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, 1999
[ ] 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 OCTOBER 26, 1999
----------------------------
CLASS
-----
Common Stock, $ .001 Par Value 2,883,166
---------
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, 1999 and
------- December 31, 1998
Consolidated Statements of Operations for
the three months ended September 30, 1999
and September 30, 1998
Consolidated Statements of Operations for
the nine months ended September 30, 1999 and
September 30, 1998
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999 and
September 30, 1998
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, 1999 and September 30, 1998
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, 1998, filed with the Securities and Exchange Commission on
March 30, 1999.
- 3 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................$ 476,030 $ 573,129
Accounts receivable, net of allowance for
doubtful accounts of $160,000 and $260,000 2,586,431 2,858,990
Inventory................................................................ 1,976,884 2,609,472
Current maturities of notes receivable................................... 48,000 72,744
Prepaids and other....................................................... 189,582 237,087
--------------- --------------
Total current assets.......................................................... 5,276,927 6,351,422
Property, plant and equipment, net............................................ 5,003,322 4,837,671
Intangible assets, net........................................................ 2,790,024 2,996,871
Notes receivable, less current maturities..................................... 44,000 80,000
Other assets.................................................................. 248,442 301,484
--------------- --------------
Total assets..................................................................$ 13,362,715 $ 14,567,448
=============== ==============
LIABILITIES
Current liabilities
Accounts payable.........................................................$ 1,743,881 $ 1,751,847
Accrued expenses......................................................... 1,213,337 1,285,841
Current maturities of long-term debt..................................... 2,098,568 2,560,439
Indebtedness to related party............................................ 125,000 125,000
--------------- --------------
Total current liabilities..................................................... 5,180,786 5,723,127
Long-term debt, less current maturities....................................... 2,400,864 3,575,964
--------------- --------------
Total liabilities............................................................. 7,581,650 9,299,091
--------------- --------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding........................................... -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 2,866,446 and 2,800,313 shares
issued and outstanding................................................. 2,866 2,800
Additional paid-in capital............................................... 16,967,523 16,928,486
Deficit.................................................................. (11,189,324) (11,662,929)
--------------- --------------
Total stockholders' equity.................................................... 5,781,065 5,268,357
--------------- --------------
Total liabilities and stockholders' equity....................................$ 13,362,715 $ 14,567,448
=============== ==============
</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,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 5,379,825 $ 6,848,610
Cost of revenues............................................ 3,025,181 4,261,270
--------------- ---------------
Gross profit................................................ 2,354,644 2,587,340
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 1,938,126 2,005,992
Depreciation and amortization.......................... 165,450 163,947
Provision for doubtful accounts and notes.............. 1,009 41,609
--------------- ---------------
Total operating expenses.................................... 2,104,585 2,211,548
--------------- ---------------
Income from operations...................................... 250,059 375,792
Interest expense, net....................................... (168,746) (214,971)
--------------- ---------------
Net income..................................................$ 81,313 $ 160,821
=============== ===============
Earnings per common share - basic...........................$ 0.03 $ 0.06
=============== ===============
Earnings per common share - diluted.........................$ 0.03 $ 0.06
=============== ===============
</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,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 17,510,175 $ 20,290,975
Cost of revenues............................................ 10,307,921 12,421,953
--------------- ---------------
Gross profit................................................ 7,202,254 7,869,022
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 5,716,937 7,407,176
Depreciation and amortization.......................... 476,352 540,357
Provision for doubtful accounts and notes.............. 2,013 183,423
Provision for impairment of intangible assets.......... -- 1,052,039
--------------- --------------
Total operating expenses.................................... 6,195,302 9,182,995
--------------- ---------------
Income (loss) from operations............................... 1,006,952 (1,313,973)
Interest expense, net....................................... (533,347) (598,071)
--------------- ---------------
Net income (loss)...........................................$ 473,605 $ (1,912,044)
=============== ===============
Earnings (loss) per common share - basic....................$ 0.17 $ (0.70)
=============== ===============
Earnings (loss) per common share - diluted..................$ 0.17 $ (0.70)
=============== ===============
</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,
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...........................................$ 473,605 $ (1,912,044)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for doubtful accounts and notes.............. 2,013 183,423
Provision for impairment of intangible assets.......... -- 1,052,039
Depreciation and amortization.......................... 476,352 540,357
Pension contribution paid through issuance of
Common Stock........................................ 39,103 62,788
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............. 270,546 (885,584)
Decrease in costs and estimated
earnings in excess of billings...................... -- 124,244
Decrease in inventory.................................. 632,588 482,183
Decrease (increase) in prepaids and other.............. 47,505 (78,802)
Decrease in other assets............................... 53,042 25,226
(Decrease) increase in accounts payable and accrued
expenses............................................ (80,470) 189,162
--------------- ---------------
Net cash provided by (used in) operating activities......... 1,914,284 (217,008)
--------------- ---------------
INVESTING ACTIVITIES:
Payments received on notes receivable.................. 60,744 62,100
Capital expenditures................................... (435,156) (251,005)
--------------- ---------------
Net cash used in investing activities....................... (374,412) (188,905)
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
long-term debt...................................... 10,332,064 11,957,374
Repayment of notes payable and
long-term debt...................................... 11,969,035 (11,429,531)
--------------- ---------------
Net cash (used in) provided by financing activities......... (1,636,971) 527,843
--------------- ---------------
Net (decrease) increase in cash and cash equivalents........ (97,099) 121,930
Cash and cash equivalents, beginning of period.............. 573,129 654,932
--------------- ---------------
Cash and cash equivalents, end of period....................$ 476,030 $ 776,862
=============== ===============
</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, 1999 AND 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Aqua Care Systems, Inc. and subsidiaries (the "Company") is engaged in
the design, engineering, manufacturing, assembly, sales, marketing, distribution
and service of filtration systems and products, flow control systems and
products, water filtration and purification products and car wash equipment.
Currently, the Company provides equipment sales and services to 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 Company continually evaluates the carrying value of goodwill.
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, 1999 AND 1998)
REVENUE RECOGNITION
The Company recognizes revenue on certain filtration systems 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
such 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 values as of September 30, 1999 and December 31, 1998. The
estimated fair values are not necessarily indicative of the amounts the Company
could realize in a current market exchange or of future earnings or cash flows.
STOCK BASED COMPENSATION
The Company recognizes compensation expense for its stock option
incentive plans using the intrinsic value method of accounting. Under the terms
of the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date, or other measurement date,
over the amount an employee must pay to acquire the stock.
EARNINGS 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 period.
Diluted earnings per share are computed on the basis of the weighted
average number of common shares and dilutive securities outstanding during each
period. Dilutive securities having an anti-dilutive effect on diluted earnings
per share are excluded from the calculation.
F-6
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 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.
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. The adoption of SFAS No. 130 did not impact the Company's
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 No. 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 No. 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. The Company adopted SFAS No. 131 in 1998.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement applies to all entities and is effective for all
fiscal quarters of the fiscal years beginning after June 15, 1999. The Company
did not engage in derivative instruments or hedging activities in any periods
presented in the consolidated financial statements.
2. INVENTORY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Materials and purchased parts.............................$ 1,897,698 $ 1,798,051
Work in process........................................... 79,186 811,421
------------- -------------
Total inventory...........................................$ 1,976,884 $ 2,609,472
============= =============
</TABLE>
F-7
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Land and buildings...................................................$ 2,745,427 $ 2,745,427
Machinery and equipment.............................................. 2,754,051 2,323,455
Furniture and fixtures............................................... 653,792 652,726
Leasehold improvements............................................... 30,944 27,450
------------- -------------
6,184,214 5,749,058
Less accumulated depreciation........................................ (1,180,892) (911,387)
------------- -------------
Net property, plant and equipment....................................$ 5,003,322 $ 4,837,671
============= =============
</TABLE>
4. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Goodwill.............................................................$ 4,134,266 $ 4,134,266
Less accumulated amortization........................................ (1,344,242) (1,137,395)
------------- -------------
Net intangible assets................................................$ 2,790,024 $ 2,996,871
============= =============
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
12% note payable, interest only payable quarterly with a
balloon payment of $1,150,000 due June 2003, collateralized
by substantially all of the assets of the Company................... $ 1,150,000 $ 1,200,000
Prime plus 2%, (10.25% at September 30, 1999), 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, (See (b) below)............................... 725,005 1,486,876
Prime plus 2.5%, (10.75% at September 30, 1999), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $400,000 due June 2000,
principally collateralized by land and buildings of FSDA,
(See (b) below)...................................................... 636,800 899,600
</TABLE>
F-8
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Prime plus 2.5%, (10.75% at September 30, 1999), 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,
(See (b) below)...................................................... 223,200 320,400
11% note payable, principal and interest payable monthly with an
estimated balloon payment of approximately $600,000 due March
2001, collateralized by all the assets of FSDA, (See (b) below)...... 1,314,499 1,674,499
9.25% mortgage note payable, principal and interest payable monthly
with an estimated balloon payment of approximately $360,000 due
June 2001, collateralized by land and building of ACSI............... 399,215 412,642
Prime plus 1%, notes payable, issued in connection with the
acquisition of CWES, paid in April 1999.............................. -- 80,000
9.50% note payable, principal and interest payable monthly through
June 2002, collateralized by substantially all of the assets of GFSI. 50,713 62,386
----------- ---------
4,499,432 6,136,403
Less current maturities.............................................. 2,098,568 (2,560,439)
----------- -----------
Total long-term debt.................................................$ 2,400,864 $ 3,575,964
=========== ===========
</TABLE>
At September 30, 1999, maturities of long-term debt are:
2000 $ 2,098,568
2001 1,233,252
2002 17,612
2003 1,150,000
-------------
$ 4,499,432
=============
F-9
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
(a) The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum tangible net
worth and maintain certain financial ratios. Certain of such loans also provide
that the lenders may, at their options, accelerate such loans as a result of,
among other things, a material adverse change in the Company's financial
position or results of operations. The lenders have not notified the Company
that such an event has occurred and the Company does not expect that such notice
will be received.
(b) At December 31, 1998, the Company was not in compliance with
certain covenants relating to the above noted debt. However, the Company
obtained waivers of such non-compliance from the lenders.
6. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
INDEBTEDNESS TO RELATED PARTY SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ----------------------------- ------------------ -----------------
<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, 1999 and 1998.
7. INCOME TAXES
At September 30, 1999 and December 31, 1998, the Company has
approximately $7,400,000 and $7,550,000, 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
$6,300,000 of the Company's net operating losses for tax purposes. Realization
of the approximate $2,780,000 and $2,840,000 deferred tax assets at September
30, 1999 and December 31, 1998, 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>
1999 1998
- ----------------------------------------------------------------------------------------------------------
<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>
F-10
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
8. EQUITY TRANSACTIONS
(a) At September 30, 1999, 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.
(b) As of September 30, 1999 and December 31, 1998, respectively, the
Company has reserved an aggregate 993,100 and 933,100 shares of Common Stock for
issuance upon exercise of options and warrants.
(c) The following reconciles the components of the earnings per share
computation:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per
common share
Net income (loss) $473,605 2,841,900 $0.17 $(1,912,044) 2,732,733 $(0.70)
===== =====
Effect of dilutive
securities
Options -- -- -- --
Warrants -- -- -- --
-------- --------- ----------- ---------
Earnings (loss) per
common share
assuming dilution
Net income (loss) $473,605 2,841,900 $0.17 $(1,912,044) 2,732,733 $(0.70)
======== ========= ===== =========== ========= =====
</TABLE>
9. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company
primarily evaluates the operating performance of its segments based on the
categories noted in the table below. During the nine months ended September 30,
1999 and 1998, the Company had no intercompany sales.
Financial information for the Company's business segments is as
follows:
F-11
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- ------------
<S> <C> <C>
REVENUES
- --------
Industrial and municipal fluid handling and filtration...............$ 11,376,728 $ 11,633,054
Commercial and residential water filtration and purification......... 3,531,609 5,212,685
Car wash equipment sales and service................................. 2,601,838 3,445,236
Corporate............................................................ -- --
------------- -------------
Total revenues.......................................................$ 17,510,175 $ 20,290,975
============= =============
OPERATING INCOME (LOSS)
- -----------------------
Industrial and municipal fluid handling and filtration...............$ 791,407 $ (401,781)
Commercial and residential water filtration and purification......... 613,506 (518,153)
Car wash equipment sales and service................................. 97,381 449,993
Corporate............................................................ (495,342) (844,032)
-------------- --------------
Total operating income (loss)........................................$ 1,006,952 $ (1,313,973)
============= =============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Industrial and municipal fluid handling and filtration...............$ 192,429 $ 220,977
Commercial and residential water filtration and purification......... 149,670 185,730
Car wash equipment sales and service................................. 96,750 96,750
Corporate............................................................ 37,503 36,900
------------- -------------
Total depreciation and amortization..................................$ 476,352 $ 540,357
============= =============
INTEREST EXPENSE, NET
- ---------------------
Industrial and municipal fluid handling and filtration...............$ 376,538 $ 492,337
Commercial and residential water filtration and purification......... -- --
Car wash equipment sales and service................................. 876 11,401
Corporate............................................................ 155,933 94,333
------------- -------------
Total interest expense, net..........................................$ 533,347 $ 598,071
============= =============
</TABLE>
F-12
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- ------------
<S> <C> <C>
TOTAL ASSETS
- ------------
Industrial and municipal fluid handling and filtration...............$ 7,699,416 $ 9,068,418
Commercial and residential water filtration and purification......... 2,560,839 3,252,952
Car wash equipment sales and service................................. 1,726,049 1,941,335
Corporate............................................................ 1,376,411 1,626,756
------------- -------------
Total assets.........................................................$ 13,362,715 $ 15,889,461
============= =============
CAPITAL EXPENDITURES
- --------------------
Industrial and municipal fluid handling and filtration...............$ 336,198 $ 178,132
Commercial and residential water filtration and purification......... 45,106 26,676
Car wash equipment sales and service................................. 31,418 33,379
Corporate............................................................ 22,434 12,818
------------- -------------
Total capital expenditures...........................................$ 435,156 $ 251,005
============= =============
</TABLE>
10. FINANCING FEES
The Company offers a retail financing program for the purpose of
assisting one of its subsidiary's water filtration and 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, 1999
and 1998 aggregated $570,561 and $585,007, respectively, and are included in
revenues.
11. SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 30, 1999 and 1998, the Company paid
$465,038 and $526,563, respectively, for interest.
12. COMMITMENTS AND CONTINGENCIES
(a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2003. Total rent expense aggregated
$131,421 and $176,607, for the nine months ended September 30, 1999 and 1998,
respectively.
F-13
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998)
(b) The Company has entered into a distribution agreement with Ryko
Manufacturing Company ("Ryko"). Under the terms of the agreement, the Company is
the exclusive distributor of Ryko car wash equipment in the South Florida
region. The distribution agreement provides that the Company sells directly or
receives a commission on all Ryko equipment sold within its region. Pursuant to
the most recent extension issued by Ryko, the distribution agreement is due to
expire in March 2000.
(c) The Company has 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, 1999 and 1998, the
Company contributed 66,133 and 96,591 shares of restricted Common Stock valued
at $39,103 and $62,788, respectively.
(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. The Company has provided for what it believes
to be the estimated probable loss in connection with this matter.
(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 those previously disclosed, will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.
13. SUBSEQUENT EVENTS
a) In October 1999, pursuant to the 401(k) employee savings and
retirement plan described in Note 12(c), the Company contributed 16,720 shares
of restricted Common Stock valued at $13,063.
b) In October 1999, the Company refinanced a mortgage collateralized by
land and building located in Coral Springs, Florida. The new mortgage has an
initial principal balance of $570,000 and a term of fifteen years. Principal and
interest are to be paid in equal monthly installments beginning in November
1999. Such mortgage bears interest at the rate of 8.5% for the first five years.
The interest rate will be adjusted in October 2004 and October 2009, each time
to one-half percent over the Wall Street Journal Prime Rate.
c) In October 1999, the Company entered into a one year consulting
agreement with a financial advisory concern. In conjunction with such agreement,
the Company issued 200,000 warrants to purchase shares of Common Stock at
exercise prices ranging from $2.20 to $4.35 per share. The warrants become
exercisable in October 2000 and expire in October 2003.
F-14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto appearing
elsewhere in this Quarterly Report on Form 10-QSB, as well as, the Company's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Presented below are the consolidated results of operations for the
Company for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues $ 17,510,175 $ 20,290,975
Cost of revenues 10,307,921 12,421,953
---------- ----------
Gross profit 7,202,254 7,869,022
Operating expenses 6,195,302 9,182,995
--------- ---------
Income (loss) from operations 1,006,952 (1,313,973)
Interest expense, net (533,347) (598,071)
--------- ---------
Net income (loss) $ 473,605 $ (1,912,044)
======= ==========
Earnings (loss) per common share-basic $ 0.17 $ (0.70)
==== ==========
Earnings (loss) per common share-diluted $ 0.17 $ (0.70)
==== ==========
</TABLE>
Revenues decreased by $2,780,800, or 13.7%, from $20,290,975 for the
nine months ended September 30, 1998, to $17,510,175 for the nine months ended
September 30, 1999. Of this decrease, $1,681,076 was attributable to lower sales
generated by the commercial and residential water filtration and purification
segment, $843,398 was due to a decrease in revenues recognized by the car wash
equipment sales and service segment and $256,326 was attributable to lower
revenues earned by the industrial and municipal fluid handling and filtration
segment.
- 18 -
<PAGE>
Cost of revenues decreased by $2,114,032, or 17.0%, from $12,421,953
for the nine months ended September 30, 1998, to $10,307,921 for the nine months
ended September 30, 1999. As a percentage of revenues, these amounts represented
61.2% for 1998, as compared to 58.9% for 1999. The decrease in cost of revenues
as a percentage of revenues primarily was due to efficiencies realized through
the purchasing process.
Gross profit decreased $666,768, or 8.5%, from $7,869,022 for the nine
months ended September 30, 1998 to $7,202,254 for the nine months ended
September 30, 1999, which, as a percentage of revenues, represented an increase
from 38.8% to 41.1%, respectively, for such periods.
The Company's operating expenses decreased $2,987,693, or 32.5%, from
$9,182,995 for the nine months ended September 30, 1998 to $6,195,302 for the
nine months ended September 30, 1999. As a percentage of revenues, these
expenses decreased from 45.3% for 1998 to 35.4% for 1999. Of the $2,987,693
decrease, $1,974,853 related to the recognition of non-recurring charges, of
which $1,052,039 was due to the permanent impairment of certain of the Company's
operating subsidiaries' intangible assets during the nine months ended September
30, 1998. The Company incurred no such non-recurring charges during the nine
months ended September 30, 1999. The remaining $1,012,840 decrease in operating
expenses was primarily in the expense categories of payroll and related expenses
($828,904) and provisions for doubtful accounts and notes ($181,410). Management
evaluates operating expenses on a regular basis, and as such, adjusts resources
allocated to cover such expenses. Optimum levels of operating expenses are
targeted and adjusted according to business levels in order to provide maximum
efficiency and effectiveness.
Net interest expense decreased $64,724, or 10.8%, from $598,071 for
the nine months ended September 30, 1998 to $533,347 for the nine months ended
September 30, 1999. This decrease was mainly attributable to lower average
interest rates on outstanding debt balances for the nine months ended September
30, 1999, as compared to the nine month period ended September 30, 1998.
Principally as a result of the factors described above, the Company
achieved net income of $473,605 for the nine months ended September 30, 1999,
compared to a net loss of $(1,912,044) incurred for the nine months ended
September 30, 1998.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1999, the Company had $476,030 of cash and cash
equivalents, working capital of $96,141, assets of $13,362,715, long-term debt,
net of current maturities, of $2,400,864 and stockholders' equity of $5,781,065.
The Company's operating activities provided $1,914,284 of cash resulting from a
decrease in inventory ($632,588); depreciation and amortization ($476,352); net
income ($473,605); a decrease in accounts receivable ($270,546); a decrease in
other assets ($53,042); a decrease in prepaids and other ($47,505); the pension
contribution paid through the issuance of Common Stock ($39,103); and the
provision for doubtful accounts and notes ($2,013); offset by a decrease in
accounts payable and accrued expenses ($80,470). Investing activities used
$374,412 of cash due to capital expenditures
- 19 -
<PAGE>
($435,156); offset by payments received on notes receivable ($60,744). Financing
activities used $1,636,971 of cash due to repayments of notes payable and
long-term debt ($11,969,035); offset by the net proceeds from issuance of notes
payable and long-term debt ($10,332,064).
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 $2,098,568 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 financings,
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.
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
During the nine months ended September 30, 1999, the Company spent
$435,156 on capital expenditures mainly relating to the development of a new
computer system to be implemented by all of the Company's subsidiaries and the
purchase of machinery and equipment at FSDA. During the remaining three months
of 1999, the Company intends to utilize approximately $100,000 more to purchase
additional machinery and equipment, most specifically at FSDA, and to complete
the development of the above noted computer system. The Company does not
presently anticipate any significant additional capital expenditures other than
those noted above and those relating to future acquisitions.
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. The adoption of SFAS No. 130 did not impact the Company's
financial statements.
- 20 -
<PAGE>
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 No.
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 No. 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. The Company adopted SFAS No. 131 in 1998.
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Statement applies to all entities and is
effective for all fiscal quarters of the fiscal years beginning after June 15,
1999. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the consolidated financial statements.
YEAR 2000
In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result, date
sensitive computer software may recognize a date using "00" as the year 1900
rather than the year 2000. This is generally referred to as the Year 2000 issue.
If this situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could disrupt operations.
During 1999, the Company will complete the implementation of its new
computer system to use 4-digit year fields and will therefore believe itself to
be "Year 2000" compliant. The aggregate cost of such implementation is
anticipated to be approximately $250,000, and the Company does not believe that
it will experience any material disruption in its operations with respect
thereto.
The Company is exposed to the risk that one or more of its vendors or
customers, including financial institutions, could experience Year 2000 problems
that impact their abilities to meet obligations to the Company. To date, the
Company is not aware of any vendor or customer Year 2000 issue that would have a
material adverse impact on the Company's operations. The Company has received an
interim status report from its primary vendors and customers. The Company has no
means of ensuring that its vendors and customers will be Year 2000 ready. The
inability of such vendors and customers to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company. The
effect of non-compliance by vendors and customers is not determinable at this
time. The Company's Year 2000 risks are considered minimal and no contingency
plans are believed to be necessary.
- 21 -
<PAGE>
Widespread disruptions in the national or international economy,
including disruption affecting the financial markets, resulting from Year 2000
issues, or in certain industries, such as commercial or investment banks, could
also have an adverse impact on the Company. The likelihood and effect of such
disruptions is not determinable at this time.
This Form 10-QSB contains certain forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations and business of the Company
and its subsidiaries, including statements made under Management's Discussion
and Analysis of Financial Condition and Results of Operations. These forward
looking statements involve certain risks and uncertainties. No assurance can be
given that any of such matters will be realized. Factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, among others, the following: competitive pressures in the
industries noted; general economic and business conditions; the ability to
implement and the effectiveness of business strategy and development plans;
quality of management; business abilities and judgment of personnel;
availability of qualified personnel; and labor and employee benefit costs.
INFLATION
The Company has not been materially affected by the impact of
inflation.
- 22 -
<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. The Company has provided for
what it believes to be the estimated probable loss in
connection with this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
On July 30, 1999, 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:
<TABLE>
<CAPTION>
=============================================================================================================================
NUMBER VOTING FOR WITHHOLD AUTHORITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William K. Mackey 2,508,104 2,405,287 102,817
- -----------------------------------------------------------------------------------------------------------------------------
Norman J. Hoskin 2,508,104 2,405,287 102,817
- -----------------------------------------------------------------------------------------------------------------------------
James P. Cefaratti 2,508,104 2,405,287 102,817
- -----------------------------------------------------------------------------------------------------------------------------
David K. Lucas 2,508,104 2,405,287 102,817
- -----------------------------------------------------------------------------------------------------------------------------
Peter C. Rossi 2,508,104 2,405,287 102,817
=============================================================================================================================
</TABLE>
- 23 -
<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.
- 24 -
<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: October 26, 1999 /S/ WILLIAM K. MACKEY
----------------------------
William K. Mackey
Chairman of the Board
President
Chief Executive Officer
Treasurer
Dated: October 26, 1999 /S/ GEORGE J. OVERMEYER
-----------------------------
George J. Overmeyer
Corporate Controller
- 25 -
<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-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 476,030
<SECURITIES> 0
<RECEIVABLES> 2,746,431
<ALLOWANCES> (160,000)
<INVENTORY> 1,976,884
<CURRENT-ASSETS> 5,276,927
<PP&E> 6,184,214
<DEPRECIATION> (1,180,892)
<TOTAL-ASSETS> 13,362,715
<CURRENT-LIABILITIES> 5,180,786
<BONDS> 0
0
0
<COMMON> 2,866
<OTHER-SE> 5,778,199
<TOTAL-LIABILITY-AND-EQUITY> 13,362,715
<SALES> 17,510,175
<TOTAL-REVENUES> 17,510,175
<CGS> 10,307,921
<TOTAL-COSTS> 10,307,921
<OTHER-EXPENSES> 6,193,289
<LOSS-PROVISION> 2,013
<INTEREST-EXPENSE> 533,347
<INCOME-PRETAX> 473,605
<INCOME-TAX> 0
<INCOME-CONTINUING> 473,605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473,605
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
