10-Q 1 q301.txt MARCH 31, 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 March 31, 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 May 3, 2001: 5,990,048. ---------- GLOBAL WATER TECHNOLOGIES, INC. (GWTR) INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Statements of Operations Three months ended March 31, 2001 and 2000 Consolidated Balance Sheet As of March 31, 2001 and December 31, 2000 Consolidated Statements of Cash Flows Three months ended March 31, 2001 and 2000 Notes to Financial Statements March 31, 2001 and 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II 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 BALANCE SHEET

The accompanying notes are an integral part of the financial statements. 4 GLOBAL WATER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 5 GLOBAL WATER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2001 and 2000 1. INTERIM FINANCIAL STATEMENTS The consolidated balance sheet as of March 31, 2001, and the related consolidated statements of operations for the three months ended March 31, 2001 and 2000, and the statements of cash flows for the three months ended March 31, 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. As of March 31, 2001, 168,767 options from this 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 cooling towers and in retrofitting existing industrial cooling towers and cooling tower components for both the international and domestic markets. All of its operations are within the United States. Based on risks, financial resources, profitability and internal resources consumed, management has determined that the most relevant segment information is international and domestic transactions. 6 The Company's export sales were $3,122,089 and $790,718 for the three months ended March 31, 2001 and 2000, respectively. The following schedule summarizes the segmentation of the international and domestic business segments for the three months ended March 31, 2001 and 2000. BUSINESS SEGMENT STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000

4. NEW CONTRACTS AND BACKLOG The Company has a backlog of $36,171,877 at March 31, 2001, compared to a backlog amount of $24,678,877 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 work on uncompleted contracts. 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 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. 7 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 March 31, 2001, the Company did not have any derivative instruments covered by FASB Statement No. 133. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Global Water Technologies, Inc. (the "Company"), primarily through its wholly owned subsidiary, Psychrometric Systems, Inc., is in the business of designing, selling, manufacturing and building industrial cooling towers, repairs and maintenance in the retrofit of existing industrial cooling towers and 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 from the following principal sources: new cooling tower sales, retrofits to existing cooling tower construction repair projects, 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, 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. 8 THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Total revenues were derived from engineering, construction, retrofits, spare parts of cooling towers, Global Water Services projects and services from Applied Water Technologies' water treatment program. For the three month period ended March 31, 2001, total revenue increased 18.3% to $16,856,555 as compared to $14,245,354 for the three month period ended March 31, 2000. International revenues comprised 18.5% of total revenues in 2001 versus 5.6% in 2000. Contracts awarded ("bookings") during the three month period ended March 31, 2001 increased 3.8% from 2000. Backlog increased from $34,258,116 at December 31, 2000 to $36,171,877 at March 31, 2001. The Company's cost of sales increased 27.4% from $12,217,495 in 2000 to $15,569,332 in 2001. As a percentage of revenues, cost of sales increased from 85.9% in 2000 to 92.4% in 2001. This increase is mainly due to additional costs allocated to jobs from the general and administrative area. 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 43.8% from $2,147,090 in 2000 to $1,206,289 in 2001. Total expenses prior to project allocations, are 7.6% lower than fourth quarter 2000 figures. As a percentage of revenues, these expenses decreased from 15.1% in 2000 to 7.2% in 2001. Management believes that already incurred personnel reductions along with other cost savings measures will continue to favorably impact future operating results. Research and development costs increased from $4,025 in 2000 to $11,033 in 2001. These costs include a portion of the Applied Water Technologies facility in Idaho. Operating income (loss), based on the explanations noted above, increased from a loss of ($123,256) in 2000 to income of $69,901 in 2001. Other income and expense primarily consisted of interest expense, which decreased from $114,170 in 2000 to $46,394 in 2001, due to the Company's various debt financings and income from overdue receivables. Income taxes (benefit) increased from a benefit of ($85,170) with an effective 34.0% tax rate in 2000 to a tax expense of $8,500 with an effective tax rate of 36.0% in 2001. Net income (loss) available to common stockholders increased from ($170,334) in the three month period ended March 31, 2000 to a net income of $12,007 in the similar period in 2001. This amount includes a preferred stock dividend of $5,000 in 2000 and $3,000 in 2001. Basic and fully diluted income (loss) per share was ($0.032) in the three month period ended March 31, 2000 and $0.002 in 2001. 9 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had working capital of $1,506,299 compared to working capital of $4,774,844 at March 31, 2000 and working capital of $1,316,991 at December 31, 2000. The primary reasons for the decrease from the previous year's quarter is the investment in long term receivables of $1,238,816 and the results from 2000 operations. The Company's cash flow provided by and used in its operating, investing and financing activities during the first three months of 2001 and 2000 are as follows: 2001 2000 ---- ---- Operating activities $ (184,354) $(1,887,389) Investing activities (189,752) (110,486) Financing activities (42,591) 1,359,424 ----------- ----------- Net (decrease) in cash and cash equivalents $ (416,697) $ (638,451) =========== =========== 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 advanced 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, capital requirements may inhibit the Company's future growth potential. At March 31, 2001, net costs in excess of billings and estimated earnings on uncompleted contracts were $13,495,410 as compared to net costs in excess of billings and estimated earnings on uncompleted contracts of $12,336,243 at March 31, 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 over the remainder 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 March 31, 2001, $2,450,000 was outstanding on this line of credit. The line of credit is currently being renewed. The interest rate on the note is tiered as follows: 6.69% on the first $770,000 and 9.75% on the remaining portion. In addition to the interest rate stated, the Company pays the above noted stockholder additional interest of $8,131 per month on his certificates of deposit securing the above mentioned Company notes. 10 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 is in the process of being renewed. As of March 31, 2001, there was an outstanding balance of $1,855,988 on this line of credit. The Company has a term loan secured by the Small Business Administration with an outstanding balance at March 31, 2001 of $200,858. 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 March 31, 2001 was $278,326 with scheduled principal payments over the next twelve months of $79,646 with interest rates ranging from 8.5% to 10.8%. Management believes that the Company will have sufficient capital resources to fund its ordinary capital requirements for at least the next four quarters for continuing operations. 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. 11 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There were no Current Reports on Form 8-K filed during the quarter ended March 31, 2001. 12 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: May 3, 2001 By: /s/ George A. Kast ------------------------------------ George A. Kast Chief Executive Officer and Chairman of the Board Date: May 3, 2001 By: /s/ Martin Hout ------------------------------------ Martin Hout Chief Financial Officer 13

GLOBAL WATER TECHNOLOGIES INC 10-Q