U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
December 31, 1998
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from ___________ to __________
COMMISSION FILE NUMBER: 33-37513-D
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GLOBAL WATER TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 84-1148204
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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Securities to be registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act: None
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 at least the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $34,734,340
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Aggregate market value of voting stock held by non-affiliates as of March 12,
1998: $4,373,275
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Shares of Common Stock, $0.00001 par value, outstanding as of March 12,
1998: 294,854,250
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Documents incorporated by reference: Exhibits to Issuer's Registration
Statement on Form S-18, No. 33-37513-D and to Issuer's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998.
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TABLE OF CONTENTS
PART I
Item 1. Description of Business.. . . . . . . . . . . . . . . . . . . .3
Item 2. Description of Property.. . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders.. . . . . 17
PART II
Item 5. Market Price of the Registrant's Common Stock and Related
Security Holder Matters.. . . . . . . . . . . . . . . . . . . 18
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 19
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . 24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . 24
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act. . 25
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 12. Certain Relationships and Related Transactions. . . . . . . . 33
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.. . . 34
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GLOBAL WATER TECHNOLOGIES, INC.
FORM 10-KSB
PART I
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS REPORT CONTAINS
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS
THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. SEE
"ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." NO
ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE
FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE FOLLOWING MATTERS INCLUDE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS
COVERED IN SUCH FORWARD-LOOKING STATEMENTS. OTHER FACTORS COULD ALSO CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN
FORWARD-LOOKING STATEMENTS.
ITEM 1. DESCRIPTION OF BUSINESS.
Global Water Technologies, Inc. (the "Company"), through its wholly
owned subsidiary, Psychrometric Systems, Inc. ("PSI"), designs, sells,
manufactures and builds industrial cooling towers, and repairs, maintains
and retrofits existing industrial cooling towers and cooling tower
components for these and similar facilities. The Company primarily 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, Commonwealth Edison,
Mitsubishi, Mobil, Texaco, Bechtel, Fluor Daniel and other large
corporations around the world.
Except as otherwise noted, all references to the "Company" include
Global Water Technologies, Inc. and its subsidiaries.
The Company custom designs industrial cooling towers for its customer
base in a competitive bid job award process. The Company provides value
engineering and specific cooling tower designs to its customer base.
Although influenced by many factors, management believes competitive
pricing is one of the main criteria for job awards. Based on customer
requirements, the Company designs cooling towers using structural members
manufactured from wood, fiberglass and concrete. Light manufacturing of
wooden and fiberglass structural components is done at the Company's
facilities for
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selected jobs prior to treatment procedures. Component parts are
subcontracted and ordered from various suppliers to be shipped directly to
the job site. For domestic projects, Company managed crews erect the
cooling tower in the field or a subcontractor is awarded the erection of
the tower. The field erection normally takes between four to six weeks for
the typical two to three cell cooling tower. The erection at foreign job
sites is usually outside of the Company's scope of responsibility. From
contract award to final completion of the structure, a typical project will
last four to six months.
From time to time, the Company may have projects that exceed the 10%
revenue threshold for defining a major customer. Because each project is
awarded independently from other projects, management does not believe that
the completion of the contractual arrangements with any major customer that
may arise will have a material adverse effect on the Company.
The Company utilizes proprietary software products and know-how to
design and estimate costs for potential projects. Although not copyrighted
or patented, management believes that the proprietary information is
integral to its ability to accurately and reliably design cooling towers to
meet the desired specifications and to estimate job costs. This know-how is
augmented by key knowledgeable employees. The Company's competitive
position could be adversely affected by the loss of these employees or
know-how.
PSI was named as one of America's 50 Hottest New Small Businesses by
ENTREPRENEUR magazine in early 1996, achieving a ranking of #30 within the
group of 50. The Small Business Administration named PSI "The Small
Business Exporter of the Year" in 1997 for Region VIII, which includes
Colorado. In June of 1998, the Company's President and Chief Executive
Officer, George Kast, was named an Entrepreneur of the Year for the Rocky
Mountain Region. Mr. Kast received top honors in the category of "High-Tech
Manufacturing and Design."
THE COOLING TOWER MARKET
Cooling towers are designed to reject heat from process operations
into the atmosphere through evaporation and direct heat transfer. Hot
water is pumped to the top of the cooling tower and distributed over the
fill media through various nozzle apertures. The fill media is designed to
maximize the air/water interface to improve the efficiency of the heat
rejection. As the air comes into contact with the hot water from the
process, some water evaporates causing a reduction in heat for the
remaining water. Fans placed on the top of the tower cause air to be drawn
in from the sides and the bottom of the tower in an induced draft design.
The induced draft air flow cools the water through direct contact and
through evaporation. The evaporated water, now in the form of steam, is
ejected through the fanstacks at the top of the tower. The cooler water at
the bottom of the tower in the basin, is then re-circulated back into the
process where it again absorbs heat until the entire process is repeated.
Cooling towers have been used in the process industries for nearly 100
years.
Most process industries with available water that generate heat in the
process utilize cooling towers in their operations. Accordingly, cooling
towers are vital to the continuing operation of these facilities and are
considered critical pieces of the plant and equipment. In fact, these
processes cannot continue to operate without cooling towers or some other
more expensive means to reject heat from
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these facilities. Cooling towers can range in price from $10,000 for a
small 600 gallon per minute ("GPM") or 250 ton HVAC facility to over
$10,000,000 for a heavy industrial or utility customer needing capacities
of 300,000 GPM. GPM is the standard unit of measurement in the industrial
cooling tower segment, while HVAC usage denominates capacity in nominal
cooling tons. One ton of cooling is approximately equivalent to 2.5 - 3.0
GPM under humid environmental conditions.
The cooling tower market can be subdivided into two main segments,
facilities using pre-packaged or factory assembled units and plants
employing field erected cooling towers. Industrial cooling towers are
usually stand alone, separate facilities while factory assembled units
often are placed on top of office buildings or in close proximity to the
heat source adjacent to the building. Factory assembled cooling towers are
shipped directly to the end user as a completed unit and installed on site
with minimal additional fabrication. These units are typically sold to
HVAC and light to medium industrial users. Cooling towers for HVAC
applications are sized from approximately 30 to 500 nominal tons. Larger
tonnages are obtained from either sequencing a number of factory assembled
units or constructing small field erected units on site. Field erected
cooling towers are constructed on site and are utilized by medium and heavy
industrial and utilities. Heavy industrial users require cooling towers
sized from 10,000 to 100,000 GPM and some utility applications range up to
300,000 GPM.
Accurate information about the cooling tower industry is difficult to
obtain since many cooling tower manufacturers are either privately held and
do not divulge market information or are divisions of very large public
entities. Furthermore, many existing cooling tower companies operating in
the U.S. are owned by foreign entities where reporting requirements are
substantially different from U.S. provisions. Limited market information
is available from the U.S. Department of Commerce, public SEC information,
commissioned private studies and internal intelligence sources. Based on
this limited information and management's evaluation of the market,
management estimates that the total annual United States cooling tower
market ranges from $500 million to $700 million, and that the total annual
worldwide market ranges from $1.5 billion to $2.0 billion.
PRODUCT LINE
The market currently served by the Company can be subdivided into two
main sub-segments: international cooling towers and domestic cooling
towers. For the year ended December 31, 1998, the domestic tower revenue
recognition represented approximately 85% of the Company's revenues, and
international tower revenue represented approximately 15%. Based upon its
current backlog of business and current outstanding bid activity,
management believes that future revenue recognition for 1999 will
approximate 1998 percentages for international and domestic revenues.
Within each of these main sub-segments, the product line can be further
divided into new cooling towers and retrofits and repairs of existing
towers.
NEW COOLING TOWERS. New cooling tower project opportunities come from
two major sources: a worldwide network of independent manufacturers
representatives and internal sales personnel. Although some projects arise
from past sales relationships with customers, most projects are awarded
independently. In addition to its direct sales activities, the Company
markets new
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cooling towers in a number of ways, including sponsorship of trade shows,
direct mail solicitation and advertising in various trade publications.
The Company is presently developing a compact disk ("CD"), which will
portray its products using interactive illustrations and animation. This
CD will be distributed to engineering firms, manufacturers and specialized
mailing lists in the industrial cooling tower market. The Company also
maintains web pages on the worldwide web at http://www.gwtr.com and
http://www.psicoolingtowers.com.
Bids on new cooling tower projects typically range from $50,000 to
$12,000,000 per project. Although the Company has bid on larger projects,
the majority of projects fall within this range.
Although there is no typical bidding process, normally the customer or
a customer's agent describes the operating performance requirements of the
tower. Company personnel assemble a value engineering plan for the given
heat load configuration and a cost estimate for the materials, labor, and
ancillary equipment to meet the specific performance criteria for the
facility. Many factors affect the cost calculation, including water
quality, environmental conditions, operating details, local building
requirements, structural materials needed, local labor conditions and other
factors which affect the cost components of the cooling tower. Some
projects may be awarded to the low bidder, while others may have other
performance factors as the prime criteria for contract award.
At the time the job is awarded, final terms and conditions are
negotiated including on-site dates, contract terms and conditions,
financial performance, warranties and other factors defining the rights and
obligations of the parties. Normal payment terms include payment upon
completion of the customer engineering package which is followed by
additional payments upon completion or partial completion of the material
procurement/manufacturing phase and, if applicable, the erection phase.
The Company recognizes contract revenues using the percentage-of-completion
method, based primarily on contract costs incurred to date compared with
total estimated contract costs. Contracts on some cooling towers
arrangements which have both new and retrofit components are segmented
between types of services, and accordingly, gross margin related to each
activity is recognized as those separate services are rendered. Changes to
total estimated contract costs and to contract revenues via change orders
are recognized in the period in which they are determined and the costs are
incurred. 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.
Cost components for new cooling towers include hardware, structural
components, water distribution system, heat transfer media, air movement
equipment (fans, drive shafts, gearboxes etc.), fanstacks, labor, tools,
and freight. Most of the material requirements are purchased from
independent outside vendors, custom fabricated for the specific project
requirements and shipped directly to job sites. Some wooden and fiberglass
structural materials and other components are fabricated by the Company at
leased facilities.
The customer will often require a thermal performance test and
verification as part of the documentation on tower performance. Either the
Company's personnel or independent third parties perform these tests.
Historically, these performance tests have shown that the Company's
products consistently meet or exceed performance design specifications. In
addition to the performance tests
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described above, the Company provides a limited warranty on its products to
be free from material defects for 12 months from start-up or 18 months from
shipment, whichever occurs first. Management believes that there are no
significant warranty issues from products placed in service since
inception.
The Company has installed environmental friendly plume-abated towers
in Japan and the United States. Plume abatement features increase the
selling price of the facilities and provides additional customer benefits,
such as reduced damage to surrounding deciduous trees and reduction in
potential liability caused by condensing water and ice in winter driving
conditions. In addition to plume abatement, the Company also has
successfully installed sound abated towers which decrease noise levels and
sound pollution.
RETROFIT MARKET. In the retrofit or repair market, the Company has
bid on projects ranging from $5,000 to $4,000,000. Management expects to
bid on projects in excess of this range in the future as opportunities may
arise. Normally, the customer selects options from a list of possible
repair scopes for the existing cooling tower retrofit project. In
approximately 75% of the projects bid by the Company, a portion of the work
scope is based upon a time and material unit price. Most retrofit projects
do not require drawings or extensive engineering work. Profit is recognized
on a percentage-of-completion basis.
Retrofit projects could have significant change orders as compared to
the total price of the contract. Change orders from retrofit projects
arise due to the uncertainty surrounding the job scope at the time of the
bid. Often, the existing towers are operating when the job walkthrough is
done to determine the scope of the repairs necessary. Damaged areas in
need of repair can only be observed after the crew has begun their retrofit
work and the damaged area is exposed.
SUPPLIERS, VENDORS AND SPARE PARTS
The Company utilizes selected vendors for its sub-component
requirements. In a limited number of cases, specific manufacturers have
worked in conjunction with the Company to supply components to customers
under common marketing programs. Because the Company has access to a broad
number of suppliers and works with them on a regular basis, management
believes that the customer can achieve economic benefits by utilizing the
Company's buying power when component spare parts are needed. The Company
relies upon the suppliers and vendors to manufacture components to Company
specifications. The Company has not experienced any significant delays in
obtaining parts and components for its products, and management believes
that the Company's relationships with its suppliers are good and that the
material availability is adequate.
ACQUISITIONS
On November 1, 1997, the Company acquired certain assets of Texas
Cooling Tower Company ("Texas Tower"), located in Bulverde, Texas. The
assets acquired included casts/dies, furniture and equipment and other
inventory, for which the Company paid $70,000. The Company
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uses this equipment and inventory to expand its product line into
complementary fiberglass cooling tower designs for specific industrial
process applications.
PRODUCT RESEARCH, DESIGN AND DEVELOPMENT
The Company leases a facility from George A. Kast, the President and
principal shareholder of the Company, in Coeur d'Alene, Idaho, for its
research and development requirements. The Company is evaluating various
technologies related to cooling towers, heat rejection rates, water reuse,
disinfection, water treatment and product design at this facility. The
facility is staffed by one employee as of December 31, 1998. The Company
plans to continue research and refinement programs at its facility but has
no fixed research and development budget. For the fiscal years ended
December 31, 1998 and 1997, the Company expended $232,657 and $147,895,
respectively, for research and development.
NON-CHEMICAL WATER TREATMENT
During fiscal 1998, the Company, through its wholly owned subsidiary
Applied Water Technologies, Inc. ("AWT") (previously Advanced Oxidation
Technologies, Inc.), a Nevada corporation, began offering clean water
technology services to cooling tower customers. Historically, water used in
cooling towers has been treated with chemicals to prevent or inhibit the
formation of scale, bacteria, algae and corrosion at substantial expense.
Build-up of the chemicals used in treating the water causes operating
inefficiency and necessitates periodic shut-downs for cleaning. Disposal of
the contaminated water poses environmental compliance issues for the Company's
customers. The Company's clean water technology replaces the need for
hazardous chemicals, increases operating efficiency, reduces water use by
increasing recycling and increases the time between shut-downs for
cleaning. It also dramatically reduces the costs associated with water
discharge. Retrofits or total cooling water packages are available.
Management believes this environmentally sound approach to the
treatment of process cooling water offers many benefits to the Company's
customers including reduction in water use, reduced liability from
employees' handling of hazardous chemicals and reduction of pollutants
being discharged. The Company will integrate the "non-chemical" water
treatment service with other Company products to bring a total solution to
its existing and future customers. The Company believes that this
integrated "solutions" approach will be attractive to its customer base and
will result in longer term contracts with potentially higher profit
margins. The Company is currently marketing this concept and, during the
first quarter of 1999, received its initial contract for non-chemical water
treatment services for a major mid-western utility.
On July 20, 1998, the Company entered into an exclusive licensing
agreement with Electronic Descaling 2000, Inc. ("ED 2000") for the
manufacturing, sales and servicing rights to a technologically advanced
scale control unit. The Company will exclusively market the equipment to
prevent and eliminate costly scale buildup within cooling water loops and
cooling towers for various industries worldwide.
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GOVERNMENTAL REGULATION
The Company is subject to the requirements of a number of federal,
state and local laws, such as the federal Occupational Safety and Health
Act ("OSHA") in the erection and manufacturing of the cooling towers, the
Department of Transportation ("DOT"), the Federal Aviation Administration
("FAA"), the Environmental Protection Agency ("EPA") and various state
regulatory agencies. The Company endeavors to comply with all state and
federal laws and believes that it is in compliance with all applicable
federal, state and local regulations applicable to it, including
environmental regulations.
COMPETITION
The market for cooling towers is extremely competitive worldwide.
There are approximately 10 manufacturers of new industrial cooling towers
in the United States. There are approximately 15 regional companies
providing retrofits and repair services. The Company's primary competitors
internationally consist of the same competitors with which the Company
competes in the United States. Additionally, there are 10-15 companies
which compete regionally on an international basis with the Company's
products and services.
The two largest competitors on a worldwide basis are the Marley
Cooling Tower Co., a division of United Dominion Industries Limited based
in the United States, and Hamon Cooling Towers, a division of the Hamon
Group of Belgium. Collectively, these two companies account for
approximately 40% of the worldwide industrial cooling tower market.
A number of the Company's competitors are substantially larger in size
than the Company and have greater financial, operating and other resources.
Many of these competitors have been in business for a number of years and
are well established in the industry.
In addition, a number of the aforementioned competitors manufacture
and market cooling towers employing fiberglass, wood and concrete materials
which are similar to the Company's products. Management believes that the
Company's products provide superior value to the customer through service,
performance and operating efficiencies. There can be no assurance that
competitors will not develop and produce products which are comparable or
superior to the Company's product line.
In the area of water treatment services, the Company competes with,
among others, Nalco Chemical Co. and Hercules, which are publicly traded
companies. Market estimates vary extensively for the size of the worldwide
water treatment market, but various sources estimates that the total size
may approach $300 billion worldwide. All of the Company's competitors in
the water treatment market are substantially larger in size than the
Company and have greater financial, operating and other resources. These
competitors have been in business for a number of years and are well
established in the industry.
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EMPLOYEES
As of December 31, 1998, the Company employed 71 full time individuals
in the fields of engineering, management, marketing, accounting, finance,
drafting, design, project management, law and administrative support
throughout its operations. There were 57 individuals at its corporate
headquarters in Golden, Colorado. The Company utilizes an employment
service organization to provide field personnel for its projects where the
erection of the tower is within the Company's scope of work. These crews
have ranged from approximately 30 to 170 individuals and fluctuates in
accordance with the total number of projects requiring field installation
at any given time. Only crews on selected jobs where union representation
is mandatory are subject to a collective bargaining agreement. The Company
believes that relations with its employees are good.
CUSTOMERS
The Company had a major customer accounting for more than 10% of its
revenues for the year ended December 31, 1998. This customer accounted for
$4.8 million in recognized revenue during 1998 or 13.9% of the Company's
total 1998 revenue. Additionally, the Company has two major projects with
one customer included in its backlog, which represents approximately 36% of
its total backlog for 1999. From time to time, the Company may have
projects that exceed the 10% revenue threshold for defining a major
customer. Because each project is awarded independently from other
projects, management does not believe that the completion of the
contractual arrangements with any major customer that may arise will have
a material adverse effect on the Company.
The Company has experienced seasonality in the business over the past
few years. In general, the fourth calendar quarter of the year has
experienced higher revenues and higher operating income that the other
calendar quarters. Management attributes most of this to cooling tower
projects following the warmer summer months and to end of the year capital
budgets of customers.
BACKGROUND
The Company was incorporated under the name Fi-Tek VI, Inc. in the
State of Delaware on July 12, 1990, for the primary purpose of seeking out
acquisitions of properties, businesses or merger candidates, without
limitation as to the nature of the business operations or geographic area
of the acquisition candidate. In October 1992, the Company completed an
initial public offering, receiving proceeds of $160,000 from the sale of
8,042,500 units, consisting of Common Stock and Class A and Class B
Warrants (collectively, the "Warrants"). The Company's offering was subject
to the Colorado Securities Act, which required the placement into escrow of
80% of the net proceeds of the offering ($93,714) until the completion of
a transaction or series of transactions whereby at least 50% of the gross
proceeds received from the sale of shares in the offering was committed for
use in one or more specific lines of business. The escrow condition had
not been satisfied as of the fourth anniversary of the initial public
offering, and accordingly, the Company distributed those funds pro rata to
those persons who were owners of the shares of Common Stock purchased in
the offering. The expiration
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date of the Warrants which were included in the units sold in the public
offering have been extended past their original expiration date, and will
now expire April 14, 2000, unless extended.
On September 25, 1997, the Company and PSI consummated an Agreement
and Plan of Reorganization whereby the Company acquired all of the issued
and outstanding common shares of PSI in exchange for the issuance of
261,382,500 shares of the Company's Common Stock and 1,000,000 shares of a
newly-authorized Series A non-voting preferred stock ("Preferred Stock").
Each share of Preferred Stock is convertible into 290 shares of Common
Stock upon attainment of gross annual sales of $60,000,000 for the Company
and its subsidiaries (the "Company"), but only if such annual sales goal is
reported not later than the due date of the Company's Annual Report on Form
10-K for the fiscal year ending in 2002, and is subject to redemption by
the Company at a price of $0.0001 per share in the event the required sales
level is not attained. The Company has accounted for the transaction as a
reverse acquisition under the purchase method of accounting. The fiscal
year of the Company was changed from June 30 to December 31 to correspond
to the fiscal year of PSI.
On November 5, 1997 and subsequent to its reverse acquisition with
PSI, the Company changed its name from Fi-Tek VI, Inc. to Global Water
Technologies, Inc. to reflect the Company's focus on the growing water-
related market opportunities. The Company's trading symbol was also
changed to "GWTR" on that date.
RISK FACTORS
The securities of the Company are speculative in nature and involve a
high degree of risk. Prospective investors should consider the following
risks inherent in the Company's business:
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that it may require additional capital during
calendar year 1999. The Company may raise additional capital through the
private placement or public offering of its equity securities, or both.
The Company intends to file a registration statement with the Securities and
Exchange Commission to enable persons holding the Company's Warrants to
exercise their Warrants and receive shares of Common Stock. There can be no
assurance that the Warrantholders will exercise any of the Warrants. There
also can be no assurance that any capital raising efforts will be successful
and result in additional capital for the Company. The failure to acquire
additional funding could have a material adverse effect on the Company's
ability to bid on and be awarded cooling tower projects.
GROWTH DEPENDENT ON BONDING AND BANKING CAPACITY
The Company depends on its ability to obtain surety bonds for a
certain portion of its projects. Although Management believes that the
Company's bonding capacity is adequate at its current expected level of
activity, there can be no assurance that an unanticipated project will
exceed the Company's bonding capacity or that the bonding company may
require additional collateral
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arrangements to extend bonds on certain projects. The failure to acquire
additional bonding capacity when required could have a material adverse
effect on the Company's business prospects.
The Company depends on its banking lines of credit to fund its short
term cash requirements. The expansion into new businesses along with the
Company's increased level of activity could require additional or an
expansion of existing banking credit lines. Although Management believes
that the Company can expand its banking facilities with a number of
different financial institutions, there can be no assurance that such an
expansion will occur or on terms acceptable to the Company. The failure to
expand the Company's current credit lines could have a material adverse
effect on the Company's ability to grow its business.
PROJECT MANAGEMENT AND LABOR COSTS
Historically, the Company has had a predominant number of projects
which are fixed price contracts. The cost estimates for these projects are
formulated during the bidding process. There are many factors which are
included in the cost estimates including material costs, labor rates,
freight estimates, seasonal inefficiencies, contingencies, engineering and
miscellaneous supplies. Although the Company considers its ability to
estimate costs to be good, there can be no assurance that an unanticipated
cost component may adversely affect the overall job profitability.
VENDORS
The Company's policy on suppliers and vendors is to obtain at least
two qualified sources where possible to supply the components for the
Company's cooling tower products. Qualifying criteria include but are not
limited to quality of components, price, delivery flexibility,
manufacturing scheduling and payment terms. The Company presently uses
primarily one major supplier for drift eliminators, structural fiberglass
and fiberglass fans; however, other suppliers of these components are
available. Management believes that if necessary, similar economic terms
could be negotiated with other qualified suppliers. If the Company were
unable to acquire any components it required, it would adversely affect the
Company's business.
MANAGEMENT OF GROWTH
The Company's goal is to increase its sales through its current
product line and expand its business into new markets, including its non-
chemical water treatment service and other related products. The Company
also may acquire other companies which have businesses synergistic to that
of the Company. Such expansion could place a significant burden on the
Company's existing resources and may require the Company to implement
additional operating, manufacturing and financial controls, improve
coordination among marketing, engineering, manufacturing and finance
functions, increase capital expenditures and to hire additional personnel.
In addition, the Company would be required to install additional reporting
and management information systems for order processing, production,
monitoring, inventory control and financial reporting. There can be no
assurance that the Company will be able to successfully manage any
substantial expansion of its
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business, including attracting and retaining qualified personnel. A
failure to do so could have a material adverse effect on the Company's
operating results.
OVERALL ECONOMIC CONDITIONS
Although management believes that the Company is somewhat insulated
because of the breadth and large number of diverse industries utilizing
cooling towers, the various international markets where the Company
competes and the competitive nature of its products, there can be no
assurance that the overall business climate for the Company will remain
favorable. Many factors influence the customer's ability to purchase
needed cooling tower capital equipment including overall economic levels of
activity, interest rates and other factors affecting their business. There
can be no assurance that overall cooling tower demand will increase or stay
the same in the future. If the demand for cooling towers decreases, it
could have a material adverse effect on the Company's sales and profitability.
RISKS OF INTERNATIONAL BUSINESS
The Company has or is engaged in projects in the Pacific Rim, North
America, South America, Asia, Europe and other parts of the world. Such
operations are subject to certain risks, such as changes in United States
or foreign government regulatory policies, local political and economic
developments, currency fluctuations, exchange controls, royalty and tax
increases, retroactive tax claims, expropriation, and import and export
regulations and other laws and policies of the United States affecting
foreign trade, investment and taxation. In addition, in the event of any
disputes arising from foreign operations, the Company may be subject to the
exclusive jurisdiction of foreign courts and may not be successful in
subjecting foreign persons or entities to the jurisdiction of the courts in
the United States. The Company attempts to mitigate these various risk
elements through letters of credit, limiting job scope, currency risk
management, local subcontractors and other methods to limit the Company's
exposure. There can be no assurance that the Company will be able to manage
these risk elements successfully.
POSSIBLE PROJECT CONTINGENCY
The Company has a receivable emanating from a project performed by the
Company in 1995. The total amount of the receivable is $115,000. This
receivable has been fully reserved in the books and records of the Company.
Discussions with the customer have not been productive. The customer has
also notified the Company of a potential claim against the Company in the
amount of $940,000. The customer has offered to release the Company from
liability on its claim if the Company releases the customer from the
Company's receivable. The Company believes the customer's claim is without
merit and considers its risk of loss to be remote. Consequently, the
Company has recorded no provision for loss related to the potential
counterclaim. Management has not yet finalized the course of action it
will pursue with respect to this matter.
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REVENUE FLUCTUATIONS
The Company has experienced seasonality in its business over the past
few years. In general, the fourth calendar quarter of the year has
experienced higher revenues and higher operating income than the other
calendar years. Management attributes most of this increase to cooling
tower projects following the warmer summer months and to end of the year
capital budgets of customers.
GOVERNMENT REGULATION
The Company's products and services are subject to regulations adopted
by governmental authorities, including but not limited to OSHA, the DOT,
the EPA, FAA and various state governmental agencies. Government
regulations can be burdensome and may result in delays and expense to the
Company. In addition, modifications to regulations could adversely affect
the timing and cost of new products and services introduced by the Company.
Failure to comply with applicable regulatory requirements can result in,
among other things, operating restrictions and fines.
DEPENDENCE ON MAJOR CUSTOMER
The Company had a major customer accounting for 13.9% of its revenues
for the year ended December 31, 1998, but did not have a major customer
accounting for more than 10% of its revenues for the year ended December
31, 1997. Additionally, the Company has two major projects with one
customer included in its backlog which represents approximately 36% of its
total backlog for 1999. From time to time, the Company may have projects
that exceed the 10% revenue threshold for defining a major customer.
Because each project is awarded independently from other projects,
management does not believe that the completion of the contractual
arrangements with any major customer that may arise will have a material
adverse effect on the Company.
SUBSTANTIAL COMPETITION
There is substantial competition in all aspects of the cooling tower
industry and water treatment market. Many of these competitors have been
in business longer than the Company and have substantially greater
personnel, financial resources and an established customer base available
to them than the Company. Accordingly, there can be no assurance that the
Company will be able to continue to compete with these competitors
successfully.
DEPENDENCE ON PERSONNEL
The Company employs a small group of skilled individuals to accomplish
its strategic business plan. The planned operations are dependent on a
limited number of personnel, including George A. Kast, (President and Chief
Executive Officer), Gary L. Brown (President of PSI and General Counsel),
Martin E. Hout (Chief Financial Officer), Michael A. Kast (Senior Vice
President of PSI), Steven D. Adams (Vice President of Applications of PSI)
and William W. Howard (Vice President of Engineering of PSI). None of
these individuals are currently subject to employment agreements or
employee non-compete agreements. If the Company fails to retain the
services of one or more of
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these persons, the Company's operations may be adversely affected. The
Company maintains key-man insurance on the life of George A. Kast.
DIVIDENDS
The Company does not anticipate paying any cash dividends on its
Common Stock for the foreseeable future. The Company expects that future
earnings, if any, will be used to finance growth. No person seeking
dividend income from an investment should consider an investment in the
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 294,854,250 shares of the Company's Common Stock issued and
outstanding as of the date of this Report, 262,811,750 shares are
"restricted securities" as that term is defined under Rule 144 promulgated
under the Act. Currently there is only a limited public market for the
shares of the Company's Common Stock and there can be no assurance that
this market will continue or be available for the sale of the Shares
offered hereby. Sales of substantial amounts of shares of Common Stock by
shareholders pursuant to Rule 144 or otherwise could adversely affect the
then market price of the Company's securities and make it more difficult
for the Company to sell equity securities in the future at a time and price
which it deems appropriate. The Company is unable to predict the effect
that sales made in the future under Rule 144 or otherwise may have on the
then prevailing market price of the Common Stock. Nonetheless, the
possibility exists that the sale of these shares may have a depressive
effect on the price of the Company's Common Stock.
AUTHORIZED STOCK AVAILABLE FOR ISSUANCE BY THE COMPANY
Under the Company's Articles of Incorporation, there are 800,000,000
authorized shares of Common Stock and 20,000,000 authorized shares of
Preferred Stock. There are 294,854,250 shares outstanding of Common Stock.
In regard the Preferred Stock, there are outstanding 1,000,000 shares of
Series A Preferred Stock and 250 shares of Series B Preferred Stock. The
remaining shares of Common Stock and/or Preferred Stock not issued or
reserved for specific purposes may be issued without any action or approval
of the Company's shareholders. The Company intends to file a registration
statement with the Securities and Exchange Commission to enable persons
holding the Company's Warrants to exercise their Warrants and receive
shares of Common Stock. There can be no assurance that the Warrantholders
will exercise any of the Warrants. Other than the Warrant exercise,
management has no present plans, agreements or undertakings involving the
issuance of such shares. Any such issuances could be used as a method of
discouraging, delaying or preventing a change in control of the Company or
could dilute the Investor's ownership of the Company. There can be no
assurance that management will not undertake to issue such shares if it
deems it appropriate to do so.
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CONCENTRATION OF VOTING CONTROL
George A. Kast and members of his immediate family own approximately
85% of the outstanding shares of Common Stock of the Company. Since the
Company does not have cumulative voting, this concentration of control
means that Mr. Kast, either by himself or with members of his family, will
be able to elect all of the directors of the Company. Mr. Kast also will
be able to shape the policies and procedures of the Company, to determine
if and when any dividends are paid, and to determine the circumstances
under which the Company may be sold or merged, along with other important
corporate decisions.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights that could
adversely affect the voting power of the Common Stock. The possible
issuance of shares of Preferred Stock can be used to oppose hostile
takeover attempts.
ITEM 2. DESCRIPTION OF PROPERTY.
Effective March 10, 1998, the Company and George A. Kast, President
and CEO, entered into a triple-net lease for a 36,740 square foot office
building in Golden, Colorado, for the Company's expanding office space
requirements. The lease requires the Company to pay rent at a rate of
$21,454 per month for the 34-month lease. Gross operating expenses for the
building approximate $20,000 per month, of which Mr. Kast is personally
responsible for the payment of approximately $5,000 per month, which has
been paid by the Company. As of December 31, 1998, the Company has
recorded a note receivable from Mr. Kast related to the operating costs of
the facility for which Mr. Kast is responsible for $47,766. This note bears
interest at 8% per annum and is due no later than September 30, 1999. The
lease also provides Mr. Kast with the option to purchase the building on or
before December 31, 2000.
From January through March 15, 1998, at which time the Company
relocated to its Golden offices as noted above, the Company's principal
offices were located in Lakewood, Colorado, and consisted of approximately
12,260 square feet of office space which was occupied pursuant to a 60-month
lease with an unaffiliated entity and which expires on October 31,
1999. Subsequent to December 31, 1998, the Company entered into an
agreement with an unaffiliated entity to occupy these premises and relieve
the Company from its existing obligation under the lease.
The Company leases approximately 17,700 square feet from an
unaffiliated entity in Denver, Colorado, which is utilized for light
structural fabrication, component storage and centralized warehousing for
tools and equipment. The facility was leased from January 6, 1997, through
January 5, 1998, and the Company is currently leasing the facility on a
month-to-month basis. Management believes that the lease on this facility
can be renewed and/or additional space secured without substantial economic
implications.
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The Company leases a 5,000 square foot research and development
facility in Coeur d'Alene, Idaho, from its principal stockholder, George A.
Kast. The facility is subject to a lease which terminates September 30,
2001. The lease terms obligate the Company to a monthly payment of $1,238.
During 1998, the Company paid Mr. Kast $14,856 for this facility.
Management believes that the Company's insurance policies provide
adequate coverage for the contents at all facilities. The lessor of each
of the Company's leased facilities is responsible for the building
structure itself. The Company could have material adverse consequences if
its facilities were destroyed by fire or other disaster.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known
to be contemplated for which the Company anticipates a material risk of
loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of shareholders was held on June 30,
1998. Information concerning the matters considered and approved by the
shareholders, and the vote thereon, was reported in the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1998.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock began trading on the Over the Counter
Bulletin Board during the third quarter of fiscal 1994.
The following table sets forth the high and low bid prices for the
Company's Common Stock for the past two years. The quotations reflect
inter-dealer prices, with retail mark-up, mark-down or commissions, and may
not represent actual transactions. The information presented has been
derived from the National Quotation Bureau, Inc. Library.
High Low
Bid Bid
--- ---
1997 Fiscal Year
----------------
First Quarter . . . . . . . . . . . . . . . . . $.01 $.01
Second Quarter. . . . . . . . . . . . . . . . . $.01 $.01
Third Quarter . . . . . . . . . . . . . . . . . $.08 $.01
Fourth Quarter. . . . . . . . . . . . . . . . . $.08 $.04
1998 Fiscal Year
----------------
First Quarter . . . . . . . . . . . . . . . . . $.135 $.03125
Second Quarter. . . . . . . . . . . . . . . . . $.135 $.06
Third Quarter . . . . . . . . . . . . . . . . . $.065 $.04
Fourth Quarter. . . . . . . . . . . . . . . . . $.05 $.035
1999 Fiscal Year
----------------
First Quarter (through March 20, 1999). . . . . $.075 $.05
On March 12, 1999, the last reported bid and asked prices for the
Common Stock were $0.075 and $0.11, respectively. No quotations are
available for the Class A and Class B Warrants.
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HOLDERS
As of March 1, 1999, the Company had 67 holders of record of the
Company's Common Stock.
DIVIDENDS
The payment of dividends by the Company is within the discretion of
its Board of Directors and depends in part upon the Company's earnings,
capital requirements, debt covenants and financial condition. Since its
inception, the Company has not paid any dividends on its Common Stock and
does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain earnings, if any, to finance its operations.
RECENT SALES OF UNREGISTERED SECURITIES
In October 1998, the Company issued 804,250 shares of its Common
Stock, 804,250 Class A Warrants, exercisable at $.12 per share, and 804,250
Class B Warrants, exercisable at $.20 per share, to three persons pursuant
to the exercise of stock purchase warrants granted in October 1997. The
Company received proceeds from the exercise of the warrants of $19,302. No
underwriters were involved in the sale of the shares, and no commissions
were paid. The Company claims the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, for transactions not involving a
public offering.
ITEM 6. MANAGEMENT'S 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. ("PSI"), 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 primarily 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, Commonwealth Edison, Mitsubishi, Mobil, Texaco, Bechtel,
Fluor Daniel 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 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.
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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.
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 contracts related to new cooling towers.
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 recorded a one-time extraordinary
charge to income as of January 1, 1998. The amount of this charge,
amounting to $754,296 net of the related tax effect of $593,119, is
reflected as a cumulative effect of a change in an accounting principle on
the attached income statement. SEE Note 16 in the notes to the financial
statements for the Pro-Forma quarterly 1998 operating results.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues were derived from engineering, equipment, installation,
retrofits and spare parts of cooling towers. For the year ended December
31, 1998, total tower revenue increased 85.8% to $34,734,340 as compared to
$18,697,292 for the year ended December 31, 1997. International revenues
comprised 15.1% of total revenues in 1998 versus 20.2% in 1997, with such
decrease resulting from an increased proportion of domestic projects in the
total revenue mix.
Contracts awarded ("bookings") during 1998 increased 119.9% to
$53,142,019 from $24,163,772 in 1997. These amounts included international
bookings of $3,470,882 in 1998 (6.5% of total) and $8,749,532 in 1997
(36.2% of total). The amount in 1997 included a contract of $4.2 million
removed from the backlog in 1998. Management believes that foreign
opportunities will continue to play an important role in future periods and
that the Company will not be adversely
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affected by the current economic conditions in Asia. The increase in
bookings awarded is due to an overall increase in the number of projects
won, an increase in the average dollar amount of the contract awarded, and
increased selling expenses to take advantage of market opportunities.
Backlog increased from $11,606,245 at December 31, 1997 to $27,155,058 at
December 31, 1998.
The Company's cost of sales increased 105.3% from $13,547,484 in 1997
to $27,816,337 in 1998. As a percentage of revenues, cost of sales
increased from 72.5% in 1997 to 80.1% in 1998. The absolute increase in
cost of sales resulted from a 85.8% increase in corresponding revenues and
additional cost allocations from selling, general and administrative
expenses to project costs related to the accounting change described above.
Management believes these additional allocations more accurately reflect
the personnel resources expended directly due to project requirements. 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 18.1% from
$4,031,159 in 1997 to $4,762,328 in 1998. As a percentage of revenues,
these expenses decreased from 21.6% in 1997 to 13.7% in 1998. The
additional project allocations described above are the main reason for the
decrease as a percentage of revenues. As a percentage of new bookings
which increased 119.9%, these expenses decreased from 16.7% in 1997 to 9.0%
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. The second occurred in such areas as travel related to
international sales opportunities and increased participation in national
and international trade shows and additional facility costs. 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.
Research and development costs increased 57.3% to $232,657 in 1998
from $147,895 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, based on the explanations noted above, increased
98.1% from $970,754 or 5.2% of revenues in 1997 to $1,923,218 or 5.5% of
revenues in 1998.
Other income and expense primarily consisted of interest expense,
which increased 28.0% to $157,520 in 1998 from $123,072 in 1997, related to
the Company's various debt financings. Income taxes increased from
$273,878 with an effective tax rate of 32.4% in 1997 to $777,569 with an
effective tax rate of 44% in 1998.
Net income before the cumulative effect of change in accounting
principle and preferred stock dividend increased 73.3% from $570,982 in
1997 to $989,309 in 1998. Both basic and fully diluted income per share
decreased from $0.002 in 1997 to $0.001 in 1998.
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The Company's export sales were $5,241,036 and $3,777,426 for the
fiscal years 1998 and 1997, respectively. Management believes that the
importance of the international segment will continue to grow as the
Company's revenue base expands.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $1,941,495 as
compared to working capital of $1,223,939 at December 31, 1997. The
working capital increase is mainly due to a net increase in accounts
receivable due to increased revenue volume offset by a corresponding
increase in accounts payable and accrued liabilities from December 31, 1997
to December 31, 1998. The Company's cash flow provided by and used in its
operating, investing and financing activities are summarized as follows:
Year Ended December 31
------------------------
1998 1997
---- ----
Operating activities $ 303,953 $ 484,098
Investing activities (52,255) (191,172)
Financing activities 1,380,714 (235,627)
---------- ----------
Net increase in cash $1,632,412 $ 57,699
========== ==========
The Company's capital requirements for its continuing operations
consist of its general working capital needs, increased lease obligations
as described in ITEM 2. DESCRIPTION OF PROPERTY, scheduled payments on its
debt obligations and capital expenditures. Management anticipates that the
Company's operating activities in the future will continue to provide cash
even though the investment in receivables, inventory and costs and
estimated earnings in excess of billings is expected to increase as sales
volume increases. The Company tries to minimize its investment in these
working capital components, but as sales and backlogs increase, management
believes that these investments will also increase.
Scheduled principal payments on term loans will total $1,036,159
during the fiscal year ended December 31, 1999 with Norwest Bank and other
financial institutions. A portion of the term loans outstanding is
guaranteed by the Small Business Administration and subjects the Company to
certain financial covenants. These covenants include minimum net worth
requirements, limitations on capital withdrawals from the Company and
collateral claims on substantially all of the Company's assets. In March
1998, the Company secured two additional financings through Norwest Bank,
Lakewood, CO. These included (a) a $475,000 Small Business Administration
75% guaranteed loan maturing in June 2003 and (b) a $1,000,000 Export-Import
Bank 90% guaranteed credit agreement (primarily related to eligible
foreign accounts receivable and inventory) maturing in March 1999. Both
financings bear interest at 1.0% above prime rate. The total amount of the
Small Business Administration guaranteed term loan outstanding at December
31, 1998 was $532,733. Principal payments of $8,334 and $7,917 plus
interest on the outstanding balances are due and payable each month.
Interest is calculated at the prime rate of interest plus one percent. The
prime rate will change periodically as economic conditions in the general
economy fluctuate. At December 31, 1998, the interest rate used
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for interest payments was 7.25%. The bank has the right to accelerate
payment on any or all of the principal outstanding if the financial
covenants are not maintained. If the bank exercised this right, it would
have a material adverse effect on the Company and its financial position.
As of December 31, 1998, all financial covenants have been maintained.
The Company has a revolving line of credit with Norwest Bank in the
amount of $1,275,000 of which $750,000 was outstanding at December 31,
1998. The line of credit bears interest at a rate of 7.25% rate and bears
no annual commitment fee. The line of credit is due January 3, 2000. The
line of credit and the SBA term loan above are secured by cash collateral
of $742,867 at December 31, 1998, of which the entire amount is pledged by
Michael A. Kast, one of the Company's stockholders. As compensation for
pledging the cash collateral, the Company pays additional interest to
Michael A. Kast. See ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. Management believes that the Company's short-term debt can
be refinanced at comparable or better terms when the debt becomes due.
The Company has various loans secured by Company vehicles. At
December 31, 1998, the total amount outstanding was $97,502 for eight
individual bank obligations. The short-term principal payments obligations
for the fiscal year ended December 31, 1999 will be $48,147 for these
loans.
In total, as of December 31, 1998, the Company had outstanding loans
from commercial lenders of $2,173,235 and had $32,000 outstanding in
letters of credit. The unused availability under the line-of-credit as of
this date was $700,000.
EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with its
foreign customers or material unfavorable effects upon its results of
operations as a result of domestic inflation.
YEAR 2000 ISSUE
The Company's management does not believe that the Company will be
materially adversely affected by the computer software Year 2000 issue.
The Company has a relatively small number of transactions with its select
customer base and does not have significant exposure to the Year 2000
issue. The Company's vendors and suppliers may have some exposure to the
issue but at this time, management does not anticipate a material adverse
impact on the Company's operations.
Management has determined that the mission critical systems for the
Company include its accounting software system, application packages and
its estimating system used for project bids. The accounting software
package has been upgraded by the vendor and is Y2K compliant. Vendors for
application packages have stated that all known Y2K issues have been
remediated. The estimating system does not employ date stamps for its
internal functionality. Although hardware systems utilized by the Company
may experience some system failure due to hardwire coding, management
believes the replacement of these systems would not cause material adverse
impacts on the Company.
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Contingency plans include replacement of selected operating systems and
other hardware replacement to prevent material adverse consequences.
FORWARD LOOKING INFORMATION
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 document. 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.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements set forth on pages F-1 to F-20 of this Report
are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company's principal independent accountants did not resign or
decline to stand for re-election nor were they dismissed during the
Company's two most recent fiscal years. The Company's financial statements
for the years ended December 31, 1998 and 1997 were audited by Comiskey and
Company, P.C. There were no disagreements between the Company and its
principal independent accountants, Comiskey and Company, P.C.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following sets forth certain information with respect to the
officers and directors of the Company.
Name Age Position Officer or Director Since
- ---- --- -------- -------------------------
George A. Kast 41 President, Chief Executive 1997
Officer and Chairman of the
Board
Gary L. Brown 42 General Counsel and a Director 1997
Martin E. Hout 43 Chief Financial Officer and Treasurer 1999
Kelli C. Kast 32 Secretary and Associate General 1999
Counsel
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have
been elected and qualified. Officers of the Company are elected annually
by the Board of Directors and hold office until their successors are
elected and qualified.
The following sets forth biographical information concerning the
Company's directors and executive officers for at least the past five
years.
GEORGE A. KAST, the founder, officer and director of PSI, has been an
officer and director of the Company since the Company's acquisition of PSI
in September 1997. Prior to forming PSI, from 1983 to 1992, Mr. Kast was
the vice-president of GEA/Thermal-Dynamic Towers, Inc. ("TDT"), Lakewood,
Colorado, where he was responsible for all marketing activities and
directly experienced in design and project management of cooling towers,
including the design and creation of the pultruded fiberglass structural
cooling towers.
GARY L. BROWN has been Chief Operating Officer and General Counsel of
PSI since 1996 and became a director of the Company when the Company
acquired PSI in September 1997. From 1993 to 1996, he was the general
counsel of Fischbach Corporation, which included Fischbach & Moore, Natkin
& Company, Ficon Corporation and Fischbach Power Services, among others.
Prior to joining the Fischbach companies, Mr. Brown was engaged in private
practice for ten years with the firm of Gorsuch, Kirgis, Campbell, Walker
& Grover in Denver, Colorado. Mr. Brown received a
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<PAGE>
B.S.J. degree from the University of Kansas in journalism in 1979 and a
J.D. degree from Washburn University in 1983.
MARTIN E. HOUT has been employed by PSI since 1995 and was named as
the Chief Financial Officer and Treasurer of the Company in January of
1999. Prior to his association with PSI, he was the president of
International Consulting Associates, Inc., Lakewood, Colorado, from 1994 to
1995, and from 1993 to 1994, a financial officer at GAC Technologies, a
manufacturing subsidiary of Golden Aluminum Co., a subsidiary of ACX
Technologies, Inc., Golden, Colorado. From 1988 to 1993, he held various
positions including planning manager and controller of a subsidiary of
Golden Aluminum Co. Mr. Hout received a B.A. degree from the University of
Illinois in 1979 and a M.B.A. degree in international finance from the
University of Denver in 1991. He is a certified public accountant in
Colorado and Illinois.
KELLI C. KAST joined the Company as Associate General Counsel in 1997.
From 1996 to joining the Company, Ms. Kast was employed in the legal
department of Boise Cascade Company, Boise, Idaho. Ms. Kast received a
B.A. degree from the University of Idaho in 1988 and a J.D. degree from the
University of South Dakota in 1995.
The Company presently has no audit/systems committee nor a compensation
committee.
SIGNIFICANT EMPLOYEES
The following employees make a significant contribution to the
business of the Company.
MICHAEL A. KAST, age 42, has been the director of projects and a
director of PSI since 1993. He is currently a senior vice president of
PSI. From 1983 to 1992, he was the founder and former president of TDT. He
is responsible for all of the Company's business activities including
labor, project management, erection, reconstruction and new towers.
STEVE D. ADAMS, age 37, was the director of applications and projects
at TDT from 1992 to 1994 and the product manager for new tower and
engineering manager at Custodis-Ecodyne, Inc., Santa Rosa, California from
1988 to 1992, where he was product manager for new tower and engineer
manager. Mr. Adams joined PSI in 1994 and is currently vice president-
applications. His responsibilities include new tower design, estimating
and testing. He received a B.S. degree in chemical engineering from the
University of Missouri in 1983.
WILLIAM W. HOWARD, age 41, was structural design manager for TDT from
1990 to 1993 when he joined PSI. In 1991, he was the committee chairman
for the Redwood, Douglas Fir and Fastener Specifications Standards
committee of the Cooling Tower Institute. As vice president of engineering
of PSI, his responsibilities include the analysis and design of all
structural members and joints, proposal reviews, project engineer and
directing new tower project managers. He received a B.S. degree in
architectural engineering, structures from the University of Colorado in 1982.
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<PAGE>
TIMOTHY P. KAST, age 34, has been the director of research and
technology at PSI's Coeur d'Alene facility in Idaho since 1993. From 1990
to 1993, he was the chief engineer and project designer for TDT where he
led an interdisciplinary team of engineers in the development, design,
analysis, field support and testing of industrial evaporative cooling
towers and assorted equipment. He is currently vice president of
technology for Advanced Oxidation Technologies, Inc. He received a B.S.
degree and a M.S. degree in chemical engineering in 1986 and 1989 from the
University of Idaho and is pursuing his Ph.D. in chemical engineering from
the same institution.
FAMILY RELATIONSHIPS
The following family relationships exist between and among the
officers and directors of the Company: George A. Kast is the brother of
Kelli C. Kast, and Kelli C. Kast is the sister-in-law of Gary L. Brown.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
No officer, director, significant employee, promoter or control person
of the Company has been involved in any event of the type described in Item
401(d) of Regulation S-B during the past five years.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Not applicable.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
to the Company's CEO and the other executive officers of the Company who
received in excess of $100,000 of salary and bonus from the Company during
the year ended December 31, 1998:
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation ($$) Restricted
Name and ------------------------ Stock Options Other
Position Year Salary Bonus Awards(4) & SARs(4) Compensation
- -------- ---- ------ ----- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
George A. Kast, 1998 $172,500 $ 75,137 -0- -0- $ 14,856(1)
President and Chief 1997 $166,438 $ 7,023 -0- -0- $ 13,618(1)
Executive Officer 1996 $124,000 $ 46,368 -0- -0- $ 4,926(1)
Gary L. Brown 1998 $145,000 $ 25,137 -0- -0- -0-
Director 1997 $125,000 $ 25,000 -0- -0- -0-
1996 $125,000(2) $ 791(3) -0- -0- -0-
</TABLE>
__________________________
(1) Represents rental payments made to Mr. Kast for the Coeur d'Alene
research and development center.
(2) Mr. Brown joined PSI in April 1996; thus, salary shown is annualized.
(3) PSI issued Mr. Brown 408 shares of PSI's common stock (which was
exchanged for 5,233,807 shares of the Company's Common Stock and
20,023 shares of the Company's preferred stock) as a bonus upon his
employment by PSI in 1996.
(4) No long-term compensation was awarded.
COMPENSATION OF DIRECTORS
STANDARD ARRANGEMENTS. Members of the Company's Board of Directors
are not compensated in their capacities as Board Members. However, the
Company reimburses all of its officers, directors and employees for
accountable expenses incurred on behalf of the Company.
OTHER ARRANGEMENTS. The Company has no other arrangements pursuant to
which any director of the Company was compensated during the year ended
December 31, 1998, for services as a director.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None of the Company's officers presently have employment agreements
with the Company.
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<PAGE>
1998 STOCK OPTION PLAN
On May 20, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan") which provides for the issuance of options to purchase up to
30,000,000 shares of Common Stock to employees, officers, directors and
consultants of the Company and its subsidiaries. The Plan was ratified by
the Company's shareholders at the Company's Annual Meeting of Shareholders
on June 30, 1998. No options were granted under the Plan as of December
31, 1998. Unless sooner terminated, the Plan will expire on May 31, 2000.
The purposes of the Plan are to encourage stock ownership by
employees, officers, directors and consultants of the Company so that they
may acquire or increase their proprietary interest in the Company, to (i)
induce qualified persons to become employees or officers of or consultants
to the Company; (ii) compensate employees, officers, directors and
consultants for past services to the Company; and (iii) encourage such
persons to become employed by or remain in the employ of or otherwise
continue their association with the Company and to put forth maximum
efforts for the success of the business of the Company.
The Plan states that it is not intended to be the exclusive means by
which the Company may issue options or warrants to acquire its Common
Stock, stock awards or any other type of award. To the extent permitted by
applicable law, the Company may issue any other options, warrants or awards
other than pursuant to the Plan without shareholder approval.
The Plan is administered by a Committee consisting of the Board of
Directors or Compensation Committee, if appointed. At its discretion, the
Committee may determine the persons to whom options may be granted and the
terms thereof. As noted above, the Committee may issue options to the
Board.
The terms of any options granted under the Plan are not required to be
identical as long as they are not inconsistent with the express provisions
of the Plan. In addition, the Committee may interpret the Plan and may
adopt, amend and rescind rules and regulations for the administration of
the Plan.
Options may be granted as incentive stock options ("Incentive
Options") intended to qualify for special treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), or as non-qualified stock
options ("Non-Qualified Options") which are not intended to so qualify.
Only employees of the Company are eligible to receive Incentive Options.
The period during which options may be exercised may not exceed ten years.
The exercise price for Incentive Options may not be less than 100% of the
fair market value of the Common Stock on the date of grant; except that the
exercise price for Incentive Options granted to persons owning more than
10% of the total combined voting power of the Common Stock may not be less
than 110% of the fair market value of the Common Stock on the date of grant
and may not be exercisable for more than five years. The exercise price
for Non-Qualified Options may not be less than 85% of the fair market value
of the Common Stock on the date of grant. The Plan defines "fair market
value" as the last sale price of the Company's Common Stock as reported on
a national securities exchange or on the NASDAQ or,
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<PAGE>
if the quotation for the last sale reported is not available for the
Company's Common Stock, the mean between the highest bid and lowest asked
prices of the Company's Common Stock as reported by NASDAQ or on the
electronic bulletin board or, if none, the National Quotation Bureau,
Inc.'s "Pink Sheets" or, if such quotations are unavailable, the value
determined by the Committee or the Board of Directors in accordance with
its discretion in making a bona fide, good faith determination of fair
market value.
The Plan contains provisions for proportionate adjustment of the
number of shares issuable upon the exercise of outstanding options and the
exercise price per share in the event of stock dividends, recapitalization
resulting in stock splits or combinations or exchanges of shares.
In the event the Company is the surviving corporation in any merger or
consolidation, the holder of any option or award granted under the Plan
shall have the right to exercise such option (at its then current Option
Price) or award for the kind and amount of shares of stock subject to the
option or award prior to the merger or consolidation. All options and
awards granted under the Plan will terminate in the event of a dissolution
or liquidation of the Company not involving a transaction with another
company as described below.
In the event of shareholder approval of (i) a merger or consolidation
in which the Company is not the surviving entity (except for a change of
domicile), (ii) the sale, transfer or other disposition of all or
substantially all the Company's assets and the complete liquidation or
dissolution of the Company or (iii) any reverse merger in which the Company
is the surviving entity but in which the holders of more than 50% of the
total voting securities of the Company are held by a person or persons
different from those who held such securities immediately prior to such
merger, the Committee may provide for the automatic acceleration of one or
more of the outstanding options or awards. Upon the consummation of such
a transaction, all options shall, to the extent not previously exercised,
terminate and cease to be outstanding.
Except as otherwise provided under the Plan, an option may not be
exercised unless the recipient then is an employee, officer or director of
or consultant to the Company or a subsidiary of or parent to the Company,
and unless the recipient has remained continuously as an employee, officer
or director of or consultant to the Company since the date of grant of the
option.
If an optionholder ceases to be an employee, officer or director of,
or consultant to, the Company or a subsidiary of the Company (other than by
reason of death or permanent disability), other than for cause, the holder
may exercise any options or Stock Appreciation Rights ("SARs") that are
vested but unexercised on the date his or her service is terminated until
the earlier of (i) 90 days after the date of termination of service, or
(ii) the expiration date of the options or SARs. However, termination of
employment at any time for cause immediately terminates all options or SARs
held by the terminated employee. If termination is by reason of
disability, however, the holder may exercise his or her options or SARs
until the earlier of (i) 12 months after the termination of service, or
(ii) the expiration of the term of the option or SAR. If the holder dies
while in service to the Company, the holder's estate or successor by
bequest or inheritance may exercise any options or SARs that the holder was
entitled to exercise on the date of his or her death at any time until the
earlier of (i) the
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<PAGE>
period ending three months after the holder's death, or (ii) the expiration
of the term of the option or SAR.
Options granted under the Plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act of 1974, or the rules thereunder. Options
may be exercised, during the lifetime of the recipient, only by the
recipient and thereafter only by his legal representative.
The Committee may suspend, terminate, modify or amend the Plan, except
that, without shareholder approval, the Board may not (i) increase the
maximum number of shares of Common Stock subject to the Plan (except in the
case of certain organic changes to the Company), (ii) reduce the exercise
price at which options may be granted or the exercise price for which any
outstanding options may be exercised, (iii) extend the term of the Plan,
(iv) change the class of persons eligible to receive options or awards
under the Plan, or (v) materially increase the benefits accruing to
participants under the Plan. In addition, the Committee or the Board may
not, without the consent of the optionholder, take any action that
disqualifies any option previously granted under the Plan for treatment as
an Incentive Stock Option or which adversely affects or impairs the rights
of the optionholder of any outstanding option. Notwithstanding the
foregoing, the Board may amend the Plan from time to time as it deems
necessary in order to meet the requirements of any amendments to Rule 16b-3
under the Securities Exchange Act without the consent of the shareholders
of the Company.
SARs will entitle the recipient to receive a payment equal to the
appreciation in market value of a stated number of shares of Common Stock
from the price on the date the SAR was granted or became effective to the
market value of the Common Stock on the date first exercised or
surrendered. The Committee or the Board may determine such other terms,
conditions or limitations, if any, on any Awards granted pursuant to the
Plan.
OPTION/SAR GRANTS
No options were granted during the fiscal year ended December 31, 1998.
OPTION/SAR EXERCISES AND YEAR END OPTION VALUES
Not applicable.
REPORTING ON REPRICING OF OPTIONS/SARS
Not applicable.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date hereof, the ownership
of the Company's Common Stock by (i) each director and executive officer of
the Company, (ii) all executive officers and directors of the Company as a
group, and (iii) all persons known by the Company to beneficially own more
than 5% of the Company's Common Stock.
Name and Address Amount and Nature of
of Shareholder Beneficial Ownership (1) Percent of Class
- -------------- ------------------------ ----------------
George A. Kast 228,375,858 77.5%
1767 Denver West Boulevard
Golden, Colorado 80401
Gary L. Brown 5,233,807 1.8%
1767 Denver West Boulevard
Golden, Colorado 80401
Kelli C. Kast 2,934,250(2) 1.0%
1767 Denver West Boulevard
Golden, CO 80401
All Directors and Executive 236,543,915 80.2%
Officers as a group (3 persons)
__________________________
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage
owned by such person, but are not deemed outstanding for the purpose
of calculating the percentage owned by each other person listed.
(2) Includes 400,000 shares owned by Ms. Kast's spouse to which she
disclaims dispositive power.
CHANGES IN CONTROL
There are no understandings, arrangements or agreements known by
management at this time which would result in a change in control of the
Company.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
In January 1994, Michael A. Kast, a stockholder of PSI, pledged
certificates of deposit in the amount of $500,000 to a bank to secure a
credit line for the Company. In consideration for such pledge, PSI agreed
to pay Michael A. Kast interest at an annual rate of 7.65% for one year.
In August 1994, the Company paid Michael A. Kast $5,000 and issued him 200
shares of PSI's preferred stock as additional consideration for pledging
the loan collateral. This preferred stock was redeemed in 1997. The
collateral balance as of December 31, 1998 was $742,867. The total amount
of interest paid by the Company was $48,784 and $48,784 for the years ended
December 31, 1997 and 1998, respectively.
In June 1997, PSI loaned $2,000 to Motion Marine, Inc., a subchapter
S corporation owned by PSI's principal shareholder, George A. Kast. The
note carried an interest rate of 10% per annum and the principal amount of
the note and accrued interest and was repaid on September 4, 1997.
In February 1997, PSI loaned George A. Kast $200,000 with interest at
8%. The loan was approved by the directors and shareholders of PSI. In
October 1997, Mr. Kast repaid the loan in full.
In December 1998, George A. Kast signed a note payable to the Company
for $47,766 with interest at 8% per annum related to the lease obligation
and the related expenses for the portion of the building facility not
utilized by the Company. The note is due no later than September 30, 1999.
George A. Kast has personally guaranteed the Company's obligations
(approximately $1,225,000 and $1,776,000 as of December 31, 1997 and 1998,
respectively) with financial institutions, including the Company's SBA term
loan. In addition, as of December 31, 1997 and 1998, Mr. Kast had
personally guaranteed approximately $4,200,000 and $16,600,000,
respectively, of Company obligations with bonding companies.
In March 1998, the Company and George A. Kast entered into a lease for
a 36,700 square foot office building in Golden, Colorado, for the Company's
principal offices. The lease requires the Company to pay rent at a rate of
$21,454 per month for the 34-month lease. Gross operating expenses for the
building approximate $20,000 per month, of which Mr. Kast is personally
responsible for the payment of approximately $5,000 per month, which has
been paid by the Company. As of December 31, 1998, the Company has a note
receivable from Mr. Kast related to the operating costs of the building for
which Mr. Kast is responsible in the amount of $47,766. The note bears
interest at 8% per annum and is due September 30, 1999. The building lease
also provides Mr. Kast with the option to purchase the building on or
before December 31, 2000.
On August 13, 1998, the Company designated 1,000 shares of its
authorized but unissued Preferred Stock as Series B non-voting and non-
convertible Preferred Stock. Each share of Series B Preferred has a
redemption value of $1,000 per share, and a dividend rate of $80 (8%) per
share. Shares of Series B Preferred are automatically redeemable by the
Company on December 31, 2003.
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<PAGE>
The Company issued 250 shares of Series B Preferred Stock to George A. Kast
in consideration of a cash payment of $250,000.
PARENTS OF THE COMPANY
See the information set forth above under ITEM 9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS and ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
TRANSACTIONS WITH PROMOTERS
Not applicable.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB:
Consolidated Financial Statements of Global Water Technologies, Inc.:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31,
1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements - December 31, 1998
and 1997
Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial
Statements.
Exhibit
Number Description
- -------- -----------
3.1 Certificate of Incorporation, dated July 12, 1990 (1)
3.2 Certificate of Designations of Preferred Stock (Series A), filed
with the State of Delaware on September 25, 1997 (4)
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<PAGE>
3.3 Certificate of Amendment to the Certificate of Incorporation,
filed with the State of Delaware on November 5, 1997 (4)
3.4 Bylaws (2)
3.5 Amendment to the Bylaws, dated September 12, 1997 (4)
3.6 Certificate of Amendment to the Designation of Preferred Stock
(Series B), filed with the State of Delaware on December 29, 1998.
10.1 Plan and Agreement or Reorganization, dated September 12, 1997,
between the Registrant and Psychrometric Systems, Inc. (3)
10.2 Lease Agreement, dated September 21, 1994, between Psychrometric
Systems, Inc. and Golden Hill Partnership (4)
10.3 Lease Agreement, dated December 27, 1996, between Psychrometric
Systems, Inc. and N. R. Petry Co. (4)
10.4 Lease Agreement, dated October 1, 1996, between George A. Kast
and Psychrometric Systems, Inc. (4)
10.5 Sublease Agreement, dated March 10, 1998, by and between The
Coleman Company, Inc., Global Water Technologies, Inc. and George
A. Kast (4)
10.6 1998 Stock Option Plan
21 Subsidiaries of the Company
27 Financial Data Schedule
__________________________
(1) Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-18 (No. 33-37513-D).
(2) Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-18 (No. 33-37513-D).
(3) Incorporated by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1997.
(4) Incorporated by reference to the Exhibit by the same number to the
Registrant's Annual Report on form 10-KSB for the fiscal year ended
December 31, 1997.
(b) During the quarter ended December 31, 1998, no Current Reports on
Form 8-K were filed by the Company.
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<PAGE>
(c) Required exhibits are attached hereto or are incorporated by
reference and are listed in Item 13(a)(3) of this Report.
(d) Required financial statements are attached hereto and are listed
in Item 13 of this Report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: March 23, 1999 GLOBAL WATER TECHNOLOGIES, INC.
By /s/ George A. Kast
-------------------
George A. Kast,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ George A. Kast President, Chief Executive Officer, March 23, 1999
- -------------------- (Principal Executive Officer) and
George A. Kast Chairman of the Board
/s/ Martin E. Hout Chief Financial Officer March 23, 1999
- -------------------- (Principal Financial Officer)
Martin E. Hout
/s/ Kelli C. Kast Secretary March 23, 1999
- --------------------
Kelli C. Kast
/s/ Gary L. Brown Director March 23, 1999
- --------------------
Gary L. Brown
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<PAGE>
Index to Financial Statements
-----------------------------
GLOBAL WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Comiskey and Company, P.C. Independent Certified
Public Accountants. . . . . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations
For Years Ended December 31, 1998 and 1997. . . . . . . . . . . .F-3
Consolidated Balance Sheets As of December 31, 1998 and 1997 . . . . .F-4
Consolidated Statements of Cash Flows
For Years Ended December 31, 1998 and 1997. . . . . . . . . . . .F-5
Consolidated Statements of Stockholders' Equity
For the Years ended December 31, 1998 and 1997. . . . . . . . . .F-6
Notes to Consolidated Financial Statements
December 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . .F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Global Water Technologies, Inc.
We have audited the consolidated balance sheets of Global Water
Technologies, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, cash flows, and stockholders' equity
for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as, evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the consolidated financial position of Global
Water Technologies, Inc. as of December 31, 1998 and 1997 and the results
of its operations, cash flows, and changes in stockholders' equity for each
of the years then ended in conformity with generally accepted accounting
principles.
Denver, Colorado
February 12, 1999
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F-2
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
1998 1997
---- ----
Net revenues:
United States $ 29,486,771 $ 14,919,866
International 5,247,569 3,777,426
------------- -------------
Total revenues 34,734,340 18,697,292
------------- -------------
Costs and expenses:
Cost of sales 27,816,137 13,547,484
Selling, general and administrative 4,762,328 4,031,159
Research and development 232,657 147,895
------------- -------------
Total costs and expenses 32,811,122 17,726,538
------------- -------------
Operating income 1,923,218 970,754
Other income (expense):
Interest expense, net (157,520) (123,072)
Other, net 1,180 (2,822)
------------- -------------
Income before income taxes 1,766,878 844,860
Income taxes 777,569 273,878
------------- -------------
Net income before preferred dividend 989,309 570,982
Preferred stock dividend 7,640 -
------------- -------------
Net income (including the effect of a
change in accounting principle for
the current year) 981,669 570,982
Cumulative effect of a change in an
accounting principle - net of
$ 593,119 of related tax effect (754,296) -
------------- -------------
Net income available for common
shareholders $ 227,373 $ 570,982
============= =============
Income per share:
Basic weighted average shares
outstanding 294,251,063 270,014,801
Basic income per share - prior to
accounting change 0.003 0.002
Cumulative effect of accounting change (0.002) -
------------- -------------
Basic income per share available
for common $ 0.001 $ 0.002
============= =============
Fully diluted weighted average shares
outstanding 294,251,063 270,126,740
Fully diluted income per share -
prior to accounting change 0.003 0.002
Cumulative effect of accounting change (0.002) -
------------- -------------
Fully diluted income per share $ 0.001 $ 0.002
============= =============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
1998 1997
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,751,299 $ 118,887
Trade accounts receivable, net of
allowance for doubtful accounts of
$134,169 and $50,000, respectively 8,205,563 3,937,645
Other receivables 111,365 16,097
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,623,538 2,695,782
Income taxes receivable 60,960 34,995
Inventories 318,458 380,128
Prepaid expenses 164,304 126,031
------------- -------------
Total current assets 14,235,487 7,309,565
------------- -------------
Property and equipment, net 625,309 604,578
Intangibles, net of amortization 41,246 52,250
Deposits 106,020 13,086
Restricted assets, certificate of deposit --- 222,836
------------- -------------
$ 15,008,062 $ 8,202,315
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 1,036,159 $ 137,865
Accounts payable 7,366,472 4,685,568
Accrued liabilities 1,884,950 638,821
Billings in excess of costs and
estimated earnings on uncompleted
contracts 1,686,168 499,594
Income taxes payable 213,611 ---
Deferred income taxes 106,632 123,778
------------- -------------
Total current liabilities 12,293,992 6,085,626
------------- -------------
Long-term debt 1,137,076 923,958
Deferred income taxes 78,005 190,417
Stockholders' equity:
Preferred stock, 0.00001 par value,
20,000,000 shares authorized; 1,000,000
shares issued and outstanding; stated at
redemption value of $ 0.0001 100 100
Preferred stock, no par, 1,000 shares
authorized; 250 shares issued and
outstanding as of December 31, 1998
only; stated at redemption value of
$ 1,000 250,000 ---
Common stock, 0.00001 par value;
800,000,000 shares authorized;
94,854,250 and 294,050,000 shares
issued and outstanding, respectively 2,948 2,940
Capital in excess of par value 541,918 522,624
Retained earnings 704,023 476,650
------------- -------------
Total stockholders' equity 1,498,989 1,002,314
------------- -------------
$ 15,008,062 $ 8,202,315
============= =============
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended December 31, 1998 and 1997
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income available for common
shareholders $ 227,373 $ 570,982
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 174,712 142,223
Amortization 11,004 2,750
Loss on disposition of fixed assets 31,883 ---
Increase (decrease) in deferred
income taxes (129,558) 308,059
(Increase) decrease in working capital:
Trade accounts receivable (4,267,918) (934,717)
Other receivables (47,502) 36,337
Costs and estimated earnings in
excess of billings on uncompleted
contracts (927,756) (709,619)
Income taxes receivable (25,965) (34,995)
Inventories 61,670 (216,312)
Prepaid expenses (38,273) (14,184)
Deposits (92,934) (3,990)
Accounts payable 2,680,903 984,669
Income taxes payable 213,611 (167,513)
Accrued liabilities 1,246,129 173,793
Billings in excess of costs and
estimated earnings on uncompleted
contracts 1,186,574 347,015
------------- -------------
Net cash provided by
operating activities 303,953 484,498
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in certificate of deposit 222,836 (11,467)
Purchase of property and equipment (227,325) (174,705)
Purchase of intangibles --- (5,000)
Issuance of stockholder loan (47,766) ---
------------- -------------
Net cash (used in)
investing activities (52,255) (191,172)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net changes on the lines-of-credit 798,000 (103,267)
Issuance of common stock 19,302 5,604
Issuance (redemption) of preferred stock 250,000 (2,000)
Proceeds from issuance of debt 496,378 ---
Repayment of debt (182,966) (135,964)
------------- -------------
Net cash (used in)
financing activities 1,380,714 (235,627)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,632,412 57,699
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 118,887 61,188
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,751,299 $ 118,887
============= =============
Supplemental cash flow disclosures - The effect of a certain $50,000 non-cash
financing transaction related to a non-compete agreement for common
stock in the Company was excluded from the consolidated cash flows for the
year ended December 31, 1997. Cash paid for interest was $167,420 and
$141,598 for the years ended December 31, 1998 and 1997, respectively.
Cash paid for income taxes was $176,547 for the year ended December 31, 1998.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
PREFERRED STOCK SERIES A & B COMMON STOCK CAPITAL IN RETAINED
--------------- --------------- ------------ EXCESS OF EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) TOTAL
------ ------ ------ ------ ------ ------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 50 $5,000 1,000,000 $ 100 261,382,500 $ 2,614 $464,346 $ (94,332) $ 377,728
Redemption of
preferred stock,
September 24, 1997 (50) (5,000) --- --- --- --- 3,000 --- (2,000)
Stock deemed issued
in reverse
acquisition,
September 25, 1997 --- --- --- --- 32,042,500 320 5,284 --- 5,604
Stock issued for non-
compete Agreement,
December 15, 1997 --- --- --- --- 625,000 6 49,994 --- 50,000
Net income --- --- --- --- --- --- --- 570,982 570,982
---- ------ --------- -------- ----------- ------- -------- --------- ----------
BALANCE,
DECEMBER 31, 1997 --- $ --- 1,000,000 $ 100 294,050,000 $ 2,940 $522,624 $ 476,650 $1,002,314
Issuance of
Series B
preferred stock
August 13, 1998 --- --- 250 250,000 --- --- --- --- 250,000
Stock issued
October 7, 1998 --- --- --- --- 804,250 8 19,294 --- 19,302
Net income
available for
common --- --- --- --- --- --- --- 227,373 227,373
---- ------ --------- -------- ----------- ------- -------- --------- ----------
BALANCE
DECEMBER 31, 1998 --- $ --- 1,000,250 $250,100 294,854,250 $ 2,948 $541,918 $ 704,023 $1,498,989
==== ====== ========= ======== =========== ======= ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
COMPANY HISTORY
- --------------
Global Water Technologies, Inc. ("GWTR") was incorporated in the state of
Delaware on July 12, 1990 under its predecessor name of Fi-Tek VI, Inc. and
became a public company in 1992. Until September 25, 1997, GWTR was
considered a development stage company which had not engaged in any
business other than organizational efforts, raising capital and
investigating business opportunities.
On September 25, 1997, GWTR and Psychrometric Systems, Inc. ("PSI")
consummated an Agreement and Plan of Reorganization whereby GWTR acquired
all of the issued and outstanding common shares of PSI in exchange for the
issuance of 261,382,500 shares of GWTR's Common Stock and 1,000,000 shares
of a newly-authorized Series A non-voting preferred stock ("Preferred
Stock"). Each share of Preferred Stock is convertible into 290 shares of
Common Stock upon attainment of gross annual sales of $60,000,000 for GWTR
and its subsidiaries (the "Company"), but only if such annual sales goal is
reported not later than the due date of the Company's Annual Report on Form
10-K for the fiscal year ending in 2002, and is subject to redemption by
the Company at a price of $0.0001 per share in the event the required sales
level is not attained. The Company has accounted for the transaction as a
reverse acquisition under the purchase method of accounting. The fiscal
year of the Company was changed from June 30 to December 31 to correspond
to the fiscal year of PSI.
GWTR, through its wholly owned subsidiary, PSI, is in the business of
designing, selling, manufacturing and building new industrial cooling
towers and in retrofitting existing industrial cooling towers and cooling
tower components.
On November 5, 1997 and subsequent to its reverse merger with PSI, GWTR
changed its name from Fi-Tek VI, Inc. to Global Water Technologies, Inc. to
reflect the Company's focus on the growing water-related market
opportunities. The Company's trading symbol was also changed to "GWTR" on
that date.
BASIS OF PRESENTATION
- ---------------------
As a result of the reverse merger referred to in the above "Company
History," the consolidated financial statements through September 25, 1997
reflect only the operations of PSI. Subsequent to that date, the
consolidated financial statements include the financial statements of
Global Water Technologies, Inc. and its wholly owned subsidiaries including
PSI. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-7
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
REVENUE AND COST RECOGNITION
- ----------------------------
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.
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 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. 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 recorded a one-time extraordinary
charge to income as of January 1, 1998. Please refer to Note 16 for the
pro-forma quarterly income statement impact of the accounting change.
Contract costs include all direct materials, subcontract costs, labor costs
and those indirect costs related to contract performance. Selling, general
and administrative costs are charged to expenses as incurred.
The aggregate of costs incurred and income recognized in excess of related
billings on uncompleted contracts is shown as a current asset, and the
aggregate of billings in excess of related costs incurred and income
recognized on uncompleted contracts is shown as a current liability.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the 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.
F-8
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
INCOME PER SHARE
- ----------------
The Company adopted FASB Statement No. 128 "Earnings Per Share" retroactive
to January 1, 1996. Income per basic share is computed on the basis of the
weighted average number of common shares outstanding for the respective
periods. Fully diluted income 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. As of December 31, 1998, there
were no existing dilutive common shares. Only 804,250 options which were
exercised in October of 1998, were considered dilutive for the year ending
December 31, 1997.
INCOME TAXES
- ------------
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns.
Effective January 1, 1996, the Company filed for a change in accounting
methods. The new tax method, percentage-of-completion, is the same as used
for financial statement purposes. In accordance with IRS regulations, the
deferred income as of December 31, 1995 is being recognized over a four-year
period for tax purposes. The deferred income from the change in
method will be fully recognized by December 31, 1999. The Company also
depreciates its property and equipment on an accelerated method for income
tax purposes. A provision for deferred taxes on these timing differences
has been recorded.
During 1997, the Company established a Foreign Sales Corporation ("FSC") in
the United States Virgin Islands. The wholly owned subsidiary will be used
as a commission agent on eligible foreign sales. The eligible sales which
qualify for FSC treatment will generate permanent tax differences for the
Company.
CASH EQUIVALENTS
- ----------------
The Company considers all liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. At December
31, 1998, cash equivalents included $441,133 in amounts restricted to the
payment of vendor obligations on specific projects.
INVENTORY VALUATION
- -------------------
Inventory is stated at the lower of cost (first-in, first-out method) or
market value. The inventory consists primarily of parts and structural
materials for use on specific future jobs.
ADVERTISING
- -----------
The Company expenses costs for advertising in the period in which the
advertising first takes place. Advertising costs charged to expense totaled
$319,805 and $308,708 for the years ended December 31, 1998 and 1997,
respectively.
PROPERTY AND EQUIPMENT
- ----------------------
The principle categories of equipment include office furniture and
equipment, vehicles, machinery and equipment and leasehold improvements.
Significant additions and improvements are capitalized. Maintenance and
repairs are expensed as incurred. Depreciation of property and
F-9
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
equipment is determined principally on the straight-line method over the
estimated useful lives of the assets.
INTANGIBLES
- -----------
Intangible assets relate to a non-compete agreement and goodwill, both of
which are amortized over a five year period.
CONCENTRATIONS OF RISK
- ----------------------
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade accounts receivable. The
Company maintains minimum cash balances which are partially covered by FDIC
insurance and which are maintained in accounts held by major banks and
financial institutions in the United States. As is customary in the
industry and where appropriate, the Company often grants uncollateralized
credit to its customers, which include all sizes of companies operating in
a broad range of industries. In order to mitigate its credit risk, the
Company continually evaluates the credit worthiness of its customers and,
where appropriate, strives to obtain appropriate collateral.
From time to time, the Company may have projects that exceed the 10%
revenue threshold for defining a major customer. Because each project is
awarded independently from other projects, management does not believe that
the completion of the contractual arrangements with any major customer that
may arise will have a material adverse effect on the Company. The Company
had a major customer accounting for 13.9% of its revenues for the year
ended December 31, 1998 but did not have a major customer accounting for
more than 10% of its revenues for the year ended December 31, 1997.
Additionally, the Company has two major projects with one customer included
in its December 31, 1998 backlog which represents approximately 36% of its
total backlog.
RECLASSIFICATIONS
- -----------------
Certain amounts as of or for the year ended December 31, 1997 have been
reclassified to conform with the December 31, 1998 presentation.
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31,
1998 and 1997:
1998 1997
---- ----
Office furniture and equipment $ 623,383 $ 509,819
Machinery and equipment 192,646 178,092
Vehicles 209,307 186,455
Leasehold improvements 29,729 53,394
---------- ----------
1,055,065 927,760
Less accumulated depreciation 429,756 323,182
---------- ----------
Property and equipment, net $ 625,309 $ 604,578
========== ==========
F-10
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
- --------------------------
The Company History section of Note 1 discussed the reverse merger between
Global Water Technologies, Inc. and Psychrometric Systems, Inc. In regard
to stockholders' equity, the effect of the reverse merger resulted in the
restatement of the Common Stock, Preferred Stock and the capital in excess
of par value as if the merger had taken effect on the first day of the
presented financial statements. Prior to the merger, PSI's own preferred
stock was redeemed.
As of the date of the merger, the authorized shares of the Company's Common
Stock and Preferred Stock was 500,000,000 and 20,000,000 shares,
respectively. As a consequence of the merger, the previous PSI
shareholders held 261,382,500 shares of the Company's Common Stock and
1,000,000 shares of the Preferred Stock; the previous GWTR shareholders
held 32,042,500 shares of the Company's Common 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.
On November 4, 1997, the Company increased the authorized shares of Common
Stock to 800,000,000 shares. On December 15, 1997, the Company issued
625,000 shares of Common Stock relating to a non-compete agreement. On
October 7, 1998, the Company issued 804,250 shares of Common Stock related
to an outstanding option.
WARRANTS AND OPTIONS
- --------------------
Immediately prior to the merger, the shareholders of GWTR held warrants to
acquire the Company's Common Stock. There are 8,042,500 Class A warrants
exercisable at 12 cents per share and 8,042,500 Class B warrants
exercisable at 20 cents per share. Such warrants, which were scheduled to
expire on April 14, 1998 have been extended to April 14, 1999.
An investment banking house, which assisted in the Company's initial public
offering in 1992, holds 804,250 Class A warrants and 804,250 Class B
warrants. The option on common stock and Class A and Class B warrants was
exercised at 2.4 cents per share on October 7, 1998. The Class A warrants
and Class B warrants are exercisable at 12 cents per share and 20 cents per
share, respectively.
On May 20, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan") which provides for the issuance of options to purchase up to
30,000,000 shares of Common Stock to employees,
F-11
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
officers, directors and consultants of the Company and its subsidiaries.
The Plan was ratified by the Company's shareholders at the Company's Annual
Meeting of Shareholders on June 30, 1998. No options were granted under
the Plan at December 31, 1998. Unless sooner terminated, the Plan will
expire on May 31, 2000.
COMPREHENSIVE INCOME
- --------------------
The Company has no items requiring separate disclosure pursuant to
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income.
4. BACKLOG
The following schedule summarizes changes in backlog on contracts during
the years ended December 31, 1998 and 1997. Backlog represents the amount
of revenue the Company expects to realize from work to be performed on
uncompleted contracts.
1998 1997
---- ----
Backlog, beginning of year $ 11,606,245 $ 6,139,765
Adjustment due to accounting change 1,036,272 ---
Contract removed in 1998 (3,885,000) ---
New contracts during year 53,142,019 24,163,772
Contract revenues earned during
the year (34,744,478) (18,697,292)
------------ ------------
Backlog, end of year $ 27,155,058 $ 11,606,245
============ ============
Included in the above 1998 backlog amounts are $1,507,778 recognized under
Letters of Intent. This is consistent with standard industry practices for
the Company's main business line.
5. LONG-TERM OPERATING LEASES
Effective March 10, 1998, the Company and George A. Kast, President and
CEO, entered into a triple-net lease for a 36,740 square foot office
building in Golden, Colorado, for the Company's expanding office space
requirements. The lease requires the Company to pay rent at a rate of
$21,454 per month for the 34-month lease. Gross operating expenses for the
building approximate $20,000 per month, of which Mr. Kast is personally
responsible for the payment of approximately $5,000 per month, which has
been paid by the Company. As of December 31, 1998, the Company has
recorded a note receivable from Mr. Kast related to the operating costs of
the facility for which Mr. Katz is responsible for $47,766. This note bears
interest at 8% per annum and is due no later than September 30, 1999.
The Company has a 60-month lease for its former office space in Lakewood,
CO, for approximately $14,519 per month, and which expires in October 1999.
Subsequent to December 31, 1998, the Company entered into an agreement with
an unaffiliated entity to occupy its former office location. This third
party has entered into an agreement with the lessor to release the Company
from any future obligation on the aforementioned lease. The Company also
has a 60 month lease with a
F-12
<PAGE>
stockholder for a research and testing facility located in Idaho, for
$1,238 per month, and which expires on September 30, 2001. The Company
leases approximately 17,700 square feet from an unaffiliated entity on a
month-to-month basis in Denver, Colorado, which is utilized for light
structural fabrication, component storage and centralized warehousing for
tools and equipment.
The following is a schedule by year of future minimum lease payments
required under these leases:
1999 $417,495
2000 272,305
2001 11,142
2002 none
2003 none
--------
In the aggregate $700,942
Rent expense totaled $450,171 and $243,272 for the years ended December 31,
1998 and 1997, respectively.
6. LONG- AND SHORT-TERM DEBT
The following is a summary of the long- and short-term debt as of December
31, 1998 and 1997:
1998 1997
---- ----
Norwest Bank, Lakewood, CO:
- Line-of-credit - domestic $ 750,000 $ 745,000
- Line-of-credit - international;
guaranteed to 90% of the outstanding
balance by the Export/Import bank of
the United States secured by eligible
accounts receivable and inventories. 793,000 ---
-Small Business Administration 90%
guaranteed loan (payable in monthly
installment of $8,334 including
interest at 1.0% above prime rate;
secured by furniture and equipment,
inventory, accounts receivable and
assignment of life insurance policy) 109,423 199,841
- Small Business Administration 90%
guaranteed loan (payable in monthly
installments of $7,917 including
interest at 1.0% above prime rate;
secured by furniture and equipment,
inventory, accounts receivable and
assignment of life insurance policy) 423,310 ---
F-13
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
First Interstate Bank (payable in monthly
installments of $912, including interest
at 9.5%; secured by a vehicle) 23,505 31,741
GMAC - various (payable in monthly
installments ranging from $361 to $577,
including interest ranging from 9.75%
to 10.75%; secured by seven vehicles) 73,997 85,241
---------- ----------
2,173,235 1,061,823
Less current maturities included in
current liabilities 1,036,159 137,865
---------- ----------
Net long-term debt $1,137,076 $ 923,958
========== ==========
The Company has negotiated a line of credit with Norwest Bank totaling
$1,275,000. The line-of-credit is secured by a stockholder's personal
certificates of deposit of $742,867. The line of credit has an interest
rate of 7.25% and matures on January 3, 2000.
The Small Business Administration guarantee of certain term debts subjects
the Company to financial covenants including a minimum net worth,
limitations on capital withdrawals and the personal guarantee of George A.
Kast, President and CEO. The Company was in compliance with all covenants
as of December 31, 1998 and 1997. The Export Import Bank of the United
States guarantee of certain debts subjects the Company to collateral
requirements on eligible foreign receivables and inventories. The Company
was in compliance with all requirements as of December 31, 1998.
The following is a summary of the future maturities of debt for the years
ending December 31:
1999 1,036,159
2000 891,235
2001 105,419
2002 97,127
2003 43,295
7. INCOME TAXES
The components of the net deferred tax liability at December 31, 1998 and
1997 are as follows:
1998 1997
---- ----
Deferred tax liabilities:
Deferred revenue under section 481 150,574 $ 277,556
Property and equipment 68,006 26,639
Other 10,000 25,000
--------- ---------
Total deferred tax liabilities $ 228,580 $ 329,195
========= =========
F-14
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Deferred tax assets:
Accounts receivable allowance $ 43,943 $ 15,000
---------- ----------
Total deferred tax assets $ 43,943 $ 15,000
---------- ----------
Net deferred tax liabilities $ 184,637 $ 314,195
========== ==========
The provision for income taxes consisted of the following at December 31,
1998 and 1997:
1998 1997
---- ----
Income taxes currently payable $ 313,324 $ 130,627
Deferred income taxes 129,558 143,251
Increase (decrease) in other, net 684 --
Tax effect of accounting change 593,119 --
---------- ----------
Income tax expense $ 777,569 $ 273,878
========== ==========
The differences between the federal income tax rate of 34% and the
Company's effective tax rate were as follows:
1998 1997
---- ----
Taxes at the U.S. statutory rate $ 600,739 $ 287,253
State income taxes,
net of federal income tax benefit 58,307 25,543
Foreign sales corporation (31,827) (48,243)
Non-deductible items 10,780 9,325
Adjustment in effective tax rate
estimates for timing differences 129,076 ---
Prior year under (over) accrual - net 10,494 ---
---------- ----------
Provision for income taxes $ 777,569 $ 273,878
========== ==========
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts at December 31, 1998 and 1997, are summarized as
follows:
1998 1997
---- ----
Costs incurred to date $20,040,123 $ 9,858,349
Gross profit recognized to date 4,136,042 4,499,694
----------- -----------
Total costs plus gross profit to date 24,176,165 14,358,043
Billings to date 22,238,795 12,161,855
----------- -----------
$ 1,937,370 $ 2,196,188
=========== ===========
F-15
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
The above amounts are included in the accompanying balance sheets under the
following captions:
1998 1997
---- ----
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 3,623,538 $ 2,695,782
Billings in excess of costs and
estimated earnings on uncompleted
contracts 1,686,168 499,594
----------- -----------
$ 1,937,370 $ 2,196,188
=========== ===========
9. CERTIFICATES OF DEPOSITS - PLEDGED
The certificate of deposit, with an outstanding balance at December 31,
1997 of $222,836 was pledged as security on the company's line-of-credit
agreement with Norwest Bank - Lakewood. During 1998, the Company was
released of its collateral requirement on this certificate of deposit.
10. ACCRUED LIABILITIES
The accrued liabilities consist of the following as of December 31, 1998
and 1997:
1998 1997
---- ----
Payroll taxes payable $ 101,940 $ 6,175
Accrued commissions payable 779,038 398,484
Accrued salaries and vacations 395,938 122,036
Sales tax payable 95,489 57,097
Accrued workers compensation 98,297 19,652
Other accrued liabilities 414,248 35,377
---------- ----------
$1,884,950 $ 638,821
========== ==========
F-16
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
11. LITIGATION AND CLAIMS
The Company has a receivable emanating from a project performed by the
Company in 1995. The total amount of the receivable is $115,000. This
receivable has been fully reserved in the books and records of the Company.
Discussions with the customer have not been productive. The customer has
also notified the Company of a potential claim against the Company in the
amount of $940,000. The customer has offered to release the Company from
liability on its claim if the Company releases the customer from the
Company's receivable. The Company believes the customer's claim is without
merit and considers its risk of loss to be remote. Consequently, the
Company has recorded no provision for loss related to the potential
counterclaim. Management has not yet finalized the course of action it
will pursue with respect to this matter.
The Company believes it has appropriate reserves for these and other
unanticipated claims.
12. 401(k) PLAN
On July 1, 1996, the Company implemented a 401(k) savings plan. The
current plan covers all full time employees over the age of 21 who have
completed six months of service to the Company. The Company may contribute
to the plan upon the Board of Directors' discretion. For the years ended
December 31, 1998 and 1997, the Company did not make any contributions to
the plan.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's debt at December 31, 1998 and 1997,
approximate their fair value, since the interest rate charged per the
agreements is similar to the Company's current borrowing rate.
From time to time, the Company enters into financial instruments with off-
balance sheet risk to hedge future cash flows from firm contracts in non-
dollar denominated currencies. As of December 31, 1998 and 1997, the
Company did not have any financial instruments with off-balance sheet risk.
The Company's policy is to hedge these firm contracts where possible with
forward foreign exchange contracts. These forward contracts are executed
through the Company's banking relationships.
14. RELATED PARTY TRANSACTIONS
A stockholder has pledged two personal certificates of deposit in the
amount of $742,867 as security for the Company's line-of-credit. For the
years ended December 31, 1998 and 1997, the Company authorized fees of
$48,784 for each year, to the stockholder for this pledge. These amounts
are included in interest expense.
F-17
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
The Company leases a research and testing facility from a stockholder with
monthly payments of $1,238. For the years ended December 31, 1998 and
1997, the Company incurred $14,856 for each year in rent expense for the
research and testing facility. These amounts are included in research and
development expense.
Effective March 10, 1998, the Company and George A. Kast, President and
CEO, entered into a triple-net lease for a 36,700 square foot office
building in Golden, Colorado, for the Company's expanding office space
requirements. The lease requires the Company to pay rent at a rate of
$21,454 per month for the 34-month lease. Gross operating expenses for the
building approximate $20,000 per month, of which Mr. Kast is personally
responsible for the payment of approximately $5,000 per month, which has
been paid by the Company. As of December 31, 1998, the Company has
recorded a note receivable from Mr. Kast related to the operating costs of
the facility for which Mr. Kast is responsible for $47,766. This note bears
interest at 8% per annum and is due no later than September 30, 1999.
15. BUSINESS SEGMENT DATA
In June 1997 the Financial Accounting Standards Board issued Statement No.
131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
(FAS 131). The Company adopted FAS 131 effective January 1, 1998.
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.
The Company's export sales were $5,241,036 and $3,777,426 for the Fiscal
years 1998 and 1997, respectively. The following schedule summarizes the
segmentation of the international and domestic business segments for the
years ended December 31, 1998 and 1997.
BUSINESS SEGMENT STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998
---------------------------------------------------
DOMESTIC INTERNATIONAL OTHER TOTAL
-------- ------------- ----- -----
<S> <C> <C> <C> <C>
Revenues $29,493,304 $5,241,036 $ - $34,734,340
Costs 23,254,112 4,562,025 4,994,985 32,811,122
Segment profit 6,239,192 679,011 (4,994,985) 1,923,218
Assets 10,408,904 1,420,197 3,178,961 15,008,062
</TABLE>
F-18
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1997
----------------------------------------------------
DOMESTIC INTERNATIONAL OTHER TOTAL
-------- ------------- ----- -----
<S> <C> <C> <C> <C>
Revenues $14,919,866 $3,777,426 $ - $18,697,292
Costs 10,979,212 2,568,272 4,179,054 17,726,538
Segment profit 3,940,654 1,209,154 (4,179,054) 970,754
Assets 5,599,402 1,034,025 1,568,888 8,202,315
</TABLE>
16. CHANGE IN ACCOUNTING
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 contracts related to new cooling towers which is the Company's
primary market. The pro-forma annual net income and earnings per share are
as follows assuming a retroactive application of the accounting change for
the years ended December 31, 1998 and 1997:
1998 1997
---- ----
Pro-forma amounts assuming retroactive
application of accounting change:
Net income (loss) $ 981,669 $ (31,973)
Basic income per share $ 0.003 $ (0.000)
========== ==========
Fully diluted income per share $ 0.003 $ (0.000)
========== ==========
PRO-FORMA QUARTERLY DISCLOSURE (UNAUDITED)
- ------------------------------------------
Previous 1998 quarterly financial statements were stated under the former
method of accounting. The following schedule summarizes the quarterly
results for the Company on a pro-forma basis as if the change in accounting
principle had been in effect from January 1, 1998.
F-19
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
PRO-FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended March 31; June 30; September 30 and
December 31, 1998
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues:
United States $ 3,053,675 $ 5,571,435 $ 7,144,239 $13,723,955
International 1,269,331 1,202,862 1,709,463 1,059,380
----------- ----------- ----------- -----------
Total revenues 4,323,006 6,774,297 8,853,702 14,783,335
Costs and expenses:
Cost of sales 3,505,555 5,635,317 7,388,393 11,286,872
Selling, general and
administrative 912,686 1,143,448 1,246,959 1,459,235
Research and development 52,032 56,285 66,373 57,967
----------- ----------- ----------- -----------
Total costs and
expenses 4,470,273 6,835,050 8,701,725 12,804,074
----------- ----------- ----------- -----------
Operating income (loss) (147,267) (60,753) 151,977 1,979,261
Other income (expense):
Interest expense, net (30,316) (34,879) (45,670) (46,655)
Other, net 255 3,742 11,472 (14,289)
Income (loss) before income
taxes 177,328 91,890 117,779 1,918,317
Income taxes (78,058) (40,449) 51,845 844,231
----------- ----------- ----------- -----------
Net income (loss) before
preferred dividend (99,270) (51,441) 65,934 1,074,086
Preferred stock dividend - - (2,630) (5,010)
----------- ----------- ----------- -----------
Pro-Forma Net income (loss)
prior to change in accounting
principle $ (99,270) $ (51,441) $ 63,304 $ 1,069,076
=========== =========== =========== ===========
Income per share:
Basic weighted average
shares outstanding 294,050,000 294,050,000 294,050,000 294,854,250
Pro-forma basic income
per share $ (0.0003) $ (0.0002) $ 0.0002 $ 0.0036
=========== =========== =========== ===========
Fully diluted weighted
average shares
outstanding 294,050,000 294,050,000 294,579,684 294,854,250
Pro-forma fully diluted
income per share $ (0.0003) $ (0.0002) $ 0.0002 $ 0.0036
=========== =========== =========== ===========
</TABLE>
F-20
EXHIBIT 3.6
AMENDED CERTIFICATE OF DESIGNATIONS
OF
PREFERRED STOCK
OF
GLOBAL WATER TECHNOLOGIES, INC.
Global Water Technologies, Inc., a corporation organized under the laws of
the State of Delaware, desiring to amend and restate the Certificate of
Designations of Preferred Stock filed September 4, 1998 with respect to the
designation of 1,000 shares as Series B Preferred Stock and the rights and
preferences thereof, the Board of Directors pursuant to authority expressly
vested in it by the provisions of the certificate of incorporation, hereby
makes this Amended Certificate of Designations in accordance with Section
151(g) of the Delaware General Corporation Law, and sets forth a copy of
such resolutions, followed by a statement of the number of shares to which
the resolutions apply:
NOW THEREFORE IT BE RESOLVED, that a series of preferred stock be, and
it hereby is, designated Series B Preferred Stock (herein the "Preferred
Stock"), to be subject to the rights and conditions provided in the
Resolutions set forth below:
BE IT RESOLVED FURTHER, THAT THE CORPORATION IS AUTHORIZED TO ISSUE,
ONE THOUSAND (1,000) SHARES OF SERIES B PREFERRED STOCK WITH A REDEMPTION
VALUE OF $1,000 PER SHARE.
BE IT RESOLVED FURTHER, that the holders of the Preferred Stock
(herein the "Holders") shall have the rights, and the Preferred Stock shall
be subject to the limitations and qualifications, set forth below:
1. Dividends.
- --------------
In each year the Holders of shares of the Preferred Stock shall be
entitled to receive, before any dividends shall be declared and paid upon
or set aside for the Common Stock in such year, when and as declared by the
Board of Directors of the Corporation, out of funds legally available for
that purpose, dividends in cash at the rate of $80.00 per annum per share
and no more payable quarterly at the rate of $20.00 per share (except that
the first dividend payment shall be an amount equal to accumulated
dividends from the date of initial issuance), on the last day of March,
June, September and December in each year; provided, however, that no
dividends shall be payable with respect to the Preferred Stock if any
default or event of default shall have occurred or be continuing under the
terms of any loan agreement or credit agreement for borrowed money between
the Corporation and any holder of notes or other securities of the
Corporation senior to the Preferred Stock. Dividends on the Preferred
Stock shall be cumulative from the date on which payment is made on account
of the initial issuance of such stock
1
<PAGE>
(whether or not there shall be net profits or net assets of the Corporation
legally available for the payment of such dividends), so that, if at any
time full cumulative dividends upon the Preferred Stock shall not have been
paid or declared and a sum sufficient for payment thereof set apart, the
amount of the deficiency in such dividends shall be fully paid, but without
interest, or dividends in such amount shall have been declared on the
shares of the Preferred Stock and a sum sufficient for the payment thereof
shall have been set aside for such payment, before any sum or sums shall be
set aside for or applied to the purchase or redemption of any shares of the
Common Stock and before any dividend shall be declared or paid or any other
distribution ordered or made upon any of the Common Stock.
2. Rights on Liquidation, Dissolution or Winding Up.
- ------------------------------------------------------
In the event of any liquidation, dissolution or winding up of the
Corporation, the Holders of shares of the Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available
for distribution to its stockholders, whether from capital, surplus or
earnings, before any payment shall be made to the holders of any Common
Stock, an amount equal to $1,000 per share plus an amount equal to accrued
dividends. If upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to
its stockholders shall be insufficient to pay the holders of shares of
Preferred Stock the full amounts to which they respectively shall be
entitled, the Holders of shares of Preferred Stock shall share ratably in
any distribution of assets according to the respective amount which would
be payable in respect to the shares held by them upon such distribution if
all amounts payable on or with respect to said shares were paid in full.
3. Voting Rights.
- -------------------
Except as otherwise required by law, at every meeting of the
stockholders of the Corporation, or in connection with any action taken by
written consent in lieu of any such meeting, all voting power in the
election of directors and for all other purposes shall be vested
exclusively in the holders of shares of Common Stock.
4. Redemption.
- ----------------
The Preferred Stock is redeemable by the Company subject to the
following provision:
(a) In no event shall the Corporation redeem Preferred Stock if the
consolidated net worth of the Corporation (as defined under generally
accepted accounting principles, but after giving full effect to the
redemption) is not equal to or in excess of $3,000,000; and further,
that such redemption can not be exercised prior to the Corporation's
receipt of its audited financial statements for the year ended
December 31, 1998.
2
<PAGE>
(b) Unless otherwise prevented by law, the Corporation may at the option
of the Board of Directors redeem all or any portion of the shares of
the Preferred Stock, at a price of $1,000 per share, plus in each case
an amount equal to dividends declared prior to the redemption date but
payable subsequent to the redemption date; provided, however, that no
payment shall be made by the Corporation with respect to any such
redemption: (i) if any default or event of default shall have occurred
or be continuing under the terms of any loan agreement or credit
agreement for borrowed money between the Corporation and any holder of
notes or other securities of the Corporation senior to the Preferred
Stock, in which event the Corporation may redeem such shares on first
date on which such default or event of default has been cured by the
Corporation, and shall pay accrued dividends on such shares to such
redemption date and (ii) if the redemption of the Preferred Stock or
payment of accrued dividends would result in a default or event of
default under any such Loan Agreement.
(c) Notice of every redemption of the Preferred Stock pursuant to this
Section 4 shall be sent by first-class mail, postage pre-paid, not
less than fifteen (15) days in advance of the redemption date, to the
holders of record of the shares of Preferred Stock to be redeemed at
their respective addresses as the same shall appear on the books of
the Corporation.
(d) On and after any redemption (unless funds shall not then be available
or unless default shall be made by the Corporation as a result of the
payment of the redemption price), all rights of the Holders of shares
of Preferred Stock as stockholders of the Corporation with respect to
those shares of Preferred Stock to be redeemed, except the right to
receive the redemption price as hereinafter provided, shall cease and
terminate.
3
<PAGE>
IN WITNESS WHEREOF, THIS AMENDED CERTIFICATE OF DESIGNATIONS HAS BEEN
EXECUTED BELOW ON BEHALF OF THE CORPORATION ON THIS ELEVENTH DAY OF
NOVEMBER 1998 BY ITS PRESIDENT AND ACKNOWLEDGED BY ITS SECRETARY, THEREUNTO
DULY AUTHORIZED.
/s/ GEORGE A. KAST
--------------------------------
George A. Kast, President
ACKNOWLEDGED BY: /s/ GARY L. BROWN
--------------------------------
Gary L. Brown, Secretary
STATE OF COLORADO )
)ss.
COUNTY OF JEFFERSON )
The foregoing was acknowledged before me this 11th day of November,
1998 by George A. Kast, President of Global Water Technologies, Inc.
WITNESS my hand and official seal.
My Commission expires: 12/05/2001
-----------
/s/ DEBRA K. ROGERS
--------------------------------
Notary Public
SEAL
STATE OF COLORADO )
)ss.
COUNTY OF JEFFERSON )
The foregoing was acknowledged before me this 11th day of November,
1998 by Gary L. Brown, Secretary of Global Water Technologies, Inc.
WITNESS my hand and official seal.
My Commission expires: 12/05/2001
-----------
/s/ DEBRA K. ROGERS
--------------------------------
Notary Public
SEAL
4
EXHIBIT 10.6
GLOBAL WATER TECHNOLOGIES, INC.
1998 STOCK OPTION PLAN
ARTICLE I
1.1 PURPOSE OR PLAN; TERM.
(a) ADOPTION. On May 20, 1998 (the "Adoption Date"), the Board
of Directors (the "Board") of Global Water Technologies, Inc., a Delaware
corporation (the "Company"), adopted this stock option plan to be known as
the 1998 Stock Option Plan (the "Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby
shall have the meaning set forth in ARTICLE IV hereto.
(c) GENERAL PURPOSE. This 1998 Stock Option is intended to
encourage stock ownership by employees, officers, directors of and
consultants to Global Water Technologies, Inc. and its controlled,
affiliated subsidiary corporations (collectively, the "Company"), so that
they may acquire or increase their proprietary interest in the Company, and
is intended to facilitate the Company's efforts to (i) induce qualified
persons to become employees or officers of or consultants to the Company;
(ii) compensate employees, officers, directors and consultants for services
to the Company; and (iii) encourage such persons to remain in the employ of
or associated with the Company and to put forth maximum efforts for the
success of the Company. Such purpose shall be accomplished by providing for
the discretionary granting of options to acquire the Company's Stock
("Options"), the direct granting of the Company's Stock ("Stock Awards"),
and the granting of stock appreciation rights ("SARs"), (Stock Awards and
SARs shall be collectively referred to herein as "Awards").
(d) CHARACTER OF OPTIONS. Options granted under this Plan to
employees of the Company (or Parent or Subsidiary Corporations) that are
intended to qualify as an "incentive stock option" as defined in Code
section 422 ("Incentive Stock Option") will be specified in the applicable
stock option agreement. All other Options granted under this Plan will be
non-qualified options.
(e) RULE 16b-3 PLAN. The Plan is intended to comply with all
applicable conditions of Rule 16b-3 (and all subsequent revisions thereof)
promulgated under the Securities Exchange Act of 1934 (the "Act"). In such
instance, to the extent any provision of the Plan or action by a Committee
or the Board fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board or such
Committee. In addition, the Board may amend the Plan from time to time as
it deems necessary in order to meet the requirements of any amendments to
Rule 16b-3 without the consent of the shareholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years,
commencing on the date of adoption of the original Plan by the Board as
specified in SECTION 1.1(a) hereof. No Option or Award shall be granted
under the Plan unless granted within 10 years of the adoption of the Plan
by
<PAGE>
the Board, but Options or Awards outstanding on that date shall not be
terminated or otherwise affected by virtue of the Plan's expiration.
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The
shares of stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under
the Plan are shares of the Company's Common Stock, $.00001 par value per
share (the "Stock"), which may be either unissued or treasury shares. The
Company may not issue more than 30,000,000 shares of Stock pursuant to the
Plan, unless the Plan is amended as provided in SECTION 1.3 or the maximum
number of shares subject to the Plan is adjusted as provided in SECTION 3.1.
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding
requirements) upon exercise of an Option; and, (ii) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding
requirements) upon the grant of a Stock Award or the exercise of an SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and
before the term of the Plan expires, the shares of Stock subject to, but
not issued under, such Option or SAR shall, without further action or by or
on behalf of the Company, again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY STOCKHOLDERS. The Plan shall be submitted to
the stockholders of the Company for their approval at a regular or special
meeting to be held within 12 months after the adoption of the Plan by the
Board. Stockholder approval shall be evidenced by the affirmative vote of
the holders of a majority of the shares of the Company's Common Stock
present in person or by proxy and voting at the meeting. The date such
stockholder approval has been obtained shall be referred to herein as the
"Effective Date."
(b) COMMENCEMENT OF PLAN. The Plan is effective immediately,
but if the Plan is not approved by the stockholders within 12 months after
its adoption by the Board, the Plan and all Options and Awards made
thereunder will automatically terminate and be forfeited to the same extent
and with the same effect as though the Plan had never been adopted.
(c) AMENDMENTS TO PLAN. The Board may, without action on the
part of the Company's stockholders, terminate or make such amendments to,
changes in and additions to the Plan as it may, from time to time, deem
necessary or appropriate and in the best interests of the Company;
provided, the Board may not, without the consent of the applicable
Optionholder, take any action which disqualifies any Option previously
granted under the Plan for treatment as an Incentive
2
<PAGE>
Stock Option or which adversely affects or impairs the rights of the
Optionholder of any Option outstanding under the Plan, and further provided
that, except as provided in ARTICLE III hereof, the Board may not, without
the approval of the Company's stockholders: (i) increase the aggregate
number of shares of Stock subject to the Plan; (ii) reduce the exercise
price at which Options may be granted or the exercise price at which any
outstanding Option may be exercised; (iii) extend the term of the Plan;
(iv) change the class of persons eligible to receive Options or Awards
under the Plan; or, (v) materially increase the benefits accruing to
participants under the Plan. Notwithstanding the foregoing, Options or
Awards may be granted under this Plan to purchase shares of Stock in excess
of the number of shares then available for issuance under the Plan if (A)
an amendment to increase the maximum number of shares issuable under the
Plan is adopted by the Board prior to the initial grant of any such Option
or Award and within one year thereafter such amendment is approved by the
Company's stockholders and (B) each such Option or Award granted does not
become exercisable or vested, in whole or in part, at any time prior to the
obtaining of such stockholder approval.
ARTICLE II
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Options and Awards may be
granted only to persons ("Eligible Persons") who at the time of grant are:
(i) employees (including officers and directors) of the Company or Parent
or Subsidiary Corporations; or, (ii) consultants or independent contractors
who provide valuable services to the Company or Parent or Subsidiary
Corporations; provided that Incentive Stock Options may only be granted to
employees of the Company (and its Parent or Subsidiary Corporations). The
Committee shall have full authority to determine which Eligible Persons are
to receive Option grants under the Plan, the number of shares to be covered
by each such grant, whether or not the granted Option is to be an Incentive
Stock Option, the time or times at which each such Option is to become
exercisable, and the maximum term for which the Option is to be
outstanding. The Committee shall also have full authority to determine
which Eligible Persons are to receive Awards and the conditions relating to
such Award.
(b) GENERAL ADMINISTRATION. The Plan shall be administered by
the Compensation Committee which shall make recommendations to the Board of
Directors with respect to the grant of Options and Awards. The Board of
Directors retains complete authority in its discretion, subject to and not
inconsistent with the express provisions of the Plan, to grant Options and
Awards pursuant to the Plan. The Committee shall administer the Plan and
make recommendations to the Board concerning the following: exercise of all
powers and authorities either specifically conferred under the Plan or
necessary or advisable in the administration of the Plan: to determine the
vesting schedule and other restrictions, if any, relating to Options and
Awards; to determine the Option Price; to determine the persons to whom,
and the time or times at which, Options and Awards shall be granted; to
determine the number of shares to be covered by each Option or Award; to
determine Fair Market Value per share; to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the terms and provisions
3
<PAGE>
of the Option agreements (which need not be identical) entered into in
connection with Options granted under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan. The Committee may delegate to one or more of its members or to one
or more agents such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may
employ one or more persons to render advice with respect to any
responsibility the Committee or such person may have under the Plan.
(c) Options and Awards granted under the Plan shall be evidenced
by duly adopted resolutions of the Committee included in the minutes of the
meeting at which they are adopted or in a unanimous written consent.
(d) No member of the Committee or the Board shall be liable for
any action taken or determination made in good faith with respect to the
Plan or any Option or Award granted hereunder.
(e) In designating and selecting Eligible Persons for
participation in the Plan, the Committee shall consult with and give
consideration to the recommendations and criticisms submitted by
appropriate managerial and executive officers of the Company. The
Committee also shall take into account the duties and responsibilities of
the Eligible Persons, their past, present and potential contributions to
the success of the Company and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
2.2 TERMS AND CONDITIONS OF OPTIONS.
(a) ALLOTMENT OF SHARES. The Committee shall determine the
number of shares of Stock to be optioned from time to time and the number
of shares to be optioned to any Eligible Person (the "Optioned Shares").
The grant of a Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Awards under this Plan or any other stock option plan of the Company.
(b) EXERCISE PRICE. Upon the grant of any Option, the Committee
shall specify the option price per share. If the Option is intended to
qualify as an Incentive Stock Option under the Code, the option price per
share may not be less than 100 percent of the fair market value per share
of the stock on the date the Option is granted (110 percent if the Option
is granted to a stockholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any
Parent or Subsidiary Corporation). If the Option is not intended to qualify
as an Incentive Stock Option under the Code, the option price per share may
not be less than 85 percent of the fair market value per share of the stock
on the date the Option is granted. The determination of the fair market
value of the Stock shall be made in accordance with the valuation
provisions of SECTION 3.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Options granted under
the Plan shall be evidenced by option agreements in such form and content
as the Committee from time to time
4
<PAGE>
approves, which agreements shall substantially comply with and be subject
to the terms of the Plan, including the terms and conditions of this
SECTION 2.2. As determined by the Committee, each option agreement shall
state: (i) the total number of shares to which it pertains; (ii) the
exercise price for the shares covered by the Option; (iii) the time at
which the Options vest and become exercisable; and, (iv) the Option's
scheduled expiration date. The option agreements may contain such other
provisions or conditions as the Committee deems necessary or appropriate to
effectuate the sense and purpose of the Plan, including covenants by the
Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) OPTION PERIOD. No Option granted under the Plan that is
intended to be an Incentive Stock Option shall be exercisable for a period
in excess of 10 years from the date of its grant (five years if the Option
is granted to a shareholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any
Subsidiary Corporation), subject to earlier termination in the event of
termination of employment, retirement or death of the Optionholder. An
Option may be exercised in full or in part at any time or from time to time
during the term of the Option or provide for its exercise in stated
installments at stated times during the Option's term.
(e) VESTING; LIMITATIONS. The time at which Options vest with
respect to an Optionholder shall be in the discretion of that
Optionholder's Committee; provided that no Options shall vest prior to the
Effective Date. Notwithstanding the foregoing, to the extent a Option is
intended to qualify as an Incentive Stock Option, the aggregate fair market
value (determined as of the respective date or dates of grant) of the Stock
for which one or more Options granted to any person under this Plan (or any
other option plan of the Company or its Parent or Subsidiary Corporations)
may for the first time become exercisable as Incentive Stock Options during
any one calendar year shall not exceed the sum of $100,000 (referred to
herein as the "$100,000 Limitation"). To the extent that any person holds
two or more Options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which
such Options are granted.
(f) NO FRACTIONAL SHARES. Options shall be exercisable only for
whole shares; no fractional shares will be issuable upon exercise of any
Option granted under the Plan.
(g) METHOD OF EXERCISE. To exercise a Option, an Optionholder
(or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may
be) must take the following action:
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Option specifying
the number of shares of Stock with respect to which the Option is being
exercised;
(ii) pay the aggregate Option Price in one of the alternate
forms as set forth in SECTION 2.2(h) below; and,
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(iii) furnish appropriate documentation that the person
or persons exercising the Option (if other than the Optionholder) has the
right to exercise such Option.
As soon as practical after the Exercise Date, the Company will mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising this Option under the Plan) a certificate or certificates
representing the Stock acquired upon exercise of the Option.
(h) PAYMENT PRICE. The aggregate Option Price shall be payable
in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order;
(ii) At the Company's option, full payment in shares of
Stock held for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at fair market value on the Exercise
Date (as determined in accordance with SECTION 3.5 hereof); or,
(iii) If a cashless exercise Plan has been implemented by
the Board, full payment through a sale and remittance procedure pursuant to
which the Optionholder (A) shall provide irrevocable written instructions
to a designated brokerage firm to effect the immediate sale of the Optioned
Shares to be purchased and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such
brokerage firm in order to complete the sale transaction.
(i) RIGHTS OF A STOCKHOLDER. An Optionholder shall not have any
of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for
the Optioned Shares. No adjustment will be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
(j) REPURCHASE RIGHT. The Committee may, in its sole
discretion, set forth other terms and conditions upon which the Company (or
its assigns) shall have the right to repurchase shares of Stock acquired by
an Optionholder pursuant to a Option. Any repurchase right of the Company
shall be exercisable by the Company (or its assignees) upon such terms and
conditions as the Committee may specify in a stock repurchase agreement in
such form and content as the Committee may approve evidencing such right.
The Committee may also in its discretion establish as a term and condition
of one or more Options granted under the Plan that the Company shall have
a right of first refusal with respect to any proposed sale or other
disposition by the Optionholder of any shares of Stock issued upon the
exercise of such Options. Any such right of first refusal shall be
exercisable by the Company (or its assigns) in accordance with the terms
and conditions set forth in a stock repurchase agreement.
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(k) TERMINATION OF SERVICE. If any Optionholder ceases to be in
Service to the Company for a reason other than permanent disability or
death, such Optionholder must, within 90 days after the date of termination
of such Service, but in no event after the Option's stated expiration date,
exercise some or all of the Options that the Optionholder was entitled to
exercise on the date the Optionholder's Service terminated; provided, that
if the Optionholder is discharged for Cause or commits acts detrimental to
the Company's interests after the Service of the Optionholder has been
terminated, then the Option will thereafter be void for all purposes.
"Cause" shall mean a termination of Service based upon a finding by the
applicable Committee that the Optionholder: (i) has committed a felony
involving dishonesty, fraud, theft or embezzlement; (ii) after written
notice from the Company, has repeatedly failed or refused, in a material
respect, to follow reasonable policies or directives established by the
Company; (iii) after written notice from the Company, has willfully and
persistently failed to attend to material duties or obligations; (iv) has
performed an act or failed to act, which, if he were prosecuted and
convicted, would constitute a theft of money or property of the Company;
or, (v) has misrepresented or concealed a material fact for purposes of
securing employment with the Company. If any Optionholder ceases to be in
Service to the Company by reason of permanent disability within the meaning
of section 22(e)(3) of the Code (as determined by the applicable
Committee), the Optionholder will have 12 months after the date of
termination of Service, but in no event after the stated expiration date of
the Optionholder's Options, to exercise Options that the Optionholders was
entitled to exercise on the date the Optionholder's Service terminated as
a result of the disability.
(l) DEATH OF OPTIONHOLDER. If an Optionholder dies while in the
Company's Service, any Options that the Optionholder was entitled to
exercise on the date of death will be exercisable within the six-month
period following the date of issuance of letters testamentary or letters of
administration of a deceased Optionholder, in the case of the
Optionholder's death during his employment by the Company, but not later
than one year after the Optionholder's death or until the stated expiration
date of the Optionholder's Option, whichever occurs first, by the person or
persons ("successors") to whom the Optionholder's rights pass under a will
or by the laws of descent and distribution. As soon as practicable after
receipt by the Company of such notice and of payment in full of the Option
Price, a certificate or certificates representing the Optioned Shares shall
be registered in the name or names specified by the successors in the
written notice of exercise and mall be delivered to the successors.
(m) OTHER PLAN PROVISIONS STILL APPLICABLE. If a Option is
exercised upon the termination of Service or death of an Optionholder under
this SECTION 2.2, the other provisions of the Plan will continue to apply
to such exercise, including the requirement that the Optionholder or its
successor may be required to enter into a Stock Repurchase Agreement.
(n) DEFINITION OF "SERVICE". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder,
the Optionholder is deemed to be in "Service" to the Company so long as
such individual renders continuous services on a periodic basis to the
Company (or to any Parent or Subsidiary Corporation) in the capacity of an
employee, director, or an independent consultant or advisor. In the
discretion of the applicable Committee, an
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Optionholder will be considered to be rendering continuous services to the
Company even if the type of services change, e.g., from employee to
independent consultant. The Optionholder will be considered to be an
employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 TERMS AND CONDITIONS OF STOCK AWARDS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive Stock Awards. The Committee shall determine the number of shares of
Stock to be awarded from time to time to any Eligible Person. Except as
provided otherwise in this Plan, the grant of a Stock Award to a person (a
"Grantee") shall neither entitle such person to, nor disqualify such person
from participation in, any other grant of options or awards by the Company,
whether under this Plan or under any other stock option or award plan of
the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee
of any such Stock Award shall not be required to pay any consideration to
the Company upon receipt of such Stock Award, except as may be required to
satisfy any applicable corporate law, employment tax and/or income tax
withholding requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the Committee deems
appropriate, including, by way of illustration but not by way of
limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the
Company, or payment by the recipient of any applicable employment or
withholding taxes. Such Committee may modify or accelerate the termination
of the restrictions applicable to any Stock Award under the circumstances
as it deems appropriate.
(d) AWARD AGREEMENTS. The Committee may require as a condition
to a Stock Award that the recipient of such Stock Award enter into an award
agreement in such form and content as that Committee from time to time
approves.
2.4 TERMS AND CONDITIONS OF SARS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive SARs. The Committee shall determine the SARs to be awarded from
time to time to any Eligible Person. The grant of a SAR to a person shall
neither entitle such person to, nor disqualify such person from
participation in, any other grant of options or awards by the Company,
whether under this Plan or under any other stock option or award plan of
the Company.
(b) AWARD OF SARS. Concurrently with or subsequent to the grant
of any Option to purchase one or more shares of Stock, the Committee may
award to the Optionholder with respect to each share of Stock, underlying
the Option, a related SAR permitting the Optionholder to be paid
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any appreciation on that Stock in lieu of exercising the Option. In
addition, a Committee may award to any Eligible Person a SAR permitting the
Eligible Person to be paid the appreciation on a designated number of
shares of the Stock, whether or not such Shares are actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such terms,
conditions, restrictions or limitations as the Committee deems appropriate,
including, by way of illustration but not by way of limitation,
restrictions on transferability, requirements of continued employment,
individual performance, financial performance of the Company, or payment by
the recipient of any applicable employment or withholding taxes. The
Committee may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR AGREEMENTS. The Committee may require as a condition to
the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Committee from time to time
approves.
(e) EXERCISE. An Eligible Person who has been granted a SAR may
exercise such SAR subject to the conditions specified in the SAR agreement
by the Committee.
(f) AMOUNT OF PAYMENT. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be
equal to the amount, if any, by which the fair market value of the
specified shares of Stock on the exercise date exceeds the fair market
value of the specified shares of Stock on the date the Option related to
the SAR was granted or became effective, or, if the SAR is not related to
any Option, on the date the SAR was granted or became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or
Stock, as determined in the discretion of the Committee and set forth in
the SAR agreement. If the payment is in Stock, the number of shares to be
paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to SECTION 2.4(f) by the fair market value of
a share of Stock on the exercise date of such SAR. As soon as practical
after exercise, the Company shall deliver to the SAR grantee a certificate
or certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. SECTIONS 2.2(k) and (1),
applicable to Options, shall apply equally to SARs.
ARTICLE III
3.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards, and the price per share stated in all outstanding
Options and Awards shall be proportionately adjusted for any increase or
decrease in the number of outstanding shares of Stock of the Company
resulting from a subdivision or consolidation of shares or any other
capital adjustment or the payment of a stock dividend or any
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other increase or decrease in the number of such shares effected without
the Company's receipt of consideration therefor in money, services or
property.
3.2 MERGERS, ETC. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option
or Award granted under the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to
the Option or Award would have been entitled prior to the merger or
consolidation. Except as provided in SECTION 3.3 hereof, a dissolution or
liquidation of the Company shall cause every Option or Award outstanding
hereunder to terminate.
3.3 CORPORATE TRANSACTION. In the event of stockholder approval of a
Corporate Transaction, the Committee shall have the discretion and
authority, exercisable at any time, to provide for the automatic
acceleration of one or more of the outstanding Options or Awards granted by
it under the Plan. Upon the consummation of the Corporate Transaction, all
Options shall, to the extent not previously exercised, terminate and cease
to be outstanding.
3.4 CHANGE IN CONTROL.
(a) In the event of a Change in Control, the Committee shall
have the discretion and authority, exercisable at any time, whether before
or after the Change in Control, to provide for the automatic acceleration
of one or more outstanding Options or Awards granted by it under the Plan
upon the occurrence of such Change in Control. The Committee may also
impose limitations upon the automatic acceleration of such Options or
Awards to the extent it deems appropriate. Any Options or Awards
accelerated upon a Change in Control will remain fully exercisable until
the expiration or sooner termination of the Option term.
(b) INCENTIVE STOCK OPTION LIMITS. The exercisability of any
Options which are intended to qualify as Incentive Stock Options and which
are accelerated by the Committee in connection with a pending Corporation
Transaction or Change in Control shall, except as otherwise provided in the
discretion of the Committee and the Optionholder, remain subject to the
$100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
3.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value
of a share of Stock on any relevant date shall be determined in accordance
with the following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market,
the fair market value shall be the mean between the highest bid and lowest
asked prices (or, if such information is available, the closing selling
price) per share of Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of
Securities Dealers through its NASDAQ system or any successor system. If
there are no reported bid and asked prices (or closing selling price) for
the Stock on the date in question, then the mean between the highest bid
price and lowest asked price (or the closing selling price) on the last
preceding date for which such quotations exist shall be determinative
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of fair market value.
(b) If the Stock is at the time listed or admitted to trading on
any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the
date in question, then the fair market value shall be the closing selling
price on the exchange on the last preceding date for which such quotation
exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market,
then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including
one or more independent professional appraisals.
3.6 USE OF PROCEEDS. The proceeds received by the Company from the
sale of Stock pursuant to the exercise of Options or Awards hereunder, if
any, shall be used for general corporate purposes.
3.7 CANCELLATION OF OPTIONS. The Committee shall have the authority
to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Options
granted under the Plan by that Committee and to grant in substitution
therefore new Options under the Plan covering the same or different numbers
of shares of Stock as long as such new Options have an exercise price per
share of Stock no less than the minimum exercise price as set forth in
SECTION 2.2(b) hereof on the new grant date.
3.8 REGULATORY APPROVALS. The implementation of the Plan, granting
of any Option or Award hereunder, and the issuance of Stock upon the
exercise of any such Option or Award shall be subject to the procurement by
the Company of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the Options or Awards granted under it
and the Stock issued pursuant to it.
3.9 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably
incurred by them in connection with any action, legal proceeding to which
any member thereof may be a party by reason of any action taken, failure to
act under or in connection with the Plan or any rights granted thereunder
and against all amounts paid by them in settlement thereof or paid by them
in satisfaction of a judgment of any such action, suit or proceeding,
except a judgment based upon a finding of bad faith.
3.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the
exclusive means by which the Company may issue options or warrants to
acquire its Stock, stock awards or any other type of
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award. To the extent permitted hy applicable law, any such other option,
warrants or awards may he issued by the Company other than pursuant to this
Plan without shareholder approval.
3.11 COMPANY RIGHTS. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
3.12 ASSIGNMENT. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. No Option or Award
granted under the Plan or any of the rights and privileges conferred
thereby shall be assignable or transferable by an Optionholder or grantee
other than by will or the laws of descent and distribution, and such Option
or Award shall be exercisable during the Optionholder's or grantee's
lifetime only by the Optionholder or grantee. Notwithstanding the
foregoing, any Options or Awards granted pursuant to the Plan may be
assigned, encumbered or otherwise transferred by the Optionholder or
grantee if specifically allowed by the Committee upon the grant of such
Option or Award. The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Company and its successors or assigns, and the
Optionholders. the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
3.13 SECURITIES REGISTRATION.
(a) LEGEND ON CERTIFICATES. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend
reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased solely for
investment. These shares may not he sold, transferred or assigned
unless in the opinion of the Company and its legal counsel such sale,
transfer or assignment will not be in violation of the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and
Awards are and shall be made available only to a limited number of present
and future executives, directors, employees and/or consultants who have
knowledge of the Company's financial condition, management and its affairs.
The Plan is not intended to provide additional capital for the Company, but
to encourage ownership of Stock among the Company's employees. By the act
of accepting an Option or Award, each grantee agrees: (i) that, any shares
of Stock acquired will be solely for investment not with any intention to
resell or redistribute those shares; and, (ii) such intention will be
confirmed by an appropriate certificate at the time the Stock is acquired
if requested by the Company. The neglect or failure to execute such a
certificate, however, shall not limit or negate the foregoing agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement
covering the shares of Stock issuable under the Plan as filed under the
Securities Exchange Act of 1933, as amended, and
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as declared effective by the Securities Exchange Commission, the provisions
of SECTIONS 3.13(a) and (b) shall terminate during the period of time that
such Registration Statement, as periodically amended, remains effective.
3.14 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under the
Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its
discretion and in accordance with the provisions of this SECTION 3.14(b)
and such supplemental roles as it may from time to time adopt (including
the applicable safe-harbor provisions of SEC Rule 16b-3), provide any or
all Optionholders or Grantees with the right to use shares of Stock in
satisfaction of all or part of the federal, state and local income tax
liabilities incurred by such Optionholders or Grantees in connection with
the receipt of Stock ("Taxes"). Such right may be provided to any such
Optionholder or Grantee in either or both of the following formats:
(i) STOCK WITHHOLDING. An Optionholder or Grantee may be
provided with the election, which may be subject to approval by the
Committee, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value
equal to the percentage of the applicable Taxes (not to exceed 100 percent)
designated by the Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its discretion,
provide the Optionholder or Grantee with the election to deliver to the
Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than
pursuant to the transaction triggering the Taxes) with an aggregate fair
market value equal to the percentage of applicable taxes incurred in
connection with such Option exercise or Stock Award (not to exceed 100
percent) designated by the Optionholder or Grantee.
3.15 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall he determined in accordance with the laws of the State of
Colorado.
ARTICLE IV
DEFINITIONS
The following capitalized terms used in this Plan shall have the
meaning described below:
"AFFILIATES" shall mean all "executive officers" (as that term is defined
in Rule 16a-1(f) promulgated under the Act) and directors of the Company
and all persons who own ten percent or more of the Company's issued and
outstanding Stock.
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"AWARD" shall mean a Stock Award or SAR under the Plan.
"BOARD" shall mean the Board of Directors of the Company.
"CHANGE IN CONTROL" shall mean and include the following transactions or
situations:
(a) A sale, transfer, or other disposition by the Company through a
single transaction or a series of transactions of securities of the Company
representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or
"Unrelated Persons" acting in concert with one another. For purposes of
this Section, the term "Person" shall mean and include any individual,
partnership, joint venture, association, trust corporation, or other entity
(including a "group" as referred to in Section 13(d)(3) of the Act). For
purposes of this Section, the term "Unrelated Person" shall mean and
include any Person other than the Company, a wholly-owned subsidiary of the
Company, or an employee benefit plan of the Company.
(b) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(c) A change in the ownership of the Company through a single
transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing
at least 30 percent of the combined, voting power of the Company's then
outstanding securities. For purposes of this Section, the term "Beneficial
Owner" shall have the same meaning as given to that term in Rule 13d-3
promulgated under the Act, provided that any pledgee of voting securities
is not deemed to be the Beneficial Owner thereof prior to its acquisition
of voting rights with respect to such securities.
(d) Any consolidation or merger of the Company with or into an
Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the
surviving corporation representing at least 50 percent of the combined
voting power of the surviving corporation's then outstanding securities.
(e) During any period of two years, individuals who, at the beginning
of such period, constituted the Board of Directors of the Company cease,
for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by
the vote of at least two-thirds of the directors then still in office who
were directors at the beginning of such period.
(f) A change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule l4A of
Regulation 14A promulgated under the Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such
reporting
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requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the
General Bankruptcy Code or any successor or other statute of similar import
shall not be deemed to be a Change of Control for purposes of this Plan.
"COMMITTEE" shall mean the Compensation Committee appointed by the Board,
if one has been appointed. If no Committee has been appointed, the term
"Committee" shall mean the Board.
"COMPANY" shall mean Global Water Technologies, Inc., a Delaware
corporation.
"CORPORATE TRANSACTION" shall mean: (a) a merger or consolidation in which
the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company; or, (c) any reverse merger in which the Company
is the surviving entity hut in which the securities possessing more than 50
percent of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those who
held such securities immediately prior to such merger.
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by the
Stockholders as required by SECTION 1 3(a) hereof.
"ELIGIBLE PERSONS" shall mean, with respect to the Plan, those persons who,
at the time that the Option or Award is granted, are (i) employees
(including officers and directors) of the Company or Parent or Subsidiary
Corporations, or (ii) consultants or independent contractors who provide
valuable services to The Company or Parent or Subsidiary Corporations.
"EXERCISE DATE" shall be the date on which written notice of the exercise
of an Option is delivered to the Company in accordance with the
requirements of the Plan.
"GRANTEE" shall mean an Eligible Person that has received an Award.
"INCENTIVE STOCK OPTION" shall mean a Option that is intended to qualify as
an "Incentive stock option" under Code section 422.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
"NON-EMPLOYEE DIRECTOR" shall have the same meaning as ascribed under Rule
16b-3(b)(3)(i) of the Securities Exchange Act of 1934, as amended.
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"$100,000 LIMITATION" shall mean the limitation in which the aggregate fair
market value (determined as of the respective date or dates of grant) of
the Stock for which one or more Options granted to any person under this
Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person or Eligible Director to whom
Options have been granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from time
to time to any Eligible Person or Directors.
"OPTION PRICE" shall mean the option price per share as specified by the
Committee or by the terms of the Plan.
"OPTIONS" shall mean options granted under the Plan to acquire Stock.
"PARENT" or "PARENT CORPORATION" shall mean any corporation as defined in
Section 424(e) of the Code, with respect to the Corporation.
"PLAN" shall mean The 1998 Stock Option Plan for the Company.
"SAR" shall mean stock appreciation rights granted pursuant to SECTION 2.4
hereof.
"SERVICE" shall have the meaning set forth in SECTION 2.2(n) hereof.
"STOCK" shall mean shares of the Company's Common Stock, $.00001 par value
per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
"STOCK AWARDS" shall mean Stock directly granted under the Plan.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken chain
of corporations starting with the employer corporation, where, at each link
of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation
below.
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EXECUTED as of the ___ day of __________, 1998.
GLOBAL WATER TECHNOLOGIES, INC.
By:___________________________________
Name:_________________________________
Its:__________________________________
17
EXHIBIT 21
SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
Psychrometric Systems, Inc.
Incorporated in Nevada
Global Water Technologies Foreign Sales Corporation, Inc.
Incorporated in St. Thomas, V.I.
Advanced Oxidation Technologies, Inc.
Incorporated in Nevada
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GLOBAL WATER TECHNOLOGIES' ANNUAL REPORT TO STOCKHOLDERS FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
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0
250,100
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