U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998
------------------------
[ ] Transition report under Section 13 or 15(d) of the exchange act of
1934 for the transition period from ______________ to ______________
COMMISSION FILE NUMBER 33-37513-D
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GLOBAL WATER TECHNOLOGIES, INC.
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(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
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(Address of principal executive offices)
(Zip Code)
(Issuer's telephone number): (303) 215-1100
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NA
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(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
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Shares of Common Stock, $0.00001 par value, outstanding as of November 20,
1998: 294,854,250.
------------
Transitional Small Business Disclosure Format Yes No X
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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, 1998 and 1997
Consolidated Balance Sheet As of September 30,
1998
Consolidated Statements of Cash Flows Nine months ended
September 30, 1998 and
1997
Notes to Financial Statements September 30, 1998 and
1997
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
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GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------- -------------
Net revenues:
United States $ 7,118,646 $ 2,633,034
International 1,653,490 844,996
------------ ------------
Total revenues 8,772,136 3,478,030
------------ ------------
Costs and expenses:
Cost of sales 7,065,786 2,587,622
Selling, general and administrative 1,885,347 922,183
Research and development 66,373 16,576
------------ ------------
Total costs and expenses 9,017,506 3,526,381
------------ ------------
Operating income (loss) (245,370) (48,351)
Other income (expense):
Interest expense, net (45,670) (32,918)
Other, net 11,472 23,355
------------ ------------
Income (loss) before income taxes (279,568) (57,914)
Income taxes (benefit) (95,053) (21,724)
------------ ------------
Net income (loss) before preferred dividend (184,515) (36,190)
Preferred stock dividend 2,630 -
------------ ------------
Net income (loss) for common stockholders $ (187,145) $ (36,190)
============ ============
Income (loss) per share:
Basic weighted average shares
outstanding 294,050,000 263,472,228
Basic income (loss) per share $ (0.0006) $ (0.0001)
============ ============
Fully diluted weighted average shares
outstanding 294,050,000 263,472,228
Fully diluted income (loss) per share $ (0.0006) $ (0.0001)
============ ============
The accompanying notes are an integral part of these financial statements.
1
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GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------- -------------
Net revenues:
United States $ 16,261,530 $ 9,614,844
International 3,982,253 1,975,535
------------ ------------
Total revenues 20,243,783 11,590,379
------------ ------------
Costs and expenses:
Cost of sales 15,891,640 8,786,912
Selling, general and administrative 4,538,156 2,708,948
Research and development 174,690 89,345
------------ ------------
Total costs and expenses 20,604,486 11,585,205
------------ ------------
Operating income (loss) (360,703) 5,174
Other income (expense):
Interest expense, net (110,865) (98,367)
Other, net 15,469 24,581
------------ ------------
Income (loss) before income taxes (456,099) (68,612)
Income taxes (benefit) (154,074) (23,328)
------------ ------------
Net income (loss) before preferred dividend (302,025) (45,284)
Preferred stock dividend 2,630 -
------------ ------------
Net income (loss) for common stockholders $ (304,655) $ (45,284)
============ ============
Income (loss) per share:
Basic weighted average shares
outstanding 294,050,000 262,086,731
Basic income (loss) per share $ (0.0010) $ (0.0002)
============ ============
Fully diluted weighted average shares
outstanding 294,050,000 262,086,731
Fully diluted income (loss) per share $ (0.0010) $ (0.0002)
============ ============
The accompanying notes are an integral part of these financial statements.
2
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GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 1998
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 8,188
Trade accounts receivable, net of allowance for
doubtful accounts of $227,302 4,818,953
Other receivables 70,728
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,833,646
Inventories 343,831
Prepaid expenses 192,842
Income taxes receivable 89,651
Deferred income taxes 43,975
------------
Total current assets 9,401,814
------------
Property and equipment, net 675,605
Intangibles, net of amortization 43,997
Deposits 66,413
------------
$ 10,187,829
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 1,055,912
Accounts payable 6,307,081
Accrued liabilities 1,113,203
Billings in excess of costs and estimated earnings
on uncompleted contracts 147,713
------------
Total current liabilities 8,623,909
------------
Long-term debt 493,598
Deferred income taxes 122,853
Stockholders' equity:
Preferred stock, $0.00001 par value, 20,000,000 shares
authorized:
- Series A; 1,000,000 shares authorized issued and
outstanding; stated at redemption value of $0.0001 100
- Series B; 1,000 shares authorized, 250 shares issued
and outstanding; stated at redemption value of $1,000 250,000
Common stock, $0.00001 par value; 800,000,000 shares
authorized; 294,050,000 shares issued and outstanding 2,940
Capital in excess of par value 522,624
Retained earnings 171,805
------------
Total stockholders' equity 947,469
------------
$ 10,187,829
============
The accompanying notes are an integral part of the financial statements.
3
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GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (304,655) $ (45,279)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation 127,502 104,381
Amortization 8,253 -
Decrease in deferred income taxes (191,342) (16,643)
(Increase) decrease in working capital:
Trade accounts receivable (881,308) 78,253
Other receivables (54,631) (46,197)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (1,137,864) 503,169
Income taxes receivable (98,631) -
Inventories 36,297 (204,535)
Prepaid expenses (66,811) (173,661)
Deposits (53,327) (3,000)
Accounts payable 1,621,513 68,908
Income taxes payable - (167,513)
Accrued liabilities 474,382 167,960
Billings in excess of costs and
estimated earnings on uncompleted
contracts (351,881) 584,798
----------- -----------
Net cash provided (used) by
operating activities (872,503) 850,641
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificate of deposit 222,836 (8,484)
Purchase of property and equipment (198,529) (94,595)
----------- -----------
Net cash (used in) investing
activities 24,307 (103,079)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change on the lines-of-credit 116,476 (443,800)
Proceeds from issuance of common stock - 5,604
Proceeds from issuance of debt 496,378 -
Proceeds on issuance (redemption)
of preferred stock 250,000 (2,000)
Repayments of debt (125,357) (104,220)
----------- -----------
Net cash provided (used) by
financing activities 737,497 (544,416)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (110,699) 203,146
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 118,887 61,188
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,188 $ 264,334
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
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GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
1. INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1998, and the related
consolidated statements of operations for the three months and for the nine
months ended September 30, 1998 and 1997, and the statements of cash flows
for the nine months ended September 30, 1998 and 1997 are unaudited; in the
opinion of management, all 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-QSB and should be read in
conjunction with the Company's financial statements and notes included in
Form 10-KSB for the year ended December 31, 1997.
Certain reclassifications have been made to the 1997 financial information
for comparability purposes.
2. EARNINGS PER SHARE
The Company adopted FASB Statement No. 128 "Earnings Per Share" retroactive
to January 1, 1996. Income (loss) per basic share is computed on the basis
of the weighted average number of common shares outstanding for the
respective periods. Diluted income (loss) per share was computed using the
treasury stock method on the basis of the weighted average number of common
shares after giving effect to all dilutive potential common shares that
were outstanding during the respective periods. Certain options and
warrants were considered anti-dilutive and, therefore, the basic weighted
average shares outstanding was equal to the fully diluted weighted average
shares outstanding.
3. COMPREHENSIVE INCOME
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("FAS 130"). FAS 130, which is effective for fiscal years beginning after
December 15, 1997, defines comprehensive income as all changes in
shareholders' equity exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and certain
changes in minimum pension liabilities. The Company's comprehensive income
(loss) was equal to its net income (loss) available for common stockholders
for the three month and nine month periods ended September 30, 1998 and
1997.
4. OTHER RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of An
Enterprise and Related Information ("FAS 131"). FAS 131 changes the
disclosure requirements for segment reporting from an "industry segment"
approach required under FAS 14 to the "management approach". The new
approach is intended to allow users to "see through the eyes of management"
in order to better understand the Company's performance. FAS 131 is
effective for fiscal years beginning after December 15, 1997, with interim
segment disclosures not required until 1999. The Company has determined
that FAS
5
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131 will not have a material impact on the financial statements because the
Company has only one business: the design, sale, and manufacture and
building of new industrial cooling towers and retrofitting existing
industrial cooling towers and cooling tower components.
In June, 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes a new
model for accounting for derivatives and hedging activities and supersedes
and amends a number of existing standards. FAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company has determined that FAS
133 will not have a material impact on the financial statements because the
Company does not have material foreign exchange, commodities or interest
rate risk, and therefore does not enter into derivatives contracts often.
5. SERIES B PREFERRED STOCK
On August 13, 1998, the Company authorized the issuance of 1,000 shares of
Series B Preferred Stock with a redemption value of $1,000 per share. On
that date 250 shares were issued to George A. Kast, the Company's CEO and
principal shareholder, for a cash contribution of $250,000.
Such shares pay, out of funds legally available for that purpose, a
cumulative dividend at the rate of $80.00 per annum payable quarterly. The
shares have no voting rights but do have certain rights upon liquidation or
dissolution. The Company has the right to call such shares only after the
consolidated net worth of the Company, after giving full effect to the
call, is equal to or in excess of $3,000,000; and such call can not be
exercised prior to the Company's receipt of its audited financial
statements for the year ended December 31, 1998.
6. SUBSEQUENT EVENT -- CHANGE IN ACCOUNTING PRINCIPLE
On November 11, 1998, the Board of Directors approved the Company's
decision to change, retroactive to January 1, 1998, its application of the
percentage of completion method of accounting for revenues and costs of
long-term construction contracts related to new cooling towers which is the
Company's primary market.
Under the previous method, the Company recognized a predetermined
percentage of its profits on new cooling towers upon the attainment of
certain project milestones, specifically the completion and delivery of
certain engineering drawings and specifications. Under the new method, the
Company will recognize profits on all phases of the project, including
engineering, in the ratio that costs incurred to date bear to total
estimated costs. Management believes that the new method is preferable for
financial statement and backlog disclosure related to revenues and gross
profit. In addition, the Company believes that the new method should
improve the comparability of its financial statements with those of other
companies which use a cost-to-cost comparison approach of percentage of
completion.
As a result of this change, to which the Company's independent public
accounting firm concurs, the Company will be recording a one-time
extraordinary charge to income as of January 1, 1998. The amount of this
charge, which has not yet been determined, and the related pro-forma
quarterly effects of the accounting change will be shown in the Company's
annual report on Form
6
<PAGE>
10-KSB for the year ending December 31, 1998.
7. SUBSEQUENT EVENT - NEW CONTRACTS AND BACKLOG
The following schedule summarizes changes in backlog on contracts during
the nine months ended September 30, 1998 and 1997. Backlog represents the
amount of revenue the Company expects to realize from work on uncompleted
contracts.
Nine Months Ending September 30
-------------------------------
1998 1997
--------- ---------
Backlog, beginning of period $ 11,606,245 $ 6,139,765
New contracts during the period 25,633,804 13,413,858
Contracts cancelled (3,885,000) -
Contract revenues earned during the period (20,245,342) (11,590,379)
------------ ------------
Backlog, end of period $ 13,109,707 $ 7,963,244
------------ ------------
In addition for the period of October 1, 1998 through November 17, 1998,
the Company was awarded additional new contracts in the amount of
$16,835,942. This high volume of new contract awards compares favorably to
the $10,749,913 of contracts awarded for the entire fourth quarter of 1997.
For the period beginning on January 1, 1998 and ending on November 17,
1998, the Company has been awarded new contracts totaling $42,469,746
compared to $24,163,772 for the entire year of 1997.
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 engineering and construction contract revenues
using the percentage-of-completion method, based primarily on contract
costs incurred to date compared with total estimated contract costs.
Contracts on new cooling towers are segmented between types of services,
such as engineering and construction, and accordingly, gross margin related
to
7
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each activity is recognized as those separate services are rendered.
(Please refer to "Subsequent Events" in the notes to the financial
statements.) 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, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues were derived from engineering, construction, retrofits
and spare parts of cooling towers. For the three month period ended
September 30, 1998, total tower revenue increased 152.2% to $8,772,136 as
compared to $3,478,030 for the three month period ended September 30, 1997.
International revenues comprised 18.8% of total revenues in 1998 versus
24.3% in 1997.
Contracts awarded ("bookings") during the three month period ended
September 30, 1998 increased 302.7% to $9,577,957 from $2,378,053 in 1997.
The increase in bookings awarded is due to an overall increase in the
number of projects won and increased selling expenses to take advantage of
market opportunities. Backlog decreased from $16,190,446 at June 30, 1998
to $13,109,707 at September 30, 1998 primarily due to the cancellation of
a large international project.
The Company's cost of sales increased 173.1% from $2,587,622 in 1997
to $7,065,786 in 1998. As a percentage of revenues, cost of sales
increased from 74.4% in 1997 to 80.5% in 1998. The absolute increase in
cost of sales resulted primarily from a 152.2% 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 increased 104.4% from
$922,183 in 1997 to $1,885,347 in 1998 as the Company continues to make an
investment in its future. As a percentage of revenues, these expenses
decreased from 26.5% in 1997 to 21.5% in 1998. As a percentage of new
bookings which increased 302.7%, these expenses decreased from 38.8% in
1997 to 19.7% in 1998. In support of greater anticipated bookings, the
overall increase in selling, general and administrative expense primarily
occurred in two areas. The first was in personnel related costs, primarily
from an increase in number of staff and the necessary facilities to support
the increased staff. The second occurred in such areas as travel related
to international sales opportunities and increased participation in
national and international trade shows. Management believes that the
increases in selling expenses will continue to have a positive impact on
the increase in bookings and the recognition of the related revenues for
future periods. Additionally, a significant contract receivable in the
amount of $315,000 was written off in the quarter ended September 30, 1998.
Research and development costs increased to $66,373 in 1998 from
$16,576 in 1997. These costs include the research and development facility
in Idaho and the expenses associated with the Company's diversification
effort into water treatment and water purification.
Operating income (loss), based on the explanations noted above,
decreased from a loss of ($48,351) in 1997 to a loss of ($245,370) in 1998.
Without the write-off of the significant contract receivable noted above,
operating income for 1998 would have been $69,630 in 1998.
Other income and expense primarily consisted of interest expense,
which increased from
8
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$32,918 in 1997 to $45,670 in 1998, due to the Company's various debt
financings. Income taxes (benefit) increased from a benefit of ($21,724)
with an effective 37.5% tax rate in 1997 to a tax benefit of ($95,053) with
an effective tax rate of 34.0% in 1998.
Net income (loss) available to common stockholders decreased from
($36,190) in the three month period ended September 30, 1997 to a net loss
of ($187,145) in the similar period in 1998. This amount includes a
preferred stock dividend of $2,630 in 1998. Basic and fully diluted income
(loss) per share was ($0.0006) in the three month period ended September
30, 1998 and ($0.0001) in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues were derived from engineering, construction, retrofits
and spare parts of cooling towers. For the nine month period ended
September 30, 1998, total tower revenue increased 74.7% to $20,243,783 as
compared to $11,590,379 for the nine month period ended September 30, 1997.
International revenues comprised 19.7% of total revenues in 1998 versus
17.0% in 1997, with such increase resulting from increased emphasis on the
international market.
Contracts awarded ("bookings") during the nine month period ended
September 30, 1998 increased 91.1% to $25,633,804 from $13,413,858 in 1997.
The increase in bookings awarded is due to an overall increase in the
number of projects won and increased selling expenses to take advantage of
market opportunities. Backlog increased from $11,606,245 at December 31,
1997 to $13,109,707 at September 30, 1998.
The Company's cost of sales increased 80.9% from $8,786,912 in 1997 to
$15,891,640 in 1998. As a percentage of revenues, cost of sales increased
from 75.8% in 1997 to 78.5% in 1998. The absolute increase in cost of
sales resulted primarily from a 74.7% 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 increased 67.5% from
$2,708,948 in 1997 to $4,538,156 in 1998 as the Company continues to make
an investment in its future. As a percentage of revenues, these expenses
decreased from 23.4% in 1997 to 22.4% in 1998. As a percentage of new
bookings which increased 91.1%, these expenses decreased from 20.2% in 1997
to 17.7% in 1998. In support of greater bookings, the overall increase in
selling, general and administrative expense primarily occurred in two
areas. The first was in personnel related costs, primarily from an
increase in number of staff and the necessary facilities to support the
increased staff. The second occurred in such areas as travel related to
international sales opportunities and increased participation in national
and international trade shows. Management believes that the increases in
selling expenses will continue to have a positive impact on the increase in
bookings and the recognition of the related revenues for future periods.
Additionally, a significant contract receivable in the amount of $315,000
was written off in the quarter ended September 30, 1998.
Research and development costs increased to $174,690 in 1998 from
$89,345 in 1997. These costs include the research and development facility
in Idaho and the expenses associated with the Company's diversification
effort into water treatment and water purification.
Operating income (loss), based on the explanations noted above,
decreased from an income of
9
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$5,174 in 1997 to a an operating loss of ($360,703) in 1998; the latter
amount which includes the $315,000 write-off of the contract receivable
noted above.
Other income and expense primarily consisted of interest expense.
Income taxes (benefit) increased from a benefit of ($23,328) with an
effective 34.0% tax rate in 1997 to a tax benefit of ($154,074) with an
effective tax rate of 33.8% in 1998.
Net income (loss) available to common stockholders was ($304,655) in
the nine month period ended September 30, 1998 compared to a net loss of
($45,284) in the similar period in 1997. Basic and fully diluted income
(loss) per share was ($0.0010) in the nine month period ended September 30,
1998 and ($0.0002) in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $777,905
compared to a working capital deficit of ($19,503) at September 30, 1997.
The Company's cash flow provided by and used in its operating, investing
and financing activities during the first nine months of 1998 and 1997 are
as follows:
1998 1997
---------- ----------
Operating activities $ (872,503) $ 850,641
Investing activities 24,307 (103,079)
Financing activities 737,497 (544,416)
----------- -----------
Net increase (decrease) in
cash and cash equivalents $ (110,699) $ 203,146
=========== ===========
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.
At September 30, 1998, net costs in excess of billings and estimated
earnings on uncompleted contracts were $3,685,933 as compared to net costs
in excess of billings and estimated earnings on uncompleted contracts of
$745,617 at September 30,1997.
Budgeted capital expenditures during the remainder of the year consist
of ongoing amounts for computer equipment, vehicles and office equipment
for anticipated growth.
The Company has a line of credit with a commercial lender totaling
$1,275,000 (an increase of $250,000 as compared to the prior quarter end)
to finance its working capital needs. This is partially secured by a
stockholder's certificates of deposit. As of September 30, 1998, $561,476
was outstanding on this line of credit. The line matures on January 3,
1999. Management expects that this line of credit will be refinanced into
a long-term obligation when the obligation becomes due. The interest rate
on the note is 7.75%. In addition to the interest rate stated, the Company
pays the above noted stockholder additional interest of $4,065 per
10
<PAGE>
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 $1,000,000 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 matures on March 17, 1999. As of September
30, 1998, there was an outstanding balance of $300,000 on this line of
credit.
The Company has term loans secured by the Small Business
Administration with an outstanding balance at September 30, 1998 of
$581,486 including a new $475,000 SBA loan which fully amortizes in
September of 2003. Scheduled principal payments on these term notes are
$150,504 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, 1998 was
$106,548 with scheduled principal payments over the next twelve months of
$43,932 with interest rates ranging from 9.5% to 10.75%.
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
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits required by Item 601 of Regulation S-B are
filed herewith:
Exhibit No. Description
----------- -----------
18 Letter, dated November 19, 1998, from Comiskey &
Company, P.C. re: change in accounting principles
27 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1998.
12
<PAGE>
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 20, 1998 By: /s/ George A. Kast
-------------------------------
George A. Kast
President, Chief Executive Officer
and Chairman of the Board
Date: November 20, 1998 By: /s/ Robert L. Tomz
-------------------------------
Robert L. Tomz
Chief Financial Officer
13
EXHIBIT NO. 18
[LETTERHEAD]
November 19, 1998
To the Board of Directors
of Global Water Technologies, Inc.
Gentlemen:
We have been furnished with a copy of the Global Water Technologies, Inc.
Form 10-QSB for the quarter ended September 30, 1998. Note 6 therein
describes a change in the application of the percentage of completion
method of accounting for revenues and costs of long-term construction
contracts related to new cooling towers. It should be understood that
authoritative criteria have not been established for evaluating one
acceptable method of accounting over another acceptable method. In
accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgement and planning upon
which the decision to make this change was made.
Based upon our discussions with management and the stated reasons for the
change, we believe that such change represents, in your circumstances,
the adoption of a preferable alternative accounting principle for revenue
recognition in conformity with Accounting Principles Board Opinion No.
20.
We have not made an audit in accordance with generally accepted auditing
standards of the financial statements of Global Water Technologies, Inc.
for the three or nine month periods ended September 30, 1998 and 1997,
and accordingly, we express no opinion thereon or on the financial
information filed as part of the Form 10-QSB of which this letter is to
be an exhibit.
Very truly yours,
/s/COMISKEY & COMPANY
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GLOBAL WATER TECHNOLOGIES' QUARTERLY REPORT TO STOCKHOLDERS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,188
<SECURITIES> 0
<RECEIVABLES> 5,116,983
<ALLOWANCES> 227,302
<INVENTORY> 343,831
<CURRENT-ASSETS> 9,401,814
<PP&E> 1,126,289
<DEPRECIATION> 450,684
<TOTAL-ASSETS> 10,187,829
<CURRENT-LIABILITIES> 8,623,909
<BONDS> 493,598
0
250,100
<COMMON> 2,940
<OTHER-SE> 694,429
<TOTAL-LIABILITY-AND-EQUITY> 10,187,829
<SALES> 20,243,783
<TOTAL-REVENUES> 20,243,783
<CGS> 15,891,640
<TOTAL-COSTS> 20,604,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,865
<INCOME-PRETAX> (456,099)
<INCOME-TAX> (154,074)
<INCOME-CONTINUING> (302,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (304,655)
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