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 June 30, 2000
[ ] 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 August 11, 2000
--------------------------
Class
-----
Common Stock, $ .001 Par Value 2,930,842
---------
Transitional small business disclosure format:
Yes _____ No __X__
<PAGE>
AQUA CARE SYSTEMS, INC.
INDEX TO 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets as of June 30, 2000,
(unaudited), and December 31, 1999
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000, (unaudited), and June 30, 1999,
(unaudited)
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000, (unaudited), and June 30, 1999,
(unaudited)
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000, (unaudited), and June 30, 1999,
(unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the six months ended June 30,
2000, (unaudited), and June 30, 1999, (unaudited)
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 condensed 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 condensed 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, 1999, filed with the Securities and Exchange
Commission on March 28, 2000.
3
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited with respect to June 30, 2000)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents .................................... $ 1,579,263 $ 460,964
Accounts receivable, net of allowance for doubtful accounts of
$90,000 and $160,000, in 2000 and 1999, respectively ..... 2,081,838 2,783,381
Inventory, net ............................................... 1,566,880 1,676,292
Prepaids and other ........................................... 212,681 322,519
Net assets of discontinued operations ........................ -- 1,482,750
--------------- ---------------
Total current assets .............................................. 5,440,662 6,725,906
Property, plant and equipment, net ................................ 4,271,577 5,021,761
Intangible assets, net ............................................ 1,771,344 1,862,739
Other assets ...................................................... 281,454 356,184
--------------- ---------------
Total assets ...................................................... $ 11,765,037 $ 13,966,590
=============== ===============
Liabilities
Current liabilities
Accounts payable ............................................. $ 1,654,639 $ 1,894,111
Accrued expenses ............................................. 869,229 718,079
Current maturities of long-term debt ......................... 1,316,509 2,161,538
--------------- ---------------
Total current liabilities ......................................... 3,840,377 4,773,728
Long-term debt, less current maturities ........................... 2,597,487 3,189,132
--------------- ---------------
Total liabilities ................................................. 6,437,864 7,962,860
--------------- ---------------
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, 2,930,842 and 2,899,506 shares issued
and outstanding, in 2000 and 1999, respectively .......... 2,931 2,900
Additional paid-in capital ................................... 17,129,775 17,102,319
Deficit ...................................................... (11,805,533) (11,101,489)
--------------- ---------------
Total stockholders' equity ........................................ 5,327,173 6,003,730
--------------- ---------------
Total liabilities and stockholders' equity ........................ $ 11,765,037 $ 13,966,590
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues ................................................ $ 3,710,040 $ 5,061,634
Cost of revenues ........................................ 2,034,897 3,165,185
--------------- ---------------
Gross profit ............................................ 1,675,143 1,896,449
--------------- ---------------
Operating expenses:
Selling, general and administrative ................ 1,686,283 1,397,133
Depreciation and amortization ...................... 124,863 123,198
--------------- ---------------
Total operating expenses ................................ 1,811,146 1,520,331
--------------- ---------------
(Loss) income from operations ........................... (136,003) 376,118
Interest expense, net ................................... (171,789) (173,633)
--------------- ---------------
(Loss) income from continuing operations ................ (307,792) 202,485
(Loss) income from discontinued operations .............. (73,859) 34,762
--------------- ---------------
Net (loss) income ....................................... $ (381,651) $ 237,247
=============== ===============
(Loss) income per share from continuing operations ...... $ (0.11) $ 0.07
(Loss) income per share from discontinued operations (0.02) 0.01
--------------- ---------------
Net (loss) income per share, basic and diluted .......... $ (0.13) $ 0.08
=============== ===============
Weighted average number of outstanding shares
of Common Stock, basic and diluted .................... 2,911,744 2,846,057
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues ................................................. $ 8,053,421 $ 10,259,520
Cost of revenues ......................................... 4,438,872 6,364,505
--------------- ---------------
Gross profit ............................................. 3,614,549 3,895,015
--------------- ---------------
Operating expenses:
Selling, general and administrative ................. 3,211,253 3,006,682
Severance expense ................................... 480,000 --
Depreciation and amortization ....................... 258,062 246,399
--------------- ---------------
Total operating expenses ................................. 3,949,315 3,253,081
--------------- ---------------
(Loss) income from operations ............................ (334,766) 641,934
Interest expense, net .................................... (357,597) (363,725)
--------------- ---------------
(Loss) income from continuing operations ................. (692,363) 278,209
(Loss) income from discontinued operations ............... (11,681) 114,083
--------------- ---------------
Net (loss) income ........................................ $ (704,044) $ 392,292
=============== ===============
(Loss) income per share from continuing operations ....... $ (0.24) $ 0.10
(Loss) income per share from discontinued operations...... 0.00 0.04
--------------- ---------------
Net (loss) income per share, basic and diluted ........... $ (0.24) $ 0.14
=============== ===============
Weighted average number of outstanding shares
of Common Stock, basic and diluted ..................... 2,905,625 2,830,560
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net (loss) income ...................................... $ (704,044) $ 392,292
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization ..................... 258,062 246,399
Pension contribution paid through issuance of
Common Stock ................................... 27,487 28,613
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........ 701,543 (626,209)
Decrease in inventory ............................. 109,412 445,366
Decrease in prepaids and other .................... 109,838 27,365
Decrease in other assets .......................... 62,730 50,200
(Decrease) increase in accounts payable
and accrued expenses ........................... (88,322) 587,281
Net effect of discontinued operations ............. 132,750 5,993
-------------- ---------------
Net cash provided by operating activities .............. 609,456 1,157,300
-------------- ---------------
Investing Activities:
Proceeds from sale of net assets of subsidiary 1,350,000 --
Proceeds from sale of land and building ........... 650,000 --
Payments received on notes receivable ............. 12,000 48,744
Capital expenditures .............................. (66,484) (205,318)
-------------- ---------------
Net cash provided by (used in) investing activities 1,945,516 (156,574)
-------------- ---------------
Financing Activities:
Proceeds from issuance of notes payable and
long-term debt ................................. 7,162,756 6,771,238
Repayment of notes payable and
long-term debt ................................. (8,599,429) (7,647,583)
-------------- ---------------
Net cash used in financing activities .................. (1,436,673) (876,345)
-------------- ---------------
Net increase in cash and cash equivalents .............. 1,118,299 124,381
Cash and cash equivalents, beginning of period ......... 460,964 505,383
-------------- ---------------
Cash and cash equivalents, end of period ............... $ 1,579,263 $ 629,764
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
1. Summary of Significant Accounting Policies
Business
Aqua Care Systems, Inc. and subsidiaries, (the "Company" or "ACSI"), is
engaged in the design, engineering, manufacturing, assembly, sales, marketing,
distribution and service of filtration systems and products, flow control
systems and products and water filtration and purification products. Currently,
it provides equipment sales and service for clients in the United States and
abroad. Active subsidiaries include Filtration Systems Division of Aqua Care
Systems, Inc., ("FSDA"), DuraMeter Pump Company, Inc., ("DMPC"), KISS
International, Inc., ("KISS"), Gravity Flow Systems, Inc., ("GFSI") and Di-tech
Systems, Inc., ("DTSI").
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
as of June 30, 2000 and for the three and six months ended June 30, 2000 and
1999 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, (consisting of normal recurring accruals), considered necessary for
a fair presentation have been included. Operating results for the three and six
month periods ended June 30, 2000 and 1999, are not necessarily indicative of
the results that may be expected for the years ending December 31, 2000 and
1999. The condensed consolidated balance sheet information as of December 31,
1999 was derived from the audited consolidated financial statements included in
the Company's Form 10-KSB. For further information, refer to the condensed
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
Principles of Consolidation
The accompanying condensed consolidated financial statements include
the accounts of all subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements 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.
8
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
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.
Revenue Recognition
Equipment and parts sales are recognized when products are shipped, and
service revenues are recognized as the services are performed. Additionally, 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.
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. Due to the short-term nature and variable
rate on a significant portion of the Company's debt, management believes that
the carrying amounts of such financial instruments as reflected in the condensed
consolidated balance sheets approximate their estimated fair value as of June
30, 2000 and December 31, 1999. 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.
Stock Based Compensation
The Company recognizes compensation expense for its employee and
director 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 (Loss) Per Share
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
anti-dilutive effect on diluted earnings per share are excluded from the
calculation.
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.
9
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
Advertising Costs
The Company expenses production costs of print advertisements as of the
first date the advertisements take place. Advertising expenses included in
selling, general and administrative expenses were $51,703 and $60,653,
respectively, for the six months ended June 30, 2000 and 1999, and $28,601 and
$19,319, respectively, for the three months ended June 30, 2000 and 1999.
New Accounting Standards
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, 2000. The Company
did not engage in derivative instruments or hedging activities in any periods
presented in the condensed consolidated financial statements. Accordingly,
management anticipates implementation of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
<TABLE>
<CAPTION>
2. Inventory
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Materials and purchased parts...................................... $ 1,419,028 $ 1,473,394
Work in process.................................................... 147,852 202,898
------------- -------------
Total inventory.................................................... $ 1,566,880 $ 1,676,292
============= =============
3. Property, Plant and Equipment
June 30, 2000 December 31, 1999
------------- -----------------
Land and buildings................................................. $ 2,000,000 $ 2,745,427
Machinery and equipment............................................ 2,758,940 2,694,263
Furniture and fixtures............................................. 677,085 677,087
Leasehold improvements............................................. 32,750 30,944
------------- -------------
5,468,775 6,147,721
Less accumulated depreciation...................................... (1,197,198) (1,125,960)
------------- -------------
Net property, plant and equipment.................................. $ 4,271,577 $ 5,021,761
============= =============
4. Intangible Assets
June 30, 2000 December 31, 1999
------------- -----------------
Goodwill........................................................... $ 2,742,058 $ 2,742,058
Less accumulated amortization...................................... (970,714) (879,319)
------------- -------------
Net intangible assets.............................................. $ 1,771,344 $ 1,862,739
============= =============
</TABLE>
10
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
5. Long-Term Debt
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<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 $ 1,150,000
Prime plus 1.25%, (10.75% at June 30, 2000), revolving credit
lines, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $3,500,000 through
June 2005, principally collateralized by accounts receivable
and inventory of FSDA and DMPC .......................................... 895,878 1,527,655
Prime plus 1.25%, (10.75% at June 30, 2000), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $700,000 due June 2005,
principally collateralized by property and plant of
FSDA and DMPC ........................................................... 1,037,419 549,200
Prime plus 1.25%, (10.75% at June 30, 2000), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $100,000 due June 2005,
principally collateralized by machinery and equipment of
FSDA and DMPC ........................................................... 409,820 190,800
Prime plus 1.25%, (10.75% at June 30, 2000), note payable,
principal and interest payable monthly through March 2002,
collateralized by all of the assets of FSDA and DMPC ................... 257,687 --
8.5% mortgage note payable, principal and interest payable monthly
through October 2014, collateralized by land and building of ACSI -- 566,887
10% unsecured notes payable to a former affiliated
entity, matured October 1994 ............................................ 125,000 125,000
9.50% note payable, principal and interest payable monthly through
June 2002, collateralized by all of the assets of GFSI .................. 38,192 46,629
11% note payable, paid March 2000 ....................................... -- 1,194,499
----------- -----------
3,913,996 5,350,670
Less current maturities ................................................. (1,316,509) (2,161,538)
----------- -----------
Total long-term debt .................................................... $ 2,597,487 $ 3,189,132
=========== ===========
</TABLE>
11
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
At June 30, 2000, scheduled maturities of long-term debt, are:
2001 $ 1,316,509
2002 262,342
2003 1,281,047
2004 131,047
2005 923,051
-------------
$ 3,913,996
=============
In March 2000, the Company refinanced a significant portion of the
above noted debt. In connection with such refinancing, the principal payments
were reduced from $80,000 to $23,191 per month, and the interest rates were
reduced from Prime plus 2.5% and 11% fixed to Prime plus 1.25%, (10.75% at June
30, 2000). The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum tangible net
worth and 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 any such events
have occurred, and the Company does not expect that such notice will be
received.
6. Income Taxes
At June 30, 2000 and December 31, 1999, the Company has approximately
$7,530,000 and $6,950,000, respectively, of net operating loss carryforwards
expiring through 2018, for both financial reporting and income tax purposes.
Changes in ownership in 1995 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 $2,840,000 and $2,620,000 deferred tax assets at June 30,
2000 and December 31, 1999, 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.
7. Equity Transactions
(a) At June 30, 2000, 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 June 30, 2000 and December 31, 1999, respectively, the
Company has reserved an aggregate 1,253,600 and 1,203,600 shares of Common Stock
for issuance upon exercise of options and warrants. No options and warrants are
included in the calculation of earnings per share for the six months ended June
30, 2000 and 1999, as the effect would be anti-dilutive.
12
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
8. Discontinued Operations
During the second quarter of 2000, the Company sold the net assets of
Car Wash Equipment & Supply, Ryko of South Florida, Inc., the sole entity in the
Company's car wash equipment sales and service segment, for $1,350,000, the book
value of the net assets as of May 1, 2000. In connection with this sale, the
Company sold land and building in Coral Springs, Florida for $650,000, the net
book value of such assets as of May 1, 2000. At December 31, 1999, the net
assets of the discontinued car wash equipment sales and service segment amounted
to $1,482,750 and were comprised of cash and cash equivalents ($14,743),
accounts receivable, net of allowance for doubtful accounts ($346,766),
inventory ($399,740), machinery and equipment, net ($113,914) and intangible
assets, net ($858,342); offset by accounts payable and accrued liabilities
($250,755). Statement of operation highlights of such discontinued operations
are as follows:
<TABLE>
<CAPTION>
For the six months ended For the six months ended
June 30, 2000 June 30, 1999
------------------------ ------------------------
<S> <C> <C>
Revenues............................................................. $ 1,069,168 $ 1,870,830
Expenses............................................................. 1,080,849 1,756,747
------------- -------------
Net (loss) income from discontinued operations....................... $ (11,681) $ 114,083
============= =============
</TABLE>
In connection with the above noted sale, the Company granted a put
option to the Buyer wherein the Buyer has the right to "put" such acquired net
assets back to the Company, for the equivalent sales price paid to the Company,
in the event that the Buyer does not receive a new distribution agreement
materially similar in scope and terms to the Company's existing Distribution
Agreement with its exclusive manufacturer, Ryko Manufacturing Company, ("Ryko").
Such put option must be exercised by October 9, 2000, or it expires. The Buyer
has received written notification of Ryko's intent to offer a distribution
agreement materially in scope and terms to the Company's Distribution Agreement.
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. FSDA, DMPC and
GFSI manufacture and distribute equipment in the industrial and municipal fluid
handling and filtration segment including, but not limited to, filter presses,
pressure leaf filters, tubular filters, metering pumps and sludge dewatering
systems. KISS and DTSI are manufacturers and distributors of commercial and
residential water filtration and purification equipment including, but not
limited to, water softeners, reverse osmosis systems and water filters. The
Company primarily evaluates the operating performance of its segments based on
the categories noted in the table below. During the six months ended June 30,
2000 and 1999, the Company had no intercompany sales.
Financial information for the Company's business segments is as
follows:
13
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
<TABLE>
<CAPTION>
For the six months ended For the six months ended
------------------------ ------------------------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenues
Industrial and municipal fluid handling and filtration............... $ 6,140,252 $ 7,987,956
Commercial and residential water filtration and purification......... 1,913,169 2,271,564
------------- -------------
Total revenues....................................................... $ 8,053,421 $ 10,259,520
============= =============
Operating (loss) income
Industrial and municipal fluid handling and filtration............... $ 346,639 $ 632,198
Commercial and residential water filtration and purification......... 248,713 377,920
Corporate............................................................ (930,118) (368,184)
------------- -------------
Total operating (loss) income........................................ $ (334,766) $ 641,934
============= =============
Depreciation and amortization
Industrial and municipal fluid handling and filtration............... $ 141,615 $ 121,617
Commercial and residential water filtration and purification......... 99,780 99,780
Corporate............................................................ 16,667 25,002
------------- -------------
Total depreciation and amortization.................................. $ 258,062 $ 246,399
============= =============
Interest expense, net
Industrial and municipal fluid handling and filtration............... $ 218,870 $ 258,275
Corporate............................................................ 138,727 105,450
------------- -------------
Total interest expense, net.......................................... $ 357,597 $ 363,725
============= =============
Capital expenditures
Industrial and municipal fluid handling and filtration............... $ 54,598 $ 171,767
Commercial and residential water filtration and purification......... 11,327 27,959
Corporate............................................................ 559 5,592
------------- -------------
Total capital expenditures........................................... $ 66,484 $ 205,318
============= =============
June 30, 2000 December 31, 1999
------------- -----------------
Total assets
Industrial and municipal fluid handling and filtration............... $ 7,516,108 $ 8,340,869
Commercial and residential water filtration and purification......... 2,397,580 2,682,059
Discontinued operations.............................................. -- 1,482,750
Corporate............................................................ 1,851,349 1,460,912
------------- -------------
Total assets......................................................... $ 11,765,037 $ 13,966,590
============= =============
</TABLE>
14
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
10. 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. The Company bears no credit risk, but could share in the risk
associated with dealer fraud. Net fees for the six months ended June 30, 2000
and 1999 aggregated approximately $256,807 and $373,784, respectively, and are
included in revenues. The Company has been informally notified that the lending
company intends to discontinue offering the finance program. As such, the
Company is in the process of locating a new financing entity. The inability of
the Company to find a lending institution willing to offer such a finance
program could have a material adverse effect on the Company's financial
condition and operating results.
11. Supplemental Cash Flow Information
For the six months ended June 30, 2000 and 1999, the Company paid
$271,867 and $321,713, respectively, for interest.
12. Commitments and Contingencies
(a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2002. Total rent expense aggregated
$90,009 and $84,716, for the six months ended June 30, 2000 and 1999,
respectively.
(b) 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 six months ended June 30, 2000 and 1999,
the Company contributed 31,336 and 52,147 shares of restricted Common Stock
valued at $27,487 and $28,613, respectively.
(c) 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.
The Company's insurance carrier is defending the claim under a reservation of
rights. 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 reserved
for the estimated probable loss in connection with this matter.
(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, other
than those previously disclosed, will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.
15
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to June 30, 2000 and 1999)
(e) William K. Mackey, the Company's President, Chief Executive
Officer, Treasurer and Principal Accounting Officer resigned effective February
28, 2000. In accordance with such resignation and in satisfaction of the
Company's obligations under his employment agreement, the Board of Directors
agreed to pay Mr. Mackey $480,000 in equal installments of $40,000 per month
beginning April 1, 2000, and extend all his options to purchase the Company's
Common Stock through December 31, 2000. All costs related to this event were
charged to operations in the first quarter of 2000, the unpaid amounts of which
are included in accrued expenses in the accompanying condensed consolidated
balance sheet at June 30, 2000.
16
<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 condensed 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 or Plan of Operation" contained
in Item 6 of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999.
Results of Operations - Six months ended June 30, 2000 and 1999
Presented below are the condensed consolidated results of operations
for the Company for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------- -------------------
<S> <C> <C>
Revenues $ 8,053,421 $ 10,259,520
Cost of revenues 4,438,872 6,364,505
------------------- -------------------
Gross profit 3,614,549 3,895,015
Operating expenses 3,949,315 3,253,081
------------------- -------------------
(Loss) income from operations (334,766) 641,934
Interest expense, net (357,597) (363,725)
------------------- -------------------
(Loss) income from continuing operations (692,363) 278,209
(Loss) income from discontinued operations (11,681) 114,083
------------------- -------------------
Net (loss) income $ (704,044) $ 392,292
=================== ===================
(Loss) income per share from continuing operations $ (0.24) $ 0.10
(Loss) income per share from discontinued operations 0.00 0.04
------------------- -------------------
Net (loss) income per share $ (0.24) $ 0.14
=================== ===================
</TABLE>
Revenues decreased by $2,206,099, or 21.5%, from $10,259,520 for the
six months ended June 30, 1999, to $8,053,421 for the six months ended June 30,
2000. $1,847,704 was due to a decrease in revenues recognized by the industrial
and municipal fluid handling and filtration segment and $358,395 was due to a
decrease in sales generated by the commercial and residential water filtration
and purification segment.
17
<PAGE>
Cost of revenues decreased by $1,925,633, or 30.3%, from $6,364,505 for
the six months ended June 30, 1999, to $4,438,872 for the six months ended June
30, 2000. As a percentage of revenues, these amounts represented 62% for 1999 as
compared to 55.1% for 2000. The decrease in cost of revenues as a percentage of
revenues primarily was due to more efficient and effective purchasing and
overall management of the Company's production processes. Cost of revenues as a
percentage of revenues for the industrial and municipal fluid handling and
filtration and commercial and residential water filtration and purification
segments were 52.4% and 63.7%, respectively, for the six months ended June 30,
2000. Cost of revenues as a percentage of revenues of such segments, for the six
months ended June 30, 1999 were 61.7% and 63.2%, respectively.
Gross profit decreased $280,466, or 7.2%, from $3,895,015 for the six
months ended June 30, 1999, to $3,614,549 for the six months ended June 30,
2000, which, as a percentage of revenues, represented an increase from 38% to
44.9%, respectively, for such periods. Gross profit as a percentage of revenues
for the industrial and municipal fluid handling and filtration and commercial
and residential water filtration and purification segments were 47.6% and 36.3%,
respectively, for the six months ended June 30, 2000. Gross profit as a
percentage of revenues of such segments, for the six months ended June 30, 1999
were 38.3% and 36.8%, respectively.
The Company's operating expenses increased by $696,234, or 21.4%, from
$3,253,081 for the six months ended June 30, 1999, to $3,949,315 for the six
months ended June 30, 2000. As a percentage of revenues, these expenses
increased from 31.7% for 1999 to 49% for 2000. The $696,234 increase was
primarily due to severance expense ($480,000) and an increase in payroll and
related expenses ($214,397). 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.
Principally as a result of the factors described above, the Company
incurred a net operating loss of $(334,766) for the six months ended June 30,
2000, as compared to operating income of $641,934 for the six months ended June
30, 1999.
Interest expense, net, decreased $6,128, or 1.7%, from $363,725 for the
six months ended June 30, 1999 to $357,597 for the six months ended June 30,
2000. This decrease was mainly attributable to lower average outstanding debt
balances and interest rates on such outstanding debt balances for the six months
ended June 30, 2000, as compared to the six months ended June 30, 1999.
Including the net (loss) income from discontinued operations of
$(11,681) and $114,083 for the six months ended June 30, 2000 and 1999,
respectively, the Company incurred a net loss of $(704,044) and earned net
income of $392,292 for the six months ended June 30, 2000 and 1999,
respectively.
18
<PAGE>
Financial Condition and Liquidity
At June 30, 2000, the Company had $1,579,263 of cash and cash
equivalents, working capital of $1,600,285, total assets of $11,765,037,
long-term debt, net of current maturities, of $2,597,487 and stockholders'
equity of $5,327,173. During the six months ended June 30, 2000, the Company's
operating activities provided $609,456 of cash, as a result of a decrease in
accounts receivable ($701,543); depreciation and amortization ($258,062); the
net effect of discontinued operations ($132,750); a decrease in prepaids and
other ($109,838); a decrease in inventory ($109,412); a decrease in other assets
($62,730); and pension contribution paid through the issuance of Common Stock
($27,487); offset by the net loss ($704,044) and a decrease in accounts payable
and accrued expenses ($88,322). Investing activities provided $1,945,516 of
cash, due to proceeds from sale of net assets of subsidiary ($1,350,000);
proceeds from sale of land and building ($650,000); and payments received on
notes receivable ($12,000); offset by capital expenditures ($66,484). Financing
activities used $1,436,673 of cash, due to repayments of notes payable and
long-term debt ($8,599,429); offset by the net proceeds from issuance of notes
payable and long-term debt ($7,162,756).
During March 2000, the Company completed the refinancing of debt
remaining from the acquisition of the Filtration Systems Division of Durco
International, Inc. in June 1997. In order to consummate such acquisition, Aqua
Care incurred debt of approximately $5,200,000, which had since been paid down
to approximately $1,800,000 through March 2000. Under the terms of the original
financing, the Company had been paying approximately $120,000 per month in
principal and interest since June 1997. Pursuant to the new consolidating
arrangement, it will pay approximately $36,000 per month in principal and
interest, representing an increase in cash flow of over $1,000,000 on an annual
basis. Additionally, the interest rate on amounts refinanced is Prime plus
1.25%, (10.75% as of June 30, 2000); a significant reduction from the previous
rates which included a fixed 11% rate, combined with Prime plus 2-2.5%. The
refinanced debt maturity date, originally June 2, 2000, has been extended to
June 2, 2005.
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. The Company bears no credit risk, but could share in the risk
associated with dealer fraud. Net fees for the six months ended June 30, 2000
and 1999 aggregated approximately $256,807 and $373,784, respectively, and are
included in revenues. The Company has been informally notified that the lending
company intends to discontinue offering the finance program. As such, the
Company is in the process of locating a new financing entity. The inability of
the Company to find a lending institution willing to offer such a finance
program could have a material adverse effect on the Company's financial
condition and operating results.
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
may be required either to consummate acquisitions, or to fund the operations of
new or existing businesses, including required principal payments related to
approximately $1,316,509 of current maturities of long-term debt, management
may, from time to time, investigate and pursue various types of financing
alternatives that are available to the Company. These may include, but are not
limited to, private placements, secondary offerings, bridge financing,
debentures, lines of credit and asset-based loans. While management believes
that financing will be available for the Company to not only fund its current
operations, but also to fund its acquisition program, there can be no assurance
such financing will be on terms reasonably acceptable to the Company. No such
acquisitions have occurred since 1997, and currently there are no acquisitions
pending. There can be no assurance that any acquisitions will be consummated
during 2000.
A portion of the revenues of the Company, particularly through FSDA,
have been, and are expected to continue to be, generated from foreign countries.
The Company invoices and receives substantially all remittances in U.S. dollars.
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 with 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 six months ended June 30, 2000, the Company spent $66,484
on capital expenditures mainly relating to the purchase of machinery and
equipment at FSDA and the upgrade of existing computer systems implemented by
all of the Company's subsidiaries. During the remainder of 2000, the Company
intends to utilize approximately $100,000 to purchase additional machinery and
equipment, most specifically at FSDA. 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. 133,
"Accounting for Derivative Instruments and Hedging Activities", established
accounting and reporting standards for derivative instruments and for hedging
activities. It required that an entity recognize all derivatives as either
assets or liabilities in the statement of financial positions and measure those
instruments as fair value. The Statement applies to all entities and, as
amended, is effective for all fiscal quarters of the fiscal years beginning
after June 15, 2000. The Company did not engage in derivative instruments, nor
hedging activities, in any periods presented in the condensed consolidated
financial statements.
20
<PAGE>
Forward Looking Statements
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.
21
<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. The Company's insurance carrier is
defending the claim under a reservation of rights. 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 reserved for the estimated probable loss in connection
with this matter.
Item 4. Submission of Matters to a Vote of Security Holders
On August 4, 2000, the Annual Meeting of Shareholders of Aqua Care
Systems, Inc. was held, at which the following actions were taken:
1. The following shares of Common Stock represented at the Annual
meeting were voted in the election of Directors as follows:
Number voting For Withholding authority
------------- --- ---------------------
Norman J. Hoskin 2,186,804 2,149,629 37,175
James P. Cefaratti 2,186,804 2,149,629 37,175
David K. Lucas 2,186,804 2,149,629 37,175
Peter C. Rossi 2,186,804 2,149,629 37,175
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 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.
22
<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: August 11, 2000 /s/ Norman J. Hoskin
--------------------------
Norman J. Hoskin
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Secretary
Dated: August 11, 2000 /s/ George J. Overmeyer
--------------------------
George J. Overmeyer
Vice President of Finance and
Principal Accounting Officer
23
<PAGE>
Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
27.1 Financial Data Schedule
