U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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 APRIL 30, 2000
CLASS
Common Stock, $.001 Par Value 2,911,529
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 March 31, 2000,
(unaudited), and December 31, 1999
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000, (unaudited), and March 31, 1999, (unaudited)
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000, (unaudited), and March 31, 1999, (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended March 31, 2000,
(unaudited), and March 31, 1999, (unaudited)
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim 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 MARCH 31, 2000)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................... $ 288,845 $ 460,964
Accounts receivable, net of allowance for doubtful accounts of
$110,000 and $160,000, in 2000 and 1999, respectively .... 2,318,301 2,783,381
Inventory, net ............................................... 1,437,955 1,676,292
Prepaids and other ........................................... 281,276 322,519
Net assets of discontinued operations ........................ 1,509,434 1,482,750
------------ ------------
Total current assets .............................................. 5,835,811 6,725,906
Property, plant and equipment, net ................................ 4,970,692 5,021,761
Intangible assets, net ............................................ 1,817,041 1,862,739
Other assets ...................................................... 340,981 356,184
------------ ------------
Total assets ...................................................... $ 12,964,525 $ 13,966,590
============ ============
LIABILITIES
Current liabilities
Accounts payable ............................................. $ 1,561,097 $ 1,894,111
Accrued expenses ............................................. 1,359,922 718,079
Current maturities of long-term debt ......................... 1,136,012 2,161,538
------------ ------------
Total current liabilities ......................................... 4,057,031 4,773,728
Long-term debt, less current maturities ........................... 3,213,758 3,189,132
------------ ------------
Total liabilities ................................................. 7,270,789 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, 2,911,529 and 2,899,506 shares issued
and outstanding, in 2000 and 1999, respectively .......... 2,912 2,900
Additional paid-in capital ................................... 17,114,706 17,102,319
Deficit ...................................................... (11,423,882) (11,101,489)
------------ ------------
Total stockholders' equity ........................................ 5,693,736 6,003,730
------------ ------------
Total liabilities and stockholders' equity ........................ $ 12,964,525 $ 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
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues ......................................... $ 4,343,381 $ 5,197,886
Cost of revenues ................................. 2,403,975 3,199,320
----------- -----------
Gross profit ..................................... 1,939,406 1,998,566
----------- -----------
Operating expenses:
Selling, general and administrative ......... 1,524,970 1,609,549
Severance expense ........................... 480,000 --
Depreciation and amortization ............... 133,199 123,201
----------- -----------
Total operating expenses ......................... 2,138,169 1,732,750
----------- -----------
(Loss) income from operations .................... (198,763) 265,816
Interest expense, net ............................ (185,808) (190,092)
----------- -----------
(Loss) income from continuing operations ......... (384,571) 75,724
Income from discontinued operations .............. 62,178 79,321
----------- -----------
Net (loss) income ................................ $ (322,393) $ 155,045
=========== ===========
(Loss) income per share from continuing operations $ (0.13) $ 0.03
Income per share from discontinued operations .... 0.02 0.03
----------- -----------
Net (loss) income per share, basic and diluted ... $ (0.11) $ 0.06
=========== ===========
Weighted average number of outstanding shares
of Common Stock, basic and diluted ............. 2,899,638 2,813,859
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
- 5 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income .................................. $ (322,393) $ 155,045
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization ................. 133,199 123,201
Pension contribution paid through issuance of
Common Stock ............................... 12,399 16,085
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .... 465,080 (278,540)
Decrease in inventory ......................... 238,337 532,608
Decrease in prepaids and other ................ 41,243 4,158
Decrease in other assets ...................... 15,203 26,533
Increase (decrease) in accounts payable
and accrued expenses ....................... 308,829 (412,956)
Net effect of discontinued operations ......... (26,684) 75,380
----------- -----------
Net cash provided by operating activities .......... 865,213 241,514
----------- -----------
INVESTING ACTIVITIES:
Payments received on notes receivable ......... -- 36,744
Capital expenditures .......................... (36,432) (51,323)
----------- -----------
Net cash used in investing activities .............. (36,432) (14,579)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
long-term debt ............................. 3,954,271 3,720,326
Repayment of notes payable and
long-term debt ............................. (4,955,171) (3,938,354)
----------- -----------
Net cash used in financing activities .............. (1,000,900) (218,028)
----------- -----------
Net (decrease) increase in cash and cash equivalents (172,119) 8,907
Cash and cash equivalents, beginning of period ..... 460,964 505,383
----------- -----------
Cash and cash equivalents, end of period ........... $ 288,845 $ 514,290
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 6 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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"), Gravity Flow
Systems, Inc., ("GFSI"), KISS International, Inc., ("KISS") and Di-tech Systems,
Inc., ("DTSI").
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
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 month
periods ended March 31, 2000 and 1999, are not necessarily indicative of the
results that may be expected for the years ending December 31, 2000 and 1999.
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.
- 7 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 March
31, 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.
- 8 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 for the three months ended March
31, 2000 and 1999, were approximately $23,000 and $41,000, respectively.
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.
2. INVENTORY
MARCH 31, 2000 DECEMBER 31, 1999
---------- ----------
Materials and purchased parts ............... $1,235,700 $1,473,394
Work in process ............................. 202,255 202,898
---------- ----------
Total inventory ............................. $1,437,955 $1,676,292
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
MARCH 31, 2000 DECEMBER 31, 1999
----------- -----------
Land and buildings ........................ $ 2,745,427 $ 2,745,427
Machinery and equipment ................... 2,728,889 2,694,263
Furniture and fixtures .................... 677,087 677,087
Leasehold improvements .................... 32,750 30,944
----------- -----------
6,184,153 6,147,721
Less accumulated depreciation ............. (1,213,461) (1,125,960)
----------- -----------
Net property, plant and equipment ......... $ 4,970,692 $ 5,021,761
=========== ===========
4. INTANGIBLE ASSETS
MARCH 31, 2000 DECEMBER 31, 1999
----------- -----------
Goodwill .................................. $ 2,742,058 $ 2,742,058
Less accumulated amortization .............. (925,017) (879,319)
----------- -----------
Net intangible assets ..................... $ 1,817,041 $ 1,862,739
=========== ===========
- 9 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 2000 AND 1999)
5. LONG-TERM DEBT
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
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%, (10.25% at March 31,
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 ................................... 695,745 1,527,655
Prime plus 1.25%, (10.25% at March 31,
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 ...................... 1,055,000 549,200
Prime plus 1.25%, (10.25% at March 31,
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 .................. 425,000 190,800
Prime plus 1.25%, (10.25% at March 31,
2000), note payable, principal and
interest payable monthly through March
2002, collateralized by all of the
assets of FSDA and DMPC ......................... 294,500 --
8.5% mortgage note payable, principal
and interest payable monthly through
October 2014, collateralized by land and
building of ACSI ................................ 562,064 566,887
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 .................................. 42,461 46,629
11% note payable, paid March 2000 ............... -- 1,194,499
----------- -----------
4,349,770 5,350,670
Less current maturities ......................... (1,136,012) (2,161,538)
----------- -----------
Total long-term debt ............................ $ 3,213,758 $ 3,189,132
=========== ===========
- 10 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 2000 AND 1999)
At March 31, 2000, scheduled maturities of long-term debt, are:
2001 $ 1,136,012
2002 318,889
2003 160,591
2004 1,306,622
2005 158,796
Thereafter 1,268,860
-------------
$ 4,349,770
The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum tangible net
worth and maintain certain financial ratios. Certain of such loans also provide
that the lenders may, at their options, accelerate such loans as a result of,
among other things, a material adverse change in the Company's financial
position or results of operations. The lenders have not notified the Company
that any such events have occurred, and the Company does not expect that such
notice will be received.
6. INCOME TAXES
At March 31, 2000 and December 31, 1999, the Company has approximately
$7,270,000 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 $2,730,000 and $2,620,000 deferred tax assets at March 31,
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 March 31, 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 March 31, 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.
(c) No options and warrants are included in the calculation of earnings
per share for the three months ended March 31, 2000 and 1999, as the effect
would be anti-dilutive.
- 11 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 2000 AND 1999)
8. DISCONTINUED OPERATIONS
In April 2000, the Company entered into an agreement to sell 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. The
Company does not expect any material gain, or loss, to arise from such
transaction. Net income from the discontinued segment amounted to $62,178 and
$79,321 for the three months ended March 31, 2000 and 1999, respectively.
Net asset and statement of operation highlights of the discontinued car
wash equipment sales and service segment are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash and cash equivalents ................................. $ 21,604 $ 14,743
Accounts receivable, net of allowance for doubtful accounts 534,629 346,766
Inventory ................................................. 307,086 399,740
Machinery and equipment, net .............................. 108,552 113,914
Intangible assets, net .................................... 835,092 858,342
Accounts payable and accrued liabilities .................. (297,529) (250,755)
----------- -----------
Net assets of discontinued operations ..................... $ 1,509,434 $ 1,482,750
=========== ===========
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
----------- -----------
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues .............................. $ 925,186 $ 1,116,178
Expenses .............................. (863,008) (1,036,857)
----------- -----------
Net income from discontinued operations $ 62,178 $ 79,321
=========== ===========
</TABLE>
9. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. 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 three months ended March 31,
2000 and 1999, the Company had no intercompany sales.
Financial information for the Company's business segments is as
follows:
- 12 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 2000 AND 1999)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
------------ ------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Industrial and municipal fluid handling and filtration ..... $ 3,369,729 $ 4,119,790
Commercial and residential water filtration and purification 973,652 1,078,096
Corporate .................................................. -- --
------------ ------------
Total revenues ............................................. $ 4,343,381 $ 5,197,886
============ ============
OPERATING (LOSS) INCOME
Industrial and municipal fluid handling and filtration ..... $ 347,033 $ 327,497
Commercial and residential water filtration and purification 162,074 168,506
Corporate .................................................. (707,870) (230,187)
------------ ------------
Total operating (loss) income .............................. $ (198,763) $ 265,816
============ ============
DEPRECIATION AND AMORTIZATION
Industrial and municipal fluid handling and filtration ..... $ 70,808 $ 60,810
Commercial and residential water filtration and purification 49,890 49,890
Corporate .................................................. 12,501 12,501
------------ ------------
Total depreciation and amortization ........................ $ 133,199 $ 123,201
============ ============
INTEREST EXPENSE, NET
Industrial and municipal fluid handling and filtration ..... $ 114,701 $ 135,170
Commercial and residential water filtration and purification -- --
Corporate .................................................. 71,107 54,922
------------ ------------
Total interest expense, net ................................ $ 185,808 $ 190,092
============ ============
TOTAL ASSETS
Industrial and municipal fluid handling and filtration ..... $ 7,766,141 $ 8,110,191
Commercial and residential water filtration and purification 2,435,360 2,719,695
Discontinued operations .................................... 1,509,434 1,569,798
Corporate .................................................. 1,253,590 1,320,374
------------ ------------
Total assets ............................................... $ 12,964,525 $ 13,720,058
============ ============
CAPITAL EXPENDITURES
Industrial and municipal fluid handling and filtration ..... $ 33,464 $ 45,906
Commercial and residential water filtration and purification 2,830 4,425
Corporate .................................................. 138 992
------------ ------------
Total capital expenditures ................................. $ 36,432 $ 51,323
============ ============
</TABLE>
- 13 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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 three months ended March 31, 2000
and 1999 aggregated approximately $162,000 and $176,000, respectively, and are
included in revenues.
11. SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended March 31, 2000 and 1999, the Company paid
$148,314 and $166,439, 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
$48,000 and $53,000, for the three months ended March 31, 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 three months ended March 31, 2000 and
1999, the Company contributed 12,023 and 27,091 shares of restricted Common
Stock valued at $12,399 and $16,085, 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.
- 14 -
<PAGE>
AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 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, 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 expensed in the
three months ended March 31, 2000, and are included in accrued expenses in the
accompanying balance sheet.
- 15 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's 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 - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Presented below are the condensed consolidated results of operations
for the Company for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues ......................................... $ 4,343,381 $ 5,197,886
Cost of revenues ................................. 2,403,975 3,199,320
----------- -----------
Gross profit ..................................... 1,939,406 1,998,566
Operating expenses ............................... 2,138,169 1,732,750
----------- -----------
(Loss) income from operations .................... (198,763) 265,816
Interest expense, net ............................ (185,808) (190,092)
----------- -----------
(Loss) income from continuing operations ......... (384,571) 75,724
Income from discontinued operations .............. 62,178 79,321
----------- -----------
Net (loss) income ................................ $ (322,393) $ 155,045
=========== ===========
(Loss) income per share from continuing operations $ (0.13) $ 0.03
Income per share from discontinued operations .... 0.02 0.03
----------- -----------
Net (loss) income per share ...................... $ (0.11) $ 0.06
=========== ===========
</TABLE>
Revenues decreased by $854,505, or 16.4%, from $5,197,886 for the
three months ended March 31, 1999, to $4,343,381 for the three months ended
March 31, 2000. $750,061 was due to a decrease in revenues recognized by the
industrial and municipal fluid handling and filtration segment and $104,444 was
due to a decrease in sales generated by the commercial and residential water
filtration and purification segment.
- 16 -
<PAGE>
Cost of revenues decreased by $795,345, or 24.9%, from $3,199,320 for
the three months ended March 31, 1999, to $2,403,975 for the three months ended
March 31, 2000. As a percentage of revenues, these amounts represented 61.6% for
1999 as compared to 55.3% 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 53.9% and 60.2%, respectively, for the three months
ended March 31, 2000. Cost of revenues as a percentage of revenues of such
segments, for the three months ended March 31, 1999 were 61.3% and 62.3%,
respectively.
Gross profit decreased $59,160, or 3%, from $1,998,566 for the three
months ended March 31, 1999, to $1,939,406 for the three months ended March 31,
2000, which, as a percentage of revenues, represented an increase from 38.4% to
44.7%, 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 46.1% and 39.8%,
respectively, for the three months ended March 31, 2000. Gross profit as a
percentage of revenues of such segments, for the three months ended March 31,
1999 were 38.7% and 37.7%, respectively.
The Company's operating expenses increased by $405,419, or 23.4%, from
$1,732,750 for the three months ended March 31, 1999, to $2,138,169 for the
three months ended March 31, 2000. As a percentage of revenues, these expenses
increased from 33.3% for 1999 to 49.2% for 2000. The $405,419 increase was
primarily due to severance expense ($480,000); partially offset by a decrease in
selling and related expenses, mainly in the form of payments to independent
product representatives ($63,619). 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 $(384,571) for the three months ended March 31,
2000, as compared to operating income of $75,724 for the three months ended
March 31, 1999.
Interest expense, net, decreased $4,284, or 2.3%, from $190,092 for
the three months ended March 31, 1999 to $185,808 for the three months ended
March 31, 2000. This decrease was mainly attributable to lower average
outstanding debt balances and interest rates on such outstanding debt balances
for the three months ended March 31, 2000, as compared to the three months ended
March 31, 1999.
Including the net income from discontinued operations of $62,178 and
$79,321 for the three months ended March 31, 2000 and 1999, respectively, the
Company incurred a net loss of $(322,393) and earned net income of $155,045 for
the three months ended March 31, 2000 and 1999, respectively.
- 17 -
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2000, the Company had $288,845 of cash and cash
equivalents, working capital of $1,778,780, total assets of $12,964,525,
long-term debt, net of current maturities, of $3,213,758 and stockholders'
equity of $5,693,736. During the three months ended March 31, 2000, the
Company's operating activities provided $865,213 of cash, as a result of a
decrease in accounts receivable ($465,080); an increase in accounts payable and
accrued expenses ($308,829); a decrease in inventory ($238,337); depreciation
and amortization ($133,199); a decrease in prepaids and other ($41,243); a
decrease in other assets ($15,203); and pension contribution paid through the
issuance of Common Stock ($12,399); offset by the net loss ($322,393) and the
net effect of discontinued operations ($26,684). Investing activities used
$36,432 for capital expenditures. Financing activities used $1,000,900 of cash,
due to repayments of notes payable and long-term debt ($4,955,171); offset by
the net proceeds from issuance of notes payable and long-term debt ($3,954,271).
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%, (10.25% as of March 31, 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.
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 $1,136,012 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.
- 18 -
<PAGE>
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 three months ended March 31, 2000, the Company spent
$36,432 on capital expenditures mainly relating to the purchase of machinery and
equipment at FSDA and the purchase of new, and upgrade of existing, computer
systems implemented by all of the Company's subsidiaries. During the remainder
of 2000, the Company intends to utilize approximately $160,000 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.
FORWARD LOOKING STATEMENTS
This Form 10-KSB 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.
- 19 -
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial data schedule
(b) REPORTS ON FORM 8-K
None
No other Items of Part II are applicable to the Registrant for
the period covered by this Quarterly Report on Form 10-QSB.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
AQUA CARE SYSTEMS, INC.
Registrant
Dated: May 11, 2000 /S/ NORMAN J. HOSKIN
-----------------------------------
Norman J. Hoskin
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Secretary
Dated: May 11, 2000 /S/ GEORGE J. OVERMEYER
-----------------------------------
George J. Overmeyer
Vice President of Finance and
Principal Accounting Officer
- 21 -
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 288,845
<SECURITIES> 0
<RECEIVABLES> 2,428,301
<ALLOWANCES> (110,000)
<INVENTORY> 1,437,955
<CURRENT-ASSETS> 5,835,811
<PP&E> 6,184,153
<DEPRECIATION> (1,213,461)
<TOTAL-ASSETS> 12,964,525
<CURRENT-LIABILITIES> 4,057,031
<BONDS> 0
0
0
<COMMON> 2,912
<OTHER-SE> 5,690,824
<TOTAL-LIABILITY-AND-EQUITY> 12,964,525
<SALES> 4,343,381
<TOTAL-REVENUES> 4,343,381
<CGS> 2,403,975
<TOTAL-COSTS> 2,403,975
<OTHER-EXPENSES> 2,138,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,808
<INCOME-PRETAX> (384,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (384,571)
<DISCONTINUED> 62,178
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322,393)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
