U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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 Identification No.)
incorporation or organization)
11820 N.W. 37TH STREET, CORAL SPRINGS, FL 33065
-----------------------------------------------
(Address of principal executive offices)
(954) 796-3338
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
NUMBER OF SHARES OUTSTANDING
ON APRIL 30, 1998
---------------------------
CLASS
-----
Common Stock, $ .001 Par Value 2,722,013
---------
Transitional small business disclosure format:
Yes [ ] No [X]
<PAGE>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997
Consolidated Statements of Operations for the three months
ended March 31, 1998 and March 31, 1997
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and March 31, 1997
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months ended March
31, 1998 and March 31, 1997
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim consolidated financial statements presented in this report
are unaudited, but in the opinion of management, reflect all
adjustments necessary for a fair presentation of such information.
Results for interim periods should not be considered indicative of
results for a full year.
These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Form
10-KSB for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30, 1998.
-3-
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998)
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........................ $ 299,467 $ 654,932
Accounts receivable, net of allowance
for doubtful accounts of $144,000 and $135,000 3,906,055 3,398,593
Costs and estimated earnings in excess of billings 105,350 153,443
Inventory ........................................ 2,359,019 3,007,468
Current maturities of notes receivable ........... 77,175 77,175
Prepaids and other ............................... 224,513 109,736
------------ ------------
Total current assets .................................. 6,971,579 7,401,347
Property, plant and equipment, net .................... 4,863,519 4,939,202
Intangible assets, net ................................ 4,358,510 4,452,916
Notes receivable, less current maturities ............. 31,275 51,975
Other assets .......................................... 229,569 243,169
------------ ------------
Total assets .......................................... $ 16,454,452 $ 17,088,609
============ ============
LIABILITIES
Current liabilities
Accounts payable ................................. $ 1,432,169 $ 1,788,140
Accrued expenses ................................. 946,449 843,486
Current maturities of long-term debt ............. 2,578,910 2,773,716
Indebtedness to related party .................... 125,000 125,000
------------ ------------
Total current liabilities ............................. 5,082,528 5,530,342
Long-term debt, less current maturities ............... 3,446,060 3,733,665
------------ ------------
Total liabilities ..................................... 8,528,588 9,264,007
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding ................. -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 2,722,013 and 2,703,782 shares
issued and outstanding ....................... 2,722 2,704
Additional paid-in capital ....................... 16,802,589 16,787,794
Deficit .......................................... (8,879,447) (8,965,896)
------------ ------------
Total stockholders' equity ............................ 7,925,864 7,824,602
------------ ------------
Total liabilities and stockholders' equity ............ $ 16,454,452 $ 17,088,609
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
Revenues ......................................... $ 7,188,777 $ 3,631,701
Cost of revenues ................................. 4,500,000 2,435,173
----------- -----------
Gross profit ..................................... 2,688,777 1,196,528
----------- -----------
Operating expenses:
Selling, general and administrative ......... 2,204,711 1,152,858
Depreciation and amortization ............... 188,208 135,003
Provision for doubtful accounts and notes ... 9,000 8,000
----------- -----------
Total operating expenses ......................... 2,401,919 1,295,861
----------- -----------
Income (loss) from operations .................... 286,858 (99,333)
Interest expense, net ............................ (200,409) (23,774)
Other income, principally settlement of litigation -- 133,333
----------- -----------
Comprehensive net income ......................... $ 86,449 $ 10,226
----------- -----------
Earnings per common share - basic ................ $ 0.03 $ 0.00
=========== ===========
Earnings per common share - diluted .............. $ 0.03 $ 0.00
=========== ===========
See accompanying notes to consolidated financial statements
-5-
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................ $ 86,449 $ 10,226
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on disposal of property and plant ........... -- (123,518)
Provision for doubtful accounts and notes ........ 9,000 8,000
Depreciation and amortization .................... 188,208 135,003
Pension contribution paid through issuance of
Common Stock .................................. 14,813 --
Changes in assets and liabilities
net of effects of acquired business:
Increase in accounts receivable .................. (516,462) (308,861)
Decrease in costs and estimated
earnings in excess of billings ................ 48,093 128,236
Decrease in inventory ............................ 648,449 90,243
Increase in prepaids and other ................... (114,777) (75,302)
Decrease in other assets ......................... 13,600 17,124
Decrease in accounts payable and accrued
expenses ...................................... (253,008) (129,365)
----------- -----------
Net cash provided by (used in) operating activities ... 124,365 (248,214)
----------- -----------
INVESTING ACTIVITIES:
Payments received on notes receivable ............ 20,700 12,000
Property and plant disposed of in conjunction with
Settlement Agreement .......................... -- 150,000
Capital expenditures ............................. (18,119) (16,119)
Addition to intangible assets .................... -- (14,845)
----------- -----------
Net cash provided by investing activities ............. 2,581 131,036
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
long-term debt ................................ 3,510,334 --
Repayment of notes payable and
long-term debt ................................ (3,992,745) (45,679)
----------- -----------
Net cash used in financing activities ................. (482,411) (45,679)
----------- -----------
Net decrease in cash and cash equivalents ............. (355,465) (162,857)
Cash and cash equivalents, beginning of period ........ 654,932 561,219
----------- -----------
Cash and cash equivalents, end of period .............. $ 299,467 $ 398,362
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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.
-7-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 March 31, 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.
-8-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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, pursuant to an Asset Purchase Agreement,
acquired certain assets and assumed certain liabilities of the Filtration
Systems Division, ("FSDA"), of Durco International, Inc., formerly known as the
Duriron Company, Inc., ("DURCO"). The purchase price for the acquisition of FSDA
consisted of the sum of (i) approximately $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 Fidelity Funding Financial Group 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.
-9-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 (5,333,300)
Acquisition costs (204,031)
Warrants issued in connection with acquisition (80,000)
-----------
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.
<TABLE>
<CAPTION>
3. CONTRACTS IN PROGRESS
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS MARCH 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------- -------------- -----------------
<S> <C> <C>
Costs and estimated earnings...................... $ 1,604,370 $ 1,580,176
Less billings .................................... (1,499,020) (1,426,733)
----------- -----------
Total............................................. $ 105,350 $ 153,443
=========== ===========
</TABLE>
All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $203,162 and
$194,676 are included in accounts receivable at March 31, 1998 and December 31,
1997, respectively.
-10-
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
4. PROPERTY, PLANT AND EQUIPMENT
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Land and buildings................................................... $ 2,745,427 $ 2,745,427
Machinery and equipment.............................................. 2,285,596 2,267,638
Furniture and fixtures............................................... 785,589 785,428
Leasehold improvements............................................... 51,314 51,314
Autos and trucks..................................................... 17,906 17,906
------------ ------------
5,885,832 5,867,713
Less accumulated depreciation........................................ (1,022,313) (928,511)
------------ ------------
Net property, plant and equipment.................................... $ 4,863,519 $ 4,939,202
============ ============
5. INTANGIBLE ASSETS
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Goodwill............................................................. $ 5,506,601 $ 5,506,601
License agreement, customer list and other........................... 149,169 149,169
------------ ------------
5,655,770 5,655,770
Less accumulated amortization........................................ (1,297,260) (1,202,854)
------------ ------------
Net intangible assets................................................ $ 4,358,510 $ 4,452,916
============ ============
6. LONG-TERM DEBT
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Prime plus 2.50%, (11% at March 31, 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.............................................. $ 1,268,926 $ 1,370,620
Prime plus 3%, (11.50% at March 31, 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 ......... 1,118,600 1,162,400
Prime plus 3%, (11.50% at March 31, 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 .... 401,400 417,600
-11-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
18% note payable, principal and interest payable monthly through
May 1998, collateralized by certain of the assets of FSDA............ 100,000 250,000
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....................... 2,261,397 2,321,397
10% note payable, principal and interest payable monthly through
November 1998, collateralized by 115,556 restricted, unregistered
shares of the Company's Common Stock................................. 176,365 239,476
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 ASCI............... 425,049 429,174
Prime plus 1%, (9.50% at March 31, 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......................... 200,000 240,000
9.50% note payable, principal and interest payable monthly through
June 2002, collateralized by substantially all of the assets of GFSI. 73,233 76,714
------------ ------------
6,024,970 6,507,381
Less current maturities.............................................. (2,578,910) (2,773,716)
------------ ------------
Total long-term debt................................................. $ 3,446,060 $ 3,733,665
============ ============
</TABLE>
At December 31, 1997, maturities of long-term debt, are:
1998 $ 2,773,716
1999 1,074,740
2000 2,256,488
2001 390,472
2002 11,965
-------------
$ 6,507,381
=============
-12-
<PAGE>
<TABLE>
<CAPTION>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
7. RELATED PARTY BALANCES AND TRANSACTIONS
INDEBTEDNESS TO RELATED PARTY MARCH 31, 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 $3,125 for
each of the three months ended March 31, 1998 and 1997.
8. INCOME TAXES
At December 31, 1997 and 1996, the Company had approximately $6,300,000
and $7,100,000, respectively, of net operating loss carryforwards expiring
through 2011, for both financial reporting and income tax purposes. Changes in
ownership of greater than 50% 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
and $2,750,000 deferred tax asset at December 31, 1997 and 1996, 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.
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, 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.
-13-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
(c) At March 31, 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) The following reconciles the components of the earnings per share
(EPS) computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
INCOME 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 $ 86,449 2,722,013 $0.03 $ 10,226 2,680,639 $0.00
==== ====
Effect of Dilutive Securities
Options -- 100,456 -- --
Warrants -- 7,591 -- --
-------- --------- -------- ---------
Earnings per common share -
assuming dilution
Comprehensive net income $ 86,449 2,830,060 $0.03 $ 10,226 2,680,639 $0.00
======= ========= ==== ======== ========= ====
</TABLE>
(e) During the three months ended March 31, 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 grants. The above options expire ten
years from the dates of grants, and are exercisable one-third each year
beginning one year from the dates of grants.
-14-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
10. BUSINESS SEGMENTS
The Company's operations by business segments for the three months
ended March 31, 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>
1998 $ 6,135,821 $ 1,052,956 -- $ 7,188,777
1997 $ 2,657,523 $ 974,178 -- $ 3,631,701
OPERATING INCOME (LOSS)
1998 $ 389,985 $ 141,221 $ (244,348) $ 286,858
1997 $ 73,980 $ 68,435 $ (241,748) $ (99,333)
IDENTIFIABLE ASSETS
1998 $ 13,448,219 $ 1,853,235 $ 1,152,998 $ 16,454,452
1997 $ 7,022,030 $ 1,835,887 $ 1,273,891 $ 10,131,808
DEPRECIATION AND AMORTIZATION
1998 $ 143,658 $ 32,250 $ 12,300 $ 188,208
1997 $ 91,677 $ 31,014 $ 12,312 $ 135,003
CAPITAL EXPENDITURES
1998 $ 6,743 $ 5,506 $ 5,870 $ 18,119
1997 $ 11,671 $ 2,429 $ 2,019 $ 16,119
</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 three months ended March 31, 1998 and 1997 aggregated
approximately $180,000 and $140,000, respectively, and are included in revenues.
-15-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 years ended March 31, 1998 and 1997, the Company paid $187,482
and $24,694, 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 (5,333,300)
Acquisition costs (204,031)
Warrants issued in connection with acquisition (80,000)
-----------
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 $56,000 and $60,000, for the three months ended March 31, 1998 and
1997, respectively.
-16-
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND 1997)
Approximate future annual minimum lease payments under operating leases
at December 31, 1997 are as follows:
1998 $ 280,372
1999 209,062
2000 50,023
2001 3,360
----------
$ 542,817
==========
(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 three months ended March 31, 1998, the
Company contributed 18,231 shares of restricted Common Stock valued at $14,813.
(d) The Company is or may become involved in various lawsuits, claims
and proceedings in the normal course of its business including those pertaining
to product liability, environmental, safety and health, and employment matters.
The Company records liabilities when loss amounts are determined to be probable
and reasonably estimatable. Insurance recoveries are recorded only when claims
for recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims will not
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations.
-17-
<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 - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Presented below are the consolidated results of operations for the
Company for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
=========================================================================================
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 1998 ENDED MARCH 31, 1997
=========================================================================================
<S> <C> <C>
Revenues $7,188,777 $3,631,701
- -----------------------------------------------------------------------------------------
Cost of revenues 4,500,000 2,435,173
- -----------------------------------------------------------------------------------------
Gross profit 2,688,777 1,196,528
- -----------------------------------------------------------------------------------------
Operating expenses 2,401,919 1,295,861
- -----------------------------------------------------------------------------------------
Income (loss) from operations 286,858 (99,333)
- -----------------------------------------------------------------------------------------
Interest expense, net (200,409) (23,774)
- -----------------------------------------------------------------------------------------
Other income, principally settlement
of litigation -- 133,333
- -----------------------------------------------------------------------------------------
Net income $ 86,449 $ 10,226
=========================================================================================
</TABLE>
Revenues increased by $3,557,076, or 97.9%, from $3,631,701 for the
three months ended March 31, 1997, to $7,188,777 for the three months ended
March 31, 1998. Of this increase, $3,962,816 was due to the addition of sales of
filtration systems and metering pumps generated by the Filtration Systems
Division acquired from Durco International, Inc. in June 1997 and a $78,778
increase in sales of car wash machines and ancillary equipment of Car Wash
Equipment and Supply, Ryko of South Florida, Inc. Such increases were offset by
a $331,325 decrease in sales of municipal, industrial and commercial waste water
treatment equipment and waste water treatment plants of Gravity Flow Systems,
Inc. and EnviroSystems Supply, Inc. and a $153,193 decrease in sales of
commercial and residential water purification products and financing fees earned
from KISS International, Inc., Midwest Water Technologies, Inc. and Ditech
Systems, Inc.
- 18 -
<PAGE>
Cost of revenues increased by $2,064,827 or 84.8%, from $2,435,173 for
the three months ended March 31, 1997, to $4,500,000 for the three months ended
March 31, 1998. As a percentage of revenues, these amounts represented 67.1% for
1997 as compared to 62.6% 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 $1,492,249 or 124.7% from $1,196,528 for the
three months ended March 31, 1997 to $2,688,777 for the three months ended March
31, 1998, which, as a percentage of revenues, represented an increase from 32.9%
to 37.4%, respectively, for such periods.
The Company's operating expenses increased $1,106,058, or 85.4%, from
$1,295,861 for the three months ended March 31, 1997 to $2,401,919 for the three
months ended March 31, 1998. As a percentage of revenues, these expenses
decreased from 35.7% for 1997 to 33.4% for 1998. The $1,106,058 increase was
attributable mainly to the addition of $1,233,574 in operating expenses due to
the Filtration Systems Division which was purchased in June 1997. This increase
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 ($122,675).
Interest expense, net increased $176,635 from $23,774 for the three
months ended March 31, 1997 to $200,409 for the three months ended March 31,
1998. This increase was mainly attributable to interest expense realized on debt
incurred as part of the acquisition of the Filtration Systems Division
consummated in June 1997.
Principally as a result of the factors described above, the Company
achieved net income of $86,449 for the three months ended March 31, 1998 as
compared to net income of $10,226 earned for the three months ended March 31,
1997, an increase of $76,223.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1998, the Company had $299,467 of cash and cash
equivalents, working capital of $1,889,051, assets of $16,454,452, long-term
debt, net of current maturities, of $3,446,060 and stockholders' equity of
$7,925,864. The Company's operating activities provided $124,365 of cash,
principally as a result of a decrease in inventory ($648,449), depreciation and
amortization ($188,208) and net income ($86,449); partially offset by an
increase in accounts receivable ($516,462), an increase in prepaids and other
($114,777) and a decrease in accounts payable and accrued expenses ($253,008).
Investing activities provided $2,581 from payments received on notes receivable
($20,700); offset by capital expenditures ($18,119). Financing activities used
$482,411 of cash, due to repayments of notes payable and long-term debt
($3,992,745); offset by net proceeds from issuance of notes payable and
long-term debt ($3,510,334).
- 19 -
<PAGE>
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
will be required either to consummate acquisitions, or to fund the operations of
new or existing businesses, including approximately $2,700,000 of current
maturities of long-term debt and indebtedness to related party, 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 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 assurances such financing will be
on terms reasonably acceptable to the Company.
A portion of the revenues of the Company, particularly through FSDA and
ESSI, have been, and are expected to continue to be, generated from foreign
countries. As a result of this fact and, notwithstanding the fact that the
Company expects its foreign contracts to be denominated in U.S. dollars, the
Company is subject to the risks associated with fluctuations in the U.S. and
foreign currencies and political instability. In particular, if the U.S. dollar
increases significantly as compared to foreign currencies, this could adversely
impact the ability of the Company to secure orders and generate revenues in
foreign countries.
CAPITAL EXPENDITURE REQUIREMENTS
The Company does not presently anticipate any significant capital
expenditures other than those relating to future acquisitions.
The Company is presently in the process of evaluating the conversion of
its computer 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.
INFLATION
The Company has not been materially affected by the impact of
inflation.
- 20 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 9, 1997 Long Trail Brewing Company filed a complaint against
EnviroSystems Supply, Inc., a wholly owned subsidiary of the Company,
in Windsor Superior Court in the County of Windsor in the State of
Vermont; Docket number S216-5-97Wrcv. The complaint alleges, among
other matters, breach of express warranty and specific performance of
certain of the parameters of the written agreement for the purchase of
a wastewater treatment plant designed to treat the industrial
wastewater generated at the Plaintiff's brewing facility. Management
believes, based on facts presently known, that the outcome of such
legal proceeding will not have a material adverse effect on the
Company's financial position, liquidity, or future results of
operations.
ITEM 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.
- 21 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
AQUA CARE SYSTEMS, INC.
Registrant
Dated: May 12, 1998 /s WILLIAM K. MACKEY
---------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: May 12, 1998 /s GEORGE J. OVERMEYER
-----------------------
George J. Overmeyer
Corporate Controller
- 22 -
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 299,467
<SECURITIES> 0
<RECEIVABLES> 4,050,055
<ALLOWANCES> 144,000
<INVENTORY> 2,359,019
<CURRENT-ASSETS> 6,971,579
<PP&E> 5,885,832
<DEPRECIATION> 1,022,313
<TOTAL-ASSETS> 16,454,452
<CURRENT-LIABILITIES> 5,082,528
<BONDS> 0
0
0
<COMMON> 2,722
<OTHER-SE> 7,923,142
<TOTAL-LIABILITY-AND-EQUITY> 16,454,452
<SALES> 7,188,777
<TOTAL-REVENUES> 7,188,777
<CGS> 4,500,000
<TOTAL-COSTS> 4,500,000
<OTHER-EXPENSES> 2,392,919
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> 200,409
<INCOME-PRETAX> 86,449
<INCOME-TAX> 0
<INCOME-CONTINUING> 86,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,449
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
