued 50,000 warrants to purchase Common
Stock to its lender having an exercise price of $2.00 each, valued at fair value
of $40,000. The Company incurred approximately $204,000 in acquisition costs and
issued 37,500 additional warrants having an exercise price of $2.36, valued at
fair value of $19,000. The Company assumed operational control of FSDA on June
1, 1997. FSDA operations include manufacturing and systems integration of fluid
filtration and treatment systems and components.
F-7
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
The transaction was recorded as follows:
Fair value of net assets acquired $ 6,060,941
Costs in excess of net assets acquired 730,196
Debt and obligations under acquisition agreement (5,293,300)
Acquisition costs (204,031)
Warrants issued in connection with acquisition (120,000)
--------------
Liabilities assumed $ 1,173,806
==============
The above transaction was accounted for by the purchase method, and
accordingly, the results of operations of the acquired business have been
included in the accompanying consolidated financial statements from the date the
Company assumed operational control of the acquired entity.
3. CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS SEPTEMBER 30, 1998 DECEMBER 31, 1997
- -------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Costs and estimated earnings....................................... $ 66,367 $ 1,580,176
Less billings...................................................... (37,168) (1,426,733)
------------- --------------
Total.............................................................. $ 29,199 $ 153,443
============= =============
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $24,133 and
$194,676 are included in accounts receivable at September 30, 1998 and December
31, 1997, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Land and buildings.................................. $ 2,745,427 $ 2,745,427
Machinery and equipment............................. 2,516,175 2,267,638
Furniture and fixtures.............................. 785,588 785,428
Leasehold improvements.............................. 51,314 51,314
Autos and trucks.................................... 17,906 17,906
------------- -------------
6,116,410 5,867,713
Less accumulated depreciation....................... (1,207,606) (928,511)
------------- -------------
Net property, plant and equipment................... $ 4,908,804 $ 4,939,202
============= =============
</TABLE>
F-8
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Goodwill........................................................... $ 4,201,163 $ 5,506,601
License agreement, customer list and other......................... -- 149,169
------------- -------------
4,201,163 5,655,770
Less accumulated amortization...................................... (1,126,137) (1,202,854)
------------- -------------
Net intangible assets.............................................. $ 3,075,026 $ 4,452,916
============= =============
6. LONG-TERM DEBT
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
12% subordinated secured debentures, interest only payable
quarterly, principal due June 30, 2003, collateralized by
substantially all of the assets of the Company and
its subsidiaries................................................... $ 1,500,000 $ --
Prime plus 2%, (10.5% at September 30, 1998), revolving credit
lines, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $3,500,000 through
June 2000, principally collateralized by accounts receivable
and inventory of FSDA.............................................. 1,685,599 1,370,620
Prime plus 2.5%, (11% at September 30, 1998), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $400,000 due June 2000,
principally collateralized by property and plant of FSDA........... 987,200 1,162,400
Prime plus 2.5%, (11% at September 30, 1998), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $130,000 due June 2000,
principally collateralized by machinery and equipment of FSDA...... 352,800 417,600
18% note payable, collateralized by certain of the assets of
FSDA, paid in full in May 1998..................................... -- 250,000
11% note payable, principal and interest payable monthly with an
estimated balloon payment of approximately $1,250,000 due June
2000, collateralized by all the assets of FSDA..................... 1,794,499 2,321,397
</TABLE>
F-9
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
<TABLE>
<S> <C> <C>
10% note payable, principal and interest payable monthly through
November 1998, collateralized by 115,556 restricted, unregistered
shares of the Company's Common Stock............................... $ 45,192 $ 239,476
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 of the Company...... 416,945 429,174
Prime plus 1%, (9.5% at September 30, 1998), 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....................... 120,000 240,000
9.5% note payable, principal and interest payable monthly through
June 2002, collateralized by substantially all of the assets of GFSI 66,092 76,714
------------- -------------
6,968,327 6,507,381
Less current maturities............................................ (2,844,410) (2,773,716)
------------- -------------
Total long-term debt............................................... $ 4,123,917 $ 3,733,665
============= =============
</TABLE>
During July 1998, the Company received net proceeds of $1,465,847 from
the issuance of $1,500,000 in secured subordinated debentures which bear
interest at the rate of 12% per year. Such debentures are due June 2003 with no
pre-payment penalty. Interest is due and payable on a quarterly basis beginning
August 1998. In conjunction with the above noted financing, the Company issued
115,500 warrants to purchase the Company's Common Stock at an exercise price of
$2.60 per share. The warrants contain certain call provisions based on the
repayment of the debentures and certain market contingencies. Additionally,
beginning July 1999 and on each anniversary thereafter that such debentures
remain outstanding, the Company has agreed to issue 30,000 warrants with an
exercise price equal to the average bid price for the 20 days prior to such
anniversary dates.
7. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
INDEBTEDNESS TO RELATED PARTY SEPTEMBER 30, 1998 DECEMBER 31, 1997
- ----------------------------- ------------------ -----------------
<S> <C> <C>
10% unsecured notes payable to a former affiliated
entity, matured October 1994...................................... $ 125,000 $ 125,000
============= =============
</TABLE>
Interest expense on related party indebtedness aggregated $9,375 for
each of the nine months ended September 30, 1998 and 1997.
F-10
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
8. INCOME TAXES
At December 31, 1997, the Company had approximately $6,300,000 of net
operating loss carryforwards expiring through 2011, for both financial reporting
and income tax purposes. Changes in ownership of greater than 50% occurred as a
result of the Company's issuances of Common Stock which resulted in an
approximate $760,000 annual limitation being imposed upon the future utilization
of approximately $4,000,000 of the Company's net operating losses for tax
purposes. Realization of the approximate $2,500,000 deferred tax asset at
December 31, 1997, 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.
The reconciliation of the effective income tax rate to the Federal and
State statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal and State income tax rate 37.63% 37.63%
Effect of net operating loss carryfoward and valuation allowance (37.63%) (37.63%)
--------- ----------
Effective income tax rate 0.0% 0.0%
--------- ----------
</TABLE>
9. EQUITY TRANSACTIONS
(a) On September 12, 1997, the stockholders authorized the Board of
Directors to effectuate a one-for-four reverse stock split. The one-for-four
reverse split was effected as of February 10, 1998. All share and per share data
in the accompanying financial statements reflect the effects of the reverse
stock split for all periods presented.
(b) In connection with the Company's initial public offering in 1993,
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 (243,750 shares) and options to purchase Common Stock (29,063
options). The escrow shares and options were to be released from escrow upon the
attainment of specified net income or Common Stock price levels through 1997.
Such levels were not attained through December 31, 1997, and as such, the shares
reverted to the Company and the options were cancelled.
F-11
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
(c) At September 30, 1998 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.
On January 24, 1997, the Board of Directors authorized the repricing of
all granted and outstanding options to purchase Common Stock issued pursuant to
the 1991 Performance Equity Plan at $1.64 per share, the market price per share
of the Company's Common Stock on such date, adjusted for the reverse split
effective February 10, 1998.
(d) During the nine months ended September 30, 1998, certain employees
of the Company were granted options to purchase a total of 130,650 shares of
Common Stock at the market values at the dates of the grants. The above options
expire ten years from the dates of the grants, and vest and are exercisable
one-third each year beginning one year from the dates of the grants.
(e) The following reconciles the components of the earnings per share
(EPS) computation:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
LOSS SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Comprehensive net income $ (1,912,044) 2,732,733 $(0.70) $ 356,487 2,689,158 $0.13
===== ====
Effect of Dilutive Securities
Options -- -- -- --
Warrants -- -- -- --
------------- --------- --------- ---------
Earnings per common share -
assuming dilution
Comprehensive net income $ (1,912,044) 2,732,733 $(0.70) $ 356,487 2,689,158 $0.13
============= ========= ====== ========= ========= =====
</TABLE>
F-12
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
10. BUSINESS SEGMENTS
The Company's operations by business segments for the nine months ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
FLUID HANDLING,
FILTRATION,
PURIFICATION
AND WASTE WATER CAR WASH EQUIPMENT
REVENUES TREATMENT SALES AND SERVICE CORPORATE TOTAL
- -------- --------------- ------------------ --------- -----
<S> <C> <C> <C> <C>
1998 $ 16,845,739 $ 3,445,236 -- $ 20,290,975
1997 $ 13,971,929 $ 2,696,762 -- $ 16,668,691
OPERATING (LOSS) INCOME
1998 $ (919,934) $ 449,993 $ (844,032) $ (1,313,973)
1997 $ 999,818 $ 215,222 $ (675,293) $ 539,747
IDENTIFIABLE ASSETS
1998 $ 12,321,370 $ 1,941,335 $ 1,626,756 $ 15,889,461
1997 $ 14,633,882 $ 1,903,760 $ 682,448 $ 17,220,090
DEPRECIATION AND AMORTIZATION
1998 $ 406,707 $ 96,750 $ 36,900 $ 540,357
1997 $ 341,698 $ 93,042 $ 36,936 $ 471,676
CAPITAL EXPENDITURES
1998 $ 204,808 $ 33,379 $ 12,818 $ 251,005
1997 $ 8,990 $ 8,830 $ 12,798 $ 30,618
</TABLE>
11. FINANCING FEES
The Company offers a retail financing program for the purpose of
assisting its subsidiaries' water purification customers (dealers) in obtaining
financing through an arrangement with an unrelated lending company. As
compensation for its services, the Company receives fees based on amounts
financed. Net fees for the nine months ended September 30, 1998 and 1997
aggregated approximately $585,000 and $523,000, respectively, and are included
in revenues.
F-13
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
12. OTHER INCOME
On July 22, 1996, the Company filed a complaint against Vincent
Spaulding, Robert Langman and Robert Farry, former employees of one of the
Company's subsidiaries, in the United States District Court for the Southern
District of Florida. The complaint alleged, among other matters, breach of
express warranty and specific performance of certain of the parameters of the
Stock Purchase Agreement effective July 1994 entered into by the Company for the
purchase of Gravity Flow Systems, Inc., FLS Specialty Manufacturing, Inc. and
the name and certain assets of TOPCO International, Inc. During January 1997,
the Company agreed to a Settlement Agreement which, among other things, provided
for the payment of $150,000 in cash to the Company along with the transfer of
land and building and a mortgage note payable to the Defendants having carrying
values of $150,000 and $124,714, respectively, as of December 31, 1996. The
result of the above transaction was a net gain of approximately $124,000
recognized in March 1997.
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 30, 1998 and 1997, the Company paid
$526,563 and $243,987, respectively, for interest. Non-cash investing and
financing activities are as follows:
The Company acquired certain assets and assumed certain liabilities of
FSDA during the year ended December 31, 1997. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of net assets acquired $ 6,060,941
Costs in excess of net assets acquired 730,196
Debt and obligations under acquisition agreement (5,293,300)
Acquisition costs (204,031)
Warrants issued in connection with acquisition (120,000)
------------
Liabilities assumed $ 1,173,806
============
During 1997, in connection with the acquisition of FSDA, the Company
issued 187,500 warrants valued at $120,000.
14. COMMITMENTS AND CONTINGENCIES
(a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2001. Total rent expense aggregated
approximately $123,000 and $148,000, for the nine months ended September 30,
1998 and 1997, respectively.
F-14
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998 AND 1997)
(b) The Company entered into a distribution agreement with Ryko
Manufacturing Company ("Ryko"). Under the terms of the agreement, the Company is
the exclusive distributor of Ryko car wash equipment in the South Florida
region. The distribution agreement provides that the Company sells directly or
receives a commission on all Ryko equipment sold within its region. The two year
agreement was renewed in July 1997 and remains in place through July 1999.
(c) In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two year
period on a quarterly basis. During the nine months ended September 30, 1998,
the Company contributed 96,591 shares of restricted Common Stock valued at
$62,788.
(d) On April 9, 1997 Long Trail Brewing Company filed a complaint
against EnviroSystems Supply, Inc., a wholly owned subsidiary of the Company, in
Windsor Superior Court in the County of Windsor in the State of Vermont; Docket
number S216-5-97Wrcv. The complaint alleges, among other matters, breach of
express warranty and specific performance of certain of the parameters of the
written agreement for the purchase of a waste water treatment plant designed to
treat the industrial waste water generated at the Plaintiff's brewing facility.
Management believes, based on facts presently known, that if the outcome of such
legal proceedings is determined adverse to the Company, such determination could
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations. As a result, the Company has reserved what it
believes to be the potential full amount of exposure in the event of an adverse
determination.
(e) The Company is or may become involved in various lawsuits, claims
and proceedings in the normal course of its business including those pertaining
to product liability, environmental, safety and health, and employment matters.
The Company records liabilities when loss amounts are determined to be probable
and reasonably estimatable. Insurance recoveries are recorded only when claims
for recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims, other
than the proceedings noted in Note 14(d) above, will not have a material adverse
effect on the Company's financial position, liquidity, or future results of
operations.
15. SUBSEQUENT EVENT
(a) On October 2, 1998, the Company sold substantially all of the net
assets of Midwest Water Technologies, Inc. retaining only the accounts
receivable. In connection with this sale, the Company realized approximately
$200,000 in cash which it in turn used to pay down certain outstanding debt.
(See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion.)
F-15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto appearing
elsewhere in this Quarterly Report on Form 10-QSB, as well as, the Company's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Presented below are the consolidated results of operations for the
Company for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
=======================================================================================================
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1998 ENDED SEPTEMBER 30, 1997
=======================================================================================================
<S> <C> <C>
Revenues $20,290,975 $16,668,691
- -------------------------------------------------------------------------------------------------------
Cost of revenues 12,421,953 10,936,342
- -------------------------------------------------------------------------------------------------------
Gross profit 7,869,022 5,732,349
- -------------------------------------------------------------------------------------------------------
Operating expenses, not including
non-recurring charges 7,208,142 5,192,602
- -------------------------------------------------------------------------------------------------------
Non-recurring charges 1,974,853 --
- -------------------------------------------------------------------------------------------------------
Total operating expenses 9,182,995 5,192,602
- -------------------------------------------------------------------------------------------------------
(Loss) income from operations (1,313,973) 539,747
- -------------------------------------------------------------------------------------------------------
Interest expense, net (598,071) (310,105)
- -------------------------------------------------------------------------------------------------------
Other income, net, principally
settlement of litigation -- 126,845
- -------------------------------------------------------------------------------------------------------
Net (loss) income $(1,912,044) $ 356,487
=======================================================================================================
</TABLE>
Revenues increased by $3,622,284, or 21.7%, from $16,668,691 for the
nine months ended September 30, 1997, to $20,290,975 for the nine months ended
September 30, 1998. Of this increase, $5,056,470 was due to additional sales of
filtration systems and metering pumps generated by the Filtration Systems
Division acquired from Durco International, Inc. in June 1997, a $748,474
increase in sales of car wash machines and ancillary equipment of Car Wash
Equipment and Supply, Ryko of South Florida, Inc. and a $427,886 increase in
sales of commercial and residential water purification products and financing
fees earned by KISS
- 19 -
<PAGE>
International, Inc. Such increases were offset by a $1,613,056 decrease in sales
of municipal, industrial and commercial waste water treatment equipment and
waste water treatment plants of Gravity Flow Systems, Inc., ("GFSI"), and
EnviroSystems Supply, Inc., ("ESSI"), and a $997,490 decrease in sales of
commercial and residential water purification products and financing fees
generated by Midwest Water Technologies, Inc., ("MWTI").
Cost of revenues increased by $1,485,611 or 13.6%, from $10,936,342 for
the nine months ended September 30, 1997, to $12,421,953 for the nine months
ended September 30, 1998. As a percentage of revenues, these amounts represented
65.6% for 1997 as compared to 61.2% for 1998. The decrease in cost of revenues
as a percentage of revenues primarily was due to the addition of the sales of
the Filtration Systems Division acquired in June 1997. The cost of revenues of
such entity is comprised of lower materials and components costs than the
aggregate cost of revenues of the Company's other subsidiaries.
Gross profit increased $2,136,673 or 37.3% from $5,732,349 for the nine
months ended September 30, 1997 to $7,869,022 for the nine months ended
September 30, 1998, which, as a percentage of revenues, represented an increase
from 34.4% to 38.8%, respectively, for such periods.
The Company's operating expenses increased $3,990,393, or 76.8%, from
$5,192,602 for the nine months ended September 30, 1997 to $9,182,995 for the
nine months ended September 30, 1998. As a percentage of revenues, these
expenses increased from 31.2% for 1997 to 45.3% for 1998. The $3,990,393
increase includes non-recurring charges of $1,974,853, of which $1,052,039 was
due to the permanent impairment of certain of the Company's operating
subsidiaries' intangible assets, and $2,015,540 of additional operating expenses
mainly attributable to the Filtration Systems Division, ("FSDA"), which was
purchased in June 1997. Only four months of operations for FSDA was included in
the nine months ended September 30, 1997, as opposed to nine months included in
the nine months ended September 30, 1998.
GFSI has sustained substantial decreases in revenues and backlog mainly
due to customer and independent sales representative attrition, employee
turnover and new competition from previous affiliates. Although the Company has
taken certain actions which it believes will enhance the future performance of
GFSI, there are increased risks and diminished expectations associated with
expected future operating performance. As such, the Company has recorded a
provision for the impairment of intangible assets recorded as part of the
acquisition of GFSI in 1994, ($659,041).
During the second quarter of 1998, pursuant to incurring substantial
losses due to increased competition, exhaustion of its entire backlog, the
entrance into the market of more efficient, effective products from other
entities, ESSI's inability to attract new business and therefore continue to
sustain its own operations and management's decision that additional investments
in ESSI would not be in the long-term best interest of the Company's
shareholders, the operations of ESSI were discontinued. Concurrent with such
cessation of ESSI's operations, the Company recorded a provision for the
impairment of intangible assets, ($81,207); and provisions for costs to be borne
in relation to the shut down, including those for prospective and existing
claims and litigation, ($280,000).
- 20 -
<PAGE>
Pursuant to adverse business conditions, including the recent entrance
of a new competitor into the market and such competitor's engagement of former
employees of MWTI, significant employee turnover and customer loss through the
second quarter of 1998, MWTI has sustained continued losses and what the Company
believes to be a permanent impairment of the goodwill recorded as part of the
acquisition of MWTI in 1995. As a result of such conditions, management
restructured the remaining employee base, eliminated certain unprofitable
customers and reduced its product offerings, thus downsizing such entity to
compete as a smaller business in higher margin customer niches. In response to
the increased risk and diminished expectations associated with the expected
future operating performance and prospective claims and litigation involving the
previous owner of MWTI, the Company recorded an impairment of intangible assets,
($311,791); and provisions for inventory obsolescence, doubtful accounts and
prospective claims and litigation, ($290,000). MWTI's net assets were sold in
October 1998, (See Note 15(a)).
Additionally, the Company recorded a provision for losses which may be
incurred related to a claim against a former MWTI customer (dealer) in
conjunction with the financing program offered by the Company through an
unrelated lending company for the Company's dealers in the residential water
filtration and purification business, (See Note 11 in "Notes to Consolidated
Financial Statements"). The Company has been notified by the lending company of
a claim it has made against such MWTI dealer in the amount of $270,000. Through
the financing arrangement, the Company guarantees its dealers' performance
associated with the bona fide and proper installation and performance of the
Company's water filtration and purification units and indemnifies such lending
company against any losses the lending company incurs as a result of claims
thereunder, other than those related to credit risk. No claim has yet been
asserted against the Company. Although the Company has engaged legal counsel and
is still undergoing a determination of all of the facts and circumstances
surrounding such claim, it has recorded a reserve of $270,000. Also, the Company
expensed previously capitalized amounts relating to the termination of the
proposed acquisition of Williams Instrument Company amounting to $82,814.
The remainder of the increase in operating expenses was attributable
mainly to an additional $2,067,174 in operating expenses due to FSDA which was
purchased in June 1997, and as such, only four months of operations were
included in the statement of operations for the nine months ended September 30,
1997. Nine months of FSDA operations are included in the statements of
operations for the nine months ended September 30, 1998. Such increase noted
above was partially offset by the elimination of certain operating expenses of
the Company's other subsidiaries, mainly in the expense category of payroll and
related expenses, ($43,928).
Interest expense, net, increased $287,966 from $310,105 for the nine
months ended September 30, 1997 to $598,071 for the nine months ended September
30, 1998. This increase was mainly attributable to interest expense on debt
incurred as part of the acquisition of FSDA in June 1997.
Principally as a result of the factors described above, the Company
incurred a net loss of $(1,912,044) for the nine months ended September 30, 1998
as compared to net income of $356,487 earned for the nine months ended September
30, 1997.
- 21 -
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1998, the Company had $776,862 of cash and cash
equivalents, working capital of $1,897,490, assets of $15,889,461, long-term
debt, net of current maturities, of $4,123,917 and stockholders' equity of
$5,975,346. The Company's operating activities used $217,008 of cash,
principally as a result of the net loss ($1,912,044) and an increase in accounts
receivable ($885,584); partially offset by the provisions for impairment of
intangible assets and doubtful accounts and notes ($1,235,462), an increase in
accounts payable and accrued expenses ($189,162), a decrease in inventory
($482,183), depreciation and amortization ($540,357) and a decrease in costs and
estimated earnings in excess of billings ($124,244). Investing activities used
$188,905 due to capital expenditures ($251,005); offset by payments received on
notes receivable ($62,100). Financing activities provided $527,843 of cash, due
to the net proceeds from issuance of notes payable and long-term debt
($11,957,374); offset by repayments of notes payable and long-term debt
($11,429,531).
EBITDA, not including the non-recurring charges discussed previously in
"Results of Operations", was $1,201,237 and $1,138,268 for the nine months ended
September 30, 1998 and 1997, respectively.
During July 1998, the Company received net proceeds of $1,465,847 from
the issuance of $1,500,000 in secured subordinated debentures which bear
interest at the rate of 12% per year. The Debentures are due June 2003 with no
pre-payment penalty. Interest is due and payable on a quarterly basis beginning
August 1998. In conjunction with the issuance of the Debentures, the Company
issued 115,500 warrants to purchase the Company's Common Stock at an exercise
price of $2.60 per share. The warrants contain certain call provisions based on
the repayment of the Debentures and certain market contingencies. Additionally,
beginning July 1999 and on each anniversary thereafter that the Debentures
remain outstanding, the Company has agreed to issue 30,000 warrants with an
exercise price equal to the average bid price for the 20 days prior to such
anniversary dates. In October 1998, the Company, in conjunction with its sale of
MWTI, paid $200,000 of the principal of the Debentures, leaving a principal
balance remaining of $1,300,000.
Management expects to continue to make acquisitions to expand the
Company's markets. As consideration for an acquisition, the Company may issue
Common Stock, Preferred Stock, or other securities, notes or cash. Since cash
may be required either to consummate acquisitions, or to fund the operations of
new or existing businesses, including approximately $2,800,000 of current
maturities of long-term debt, management may, from time to time, investigate and
pursue various types of financing that are available to the Company. These
include, but are not limited to, private placements, secondary offerings, bridge
financing, debentures, lines of credit and asset-based loans. While management
believes that financing will be available for the Company to not only fund its
current operations, but also to fund its acquisition program, there can be no
assurance such financing will be on terms reasonably acceptable to the Company.
- 22 -
<PAGE>
A portion of the revenues of the Company, particularly through FSDA,
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.
CAPITAL EXPENDITURE REQUIREMENTS
The Company currently intends to utilize up to $500,000 for the
purchase of machinery and equipment, most specifically at FSDA, and to develop a
new computer system to be utilized by all of the Company's subsidiaries. Such
new system will be implemented at FSDA first as the Company has an agreement
with its former owner, Durco International, Inc., (n/k/a Flowserve Corporation),
to utilize its computer system until March 1999. During the nine months ended
September 30, 1998, the Company spent approximately $250,000 on capital
expenditures mainly relating to the purchase of machinery and equipment at FSDA.
The new computer system noted above will use "Year 2000" compliant
software. In the event that the Company may maintain part or all of its existing
computer systems through the year 2000 and beyond, management is presently in
the process of evaluating the conversion of such systems to "Year 2000"
compliant software. The Company does not expect the cost of such conversion to
be material to its financial condition or results of operations, nor does it
anticipate any material disruption in its operations with respect thereto.
The Company does not presently anticipate any significant additional
capital expenditures other than those noted above and those relating to future
acquisitions.
INFLATION
The Company has not been materially affected by the impact of
inflation.
- 23 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 9, 1997 Long Trail Brewing Company filed a complaint against
EnviroSystems Supply, Inc., a wholly owned subsidiary of the Company,
in Windsor Superior Court in the County of Windsor in the State of
Vermont; Docket number S216-5-97Wrcv. The complaint alleges, among
other matters, breach of express warranty and specific performance of
certain of the parameters of the written agreement for the purchase of
a waste water treatment plant designed to treat the industrial waste
water generated at the Plaintiff's brewing facility. Management
believes, based on facts presently known, that if the outcome of such
legal proceedings is determined adverse to the Company, such
determination could have a material adverse effect on the Company's
financial position, liquidity, or future results of operations. As a
result, the Company has reserved what it believes to be the potential
full amount of exposure in the event of an adverse determination.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 1998, the Annual Meeting of Stockholders of Aqua Care
Systems, Inc. was held, at which the following actions were taken:
1. The following shares of Common Stock represented at the Annual
Meeting were voted in the election of Directors as follows:
===============================================================================
NUMBER VOTING FOR WITHHOLD AUTHORITY
- -------------------------------------------------------------------------------
William K. Mackey 2,722,013 2,565,020 156,993
- -------------------------------------------------------------------------------
Norman J. Hoskin 2,722,013 2,565,045 156,968
- -------------------------------------------------------------------------------
James P. Cefaratti 2,722,013 2,565,045 156,968
- -------------------------------------------------------------------------------
David K. Lucas 2,722,013 2,565,045 156,968
===============================================================================
- 24 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial data schedule
(b) REPORTS ON FORM 8-K
None
No other Items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-QSB.
- 25 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
AQUA CARE SYSTEMS, INC.
Registrant
Dated: November 6, 1998 /S/ WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: November 6, 1998 /S/ GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
- 26 -
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Information for inclusion in the 10-QSB, Financial Data Schedule
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-09-1998
<CASH> $776,862
<SECURITIES> 0
<RECEIVABLES> 4,291,254
<ALLOWANCES> (190,500)
<INVENTORY> 2,525,285
<CURRENT-ASSETS> 7,687,688
<PP&E> 6,116,410
<DEPRECIATION> (1,207,606)
<TOTAL-ASSETS> 15,889,461
<CURRENT-LIABILITIES> 5,790,198
<BONDS> 7,093,327
0
0
<COMMON> 2,800
<OTHER-SE> 5,972,546
<TOTAL-LIABILITY-AND-EQUITY> 15,889,461
<SALES> 20,290,975
<TOTAL-REVENUES> 20,290,975
<CGS> 12,421,953
<TOTAL-COSTS> 12,421,953
<OTHER-EXPENSES> 8,999,572
<LOSS-PROVISION> 183,423
<INTEREST-EXPENSE> 598,071
<INCOME-PRETAX> (1,912,044)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,912,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,912,044)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
