10-Q 1 q901.txt SEPTEMBER 30, 2001 FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2001 --------------------- [ ] Transition report under Section 13 or 15(d) of the exchange act of 1934 for the transition period from ______________ to ______________ COMMISSION FILE NUMBER 0-30917 --------------- GLOBAL WATER TECHNOLOGIES, INC. -------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 84-1148204 --------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 1767 Denver West Boulevard Golden, Colorado 80401 -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Issuer's telephone number): (303) 215-1100 ------------------- NA -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 --- Shares of Common Stock, $0.0006 par value, outstanding as of November 10, 2001: 6,190,048. ---------- GLOBAL WATER TECHNOLOGIES, INC. (GWTR) INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Statements of Operations Three months and nine months ended September 30, 2001 and 2000 Consolidated Balance Sheet As of September 30, 2001 and December 31, 2000 Consolidated Statements of Cash Flows Nine months ended September 30, 2001 and 2000 Notes to Financial Statements September 30, 2001 and 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II OTHER INFORMATION Item 1. Legal Proceedings Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES GLOBAL WATER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 3 GLOBAL WATER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 4 GLOBAL WATER TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the financial statements. 5 GLOBAL WATER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The above amounts exclude the impact of the issuance of stock for services. The accompanying notes are an integral part of these financial statements. 6 GLOBAL WATER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2001 and 2000 1. INTERIM FINANCIAL STATEMENTS The consolidated balance sheet as of September 30, 2001, and the related consolidated statements of operations for the nine and three months ended September 30, 2001 and 2000, and the statements of cash flows for the nine months ended September 30, 2001 and 2000 are unaudited; in the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of such financial statements have been included. These financial statements and notes are presented as permitted by Form 10-Q and should be read in conjunction with the Company's financial statements and notes included in Form 10-K for the year ended December 31, 2000. 2. STOCK OPTIONS On February 9, 2000, the Company issued 104,538 stock options to employees as part of the 1998 Stock Option Plan approved by the Company's shareholders at its 1998 annual meeting. The options vest to employees on a schedule of 20% immediately and 20% over each of the next four years. The options can be exercised when vested, but no later than 5 years from the issuance date. Additionally, 87,000 options were granted at various dates during the second and third quarters to employees and board members. As of September 30, 2001, 238,271 options from these and earlier grants remain outstanding. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25, the former standard. If the former standard for measurement is elected, SFAS No. 123 requires supplemental disclosure to show the effects of using the new measurement criteria. The Company intends to continue using the measurement prescribed by APB Opinion No. 25. 3. BUSINESS SEGMENT DATA The Company's primary business is the design, sale, manufacture and building of new industrial water cooling towers and in retrofitting existing industrial water cooling towers and cooling tower components for both the international and domestic markets. All of its operations are based within the United States. Based on risks, financial resources, profitability and internal 7 resources consumed, management has determined that the most relevant segment information is international and domestic transactions. The Company's export sales were $5,331,453 and $3,711,942 for the nine months ended September 30, 2001 and 2000, respectively. The following schedule summarizes the segmentation of the international and domestic business segments for the nine months ended September 30, 2001 and 2000. BUSINESS SEGMENT STATEMENTS OF OPERATIONS For the nine months ended September 30, 2001 and 2000

4. NEW CONTRACTS AND BACKLOG The Company has a backlog of $83,336,751 at September 30, 2001, compared to a backlog amount of $29,867,104 for the similar period ended in 2000 and a backlog of $34,258,116 at December 31, 2000. Backlog represents the amount of revenue the Company expects to realize from existing uncompleted contracts, which will be recognized in future reporting periods. 5. STOCKHOLDERS' EQUITY Effective June 30, 2000, the Company underwent a 1-for-60 reverse split of its common shares. The number of authorized common shares was reduced from 800,000,000 to 13,333,333 and par 8 value was increased from $0.00001 to $0.0006. Unless otherwise indicated, all share and per share amounts in these financial statements have been restated to reflect the split. At the Company's annual shareholder meeting held on June 27, 2001, the shareholders approved an increase in the authorized common shares to 25,000,000. On July 15, 2001, the Company issued 200,000 shares to a public relations firm in exchange for services to be rendered over a two year period. The value of the stock issued is being amortized to income over the life of the contract. 6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Company's policy is to hedge firm contracts with derivative instruments where appropriate and to selectively hedge anticipated contracts in the Company's ordinary course of business. As of September 30, 2001, the Company did not have any derivative instruments covered by FASB Statement No. 133. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Global Water Technologies, Inc., primarily through its wholly owned subsidiary, Psychrometric Systems, Inc., is in the business of designing, selling, manufacturing and building industrial water cooling towers, repairs and maintenance in the retrofit of existing industrial cooling towers and water cooling tower components for these and similar facilities. The Company markets its products and services worldwide to the following industries: electric power utilities; process (such as agricultural, industrial and pharmaceutical process industries); petrochemical; chemical; heating, ventilation and air-conditioning ("HVAC"); manufacturing; pulp & paper and other industries utilizing cooling towers. Typical customers include companies such as Archer Daniels Midland, Amoco, Mitsubishi, Mobil, Texaco, Bechtel, Fluor Daniel, Inc. and other large corporations around the world. The Company derives revenue primarily from the following sources: new water cooling tower sales, retrofits to existing water cooling towers and spare parts and supplies to existing cooling tower customers. The Company custom designs and constructs wooden, fiberglass and concrete towers for its customer base worldwide. The Company recognizes revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Contracts on selected projects where there are both repair and new tower components are segmented between the two distinct phases and accordingly, gross margin related to each activity is recognized as those separate phases are completed using the percentage-of- completion method, 9 based primarily on contract costs incurred to date compared with total estimated contract costs. Changes to total estimated contract costs and to contract revenues via change orders are recognized in the period in which they are determined. In addition, a provision is made for the entire amount of future estimated losses, if any, on contracts in progress in the period in which such losses are determined. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues were derived from Psychrometric Systems' products, and services from Applied Water Technologies' water treatment program. For the three month period ended September 30, 2001, total revenue increased 106.8% to $18,085,046 as compared to $8,744,578 for the three month period ended September 30, 2000. International revenues comprised 1.8% of total revenues in 2001 versus 30.9% in 2000. Contracts awarded ("bookings") during the three month period ended September 30, 2001 increased 95.2% from the similar period in 2000. Backlog increased from $34,258,116 at December 31, 2000 to $83,336,751 at September 30, 2001. The Company's cost of sales increased 97.4% from $8,293,771 in 2000 to $16,371,848 in 2001. As a percentage of revenues, cost of sales decreased from 94.8% in 2000 to 90.5% in 2001. This decrease is mainly due to improved job efficiencies and profitability, as well as improving market conditions. Due to significant competition, there may continue to be constraints on profit margins in the future. Selling, general and administrative expenses decreased 15.4% from $1,639,108 in 2000 to $1,387,284 in 2001. As a percentage of revenues, these expenses decreased from 18.7% in 2000 to 7.7% in 2001. Management believes that cost containment programs previously implemented, along with other cost savings measures, will continue to favorably impact future operating results. Research and development costs decreased from $9,288 in 2000 to $2,687 in 2001. Operating income (loss), based on the explanations noted above, improved from a loss of $(1,197,589) in 2000 to an income of $323,227 in 2001. Other income and expense consisted primarily of interest expense, which decreased from $81,468 in 2000 to $75,893 in 2001. This was mainly due to the Company's various debt financings and lower interest rates in 2001. Other income (loss) was due to losses on Canadian foreign currency receipts of ($6,369) in 2001 compared to income of $35,749 in other income in 2000. Income taxes (benefit) changed from a benefit of ($354,342) with an effective 28.5% tax rate in 2000 to a tax expense of $79,928 with an effective tax rate of 33.2% in 2001. 10 Net income (loss) available to common stockholders improved from a loss of ($891,966) in the three month period ended September 30, 2000 to a net income of $158,037 in the similar period in 2001. This amount includes a preferred stock dividend of $3,000 in 2000 and $3,000 in 2001. Basic and fully diluted income (loss) per share was $0.026 in the three month period ended September 30, 2001 and ($0.149) in 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 For the nine month period ended September 30, 2001, total revenue increased 49.8% to $55,252,885 as compared to $36,885,725 for the nine month period ended September 30, 2000. International revenues comprised 9.6% of total revenues in 2001 versus 10.1% in 2000. Contracts awarded ("bookings") during the nine month period ended September 30, 2001 increased 128.2% to $104,769,303 from $45,906,721 in 2000. The increase in bookings awarded is due to significant multiple project awards in 2001 and a favorable industry environment. The Company's cost of sales increased 53.2% from $33,023,758 in 2000 to $50,595,401 in 2001. As a percentage of revenues, cost of sales increased from 89.5% in 2000 to 91.5% in 2001. The absolute increase in cost of sales resulted primarily from a 49.8% increase in corresponding revenues. Due to significant competition, there can be no assurance that the Company can maintain its profit margins in the future. Selling, general and administrative expenses decreased 27.9% from $5,972,637 in 2000 to $4,304,749 in 2001 as the Company continues to enjoy benefits from implementation of cost control programs. As a percentage of revenues, these expenses decreased from 16.2% in 2000 to 7.8% in 2001. Management believes that the continued implementation of cost control programs will have a positive impact on future periods. Research and development costs decreased to $3,575 in 2001 from $100,936 in 2000. During the second and third quarters of 2000, the Company incurred costs related to the Factory Mutual Research certification awarded in 2000. This certification allows customers to forego sprinkler system installations and may result in lower capital and operating costs for the Company's product. Operating income (loss), based on the explanations noted above, increased from a (loss) of ($2,211,606) in 2000 to an operating income of $349,160 in 2001. Other income and expense primarily consisted of interest expense. Net interest expense declined from $280,418 in 2000 to $268,615 in 2001, a decrease of 4.2%. Other income (expense) declined from an income of $36,949 in 2000 to an expense of ($30,157) in 2001. Income taxes (benefit) changed from a benefit of ($783,806) with an effective 31.9% tax rate in 2000 to a tax expense of $18,314 with an effective tax rate of 36.3% in 2001. 11 Net income (loss) available for common stockholders was ($1,682,269) in the nine month period ended September 30, 2000 compared to a net income of $23,074 in the similar period in 2001. Basic and fully diluted income (loss) per share was ($0.140) in the nine month period ended September 30, 2000. Basic and fully diluted income per share was $0.004 in 2001. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company had working capital of $2,895,164 compared to working capital of $2,879,988 at September 30, 2000 and working capital of $1,316,991 at December 31, 2000. The Company's cash flow provided by and used in its operating, investing and financing activities during the first nine months of 2001 and 2000 are as follows: 2001 2000 ---- ---- Operating activities $ 657,732 $(2,984,151) Investing activities (397,191) (592,789) Financing activities (421,281) 2,891,579 ----------- ----------- Net (decrease) in cash and cash equivalents $ (160,740) $ (685,361) =========== =========== The Company's capital requirements for its continuing operations consists of its general working capital needs, scheduled payments on its debt obligations, new business opportunities and capital expenditures. Management anticipates that due to the growth in sales volume and contracted payments from projects, the Company's operating activities will provide a cash increase during the remainder of the year. Management believes that its current debt facilities and/or possible capital market funding will be sufficient for its operational cash investment requirements during the next four quarters. However, if additional capital is not secured, the Company's future growth potential may be inhibited. At September 30, 2001, net costs in excess of billings and estimated earnings on uncompleted contracts were $16,909,161 as compared to net costs in excess of billings and estimated earnings on uncompleted contracts of $15,433,744 at September 30, 2000 and $13,867,073 at December 31, 2000. This net increase is primarily due to contracted payment terms, project delays and timing of billings. Management expects this net investment to decrease by the end of the year. Budgeted capital expenditures during the remainder of the year consist of ongoing amounts for computer equipment, software, vehicles and office equipment replacement. The Company has a line of credit with a commercial lender totaling $2,800,000 to finance its working capital needs. This is partially secured by a stockholder's certificates of deposit. As of September 30, 2001, $2,300,000 was outstanding on this line of credit. The line of credit was renewed on April 30, 2001 and matures on April 30, 2002. The interest rate on the note is tiered 12 as follows: 5.14% on the first $822,000 and 7.0% on the remaining portion. In addition to the interest rate stated, the Company pays the above noted stockholder additional interest of $8,643 per month on his certificates of deposit securing the above mentioned Company notes. The Company also has a line of credit with a commercial lender totaling $2,000,000 to finance its working capital needs on foreign projects. This line of credit is guaranteed by the Export Import Bank of the United States and subjects the Company to certain financial covenants including minimum net worth requirements. The line of credit bears interest at prime plus 1% and was also renewed on April 30, 2001 and matures on April 30, 2002. As of September 30, 2001, there was an outstanding balance of $1,705,988 on this line of credit. The Company has a term loan secured by the Small Business Administration with an outstanding balance at September 30, 2001 of $161,273. Scheduled principal payment on this note is $95,004 over the next twelve months and interest rates are stated at one percent over prime. The Company has various term notes secured by Company vehicles. The outstanding balance on these notes at September 30, 2001 was $239,222 with scheduled principal payments over the next twelve months of $88,387 with interest rates ranging from 8.5% to 10.8%. Management believes that the Company will have sufficient capital resources to fund its capital requirements in its ordinary course of business for at least the next four quarters for continuing operations. The Company believes that its plan to secure additional capital from outside funding sources will enable it to continue to have sufficient capital for continuing operations beyond the next four quarters. However, no assurances can be made that additional capital can be secured under favorable terms. No assurance can be made that the Company will have sufficient working capital to continue its requirements for continuing operations beyond the next four quarters. FORWARD LOOKING STATEMENTS Statements of the Company's or management's intentions, beliefs, anticipations, expectations and similar expressions concerning future events contained in this document constitute "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. As with any future event, there can be no assurance that the events described in forward looking statements made in this report will occur or that the results of future events will not vary materially from those described in the forward looking statements made in this report. Important factors that could cause the Company's actual performance and operating results to differ materially from the forward looking statements include, but are not limited to, changes in the general level of economic activity in the markets served by the company, competition in the cooling tower industry and other industries where the Company markets its products and the introduction of new products by competitors in those industries, delays in refining the Company's manufacturing and construction techniques, cost overruns on particular projects, availability of capital sufficient to support the Company's level of activity and the ability of the Company to implement its business strategy. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rate and foreign exchange rate risk as discussed below. Interest Rate Risk. We have current debt outstanding under a line of credit and term loans of $4,182,769 at September 30, 2001. The credit facility bears interest at 1% above prime and $3.9 million will mature and be due in April of 2002. If we are required to obtain a replacement line of credit at higher interest rates, a change in rates of 1% would effect our estimated annual interest expense by approximately $25,000 on the amount of borrowings outstanding under our credit lines at September 30, 2001. Foreign Exchange Rate Risk. Foreign exchange rate risk arises from the possibility that changes in foreign exchange rates will impact the value of financial instruments or contract prices for work performed for our foreign customers. We are at risk that the exchange rate may fluctuate in a way that impacts the revenues that we are entitled to receive from a particular customer and the costs incurred in the local currency. As of September 30, 2001, the currency creating foreign risk for us is the Canadian dollar but is immaterial to our current operations at the September 30, 2001 amounts. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. A subsidiary, Psychrometric Systems, Inc. ("PSI") is a defendant in a lawsuit filed by a subcontractor in the Commonwealth Courts of Puerto Rico alleging breach of contract emanating from a project PSI performed for the Puerto Rico Electric Power Authority. The suit seeks damages in the amount of $450,000. PSI has denied the allegations of the plaintiff and has filed a counterclaim against the plaintiff in the amount of $950,000 associated with the cost of completion of the project after the plaintiff defaulted and was terminated for cause under its contract with PSI. PSI has also filed suit against the subcontractor's bonding company for the recovery of its damages associated with the costs of completing the subcontractor's work on the project. The subcontractor has sought leave to amend its claim against PSI for damages in the approximate amount of $1,200,000. The court has not granted the subcontractors motion for leave to amend and issued a show cause order to the subcontractor concerning its motion. To date, no trial date has been set and discovery is in process. While PSI feels very strong in its position, there is no definitive time frame for the completion of this litigation and no assurances can be given on its outcome. PSI filed suit seeking approximately $4,300,000 against Consorcio Azucerero Esconpion S.A. de CV ("CAZE") La Providencia, El Potrero, and Impulsora De La Cuenca Del Papaloapon on December 29, 2000 alleging breach of contract in the engineering and supply of cooling tower materials to the above named defendants. The complaint was served upon the defendants and CAZE has sought to remove the proceeding to Federal District Court for the District of Colorado. PSI has objected to the requested removal and to date, the court has not ruled on PSI's objection and motion to remand back to state court. CAZE has answered the complaint filed by PSI and has denied the allegations contained in the complaint. CAZE has also asserted a counterclaim against PSI for alleged breach of contract. CAZE thereafter moved for a stay of all proceedings relating to this matter. PSI does not believe there is any merit to CAZE's counterclaim. The underlying basis of CAZE's request for a stay of the proceedings was to allow the co-defendants the opportunity to retain independent counsel, inasmuch as the Government of Mexico expropriated the capital stock and assets of the three sugar mills (La Providencia, El Potrero and Impulsora De La Cuenca Del Papaloapon) from CAZE, which had heretofore owned the capital stock and assets of the mills. The order of expropriation by the Government of Mexico occurred on September 3, 2001. To date, neither the Government of Mexico, nor El Potrero, La Providencia or Impulsora De La Cuenca Del Papaloapon have entered an appearance or filed an answer to the complaint of PSI. All parties to this matter are engaged in settlement discussions. The three sugar mills (El Potrero, La Providencia and Impulsora De La Cuenca Del Papaloapon) have formally indicated a desire to complete the purchase of the engineering services and cooling tower materials. PSI 15 believes that it has meritorious claims concerning this matter. PSI has retained all manufactured materials in its possession and has not allowed any materials to be shipped to Mexico. In the event that this matter is not amicably resolved, PSI will vigorously pursue its remedies in the litigation. In the event that PSI is unsuccessful in its pursuit of its legal remedies, the Company may be forced to write off all or a portion of the receivable, less the cost of the materials retained in its possession. PSI has various other contingent assets on its books resulting from claims and commitments incident to its ordinary course of business. Management believes that these items will be favorably resolved and, based upon the advice of counsel, will be sufficient such that these contingencies will not have a materially adverse effect on the financial position of the Company. ITEM 5. OTHER INFORMATION. On October 30, 2001, the Company received a request from the Securities and Exchange Commission to voluntarily produce documents relating to statements made in its press releases and in statements concerning the Company made on an Internet website and in 'spam' emails sent to an unknown number of persons by an Internet website operator that publishes information concerning public companies. The Company paid a normal and customary fee to such Internet website operation to post information about the Company during a 30-day period. The Company has provided the requested documents and information to the SEC, and intends to continue to cooperate fully with the SEC's investigation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) On September 25, 2001, the Company filed on Form 8-K a revised listing of operational and financial risks. 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLOBAL WATER TECHNOLOGIES, INC. Date: November 14, 2001 By: /s/ George A. Kast ------------------------------------ George A. Kast Chief Executive Officer and Chairman of the Board Date: November 14, 2001 By: /s/ Martin Hout ------------------------------------ Martin Hout Chief Financial Officer 17

GLOBAL WATER TECHNOLOGIES INC 10-Q