As filed with the Securities and Exchange Commission on May 8, 2000
Registration No. 333-89857
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2 ON
FORM S-1
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
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GLOBAL WATER TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 1799 84-1148204
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(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number
or organization) Code Number)
Global Water Technologies, Inc.
1767 Denver West Boulevard
Golden, Colorado 80401
(303) 215-1100
(Address and telephone number of principal executive offices and
principal place of business)
---------------
George A. Kast
Global Water Technologies, Inc.
1767 Denver West Boulevard
Golden, Colorado 80401
(303) 215-1100
(Name, address and telephone number of agent for service)
COPIES OF ALL COMMUNICATIONS TO:
D. Elizabeth Wills, Esq.
Rothgerber Johnson & Lyons LLP
1200 Seventeenth Street, Suite 3000
Denver, Colorado 80202
(303) 628-9525
(303) 623-9222 FAX
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said section 8(a), may determine.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================
Proposed
Title of each Proposed maximum
class of Amount maximum aggregate Amount of
securities to to be offering offering registration
be registered registered price price fee
=================================================================================
<S> <C> <C> <C> <C>
Common stock, $.00001 par value 14,850,000 $.09(1) $1,336,500 $ 372
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Common stock, $.00001 par value(2) 16,200,000 $.16(3) $2,592,000 $ 721
=================================================================================
Totals 31,050,000 $3,928,500 $1,093(4)
=================================================================================
</TABLE>
(1) Based upon the average of the bid and asked prices of Global Water
Technologies, Inc. common stock as reported on the OTC Bulletin Board
on October 22, 1999, the date registration statement no. 333-89857 was
initially filed, in accordance with Rule 457(c) under the Securities
Act of 1933, as amended.
(2) Issuable upon the exercise of outstanding Class C Common Stock
Purchase Warrants exercisable at $.16 per share.
(3) Computed in accordance with Rule 457(g).
(4) A filing fee of $1,093 was paid at the time of filing Registration
Statement No. 333- 89857
---------------
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED MAY 8, 2000
8,725,000 SHARES
GLOBAL WATER TECHNOLOGIES, INC.
COMMON STOCK
This prospectus relates to the resale by the Selling Security Holders
of up to 8,725,000 shares of common stock. The Selling Security Holders
may sell the stock from time to time in the over-the-counter market at the
prevailing market price or in negotiated transactions. The selling price
of the shares will be determined by market factors at the time the shares
are sold.
The shares offered include:
* 5,600,000 shares which are presently outstanding
* up to 3,125,000 shares issuable upon the exercise of Class C
Warrants held by certain private investors
We will receive no proceeds from the sale of the shares by the Selling
Security Holders. However, we may receive proceeds from the sale of shares
to the Selling Security Holders upon exercise of the Class C Warrants.
Our common stock trades on the OTC Bulletin Board under the trading
symbol GWTR. On May 3, 2000, the last reported bid and asked prices of the
common stock on the OTC Bulletin Board were $0.22 and $0.23 per share.
AN INVESTMENT IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ____________, 2000
<PAGE>
The following language appears in red on the left side of the cover page.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
You should rely only on the information contained in this Prospectus.
We have not authorized anyone to provide you with information different
from that which is contained in this Prospectus. We are offering holders
of the Warrants the opportunity to exercise those Warrants and receive
shares of common stock only in jurisdictions where exercise of the Warrants
is permitted. The information in this Prospectus is accurate only as of
the date of this Prospectus, regardless of the time of delivery of this
Prospectus or the date you decide to exercise your Warrants.
In this prospectus, the terms "Global Water," "Company," "we," "us"
and "our" refer to Global Water Technologies, Inc. and our wholly owned
subsidiaries, Psychrometric Systems, Inc., Applied Water Technologies,
Inc. and Global Water Services, Inc. We refer to Psychrometric Systems,
Inc. as PSI, Applied Water Technologies, Inc. as AWT and Global Water
Services, Inc. as GWS and to our common stock, $.00001 par value as common
stock. We refer to our shareholders who intend to resell their shares of
common stock pursuant to this prospectus as Selling Security Holders.
TABLE OF CONTENTS
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . .9
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE SHARES . . . . . 10
PRICE RANGE OF OUR COMMON STOCK. . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 15
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 44
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 45
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<PAGE>
SELLING SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 49
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . 51
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . 52
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US . . . . . . . . . . 53
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .F-1
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<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE
INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION AND OUR FINANCIAL STATEMENTS BEFORE MAKING AN INVESTMENT DECISION.
CONTROL OF OUR COMPANY BY INSIDERS
Our company's President, George A. Kast, who is also a director,
beneficially owns 63.4% of our outstanding common stock. As a result, Mr.
Kast has, among other rights, the ability to control the election of
directors and approve any corporate actions that must be submitted for a
vote of shareholders.
OUR BUSINESS
We do business through our three (3) subsidiaries:
* Psychrometric Systems, Inc. ("PSI") which provides process
cooling water primarily through the design, engineering and
project management of water cooling towers to industrial and
manufacturing clients worldwide;
* Applied Water Technologies, Inc. ("AWT") which provides our
customers with proprietary environmentally sound water treatment
systems and services which are designed to meet the growing need
for water purification and re-use worldwide. Build-up of
chemicals used in traditional water treatment programs may cause
operating inefficiencies and necessitate periodic shut-downs for
cleaning heat exchangers and other areas within the cooling water
loop. Our clean water technology may replace the need for
hazardous chemicals, and may increase operating efficiency,
reduce water use by increasing recycling and increase the time
between shut-downs for cleaning; and
* Global Water Services, Inc. ("GWS") which provides total cooling
water solutions and service programs to our customer base,
including cooling water systems and water treatment services.
Except as otherwise noted, all references to GWT includes our three (3)
subsidiaries.
We primarily market our products and services worldwide to the
following industries:
* electric power utilities;
* process (such as agricultural, industrial and pharmaceutical
process industries);
* petrochemical;
* chemical;
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<PAGE>
* heating, ventilation and air-conditioning;
* manufacturing;
* pulp & paper and other industries utilizing cooling water.
Typical customers include companies such as Archer Daniels Midland, Amoco,
Mitsubishi, Mobil, Texaco, Bechtel, Fluor Daniel and other large
corporations around the world.
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, Global Water'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."
Our principal executive offices are located at 1767 Denver West
Boulevard, Golden, Colorado 80401, and our telephone number is (303)
215-1100. Our World Wide Web sites are "www.gwtr.com" and
"www.psicoolingtowers.com." Any reference contained in this prospectus to
our Web sites, or to any other Web site, shall not be deemed to incorporate
information from those sites into this prospectus.
THE OFFERING
Common stock offered by the selling
security holders. . . . . . . . . 8,725,000 shares of common stock
Price per share to the public . . . . Market price at the time of resale
Proceeds from offering. . . . . . . . We will not receive any of the
proceeds from the sale of the
shares of common stock offered by
the Selling Security Holders;
however, we may receive proceeds
from the sale of shares issuable
upon the exercise of Class C
Warrants and the exercise of
outstanding options. Proceeds
from the exercise of Class C
Warrants and options will be used
for working capital and general
corporate purposes.
Risk Factors. . . . . . . . . . . . . The shares of common stock offered
by the Selling Security Holders
are highly speculative, involve a
high degree of risk and should not
be purchased by an investor who
cannot afford the loss of his or
her entire investment.
Trading Symbol. . . . . . . . . . . . Common stock: GWTR
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<PAGE>
There were 358,758,000 shares of common stock outstanding as of April 20,
2000. This number does not include the following:
* 17,693,500 shares of common stock underlying Class A and Class B
warrants exercisable at $.12 and $.20 per share, respectively,
expiring April 14, 2001;
* 3,125,000 shares of common stock underlying Class C warrants
exercisable at $.158 per share, expiring July 12, 2003;
* 4,484,380 shares of common stock underlying options to purchase
common stock at $.08 per share, expiring on March 8, 2004;
* 6,272,300 shares of common stock underlying options to purchase
common stock at $.125 per share expiring on February 9, 2005; and
* 1,050,000 shares of common stock underlying other outstanding
warrants exercisable between $.08 and $.12 per share, expiring
February 18, 2002.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes the financial data for our business.
You should read this information together with the consolidated financial
statements and their related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenues $67,952,967 $34,734,340 $18,697,292
Total Costs and Expenses $65,821,405 $32,811,122 $17,726,538
Operating Income (Loss) $ 2,131,562 $ 1,923,218 $ 970,754
Net Income (Loss) $ 1,284,782 $ 227,373(1) $ 570,982
Weighted Average Common Shares
Outstanding - Primary 334,155,087 294,251,063 270,014,801
Net Income Per Common Share -
Primary $ 0 .004 $ 0.001 $ 0.002
Weighted Average Common Shares
Outstanding - Fully Diluted 334,558,354 294,251,063 270,126,740
Net Income Per Common Share -
Fully Diluted $ 0 .004 $ 0.001 $ 0.002
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
---- ---- ----
BALANCE SHEET DATA:
<S> <C> <C> <C>
Working Capital $ 4,940,336 $ 1,941,495 $ 1,223,939
Total Assets $25,263,930 $15,008,062 $ 8,202,315
Total Liabilities $21,517,734 $13,509,073 $ 7,200,001
Stockholders' Equity $ 3,746,196 $ 1,498,989 $ 1,002,314
</TABLE>
____________________________
(1) Net of charge of $754,296 net of the related tax effect of $593,119
due to change in accounting principal in 1998.
RISK FACTORS
An investment in the common stock being offered for resale by the
Selling Security Holders is very risky. The risks described below are not
the only ones that we face. Additional risks that are not yet known to us
or that we currently think are immaterial could also impair our business,
operating results or financial condition. The trading price of our common
stock could decline due to any of these risks, and you could lose all or
part of your investment. You also should refer to the other information
set forth in this Prospectus, including our consolidated financial
statements and the related notes.
WE MAY NEED ADDITIONAL CAPITAL IN 2000
We anticipate that we may need additional capital during calendar year
2000 to develop and market our products as our business grows. Our planned
expansion into new business areas will also require substantial financial
funding. There can be no assurance that we will be able to secure funding
sources. If we were not able to obtain additional funding when it was
required, it could have a material adverse effect on our business
prospects.
OUR GROWTH MAY BE LIMITED IF OUR BANKING CAPACITY IS NOT INCREASED
We depend on banking lines of credit to fund our short-term cash
requirements. The expansion into new businesses along with our increased
level of activity could require us to seek additional credit lines or
expand our existing banking credit lines. Although we believe that we are
able to expand our 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 us. The failure to expand our current credit
lines could have a material adverse effect on our ability to grow our business.
OUR PROFIT MARGINS COULD DECREASE IF WE ARE NOT PRUDENT IN MANAGING OUR PROJECTS
In the past, a majority of our projects have been fixed-price
contracts. The cost estimates for these projects are formulated during the
bidding process. Many factors are included in the cost estimates,
including material costs, labor rates, labor productivity, freight
estimates, seasonal inefficiencies, contingencies, engineering and
miscellaneous supplies. Although we consider our
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<PAGE>
ability to estimate costs to be good, any unanticipated costs could
adversely affect the job's overall profitability.
WE RELY ON OUTSIDE VENDORS FOR EQUIPMENT AND SUPPLIES
Our policy on suppliers and vendors is to obtain at least two
qualified sources where possible to supply the components for our water
cooling tower products. Qualifying criteria include quality components,
price, delivery flexibility, manufacturing scheduling and payment terms. We
presently use primarily one major supplier for certain cooling tower
components; however, other suppliers of these components are available. We
believe that if necessary, similar economic terms could be negotiated with
other qualified suppliers. If we were unable to acquire any of these
components, it would adversely affect our ability to complete projects on
a timely basis, which could have an adverse effect on our business.
WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES
Our goal is to increase sales through our current product line and to
expand our business into new and complimentary markets, including our water
treatment service program, water cooling service program and new marketing
strategies. We also may acquire other companies which have businesses
which complement or may expand our business. Such expansion could
* place a significant burden on our existing resources;
* may require us to implement additional operating, manufacturing
and financial controls and improve coordination among marketing,
engineering, manufacturing and finance functions;
* increase our capital expenditures;
* hire additional personnel; and
* require us to install additional reporting and management
information systems for order processing, production, monitoring,
inventory control and financial reporting.
There can be no assurance that we would be able to successfully manage any
substantial expansion of our business, including attracting and retaining
qualified personnel. A failure to do so could have a material adverse
effect on our operating results.
OUR BUSINESS COULD BE AFFECTED BY DECLINING GENERAL BUSINESS CONDITIONS OR
A DECLINING DEMAND FOR COOLING WATER
Although we believe that we are somewhat insulated because of the
breadth and large number of diverse industries utilizing cooling water, the
diverse international markets where we
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<PAGE>
compete and the competitive nature of our products, we cannot guarantee
that the overall business climate will remain favorable. Many factors
influence our customer's ability to purchase needed cooling water capital
equipment, including overall economic levels of activity, interest rates
and other factors affecting their business. We cannot guarantee that
overall cooling water demand will increase or stay the same in the future.
If the demand for cooling water decreases, it could have a material adverse
effect on our sales and profitability.
OUR INTERNATIONAL BUSINESS COULD BE ADVERSELY AFFECTED BY POLITICAL, SOCIAL
AND ECONOMIC CONDITIONS IN THE COUNTRIES IN WHICH WE DO BUSINESS
We have in the past engaged in projects in the Pacific Rim, North
America, South America, Asia and Europe and other parts of the world. Our
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, 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, we 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. We attempt to mitigate these various risk elements
through letters of credit, limiting job scope, currency risk management,
using local subcontractors and other methods to limit our exposure. We
cannot guarantee, however, that we will be able to manage these risk
elements successfully.
WE HAVE EXPERIENCED SEASONAL FLUCTUATIONS IN OUR REVENUES, WHICH MAY AFFECT
OUR FINANCIAL RESULTS
We have experienced some seasonality in our business over the last few
years. In general, the fourth calendar quarter of the year has experienced
higher revenues and higher operating income than the other calendar
quarters. We attribute some of this increase to cooling water projects
following the warmer summer months and to end of the year capital budgets
of customers. We believe that some of this seasonality in recognizing
project revenues will be eliminated by the change in our accounting policy
in 1998 with respect to recognizing revenues; however, we cannot guarantee
that quarterly revenues will not vary significantly.
WE ARE A YOUNG COMPANY SO WE HAVE ONLY A LIMITED OPERATING HISTORY WITH
WHICH YOU CAN EVALUATE OUR BUSINESS AND PRODUCTS
Our operating history dates back to the start-up of PSI in January
1993. As such, we are subject to many of the risks common to enterprises
with a limited operating history, including potential under-capitalization,
limitations with respect to personnel, financial and other resources and
limited customers and revenues. Our likelihood of success must be
considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered in connection with the development and
marketing of large systems.
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<PAGE>
WE MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION
Our products and services are subject to regulations adopted by
governmental authorities, including but not limited to OSHA, the DOT, the
EPA and various state governmental agencies. Government regulations can be
burdensome and may result in delays and expense to us. In addition,
modifications to regulations could adversely affect the timing and cost of
new products and services we introduce. Failure to comply with applicable
regulatory requirements can result in, among other things, operating
restrictions and fines.
FROM TIME TO TIME, WE PROVIDE SERVICE TO CUSTOMER(S) WHO REPRESENT MORE
THAN 10% OF OUR REVENUE, THE LOSS OF WHICH COULD ADVERSELY AFFECT OUR
REVENUE AND PROFITABILITY
For the year ended December 31, 1999, we had a major customer
accounting for 39.8% of our revenues. We had a major customer accounting
for 13.9% of our revenues for the year ended December 31, 1998. We did not
have a major customer accounting for more than 10% of our revenues for the
year ended December 31, 1997. We have one major project included in our
backlog which represents approximately 17% of our total backlog for 2000.
From time to time, we may have projects that exceed the 10% revenue
threshold for defining a major customer. Because each construction project
is awarded independently from other projects, we do not believe that the
completion of the contractual arrangements with any major customer that may
arise will have a material adverse effect on us.
WE HAVE SIGNIFICANT COMPETITION IN OUR BUSINESS SEGMENTS
There is substantial competition in all aspects of the cooling water
industry and water treatment market. Many of our competitors have been in
business longer than we have and have substantially greater personnel,
financial resources and established customer bases available to them than
we do. We cannot guarantee that we will be able to continue to compete with
these competitors successfully. Competition from these competitors for the
projects we bid on could diminish our revenues and profitability.
WE DEPEND ON A SMALL NUMBER OF KEY EXECUTIVES AND OUR BUSINESS COULD SUFFER
IF WE LOST THEM
We employ a small group of skilled individuals to accomplish our
strategic business plan. We believe our performance is substantially
dependent on the continued employment and performance of our senior
management, including George A. Kast, (Chief Executive Officer of GWT),
Gary L. Brown (President of PSI and General Counsel of GWT), Michael A.
Kast (Senior Vice President of PSI), Martin E. Hout (Chief Financial
Officer), 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 we fail to retain the services of one or more of
these persons, our business could suffer significantly. We maintain key-man
insurance on the life of George A. Kast.
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<PAGE>
WE DO NOT ANTICIPATE PAYING DIVIDENDS
We do not anticipate paying any cash dividends on our common stock for
the foreseeable future. We expect that future earnings, if any, will be
used to finance our growth. Accordingly, no one seeking dividend income
from an investment should exercise their warrants.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK
We presently have outstanding 358,633,000 shares of common stock. Of
this amount, 266,017,963 shares are "restricted securities" under the
Securities Act subject to restrictions on the timing, manner and volume of
sales of such shares. Currently there is only a limited public market for
our common stock and we cannot guarantee that this market will continue or
be available for the sale of common stock acquired upon exercise of the
warrants. We cannot predict if future sales of our common stock, or the
availability of our common stock for sale, will adversely affect the market
price for our common stock or our ability to raise capital by offering
equity securities.
OUR OFFICERS AND DIRECTORS EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS,
WHICH COULD RESULT IN THEIR TAKING ACTIONS WITH WHICH OTHER SHAREHOLDERS DO
NOT AGREE
Our officers and directors own approximately 74.0% of our outstanding
common stock. Since cumulative voting has not been authorized by our
Certificate of Incorporation, this concentration of control means that the
officers and directors will be able to elect all of the directors of our
company. Our officers and directors also will be able to shape our
policies and procedures, to determine if and when any dividends are paid,
and to determine the circumstances under which we may be sold or merged,
along with other important corporate decisions.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS
COULD DEPRESS OUR STOCK PRICE
Our Board of Directors has the authority to issue up to 18,123,409
additional shares of preferred stock and to determine the price and the
terms (including preferences and voting rights) of those shares without
shareholder approval. Although we have no current plans to issue
additional shares of preferred stock, any such issuance could:
* have the effect of delaying, deterring or preventing a change in
control of our company;
* discourage bids for our common stock at a premium over the market
price; or
* adversely affect the market price of, and the voting and other
rights of the holder of, our common stock.
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<PAGE>
We are subject to certain Delaware laws that could have the effect of
delaying, deterring or preventing a change in control of our company. In
addition, certain provisions of our Certificate of Incorporation and By-Laws,
and the significant amount of common stock held by our officers and
directors, could together have the effect of discouraging potential
takeover attempts or making it more difficult for shareholders to change
management.
OUR STOCK PRICE MAY EXPERIENCE PRICE AND VOLUME FLUCTUATIONS WHICH MAY MAKE
IT HARDER TO RESELL YOUR SHARES AND FOR US TO ATTRACT SUPPORT FOR OUR STOCK
While our common stock is listed for trading on the OTC Bulletin
Board, our stock has traded in only relatively small volumes compared to
total shares outstanding and has been subject to volatility in the price.
No assurance can be given that a more active market will develop or that a
shareholder will be able to liquidate his/her investment without
considerable delay, if at all. Even should a more active market develop,
the price may remain volatile. Factors such as those discussed in this
"Risk Factors" section may have a significant impact upon the market price
of our stock.
Due to the price of our stock, many brokerage firms may not be willing
to effect transactions in the our securities, particularly because low-priced
securities are subject to a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who
sell low-priced (generally those below $5 per share) securities. While the
shareholders of the Company have granted the Board of Directors the
authority to effect a reverse split of our currently outstanding common
stock, not to exceed 1-for-100, no decision has yet been made with regard
to effecting a reverse split. Even if a reverse split is effected, there
can be no assurance that the price for our common stock will exceed $5.00
per share. Consequently, unless and until the market price for our common
stock increases significantly, brokerage firms may be reluctant to trade
our common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that have been
made under the provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
significant uncertainties and other factors about our
* business strategy;
* market success and acceptance of our water treatment and water
cooling service programs;
* development and expansion of existing and established business;
* plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
-9-
<PAGE>
When used in this prospectus, the words "may," "will," "should,"
"could," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or
other comparable terminology are generally intended to identify forward-
looking statements. These statements are only predictions and are not
guarantees of future performance. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially
from those expressed or implied by these forward-looking statement for a
number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any
forward-looking statements. All forward-looking statements attributable to
us are expressly qualified in their entirety by the foregoing cautionary
statement.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE SHARES
We will not receive any of the proceeds from the sale of the common
stock by the Selling Security Holders. However, we have to date received
$2,065,850 from the exercise of Class C Warrants and the exercise of
outstanding options. If all of the remaining Class C Warrants are
exercised, we would receive an additional $493,750. We have used the
proceeds from the exercise of Class C Warrants and options for working
capital and general corporate purposes, and expect that we will use the
proceeds from any Class C Warrants exercised in the future for the same
purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
and we do not anticipate paying such dividends in the foreseeable future.
We currently intend to retain earnings, if any, to fund the development and
growth of our business.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
* on an actual basis; and
* as adjusted through April 30, 1999, to give effect to the receipt
of net proceeds from the exercise of Class C warrants, and the
issuance of 14,425,000 shares of common stock and the issuance of
117,640 shares of common stock from the exercise of employee
stock options.
The number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of December 31,
1999, and includes the following transactions which occurred subsequent to
December 31, 1999:
-10-
<PAGE>
* the receipt of $108,000 by us from the exercise of an outstanding
placement agent option to purchase 1,350,000 shares of common
stock and a corresponding number of Class C warrants;
* the receipt of $2,065,850 by us from the exercise of outstanding
Class C warrants to purchase 13,075,000 shares of common stock,
and the issuance of those shares;
* the conversion of 123,659 shares of preferred stock into
35,861,120 shares of common stock and the return to us of 876,341
shares of preferred stock in consideration for the issuance of
876,341 shares of a newly created series of preferred stock; and
* the receipt of $9,411 by us from the exercise of outstanding
employee stock options to purchase 117,640 shares of common
stock, and the issuance of those shares.
The number of shares to be outstanding does not include the following:
* 4,484,380 shares of common stock subject to options issued at a
weighted average exercise price of $0.08 per share granted under
our 1998 stock option plan;
* 6,272,300 shares of common stock subject to options issued at a
weighted average exercise price of $0.125 per share granted under
our 1998 stock option plan; and
* 18,758,900 shares of common stock reserved for future issuance
under our 1998 stock option plan.
The information below is qualified by, and should be read in
conjunction with, our financial statements and the notes to those
statements appearing at the end of this prospectus.
-11-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Actual As Adjusted
------ -----------
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.00001 par value, 20,000,000 shares
authorized; 1,000,000 shares issued and outstanding;
actual only, stated at redemption value of $0.0001. . . . . 100 -0-
Preferred stock, no par, 1,000 shares authorized;
250 shares issued and outstanding; stated at
redemption value of $1,000. . . . . . . . . . . . . . . . . 250,000 250,000
Preferred stock, no par, 876,341 shares authorized;
876,341 shares issued and outstanding, as adjusted only . . -0- -0-
Common stock, $0.00001 par value; 800,000,000 shares
authorized; 308,354,250 and 358,758,000 shares
issued and outstanding, respectively. . . . . . . . . . . . 3,083 3,588
Capital in excess of par value. . . . . . . . . . . . . . . . 1,504,208 3,687,064
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 1,988,805 1,988,805
----------- -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . $ 3,746,196 $ 5,929,457
----------- -----------
Total capitalization. . . . . . . . . . . . . . . . . . . . $25,263,930 $27,447,191
=========== ===========
</TABLE>
-12-
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
Our common trades on the Over the Counter Bulletin Board under the
symbol "GWTR."
The following table sets forth the high and low bid prices for our
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 obtained
from the National Quotation Bureau, Inc. Library.
High Low
Bid Bid
--- ---
1998 FISCAL YEAR
First Quarter. . . . . . . . . . . . . . . . . . $.135 $.03
Second Quarter . . . . . . . . . . . . . . . . . $.135 $.06
Third Quarter. . . . . . . . . . . . . . . . . . $.065 $.04
Fourth Quarter . . . . . . . . . . . . . . . . . $.05 $.035
1999 FISCAL YEAR
First Quarter. . . . . . . . . . . . . . . . . . $.09 $.05
Second Quarter . . . . . . . . . . . . . . . . . $.13 $.09
Third Quarter. . . . . . . . . . . . . . . . . . $.145 $.10
Fourth Quarter . . . . . . . . . . . . . . . . . $.10 $.06
2000 FISCAL YEAR
First Quarter. . . . . . . . . . . . . . . . . . $.66 $.06
On May 3, 2000, the last reported bid and asked prices for the common
stock were $0.22 and $0.23, respectively. No quotations are available for
the Class A and Class B Warrants.
HOLDERS
As of March 31, 2000, the Company had 81 holders of record of the
Company's common stock.
-13-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and their related
notes, our pro forma consolidated statements of operations and their
related notes, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this prospectus. The
consolidated statement of operations data for the years ended December 31,
1995 and 1996 and the consolidated balance sheet data as of December 31,
1995 and 1996 are derived from financial statements not included in this
prospectus. The consolidated statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet
data as of December 31, 1997, 1998 and 1999 are derived from, and are
qualified by reference to, our audited financial statements included in
this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $67,952,967 $34,734,340 $18,697,292 $16,520,544 $17,427,482
Total costs and expenses $65,821,405 $32,811,122 $17,726,538 $15,914,996 $17,045,540
Operating income (loss) $ 2,131,562 $ 1,923,218 $ 970,754 $ 605,548 $ 381,942
Net income (loss) $ 1,284,782 $ 227,373 (1) $ 570,982 $ 305,984 $ 176,469
Weighted average common shares
outstanding--primary 334,155,087 294,251,063 270,014,801 255,526,642 237,858,075
Net income per common share--
primary $ 0.004 $ 0.001 $ 0.002 $ 0.001 $ 0.001
Weighted average common shares
outstanding--fully diluted 334,558,354 294,251,063 270,126,740 255,526,642 237,858,075
Net income per common share--
fully diluted $ 0.004 $ 0.001 $ 0.002 $ 0.001 $ 0.001
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 4,940,336 $ 1,941,495 $1,223,939 $ 757,018 $ 419,728
Total assets $25,263,930 $15,008,062 $8,202,315 $6,170,937 $7,128,694
Total liabilities $21,517,734 $13,509,073 $7,200,001 $5,793,209 $7,060,510
Stockholders' equity $ 3,746,196 $ 1,498,989 $1,002,314 $ 377,728 $ 68,184
</TABLE>
____________________________
(1) Net of charge of $754,296 net of the related tax effect of $593,119
due to change in accounting principal in 1998.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SUMMARIZES THE SIGNIFICANT FACTORS
AFFECTING OUR OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998
AND 1997. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMBINED
FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING AT THE END OF THIS
PROSPECTUS. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE
TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW OF BUSINESS
We are in the business of designing, selling, manufacturing and
building industrial cooling water systems, repairs and maintenance in the
retrofit of existing industrial cooling towers and cooling tower components
for these and similar facilities through our wholly owned subsidiary, PSI.
We primarily market our 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; manufacturing; pulp & paper and
other industries utilizing cooling water. Typical customers include
companies such as Archer Daniels Midland, Amoco, Mitsubishi, Mobil, Texaco,
Bechtel, Fluor Daniel and other large corporations around the world.
We have historically derived revenue from the following principal
sources: new cooling water system sales, retrofits to existing cooling
tower repair projects and spare parts and supplies to existing cooling
tower customers. We custom design and construct wooden, fiberglass and
concrete towers for our customer base worldwide.
We recognize 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, our Board of Directors approved our decision to
change, retroactive to January 1, 1998, our application of the percentage
of completion method of accounting for revenues and costs of long-term
contracts related to new cooling water systems.
-15-
<PAGE>
Under the previous method, we recognized a predetermined percentage of
our 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, we recognize profits on
all phases of the project, including engineering, in the ratio that costs
incurred to date bear to total estimated costs. Our management believes
that the new method is preferable for financial statement and backlog
disclosure related to revenues and gross profit. In addition, we believe
that the new method should improve the comparability of our 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 our independent public accounting
firm concurs, we 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES. Total revenues were derived from engineering, equipment,
installation, retrofits and spare parts of water cooling towers and AWT's
clean water technology services. For the year ended December 31, 1999,
total revenue increased 95.6% to $67,952,967 as compared to $34,734,340 for
the year ended December 31, 1998. International revenues comprised 11.5%
of total revenues in 1999 versus 15.1% in 1998, with such decrease
resulting from an increased proportion of domestic projects in the total
revenue mix. AWT did not appreciably contribute to the increase in
revenues during 1999.
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 1999 increased 16.2% to
$61,774,341 from $53,142,019 in 1998. These amounts included international
bookings of $8,269,087 in 1999 (13.4% of total) and $3,470,882 in 1998
(6.5% of total). We believe that foreign opportunities will continue to
play an important role in future periods. 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 contracts awarded, and increased selling
expenses to take advantage of market opportunities. Backlog decreased from
$27,155,058 at December 31, 1998 to $20,846,108 at December 31, 1999.
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. 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
contracts
-16-
<PAGE>
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.
COST OF REVENUES. Our cost of sales increased 118.7% from
$27,816,337 in 1998 to $60,851,840 in 1999. As a percentage of revenues,
cost of sales increased from 80.1% in 1998 to 89.5% in 1999. The absolute
increase in cost of sales resulted from a 95.5% increase in corresponding
revenues and additional cost allocations from selling, general and
administrative expenses to projects and a loss on one large project which
added approximately $1,482,000 of additional costs in excess of originally
anticipated profit or 2.2% of the above percentage of revenue amount.
Management believes significant price pressure from competitors will
continue to be an industry force in the future. Due to significant
competition, there can be no assurance that we can maintain our profit
margins in the future.
Our 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.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 3.7% from $4,762,328 in 1998 to
$4,938,947 in 1999. As a percentage of revenues, these expenses decreased
from 13.7% in 1998 to 7.3% in 1999. As a percentage of new bookings which
increased 16.2%, these expenses decreased from 9.0% in 1998 to 8.0% in
1999. We believe that the investment in selling resources will continue to
have a positive impact on the increase in bookings and the recognition of
the related revenues for future periods.
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. As a
percentage of new bookings which increased 119.9%, these expenses decreased
from 16.7% in 1997 to 9.0% in 1998. We believe 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. Research and development costs decreased
86.8% to $30,618 in 1999 from $232,657 in 1998. The expenses associated
with our diversification effort into water treatment and the expenses for
our new Global Water Services and Applied Water Technologies subsidiaries
are reflected in cost of sales and selling, general and administrative
categories in 1999. 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 our
diversification effort into water treatment and water purification for 1997
and 1998.
OPERATING INCOME. Operating income, based on the explanations noted
above, increased 10.7% from $1,923,218 or 5.5% of revenues in 1998 to
$2,131,562 or 3.1% of revenues in 1999.
-17-
<PAGE>
Operating income, increased 98.1% from $970,754 or 5.2% of revenues in 1997
to $1,923,218 in 1998.
Other income and expense primarily consisted of interest expense,
which increased 71.5% to $266,548 in 1999 from $157,520 in 1998. Other
income and expense was $123,072 in 1997. These expenses were from our
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, but decreased to $566,115 with an effective tax rate of
30.3% in 1999.
NET INCOME. 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 and increased by 31.7% to $1,304,782
in 1999. Both basic and fully diluted income per share decreased from
$.002 in 1997 to $.001 in 1998, but increased to $.004 in 1999.
EXPORT SALES. Our export sales were $7,818,880, $5,247,569 and
$3,777,426 for 1999, 1998 and 1997, respectively. We believe that the
importance of the international segment will continue to grow as our
revenue base expands.
SELECTED HISTORICAL QUARTERLY OPERATING RESULTS
The following table presents certain historical consolidated statement
of operations data for our twelve most recent quarters ended December 31,
1999. Actual results of operations data are presented for all periods. In
management's opinion, this unaudited information has been prepared on the
same basis as the audited annual financial statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for
fair presentation of the unaudited information for the quarters presented.
You should read this information in conjunction with the consolidated
financial statements, including the notes thereto, included elsewhere in
this prospectus. The results of operations for any quarter are not
necessarily indicative of results that we might achieve for any subsequent
periods. In addition, the quarterly results of operations prior to 1998
reflect operations accounted for under our previous accounting method.
-18-
<PAGE>
<TABLE>
<CAPTION>
03-31-98 06-30-98 09-30-98 12-31-98 03-31-99 06-30-99 09-30-99 12-31-99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
United States $ 3,053,675 $ 5,571,435 $ 7,144,239 $ 13,717,422 $ 13,882,113 $ 24,583,374 $ 11,121,979 $ 10,546,621
International 1,269,331 1,202,862 1,709,463 1,065,913 146,758 728,230 3,403,757 3,540,135
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total revenues 4,323,006 6,774,297 8,853,702 14,783,335 14,028,871 25,311,604 14,525,736 14,086,756
Costs and expenses:
Cost of sales 3,505,555 5,635,317 7,388,393 11,286,872 12,048,974 23,446,691 13,291,969 12,064,206
Selling, general
and administrative 912,686 1,143,448 1,246,959 1,459,235 1,050,410 1,303,054 1,371,736 1,213,747
Research and
development 52,032 56,285 66,373 57,967 5,730 12,883 4,869 7,136
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total costs
and expenses 4,470,273 6,835,050 8,701,725 12,804,074 13,105,114 24,762,628 14,668,574 13,285,089
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income
(loss) (147,267) (60,753) 151,977 1,979,261 923,757 548,976 (142,838) 801,667
Other income (expense):
Interest expense, net (30,316) (34,879) (45,670) (46,655) (88,602) (48,438) (94,100) 497,688
Other, net 255 3,742 11,472 (14,289) - 2,802 100 2,981
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before
income taxes (177,328) (91,890) 117,779 1,918,317 835,155 503,340 (236,838) 769,240
Income taxes (benefit) (78,058) (40,449) 51,845 777,569 283,953 130,980 (73,419) 224,601
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) before
preferred dividend (99,270) (51,441) 65,934 989,309 551,202 372,360 (163,419) 544,639
Preferred stock
dividend - - 2,630 7,640 5,001 4,999 5,000 5,000
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)
(including the effect
of a change in accounting
principle for 1998) (99,270) (51,441) 63,304 1,069,076 546,201 376,361 (168,419) 530,639
Cumulative effect of a
change in an accounting
principle--net of $593,119
of related tax effect (754,296) - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)
available for common
shareholders $ (853,566) $ (51,441) $ 63,304 $ 1,069,076 $ 546,201 $ 376,361 $ (168,419) $ 530,639
============ ============ ============ ============ ============ ============ ============ ============
Income (loss) per share:
Basic weighted average
shares outstanding 294,050,000 294,050,000 294,050,000 294,251,062 294,854,250 294,854,250 294,999,631 308,354,250
Basic income (loss)
per share--prior to
acct'g change $ (0.0003) $ (0.0002) $ 0.0002 $ 0.0040 $ 0.0019 $ 0.0012 $ 0.0006 $ 0.0020
Cumulative effect of
accounting change (0.0026) - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Basic income (loss)
per share available
for common $ (0.0029) $ (0.0002) $ 0.0002 $ 0.0040 $ 0.0019 $ 0.0012 $ (0.0006) $ 0.0020
============ ============ ============ ============ ============ ============ ============ ============
Fully diluted weighted
average shares
outstanding 294,050,000 294,050,000 294,050,000 294,243,020 294,875,221 299,156,105 294,999,631 314,237,628
Fully diluted income/
share--prior to
accounting change $ (0.0003) $ (0.0002) $ 0.0002 $ 0.0040 $ 0.0019 $ 0.0012 $ (0.0006) $ 0.0020
Cumulative effect of
accounting change (0.0026) - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Fully diluted income
(loss) per share $ (0.0029) $ (0.0002) $ 0.0002 $ 0.0040 $ 0.0019 $ 0.0012 $ (0.0006) $ 0.0020
============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $4,940,336 as compared
to working capital of $1,941,495 at December 31, 1998. The working capital
increase is mainly due to a net increase in accounts receivable, retainage
receivables and work-in-process due to increased revenue volume offset by
a corresponding increase in accounts payable and accrued liabilities from
December 31, 1998 to December 31, 1999. Our cash flow provided by and used
in our operating, investing and financing activities are summarized as follows:
-19-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities $(3,458,803) $ 303,953 $ 484,498
Investing activities (255,797) (52,255) (191,172)
Financing activities 2,670,565 1,380,714 (235,627)
----------- ---------- ---------
Net decrease/increase in cash $(1,044,035) $1,632,412 $ 57,699
=========== ========== =========
</TABLE>
Our capital requirements for continuing operations consist of general
working capital needs, increased lease obligations as described in
"Business," scheduled payments on debt obligations and capital
expenditures. We anticipate that our operating activities in the future
will 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 decrease in cash during 1999 from operating
activities was funded by an additional equity infusion from our private
placement of a net $962,425 and additional bank financing. Subsequent to
December 31, 1999, we have received an additional $2,154,100 from the
exercise of outstanding "C" warrants. We try to minimize our investment in
these working capital components, but as sales and backlogs increase,
management believes that these investments will also increase.
We believe that with the exercise of outstanding warrants, additional
debt financing and the conversion of working capital into cash, we will
have sufficient cash resources for continuing operations and to fund
expansion opportunities.
We have certain financing agreements with existing customers that
extend beyond twelve months. Management believes that these arrangements
can be sold to independent financial institutions to convert the assets
into cash. Some of these existing assets are included in the working
capital amounts described above. GWT has established long-term financing
arrangements to fund our expansion into new business opportunities.
Although each potential project will be evaluated on a case-by-case basis,
we believe that our existing relationships with significant funding sources
along with the financial strength of the potential customers will qualify
for long-term financing for our product line expansion in GWS and AWT. We
believe that the remaining future capital requirements for AWT and GWS in
light of these third party financing arrangements will be funded through
operations.
Scheduled principal payments on term loans will total $1,935,394
during the fiscal year ended December 31, 2000, with Norwest Bank and other
financial institutions. A portion of the term loans outstanding are
guaranteed by the Small Business Administration and subjects us to certain
financial covenants. These covenants include minimum net worth
requirements, limitations on capital withdrawals and collateral claims on
substantially all of our assets. The total amount of the Small Business
Administration guaranteed term loan outstanding at December 31, 1999, was
$320,210. Principal payments of $7,917 plus interest on the outstanding
balance is 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,
1999, the interest rate for all financing which bear interest rates at 1.0%
over prime
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was 9.5%. 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 us and our financial position. As of December 31, 1999, all financial
covenants have been maintained.
In September 1999 we secured a refinancing on our Export-Import line
of credit, bringing our total line up to $2,000,000. This line bears
interest at 1.0% above the prime rate and is guaranteed by the Export-Import
Bank of the United States. In March 2000, we secured an additional
$500,000 domestic line of credit maturing in June of 2000 which also bears
interest at 1.0% over prime.
We have a revolving line of credit with a bank in the amount of
$2,300,000, including the additional line of credit mentioned above, of
which $1,725,000 was outstanding at December 31, 1999. The interest rate
on the line of credit is tiered as follows: 6.69% on the first $770,000
and 9.5% on the remaining portion and bears no annual commitment fee. The
line of credit in the amount of $1,800,000 is due January 15, 2001. The
line of credit and the SBA term loan above are secured by cash collateral
of $773,233 at December 31, 1999, pledged by Michael A. Kast, one of our
directors. As compensation for pledging the cash collateral, we pay
additional interest to Michael A. Kast, a director of the Company.
Management believes that our short-term debt can be refinanced at
comparable or better terms when the debt becomes due.
We have various loans secured by company vehicles. At December 31,
1999, the total amount outstanding was $74,574 for these bank obligations.
The short-term principal payment obligations for the fiscal year ended
December 31, 2000, will be $34,794 for these loans.
In total, as of December 31, 1999, we had outstanding loans from
commercial lenders of $3,924,784 and had $138,000 outstanding in letters of
credit. The unused availability under the line-of-credit as of this date
was $107,000.
We have various options, warrants and other securities outstanding
which, if fully exercised, could generate approximately $3.6 million of
additional equity. Through April 20, 2000, $2,154,100 has been received
from the exercise of these securities which are currently in the money.
EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE
We have not experienced material unfavorable effects on our results of
operations due to currency exchange fluctuations with our foreign customers
or material unfavorable effects upon our results of operations as a result
of domestic inflation. Our policy on firm contracts denominated in
currencies other than the U.S. dollar is to hedge the net receipts through
the foreign exchange markets.
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NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS 133, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which establishes
accounting and reporting standards for all derivative instruments,
including certain derivative instruments embedded in other financial
instruments (collectively referred to as derivatives), and for hedging
activities. FAS 133 requires that an entity measure all derivatives at
fair value and recognize those derivatives as either assets or liabilities
on the balance sheet. The change in a derivative's fair value is generally
to be recognized in current period earnings. However, if certain
conditions are met, a derivative may be specifically designated as a hedge
of an exposure to changes in fair value, variability of cash flows, or
certain foreign currency exposures. Based on the hedge designation,
special hedge accounting rules allow the derivative's change in value to be
recognized either in current period earnings, together with the offsetting
change in value of the risk being hedged, or, to the extent the hedge is
effective, in comprehensive income and subsequently reclassified into
earnings when the hedged item affects earnings.
FAS 133, as amended by FAS 137, is effective for all fiscal years
beginning after June 15, 2000 (calendar year 2001), with early adoption
permitted. We do not use derivatives for trading or speculative purposes.
With respect to other derivatives, mainly foreign exchange contracts, used
as hedges of its assets, liabilities and commitments, we would have a gain
of $25,177 as of December 31, 1999, on a foreign currency forward exchange
contract designated as a hedge against a contract denominated in Canadian
dollars. Since the receivable on this contract has not yet been recorded,
the gain would be classified in comprehensive income under FAS 133.
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BUSINESS
We do business through our three (3) subsidiaries:
* Psychrometric Systems, Inc. ("PSI") provides process cooling
water primarily through the design, engineering and project
management of cooling towers to industrial and manufacturing
clients worldwide;
* Applied Water Technologies, Inc. ("AWT") provides our customers
with proprietary environmentally sound water treatment systems
and services which are designed to meet the growing need for
water purification and re-use worldwide. Build-up of chemicals
used in traditional water treatment programs may cause operating
inefficiencies and necessitate periodic shut-downs for cleaning
heat exchangers and other areas within the cooling water loop.
Our clean water technology replaces the need for hazardous
chemicals, and may increase operating efficiency, reduce water
use by increasing recycling and increase the time between shut-
downs for cleaning; and
* Global Water Services, Inc. ("GWS") provides total cooling water
solutions and service programs to our customer base, including
cooling water systems and water treatment services.
Except as otherwise noted, all references to GWT includes our three (3)
subsidiaries.
We primarily market our 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;
* manufacturing;
* pulp & paper and other industries utilizing cooling water.
Typical customers include companies such as Archer Daniels Midland, Amoco,
Mitsubishi, Mobil, Texaco, Bechtel, Fluor Daniel and other large
corporations around the world.
We custom design industrial water cooling towers for our customer base
in a competitive bid job award process. We provide value engineering and
specific water cooling tower designs to our customer base. Although
influenced by many factors, we believe competitive pricing is one of the
main criteria for job awards. Based on customer requirements, we design
water cooling towers using structural members manufactured from wood,
fiberglass and concrete. Light manufacturing of wooden and fiberglass
structural components is done at our facilities for selected jobs prior to
treatment procedures. Component parts are subcontracted and ordered
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from various suppliers to be shipped directly to the job site. For
domestic projects, crews that we manage or independent subcontractors erect
the water cooling tower in the field. 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 scope of our
responsibility. From contract award to final completion of the structure,
a typical project will last four to six months.
From time to time, we may have projects that exceed the 10% revenue
threshold for defining a major customer. Because each project is awarded
independently from other projects, we do not believe that the completion of
the contractual arrangements with any major customer that may arise will
have a material adverse effect on our revenues.
We utilize proprietary software products and know-how to design and
estimate costs for potential projects. Although not copyrighted or
patented, we believe that the proprietary information is integral to our
ability to accurately and reliably design water cooling towers to meet the
desired specifications and to estimate job costs. This know-how is
augmented by key knowledgeable employees.
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 1998 GWT'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 WATER COOLING TOWER MARKET
Water 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 fan stacks 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 process industries for
nearly 100 years.
Most process industries with available water that generate heat in the
process utilize water cooling towers in their operations. Accordingly,
water 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 and less efficient means to reject heat from
these facilities. Water cooling towers can range in
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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 water 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 water 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 water 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 normally 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 larger
HVAC applications, medium and heavy industrial and utilities. Heavy
industrial users require water cooling towers sized from 10,000 to 100,000
GPM and some utility applications range up to 300,000 GPM.
Accurate information about the water 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 water 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 we currently serve can be subdivided into two main sub-
segments: international water cooling towers and domestic water cooling
towers. For the year ended December 31, 1999, the domestic tower revenue
recognition represented approximately 88.5% of our revenues, and
international tower revenue represented approximately 11.5%. Based upon
our current backlog of business and current outstanding bid activity, we
believe that future revenue recognition for 2000 will approximate 1999
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 WATER COOLING TOWERS. New water cooling tower project
opportunities come from two major sources: a worldwide network of
independent manufacturers representatives and
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internal sales personnel. Although some projects arise from past sales
relationships with customers, most projects are awarded independently. In
addition to our direct sales activities, we market new water cooling towers
in a number of ways, including sponsorship of trade shows, direct mail
solicitation and advertising in various trade publications. We are
presently developing a compact disk ("CD"), which will portray our products
using interactive illustrations and animation. This CD will be distributed
to engineering firms, manufacturers and specialized mailing lists in the
industrial water cooling tower market. We also maintain web pages on the
worldwide web at http://www.gwtr.com and http://www.psicoolingtowers.com.
Bids on new water cooling tower projects typically range from $50,000
to $12,000,000 per project. Although we have bid and constructed larger
projects, the majority of our 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. Our 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. We
recognize 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 water 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. We fabricate some wooden
and fiberglass structural materials and other components at leased facilities.
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The customer will often require a thermal performance test and
verification as part of the documentation on tower performance. Either our
personnel or independent third parties perform these tests. Historically,
these performance tests have shown that our products consistently meet or
exceed performance design specifications. In addition to the performance
tests described above, we provide a limited warranty on our products to be
free from material defects for 12 months from start-up or 18 months from
shipment, whichever occurs first. Additionally, we have passthrough
warranties from our sub-vendors for various components utilized in our
cooling towers. We believe that there are no significant warranty issues
from products placed in service since inception.
We have 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 impact to surrounding deciduous trees and reduction in potential
liability caused by condensing water and ice in winter driving conditions.
In addition to plume abatement, we have also successfully installed sound
abated towers which decrease noise levels and sound pollution.
RETROFIT MARKET. In the retrofit or repair market, we have bid on
projects ranging from $5,000 to $5,000,000. We expect 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 water cooling tower retrofit project. In
approximately 75% of the projects we bid on, 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, existing towers are operating when job walkthroughs are
performed to determine the scope of the repairs necessary. Other damaged
areas in need of repair can only be observed and retrofitted after the crew
has begun their retrofit work and the damaged area is exposed for observation.
SUPPLIERS, VENDORS AND SPARE PARTS
We utilize selected vendors for our sub-component requirements. In a
limited number of cases, specific manufacturers have worked in conjunction
with us to supply components to customers under common marketing programs.
Because we have access to a broad number of suppliers which we work with on
a regular basis, management believes that the customer can achieve economic
benefits by utilizing our buying power when component spare parts are
needed. We rely upon the suppliers and vendors to manufacture components
to our specifications. We have not experienced any significant delays in
obtaining parts and components for our products, and we believe that our
relationships with our suppliers are good and that the material
availability is adequate.
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PRODUCT RESEARCH, DESIGN AND DEVELOPMENT
We lease a facility in Coeur d'Alene, Idaho, for our research and
development requirements. We are evaluating various technologies related
to water cooling towers, heat rejection rates, water reuse, disinfection,
water treatment and product design at this facility. The facility was
staffed by one employee as of December 31, 1999. We plan to continue
research and technology programs at this facility but we have no fixed
research and development budget. For the fiscal years ended December 31,
1999, 1998 and 1997, we expended $30,618 and $232,657, and $147,895
respectively, for research and development.
TOTAL WATER TREATMENT SERVICE PROGRAM
During fiscal 1998, we began offering clean water technology services
to water cooling tower customers through our wholly owned subsidiary
Applied Water Technologies, Inc. ("AWT"), a Nevada corporation.
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 inefficiencies and necessitates periodic shut-downs
for cleaning. Disposal of the contaminated water poses environmental
compliance issues for our customers. AWT's clean water technology replaces
the need for hazardous chemicals, increases operating efficiency, reduces
water use by increasing cycling levels 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.
We believe this environmentally sound approach to the treatment of
process cooling water offers many benefits to our customers including
reduction in water use, reduced liability from employees' handling of
hazardous chemicals and reduction of pollutants being discharged. We will
integrate the environmentally sound water treatment service with our other
products to bring a total solution to our existing and future customers.
We believe that this integrated "solutions" approach will be attractive to
our customer base and will result in longer term contracts with potentially
higher profit margins.
This full service program is intended to enhance our water cooling
tower historic business segment by adding scale and corrosion control,
filtration and micro-organism and algae control which enable us to provide
our customers cold, clean water at fixed costs over long-term periods of
time. We believe that our total water management program will provide us
with a competitive advantage because other water treatment competitors do
not offer cooling towers and our cooling tower competitors do not generally
offer water treatment services.
AWT's "AquaPhysics" program offers a series of non-chemical treatment
technologies, coupled with on-site monitoring and service, to provide a
proven environmentally sound approach to cooling water management. The
three-phased AquaPhysics systems will employ technologically advanced
equipment that comprehensively addresses scale, micro biofouling, corrosion
and filtration of suspended solids. The combination of these leading edge
technologies
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results in clean, cold water for optimum cooling efficiency and recycling
without the use of storage and handling of hazardous chemicals.
The total water management program offers a proprietary method of
reducing scale deposited from the water inside the pipes. This system,
based on eight patented technologies, delivers electric charges through the
water passing inside a pipe from a device which is easily fitted around the
outside of the pipe. The electric charges in the system cause a solenoid
induced molecular agitation which precipitates the calcium carbonate in
water causing it to clump into sizes which can then be filtered out of the
water flow. Our total water management program also offers a proprietary
method of microbiological control through an ionization process which kills
bacteria and algae utilizing a silver anode. Filtration to remove
suspended solids and insoluble crystals and corrosion control will be
provided by purchasing standard products produced by many suppliers.
Finally, the total water management program includes a remote monitoring
system, which permits us to monitor the temperature and condition of the
waterflow and to react quickly to control the system as required.
We plan to market our non-chemical treatment service primarily by
targeting customers with buildings or other facilities with an HVAC focus
and to those who recognize the benefits and have requirements for
environmental compliance and safety. We plan to market on the basis of
providing an end result, rather than selling technology or equipment, and
providing a long-term guarantee for clean and healthy water. The
AquaPhysics based program will also be shown to save valuable water
resources, with the systems able to cycle the same water up to
approximately eight times, as opposed to other chemical based systems which
may require water for a once through basis or up to a maximum of three or
four cycles before it has to be purged.
Through 1999, we had invested approximately $400,000 in start-up and
related expenses leading to the AWT treatment service program. We
initiated service under our first contract which commenced in June 1999.
Our initial contract is with Commonwealth Edison and is for a five-year
term. Our treatment program serves a closed loop system with HVAC towers
and associated piping and systems to cool nuclear fuel after the fuel has
been taken out of service at that major Illinois utility's Zion nuclear
power plant. The customer will pay a monthly fee from which we will
recover our initial investment over a relatively short period, providing an
example of the higher margin anticipated from this new business segment.
GWS WATER SERVICE PROGRAM
Based on years of experience in design, constructing and maintaining
water cooling towers, we have continued to develop improved products to
assist our customers with efficient removal of heat from their process
systems. We typically design and construct towers that exceed the bid
specifications provided by our customers for thermal water treatment.
Nevertheless, it is natural for all materials used in constructing water
cooling towers and the impact of water itself to cause reductions in
efficiency as time progresses, particularly if not properly maintained. It
is not unusual for efficiency to be reduced 20% to 30% after five to ten
years of operation.
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During fiscal 1999, through our wholly owned subsidiary Global Water
Services, Inc. ("GWS"), a Nevada corporation, we began offering total
cooling water management services, including operating and maintenance
services to water cooling tower customers. Traditionally, cooling towers
experience a degradation in thermal heat performance over the life of the
tower. This decrease in operating performance is due mainly to a shortfall
in preventive maintenance practices by cooling tower operators. Because of
reductions in water cooling tower efficiency, other plant operations are
adversely affected, leading to a reduction in plant output, a decrease in
production yields and/or a decline in product quality. These
inefficiencies may lead to an adverse impact on plant profitability due to
the lack of sufficient cooling water for the facility.
Through our wholly owned subsidiary GWS, we address this customer need
through our proprietary long-term service arrangement which provides total
water cooling management services to customers. We believe this approach
to the water cooling tower user's industries will lower overall costs,
improve efficiencies and provide increased profitability to our customers.
We believe that synergies with AWT and PSI will provide many opportunities
to improve profitability and increase our market share as these service
arrangements are developed over the next few quarters.
GWS assumes full responsibility, with the approval of our customers,
for selecting all the systems, equipment, supplies and water treatment
program needed for the servicing, recruiting, training and managing the
operational manpower required under each project. We are not aware of any
other companies which provide such a full service program in our industry.
We anticipate structuring and pricing our contracts to provide us with
increased gross margins as compared to our traditional water cooling tower
construction business.
We believe that GWS' services will differentiate it from competitors
as a result of the scope of the equipment, services, technology, systems
and water treatment bundled into one service package, all for a monthly fee
over a long-term period. We anticipate that our customers will view these
service contracts as a long-term solution which will result in significant
revenue improvement and substantial cost savings.
Although GWS currently has no contracts in place, we are pursuing
contracts with several major electric utilities and other industrial
companies utilizing water cooling towers.
GOVERNMENTAL REGULATION
We are 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. We endeavor to comply with all state and federal laws and believe
that we are in compliance with all federal, state and local regulations
applicable to our business, including environmental regulations.
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COMPETITION
The market for water cooling towers is extremely competitive
worldwide. There are approximately 10 manufacturers of new industrial
water cooling towers in the United States. There are approximately 15
regional companies providing retrofits and repair services. Our primary
competitors internationally consist of the same competitors with which we
compete in the United States. Additionally, there are 10-15 companies
which compete regionally on an international basis with our 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 water cooling tower market.
A number of our competitors are substantially larger in size than we
are 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 water cooling towers employing fiberglass, wood and concrete
materials which are similar to our products. Management believes that our
products provide superior value to our customers 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 our product line.
In the area of water treatment services, we compete 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 our competitors in the water
treatment market are substantially larger in size than we are, 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.
EMPLOYEES
As of December 31, 1999, we employed 100 full time individuals in the
fields of engineering, management, marketing, accounting, finance,
drafting, design, project management, law and administrative support
throughout our operations. There were 72 individuals at our corporate
headquarters in Golden, Colorado. We utilize an employment service
organization to provide field personnel for our projects where the erection
of the tower is within our 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. We believe that relations
with our employees are good.
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CUSTOMERS
We had a major customer which accounted for more than 10% of our
revenues for the year ended December 31, 1999. This customer accounted for
$26.8 million in recognized revenue during 1999 or 39.8% of our total 1999
revenue. We had a major customer accounting for 13.9% of our revenues for
the year ended December 31, 1998. We did not have a major customer
accounting for more than 10% of our revenues for the year ended December
31, 1997. From time to time, we 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 us.
We have 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 than 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
GWT was incorporated under the name Fi-Tek VI, Inc. ("Fi-Tek") 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, Fi-Tek 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. The
expiration 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, 2001, unless extended.
On September 25, 1997, Fi-Tek VI and PSI consummated an Agreement and
Plan of Reorganization whereby Fi-Tek VI acquired all of the issued and
outstanding common shares of PSI in exchange for the issuance of
261,382,500 shares of common stock and 1,000,000 shares of a newly-authorized
Series A non-voting preferred stock ("Series A Preferred Stock"). Subsequent
to the reverse acquisition with PSI, we changed our name from Fi-Tek to Global
Water Technologies, Inc. to reflect our focus on the growing water-related
market opportunities. The trading symbol for our common stock was also
changed to "GWTR." Fi-Tek accounted for the transaction as a reverse
acquisition under the purchase method of accounting. The fiscal year of
Fi-Tek was changed from June 30 to December 31 to correspond to the fiscal
year of PSI.
Each share of Series A Preferred Stock was automatically convertible
into 290 shares of common stock upon attainment of gross annual sales of
$60,000,000, but only if such annual sales were reported not later than the
due date of the Annual Report on Form 10-K for the fiscal year ending in
2002, and was subject to redemption at a price of $.0001 per share in the
event the required sales level is not attained. Our revenues for the
fiscal year ended December 31, 1999, exceeded $60 million. Accordingly, on
March 21, 2000, the date we filed our Annual Report on
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Form 10-KSB with the Securities and Exchange Commission, the outstanding
shares of Series A Preferred Stock converted into common stock on the basis
of 290 shares of common stock for each one share of Series A Preferred
Stock. See TRANSACTIONS WITH MANAGEMENT, below, for information relating
to George A. Kast's exchange of his Series A Preferred Stock for the same
number of shares of a newly created non-voting Series C Preferred Stock
prior to conversion into common stock. The remaining 123,659 shares of
Series A Preferred Stock outstanding converted into 35,861,110 shares of
common stock on March 21, 2000.
PROPERTIES
Effective March 10, 1998, we entered into a triple-net lease for a
portion of a 36,740 square foot office building in Golden, Colorado, with
George A. Kast, President and CEO, for our expanding office space
requirements. The lease required that we pay rent at a rate of $21,454 per
month for the 34-month lease. Gross operating expenses for the building
approximated $20,000 per month, of which Mr. Kast was personally
responsible for the payment of approximately $5,000 per month, which was
paid by us during 1998. At December 31, 1998, we recorded a note
receivable from Mr. Kast in the amount of $47,766 (principal and interest
at 8% per annum) related to the operating costs of the facility for which
Mr. Kast is responsible. This note was repaid during 1999.
The lease also provided Mr. Kast with the option to purchase the
building in which GWT's principal offices are located on or before December 31,
2000. During December 1999, Mr. Kast, through an affiliated entity, GK
Holdings, Inc., exercised his option. On December 31, 1999, we entered into
a ten year lease of the building, commencing January 1, 2000, with GK
Holdings. The triple-net lease requires monthly rental payments of $53,538
per month. Management believes that the terms of the lease are no less
favorable to GWT than comparable office space in the geographical area in
which our offices are located. GWT subleases the garden level of the
building to several unaffiliated entities at varying monthly rentals. Non-
related third parties pay rent of approximately $12,600 monthly, reducing
our net monthly rent to approximately $40,900.
From January 1993 through March 15, 1998, our 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, which expired on October 31, 1999. During 1999, we
entered into an agreement with an unaffiliated entity to occupy these
premises and relieve us from our former obligation under the lease.
We lease approximately 17,700 square feet from an unaffiliated entity
in Denver, Colorado, for $6,642 per month. The lease terminates in January
of 2001. This facility is utilized for light structural fabrication,
component storage and centralized warehousing for tools and equipment. We
believe that the lease on this facility can be renewed and/or additional
space secured without substantial economic implications.
We also lease a 5,000 square foot research and development facility in
Coeur d'Alene, Idaho, from Mr. Kast. The facility is subject to a lease
which terminates September 30, 2001. The
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lease terms obligate us to a monthly payment of $1,238. During 1999, we
paid Mr. Kast $14,856 for this facility.
Management believes that our insurance policies provide adequate
coverage for the contents at all facilities. The lessor of each of our
leased facilities is responsible for the building structure itself. We
could have material adverse consequences if our facilities were destroyed
by fire or other disaster.
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.
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<PAGE>
MANAGEMENT
Set forth below is certain information regarding the directors,
executive officers and key employees of the Company as of the date hereof.
Service with the Company prior to September 1997 was rendered to PSI.
NAME AGE POSITION OFFICER OR DIRECTOR SINCE
- ---- --- -------- -------------------------
George A. Kast 42 Chief Executive Officer and 1993
Chairman of the Board
Martin E. Hout 44 Chief Financial Officer and 1998
Treasurer
Gary L. Brown 43 Secretary, General Counsel 1996
and a Director
Michael A. Kast 43 Director 1999
Robert L. Koch 46 Director 1999
The following sets forth biographical information concerning the
Company's directors and executive officers for at least the past five years.
GEORGE A. KAST, founded PSI in 1993, was an officer and director of
PSI until 1997, when PSI merged with Fi-Tek VI, Inc. and became GWT. 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 protruded fiberglass structural cooling towers.
MARTIN E. HOUT was PSI's and then GWT's controller and planning
officer from 1995 to 1998, when he became the Chief Financial Officer.
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 1985 to 1993, he held various financial positions
with 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.
GARY L. BROWN has been Chief Operating Officer and General Counsel of
PSI since 1996 and became an officer of GWT in September 1997. From 1993
to 1996, he was counsel for Fischbach Corporation, which included
Fischbach & Moore, Natkin & Company, Ficon Corporation and Fischbach Power
Services, among others. Prior to joining the Fischbach
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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 B.S.J. degree from the University of Kansas in
journalism in 1979 and a J.D. degree from Washburn University in 1983.
MICHAEL A. KAST 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 our business activities including labor, construction, erection,
reconstruction and new towers.
ROBERT L. KOCH has been the Manufacturing Operations Leader for Allied
Signal Aerospace from 1997 to the present. From 1994 to 1996, he was the
manager of New Product Engineering for LORI, Inc., and from 1996 to 1997,
the Vice President of Operations for HaddComm International.
BOARD COMMITTEES
The Company presently has no audit/systems committee nor a
compensation committee.
SIGNIFICANT EMPLOYEES
The following employees make a significant contribution to our business.
STEVE D. ADAMS, age 38, was the director of applications and projects
at TDT from 1992 to 1994. Prior to joining TDT, he was the product manager
for new tower and engineering manager at Custodis-Ecodyne, Inc., Santa
Rosa, California from 1988 to 1992. 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 42, 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.
FAMILY RELATIONSHIPS
The following family relationships exist between and among the
officers and directors of the Company: George A. Kast and Michael A. Kast
are brothers.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
to our CEO and our other executive officers who received in excess of
$100,000 of salary and bonus during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation ($$) Restricted Options
------------------------ Stock & Other
Name and Position Year Salary Bonus Awards SARs Compensation
- ----------------- ---- ------ ----- ------ ---- -------------
<S> <C> <C> <C> <C> <C> <C>
George A. Kast, 1999 $225,000 $ -0- -0- 632,600 $ 14,856(1)
President and Chief 1998 $172,500 $75,137 -0- -0- $ 14,856(1)
Executive Officer 1997 $166,438 $ 7,023 -0- -0- $ 13,618(1)
Gary L. Brown 1999 $180,000 $40,000 -0- 463,100 -0-
General Counsel 1998 $145,000 $25,137 -0- -0- -0-
1997 $125,000 $25,000 -0- -0- -0-
Michael A. Kast, 1999 $156,667 $ -0- -0- 413,500 $137,567(3)
Vice President 1998 $145,000 $25,137 -0- -0- $ 48,784(3)
of PSI 1997 $104,000 $ 2,000(2) -0- -0- $ 48,784(3)
Martin E. Hout 1999 $110,000 $12,500 -0- 562,500 -0-
Chief Financial 1998 $ 73,461 $ 2,500 -0- -0- -0-
Officer 1997 $ 63,000 $ 2,056 -0- -0- -0-
</TABLE>
________________________
(1) Represents rental payments made to Mr. Kast for the Coeur d'Alene
research and development center.
(2) PSI issued Mr. Kast 1,020 shares of PSI's common stock (which was
exchanged for 13,089,518 shares of our common stock and 50,059 shares
of our preferred stock) as a bonus upon his employment by PSI.
(3) Represents interest on certificates of deposit pledged as security for
the Company's line of credit.
COMPENSATION OF DIRECTORS
Outside members of the Company's Board of Directors are compensated in
their capacities as Board Members in the amount of $5,000 for each
quarterly meeting attended. They may also participate in our Stock Option
Plan. Other members of our Board of Directors are not compensated in their
capacities as Board members. However, we reimburse all of our officers,
directors and employees for accountable expenses incurred on behalf of GWT.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None of our officers presently have employment agreements with the Company.
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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. As of the date of this prospectus, 11,241,100 options
have been awarded to Company employees which vest over four years from the
grant date. Of these options awarded, 10,756,680 remain outstanding.
Unless sooner terminated, the Plan will expire on May 31, 2008.
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"
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as the last sale price of the Company's common stock as reported on a
national securities exchange or on the Nasdaq or, 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 Option holder 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 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
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<PAGE>
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 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 Option holder, 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 Option holder 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 GRANTS
The following table sets forth certain information regarding Options
to purchase shares of common stock issued to executive officers of the
Company during the fiscal year ended December 31, 1999.
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<PAGE>
OPTION GRANTS IN 1999
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Expiration
Name Options Granted Employees in 1998 Price Date
---- --------------- ----------------- ----- ----
George A. Kast 632,600(1) 12.7% $0.08 March 8, 2004
Gary L. Brown 463,100(1) 9.3% $0.08 March 8, 2004
Michael A. Kast 413,500(1) 8.3% $0.08 March 8, 2004
Martin E. Hout 562,500(1) 11.3% $0.08 March 8, 2004
_____________________
(1) The exercise price of each option is 114% of the fair market value as
measured by the closing price of our common stock on the date the
option was granted. The exercise price is payable in cash.
YEAR END OPTION VALUES
No options were exercised by the executive officers of the Company
during the fiscal year ended December 31, 1999. The following table
provides information on option values of such officers' unexercised options
at December 31, 1999:
AGGREGATED OPTION EXERCISES IN 1999 AND
FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired at Fiscal Year-end(#) at Fiscal Year-end($)
on Value --------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable(2)
- ---- -------- -------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
George A. Kast 0 0 126,520 506,080 - -
Gary L. Brown 0 0 92,620 370,480 - -
Michael A. Kast 0 0 82,700 330,800 - -
Martin E. Hout 0 0 112,500 450,000 - -
</TABLE>
_____________________
(1) Market value of the underlying shares on the date of exercise less the
option exercise price.
(2) Market value of shares covered by in-the-money options on December 31,
1999, less the option exercise price. Options are in the money if the
market value of the shares covered thereby is greater than the option
exercise price. At December 31, 1999, none of the options were in the
money.
LONG-TERM INCENTIVE PLANS
The Company has no long term incentive plans other than its 1998 Stock
Option Plan.
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INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 143 of the Delaware General Corporation Law ("DGCL")
authorizes a corporation's board of directors to grant indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities) including
reimbursement for expenses incurred) arising under the Securities Act.
As permitted by the DGCL, the Company's Certificate of Incorporation
includes a provision that eliminates the personal liability of its
directors for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty
to the Company or its shareholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the DGCL (regarding unlawful dividends and stock
purchases) or (iv) for any transaction from which the director derived an
improper personal benefit.
As permitted by the DGCL, the Company's By-Laws provide that the
Company is required to indemnify its directors and officers to the fullest
extent permitted by the DGCL, and that the Company is permitted to
indemnify its other employees to the extent permitted by law.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information known to the
Company with respect to the beneficial ownership of the Company's common
stock as of the date hereof 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 our common stock. The address of each of the executive officers
is c/o Global Water Technologies, Inc., 1767 Denver West Boulevard, Golden,
Colorado 80401.
Name and Address Amount and Nature of
of Shareholder Beneficial Ownership (1) Percent of Class
- -------------- ------------------------ ----------------
George A. Kast 228,728,898(2) 63.0%
Gary L. Brown 11,340,917(3) 3.1%
Michael A. Kast 27,882,228(4) 7.7%
Martin E. Hout 295,400(5) .1%
Robert L. Koch 10,000 (6)
All Directors and Executive 267,257,443 73.9%
Officers as a group (5 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 options to purchase 253,040 shares of common stock at $.08
per share granted on March 8, 1999, and options to purchase 100,000
shares of common stock at $0.125 per share granted on February 9,
2000, pursuant to the Company's 1998 Stock Option Plan, which are
currently exercisable.
(3) Includes options to purchase 185,240 shares of common stock at $.08
per share granted on March 8, 1999, and options to purchase 115,200
shares of common stock at $0.125 per share granted on February 9,
2000, pursuant to the Company's 1998 Stock Option Plan, which are
currently exercisable.
(4) Includes options to purchase 165,400 shares of common stock at $.08
per share granted on March 8, 1999, and options to purchase 115,200
shares of common stock at $0.125 per share granted on February 9,
2000, pursuant to the Company's 1998 Stock Option Plan, which are
currently exercisable.
(5) Includes options to purchase 225,000 shares of common stock at $.08
per share granted on March 8, 1999, and options to purchase 70,400
shares of common stock at $0.125 per share
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<PAGE>
granted on February 9, 2000, pursuant to the Company's 1998 Stock
Option Plan, which are currently exercisable.
(6) Negligible.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Michael A. Kast has pledged certificates of deposit in the amount of
$773,233 to a bank to secure a credit line for PSI. In consideration for
such pledge, PSI agreed to pay Michael A. Kast interest at $8,131 per
month. The total amount of interest we paid to Michael A. Kast was
$48,784, $48,784 and $137,567 for the years ended December 31, 1997, 1998
and 1999, respectively.
George A. Kast has personally guaranteed our obligations
(approximately $1,776,000 and $3,855,000 as of December 31, 1998 and 1999,
respectively) with financial institutions, including our SBA term loan. In
addition, as of December 31, 1998 and 1999, Mr. Kast had personally
guaranteed approximately $16,600,000 and $13,500,000, respectively, of our
obligations with bonding companies.
We lease a facility from George A. Kast in Coeur d'Alene, Idaho, for
our research and development requirements. The terms of the lease call for
payments of $1,238 per month through September of 2001.
In March 1998, we entered into a lease with George A. Kast for a
portion of a 36,740 square foot office building in Golden, Colorado, for
our principal offices. The lease required us to pay rent at a rate of
$21,454 per month for the 34-month lease. Gross operating expenses for the
building during this period approximated $20,000 per month, of which Mr.
Kast was personally responsible for the payment of approximately $5,000 per
month, which was paid by us. In December 1998, Mr. Kast signed a note
payable to us in the amount of $47,766, related to the operating costs of
the building for which Mr. Kast was responsible. The note bears interest
at 8% per annum and matured September 30, 1999. This note was repaid in
installments during 1999.
During December 1999, Mr. Kast, through an affiliated entity, GK
Holdings, Inc., exercised his option to purchase the office building in
which our principal offices are located. On December 31, 1999, we entered
into a ten year lease of the building, commencing January 1, 2000, with GK
Holdings . The triple-net lease requires monthly rental payments of
$53,538 per month. We believe that the terms of the lease are no less
favorable to us than comparable office space in the area of our offices.
We sublease the garden level of the building for approximately $12,600 per
month to unaffiliated entities at varying monthly rentals.
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On August 13, 1998, we designated 1,000 shares of the 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. We can
redeem the shares of Series B Preferred subject to certain minimum equity
provisions. We issued 250 shares of Series B Preferred Stock to George A.
Kast in consideration of a cash payment of $250,000.
In February 2000, George A. Kast, who held 876,341 shares of Series A
Preferred Stock, agreed to return his shares of Series A Preferred Stock to
us in exchange for 876,341 shares of a newly created non-voting Series C
Preferred Stock. Mr. Kast's 876,341 shares of Series A Preferred stock
would have automatically converted into 254,138,890 shares of common stock
upon March 21, 2000, the date that our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999, was filed with the Securities and
Exchange Commission. The Series C Preferred Stock will automatically
convert into shares of common stock on a one-for-290 basis upon a "change
in control" of GWT.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 800,000,000 shares of common stock,
$0.00001 par value. There are presently 358,758,000 shares of common stock
issued and outstanding. All shares of common stock have equal voting
rights and, when validly issued and outstanding, have one vote per share in
all matters to be voted upon by shareholders. As of March 31, 2000, there
were approximately 81 holders of record of our common stock.
At the 1998 Annual Meeting of our shareholders, the shareholders
approved a proposal granting our Board of Directors the discretion, when
and if deemed appropriate, to effect a reverse split of our outstanding
$.00001 par value common stock, not to exceed 1-for-100, and a
corresponding amendment to our Certificate of Incorporation to reduce the
number of shares of common stock authorized and a corresponding increase in
the par value. The Board of Directors has not yet made a decision with
respect to the advisability of a reverse stock split, and is still
considering the issue.
The shares of common stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully paid and
non-assessable shares. Cumulative voting in the election of directors is
not allowed, which means that the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able
to elect all of the directors if they choose to do so and, in such event,
the holders of the remaining shares will not be able to elect any
directors. On liquidation of GWT, each common shareholder is entitled to
receive a pro rata share of our assets available for distribution to common
stockholders.
-45-
<PAGE>
PREFERRED STOCK
We are authorized to issue up to a total of 20,000,000 shares of non-
voting preferred stock, $.00001 par value, with the shares to be issued in
series by the Board of Directors. As part of the acquisition of PSI in
September 1997, our Board of Directors designated 1,000,000 shares of the
Preferred Stock as Series A non-voting Preferred Stock, which were issued
to the shareholders of PSI. Each share of Series A Preferred Stock was
converted into 290 shares of common stock with the filing of the Company's
Annual Report on Form 10-KSB for December 31, 1999.
Prior to filing the 10-KSB, we reached an agreement with George A.
Kast, our President and principal shareholder, to return 876,341 shares of
Series A Preferred to GWT prior to conversion. Mr. Kast's shares would
have automatically converted into 254,138,890 shares of common stock. In
exchange for his Series A Preferred shares, we issued Mr. Kast 876,341
shares of a newly designated Series C Convertible Preferred Stock, which
would convert into shares of common stock on a one-for-290 basis upon a
"change in control" of our company.
A "change in control" is deemed to occur:
* on the date any individual, entity or group acquires the
beneficially ownership of 30% or more of the then outstanding
shares of common stock or the then outstanding voting securities
of GWT entitled to vote generally in the election of directors;
* on the date the individuals who constitute the Board of Directors
on February 11, 2000 (the "Incumbent Board"), cease to constitute
at least a majority of the members of the Board; provided that
any person becoming a director subsequent to February 11, 2000,
whose appointment, election or nomination for election by GWT's
shareholders was approved by a vote of a least a majority of
directors then comprising the Incumbent Board shall be considered
as though such person was a member of the Incumbent Board;
* on the date of consummation of a merger, consolidation,
recapitalization, sale or disposition or all or a substantial
portion of GWT's assets; provided, however, that a change in
control shall not occur if consummation of the transaction
results in at least 50% of the voting power immediately after the
transaction being beneficially owned by at least 50% of the
holders of outstanding voting securities immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially
altered in the transaction; or
* on the date GWT files a Current Report or proxy statement with
the Securities and Exchange Commission disclosing that a change
in control has or may have occurred or may occur pursuant to any
then-existing contract or transaction.
-46-
<PAGE>
On August 13, 1998, the Company's Board of Directors designated 1,000
shares of the Preferred Stock as Series B non-voting and non-convertible
Preferred Stock, and issued 250 shares of Series B Preferred to George A.
Kast. Each share of Series B Preferred has a redemption value of $1,000
and a dividend rate of $80 (8%) per share.
The remaining shares of Preferred Stock may be issued in one or more
series from time to time with such designations, rights, preferences and
limitations as the Company's Board of Directors may determine without
approval of its shareholders. The rights, preferences and limitations of
separate series of serial Preferred Stock may differ with respect to such
matters as may be determined by the Company's Board of Directors, including
without limitation, the rate of dividends, method or nature or prepayment
of dividends, terms of redemption, amounts payable on liquidation, sinking
fund provisions, conversion rights and voting rights. The ability of the
Board to issue Preferred Stock could also be used by it as a means for
resisting a change of control of the Company and can therefore be
considered an "anti-takeover" device. The Company currently has no plans
to issue any shares of Preferred Stock.
DIVIDEND POLICY
Dividends are payable on common stock when, as, and if declared by the
Board of Directors out of funds legally available to pay dividends, subject
to any preferences which may be given to holders of preferred stock. The
Company has paid no cash dividends on its common stock to date and it does
not anticipate payment of cash dividends in the foreseeable future.
CLASS A AND B WARRANTS
We have 8,042,500 Class A and 8,042,500 Class B common stock purchase
warrants outstanding which we originally issued as part of the units sold
in our initial public offering in 1992. The expiration date of these
warrants has been continually extended by the Board of Directors since
their original expiration date in April 1994. Currently, the expiration
date of the warrants is April 14, 2001.
Subject to redemption by us, each Class A warrant is exercisable for
one share of common stock at a price of $.12 per share. Each Class B
warrant is exercisable for one share of common stock at a price of $.20 per
share.
We may call these warrants for redemption at any time during the
Exercise Period upon 30 days notice to the holders of the warrants.
Holders have the right to exercise their warrants between the date of
notice of redemption and the date for redemption. Any holder who does not
exercise his warrants prior to the date set for the redemption will receive
only the redemption price of $.0001 per warrant.
An additional 804,250 Class A warrants and 804,250 Class B warrants
are held by personnel of an investment banking house, which assisted in the
Company's initial public offering
-47-
<PAGE>
in 1992. These warrants were acquired upon the exercise of options to
purchase 804,250 units, at $.024 per unit, in October of 1998.
We may employ selected brokers and/or dealers to solicit the exercise
of warrants on our behalf. We may pay such brokers and dealers a warrant
solicitation fee of up to 3% of the gross proceeds received from the
exercise of warrants originated by or from the broker's or dealer's office.
No Warrant solicitation fee will be paid if (i) the exercise of the
warrants is made at a time when the market price of our common stock is
lower than the exercise price of the warrants, (ii) the warrants to be
exercised are held in a discretionary account, (iii) the solicitation of
the exercise of such warrants would violate applicable provisions of
Regulation M promulgated in the Securities Exchange Act of 1934, as
amended, (iv) the brokers or dealers failed to notify the Company in
writing at least 10 calendar days prior to commencement of such
solicitation and (v) the exercise of the warrants is the result of an
unsolicited transaction.
CLASS C WARRANTS
We presently have outstanding 3,125,000 non-transferable Class C
warrants. Each Class C warrant entitles the holder thereof to purchase one
share of common stock at a price of $.158 per share (the "Exercise Price"),
subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. The holder of any Class C warrant may
exercise Class C warrants by surrendering the certificate representing the
Class C warrant to the Transfer and Warrant Agent, with the election to
purchase form on the reverse side of such certificate properly completed
and executed, together with payment of the exercise price. Subject to
compliance with applicable state securities laws, the Class C warrants may
be exercised at any time in whole or in part at the Exercise Price until
expiration of the Class C warrants on July 12, 2003 (the "Expiration Date").
The Class C warrants are subject to redemption by us at $.01 per Class
C warrant in the event that the closing bid price for our common stock, as
published by Bloomberg, shall have been in excess of $.22 for the 20
consecutive trading days immediately prior to the Company's mailing the
notice of redemption. On April 5, 2000, we gave holders of record of the
Class C warrants 30 days written notice of redemption as of May 5, 2000.
We have extended the date for redemption until 15 days following the
effective date of this registration statement. The Class C warrants are
exercisable until the close of business on the redemption date. If any
Class C warrant called for redemption is not exercised by the redemption
date, such Class C warrant will cease to be exercisable and the holder will
be entitled only to the redemption price.
Holders of Class C warrants have no voting rights and are not entitled
to dividends. In the event of liquidation, dissolution or winding up of
the affairs of the Company, holders of the warrants will not be entitled to
participate in any liquidation distribution.
We agreed to maintain the effectiveness of the Registration Statement
for a period of four years from the date of its initial effectiveness,
which was January 28, 2000.
-48-
<PAGE>
The Class C warrants may not be sold or otherwise transferred, except
in compliance with applicable securities laws. Class C warrants may be
exchanged or exercised any time prior to the Expiration Date.
The exercise price and the number of shares of common stock
purchasable upon the exercise of the Class C warrants are subject to
adjustment upon the occurrence of certain events, including dividends,
stock splits, combinations or recapitalizations of the common stock, or
sale by the Company of shares of its capital stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of
common stock, consolidation or merger of our company with or into another
corporation or sale of all or substantially all of the assets of our
company in order to enable Warrant holders to acquire the kind and number
of shares of common stock or other securities or property receivable in
such event by a holder of the number of shares of common stock that might
otherwise have been purchased upon the exercise of the Warrant. No
adjustments will be made until the cumulative adjustments in the exercise
price per share amount to $.01 or more. No adjustment to the exercise
price of the warrants will be made for dividends (other than dividends in
the form of stock), if any, paid on the common stock, or for the issuance
of restricted securities in connection with acquisitions by our company,
the grant of stock options to persons covered by the 1998 Stock Option
Plan, or any subsequent qualified incentive stock option plan duly adopted
by our company's Board of Directors and shareholders, and shares of common
stock issued upon the conversion of Class A Preferred Stock.
OTHER OUTSTANDING WARRANTS
There are also outstanding warrants to purchase 1,050,000 shares of
common stock which is exercisable until February 18, 2002, at prices
ranging from $.08 to $.12 per share.
REPORTS TO SHAREHOLDERS
We file periodic reports, including Annual Reports containing our
consolidated financial statements of the Company audited by independent
public accountants, and quarterly reports, which contain unaudited
financial statements, with the Securities and Exchange Commission.
STOCK TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our common stock and the Warrant Agent for the
Class A, B and C warrants is American Securities Transfer & Trust,
Incorporated, 12039 West Alameda Parkway, Suite Z-2, Lakewood, Colorado 80228.
-49-
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth the names of the Selling Security
Holders, the number of shares of the Company's common stock and shares
underlying currently exercisable Class C Warrants owned beneficially by
each selling shareholder as of May 1, 2000, and the number of shares that
may be offered pursuant to this Prospectus. This information is based upon
information provided by the Selling Security Holders.
<TABLE>
<CAPTION>
Common Stock Underlying
Class C Warrants
Common Stock Beneficially Owned Beneficially Owned
-------------------------------- ----------------------------------
Prior to Offering To Be Sold Prior to Offering To Be Sold
-------------------- ---------- -------------------- ----------
Selling Security Holder Number Percent Number Number Percent Number
- ----------------------- ------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Spencer Enslein 250,000 * 250,000 -0- -0-
Henry S. Krauss 452,500 * 452,500 250,000 * 250,000
Maurice and Mary-Ann
LaFlamme 250,000 * 250,000 250,000 * 250,000
John O'Shea 1,695,000 * 1,695,000 750,000 * 750,000
Generation Capital Associates -0- -0- 250,000 * 250,000
William Marocco 1,250,000 * 1,250,000 1,250,000 * 1,250,000
Inverness Investment, Inc.
Profit Sharing Plan 250,000 * 250,000 -0- -0-
Jeff McLaughlin 250,000 * 250,000 -0- -0-
Pio Verges 250,000 * 250,000 -0- -0-
Vincent Capadanno 250,000 * 250,000 -0- -0-
Roger Weissenberg 250,000 * 250,000 250,000 * 250,000
Daniel Luskind 202,500 * 202,500 -0- -0-
FCS c/fbo Vicki D.E.
Barone IRA 250,000 * 250,000 -0- -0-
FCS c/fbo Kevin Watley IRA -0- -0- 125,000 * 125,000
--------- --------- --------- ---------
5,600,000 5,600,000 3,125,000 3,125,000
</TABLE>
__________________________
* Less than 1%.
-50-
<PAGE>
PLAN OF DISTRIBUTION
Each Selling Security Holder is free to offer and sell his or her
common shares at such time, in such manner and at such prices as he or she
may determine. The types of transactions in which the shares of common
stock are sold may include transactions in the over-the-counter market
(including block transactions), on the Nasdaq SmallCap Market (or any other
exchange on which the shares may be listed), in negotiated transactions, or
a combination of such methods of sale and/or may also be used to cover any
short positions previously established. The sales will be at market prices
prevailing at the time of sale or at negotiated prices. The Selling
Security Holders may effect such transactions by selling to or through one
or more broker-dealers. The Selling Security Holders have advised us that
they have not entered into agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their shares. The
Selling Security Holders do not have an underwriter or coordinating broker
acting in connection with the proposed sale of the common stock.
The Selling Security Holders may sell their shares directly to
purchasers or to or though broker-dealers, which may act as agents or
principals. These broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders.
The maximum commission or discount to be received by any NASD member or
independent broker-dealer will not exceed 8% for the sale of any shares by
Selling Security Holders. They may also receive compensation from the
purchasers of common stock for whom such broker-dealers may act as agents
or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that participate in the
distribution may under certain circumstances be deemed to be "underwriters"
within the meaning of the Securities Act. Any commissions received by such
broker-dealers and any profits realized on the resale of shares sold by
them while acting as principals might be deemed to be underwriting
discounts or commissions. The Selling Security Holders may agree to
indemnify such broker-dealers for transactions involving sales of the
shares of common stock against certain liabilities, including liabilities
arising under the Securities Act. In addition, GWTR has agreed to
indemnify the Selling Security Holders with respect to the shares offered
hereby against certain liabilities, including, without limitation, certain
liabilities under the Securities Act, or, if such indemnity is unavailable,
to contribute toward amounts required to be paid in respect of such
liabilities.
Because the Selling Security Holders may be deemed to be
"underwriters" within the meaning of Section 2(a)(11) of the Securities
Act, the Selling Security Holders will be subject to prospectus delivery
requirements.
We have informed the Selling Security Holders that the anti-manipulation
rules of the SEC, including Regulation M promulgated under the Securities
Exchange Act of 1934, as amended, may apply to their sales in the market and
have provided the Selling Security Holders with a copy of such rules and
regulations.
-51-
<PAGE>
The Selling Security Holders may resell all or a portion of the shares
of common stock in open market transactions in reliance upon Rule 144 under
the Securities Act, provided they meet the criteria and conform to the
requirements of such Rule.
We are responsible for all costs, expenses and fees incurred in
registering the shares offered hereby. The Selling Security Holders are
responsible for brokerage commissions, if any, attributable to the sale of
the shares of common stock.
LEGAL MATTERS
Legal matters in connection with the shares offered hereby have been
passed on for us by Rothgerber Johnson & Lyons LLP, Denver, Colorado.
EXPERTS
The financial statements of the Company as of December 31, 1999, 1998
and 1997 and for the years then ended included in this prospectus have been
audited by Comiskey & Company, Professional Corporation, independent
auditors, as stated in their report appearing in this prospectus, and are
included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
SHARES ELIGIBLE FOR FUTURE SALE
We presently have outstanding 358,758,000 shares of common stock, of
which 266,017,963 shares are "restricted" securities currently eligible for
sale into the public market.
In general, under Rule 144, any of our affiliates, or person or
persons whose shares are aggregated, who has beneficially owned restricted
shares for at least one year, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of:
* 1% of the then outstanding common stock, approximately 3,588,000
shares; or
* the average weekly trading volume of the common stock during the
four calendar weeks preceding the date that the notice of the
sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to
manner of sale, notice and availability of current public information about
us. A person, or persons whose shares are aggregated who is not deemed to
have been one of our affiliates at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least two years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above.
In addition, we have filed a registration statement on Form S-8
registering 30,000,000 shares of common stock subject to outstanding stock
options or reserved for issuance under our
-52-
<PAGE>
1998 Stock Option Plan. Shares registered under such registration
statement would be subject to Rule 144 volume limitations applicable to
affiliates, and be available for sale in the open market, unless subject to
vesting restrictions.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement on Form S-1 under the Securities
Act with respect to the common stock offered in this prospectus. This
prospectus, filed as part of the registration statement, does not contain
all of the information set forth in the registration statement and its
exhibits and schedules, portions of which have been omitted as permitted by
the rules and regulations of the SEC. For further information about us and
the common stock, we refer you to the registration statement and to its
exhibits and schedules. Statements in this prospectus about the contents of
any contract, agreement or other document are not necessarily complete and,
in each instance, we refer you to the copy of such contract, agreement or
document filed as an exhibit to the registration statement, and each such
statement being qualified in all respects by reference to the document to
which it refers. Anyone may inspect the registration statement and its
exhibits and schedules without charge at the public reference facilities
the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois, 60661. You may obtain copies of all or any part of
these materials from the SEC upon payment to the SEC of prescribed fees.
You may also inspect these reports and other information without charge at
a Web site maintained by the SEC. The address of this site is
http://www.sec.gov.
We file annual, quarterly and current reports and other documents with
the SEC. You may inspect and copy these reports and other information at
the public reference facilities maintained by the SEC and at the SEC's
regional offices at the addresses noted above. You may obtain copies of
this material from the public reference section of the SEC as described
above, or inspect them without charge at the SEC's Web site.
-53-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GLOBAL WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Comiskey and Company, P.C. Independent Certified
Public Accountants. . . . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Statements of Operations For Years Ended
December 31, 1999, 1998 and 1997. . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets As of December 31, 1999, 1998 and 1997 . .F-3
Consolidated Statements of Cash Flows For Years Ended
December 31, 1999, 1998 and 1997. . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity For the Years ended
December 31, 1999, 1998 and 1997. . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements December 31, 1999, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-6
-54-
<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, 1999, 1998 and 1997, and the related
consolidated statements of operations, cash flows, and stockholders' equity
for each of the years ended December 31, 1999, 1998 and 1997. These
financial statements are the responsibility of our 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, 1999, 1998 and 1997 and the
results of its operations, cash flows, and changes in stockholders' equity
for each of the years ended December 31, 1999, 1998 and 1997, in conformity
with generally accepted accounting principles.
Denver, Colorado
February 18, 2000
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F-1
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues:
United States $ 60,134,087 $ 29,486,771 $ 14,919,866
International 7,818,880 5,247,569 3,777,426
------------ ------------ ------------
Total revenues 67,952,967 34,734,340 18,697,292
------------ ------------ ------------
Costs and expenses:
Cost of sales 60,851,840 27,816,137 13,547,484
Selling, general and administrative 4,938,947 4,762,328 4,031,159
Research and development 30,618 232,657 147,895
------------ ------------ ------------
Total costs and expenses 65,821,405 32,811,122 17,726,538
------------ ------------ ------------
Operating income 2,131,562 1,923,218 970,754
Other income (expense):
Interest expense, net 266,548 157,520 123,072
Other, net 5,883 1,180 2,822
------------ ------------ ------------
Income before income taxes 1,870,897 1,766,878 844,860
Income taxes 566,115 777,569 273,878
------------ ------------ ------------
Net income before preferred dividend 1,304,782 989,309 570,982
Preferred stock dividend 20,000 7,640 -
------------ ------------ ------------
Net income (including the effect of a change in
accounting principle for 1998) 1,284,782 981,669 570,982
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 $ 1,284,782 $ 227,373 $ 570,982
============ ============ ============
Income per share:
Basic weighted average shares outstanding 334,155,087 294,251,063 270,014,801
Basic income per share--prior to accounting
change $ 0.004 $ 0.003 $ 0.002
Cumulative effect of accounting change - (0.002) -
------------ ------------ ------------
Basic income per share available for common $ 0.004 $ 0.001 $ 0.002
============ ============ ============
Fully diluted weighted average shares
outstanding 334,558,354 294,251,063 270,126,740
Fully diluted income/share-prior to acct
change $ 0.004 $ 0.003 $ 0.002
Cumulative effect of accounting change - (0.002) -
------------ ------------ ------------
Fully diluted income per share $ 0.004 $ 0.001 $ 0.002
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 707,264 $ 1,751,299 $ 118,887
Trade accounts receivable, net of allowance
for doubtful accounts of $136,029, $134,169
and $50,000, respectively 11,210,659 8,205,563 3,937,645
Other receivables 358,861 111,365 16,097
Costs and estimated earnings in excess of
billings on uncompleted contracts 10,968,967 3,623,538 2,695,782
Income taxes receivable - 60,960 34,995
Inventories 888,102 318,458 380,128
Prepaid expenses 279,459 164,304 126,031
------------ ------------ ------------
Total current assets 24,413,312 14,235,487 7,309,565
------------ ------------ ------------
Property and equipment, net 768,821 625,309 604,578
Intangibles, net of amortization 30,242 41,246 52,250
Deposits 51,555 106,020 13,086
Restricted assets, certificate of deposit - - 222,836
------------ ------------ ------------
$ 25,263,930 $ 15,008,062 $ 8,202,315
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 1,935,394 $ 1,036,159 $ 137,865
Accounts payable 13,718,901 7,366,472 4,685,568
Accrued liabilities 1,916,508 1,884,950 638,821
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,304,863 1,686,168 499,594
Income taxes payable 586,793 213,611 -
Deferred income taxes 10,517 106,632 123,778
------------ ------------ ------------
Total current liabilities 19,472,976 12,293,992 6,085,626
------------ ------------ ------------
Long-term debt 1,989,390 1,137,076 923,958
Deferred income taxes 55,368 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 100 100 100
Preferred stock, no par, 1,000 shares authorized;
250 shares issued and outstanding as of
December 31, 1999 and 1998 only; stated at
redemption value of $1,000 250,000 250,000 -
Common stock, $0.00001 par value; 800,000,000
shares authorized; 308,354,250, 294,854,250
and 294,050,000 shares issued and outstanding,
respectively 3,083 2,948 2,940
Capital in excess of par value 1,504,208 541,918 522,624
Retained earnings 1,988,805 704,023 476,650
------------ ------------ ------------
Total stockholders' equity 3,746,196 1,498,989 1,002,314
------------ ------------ ------------
$ 25,263,930 $ 15,008,062 $ 8,202,315
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income available for common shareholders: $ 1,284,782 $ 227,373 $ 570,982
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 204,852 174,712 142,223
Amortization 11,004 11,004 2,750
(Gain) Loss on disposition of fixed assets (1,392) 31,883 -
Increase (decrease) in deferred income taxes: (118,752) (129,558) 308,059
(Increase) decrease in working capital:
Trade accounts receivable (3,005,096) (4,267,918) (934,717)
Other receivables (295,262) (47,502) 36,337
Costs and estimated earnings in excess of
billings on uncompleted contracts (7,345,429) (927,756) (709,619)
Income taxes receivable 60,960 (25,965) (34,995)
Inventories (569,644) 61,670 (216,312)
Prepaid expenses (115,155) (38,273) (14,184)
Deposits 54,465 (92,934) (3,990)
Accounts payable 6,352,429 2,680,903 984,669
Income taxes payable 373,182 213,611 (167,513)
Accrued liabilities 31,558 1,246,129 173,793
Billings in excess of costs and estimated
earnings on uncompleted contracts (381,305) 1,186,574 347,015
------------ ------------ ------------
Net cash provided by (used in)
operating activities (3,458,803) 303,953 484,498
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in certificate of deposit - 222,836 (11,467)
Purchase of property and equipment (323,563) (227,325) (174,705)
Proceeds from sales of assets 20,000 - -
Purchase of intangibles - - (5,000)
Issuance of stockholder loan 47,766 (47,766) -
------------ ------------ ------------
Net cash (used in) investing activities (255,797) (52,255) (191,172)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Lines-of-credit draws 9,481,000 3,954,476 656,270
Lines-of-credit paydowns (7,494,000) (3,156,476) (759,537)
Issuance of common stock 962,425 19,302 5,604
Issuance (redemption) of preferred stock - 250,000 (2,000)
Proceeds from issuance of debt - 496,378 -
Repayment of debt (278,860) (182,966) (135,964)
------------ ------------ ------------
Net cash provided by (used in) financing
activities 2,670,565 1,380,714 (235,627)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,044,035) 1,632,412 57,699
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,751,299 118,887 61,188
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 707,264 $ 1,751,299 $ 118,887
============ ============ ============
</TABLE>
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 $395,183,
$167,420 and $141,598 for the years ended December 31, 1999, 1998 and 1997,
respectively. Cash paid for income taxes was $37,565 and $176,547 for the
year ended December 31, 1999 and 1998, respectively. Purchases of property
using debt totaled $43,410 for the year ended 1999.
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Capital in Retained
Preferred Stock Series a & B common stock 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
Stock issued
September 29, 1999 --- --- --- --- 13,500,000 135 962,290 --- 962,425
Net income available
for common --- --- --- --- --- --- --- 1,284,782 1,284,782
---- ------ --------- -------- ----------- ------- ---------- ---------- ----------
BALANCE,
DECEMBER 31, 1999 --- $ --- 1,000,250 $250,000 308,354,250 $ 3,083 $1,504,208 $1,988,805 $3,746,196
==== ====== ========= ======== =========== ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
COMPANY HISTORY
- ---------------
Global Water Technologies, Inc. ("GWT") 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, GWT 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, GWT and Psychrometric Systems, Inc. ("PSI")
consummated an Agreement and Plan of Reorganization whereby GWT acquired
all of the issued and outstanding common shares of PSI in exchange for the
issuance of 261,382,500 shares of GWT'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 GWT
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 $.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.
GWT, through its wholly owned subsidiary, PSI, is in the business of
designing, selling, manufacturing and building new industrial water cooling
towers and in retrofitting existing industrial water cooling towers and
cooling tower components. PSI is the main operating entity of GWT and
represents approximately 100% of its revenue.
GWT, through another wholly owned subsidiary, Applied Water Technologies,
Inc. ("AWT") is in the business of providing environmentally sound water
treatment services to the cooling tower market. Global Water Services,
Inc., another wholly owned GWT subsidiary, is in the business of providing
total cooling water management services to cooling tower customers.
On November 5, 1997, and subsequent to its reverse merger with PSI, GWT
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 "GWT" on
that date.
F-6
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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.
REVENUE AND COST RECOGNITION
- ----------------------------
The Company recognizes revenues on service contracts when the services are
rendered.
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.
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
F-7
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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. On December 31, 1999, there were
3,018,760 warrants and options that were considered dilutive securities.
As of December 31, 1998, there were no existing dilutive common shares.
Only 804,250 options, which were exercised in October 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. The company files a
consolidated tax return for federal and for most state jurisdictions.
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,
1999 and 1998, cash equivalents included $254,175 and $441,133, respectively,
in amounts restricted to the payment of vendor obligations on specific projects.
F-8
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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
$408,402, $319,805 and $308,708 for the years ended December 31, 1999, 1998
and 1997, respectively.
PROPERTY AND EQUIPMENT
- ----------------------
The principal 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 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. For the year
ending December 31, 1999, the Company had a major customer accounting for
39.8% of revenues. 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 one major project
F-8
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
with one customer included in its December 31, 1999, backlog which
represents approximately 17% of its total backlog.
RECLASSIFICATIONS
- -----------------
Certain amounts as of or for the years ended December 31, 1997 and 1998
have been reclassified to conform with the December 31, 1999, presentation.
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31,
1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Office furniture and equipment $ 893,132 $ 623,383 $509,819
Machinery and equipment 224,120 192,646 178,092
Vehicles 213,098 209,307 186,455
Leasehold improvements 39,610 29,729 53,394
---------- ---------- --------
$1,369,960 $1,055,065 $927,760
Less accumulated depreciation 601,139 429,756 323,182
---------- ---------- --------
Property and equipment, net $ 768,821 $ 625,309 $604,578
========== ========== ========
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.
F-10
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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.
On February 22, 2000, the Company authorized the issuance of 876,341 shares
of Series C Preferred Stock at no par and zero redemption value. These
shares were issued in exchange for 876,341 shares of Series A Preferred
Stock. The Series A Preferred Stock would have converted into 254,138,890
upon the filing of the Company's 10-KSB for the fiscal year ended December 31,
1999. The Series C Preferred Stock will automatically convert into
Common stock at a ratio of 290:1 upon a change in control of the Company.
The remaining 123,659 shares of Series A Preferred Stock converted into
35,861,110 upon the filing of the Company's 10-KSB for December 31, 1999.
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.
On September 29, 1999, the Company concluded its Private Placement with the
issuance of 13,500,000 shares, a corresponding 13,500,000 Class C warrants,
1,350,000 underwriter warrants (Class C) and an option to acquire an
additional 1,350,000 shares and warrants. Gross proceeds were $1,080,000
while net proceeds after fees, commissions and expenses were $962,425. The
Class C warrants are exercisable at $.158 per share and expire on February 18,
2002.
WARRANTS AND OPTIONS
- --------------------
Immediately prior to the merger, the shareholders of GWT 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, 2000, have been extended to April 14, 2001.
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.
F-11
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
COMPREHENSIVE INCOME
- --------------------
The Company has no items requiring separate disclosure pursuant to
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income.
5. EMPLOYEE STOCK OPTIONS
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. Management granted 4,968,800 options to employees on
March 8, 1999.
The Company granted the aforementioned stock options to employees at a
strike price of $.08 per share when the Company's stock traded at $.07.
The options vest to employees in the following manner: 20% immediately and
20% each year over the next four years measured from the grant date. If an
employee leaves the Company for any reason prior to the shares being
vested, then the remaining non-vested shares are forfeited. No options
were exercised during the year.
OPTION ACTIVITY
- ---------------
Outstanding at January 1, 1999 -0-
Granted March 8, 1999 4,968,800
Forfeited (348,480)
---------
Outstanding at December 31, 1999 4,620,320
=========
Exercisable at December 31, 1999 993,760
=========
Under FAS 123, Accounting for Stock Based Compensation, the measurement of
fair value utilizing an option pricing model at the date of grant is based
upon, among other criteria, the applicable exercise price, the current
stock value, the estimated exercise date of the options, the vesting
schedule, the estimated forfeitures, the risk-free rate of return, the
volatility of the stock underlying the options and adjustments to the above
pertaining to specific Company circumstances. The fair value of the above
employee stock options utilizing a Black-Scholes option pricing model is
$121,855. The assumptions underlying the calculation of the fair value was
a 75% volatility, a risk-free rate of return of 5.5% over the life of the
options, a forfeiture rate of 10% per year and an exercise of options after
the stock is vested. These amounts have not been reflected in income since
the Company is accounting for stock based compensation in accordance with
APB-25.
F-12
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
The pro-forma effect of utilizing the fair value based accounting to
measure stock based compensation would be the following:
1999
----
Pro-form net income $1,197,555
Pro-forma basic income per share $0.004
Pro-forma fully diluted income per share $0.004
6. BACKLOG
The following 1999 schedule summarizes changes in backlog on contracts
during the years ended December 31, 1999, 1998 and 1997. Backlog
represents the amount of revenue the Company expects to realize from work
to be performed on uncompleted contracts.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Backlog, beginning of year $27,155,058 $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 61,774,341 53,142,019 24,163,772
Contract revenues earned during the
year (68,083,291) (34,744,478) (18,697,292)
----------- ----------- -----------
Backlog, end of year $20,846,108 $27,155,058 $11,606,245
=========== =========== ===========
</TABLE>
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.
7. 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 portion of 36,740 square foot
office building in Golden, Colorado, for the Company's expanding office
space requirements. The lease required the Company to pay rent at a rate
of $21,454 per month for the 34-month lease. Gross operating expenses for
the building approximated $20,000 per month, of which Mr. Kast was
personally responsible for the payment of approximately $5,000 per month,
which was paid by the Company. As of December 31, 1998, the Company had
recorded a note receivable from Mr. Kast related to the operating costs of
the facility for which Mr. Kast was responsible for $47,766. This note
bears interest at 8% per annum and was due no later than September 30,
1999. This note was repaid in installments during 1999 and the Company
received the last payment on October 6, 1999.
F-13
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
During December 1999, Mr. Kast, through an affiliated entity, GK Holdings,
Inc., exercised his option to purchase the office building in which GWT's
principal offices are located. On December 31, 1999, GWT and GK Holdings
entered into a ten-year lease of the building, commencing January 1, 2000.
The triple-net lease requires monthly rental payments of $53,538 per month.
The Company believes that the terms of the lease are no less favorable to
GWT than comparable office space in the area of our offices. GWT subleases
the garden level of the building for approximately $12,600 per month to
unaffiliated entities at varying monthly rentals. All of the subleases
have terms of twelve months or less.
The Company had a 60-month lease for its former office space in Lakewood,
CO, for approximately $14,519 per month, and which expired 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 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 Company signed a 12-
month lease for this facility with renewal options in January of 2000.
The following is a schedule by year of future minimum lease payments
required under these leases:
2000 $ 657,312
2001 653,598
2002 642,456
2003 642,456
2004 642,456
Thereafter 3,212,280
----------
In the aggregate $6,450,558
==========
Rent expense totaled $377,443, $450,171 and $243,272 for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-14
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
8. LONG- AND SHORT-TERM DEBT
The Company has negotiated a line of credit with Norwest Bank totaling
$1,800,000. The line-of-credit is secured by a stockholder's personal
certificates of deposit of $773,233 and certain business assets. The line
of credit has a tiered rate of 6.69% on the first $770,000 and 9.5% on the
remaining portion and matures on January 15, 2001.
In March of 2000, the Company negotiated a line of credit with Norwest Bank
totaling $500,000. This line of credit has an interest rate of 9.5% and is
due in June of 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, 1999, 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, 1999. The
international line of credit matures on September 15, 2000.
The following is a summary of the future maturities of debt for the years
ending December 31:
2000 $1,935,394
2001 1,832,921
2002 103,747
2003 44,131
2004 8,591
The following is a summary of the long- and short-term debt as of December 31,
1999, 1998 and 1997:
F-15
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Norwest Bank, Lakewood, CO:
--Line-of-credit--domestic $1,725,000 $ 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, interest at 1% above
prime 1,805,000 793,000 ---
--Small Business Administration 90%
guaranteed loan--payable in monthly
installments of $8,334 plus interest
at 1.0% above prime rate; secured by
furniture and equipment, inventory,
accounts receivable and assignment
of life insurance policy 596 109,423 199,841
--Small Business Administration 90%
guaranteed loan--payable in monthly
installments of $7,917 plus interest
at 1.0% above prime rate; secured by
furniture and equipment, inventory,
accounts receivable and assignment of
life insurance policy 319,614 423,310 ---
First Interstate Bank--payable in monthly
installments of $912, including interest
at 9.5%; secured by a vehicle --- 23,505 31,741
Ford Motor--payable in monthly installments
of $893, including interest at 8.49%,
secured by a vehicle 42,244
GMAC--various--payable in monthly
installments ranging from $361 to $577,
including interest ranging from 9.75% to
10.75%; secured by seven vehicles 32,330 73,997 85,241
---------- ---------- ----------
3,924,784 2,173,235 1,061,823
Less current maturities included in
current liabilities 1,935,394 1,036,159 137,865
---------- ---------- ----------
Net long-term debt $1,989,390 $1,137,076 $ 923,958
========== ========== ==========
</TABLE>
9. INCOME TAXES
The components of the net deferred tax liability at December 31, 1999, 1998
and 1997 are as follows:
F-16
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred revenue under section 481 $ -- $ 150,574 $ 277,556
Property and equipment 61,685 68,006 26,639
Other 15,000 10,000 25,000
---------- ---------- ----------
Total deferred tax liabilities $ 76,685 $ 228,580 $ 329,195
========== ========== ==========
Deferred tax assets:
Accounts receivable allowance $ 10,800 $ 43,943 $ 15,000
---------- ---------- ----------
Total deferred tax assets $ 10,800 $ 43,943 $ 15,000
---------- ---------- ----------
Net deferred tax liabilities $ 65,885 $ 184,637 $ 314,195
========== ========== ==========
</TABLE>
The provision for income taxes consisted of the following at December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes currently payable $ 686,557 $ 313,324 $ 130,627
Deferred income taxes (228,763) (129,558) 143,251
Increase (decrease) in other, net (1,690) 684 --
Tax effect of accounting change -- 593,119 --
---------- ---------- ----------
Income tax expense $ 566,115 $ 777,569 $ 273,878
========== ========== ==========
</TABLE>
The differences between the federal income tax rate of 34% and the Company's
effective tax rate were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Taxes at the U.S. statutory rate $ 636,105 $ 600,739 $ 287,253
State income taxes,
net of federal income tax benefit 37,044 58,307 25,543
Foreign sales corporation (175,270) (31,827) (48,243)
Non-deductible items 39,411 10,780 9,325
Adjustment in effective tax rate
estimates for timing differences 34,025 129,076 --
Prior year under (over) accrual--net (5,200) 10,494 --
---------- ---------- ----------
Provision for income taxes $ 566,115 $ 777,569 $ 273,878
========== ========== ==========
</TABLE>
10. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts at December 31, 1999, 1998 and 1997, are summarized
as follows:
F-17
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Costs incurred to date $53,062,731 $20,040,123 $ 9,858,349
Gross profit recognized to date 7,342,093 4,136,042 4,499,694
----------- ----------- -----------
Total costs plus gross profit to
date $60,404,824 $24,176,165 $14,358,043
Billings to date 50,740,720 22,238,795 12,161,855
----------- ----------- -----------
$ 9,664,104 $ 1,937,370 $ 2,196,188
=========== =========== ===========
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on uncompleted
contracts $10,968,967 $ 3,623,538 $ 2,695,782
Billings in excess of costs and
estimated earnings on uncompleted
contracts 1,304,863 1,686,168 499,594
----------- ----------- -----------
$ 9,664,104 $ 1,937,370 $ 2,196,188
=========== =========== ===========
</TABLE>
11. 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.
12. ACCRUED LIABILITIES
The accrued liabilities consist of the following as of December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Payroll taxes payable $ 78,876 $ 101,940 $ 6,175
Accrued commissions payable 810,690 779,038 398,484
Accrued salaries and vacations 272,174 395,938 122,036
Sales tax payable 524,129 95,489 57,097
Accrued workers compensation - 98,297 19,652
Other accrued liabilities 230,639 414,248 35,377
---------- ---------- ----------
$1,916,508 $1,884,950 $ 638,821
========== ========== ==========
</TABLE>
F-18
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
13. LITIGATION AND CLAIMS
The Company has a series of unapproved change order requests pending
against a customer for a project completed in 1999. Discussions and
negotiations with this customer concerning these change order requests are
ongoing. The customer has offered to settle the amount for less than the
Company's requests. The Company believes that a favorable resolution of
this matter will occur and will not be materially detrimental to the
Company's financial condition.
There are no other litigation or claim matters which the Company believes
are material. The Company believes it has appropriate reserves for these
and other unanticipated claims.
14. 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, 1999, 1998 and 1997, the Company did not make any
contributions to the plan.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's debt at December 31, 1999, 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.
On November 5, 1999, the Company entered into a forward Foreign Exchange
sales contract that was outstanding as of December 31, 1999, in the amount
of 1,000,000 CAD to be delivered on May 31, 2000, for $677,507 USD. This
financial instrument is designated as a hedge against a firm contract for
Canadian dollars to be delivered in the Company's ordinary course of
business. The Company has not yet adopted FAS 133, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. The market value of
a similar financial instrument as of December 31, 1999, was approximately
$652,330, an unrealized gain of $25,177.
F-19
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Based on a volatility of 5.8% for Canadian dollar exchange rate vis-a-vis
the U.S. dollar, a 95% confidence interval for the remaining time on the
financial instrument would equate to a contract range of $579,450 to
$725,210 over the remaining life of the instrument.
16. RELATED PARTY TRANSACTIONS
A stockholder has pledged two personal certificates of deposit in the
amount of $773,233 as security for the Company's line-of-credit. For the
years ended December 31, 1999, 1998 and 1997, the Company authorized fees
of $137,567, $48,784, and $48,784, respectively, to the stockholder for
this pledge. These amounts are included in interest expense.
The Company leases a research and testing facility from a stockholder with
monthly payments of $1,238. For the years ended December 31, 1999, 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 36,740 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 note was repaid in installments during 1999.
17. BUILDING PURCHASE/LEASE
During December 1999, Mr. Kast, through an affiliated entity, GK Holdings,
Inc., exercised his option to purchase the office building in which GWT's
principal offices are located. On December 31, 1999, GWT and GK Holdings
entered into a ten-year lease of the building, commencing January 1, 2000.
The triple-net lease requires monthly rental payments of $53,538 per month.
The Company believes that the terms of the lease are no less favorable to
GWT than comparable office space in the area of our offices. GWT subleases
the garden level of the building for approximately $12,600 per month to
unaffiliated entities at varying monthly rentals.
F-20
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
18. 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 $7,818,880, $5,241,036 and $3,777,426 for
the Fiscal years 1999, 1998 and 1997, respectively. The following schedule
summarizes the segmentation of the international and domestic business
segments for the years ended December 31, 1999, 1998 and 1997.
BUSINESS SEGMENT STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999
----
DOMESTIC INTERNATIONAL OTHER TOTAL
-------- ------------- ----- -----
<S> <C> <C> <C> <C>
Revenues $60,134,087 $7,818,880 $ -- $67,952,967
Costs 56,813,958 4,037,882 4,969,565 65,821,405
Segment profit (loss) 3,320,129 3,780,998 (4,969,565) 2,131,562
Assets 17,994,559 5,711,489 1,557,882 25,263,930
</TABLE>
<TABLE>
<CAPTION>
1998
----
DOMESTIC INTERNATIONAL OTHER TOTAL
-------- ------------- ----- -----
<S> <C> <C> <C> <C>
Revenues $29,486,771 $5,247,569 $ -- $34,734,340
Costs 23,247,579 4,568,558 4,994,985 32,811,122
Segment profit (loss) 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-21
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 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 (loss) 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>
19. SUBSEQUENT EVENTS
On February 24, 2000, the Company announced that revenues would exceed
sixty million in fiscal year 1999 which would trigger the conversion of
outstanding Series A Preferred Stock. Concurrently, the Company announced
that George Kast had exchanged his Series A Preferred Stock for Series C
Preferred Stock. Subsequent to the announcement, the Company's stock price
has experienced considerable trading activity and has traded as high as
$.74 per share. At the current pricing levels for the Company's stock, all
of the outstanding warrants and options previously discussed are "in-the-
money." Through March 17, 2000, the Company has received $676,800 in the
exercise of outstanding C warrants and placement agent options.
20. 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 $0.0030 $(0.0001)
======= =========
Fully diluted income per share $0.0030 $(0.0001)
======= =========
F-22
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
21. SUBSEQUENT EVENTS--UNAUDITED
Through April 30, 2000, the Company has received a total of $2,183,261 from
the exercise of outstanding C warrants, placement agent options and
employee stock options.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Global Water Technologies, Inc.
Our audits of the consolidated financial statements of Global Water
Technologies, Inc. as of December 31, 1999, 1998 and 1997 referred to in
our report dated February 18, 2000, and included elsewhere herein also
included an audit of the accompanying financial statement schedule. In our
opinion, the accompanying financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Denver, Colorado
February 18, 2000
/S/ COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F-24
<PAGE>
FINANCIAL STATEMENT SCHEDULE UNDER REGULATION SX
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts 1999 $134,169 $425,493 $0 $423,633 $136,029
1998 50,000 218,054 $0 133,885 134,169
1997 10,000 165,840 $0 125,840 50,000
</TABLE>
F-25
<PAGE>
GLOBAL WATER TECHNOLOGIES, INC.
8,725,000 Shares
_____________________
PROSPECTUS
_____________________
_______________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant, other than the
warrant solicitation fee, in connection with the issuance and distribution
of the securities being offered. All expenses are estimated except the
registration fee.
Registration and filing fee . . . . . . . . . . . . . . . . $ 1,093
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . 937
Printing. . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Accounting fees and expenses. . . . . . . . . . . . . . . . 1,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . 10,000
Blue Sky fees and filing fees . . . . . . . . . . . . . . . 1,000
Transfer and Warrant Agent fees . . . . . . . . . . . . . . 970
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 5,000
-------
Total (1) . . . . . . . . . . . . . . . . . . . . . . . . . $21,000
=======
___________________
(1) All amounts listed above are estimates, except for the filing fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. The Delaware Business Corporation Act (the "Act") allows
indemnification of directors, officers, employees and agents of the Company
against liabilities incurred in any proceeding in which an individual is
made a party because he was a director, officer, employee or agent of the
Company if such person conducted himself in good faith and reasonable
believed his actions were in, or not opposed to, the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A person must be
found to be entitled to indemnification under this statutory standard by
procedures designed to assure that disinterested members of the Board of
Directors have approved indemnification or that, absent the ability to
obtain sufficient numbers of disinterested directors, independent counsel
or shareholders have approved the indemnification based on a finding that
the person has met the standard. Indemnification is limited to reasonable
expenses. In addition, the Company's By-Laws provide that the Company
shall have the power to indemnify its officers, directors, employees and
agents to the extent permitted by the Act.
B. The Certificate of Incorporation and the Bylaws of the Registrant
provide that the Registrant will indemnify its officers and directors for
costs and expenses incurred in connection with the defense of actions,
suits or proceedings where the officer or director acted in good faith and
in a manner he reasonably believed to be in the Registrant's best interest
and is a party by
II-1
<PAGE>
reason of his status as an officer or director, absent a finding of
negligence or misconduct in the performance of duty.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have sold and issued our securities to
the following persons for the cash or other consideration indicated in
transactions that were not registered under the Securities Act of 1933.
I.
In September 1997, we issued 1,500,000 shares of Common Stock to each
of Ronald J. Miller and Frank L. Kramer, our sole officers and directors at
the time of the issuance, in consideration of past services rendered to us,
which services were determined by the Board of Directors to have a value of
$15,000 each, or $30,000 in the aggregate. We deemed these transactions to
be exempt from registration pursuant to the exemption provided by Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"). The
certificates representing these shares were impressed with a restrictive
legend and "stop transfer" instructions were placed by our transfer agent
against the transfer of the certificates.
II.
In connection with our acquisition of Psychrometric Systems, Inc.
("PSI") on September 25, 1997, we issued 261,382,500 shares of Common Stock
to the officers, directors and shareholders of PSI in consideration for all
of the outstanding shares of PSI.
We deemed the issuance of our shares to the PSI shareholders to be
exempt from registration pursuant to the exemption from registration
provided by Section 4(2) of the 1933 Act and/or Regulation D and Rule 506
adopted thereunder. All recipients of our Common Stock were shareholders
of PSI and either officers, directors and/or employees. No broker/dealers
were involved in the sale and no commissions were paid. All purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Our transfer agent placed "stop transfer" instructions
against the transfer of these certificates.
III.
In November 1997, we issued 625,000 shares of Common Stock to Donald
W. Poitras in consideration of Mr. Poitras executing a five year covenant
not to compete with the Registrant. In October 1997, we purchased certain
equipment, including casts/dies, furniture and equipment and other
inventory, from Mr. Poitras' company, Texas Cooling Tower. Mr. Poitras had
been in
II-2
<PAGE>
the cooling tower business in Texas prior to the sale of the equipment to
us. The issuance of the stock to Mr. Poitras was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. The
certificate issued to Mr. Poitras was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established and "stop
transfer" instructions were placed against the transfer of his certificate.
IV.
In October 1998, we issued 804,250 shares of Common Stock, 804,250
Class A Common Stock Purchase Warrants and 804,250 Class B Common Stock
Purchase Warrants to John P. O'Shea, Daniel Luskind and Henry S. Krauss
pursuant to the exercise of warrants to purchase Common Stock, Class A
Warrants and Class B Warrants granted to these individuals in October 1997.
The warrants were granted in replacement for identical Common Stock
purchase warrants which were originally granted to Messrs. O'Shea, Luskind
and Krauss, principals of Westminster Securities Corporation, the
underwriter of our initial public offering in 1992, which had expired. The
issuance of the securities upon exercise of the warrants was made in
reliance upon the exemption from registration provided by Section 4(2) of
the 1933 Act. No broker/dealers were involved in the sale and no
commissions were paid. The certificates issued to Messrs. O'Shea, Luskind
and Krauss were impressed with a restrictive legend advising that the
securities represented by the certificates may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established. Our transfer
agent placed "stop transfer" instructions against the transfer of these
certificates.
V.
In February 1999, we issued a warrant to purchase 1,050,000 shares of
Common Stock to Magnum Financial Group in connection with our retention of
that firm as our financial consultant. The warrant is exercisable over a
period of three years at prices ranging from $0.08 to $0.12 per share. The
warrant was issued in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved
in the sale and no commissions were paid.
VI.
In March 1999, we granted options to purchase 4,968,800 shares of
Common Stock to our employees. The options are exercisable over a 5-year
period at $0.08 per share. Through April 30, 2000, 117,640 of these
options have been exercised and 366,780 options were forfeited. In
February 2000, we granted options to purchase 6,272,300 shares of Common
Stock to our employees. The options are exercisable over a 5-year period
at $0.125 per share. The options
II-3
<PAGE>
were issued in reliance upon the exemption from registration provided by
Section 4(2) of the 1933 Act. No broker/dealers were involved in the
issuance and no commissions were paid.
VII.
In September 1999, we issued and sold 54 Units, each of which
consisted of 250,000 shares of Common Stock and 250,000 Class C Common
Stock Purchase Warrants, to 24 accredited investors. The Units were sold
in reliance upon the exemption from registration provided by Section 4(2)
of the 1933 Act and Rule 506 adopted thereunder. All purchasers were
accredited investors. The certificates issued to the purchasers were
impressed with a restrictive legend, and our transfer agent was advised to
place "stop transfer" instructions against the transfer of these
certificates. The placement agent for the offering was Westminster
Securities Corporation, which received compensation in the form of
commissions equal to 8% of total proceeds and a 2% non-accountable expense
allowance. In addition, the placement agent, or its designees, received
1,350,000 Class C Warrants and an option to purchase 1,350,000 shares and
1,350,000 Class C Warrants. Through April 30, 2000, the placement agent
option was exercised and Class C Warrant holders exercised 13,075,000 Class
C warrants.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, dated July 12, 1990 (1)
3.2 Certificate of Designations of Preferred Stock, filed September 25,
1997(4)
3.3 Certificate of Amendment to the Certificate of Incorporation,
filed 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. (6)
3.7 Certificate of Designations of Preferred Stock (Series C), filed
with the State of Delaware on February 24, 2000. (8)
II-4
<PAGE>
5.1 Opinion of Rothgerber Johnson & Lyons LLP with respect to the
legality of the shares of Common Stock to be issued upon exercise
of the Warrants.(7)
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 (6)
10.7 Registration Rights Agreement dated as of July 12, 1999 (7)
10.8 Real Property Lease, dated December 30, 1999, between GK
Holdings, Inc. and Global Water Technologies, Inc. (7)
18 Letter, dated November 19, 1998, from Comiskey & Company, P.C.
re: change in accounting principles (5)
21 Subsidiaries of the Company
24.1 Consent of Rothgerber Johnson & Lyons LLP (included in Exhibit 5.1)
24.2 Consent of Comiskey & Company, P.C.
________________________
(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 of the same number filed as
an exhibit to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(5) Incorporated by reference to the Exhibit of the same number filed as
an exhibit to the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1998.
(6) Incorporated by reference to the Exhibit of the same number filed as
an exhibit to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
II-5
<PAGE>
(7) Filed as an Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (No. 333-89857), and incorporated herein by
reference.
(8) Filed as an Exhibit of the same number to the Registrant's Current
Report on Form 8-K, dated February 24, 2000, and incorporated herein
by reference.
ITEM 17 UNDERTAKINGS
The undersigned Registrant will:
(a)(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act; (ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and (iii) include any additional or changed
material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and authorized this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Golden, State of Colorado, on
May 8, 2000.
GLOBAL WATER TECHNOLOGIES, INC.
May 8, 2000 By: /s/ GEORGE A. KAST
-----------------------------------------
George A. Kast, President, Chief
Executive Officer and Director
In accordance with the requirements of the Securities Exchange Act of
1933, this registration statement was signed by the following persons in
the capacities and on the dates stated.
Signatures Title Date
- ---------- ----- ----
/s/ George A. Kast President, Chief Executive May 8, 2000
- ------------------------ Officer, (Principal Executive
George A. Kast Officer) and Chairman of the Board
/s/ Martin E. Hout Chief Financial Officer May 8, 2000
- ------------------------ (Principal Financial and
Martin E. Hout Accounting Officer)
/s/ Gary L. Brown Secretary and Director May 8, 2000
- ------------------------
Gary L. Brown
/s/ Michael A. Kast Director May 8, 2000
- ------------------------
Michael A. Kast
Director May _, 2000
- ------------------------
Robert C. Koch
II-7
EXHIBIT 21
SUBSIDIARIES OF THE ISSUER
Psychrometric Systems, Inc.
Incorporated in Nevada
Global Water Technologies Foreign Sales
Corporation, Inc.
Incorporated in St. Thomas, V.I.
Applied Water Technologies, Inc.
Incorporated in Nevada
Global Water Services, Inc.
Incorporated in Nevada
EXHIBIT 24.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this registration statement on Form S-1 of our
report dated February 18, 2000 on the financial statements of Global
Water Technologies, Inc., and to references in the prospectus to our firm
as experts in accounting and auditing.
/S/ COMISKEY & COMPANY
PROFESSIONAL CORPORATION
Denver, Colorado
May 8, 2000
