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, 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
November 7, 2000
---------------------
Class
-----
Common Stock, $.001 Par Value 2,948,420
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 September 30,
2000, (unaudited), and December 31, 1999
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2000, (unaudited), and September
30, 1999, (unaudited)
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2000, (unaudited), and September
30, 1999, (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000, (unaudited), and September
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 nine months ended September
30, 2000, (unaudited), and September 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 September 30, 2000)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- --------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents................................................$ 1,177,513 $ 460,964
Accounts receivable, net of allowance for doubtful accounts of
$90,000 and $160,000, in 2000 and 1999, respectively................. 2,574,414 2,783,381
Inventory, net........................................................... 1,824,134 1,676,292
Prepaids and other....................................................... 276,841 322,519
Net assets of discontinued operations.................................... -- 1,482,750
--------------- --------------
Total current assets.......................................................... 5,852,902 6,725,906
Property, plant and equipment, net............................................ 4,233,058 5,021,761
Intangible assets, net........................................................ 1,725,646 1,862,739
Other assets.................................................................. 250,851 356,184
--------------- --------------
Total assets..................................................................$ 12,062,457 $ 13,966,590
=============== ==============
Liabilities
Current liabilities
Accounts payable.........................................................$ 2,051,900 $ 1,894,111
Accrued expenses......................................................... 585,863 718,079
Current maturities of long-term debt..................................... 1,555,084 2,161,538
--------------- --------------
Total current liabilities..................................................... 4,192,847 4,773,728
Long-term debt, less current maturities....................................... 2,523,535 3,189,132
--------------- --------------
Total liabilities............................................................. 6,716,382 7,962,860
--------------- --------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par; 5,000,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.001 par; 30,000,000 shares
authorized, 2,948,420 and 2,899,506 shares issued
and outstanding, in 2000 and 1999, respectively...................... 2,948 2,900
Additional paid-in capital............................................... 17,142,392 17,102,319
Deficit.................................................................. (11,799,265) (11,101,489)
--------------- --------------
Total stockholders' equity.................................................... 5,346,075 6,003,730
--------------- --------------
Total liabilities and stockholders' equity....................................$ 12,062,457 $ 13,966,590
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-1
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 4,169,674 $ 4,648,817
Cost of revenues............................................ 2,448,749 2,701,573
--------------- ---------------
Gross profit................................................ 1,720,925 1,947,244
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 1,536,714 1,546,407
Depreciation and amortization.......................... 135,699 133,200
--------------- ---------------
Total operating expenses.................................... 1,672,413 1,679,607
--------------- ---------------
Income from operations...................................... 48,512 267,637
Interest expense, net....................................... (147,244) (168,746)
Other income................................................ 105,000 --
--------------- ---------------
Income from continuing operations........................... 6,268 98,891
Loss from discontinued operations........................... -- (17,578)
--------------- ----------------
Net income..................................................$ 6,268 $ 81,313
=============== ===============
Income per share from continuing operations.................$ 0.00 $ 0.03
Income per share from discontinued operations............... -- 0.00
--------------- ---------------
Net income per share, basic and diluted.....................$ 0.00 $ 0.03
=============== ===============
Weighted average number of outstanding shares
of Common Stock, basic and diluted........................ 2,931,037 2,864,581
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues....................................................$ 12,223,095 $ 14,908,337
Cost of revenues............................................ 6,887,621 9,066,078
--------------- ---------------
Gross profit................................................ 5,335,474 5,842,259
--------------- ---------------
Operating expenses:
Selling, general and administrative.................... 4,747,967 4,553,086
Severance expense...................................... 480,000 --
Depreciation and amortization.......................... 393,761 379,602
--------------- ---------------
Total operating expenses.................................... 5,621,728 4,932,688
--------------- ---------------
(Loss) income from operations............................... (286,254) 909,571
Interest expense, net....................................... (504,841) (532,471)
Other income................................................ 105,000 --
--------------- ---------------
(Loss) income from continuing operations.................... (686,095) 377,100
(Loss) income from discontinued operations.................. (11,681) 96,505
--------------- ---------------
Net (loss) income...........................................$ (697,776) $ 473,605
=============== ===============
(Loss) income per share from continuing operations..........$ (0.24) $ 0.13
(Loss) income per share from discontinued operations........ (0.00) 0.04
--------------- ---------------
Net (loss) income per share, basic and diluted..............$ (0.24) $ 0.17
=============== ===============
Weighted average number of outstanding shares
of Common Stock, basic and diluted........................ 2,913,959 2,841,900
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net (loss) income...........................................$ (697,776) $ 473,605
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Gain on sale of net assets of subsidiary............... (105,000) --
Depreciation and amortization.......................... 393,761 379,602
Pension contribution paid through issuance of
Common Stock........................................ 40,121 39,103
Changes in assets and liabilities:
Decrease in accounts receivable........................ 208,967 113,130
(Increase) decrease in inventory....................... (147,842) 605,387
Decrease in prepaids and other......................... 45,678 47,505
Decrease in other assets............................... 81,333 53,046
Increase in accounts payable and accrued expenses...... 25,573 71,143
Net effect of discontinued operations.................. 132,750 75,052
--------------- ---------------
Net cash (used in) provided by operating activities......... (22,435) 1,857,573
--------------- ---------------
Investing Activities:
Proceeds from sale of net assets of subsidiaries....... 1,455,000 --
Proceeds from sale of land and building................ 650,000 --
Payments received on notes receivable.................. 24,000 60,744
Capital expenditures................................... (117,965) (403,742)
--------------- ---------------
Net cash provided by (used in) investing activities......... 2,011,035 (342,998)
--------------- ----------------
Financing Activities:
Proceeds from issuance of notes payable and
long-term debt...................................... 9,996,876 10,332,064
Repayment of notes payable and
long-term debt...................................... (11,268,927) (11,889,035)
--------------- ----------------
Net cash used in financing activities....................... (1,272,051) (1,556,971)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents........ 716,549 (42,396)
Cash and cash equivalents, beginning of period.............. 460,964 505,383
--------------- ---------------
Cash and cash equivalents, end of period....................$ 1,177,513 $ 462,987
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 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 September 30, 2000 and for the three and nine months ended September 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 nine month periods ended September 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.
F-5
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
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.
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
September 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.
F-6
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
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.
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 $29,447 and $16,043,
respectively, for the three months ended September 30, 2000 and 1999, and
$81,150 and $76,696, respectively, for the nine months ended September 30, 2000
and 1999.
New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44 (Interpretation 44), Accounting for Certain
Transactions Involving Stock Compensation. Interpretation 44 provides criteria
for the recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 was effective
July 1, 2000, with certain provisions that were effective retroactively to
December 15, 1998 and January 12, 2000. Adoption of Interpretation 44 did not
have an impact on the Company's financial statements.
2. Inventory
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Materials and purchased parts........................................$ 1,466,958 $ 1,473,394
Work in process...................................................... 357,176 202,898
------------- -------------
Total inventory......................................................$ 1,824,134 $ 1,676,292
============ ============
</TABLE>
3. Property, Plant and Equipment
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Land and buildings...................................................$ 2,000,000 $ 2,745,427
Machinery and equipment.............................................. 2,810,420 2,694,263
Furniture and fixtures............................................... 677,086 677,087
Leasehold improvements............................................... 32,750 30,944
------------- -------------
5,520,256 6,147,721
Less accumulated depreciation........................................ (1,287,198) (1,125,960)
------------- -------------
Net property, plant and equipment....................................$ 4,233,058 $ 5,021,761
============= =============
</TABLE>
4 Intangible Assets
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Goodwill.............................................................$ 2,742,058 $ 2,742,058
Less accumulated amortization........................................ (1,016,412) (879,319)
------------- -------------
Net intangible assets................................................$ 1,725,646 $ 1,862,739
============= =============
</TABLE>
F-7
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
5. Long-Term Debt
<TABLE>
<CAPTION>
September 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 September 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....................................... 1,134,453 1,527,655
Prime plus 1.25%, (10.75% at September 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........................................................ 1,019,831 549,200
Prime plus 1.25%, (10.75% at September 30, 2000), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $100,000 due June 2005,
principally collateralized by machinery and equipment of
FSDA and DMPC........................................................ 394,643 190,800
Prime plus 1.25%, (10.75% at September 30, 2000), note payable,
principal and interest payable monthly through March 2002,
collateralized by all of the assets of FSDA and DMPC................. 220,875 --
10% unsecured notes payable to a former affiliated
entity, matured October 1994......................................... 125,000 125,000
9.50% note payable, principal and interest payable monthly through
June 2002............................................................ 33,817 46,629
11% note payable, paid March 2000.................................... -- 1,194,499
8.5% mortgage note payable, paid June 2000........................... -- 566,887
------------- -------------
4,078,619 5,350,670
Less current maturities.............................................. (1,555,084) (2,161,538)
------------- -------------
Total long-term debt.................................................$ 2,523,535 $ 3,189,132
============= =============
</TABLE>
F-8
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
At September 30, 2000, scheduled maturities of long-term debt, are:
2001 $ 1,555,084
2002 221,155
2003 1,281,047
2004 131,047
2005 890,286
-------------
$ 4,078,619
=============
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
September 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 September 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
September 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 September 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.
F-9
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
(b) As of September 30, 2000 and December 31, 1999, respectively, the
Company has reserved an aggregate 1,150,225 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 nine months ended
September 30, 2000 and 1999, as the effect would be anti-dilutive.
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
($250,755). Statement of operation highlights of such discontinued operations
are as follows:
<TABLE>
<CAPTION>
For the nine months ended For the nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues.............................................................$ 1,069,168 $ 2,601,838
Expenses............................................................. 1,080,849 2,505,333
------------- -------------
Net (loss) income from discontinued operations.......................$ (11,681) $ 96,505
============= =============
</TABLE>
In connection with the above noted sale, the Company granted a put
option to the Buyer wherein the Buyer had 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 did not receive a new distribution agreement
materially similar in scope and terms to the Company's previous Distribution
Agreement with its exclusive manufacturer, Ryko Manufacturing Company, ("Ryko").
The Buyer received a distribution agreement materially similar in scope and
terms to the Company's Distribution Agreement, effective October 1, 2000, thus
nullifying the put option and completing the sale.
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 nine months ended September
30, 2000 and 1999, the Company had no intercompany sales.
F-10
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
Financial information for the Company's business segments is as
follows:
<TABLE>
<CAPTION>
For the nine months ended For the nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues
--------
Industrial and municipal fluid handling and filtration...............$ 9,487,454 $ 11,376,728
Commercial and residential water filtration and purification......... 2,735,641 3,531,609
------------- -------------
Total revenues.......................................................$ 12,223,095 $ 14,908,337
============= =============
Operating (loss) income
-----------------------
Industrial and municipal fluid handling and filtration...............$ 464,106 $ 791,407
Commercial and residential water filtration and purification......... 363,369 613,506
Corporate............................................................ (1,113,729) (495,342)
-------------- --------------
Total operating (loss) income........................................$ (286,254) $ 909,571
============== =============
Depreciation and amortization
-----------------------------
Industrial and municipal fluid handling and filtration...............$ 212,424 $ 192,429
Commercial and residential water filtration and purification......... 149,670 149,670
Corporate............................................................ 31,667 37,503
------------- -------------
Total depreciation and amortization..................................$ 393,761 $ 379,602
============= =============
Interest expense, net
---------------------
Industrial and municipal fluid handling and filtration...............$ 322,649 $ 376,538
Corporate............................................................ 182,192 155,933
------------- -------------
Total interest expense, net..........................................$ 504,841 $ 532,471
============= =============
Capital expenditures
--------------------
Industrial and municipal fluid handling and filtration...............$ 101,346 $ 336,198
Commercial and residential water filtration and purification......... 12,074 45,106
Corporate............................................................ 4,545 22,438
------------- -------------
Total capital expenditures...........................................$ 117,965 $ 403,742
============= =============
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Total assets
Industrial and municipal fluid handling and filtration...............$ 8,392,547 $ 8,340,869
Commercial and residential water filtration and purification......... 2,255,539 2,682,059
Discontinued operations.............................................. -- 1,482,750
Corporate............................................................ 1,414,371 1,460,912
------------- -------------
Total assets.........................................................$ 12,062,457 $ 13,966,590
============= =============
</TABLE>
F-11
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 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 nine months ended September 30,
2000 and 1999 aggregated approximately $390,720 and $570,561, respectively, and
are included in revenues. The Company has been informally notified that the
lending company intends to discontinue offering the finance program effective
September 2001. 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 Other Income
On September 14, 2000, the Company sold substantially all of the net
assets of Gravity Flow Systems, Inc. for $105,000 in cash. The Company realized
a net gain on this sale of net assets of $105,000.
12 Supplemental Cash Flow Information
For the nine months ended September 30, 2000 and 1999, the Company paid
$386,048 and $463,277, respectively, for interest.
13 Commitments and Contingencies
(a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2002. Total rent expense aggregated
$132,983 and $129,509, for the nine months ended September 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 nine months ended September 30, 2000 and
1999, the Company contributed 48,914 and 66,133 shares of restricted Common
Stock valued at $40,121 and $39,103, 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 alleged, 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.
During September 2000, the Company and its insurer settled such matter for
$235,000; $135,000 borne by the Company and $100,000 borne by its insurer. Since
the Company previously reserved for the estimated probable loss in connection
with this matter, there was no material effect on the Company's operations as a
result of the settlement.
F-12
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited with respect to September 30, 2000 and 1999)
(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.
(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 September 30, 2000.
(f) On October 1, 2000, the Company entered into two-year employment
agreements with each of the Company's Chief Executive Officer and Vice President
of Finance. The Agreements provide for annual base salaries of $125,000 and
$100,000, respectively, plus bonuses, if any, as determined by the Board of
Directors. In connection with such Agreements, the Company granted 50,000
options to purchase Common Stock at $1.38, market value at the date of grant, to
each of the above noted Officers. The above options expire ten years from the
date of grant, and are exercisable one-half each year beginning one year from
the date of grant. The employment agreements contain provisions for severance
payments in the event of a change of control of the Company, material default by
the Company and termination of such Officers without cause.
F-13
<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 - Nine months ended September 30, 2000 and 1999
Presented below are the condensed consolidated results of operations
for the Company for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues $ 12,223,095 $ 14,908,337
Cost of revenues 6,887,621 9,066,078
----------------- -----------------
Gross profit 5,335,474 5,842,259
Operating expenses 5,621,728 4,932,688
----------------- ------------------
(Loss) income from operations (286,254) 909,571
Interest expense, net (504,841) (532,471)
Other income 105,000 --
----------------- ------------------
(Loss) income from continuing operations (686,095) 377,100
(Loss) income from discontinued operations (11,681) 96,505
----------------- ------------------
Net (loss) income $ (697,776) $ 473,605
================ ================
(Loss) income per share from continuing operations $ (0.24) $ 0.13
(Loss) income per share from discontinued operations (0.00) 0.04
---------------- ----------------
Net (loss) income per share $ (0.24) $ 0.17
================ ================
</TABLE>
Revenues decreased by $2,685,242, or 18%, from $14,908,337 for the
nine months ended September 30, 1999, to $12,223,095 for the nine months ended
September 30, 2000. $1,889,274 was due to a decrease in revenues recognized by
the industrial and municipal fluid handling and filtration segment and $795,968
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 $2,178,457, or 24%, from $9,066,078 for
the nine months ended September 30, 1999, to $6,887,621 for the nine months
ended September 30, 2000. As a percentage of revenues, these amounts represented
60.8% for 1999 as compared to 56.3% 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 54.5% and 62.9%, respectively, for the nine months
ended September 30, 2000. Cost of revenues as a percentage of revenues of such
segments, for the nine months ended September 30, 1999 were 60.1% and 63%,
respectively.
Gross profit decreased $506,785, or 8.7%, from $5,842,259 for the nine
months ended September 30, 1999, to $5,335,474 for the nine months ended
September 30, 2000, which, as a percentage of revenues, represented an increase
from 39.2% to 43.7%, 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 45.5% and 37.1%, respectively, for the nine months ended September
30, 2000. Gross profit as a percentage of revenues of such segments, for the
nine months ended September 30, 1999 were 39.9% and 37%, respectively.
The Company's operating expenses increased by $689,040, or 14%, from
$4,932,688 for the nine months ended September 30, 1999, to $5,621,728 for the
nine months ended September 30, 2000. As a percentage of revenues, these
expenses increased from 33.1% for 1999 to 46% for 2000. The $689,040 increase
was primarily due to severance expense ($480,000) and an increase in payroll and
related expenses ($206,435). 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 $(286,254) for the nine months ended September
30, 2000, as compared to operating income of $909,571 for the nine months ended
September 30, 1999.
Interest expense, net, decreased $27,630, or 5.2%, from $532,471 for
the nine months ended September 30, 1999 to $504,841 for the nine months ended
September 30, 2000. This decrease was mainly attributable to lower average
outstanding debt balances and lower interest rates on such outstanding debt
balances for the nine months ended September 30, 2000, as compared to the nine
months ended September 30, 1999.
Including the other income from the sale of the net assets of GFSI in
September 2000 of $105,000 and the net (loss) income from discontinued
operations of $(11,681) and $96,505 for the nine months ended September 30, 2000
and 1999, respectively, the Company incurred a net loss of $(697,776) and earned
net income of $473,605 for the nine months ended September 30, 2000 and 1999,
respectively.
18
<PAGE>
Financial Condition and Liquidity
At September 30, 2000, the Company had $1,177,513 of cash and cash
equivalents, working capital of $1,660,055, total assets of $12,062,457,
long-term debt, net of current maturities, of $2,523,535 and stockholders'
equity of $5,346,075. During the nine months ended September 30, 2000, the
Company's operating activities used $22,435 of cash, as a result of the net loss
($697,776), an increase in inventory ($147,842) and the gain on sale of net
assets of subsidiary ($105,000); offset by depreciation and amortization
($393,761), a decrease in accounts receivable ($208,967), the net effect of
discontinued operations ($132,750), a decrease in other assets ($81,333), a
decrease in prepaids and other ($45,678), the pension contribution paid through
the issuance of Common Stock ($40,121), and an increase in accounts payable and
accrued expenses ($25,573). Investing activities provided $2,011,035 of cash,
due to proceeds from sale of net assets of subsidiaries ($1,455,000); proceeds
from sale of land and building ($650,000); and payments received on notes
receivable ($24,000); offset by capital expenditures ($117,965). Financing
activities used $1,272,051 of cash, due to repayments of notes payable and
long-term debt ($11,268,927); offset by the net proceeds from issuance of notes
payable and long-term debt ($9,996,876).
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 September 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 nine months ended September 30,
2000 and 1999 aggregated approximately $390,720 and $570,561, respectively, and
are included in revenues. The Company has been informally notified that the
lending company intends to discontinue offering the finance program effective
September 2001. 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 $1,555,084 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 nine months ended September 30, 2000, the Company spent
$117,965 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 Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44 (Interpretation 44), Accounting for Certain
Transactions Involving Stock Compensation. Interpretation 44 provides criteria
for the recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 was effective
July 1, 2000, with certain provisions that were effective retroactively to
December 15, 1998 and January 12, 2000. Adoption of Interpretation 44 did not
have an impact on the Company's 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 alleged, 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. During
September 2000, the Company and its insurer settled such
matter for $235,000; $135,000 borne by the Company and
$100,000 borne by its insurer. Since the Company previously
reserved for the estimated probable loss in connection with
this matter, there was no material effect on the Company's
operations as a result of the settlement.
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:
<TABLE>
<CAPTION>
Number voting For Withholding authority
------------- --- ---------------------
<S> <C> <C> <C>
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
</TABLE>
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: November 7, 2000 /s/ Norman J. Hoskin
--------------------------
Norman J. Hoskin
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Secretary
Dated: November 7, 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
