U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended November 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________________________
Commission file number 1-12556
TOWER TECH, INC.
(Name of small business issuer in its charter)
Oklahoma 73-1210013
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rural Route 3, PO Box 1838, Chickasha, Oklahom 73023
(Address of principal executive of (Zip Code)
Issuer's telephone number 405/222-2876
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
common stock, par value $.001 Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $18,636,527
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act). $18,914,704 based on 1,823,104 shares at $10.375 per share, the last sale
price of the Common Stock on February 19, 1997.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 3,370,368 shares as of
February 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The list documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990). Items 9 through 12 of Part III of this Form 10-KSB are incorporated by
reference from the Issuer's definitive proxy statement to be filed on or before
March 31, 1997.
Transitional Small Business Disclosure Format (check one). Yes No X
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TABLE OF CONTENTS
Part I
Item 1. Business..................................................4
Item 2. Properties.....................................................9
Item 3. Legal Proceedings..............................................9
Item 4. Submission of Matters to a Vote of Security Holders............9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................10
Item 7. Financial Statements...........................................14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................14
Part III
Item 9. Directors and Executive Officers of the Registrant.............16
Item 10. Executive Compensation.........................................16
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................16
Item 12. Certain Relationships and Related Transactions.................16
Part IV
Item 13. Exhibits and Reports on Form 8-K...............................17
Financial Statements...........................................F-1
Index to Exhibits..............................................22
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PART I
Item 1. Description of Business.
The Company is in the business of manufacturing and selling modular
cooling towers. Its TTMT Series cooling tower is made primarily of fiberglass
reinforced plastic and is sold in both the air conditioning and industrial
segments of the cooling tower market. The Company has also recently introduced a
modular concrete cooling tower for the industrial and utility segments of the
cooling tower market. The Company's TTMT Series cooling tower utilizes several
innovative design features, including the Rotary Spray Nozzle, a bottom-mounted
direct drive motor fan assembly and a modular design to create a compact,
efficient cooling tower which management believes reduce many deficiencies
associated with other cooling towers, which do not incorporate all of these
design features. Individual modules can be utilized for small air conditioning
or light industrial applications, and the modular design allows a number of
modules to be connected in a series for large industrial or utility
applications. Compact design of the modules permits them to be factory
assembled, inventoried for immediate shipment, easily transported and quickly
installed. The design of the TTMT Series cooling tower allows it to be
transported as a complete module on a standard low boy trailer. The new modular
concrete tower features tilt-up concrete construction and incorporates many of
the innovative characteristics of the TTMT Series cooling tower. The Company
also leases TTMT Series modules to customers for temporary or emergency use.
The Company was founded in 1984 by Mr. Harold Curtis and has been in the
business of building, repairing and upgrading forced draft and induced draft
cooling towers since 1985. Although the Company has the resources to compete in
this aspect of the cooling tower business, the Company is not focusing on the
construction, repair or maintenance of conventional cooling towers. Management
believes that the Company's modular cooling towers can be competitively marketed
to those customers who would otherwise be in the market for a cooling tower of
standard design or for repair or upgrade of such cooling towers. In 1989, the
Company developed a mobile auxiliary cooling tower and constructed a fleet of
mobile towers for lease to customers. In October 1992, the Company sold its
fleet of mobile auxiliary cooling towers and related patents. A portion of the
proceeds from this sale were used to fund development of the TTMT Series cooling
tower. In 1990, Mr. Curtis began developing a spray nozzle for use in cooling
towers which was intended to operate more efficiently and with fewer maintenance
requirements than nozzles which were currently available. As a result of this
development activity, the Rotary Spray Nozzle was completed in 1991 and patents
were issued on the technology in 1992. The Company has been selling the Rotary
Spray Nozzle to its competitors since 1992, primarily for replacement parts in
cooling towers of standard design, and has also incorporated the Rotary Spray
Nozzle into its cooling towers. In 1991, the Company began initial design and
prototyping of a modular cooling tower which used the Rotary Spray Nozzle. The
end result of this process was the Company's line of TTMT Series cooling towers.
During fiscal 1995, the Company expanded its product line by developing a
modular concrete tower for application to the industrial and utility segments of
the cooling tower market.
The Cooling Tower Market
The market for cooling towers can be broken down into three general
market segments: the air conditioning or HVAC segment, the light to medium
industrial segment, and the heavy industrial and utility segment. Although all
cooling towers work on the same basic principles, cooling towers generally are
divided into two categories: (1) factory assembled units and (2) field erected
cells. Factory assembled cooling towers are shipped to the customer as a
completed unit and typically are sold to HVAC and light to medium industrial
users. In the HVAC segment of the market, cooling towers are sized from 30 to
500 nominal tons. Light to medium industrial applications require cooling towers
with capacities ranging from 500 to 10,000 gallons per minute ("GPM"). GPM is
the standard unit of measurement in the industrial segment, while the HVAC
segment denominates capacity in nominal tons. One ton is approximately
equivalent to three GPM. Because of shipping and other technical constraints,
factory assembled units ordinarily range in size from 30 to 500 nominal tons.
Field erected cooling towers are constructed on site and typically are sold to
medium and heavy industrial and utility users. Heavy industrial applications
require cooling towers sized from 10,000 to 100,000 GPM, while utility
applications range from 30,000 to 200,000 GPM.
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Cooling towers can range in price from less than $20,000 for a 500
nominal ton unit intended for HVAC use to $1,000,000 or more for a cooling tower
fabricated to meet the specifications of a heavy industrial or utility customer.
Accurate information about cooling tower industry sales is difficult to obtain
because many cooling tower companies are privately held or are divisions of
large companies. In addition, the size of the new cooling tower market can be
understated because the refurbishment or rebuilding of a cooling tower in some
cases essentially entails the erection of a new cooling tower even though it may
not be characterized as a new cell. Limited market information is available from
the U.S. Department of Commerce and from private studies. Based on this limited
information and management's evaluation of the market, management estimates that
the total annual United States cooling tower market ranges from $200 million to
$300 million and that the total annual worldwide market ranges from $600 million
to $700 million.
The TTMT Series Cooling Tower
Cooling towers come in a variety of sizes, prices, designs and quality.
Small capacity cooling towers intended for HVAC use typically are forced draft
or induced draft towers which may be constructed of wood, galvanized steel or
fiberglass. Most large capacity cooling towers used in the United States and
worldwide today are induced draft towers and are constructed primarily of wood.
These wood towers are usually constructed on a concrete water basin and have a
treated wood framework, which is sometimes clad with galvanized steel or
fiberglass. Internal components of conventional cooling towers are typically
made of wood, galvanized steel, stainless steel, fiberglass and plastic.
The TTMT Series cooling tower is designed to address many of the
deficiencies which management believes exist in the design of most other cooling
towers on the market. Management believes that the modular design and
interconnectability of the TTMT Series cooling tower is unique in the industrial
segment of the market. The TTMT Series cooling tower is energy efficient,
corrosive free, low maintenance and available for immediate delivery.
The modular design of the TTMT Series cooling tower allows a number of
units to be interconnected to meet almost any cooling requirements or
specifications. Other vendors offer small factory assembled cooling towers,
including units which incorporate fiberglass components and which can be
interconnected. However, most factory assembled units are forced draft towers
and interconnection of such towers exacerbates recirculation losses which are
typical of this type of tower. Thus, other factory assembled cooling towers have
limited application except in the HVAC segment and light end of the industrial
segment of the market. Most segments of the cooling tower market can be served
by the TTMT Series cooling tower from light HVAC applications to large
petrochemical and refinery operations.
Immediate delivery of the TTMT Series cooling tower is possible because
the modules are factory assembled and can be inventoried. Usually, there is only
one hour of installation time required per module. The concrete basin of most
field erected cooling towers is replaced in the TTMT Series cooling tower by a
self-contained fiberglass water basin. The TTMT Series cooling tower is
supported on a substructure which can either be customer provided fabricated
metal, concrete piers, or the Company's own FRP substructure. The modular design
also lends itself to shipping by standard trucking without over height permits.
The self-containerized module has been readily shipped to foreign customers as
well.
Management believes that a problem with some cooling towers manufactured
today arises from water distribution nozzles which tend to clog. Most nozzles
used in cooling towers today utilize an orifice/splash plate combination to
minimize the clogging problem. This design often exhibits void areas in the
water distribution which results in unnecessary performance deficiencies. These
deficiencies can be overcome to some degree by installing additional fill media
and/or designing a higher air inlet area in the cooling tower. This results in
additional capital investment as well as higher operating costs due to increased
pump head and fan horsepower requirements.
5
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To address this problem, Mr. Curtis designed and patented the Rotary
Spray Nozzle primarily for use in the TTMT Series cooling tower. The Rotary
Spray Nozzle is designed to operate clog-free even in severe operating
conditions. This nozzle utilizes a rotating disc that operates on a water
bearing to evenly distribute the flow throughout the entire fill area while
providing a self-cleaning action. The radial discharge design allows the nozzle
to operate as low as 1 inch above the fill media with lower operating pressure
than most conventional nozzles. Since conventional nozzles typically operate at
distances of up to 24 inches above the fill media, the Rotary Spray Nozzle adds
increased performance and significantly reduces pump head requirements.
In addition to reduced pump head requirements attributable to the Rotary
Spray Nozzle, the pump head requirement in the TTMT Series cooling tower is
reduced because the circulating water is collected in an elevated water basin
above the air inlet louvers. This results in reduced operating costs for the
TTMT Series cooling tower as compared to a comparably sized conventional cooling
tower.
The TTMT Series cooling tower was designed with a bottom mounted fan
system. Maintenance is greatly reduced by this design as the fans are direct
motor driven without gear boxes, drive shafts, and pulleys. Each module has four
fans which can be zoned to operate more efficiently. The mechanical equipment is
located in the dry air stream and is also protected from the natural elements by
the cooling tower itself. Service can be performed from ground level and
customer spare parts inventory is limited to one motor and one fan. In the event
of mechanical failure, the probability is that only one fan or motor would be
inoperable, enabling the continued operation of the remaining three fans until
repairs could be made.
The water collection system of the TTMT Series cooling tower consists of
a network of chevron type blades positioned in a canopy over the fans and
supported by internal FRP beams. The water is collected from the fill media and
discharged into hollow FRP support beams which serve as the water basin. There
are two levels of water collectors. The first level is for primary water
collection and the second level is to collect mist droplets and direct them back
into the water basin, which is designed to leave the fan area completely dry.
The fill media is nestled on top of the water collector vanes and is easily
installed or removed. The distribution system, consisting of a PVC header pipe
and laterals, is connected to the top of the module by molded end caps. The
drift (or mist) eliminators are supported by the distribution piping header and
laterals and locked into the molded perimeter wall channel.
The FRP construction of the TTMT Series cooling tower virtually
eliminates all significant corrosion problems. The wood structural components
used in many cooling towers are usually treated with chemicals and thus may be
environmentally undesirable. Galvanized metal parts also contain zinc and lead
which may lead to environmental problems. Corrosion and deterioration of the
wood and metal parts of a cooling tower may lead to costly maintenance, repair,
and ultimate replacement.
The TTMT Series cooling tower is produced in several sizes. The basic
units range in size from a six by six foot module to a twelve foot by thirty
foot module. The individual module capacities range from 50 nominal tons to
1,000 nominal tons, or approximately 150 GPM to 3,000 GPM. This range is
achieved by using various sizes of modules and internal components, including
motors, fans and fill media. Individual modules of varying sizes can be
connected in a series to satisfy the specific cooling requirements of customers.
The Modular Concrete Cooling Tower
In December 1994, the Company introduced its modular concrete cooling
tower for the industrial and utility segments of the cooling tower market. The
design of the concrete tower incorporates some of the patented technology used
in the Company's TTMT Series cooling tower, as well as technology unique to the
product. This tower gives the Company added capabilities to penetrate the large
utility, petro-chemical and industrial markets. The same technological advances
made with the TTMT Series cooling towers are utilized in the concrete tower. The
concrete tower is built using a tilt-up construction method which substantially
reduces construction time as compared to the time required to build a similar
size wood or conventional concrete tower.
6
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Modular Cooling Tower Leasing Program
The Company also leases modular cooling towers. Because of the compact
size and other design features of the TTMT Series cooling tower, it can easily
be mounted on a skid and equipped with necessary electrical connections to
produce a mobile cooling tower which can be transported by truck to the desired
location. Leased towers are used to augment large cooling towers during peak
heat loads, to provide temporary cooling while maintenance and repairs are being
made to existing cooling towers, to supply cooling in the event of a failure of
an existing cooling tower due to fire, weather damage or mechanical
malfunctions, and to provide temporary cooling during research and development,
testing and evaluation programs. The Company has over forty cooling towers in
its rental fleet.
Patents
The Company owns patents (U.S. Patent No. 5,227,095) covering the basic
design of the TTMT Series cooling tower and the concrete cooling tower (U.S.
Patent No. 5,545,356). The patents expire in 2010 and 2014, respectively. The
Company owns and has applied for other United States and foreign patents for
technology used in the TTMT Series and concrete cooling towers. Mr. Curtis has
also granted an exclusive, royalty-free license to the Company for the Rotary
Spray Nozzle which gives the Company the exclusive right to use this technology
in cooling tower applications. The licensed technology is the subject of patents
(U.S. Patent Nos. 5,143,657 and 5,152,458) which expire in 2009. The Rotary
Spray Nozzle can also be used in other fluid distribution systems, such as lawn
sprinklers, pond aeration, and moving fluidized solids such as grain. Mr. Curtis
has retained all rights with respect to the Rotary Spray Nozzle patents in all
applications other than cooling towers.
Product Design and Development
The Company spent $386,474, $108,183 and $29,169 on research and
development during fiscal years 1996, 1995 and 1994, respectively. The Company
is continuously evaluating its products and manufacturing methods. The Company
does not have any significant products other than the TTMT Series and concrete
cooling towers at this time. The Company plans to continue to research
refinements in cooling tower design and construction, although it has no fixed
research and development budget.
Assembly of Products
The Company's products are assembled at its plant in Chickasha, Oklahoma.
During 1994, the Company completed the process of outsourcing the manufacture of
all fiberglass component parts, many of which are manufactured for the Company
using pultrusion or extrusion molding technology. Generally, management believes
that it is more advantageous to subcontract out the manufacturing part of its
business to suppliers who have the capability to produce the fiberglass
components using advanced manufacturing methods. However, after a detailed
review of the manufacturing process of its water collection parts, the Company
decided to bring this process back into Company operations in order to help
ensure and control quality, supply, and costs of production of these parts.
Accordingly, in December 1995, the Company invested in the equipment and
personnel necessary to extrude the plastic parts for its water collection
system. The Company also casts some of the concrete component parts of the
concrete towers.
Suppliers and Vendors
The Company relies upon suppliers for most components and parts used to
make its products. The Rotary Spray Nozzle is purchased from a vendor who uses
the Company's tools and dies. Most parts and components purchased from suppliers
are available from multiple sources. In some cases, the Company has invested in
tools and dies which are used by suppliers in the manufacture of components for
the Company. If the Company were to switch suppliers, in some cases it would be
required to incur additional tooling costs and might experience delays in
obtaining component parts necessary for the fabrication of completed products.
The Company has not experienced any significant delays in obtaining parts and
components for its products, and management believes that the Company's
relationships with its suppliers are good.
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Marketing and Sales
The Company sells its products through a combination of direct sales by
Company employees, sales through an established nationwide network of sales
representatives, and sales through representatives, licensees, distributors and
other arrangements in international markets. The Company has entered into
international ventures and/or licensing agreements for the manufacture,
marketing and/or sales of the Company's products in India, Southeast Asia, South
America, South Africa and the Mediterranean area. Also, negotiations are in
process for similar arrangements for the Philippines, Taiwan, Japan, the Middle
East, and Europe. Sales representatives typically market the Company's products
along with a variety of other cooling tower related products.
In addition to its direct sales activities, the Company markets its
products in a number of ways, including participating in trade shows, conducting
direct mail solicitation and advertising in various trade publications. The
Company makes extensive use of marketing videos which portray its products using
pictures and computer animation. These video tapes are distributed to
engineering firms, manufacturers and specialized mailing lists in the industrial
cooling tower market. The Company also has a full-time marketing manager who is
responsible for publicizing the product, identifying marketing opportunities and
developing a marketing strategy.
Warranties and Customer Service
The Company provides a five-year limited warranty on its products. During
the time the Company was redesigning and refining the TTMT Series cooling tower,
the Company incurred costs associated with correcting problems with and
retrofitting towers which had been shipped to customers. In 1996, the Company
incurred $358,000 of expenses to retrofit and service towers, as compared to
$779,000 during fiscal 1995. The Company also provides field support services on
an individual call basis and offers service maintenance contracts.
Necessary repairs are made at the installation site.
Governmental Regulation
The Company is subject to the requirements of a number of federal, state
and local laws, such as the federal Occupational Safety and Health Act ("OSHA").
The Company generates small quantities of waste in the course of its
manufacturing activities, some of which are classified as hazardous waste under
state and federal law. The Company endeavors to comply with all state and
federal laws and believes that it is in compliance with all applicable federal,
state and local regulations applicable to it, including environmental
regulations.
Competition
The market for cooling towers is extremely competitive. There are 15 to
25 manufacturers of cooling towers in the United States. The two biggest
manufacturers, Marley Cooling Tower Co. and Baltimore Air Coil, collectively
account for 60 to 70 percent of the market. A number of the Company's
competitors are substantially larger in size and have greater financial and
other resources than the Company. Many of these competitors have been in
business for a number of years and are well established in the industry.
A number of the Company's competitors manufacture and market cooling
towers which use fiberglass and other composite materials, PVC cellular fill and
other construction and design refinements and which are similar to the TTMT
Series cooling tower. Several competitors manufacture factory assembled
fiberglass cooling towers, including units which can be connected in a series.
Management believes that its TTMT Series cooling tower offers advantages over
cooling towers produced by the Company's competitors. There can be no assurance
that competitors will not develop and produce a product which is comparable or
superior to the Company's products.
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Employees
As of November 30, 1996, the Company had 129 employees. None of the
Company's employees is subject to a collective bargaining agreement. The Company
believes that relations with its employees are good.
Item 2. Description of Property.
The Company's principal place of business is located in Chickasha,
Oklahoma. These facilities include approximately 20 acres of land near
Chickasha, Oklahoma with three separate production buildings totaling over
52,000 square feet, a building of approximately 8,000 square feet used as
offices and a test facility, and two one-story office buildings having
approximately 6,500 square feet. The Company has purchased a 50 acre tract in
South Oklahoma City and is constructing a new manufacturing facility of
approximately 98,000 square feet which will house its fiberglass tower assembly
operations. Construction is approximately 30 percent complete and is expected to
be completed in May 1997. An office facility of approximately 16,000 to 24,000
square feet will also be constructed on the site. Construction on the office
facility is expected to begin in March or April and be completed in July or
August of 1997. The Company will move its general headquarters to this new
office facility when it is completed. The new facilities have been financed
through an industrial revenue bond issuance by the Oklahoma Industries Authority
("OIA") in the amount of $4,405,000. Management estimates the Company's total
investment in the new facilities will be $7.5 million, including $1.5 million to
equip the facility. For additional information about the financing of the
Oklahoma City facility, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources".
The new manufacturing facility is expected to increase efficiency of the
fiberglass operations. The ceiling height and configuration of the existing
facility limits production methods. The new facility should be adequate to
support annual fiberglass tower sales of approximately $50 million and should be
adequate to support the fiberglass operations for several years. The new
facility also will be closer to major transportation routes and facilities,
particularly the Oklahoma City airport. Management plans to use the existing
facility in Chickasha to house the Company's concrete tower operations.
Currently, much of the concrete operations are conducted outdoors.
Item 3. Legal Proceedings
The Company is not subject to any legal proceedings and is not aware of
any pending or threatened legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to stockholders during the fourth quarter of
the fiscal year covered by this report.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded over-the-counter and quoted on the
NASDAQ system under the symbol "TTMT". The Common Stock is also listed on the
Boston Stock Exchange. The following table shows the high and low closing bid
prices for the Common Stock as reported by NASDAQ for each quarter since
November 30, 1993, the date of the Company's initial public offering. Prior to
that date, there was no market for the Company's Common Stock. Bid prices
represent prices between dealers, do not include retail mark-ups, mark-downs or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
February 28, 1994 ......... 7-1/8 5-3/4
May 31, 1994 .............. 5-7/8 4-5/8
August 31, 1994 ........... 5 3- 3/4
November 30, 1994 ......... 4-1/2 2-5/8
February 28, 1995 ......... 5-1/4 3-1/2
May 31, 1995 ....... ...... 5-1/4 3-3/4
August 31, 1995 ........... 4 2-1/2
November 30, 1995 ......... 4-3/4 2-1/2
February 28, 1996 ......... 7-5/8 4
May 31, 1996 .............. 10-1/4 6-7/8
August 31, 1996 ........... 12-1/2 8-3/8
November 30, 1996 ......... 15 9-1/8
</TABLE>
On February 19, 1997, the last sale price of the Common Stock as reported
by NASDAQ was $10.375 per share. On February 19, 1997, the Common Stock was held
of record by 56 holders. The Company believes that there are more than 400
beneficial holders of its Common Stock.
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, for use in its business.
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
The Company has been in the conventional cooling tower business since
1985, which consists of constructing, repairing and upgrading forced draft and
induced draft wood cooling towers and selling spare parts for conventional
cooling towers. In 1991, the Company began developing its TTMT Series cooling
tower. During 1991 and 1992, the majority of the Company's revenues were derived
from conventional cooling tower projects. Beginning in 1991, the Company shifted
its emphasis from conventional cooling tower projects to developing the TTMT
Series cooling tower. The Company began selling prototypes of its modular
cooling tower in 1991 and continued to sell modules during the development stage
of the product. Development of the TTMT Series cooling tower was completed
during 1994. The Company also developed a new modular concrete cooling tower
during 1994. This new product was introduced to the market during the first
quarter of 1995. The Company also sells parts and leases cooling towers. The
Company has the ability to compete in the conventional cooling tower business,
but intends to focus on producing and selling modular cooling towers. The
Company will continue to construct, repair and maintain conventional cooling
towers if sufficient margins exist on a particular project.
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The Company derives revenue from the following principal sources: TTMT
Series cooling tower sales; concrete cooling tower construction projects;
modular cooling tower leases; other tower revenue consisting of parts sales and
service and conventional cooling tower projects; and other operating revenue
consisting of licensing fees and payments paid to the Company for the licensing
of its technology to others. TTMT Series cooling towers are typically sold on a
bid basis and revenue is generally recognized when towers are shipped to
customers. Concrete cooling tower projects are typically done on a fixed-price
basis. Revenue and related costs for such projects are recognized under the
percentage of completion method of accounting. Rental towers are usually leased
under short-term or month-to-month agreements and revenue is recognized when
earned. Revenues from licensing agreements are recognized when a non-cancelable
contract is signed specifying a fixed non-refundable technology transfer fee and
technology materials are delivered to the licensee.
Results of Operations
Twelve Months Ended November 30, 1996 Compared to Twelve Months
---------------------------------------------------------------
Ended November 30, 1995
-----------------------
For the twelve months ended November 30, 1996, total tower revenues
increased to $17,796,544 from $9,770,894 for the comparable period in the prior
year. During the current twelve month period, 60 percent of total tower revenues
was derived from sales of 288 modular fiberglass cooling towers, 30 percent of
total tower revenues was derived from design and construction of the new modular
concrete cooling towers, 4 percent of total tower revenues was derived from
rental of modular fiberglass cooling towers, and 6 percent of total tower
revenues was derived from other tower revenue. In the comparable twelve month
period in 1995, 75 percent of total tower revenues was derived from sales of 210
modular cooling towers, 10 percent of total tower revenues was derived from
design and construction of modular concrete towers, 12 percent of total tower
revenues was derived from rental of modular cooling towers, and 3 percent of
total tower revenues were derived from other tower revenue. Other tower revenues
consist primarily of modular tower parts sales and service. The increase in
fiberglass tower revenues for 1996 is due not only to the increase in the
quantity of units sold but also due to the sales of larger capacity, more
expensive units. The increase in concrete tower sales reflects the success the
Company has had marketing this product since its introduction in the first
quarter of 1995. Other operating revenue for the twelve months ended November
30, 1996, consists of technology transfer fees of $839,983 which were realized
as a result of international license agreements. These technology transfer fees
demonstrate the Company's ability to capitalize on the technology it develops.
The Company is in the business of developing technology for the cooling tower
industry and marketing that technology, either directly or in the form of
products such as its TTMT Series cooling tower.
The Company's cost of goods sold and constructed during the twelve month
period ended November 30, 1996 was $14,740,210, or 83 percent of total tower
revenues, as compared to $8,963,375, or 92 percent, during the comparable period
in 1995. The increase in cost of goods sold and constructed resulted from
increased production and sales of both the modular fiberglass and concrete
cooling towers. The Company continues to see improvements in gross margins in
the fiberglass line as that product line matures. In the concrete line, gross
margins are less than anticipated because of the recent introduction of the
product. Gross margins in the fourth quarter were lower than gross margins
enjoyed during the third quarter, primarily because of favorable contract terms
on certain jobs completed during the third quarter and unexpectedly high costs
recognized on projects completed during the fourth quarter. Management continues
to believe that gross margins on concrete projects will improve and will
eventually be consistent with gross margins realized on the fiberglass line.
Included in the cost of goods sold for the twelve month period ended November
30, 1996, is $358,016 to retrofit and service towers previously sold. This
compares to retrofit and warranty costs of $779,000 during the fiscal year ended
November 30, 1995. In 1995, design changes were made and a complete quality
control system was implemented which management believes will continue to reduce
such expenditures in future periods.
11
<PAGE>
The twelve month period ended November 30, 1996 reflected a 17 percent
increase in general and administrative expenses from $1,321,195 in 1995 to
$1,543,530 in 1996. The increase is due mainly to the addition of office staff
and related expenses. Selling expenses increased from $659,916 to $1,009,499 due
to increased sales and marketing efforts for both the fiberglass and the
concrete modular cooling towers. The increase over 1995 is due mainly to
increased salaries expense related to the increase in the sales and marketing
staff. Increases were also incurred in travel and related expenses, due to
increased participation at national and international trade shows, international
joint venture and license agreements, direct customer calls and presentations to
engineering firms across the United States. Increases were also incurred in
postage costs related to increased telemarketing efforts and advertising costs
related to increased direct advertising in trade journals and magazines.
Management expects the increased investment in selling expenses to have a
continued positive impact on revenues in future periods. Research and
development expenses increased from $108,183 in 1995 to $386,474 in 1996, due
mainly to expenditures on the new modular concrete tower development, and due to
development of the new water collection system. Management does not believe that
the Company will incur significant additional expenses on development of the new
modular concrete tower. However, management does expect to continue to research
refinements in cooling tower design and construction, although the Company has
no fixed research and development budget.
The Company's income from operations for the twelve months ended November
30, 1996 was $956,814, as compared to loss from operations of $1,281,775 for the
comparable period in the prior year. After interest expense and miscellaneous
items, the Company's net income was $565,118 compared to a loss of $1,607,872
for the twelve months ended November 30, 1995. The increase in the Company's net
income reflects the Company's success in developing and marketing of its
technology and products both nationally and internationally.
At January 31, 1997, the Company's estimated backlog was over $6,000,000
including three contracts for the modular concrete cooling towers totaling
$1,784,000. Two concrete tower contracts are scheduled for completion in the
second quarter of 1997 and the remaining contract is projected to be completed
in the fourth quarter of 1997. Interest in this product has continued to
increase dramatically in both the United States and internationally. Essentially
all of the estimated backlog for the modular fiberglass cooling towers is
scheduled for delivery in the first half of fiscal year 1997.
Liquidity and Capital Resources
At November 30, 1996, the Company had working capital of $3,147,126, as
compared to a working capital deficit of $618,610 at November 30, 1995.
Improvement in the Company's liquidity during the year resulted from profitable
operations and financing activities including the issuance of common stock and
the exercise of warrants and options. The Company's cash flow provided by and
used in its operating, investing and financing activities during fiscal years
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Operating activties ($3,525,523) ($567,607)
Investing ($5,439,692) ($820,171)
Financing $9,177,287 $1,867,879
</TABLE>
The Company's capital requirements for its continuing operations consist
of its general working capital needs, scheduled payments on its debt obligations
and capital expenditures. Management anticipates that the Company's operating
activities will require cash during 1997, which primarily relates to the
anticipated growth in receivables and inventory levels to support expanding
sales. The Company tries to minimize its inventory of component parts, although
minimum order requirements of some suppliers can cause inventory levels to
fluctuate significantly from period to period. Similarly, management attempts to
manage accounts receivable to increase cash flow, but it is anticipated that
accounts receivable will increase as sales increase. Other significant variances
in working capital items can also be expected. Also, the Company's concrete
construction projects will have a greater effect on working capital requirements
in the future. At November 30, 1996, net costs in excess of billing and
estimated earnings on uncompleted contracts were $471,716 as compared to net
billings in excess of costs and estimated earnings on uncompleted concrete
construction projects of $539,775 at November 30, 1995. Normally, concrete
construction projects provide for progress payments of the contract price with a
retainage of 10 to 15 percent payable after completion of the project.
12
<PAGE>
Scheduled principal payments on capital leases will total $111,934 over
the next twelve months. In addition, $2,919,113 of the Company's debt will
become due and payable during the next twelve months.
Substantially all of the Company's planned capital expenditures during
the next six to eight months will be related to the new facility being
constructed by the Company in south Oklahoma City. The manufacturing facility is
approximately 30 percent complete and is expected to be completed in May 1997.
Construction of the office facility is expected to begin in March or April and
be completed in July or August 1997. Management estimates that the Company's
total investment in the project will be approximately $7.5 million, including
$1.5 million to equip the facility. Of the total capital required for the plant,
approximately $4.4 million was derived from a loan from the Oklahoma Industries
Authority (OIA), and $1.8 million was derived from a loan from Boatman's Bank,
and approximately $1.5 million is expected to be derived from loans for plant
equipment. The industrial revenue bonds were issued by the OIA in October 1996.
The bonds pay interest only for the first twelve months out of an interest
reserve fund of $238,000 set aside from the bond proceeds. After the first
twelve months, the bonds are payable in quarterly installments of principal and
interest in the amount of $157,000. A debt service reserve fund of $157,000 was
also set aside from the bond proceeds. The balance of the bond proceeds, less
issuance costs, are available to fund construction of the facility. The OIA
holds a mortgage on the facility to secure payment of the bond indebtedness. The
Boatman's Bank loan was intended to provide $1.8 million of temporary financing
for the project. Accordingly, the Company intends to obtain permanent funding
for this amount and is evaluating alternative sources of capital. Management
expects that some or all of the required capital will be obtained through the
sale of equity. At this time, the Company has not identified a specific source
of additional capital.
The Company has secured loans with noncommercial lenders totaling
$3,600,000 to finance its working capital needs, of which $3,600,000 was
outstanding at November 30, 1996. Interest rates and payment terms are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Loan Interest Interest Maturity
Amount Rate Payable Date
---------------- ------------ -------------- --------------
<C> <C> <C> <C>
$2,000,000 13% Quarterly 5/31/98
$1,000,000 11.25% Quarterly 5/8/99
$ 500,000 11.25% Quarterly 5/8/97
$ 100,000 15% Quarterly 5/2/97
</TABLE>
Management also has secured a line of credit at Chickasha Bank in the
amount of $500,000 for short term cash flow needs, of which $500,000 was
outstanding at November 30, 1996. This line of credit bears interest at the
bank's base floating rate, which was 10% at November 30, 1996. The principal and
interest are due April 13, 1997. In December 1995, the Company secured financing
in the amount of $294,505 to acquire extrusion equipment to produce the water
collection system for the cooling towers. Previously these parts were
out-sourced. However, to insure quality and an uninterrupted supply, the Company
made the decision to bring this manufacturing process in-house. This note is
payable monthly and matures in January 2000. In August 1996, the Company secured
a real estate mortgage in the amount of $387,500 to finance the acquisition of
the property in south Oklahoma City which will be the site for the new plant
expansion. Principal and interest at 3.5% is due August 1, 1997 and will be paid
with proceeds from the OIA loan. In September 1996, the Company secured a line
of credit at Boatmen's Bank in the amount of $3,800,000, of which $1,325,000 was
outstanding at November 30, 1996. Of the credit facility, $2,000,000 is to be
used for general working capital needs, $1,500,000 will be used to fund the
Company's commitment to the expansion in south Oklahoma City, and $300,000 is
earmarked for down payments on equipment to be acquired in conjunction with the
plant and office expansion. Interest on this line of credit is due monthly and
the principal is due September 1, 1997. In April 1995, the Company secured a
real estate mortgage in the amount of $116,000 to finance the acquisition of
property adjacent to its existing facilities to be used as offices.
13
<PAGE>
Principal and interest on this mortgage is due in monthly payments of $1,555
with the remaining principal and interest due April 15, 1998. This mortgage
bears interest at the bank's base floating rate, which was 10 percent at
November 30, 1996. In October 1995, the Company obtained another mortgage loan
in the amount of $83,723 secured by real estate. The loan bears interest at the
bank's floating rate, which was 10 percent at November 30, 1996, and is payable
semi-annually, and matures on October 12, 1998. In April 1996, the Company
secured an $1,200,000 credit arrangement with one of its major vendors to fund
materials purchased from the vendor of which $619,000 was included in accounts
payable at November 30, 1996.
During 1996, the Company issued common stock and received aggregate net
proceeds of approximately $4 million. The Company used the net proceeds to
purchase and redeem preferred stock, to pay dividends accrued on the preferred
stock, to retire debt and to fund its working capital requirements.
The Company believes it has sufficient capital resources to fund its
ordinary capital requirements for at least the next four quarters, other than
debt which will mature during the next twelve months. Management anticipates
that the Company will be able to renew or replace its debt obligations as they
mature. Specifically, management expects that the Boatmen's facility will be
replaced via the sale of common stock or other debt/equity placements.
Management is very pleased with the continued improvement in the Company's
liquidity and capital resources and believes that the Company's improved
financial position will facilitate additional growth. Although the Company's
financial position has improved, substantial growth beyond that expected by
management could increase the Company's capital requirements and require it to
obtain additional capital to maintain its growth.
Forward Looking Statements
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations and similar expressions concerning future events
contained in this report constitute "forward looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. As with any future event,
there can be no assurance that the events described in forward looking
statements made in this report will occur or that the results of future events
will not vary materially from those described in the forward looking statements
made in this report. Important factors that could cause the Company's actual
performance and operating results to differ materially from the forward looking
statements include, but are not limited to, changes in the general level of
economic activity in the markets served by the Company, competition in the
cooling tower industry and the introduction of new products by competitors,
delays in refining the Company's manufacturing and construction techniques, cost
overruns on particular projects, availability of capital sufficient to support
the Company's level of activity and the ability of the Company to implement its
business strategy.
Item 7. Financial Statements.
The financial statements required by this item begin at page F-1 of this
report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Effective July 1, 1996, Price Waterhouse LLP sold its Oklahoma City
practice to Coopers & Lybrand L.L.P., and as a result resigned as the
independent accountants of the Company. The reports of Price Waterhouse LLP on
the Company's financial statements for the last two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified as to
uncertainty, audit scope or accounting principle. In connection with its audits
for the two most recent fiscal years and through July 1, 1996, there have been
no disagreements with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Price
Waterhouse LLP would have caused it to make reference thereto in its report on
the financial statements for such years. During the two most recent fiscal years
and through July 1, 1996, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
14
<PAGE>
The Company engaged Coopers & Lybrand L.L.P. as its new independent
accountants effective as of July 1, 1996. During the two most recent fiscal
years and through July 1, 1996, the Company has not consulted with Coopers &
Lybrand L.L.P. regarding either (1) the application of accounting principles to
a particular transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, and either
a written report was provided to the Company or oral advice was provided that
Coopers & Lybrand L.L.P. concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue; (2) any matter that was either the subject of a disagreement,
as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.
15
<PAGE>
PART III
Items 9 through 12 of Part III of this Form 10-KSB are incorporated by reference
from the Company's proxy statement to be filed on or before March 29, 1997.
16
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits have been filed as part of this report:
Exhibit No. Description
----------- -----------
3.1-1 Amended and Restated Certificate of
Incorporation of Tower Tech, Inc.
3.2-1 Amended Bylaws of Tower Tech, Inc.
3.3-1 Amendment to Bylaws
4.1 Omitted
4.2 Omitted
4.3-1 Form of Stock Certificate
4.4-1 Form of Underwriters' Warrants
4.5 Omitted
4.6 Omitted
4.7 Omitted
4.8 Omitted
4.9 Omitted
4.10-6 Registration Rights Agreement,
dated February 2, 1996, among
Tower Tech, Inc., Lancer LP,
Michael Taglich, and Robert Taglich.
10.18 Promissory Note between Tower Tech,
Inc., and Campbell, Hurley, Campbel
and Campbell, dated August 1, 1996.
10.24 Loan Agreement between Tower Tech,
Inc. and Chickasha Bank & Trust Co.,
dated March 23, 1995
10.38 Promissory Note between Tower Tech,
Inc., and Boatmen's Bank, dated
September 26, 1996.
10.4 Loan Agreement between Tower Tech,
Inc., and Oklahoma Industries
Authority dated October 1, 1996.
17
<PAGE>
10.5 Omitted
10.6 Omitted
10.7 Omitted
10.8-1 Executive Employment Agreement
between Harold Curtis and
Tower Tech, Inc.,dated September 1,
1993
10.9-1 Agreement by and between Morrison
Molded Fiber Glass Co., and Tower
Tech, Inc., made effective July 26,
1993, regarding the purchase by
Tower Tech, Inc. of certain
pultruded components from Morrison
Molded Fiber Glass Company
10.10-1 U. S. Patent No. 5,143,657 entitled
FLUID DISTRIBUTOR issued September
1, 1992
10.11-1 U. S. Patent No. 5,152,458 entitled
AUTOMATICALLY ADJUSTABLE FLUID
DISTRIBUTOR issued October 6, 1992
10.12-1 U. S. Patent No. 5,227,095 entitled
MODULAR COOLING TOWER issued July
13, 1993
10.13-1 Exclusive License Agreement by and
between Harold D. Curtis and Tower
Tech, Inc.
10.14-1 Assignment by and between Harold D.
Curtis, as Assignor, and Tower
Tech, Inc., as Assignee
10.15-1 Assignment of Invention Contained
in PCT Application by and between
Harold D. Curtis, as Assignor, and
Tower Tech, Inc., as Assignee
10.16-1 Assignment of Patent by and between
Harold D. Curtis, as Assignor, and
Tower Tech, Inc., as Assignee, of
Patent No. 5,227,095
10.17-7 1993 Stock Option Plan, as amended
10.18-1 Form of Distributorship Agreement
10.19 Omitted
10.20 Omitted
10.21 Omitted
<PAGE>
10.22 Omitted
10.23-2 Promissory Note between Tower
Tech, Inc. and Electrical
Constructors, Inc., dated April
15, 1994
10.24-2 Warrant Certificate, dated July
27, 1994, between Electrical
Constructors and Tower Tech,
Inc., entitling Electrical
Constructors to purchase 50,000
shares of Tower Tech, Inc.'s
common stock, $.001 par value..
10.25-2 Note between Tower Tech, Inc.,
as Maker, and Electrical
Constructors, as Payee, dated
July 27, 1994
10.26-2 Warrant Certificate, dated
August 18, 1994, between J.
David Bronstad and Tower Tech,
Inc., entitling J. David
Bronstad to purchase 100,000
shares of Tower Tech, Inc.'s
common stock, $.001 par value
10.27-3 Security Agreement between
Tower Tech, Inc. and J. David
Bronstad dated August 18, 1994
10.28 Omitted
10.29-4 Promissory Note between Tower
Tech, Inc. and Chickasha Bank
& Trust Co., dated April 10,
1995
10.30 Omitted
10.31-5 Warrant Certificate, dated
April 25, 1995, between J.
David Bronstad and Tower Tech
Inc., entitling J. David
Bronstad to purchase 40,000
shares of Tower Tech, Inc.'s
common stock, $.001 par value
10.32-5 Warrant Certificate, dated
April 25, 1995, between James
McDonald and Tower Tech, Inc.,
entitling James McDonald to
purchase 10,000 shares of Tower
Tech, Inc.'s common stock,
$.001 par value
10.33-5 Security Agreement between
Tower Tech, Inc. and J. David
Bronstad dated April 25, 1995
10.3-5 Security Agreement between
Tower Tech, Inc. and James
McDonald dated April 25, 1995
10.35-5 Promissory Note between Tower
Tech, Inc. and Chickasha Bank
& Trust Co., dated March 3,
1995
10.36-5 Promissory Note between Tower
Tech, Inc. and James McDonald,
dated May 2, 1995
10.37-5 Promissory Note between Tower
Tech, Inc. and J. David
Bronstad, dated May 2, 1995
10.38-5 Promissory Note between Tower
Tech, Inc., and J. David
Bronstad, dated June 14, 1995
10.39-5 Promissory Note between Tower
Tech, Inc., and J. David
Bronstad, dated June 27, 1995
10.40-5 Promissory Note between Tower
Tech, Inc., and Electrical
Constructors, dated September
12, 1995.
10.41-6 Promissory Note between Towe
Tech, Inc., and Chickasha
Bank. & Trust dated October 13,
1995.
19
<PAGE>
16.1-9 Letter on changes in certifying
accountant
23.1 Consent of Coopers & Lybrand
L.L.P.
23.2 Consent of Price Waterhouse
LLP
1 Incorporated by reference from the same numbered exhibit to Registration
Statement No. 33-69574-FW, as filed with the Commission on September 29,
1993, and as amended.
2 Incorporated by reference from the same numbered exhibit to Form
10-QSB for the quarter ended August 31, 1994.
3 Incorporated by reference from the same numbered exhibit to Form 10-KSB
for the year ended November 30, 1994.
4 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended May 31, 1995.
5 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended August 31, 1995.
6 Incorporated by reference from the same numbered exhibit to Form 10-KSB/A
for the year ended November 30, 1995.
7 Incorporated by reference from the same numbered exhibit to Registration
Statement No. 333- 07337 on Form S-8.
8 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended August 31, 1996.
9 Incorporated by reference from the same numbered exhibit to Form 8-K
filed on July 2, 1996.
(b) The Company did not file any reports on Form 8-K during the
quarter ended November 30, 1996.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TOWER TECH, INC.
By: HAROLD CURTIS
--- -------------
Harold Curtis, Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this registration statement was signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- --------- ----- ----
HAROLD CURTIS
-------------
Harold Curtis Chief Executive Officer/ Director February 28, 1997
(Principal Executive Officer)
CHARLES D. WHITSITT
- -------------------
Charles D. Whitsitt Chief Financial Officer February 28, 1997
(Principal Financial Officer and
Principal Accounting Officer)
LINCOLN E. WHITAKER
- -------------------
Lincoln E. Whitaker Director February 28, 1997
RANDAL K. OBERLAG
- -----------------
Randal K. Oberlag Director February 28, 1997
LEON POAG
- ---------
Leon Poag Director February 28, 1997
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Reports of Independent Accountants.......................................F-2
Balance Sheet as of November 30, 1996 and 1995 ......................... F-4
Statement of Operations for the years ended November 30, 1996
and November 30, 1995.............................................. F-5
Statement of Stockholders' Equity for the years ended November 30, 1996
and November 30, 1995 ............................................ F-6
Statement of Cash Flows for the years ended November 30, 1996
and November 30, 1995 ............................................ F-7
Notes to Financial Statements .......................................... F-9
F-1
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Stockholders of
Tower Tech, Inc.
We have audited the accompanying balance sheet of Tower Tech, Inc. (the
"Company") as of November 30, 1996 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of November 30,
1996 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
February 12, 1997
F-2
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Stockholders of
Tower Tech, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Tower Tech, Inc. at November 30,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Oklahoma City, Oklahoma
February 6, 1996
F-3
<PAGE>
Tower Tech, Inc.
Balance Sheet
November 30,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash ...................................... $850,332 $638,260
Accounts receivable, net of allowances of
$22,645 and $10,645, respectively........ 5,026,698 2,097,558
Receivables from officers and employees ... 48,867 62,339
Costs in excess of billings and estimated
earnings on uncompleted contracts ....... 471,716 --
Inventory ................................. 2,919,26 2,103,085
Restricted assets - current ............... 373,532 --
Prepaid expenses .......................... 28,454 88,359
------ -----
Total current assets ................... 9,718,863 4,989,601
Property, plant and equipment, net ............ 3,774,209 2,318,383
Rental fleet, net ............................. 837,491 500,525
Restricted assets - long-term ................. 3,572,616 --
Patents, net .................................. 158,759 44,081
Other assets .................................. 248,398 8,687
------ -----
Total assets ........................ $18,310,33 $7,861,277
====== =====
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt ...... $2,919,113 $1,710,560
Current portion of obligations under
capital lease ............................ 111,934 48,852
Accounts payable .......................... 2,554,742 2,559,640
Accrued liabilities ....................... 802,469 532,093
Billings in excess of costs and estimated
earnings on uncompleted contracts ....... -- 539,775
Interest payable .......................... 54,365 115,572
Dividends payable ......................... -- 101,719
Customer deposits ......................... 129,114 --
------ -----
Total current liabilities .............. 6,571,737 5,608,211
------ -----
Long-term debt, net of current maturities ..... 7,522,100 1,193,784
------ -----
Obligations under capital lease, net of current
maturities............................... 259,271 99,637
------ -----
Contingencies and Commitments (Note 12) ....... -- --
------ -----
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000
shares authorized; 0 and 315,667 shares
issued & outstanding at November 30,
1996 and 1995, respectively ............... -- 316
Common stock, $.001 par value; 10,000,000
shares authorized; 3,370,368 and
2,428,572 shares issued and outstanding at
November 30, 1996 and 1995, respectively .. 3,371 2,429
Capital in excess of par ...................... 7,187,948 4,756,109
Accumulated deficit ........................... (3,234,091) (3,799,209)
------ -----
Total stockholders' equity ............. 3,957,228 959,645
------ -----
Total liabilities and stockholders' equity $18,310,336 $7,861,277
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Tower Tech, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
November 30,
1996 1995
---- ----
<S> <C> <C>
Assets
Revenues:
Tower sales ............................... $10,628,983 $7,329,600
Concrete tower construction ............... 5,355,931 975,754
Tower rentals ............................. 670,055 1,138,644
Other tower revenue ....................... 1,141,575 326,896
------ -----
Total tower revenue ................ 17,796,544 9,770,894
Other operating revenue ................... 839,983 --
------ -----
Total revenues ..................... 18,636,527 9,770,894
------ -----
Costs and expenses:
Cost of goods sold and constructed ............ 14,740,210 8,963,375
General and administrative ................ 1,543,530 1,321,195
Selling expenses .......................... 1,009,499 659,916
Research and development .................. 386,474 108,183
------ -----
Total costs and expenses ........... 17,679,713 11,052,669
------ -----
Income (loss) from operations ...... 956,814 (1,281,775)
------ -----
Other income (expense):
Interest .................................. (465,776) (369,432)
Miscellaneous ............................. 76,477 39,385
Gain (loss) on sale of assets ............. (2,397) 3,950
------ -----
Total other income (expense) ....... (391,696) (326,097)
------ -----
Income (loss) before income taxes ............. 565,118 (1,607,872)
Income taxes .................................. -- --
------ -----
Net income (loss) ............................. 565,118 (1,607,872)
Dividends on preferred shares ................. (62,812) (164,390)
------ -----
Net income (loss) applicable to common shares . $502,306 $(1,772,262)
====== =====
Weighted average shares outstanding - primary . 3,281,291 2,428,572
====== =====
Net income (loss) per common share - primary .. $ 0.15 $(0.73)
====== =====
Weighted average shares outstanding - fully diluted 3,368,057 2,428,572
====== =====
Net income (loss) per common share - fully diluted $ 0.15 $(0.73)
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Tower Tech, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended
November 30,
1996 1995
---- ----
<S> <C> <C>
Preferred stock
Balance at beginning of period ................ $ 316 $ 100
Issuance of preferred stock - Series B .... -- 35
Issuance of preferred stock - Series C .... -- 131
Retirement of preferred stock - Series A .. -- (100)
Issuance of preferred stock - Series D .... -- 150
Conversion of preferred stock - Series B to
common stock (35) --
Conversion of preferred stock - Series C to Series E (131) --
Conversion of preferred stock - Series C to Series E 131 --
Purchase of preferred stock - Series E .... (131) --
Redemption of preferred stock - Series D .. (150) --
------ -----
Balance at end of period ...................... -- 316
------ -----
Common stock
Balance at beginning of period ................ 2,429 2,429
Issuances of common stock ................. 781 --
Conversion of preferred stock - Series B to
common stock 70 --
Exercise of warrants and options .......... 91 --
------ -----
Balance at end of period ...................... 3,371 2,429
----- -----
Capital in excess of par
Balance at beginning of period ................ 4,756,109 3,580,715
Proceeds from issuance of common stock .... 3,404,350 --
Issuance of preferred stock Series B, C, and D -- 1,339,784
Preferred dividends ....................... (62,812) (164,390)
Redemption of preferred stock - Series D .. (1,499,850) --
Conversion of preferred stock - Series B to
common stock (35) --
Purchase of preferred stock - Series E .... (18,941) --
Exercise of warrants and options .......... 609,127 --
------ -----
Balance at end of period ...................... 7,187,948 4,756,109
------ -----
Accumulated deficit
Balance at beginning of period ............... (3,799,209 (2,191,337)
Net income (loss) ........................ 565 (1,607,872)
------ -----
Balance at end of period ...................... (3,234,091) (3,799,209)
------ -----
Total stockholders' equity .................... $3,957,228 $959,645
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Tower Tech, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended
November 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 565,118 $ (1,607,872)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 419,085 316,239
Loss (gain) on disposal of equipment 2,397 (3,200)
(Increase) decrease in accounts
receivable (2,929,140) 179,244
Decrease (increase) in receivables
from officers & employees 13,472 (53,928)
Increase in inventory (816,179) (433,237)
Decrease (increase) in prepaid expenses 59,905 (38,497)
Increase in other assets (60,356) (6,022)
(Decrease) increase in accounts payable (4,898) 306,703
Increase in accrued liabilities and interest
payable 209,169 417,832
Increase (decrease) in customer deposits 129,114 (184,644)
(Decrease) increase in billings in excess
of cost (1,011,491) 539,775
------------ -----------
Net cash used in operating activities (3,423,804) (567,607)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (979,609) (472,251)
Additions to rental fleet (413,173) (308,951)
Proceeds from sale of assets 21,426 3,200
Increase in patent costs (122,188) (42,169)
Purchase of restricted assets (3,946,148) -
----------- -----------
Net cash used in investing activities (5,439,692) (820,171)
------------ -----------
Cash flows from financing activities:
Proceeds from borrowings 13,080,026 4,462,968
Repayments of notes payable - stockholder - (42,742)
Repayments of long-term debt and capital
lease obligations (6,155,851) (2,967,347)
Redemption of preferred stock (1,500,000) -
Proceeds from issuance of preferred stock - 490,000
Proceeds from common stock issuances 3,386,059 -
Proceeds from exercise of options and warrants 609,220 -
Payment of preferred dividends (164,531) (75,000)
Payment of bond closing costs (179,355) -
------------ ------------
Net cash provided by financing activities 9,075,568 1,867,879
------------ ------------
Net increase in cash 212,072 480,101
Cash at beginning of year 638,260 158,159
------------- -----------
Cash at end of year $ 850,332 $ 638,260
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Tower Tech, Inc.
Statement of Cash Flows (continued)
Supplemental Disclosure of Cash Flow Information
Cash paid for interest during the years ended November 30, 1996 and
November 30, 1995 was $512,195 and $281,065, respectively.
Supplemental Schedule of Non-Cash Investing and Financing Activities
The Company acquired certain property, plant and equipment under capital
lease obligations of $447,911, and $153,406 for the years ended November 30,
1996 and 1995, respectively.
The Company acquired certain real estate during 1996 and 1995 by executing
notes payable in the aggregate amount of $387,500 and $218,723, respectively.
The Company converted a $350,000 note payable to it's C.E.O. and his wife
to 35,000 shares of Series B preferred stock on May 15, 1995. See Note 10.
On November 30, 1995, the Company issued 150,000 shares of Series D preferred
stock in exchange for a $500,000 note payable and 100,000 shares of Series A
preferred stock. See Note 10.
See Note 10 for other non-cash issuances and conversions of preferred stock.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
Tower Tech, Inc.
Notes to Financial Statements
1. General and Summary of Significant Accounting Policies
General
Tower Tech, Inc. (the "Company") has been in the business of building, repairing
and upgrading conventional water cooling towers since 1985. In 1991, the Company
began developing a new line of modular water cooling towers made primarily of
fiberglass ("TTMT Series"). In 1993, the Company began production of the TTMT
Series cooling tower, which has been introduced into both the air conditioning
and industrial segments of the cooling tower market. Compact design of the
modules permits them to be factory assembled, inventoried for immediate
shipment, easily transported and quickly installed. The Company has also built
cooling towers based on the TTMT Series modules which the Company rents for
short-term or emergency use to customers. In 1995, the Company introduced a
concrete water cooling tower which is constructed using the TTMT technology. The
concrete towers, which are constructed using tilt-up concrete construction
methods at the customer's location, are sold under fixed price contracts.
Revenue and cost recognition
Revenue from TTMT tower sales is recognized as towers are shipped to customers.
Revenues and costs under fixed price contracts for the construction of concrete
towers are recognized on the percentage of completion method and are recorded
based upon a ratio of costs incurred to date on the contract to total estimated
costs. Contract costs include material, direct labor and other direct costs
related to contract performance. Changes in job conditions, estimated
profitability and final contract settlements may result in revisions to cost and
income, and are recognized in the period in which the revisions are determined.
Provisions for estimated losses on uncompleted contracts, if any, are made in
the period in which such losses are determined.
Rental towers are rented under short-term or month-to-month rental agreements
and revenue is recognized when earned. Rental towers are classified as rental
fleet and depreciated over their estimated useful life of five years.
Revenues from licensing agreements are recognized upon delivery of the related
technology materials and are included in other operating revenue.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with a maturity of three months or less to be cash
equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation (which includes
amortization of assets under capital leases) is provided for using the
straight-line method over the estimated useful lives of the assets as follows:
F-9
<PAGE>
Notes to Financial Statements, continued
1. General and Summary of Significant Accounting Policies, continued
Property, plant and equipment, continued
Buildings and plant improvements 7-40 years
Shop equipment 5-10 years
Office furniture and equipment 3-10 years
Molds and dies 7-10 years
Trucks and vehicles 5 years
Assets under capital lease 5-10 years
Repairs and maintenance charges which do not increase the useful lives of assets
are charged to expense as incurred.
Patents
Costs associated with obtaining patents are capitalized and amortized from the
date granted over the life of the patents (17 years).
Debt issue costs
Other assets relate primarily to costs associated with the issuance of the
Oklahoma Industries Authority Revenue Bonds and the $3.8 million line of credit
with a bank. See Note 6. The costs are being amortized over the life of the
related debt obligations.
Warranty costs
The Company provides, by a current charge to cost of goods sold, an amount it
estimates will be needed to cover future warranty obligations for towers sold
during the year. The accrued liability for warranty costs is included in accrued
liabilities in the accompanying balance sheet.
Income taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects of
temporary differences that arise as a result of the differences in the carrying
amounts and tax bases of assets and liabilities.
Research and development
Costs associated with research and development of new and improved products are
charged to expense as incurred.
Income (loss) per common share
Net income (loss) per common share is computed based on the weighted average
number of shares of common stock outstanding plus dilutive common equivalent
shares arising from the issuance of warrants and options.
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 disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
F-10
<PAGE>
Notes to Financial Statements, continued
1. General and Summary of Significant Accounting Policies, continued
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, and debt instruments. Fair value
estimates have been determined by the Company, using available market
information and appropriate valuation methodologies. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision.
The carrying value of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair values,
due to the short maturity of these instruments. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and average
maturities, the fair market value of long-term debt and notes payable
approximates their carrying value.
Concentration of credit risk
The Company sells cooling towers to customers throughout the U.S. The Company
extends credit based upon an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on accounts
receivable is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted by
SFAS 123, the Company plans to continue to retain its current method of
accounting for stock compensation costs and adopt the disclosure requirements of
this Statement in fiscal 1997.
2. Inventories
Inventories consist of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
---------------- -----------------
<S> <C> <C>
Raw materials $ 2,317,411 $ 1,404,635
Work in process 305,209 211,216
Finished goods 296,644 487,234
---------- -----------
$ 2,919,264 $ 2,103,085
=========== ===========
</TABLE>
3. Restricted Assets
Restricted assets consist of investments held by trustee in connection with
financing obtained to fund construction of the Company's new manufacturing and
office facility. See Note 4. Amounts required for obligations classified as
current liabilities are reported in current assets. Investments are stated at
cost which approximates market. The composition of restricted assets at November
30, 1996, is set forth in the following table:
F-11
<PAGE>
Notes to Financial Statements, continued
3. Restricted Assets, continued
<TABLE>
<CAPTION>
1996
----
<S> <C>
Under bond indenture agreements -
held by trustee:
Cash and cash equivalents $ 3,555
U.S. Treasury Notes 3,942,593
-----------
Total restricted assets 3,946,148
Amount required for current liabilities (373,532)
Noncurrent restricted assets $ 3,572,616
===========
</TABLE>
4. Property, Plant and Equipment
Following is a summary of property, plant and equipment at November 30:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Building and plant improvements $1,782,561 $ 1,229,189
Shop equipment 452,191 396,566
Office furniture and equipment 197,669 177,325
Molds and dies 1,117,156 963,342
Trucks and vehicles - 35,537
Assets under capital lease 660,612 212,701
Construction in progress 564,785 19,862
Capitalized interest 27,932 -
-------------- ---------------
4,802,906 3,034,522
Accumulated depreciation (1,028,697) (716,139)
----------- -------------
$ 3,774,209 $ 2,318,383
=========== ===========
</TABLE>
Construction in progress consists primarily of construction on the Company's new
manufacturing and office facility in south Oklahoma City, Oklahoma. The new
facility has been financed through an industrial revenue bond issuance by the
Oklahoma Industries Authority in the amount of $4,405,000. See Note 6.
Management estimates the Company's total investment in the new facility, which
is scheduled for completion in 1997, will be approximately $7.5 million,
including $1.5 million to equip the facility.
Depreciation of property, plant and equipment was $411,575 and $314,117, for the
years ended November 30, 1996 and November 30, 1995, respectively, of which
$297,870 and $280,807 was included in costs of good sold and constructed.
5. Rental Fleet
The Company has a fleet of TTMT Series modular cooling towers which are
available for lease under short-term and month-to-month agreements. The rental
fleet is depreciated using the straight-line method over estimated useful lives
of 7 to 10 years. Following is a summary of the rental fleet and accumulated
depreciation at November 30:
F-12
<PAGE>
Notes to Financial Statements, continued
5. Rental Fleet, continued
<TABLE>
<CAPTION>
1996 1995
-------------------- -----------------
<S> <C> <C>
Rental fleet $ 1,014,578 $ 612,195
Accumulated depreciation (177,087) (111,670)
------------ ------------
$ 837,491 $ 500,525
============ ===========
6. Long-Term Debt
The following is a summary of long-term debt at November 30:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Oklahoma Industries Authority Revenue Bonds,
Series 1996, principal and interest are payable
quarterly on January 1, April 1, July 1 and
October 1; interest at an average rate of 7.28%,
final payment is due October 1, 2007; secured
by the Company's right, title and interest in the
real estate comprising the Company's manufacturing
facility; bonds are eligible for Oklahoma Industries
Authority Revenue Bonds, Series 1996, principal
and interest are payable quarterly on January 1,
April 1, July 1 and October 1; interest at an
average rate of 7.28%, final payment is due October
1, 2007; collateralized by the Company's right
title, and interest in the real estate comprising
the Company's manufacturing facility; bonds are
eligible for early redemption subject to certain
restrictions. $ 4,405,000 $ -
Line of credit payable to an individual; credit
limit of $2,000,000; principal and interest due
May 31, 1998; interest rate at 13%; collateralized
by accounts receivable, inventory, equipment, and
personal guarantee of the Company's C.E.O. and
his wife. 2,000,000 -
Notes payable to an individual; principal
payments of $500,000 and $1,000,000 due on May 8,
1997 and 1999, respectively; variable interest
at bank prime + 3% (11.25% at November 30,
1996) collateralized by a first lien and right
of assignment on certain patents. 1,500,000 -
Line of credit with a bank; credit limit of
$3,800,000; principal and interest due January 31,
1997; (subsequently extended to September 1, 1997)
interest at 30 day LIBOR plus 1% (6.50% a November
30, 1996); collateralized by all accounts,
equipment, general intangibles, instruments,
documents and chattel paper. 1,325,000 -
Note payable to an individual; principal and
interest due August 1, 1997; interest at 3.5%;
collateralized by real estate. 387,500 -
F-13
Notes to Financial Statements, continued
6. Long-Term Debt, continued
1996 1995
---- ----
Note payable to a bank; principal and interest
due April 13, 1997; variable interest at bank
prime (10% at November 30, 1996);
collateralized by real estate. 500,000 499,970
Note payable to a bank; 35 monthly payments
of principal and interest with remaining
principal due April 15, 1998; variable
interest at bank prime (10% at November 30,
1996); collateralized by real estate. 104,908 112,388
Note payable to an individual; principal due
May 2, 1997; interest at 15% due quarterly;
collateralized by accounts receivable,inventory
equipment, all other chattels, patent and
personal guarantee of the Company's C.E.O.
and his wife. 100,000 100,000
Note payable to a bank; semi-annual payments
of principal and interest with final payment
due October 13, 1998; variable interest at
bank prime (10% at November 30, 1996);
collateralized by real estate. 75,973 83,723
Line of credit payable to an individual; credit
limit of $1,000,000; principal and interest due
August 18, 1996; interest at 15%; collateralized
by accounts receivable, inventory, equipment,
and personal guarantee of the Company's C.E.O.
and his wife. - 1,000,000
Notes payable to individuals; interest ranging from
10% - 15%; collateralized by common stock warrants,
first lien and right of assignments on certain
patents and by personal guarantee of the Company's
C.E.O. and his wife. - 680,000
Line of credit payable to an individual; credit
limit of $400,000; principal due April 25, 1997;
interest due quarterly; collateralized by
accounts receivable, inventory, equipment, all
other chattels and patent rights, and personal
guarantee of the Company's C.E.O. and his wife. - 400,000
Various notes payable to financial institutions;
principal and interest due monthly; collateralized
by vehicles and equipment. 42,832 28,263
------------- -------------
10,441,213 2,904,344
Current portion (2,919,113) (1,710,560)
------------ -----------
Long-term debt, net $ 7,522,100 $ 1,193,784
=========== ===========
</TABLE>
F-14
Notes to Financial Statements, continued
6. Long-Term Debt, continued
Principal amounts maturing on long-term debt for each year is as follows at
November 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,919,113
1998 2,473,101
1999 1,339,677
2000 359,322
2001 375,000
Thereafter 2,975,000
------------
$10,441,213
</TABLE>
7. Obligations Under Capital Leases
The Company leases certain equipment under capital lease agreements. The
equipment leases have original terms ranging from 3 to 5 years. Most equipment
leases have purchase options at the end of the original lease term. Future
minimum payments by year and in the aggregate under noncancelable capital leases
consist of the following at November 30, 1996:
<TABLE>
<CAPTION>
<C> <C>
1997 $ 151,135
1998 145,780
1999 136,571
2000 19,102
----------
Total minimum lease payments 452,588
Amount representing interest (81,383)
-------
Present value of net minimum
lease payments 371,205
Current portion (111,934)
--------
$ 259,271
=========
</TABLE>
8. Income Taxes
Deferred tax liabilities and assets at November 30 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation ......................... $140,351 $51,191
------ -----
Deferred tax assets:
Accounts receivable allowance ........ 8,546 4,013
Warranty reserve ..................... 37,740 75,400
Other ................................ 22,158 6,813
Net operating loss carryforward ...... 1,242,608 1,374,416
------ -----
Total deferred tax assets .............. 1,311,052 1,460,642
Valuation allowance for deferred tax assets (1,170,701) (1,409,451)
------ -----
Net deferred tax asset ................. 140,351 51,191
------ -----
Net deferred taxes .. -- --
---------- ----------
---------- ----------
</TABLE>
F-15
Notes to Financial Statements, continued
8. Income Taxes, continued
At November 30, 1996, the Company had a net operating loss carryforward (NOL)
for regular tax purposes of approximately $3,300,000, expiring in 2009 to 2010.
SFAS 109 requires that the Company record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of the deferred income tax assets depends on
the Company's ability to generate sufficient taxable income in the future. If
the Company achieves sufficient profitability to utilize the NOL, the valuation
allowance will be reduced resulting in a reduction of future income tax expense.
The ability of the Company to utilize the NOL carryforward to reduce future
income taxes may be limited upon occurrence of certain capital stock
transactions during any three-year period resulting in an aggregate ownership
change of more than 50%.
9. Related Party Transactions
R&B Enterprises ("R&B"), an affiliate of Lincoln E. Whitaker who is a director
of the Company, is an independent sales representative for the Company. As a
sales representative, R&B purchases products from the Company for resale and
sells products as an agent for the Company on a commission basis on the same
terms as other domestic sales representatives. During 1996 and 1995, R&B
purchased $253,034 and $69,407, respectively, of products from the Company and
earned $32,343 and $15,911, respectively, in commissions.
In December 1995, the Company executed a Joint Venture Agreement with J-Tech
Enterprises, Inc. ("J-Tech"), a Florida corporation to market the Company's
products in Alabama, Florida and Georgia. The Company received a 50% ownership
interest in the joint venture, Tower Tech-Southeast ("TTSE"), for contributing a
license to use its technology. J-Tech contributed a computer system valued at
$5,000 and $35,000 cash. The Company's investment in TTSE is being accounted for
using the equity method of accounting, although the Company did not record an
amount for their initial contribution of technology. The agreement contains a
buyout option allowing the Company to purchase the ownership interest of J-Tech
under certain conditions. Sales made to TTSE amounted to $549,549 during fiscal
year 1996.
The following represents the summarized financial data of TTSE:
<TABLE>
<CAPTION>
November 30, 1996
-----------------
<S> <C>
Balance sheet data
Assets $ 520,114
Liabilities $ 452,773
Equity $ 67,341
For the period ended
November 30, 1996
-----------------
Statement of operations data
Sales $ 751,499
Cost of Sales 611,625
Other expenses 152,532
-------
Net Loss $ (12,658)
=======
</TABLE>
F-16
Notes to Financial Statements, continued
10. Stockholders' Equity
At November 30, 1996, the Company had outstanding warrants and options allowing
the holders to purchase a total of approximately 424,480 shares of the Company's
Common Stock at an average price of $5.91 per share expiring at various periods
through July 2005. These warrants and options were issued in conjunction with
the initial public offering, various financing agreements with unrelated
individuals and the Company's stock option plan (see Note 11). Warrants for
84,400 shares of common stock were exercised during 1996.
In January 1996, the Company sold 300,000 shares of common stock, through
private placements, at a price of $4.00 per share. The Company used the proceeds
of $1,200,000 for working capital and payment of debt.
In February 1996, the Company sold 350,000 shares of common stock, through a
private placement, at a price of $6.60 per share. The Company used the net
proceeds of $2,205,000 for (i) redemption and retirement of all the outstanding
shares of Series D Preferred Stock and to repurchase certain patent rights from
the holder of the Series D Preferred Stock, (ii) payment of accrued dividends on
the Series B Preferred Stock and Series D Preferred Stock, and (iii) payment of
certain debt obligations and all accrued interest thereon.
On May 15, 1995, the Company issued 35,000 shares of newly designated Series B
Preferred Stock to Harold Curtis, C.E.O. and his wife, in exchange for $350,000
of indebtedness owed to them. The Series B Preferred Stock is entitled to
cumulative quarterly dividends at the annual rate of $.75 per share and has a
liquidation preference of $10 per share, plus accrued dividends. Additionally,
each share of Series B Preferred Stock is convertible into two shares of Common
Stock at the option of the holder and is redeemable at the option of the
Company, at $10 per share. Each share of Series B Preferred Stock has the right
to vote based on the shares of Common Stock into which it is convertible. On
March 22, 1996, the Series B Preferred Stock was converted into 70,000 shares of
common stock.
On June 20, 1995, the Company issued 130,667 shares of newly designated Series C
Preferred Stock in exchange for $490,000. The Series C Preferred Stock is not
entitled to quarterly dividends and has a liquidation preference of $3.75 per
share. Additionally, each share of Series C Preferred Stock is convertible into
one share of Common Stock. Each share of Series C Preferred Stock has the right
to vote based on the shares of Common Stock into which it is convertible. The
Series C Preferred Stock was redeemed in exchange for Series E Preferred Stock
in December 1995. The Series E Preferred Stock is entitled to cumulative
dividends at the annual rate of $.46 per share, or $60,000 in the aggregate,
payable monthly. Each share of Series E Preferred Stock may be converted into
one share of common stock at the election of the holder at any time after July
1, 1996. In April 1996, the Series E Preferred Stock was purchased in exchange
for the issuance of 130,667 shares of common stock and $18,941.
On November 30, 1995, the Company issued 150,000 shares of newly designated
Series D Preferred Stock to an unrelated partnership in exchange for $500,000 of
indebtedness owed to the partnership and redemption of the Series A Preferred
Stock. The Series D Preferred Stock is entitled to cumulative quarterly
dividends at the annual rate of $1.50 per share and has a liquidation preference
of $10 per share, plus accrued dividends. Additionally, each share of Series D
Preferred Stock is convertible into two shares of Common Stock at the option of
the holder and is redeemable at the option of the Company, at $10 per share.
Each share of Series D Preferred Stock has the right to vote based on the shares
of Common Stock into which it is convertible. On March 22, 1996 the Company
redeemed the 150,000 shares of Series D Preferred Stock for $10 per share.
F-17
<PAGE>
Notes to Financial Statements, continued
11. Stock Option Plan
In October 1996, the Company amended the Tower Tech, Inc. 1993 Stock Option Plan
(the "Plan"). Under the Plan, up to 500,000 shares of common stock may be issued
pursuant to the exercise of options. The Plan is administered by a committee
consisting of at least two members of the Board of Directors who are not
employees of the Company. The committee has not established a fixed formula for
awarding options under the Plan. Options under the Plan can be in the form of
incentive stock options or nonqualified stock options. The exercise price for
nonqualified stock options issued under the Plan may be for more or less than
the fair market value of the common stock at the time an option is granted. The
exercise price for incentive stock options must be equal to the fair market
value of the common stock at the time the options are granted. Vested options
may be exercised after five years of employment or upon termination from the
Company. The following represents stock option activity for the periods ended
November 30, 1996 and 1995:
<TABLE>
<CAPTION>
Number of Option Prices
Shares Per Share
<S> <C> <C>
Exercised during the year:
1995
1996 6,880 $ 6.25
Granted during 1995 71,480 $ 6.25
Granted during 1996 75,680 $ 6.25 - 7.38
Cancellations during 1996 14,720 $ 6.25
Outstanding at November 30, 1995 156,800 $ 6.25
Outstanding at November 30, 1996 210,880 $ 6.25 - 7.38
</TABLE>
At November 30, 1996, no options were exercisable.
12. Commitments and Contingent Liabilities
In July 1993, the Company entered into an agreement with a vendor to purchase
all reinforced plastic components and dies from the vendor for the next five
years. In October 1996, the Company extended their secured credit agreement with
the vendor whereby the Company will be extended credit not to exceed $1,200,000
for the purchase of components ($619,000 outstanding and included in accounts
payable at November 30, 1996). The credit agreement is for a term of 6 months
and is collateralized by purchased inventory, personal guaranty of the Company's
C.E.O. and a pledge of 150,000 shares of Company common stock owned by the
Company's C.E.O. Payment terms require payment of all invoices within 30 days of
invoice date.
On April 5, 1994, the Company executed a vendor agreement with another vendor
whereby the Company has committed to purchase, annually (measured from agreement
date), a minimum of $1,500,000 of cooling tower fill and drift eliminators from
the vendor. If the Company does not meet the minimum purchase amount in any one
year, the vendor agreement will be extended in time by the percentage amount of
the shortage added in months to the original length of the agreement. Management
believes that the minimum purchase amount will be met through normal operations
over the term of the agreement (5 years).
During the time the Company was redesigning and refining the TTMT Series cooling
tower, the Company incurred costs associated with correcting problems with and
retrofitting towers which had been shipped to customers. Included in cost of
goods sold and constructed for the years ended November 30, 1996 and 1995 are
$358,016 and $779,000, respectively, of expense to retrofit and service towers
previously sold. The Company has recorded a liability for estimated warranty
costs of $100,000 and $200,000 at November 30, 1996 and 1995, respectively.
Management believes the warranty reserve is sufficient to cover future warranty
costs.
F-18
<PAGE>
Notes to Financial Statements, continued
13. Licensing Agreements
During 1996 and 1995, the Company entered into certain license agreements with
various foreign cooling tower companies. The license agreements grant the
licensees an exclusive, nontransferable right and license to manufacture,
develop and promote cooling towers, using the Company's technology in specified
regions, such as India, Southeast Asia, South America, South Africa, and the
Mediterranean area. Under the agreements, the Company earns an initial fixed,
nonrefundable technology transfer fee upon delivery of the technology materials.
Fees earned during the year ended November 30, 1996 totaled $839,983. On certain
agreements, the Company also earns continuing royalties for all Licensed
Products promoted by the licensee.
The agreements with two foreign cooling tower companies give the Company an
option to purchase 49% of a company set up to market cooling towers using the
TTMT technology. At November 30, 1996, the Company has not exercised these
options.
F-19
<PAGE>
INDEX TO EXHIBITS
PAGE
10.4 Loan Agreement between Tower Tech, Inc., and Oklahoma Industries
Authority, dated October 1, 1996 ............................ E-2
23.1 Consent of Coopers & Lybrand L.L.P.............................. E-37
23.2 Consent of Price Waterhouse LLP................................. E-38
22
<PAGE>
OKLAHOMA INDUSTRIES AUTHORITY
AND
TOWER TECH, INC.
---------------------------------
LOAN AGREEMENT
---------------------------------
Dated as of October 1, 1996
=================================================================
The interest of the Oklahoma Industries Authority in this Loan
Agreement has been assigned (except for amounts payable under Sections 4.2(b),
4.2(e), 7.2 and 8.4 hereof) pursuant to the Indenture of Trust dated as of the
date hereof from the Issuer to Boatmen's National Bank of Oklahoma, as trustee
(the "Trustee"), and is subject to the security interest of the Trustee
thereunder.
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
(This Table of Contents is not a part of the Loan Agreement and is only
for convenience of reference.)
Page
PARTIES ..................................... 1
PREAMBLES ..................................... 1
ARTICLE I
DEFINITIONS ..................................... 3
ARTICLE II
REPRESENTATIONS, COVENANTS AND WARRANTIES
SECTION 2.1 Representations, Covenants and Warranties
of the Issuer....................... 6
SECTION 2.2 Representations, Covenants and Warranties
of the Company..........................6
ARTICLE III
ACQUISITION AND CONSTRUCTION OF THE
PROJECT; ISSUANCE OF THE BONDS
SECTION 3.1 Agreement to Acquire, Construct, Furnish
and Equip the Project.....................9
SECTION 3.2 Agreement to Issue the Bonds; Application
of Bond Proceeds..........................9
SECTION 3.3 Disbursements from the Construction Fund..... 9
SECTION 3.4 Furnishing Documents to the Trustee.......... 9
SECTION 3.5 Establishment of Completion Date............. 9
SECTION 3.6 Company Required to Pay in Event
Construction Fund Insufficient............... 10
ARTICLE IV
LOAN PROVISIONS
SECTION 4.1 Loan of Proceeds......................... 11
SECTION 4.2 Amounts Payable.......................... 11
SECTION 4.3 Obligations of Company Unconditional..... 12
ARTICLE V
DAMAGE, DESTRUCTION AND CONDEMNATION
SECTION 5.1 Damage, Destruction and Condemnation..... 14
SECTION 5.2 Application of Net Proceeds.............. 14
SECTION 5.3 Insufficiency of Net Proceeds............ 14
<PAGE>
ARTICLE VI
SPECIAL COVENANTS
SECTION 6.1 No Warranty of Condition or Suitability
by Issuer...................................15
SECTION 6.2 Access to the Project.........................15
SECTION 6.3 Further Assurances and Corrective
Instruments.................................15
SECTION 6.4 Issuer and Company Representatives............15
SECTION 6.5 Standby Bond Purchase Agreement...............15
ARTICLE VII
ASSIGNMENT, SELLING, LEASING;
INDEMNIFICATION; REDEMPTION
SECTION 7.1 Assignment, Selling and Leasing.................. 16
SECTION 7.2 Release and Indemnification Covenants............ 16
SECTION 7.3 Redemption of Bonds.............................. 18
SECTION 7.4 Issuer to Grant Security Interest
to Trustee..................................... 18
SECTION 7.5 Indemnification of Trustee....................... 18
ARTICLE VIII
DEFAULTS AND REMEDIES
SECTION 8.1 Defaults Defined................................. 19
SECTION 8.2 Remedies on Default.............................. 20
SECTION 8.3 No Remedy Exclusive.............................. 21
SECTION 8.4 Agreement to pay Attorneys' Fees and
Expenses....................................... 21
SECTION 8.5 No Additional Waiver Implied by One
Waiver; Consent of Standby Purchaser
Required for Waivers........................... 21
ARTICLE IX
OPTIONS TO TERMINATE AGREEMENT
SECTION 9.1 Option to Terminate Upon the Occurrence
of Certain Events............................... 22
SECTION 9.2 Optional Prepayment............................... 23
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Term of Agreement.................................. 24
SECTION 10.2 Notices............................................ 24
SECTION 10.3 Binding Effect..................................... 24
SECTION 10.4 Severability....................................... 24
SECTION 10.5 Amounts Remaining in Funds......................... 24
SECTION 10.6 Amendments, Changes and Modifications.............. 25
SECTION 10.7 Execution in Counterparts.......................... 25
SECTION 10.8 Applicable Law..................................... 25
SECTION 10.9 Captions........................................... 25
TESTIMONIUM .................................................... 26
SIGNATURES .................................................... 26
EXHIBIT A - Project Site
EXHIBIT B - Project Building
EXHIBIT C - Form of Requisition
EXHIBIT D - Form of Completion Certificate
EXHIBIT E - Payment Schedule
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT is dated as of October 1, 1996, between OKLAHOMA
INDUSTRIES AUTHORITY (the "Issuer") and TOWER TECH, INC., a corporation
organized and existing under the laws of the State of Oklahoma (the "Company").
W I T N E S S E T H :
WHEREAS, the Issuer is empowered under the Act to assist any person, firm
or corporation in the financing of certain projects and facilities, through the
issuance of its limited obligation revenue bonds. The Company has proposed the
acquisition of land and the constructing and equipping of the Project and as an
inducement therefor has requested the Issuer to assist in the financing of the
Project and certain other expenses incidental thereto, as provided in the Act
and detailed in this Agreement and generally as follows: The Issuer proposes to
issue the Bonds under the Act and use the proceeds thereof to make the Loan to
the Company to be repaid in such Loan Repayments sufficient to pay the principal
and interest of the Bonds. From the proceeds of the Loan, the Company will pay
the cost of acquisition, construction and equipping of the Project. Under the
terms of the Agreement, the Company will make Loan Repayments, and will be
responsible for paying any costs of the Project exceeding the amount of the
Bonds, maintaining and insuring the Project, and paying all taxes and expenses
relating to the Project. The Issuer's obligation with respect to the Bonds is
subject to the limitations therein contained, including the limitation that the
principal of and interest on the Bonds and any other costs or pecuniary
liability relating to the Bonds, the Loan and installation of the Project or any
proceeding, document or certification incidental to the foregoing, shall never
be payable from tax revenues or public funds of the State or any agency thereof
or general funds or assets of the Issuer (except as specifically set forth
therein) or Oklahoma County, but shall be payable only from the Loan Repayments,
or otherwise by the Company.
WHEREAS, the Issuer has determined that entering into this Agreement and
thereby assisting in the financing of the Project through the issuance of its
Bonds will promote and serve the intended purposes of the Act and will serve a
valid public purpose.
WHEREAS, the Issuer has been advised by Bond Counsel that this Agreement
conforms to the provisions and requirements of the Act. It is intended and
understood by the Issuer and the Company that this Agreement and all other
documentation relating to the issuance of the Bonds shall provide that Costs (as
herein defined), payment of principal and interest on the Bonds or any other
pecuniary liability of the Issuer relating to the issuance of the Bonds, this
Agreement or the Project shall never be payable from tax revenues or other
public or general funds or assets of the Issuer (except as specifically set
forth therein) or the County, but shall be payable solely and only from the
Trust Estate, or from other funds derived from the Project or otherwise by the
Company.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and subject to the limitations hereinafter contained, the parties hereto
covenant, agree and bind themselves as follows:
<PAGE>
ARTICLE I
DEFINITIONS
All capitalized, undefined terms used herein shall have the same meanings
as used in Article I of the hereinafter defined Indenture. In addition, the
following words and phrases shall have the following meanings:
"Bonds" means $4,405,000 Oklahoma Industries Authority Adjustable
Rate Taxable Industrial Revenue Bonds
(Tower Tech Project) Series 1996.
"Consulting Engineer" means any licensed professional architect or engineer
or an architectural or engineering firm (who may be in the employ of the Company
or chosen by the Company) acceptable to the Standby Purchaser.
"Cost" with respect to the Project shall be deemed to include all items
permitted to be financed under the provisions of the Act, including, but not
limited to:
(i) all costs which the Issuer or the Company shall be
required to pay under the terms of any contract or contracts for the
acquisition, rehabilitation, furnishing or equipping of the Project;
(ii) obligations of the Company incurred for labor and
materials (including obligations payable to the Company) in connection
with the acquisition, rehabilitation, furnishing or equipping of the
Project, including reimbursement to the Company for all advances and
payments made in connection with the Project;
(iii) the cost of performance or other bonds and any and
all types of insurance that may be necessary or appropriate to have in
effect during the course of rehabilitation of the Project;
(iv) all costs of engineering and architectural services,
including the costs of the Company for test borings, surveys,
estimates, plans and specifications and preliminary investigations
therefor, and for supervising rehabilitation, as well as for the
performance of all other duties required by or consequent to the proper
rehabilitation of the Project;
(v) all expenses incurred in connection with the issuance of
the Bonds, including but not limited to, compensation, fees and
expenses of the Issuer, the Trustee, including reasonable counsel fees,
compensation to any financial consultant, underwriters or placement
agents, legal fees and expenses, cost of printing and engraving,
recording and filing fees, and costs of title insurance, if any; and
(vi) any sums required to reimburse the Company for advances
made by the Company for any of the above items or for any other costs
incurred which are presently chargeable to the Project.
"County" means the County of Oklahoma, State of Oklahoma.
"Default" means any Default under this Agreement as specified in and
defined by Section 8.1 hereof.
"Indenture" means the Indenture of Trust dated as of this date between the
Issuer and the Trustee, pursuant to which the Bonds are authorized to be issued,
and any amendments and supplements thereto.
"Loan" means the Loan made pursuant to Section 4.1 of this Agreement.
"Loan Repayment" means the amounts payable by the Company pursuant to
Section 4.2 hereof.
"Net Proceeds" when used with respect to any insurance proceeds or any
condemnation award, means the amount remaining after deducting all expenses
(including attorneys' fees) incurred in the collection of such proceeds or award
from the gross proceeds thereof.
"Project" means the Project Building and the Project Site.
"Project Building" means (i) the property which is described generally in
Exhibit B hereto, and (ii) any items of machinery, equipment, or other tangible
property acquired in substitution for, or as a renewal or replacement of or a
modification or improvement to, the property described in (i) above.
"Project Site" means the real estate described in Exhibit A hereto on which
the Project Building will be situated and any other interests in real property,
leasehold interests, easements, licenses and rights in real property hereafter
acquired by the Company with proceeds of the Bonds for use in connection with
the Project.
"Requisition" means a written request for a disbursement from the
Construction Fund signed by a Company Representative, substantially in the form
attached hereto as Exhibit C and satisfactorily completed as contemplated by
said form.
"State" means the State of Oklahoma.
"Substitute Credit Enhancement" means a standby bond purchase agreement
or similar credit enhancement delivered to the Trustee in accordance with
Section 6.5 hereof, replacing any existing Standby Bond Purchase Agreement
issued on substantially identical terms and conditions as the then existing
Standby Bond Purchase Agreement.
"Term of Agreement" means the term of this Agreement as specified in
Section 10.1 hereof.
* END OF ARTICLE I *
<PAGE>
ARTICLE II
REPRESENTATIONS, COVENANTS AND WARRANTIES
Section 2.1. Representations, Covenants and Warranties of the Issuer. The
Issuer represents, covenants and warrants that:
(a) The Project and the financing thereof through issuance of
the Bonds will promote the public purposes of the Act and the public
welfare by encouraging and assisting the location, purchase,
rehabilitation, reconstruction, modernization, improvement,
maintenance, repair, furnishing, equipping and expansion by industrial
and commercial enterprises of their facilities near Oklahoma County and
the alleviation and prevention of conditions of unemployment and by
otherwise strengthening the economy of Oklahoma County and the City of
Oklahoma City.
(b) The Issuer has the necessary power under the Act, and has
duly taken all action on its part required to authorize, execute and
deliver the Agreement and to issue the Bonds. The execution and
performance by the Issuer will not violate or conflict with any
agreement or instrument by which the Issuer or its properties are
bound.
(c) The Issuer covenants that it will not pledge the amounts
derived from this Agreement other than as contemplated by the
Indenture.
Section 2.2. Representations, Covenants and Warranties of the
Company. The Company represents, covenants and warrants that:
(a) The Company is a corporation validly organized and
existing under the laws of the State of Oklahoma and duly authorized to
do business in the State. The execution, delivery and performance by
the Company of this Agreement and the transactions contemplated hereby
have been duly authorized by all necessary action on the part of the
Company and such actions do not violate any provision of the Company's
charter. The Company has the power to enter into this Agreement.
(b) The Company agrees that during the Term of Agreement it
will maintain its existence, will not dissolve or otherwise dispose of
all or substantially all of its assets and will not consolidate with or
merge into another legal entity or permit one or more other legal
entities to consolidate with or merge into it; provided that the
Company may, without violating the agreement contained in this Section,
consolidate with or merge into another legal entity, or permit one or
more legal entities to consolidate with or merge into it, or sell or
otherwise transfer to another legal entity all or substantially all of
its assets as an entirety and thereafter dissolve, provided (i) that
the surviving, resulting or transferee legal entity, as the case may
be, shall have a net worth immediately subsequent to such acquisition,
consolidation, merger or transfer at least equal to that of the Company
immediately prior to such acquisition, consolidation, merger or
transfer; and (ii) that if the surviving, resulting or transferee legal
entity, as the case may be, is not the Company, then such legal entity
shall be a legal entity organized and existing under the laws of one of
the States of the United States of America, shall be qualified to do
business in the State, and shall assume all of the obligations of the
Company under the Agreement, in which event the Issuer shall release
the Company in writing, concurrently with and contingent upon such
acquisition, consolidation, merger or transfer; and provided further
that, prior to such acquisition, consolidation, merger, or transfer,
the Trustee shall be furnished with a certificate from Company stating
that in the opinion of the Company none of the covenants contained in
this Agreement will be violated as a result of such acquisition,
consolidation, merger or transfer.
(c) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions hereof or
thereof, conflicts with or results in a breach of the terms,
conditions, or provisions of any agreement or instrument to which the
Company is bound, or constitutes a default under any of the foregoing,
or results in the creation or imposition of any lien, charge or
encumbrance whatsoever upon any of the property or assets of the
Company under the terms of any such instrument or agreement.
(d) There is no action, suit, proceeding, inquiry or
investigation, at law or in equity, before or by any court, public
board or body, known to be pending or threatened against or affecting
the Company, nor to the best knowledge of the Company is there any
basis therefor, wherein an unfavorable decision, ruling or finding
would materially adversely affect the transactions contemplated by this
Agreement or which would adversely affect, in any way, the validity or
enforceability of the Bonds, this Agreement or any agreement or
instrument to which the Company is a party, used or contemplated for
use in the consummation of the transactions contemplated hereby.
(e) The Project is of the type authorized and permitted
by the Act, and its estimated Cost is not less than $4,405,000.
(f) The proceeds from the sale of the Bonds will be
used only for payment of Costs of the Project.
(g) The Company will use due diligence to cause the Project to
be operated in accordance with the laws, rulings, regulations, agencies
and political subdivisions thereof. The Company has obtained or caused
to be obtained all requisite approvals of the State and of other
federal, state, regional and local governmental bodies for the
acquisition, rehabilitation, furnishing and equipping of the Project.
(h) The Company will fully and faithfully perform all the
duties and obligations which the Issuer has covenanted and agreed in
the Indenture to cause the Company to perform and any duties and
obligations which the Company is required in the Indenture to perform.
The foregoing shall not apply to any duty or undertaking of the Issuer
which by its nature cannot be delegated or assigned.
(i) The Project when completed will be located entirely
within Oklahoma City.
* END OF ARTICLE II *
<PAGE>
ARTICLE III
ACQUISITION AND CONSTRUCTION OF THE
PROJECT; ISSUANCE OF THE BONDS
Section 3.1. Agreement to Acquire, Construct, Furnish and Equip the
Project. The Company agrees to make all contracts and do all things necessary
for the acquisition, rehabilitation, furnishing and equipping of the Project,
with or without advertising for bids.
The Company further agrees that it will acquire the land, construct the
building, furnish and equip the Project with all reasonable dispatch and use its
best efforts to cause acquisition, rehabilitation, furnishing, equipping and
occupancy of the Project to be completed by October 1, 1997 or as soon
thereafter as may be practicable, delays caused by force majeure as defined in
Section 8.1 hereof only excepted; but if for any reason such acquisition,
rehabilitation, furnishing and equipping is not completed by said date there
shall be no resulting liability on the part of the Company and no diminution in
or postponement of the payments required in Section 4.2 hereof to be paid by the
Company.
Section 3.2. Agreement to Issue the Bonds; Application of Bond Proceeds. In
order to provide funds for the payment of the Cost of the Project, the Issuer,
concurrently with the execution of this Agreement, will issue, sell and deliver
the Bonds and deposit the net proceeds thereof with the Trustee in the
Construction Fund.
Section 3.3. Disbursements from the Construction Fund. The Issuer has, in
the Indenture, authorized and directed the Trustee to make disbursements from
the Construction Fund to pay the Costs of the Project, or to reimburse the
Company for any Cost of the Project paid by the Company. The Trustee shall not
make any disbursement from the Construction Fund until the Company shall have
provided the Trustee with a Requisition.
Section 3.4. Furnishing Documents to the Trustee. The Company agrees to
cause such Requisitions to be directed to the Trustee as may be necessary to
effect payments out of the Construction Fund in accordance with Section 3.3
hereof.
Section 3.5. Establishment of Completion Date. The Completion Date shall be
evidenced to the Issuer and the Trustee by delivery of the Completion
Certificate in the form attached as Exhibit "D" hereto, signed by a Company
Representative stating that, except for amounts retained by the Trustee at the
Company's direction to pay any Cost of the Project not then due and payable, (i)
rehabilitation of the Project has been completed and all costs of labor,
services, materials and supplies used in connection with such rehabilitation
have been paid, (ii) all equipment for the Project has been installed, such
equipment so installed is suitable and sufficient for the operation of the
Project, and all costs and expenses incurred in the acquisition and installation
of such equipment have been paid, and (iii) all other facilities necessary in
connection with the Project have been acquired, rehabilitated, furnished and
equipped and all costs and expenses incurred in connection therewith have been
paid. Notwithstanding the foregoing, such certificate shall state that it is
given without prejudice to any rights against third parties which exist at the
date of such certificate or which may subsequently come into being. Forthwith
upon completion of the acquisition, rehabilitation, furnishing and equipping of
the Project, the Company agrees to cause such certificate to be furnished to the
Issuer and the Trustee. Upon receipt of such certificate, the Trustee shall
retain in the Construction Fund a sum equal to the amounts necessary for payment
of the Costs of the Project not then due and payable according to such
certificate. If any such amounts so retained are not subsequently used, prior to
any transfer of said amounts to the Bond Fund as provided below, the Trustee
shall give notice to the Company of the failure to apply said funds for payment
of the Costs of the Project. Any amount not to be retained in the Construction
Fund for payment of the Costs of the Project, and all amounts so retained but
not subsequently used, shall be transferred by the Trustee into the Bond Fund.
Section 3.6. Company Required to Pay in Event Construction Fund
Insufficient. In the event the moneys in the Construction Fund available for
payment of the Costs of the Project should not be sufficient to pay the Costs of
the Project in full, the Company agrees to complete the Project and to pay that
portion of the Costs of the Project in excess of the moneys available therefor
in the Construction Fund. The Issuer does not make any warranty, either express
or implied, that the moneys paid into the Construction Fund and available for
payment of the Costs of the Project will be sufficient to pay all of the Costs
of the Project. The Company agrees that if after exhaustion of the moneys in the
Construction Fund, the Company should pay any portion of the Costs of the
Project pursuant to the provisions of this Section, the Company shall not be
entitled to any reimbursement therefor from the Issuer, the Trustee or the
Owners of any of the Bonds, nor shall the Company be entitled to any diminution
of the amounts payable under Section 4.2 hereof.
* END OF ARTICLE III *
<PAGE>
ARTICLE IV
LOAN PROVISIONS
Section 4.1. Loan of Proceeds. The Issuer agrees, upon the terms and
conditions contained in this Agreement and the Indenture, to lend to the Company
the proceeds received by the Issuer from the sale of the Bonds. Such proceeds
shall be disbursed to or on behalf of the Company as provided in Section 3.3
hereof.
Section 4.2. Amounts Payable.
(a) The Company hereby covenants and agrees to repay the Loan,
as follows: on or before any interest payment date for the Bonds or any
other date that any payment of interest, premium, if any, or principal
is required to be made in respect of the Bonds pursuant to the
Indenture, until the principal of, premium, if any, and interest on the
Bonds shall have been fully paid or provision for the payment thereof
shall have been made in accordance with the Indenture, in immediately
available funds, a sum which, together with any moneys available for
such payment in the Bond Fund, will enable the Trustee to pay the
amount payable on such date as principal of (whether at maturity or
upon redemption or acceleration or otherwise), premium, if any, and
interest on the Bonds as provided in the Indenture.
(b) The Company will also pay the reasonable expenses of the
Issuer related to the issuance of the Bonds and incurred upon the
written request of the Company.
(c) The Company will also pay the reasonable fees and expenses
of the Trustee under the Indenture and all other amounts which may be
payable to the Trustee under Section 10.02 of the Indenture, such
amounts to be paid directly to the Trustee for the Trustee's own
account as and when such amounts become due and payable.
(d) The Company covenants, for the benefit of the Owners of
the Bonds, to pay or cause to be paid, to the Trustee, such amounts as
shall be necessary to enable the Trustee to pay the Purchase Price of
Bonds delivered to it for purchase, all as more particularly described
in Sections 4.01 of the Indenture.
(e) The Company agrees to pay amounts sufficient to
reestablish the Reserve Fund at the Reserve Fund Requirement within
twelve (12) months of any deficit in the Reserve Fund below the Reserve
Fund Requirement.
(f) Recognizing that Issuer has certain audit, administrative
and clerical expenses, the Company agrees to pay to the Issuer an
administrative payment in a sum equal to its proportionate share of the
audit expense plus one-eighth of one percent (1/8th of 1%) per annum of
the principal amount of the Bonds Outstanding as of the payment date
during the term thereof, one-half of the first year's administrative
payment to be calculated by the Issuer six months after delivery of the
Bonds and payable within thirty (30) days thereafter, with like
calculations and payments semiannually thereafter with the final
payment due when the Bonds are retired. In addition, the Company agrees
to pay to the Issuer, together with interest at the Late Payment Rate,
all sums paid by the Issuer to the Trustee for the benefit of the
Owners of the Bonds, such sums to be due and payable immediately upon
payment by the Issuer. Payments under this subsection (f) shall be made
directly to the Issuer at its office in Oklahoma City, Oklahoma, or at
such other location as my be set forth in writing by the Issuer.
(g) In the event the Company should fail to make any of the
payments required in this Section 4.2, the item or installment so in
default shall continue as an obligation of the Company until the amount
in default shall have been fully paid, and the Company agrees to pay
the same with interest thereon, to the extent permitted by law, from
the date when such payment was due, at the Late Payment Rate.
It is understood and agreed that all payments payable by the
Company under subsections (a), (d) and (e) of this Section 4.2 are
assigned by the Issuer to the Trustee for the benefit of the Owners of
the Bonds. The Company assents to such assignment. The Issuer hereby
directs the Company and the Company hereby agrees to pay to the Trustee
at the Principal Office of the Trustee all payments payable by the
Company pursuant to this subsection.
For the convenience of the parties the fixed payments hereunder are
attached hereto as Exhibit "E".
Section 4.3. Obligations of Company Unconditional. The obligations of
the Company to make the payments required in Section 4.2 and to perform and
observe the other agreements contained herein shall be absolute and
unconditional and shall not be subject to any defense or any right of setoff,
counterclaim or recoupment arising out of any breach by the Issuer or the
Trustee of any obligation to the Company, whether hereunder or otherwise, or out
of any indebtedness or liability at any time owing to the Company by the Issuer
or the Trustee, and, until such time as the principal of, premium, if any, and
interest on the Bonds shall have been fully paid or provision for the payment
thereof shall have been made in accordance with the Indenture, the Company (i)
will not suspend or discontinue any payments provided for in Section 4.2 hereof,
(ii) will perform and observe all other agreements contained in this Agreement
and (iii) except as provided in Article IX hereof, will not terminate the Term
of Agreement for any cause, including, without limiting the generality of the
foregoing, failure of the Company to complete the acquisition, rehabilitation,
furnishing and equipping of the Project, the occurrence of any acts of
circumstances that may constitute failure of consideration, eviction or
constructive eviction, destruction of or damage to the Project, the taking by
eminent domain of title to or temporary use of any or all of the Project,
commercial frustration of purpose, any change in the tax or other laws of the
United States of America or of the State or any political subdivision of either
thereof or any failure of the Issuer or the Trustee to perform and observe any
agreement, whether express or implied, or any duty, liability or obligation
arising out of or connection with this Agreement. Nothing contained in this
Section shall be construed to release the Issuer from the performance of any of
the agreements on its part herein contained, and in the event the Issuer or the
Trustee should fail to perform any such agreement on its part, the Company may
institute such action against the Issuer or the Trustee as the Company may deem
necessary to compel performance so long as such action does not abrogate the
obligations of the Company contained in the first sentence of this Section.
* END OF ARTICLE IV *
<PAGE>
ARTICLE V
DAMAGE, DESTRUCTION AND CONDEMNATION
Section 5.1. Damage, Destruction and Condemnation. Unless the Company shall
have exercised its option to terminate this Agreement pursuant to the provisions
of Section 9.1(a) or Section 9.1(b) hereof, if prior to full payment of the
Bonds (or prior to provision for payment thereof having been made in accordance
with the provisions of the Indenture) (i) the Project is destroyed or damaged by
fire or other casualty or (ii) title to or any interest in, or the temporary use
of, the Project shall be taken under the exercise of the power of eminent domain
by any governmental body or by any person, firm or corporation acting under
governmental authority, the Company shall be obligated to continue to pay the
amounts specified in Section 4.2 hereof.
Section 5.2. Application of Net Proceeds. The Net Proceeds of any
insurance proceeds or condemnation award resulting from any events described in
Section 5.1 hereof shall be deposited to the Construction Fund and used by the
Company to restore the Project, unless the Bonds are redeemed pursuant to
Section 9.1(a) or 9.1(b).
Section 5.3. Insufficiency of Net Proceeds. Unless the Company shall have
exercised its option to terminate this Agreement pursuant to the provisions of
Section 9.1(a) or 9.1(b) hereof, if the Net Proceeds are insufficient to pay in
full the cost of any repair, restoration, modification or improvement of the
Project, the Company will nonetheless complete the work and will pay any cost in
excess of the amount of the Net Proceeds. The Company agrees that if by reason
of any such insufficiency of the Net Proceeds, the Company shall make any
payments pursuant to the provisions of this Section, the Company shall not be
entitled to any reimbursement therefor from the Issuer, the Trustee or the
Owners of any of the Bonds, nor shall the Company be entitled to any diminution
of the amounts payable under Section 4.2 hereof.
* END OF ARTICLE V *
<PAGE>
ARTICLE VI
SPECIAL COVENANTS
Section 6.1. No Warranty of Condition or Suitability by Issuer. THE ISSUER
MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE PROJECT OR THE CONDITION
THEREOF, OR THAT THE PROJECT WILL BE SUITABLE FOR THE PURPOSES OR NEEDS OF THE
COMPANY. THE ISSUER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
THAT THE COMPANY WILL HAVE QUIET AND PEACEFUL POSSESSION OF THE PROJECT. THE
ISSUER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
THE MERCHANTABILITY, CONDITION OR WORKMANSHIP OF ANY PART OF THE PROJECT OR ITS
SUITABILITY FOR THE COMPANY'S PURPOSES.
Section 6.2. Access to the Project. The Company agrees that the Issuer, the
Standby Purchaser, the Trustee and their duly authorized agents, attorneys,
experts, engineers, accountants and representatives shall have the right to
inspect the Project at all reasonable times and on reasonable notice. The
Issuer, the Standby Purchaser, the Trustee and their duly authorized agents
shall also be permitted, at all reasonable times, to examine the books and
records of the Company with respect to the Project.
Section 6.3. Further Assurances and Corrective Instruments. The Issuer and
the Company agree that they will, from time to time, execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such supplements
hereto and such further instruments as may reasonably be required for carrying
out the expressed intention of this Agreement.
Section 6.4. Issuer and Company Representatives. Whenever under the
provisions of this Agreement the approval of the Issuer or the Company is
required or the Issuer or the Company is required to take some action at the
request of the other, such approval or such request shall be given for the
Issuer by an Issuer Representative and for the Company by a Company
Representative. The Trustee shall be authorized to act on any such approval or
request.
Section 6.5. Standby Bond Purchase Agreement. The Company covenants and
agrees to maintain a Standby Bond Purchase Agreement or a Substitute Credit
Enhancement at all times that the Bonds remain Outstanding. The Company
covenants and agrees that it will not take any action which will impair its
rights or the rights of any other party under the Standby Bond Purchase
Agreement or Substitute Credit Enhancement. At any time the Company may, at its
option, subject to the provisions of the Standby Bond Purchase Agreement and the
Indenture, provide for the delivery to the Trustee of a Substitute Credit
Enhancement in lieu of the Standby Bond Purchase Agreement then in effect.
* END OF ARTICLE VI *
<PAGE>
ARTICLE VII
ASSIGNMENT, SELLING, LEASING;
INDEMNIFICATION; REDEMPTION
Section 7.1. Assignment, Selling and Leasing. This Agreement may not be
assigned and the Project may not be sold or leased, as a whole or in part,
except upon payment in full of the principal, interest and premium, if any, on
the Bonds.
Section 7.2. Release and Indemnification Covenants.
(a) The Company shall and hereby agrees to indemnify and save
the Issuer, the Standby Purchaser and the Trustee harmless against and
from all claims by or on behalf of any person, firm, corporation or
other legal entity arising from the conduct or management of, or from
any work or thing done on, the Project during the Term of Agreement,
including without limitation, (i) any condition of the Project, (ii)
any breach or default on the part of the Company in the performance of
any of its obligations under this Agreement, (iii) any act or
negligence of the Company or of any of its agents, contractors,
servants, employees or licensees with respect to the conduct or
management of, or work or things done on, the Project or (iv) any act
or negligence of any assignee or lessee of the Company, or of any
agents, contractors, servants, employees or licensees of any assignee
or lessee of the Company with respect to the conduct or management of,
or work or things done on, the Project. The Company shall indemnify and
save the Issuer, the Standby Purchaser and the Trustee harmless from
any such claim arising as aforesaid, or in connection with any action
or proceeding brought thereon, and upon notice from the Issuer, the
Standby Purchaser or the Trustee, the Company shall defend them or any
of them in any such action or proceeding.
(b) Notwithstanding the fact that, except as specifically set
forth on the face of the Bonds, it is the intention of the parties
hereto that the Issuer shall not incur any pecuniary liability by
reason of the terms of this Agreement or the undertakings required of
the Issuer hereunder, by reason of the issuance of the Bonds, by reason
of the execution of the Indenture or by reason of the performance of
any act requested of the Issuer by the Company, including all claims,
liabilities or losses arising in connection with the violation of any
statutes or regulation pertaining to the foregoing; nevertheless, if
the Issuer should incur any such pecuniary liability, then in such
event the Company shall indemnify and hold the Issuer harmless against
all claims, demands or causes of action whatsoever, by or on behalf of
any person, firm or corporation or other legal entity arising out of
the same or out of any offering statement or lack of offering statement
in connection with the sale or resale of the Bonds and all costs and
expenses incurred in connection with any such claim or in connection
with any action or proceeding brought thereon, and upon notice from the
Issuer, the Company shall defend the Issuer in any such action or
proceeding. All references to the Issuer in this Section 7.2 shall be
deemed to include its trustees, officers, employees and agents.
(c) The Company agrees to indemnify and hold harmless the
Issuer, the Standby Purchaser and the Placement Agents from and against
any and all loss, liability, claim, damage and expenses whatsoever (i)
arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Private Placement Memorandum which
relates to the Company, to the Project or to the Company's
participation in the transactions contemplated by the Indenture, the
Agreement or the Standby Bond Purchase Agreement or arising out of the
omission or alleged omission from the Private Placement Memorandum of
any material fact required to be stated therein or necessary to make
the statements as they relate to the Company or the Project or to the
Company's participation in the transactions contemplated by the
Indenture, the Agreement or the Standby Bond Purchase Agreement in the
light of the circumstances under which they were made, not misleading
unless such statement or omission was made in reliance upon information
furnished to the Company by the Issuer, the Standby Purchaser or the
Placement Agents, as the case may be, (ii) to the extent of the
aggregate amount paid in settlement of any litigation, commenced or
threatened, arising from a claim based on any such untrue statement or
omission or any such alleged untrue statement or omission, if such
settlement is effected with the written consent of the Company, and
(iii) reasonable expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, arising from
a claim based upon any such untrue statements or omission or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid pursuant to the preceding clauses of this sentence.
The Company shall be notified in writing of the nature of each and any
such claim within a reasonable time after the assertion thereof, but
failure to notify the Company shall not relieve them from any liability
which they may have on account of this indemnity. Each of the Issuer,
the Standby Purchaser and the Placement Agents shall be entitled to
participate at its own expense in the defense of any such claim.
Notwithstanding anything to the contrary contained herein, the Company
shall have no liability to indemnify the Issuer or the Trustee against claims or
damages resulting from the Issuer's or Trustee's own gross negligence or willful
misconduct.
Section 7.3. Redemption of Bonds. The Company, upon giving forty-five (45)
days written notice to the Trustee, shall have and is hereby granted the option
to cause all or a portion of the Bonds to be redeemed at the times permitted by
the Indenture. The Issuer, at the request of the Company, shall forthwith take
all steps (other than the payment of the money required for such redemption)
necessary under the applicable redemption provisions of the Indenture to effect
redemption of all or part of the Outstanding Bonds, as may be specified by the
Company, on the date established for such redemption.
Section 7.4. Issuer to Grant Security Interest to Trustee. The parties
hereto agree that pursuant to the Indenture, the Issuer shall assign to the
Trustee, in order to secure payment of the Bonds, all of the Issuer's right,
title and interest in and to this Agreement, except for the Issuer's rights
under Sections 4.2(b), 4.2(f), 7.2 and 8.4 hereof.
Section 7.5. Indemnification of Trustee. The Company shall and hereby
agrees to indemnify the Trustee for, and hold the Trustee harmless against, any
loss, liability or expense (including the costs and expenses of defending
against any claim of liability) incurred without gross negligence or willful
misconduct by the Trustee and not in violation of any of the terms of the
Indenture and arising out of or in connection with its acting as Trustee under
the Indenture.
* END OF ARTICLE VII *
<PAGE>
ARTICLE VIII
DEFAULTS AND REMEDIES
Section 8.1. Defaults Defined. The following shall be "Defaults" under this
Agreement and the term "Default" shall mean, whenever it is used in this
Agreement, any one or more of the following events:
(a) Failure by the Company to pay any amount required to be
paid under subsection (a) or (d) of Section 4.2 hereof, which failure
shall have resulted in a Default under clause (a), (b) or (c) of
Section 9.01 of the Indenture.
(b) Failure by the Company to observe and perform any
covenant, condition or agreement on its part to be observed or
performed, other than as referred to in Section 8.1(a), for a period of
thirty (30) days after written notice specifying such failure and
requesting that it be remedied shall have been given to the Company by
the Issuer or the Trustee; provided, however, if the failure stated in
the notice cannot be corrected within the applicable period, the Issuer
and the Trustee may consent to an extension of such time if corrective
action is instituted by the Company within the applicable period and
diligently pursued until such failure is corrected.
(c) The dissolution or liquidation of the Company, except as
authorized by Section 2.2 hereof, or the voluntary initiation by the
Company of any proceeding under any federal or state law relating to
bankruptcy, insolvency, arrangement, reorganization, readjustment of
debt or any other form of debt relief, or the initiation against the
Company of any such proceeding which shall remain undismissed for sixty
(60) days, or failure by the Company to promptly have discharged any
execution, garnishment or attachment of such consequence as would
impair the ability of the Company to carry on its operations at the
Project, or assignment by the Company for the benefit of creditors, or
the entry by the Company into an agreement of composition with its
creditors or the failure generally by the Company to pay its debts as
they become due.
(d) Any representation or warranty made by the Company herein
or any statement in any report, certificate, financial statement or
other instrument furnished in connection with this Agreement or the
Standby Bond Purchase Agreement shall at any time prove to have been
false or misleading in any material respect when made or given.
(e) The Company shall fail to perform or observe any other
term, covenant, condition or agreement contained or incorporated by
reference herein (other than a term, covenant, condition or agreement a
default in the performance or observance of which is elsewhere in this
Section specifically dealt with) and such failure shall remain
unremedied for thirty (30) days after notice to remedy the same.
(f) The occurrence of a Default under the Indenture.
The provisions of subsection (b) of this Section are subject to the following
limitation: if by reason of force majeure the Company is unable in whole or in
part to carry out any of its agreements contained herein (other than its
obligations contained in Article IV hereof), the Company shall not be deemed in
Default during the continuance of such inability. The term "force majeure" as
used herein shall mean, without limitation, the following: acts of God; strikes
or other industrial disturbances; acts of public enemies; order or restraints of
any kind of the government of the United States of America or of the State or of
any of their departments, agencies or officials, or of any civil or military
authority; insurrections; riots; landslides; earthquakes; fires; storms;
droughts; floods; explosions; breakage or accident to machinery, transmission
pipes or canals; and any other cause or event not reasonably within the control
of the Company. The Company agrees, however, to remedy with all reasonable
dispatch the cause or causes preventing the Company from carrying out its
agreement, provided that the settlement of strikes and other industrial
disturbances shall be entirely within the discretion of the Company and the
Company shall not be required to settle strikes, lockouts and other industrial
disturbances by acceding to the demands of the opposing party or parties when
such course is in the judgment of the Company unfavorable to the Company.
Section 8.2. Remedies on Default. Whenever any Default referred to in
Section 8.1 hereof shall have happened and be continuing, the Trustee, or the
Issuer with the written consent of the Trustee, may take one or any combination
of the following remedial steps:
(a) If the Trustee has declared the Bonds immediately due and
payable pursuant to Section 9.02 of the Indenture, by written notice to
the Company, declare an amount equal to all amounts then due and
payable on the Bonds, whether by acceleration on maturity (as provided
in the Indenture) or otherwise, to be immediately due and payable as
liquidated damages under this Agreement and not as a penalty, whereupon
the same shall become immediately due and payable;
<PAGE>
(b) Have reasonable access to and inspect, examine and make
copies of the books and records and any and all accounts, data and
income tax and other tax returns of the Company during regular business
hours of the Company if reasonably necessary in the opinion of the
Trustee; or
(c) Take whatever action at law or in equity may appear
necessary or desirable to collect the amounts then due and thereafter
to become due, or to enforce performance and observance of any
obligation, agreement or covenant of the Company under this Agreement.
Any amounts collected pursuant to action taken under this Section shall
be paid into the Bond Fund and applied in accordance with the provisions of the
Indenture.
Section 8.3. No Remedy Exclusive. No remedy herein conferred upon or
reserved to the Issuer or the Trustee is intended to be exclusive of any other
available remedy or remedies, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy given under this Agreement or now
or hereafter existing at law or in equity. No delay or omission to exercise any
right or power accruing upon any Default shall impair any such right or power or
shall be construed to be a waiver thereof, but any such right or power may be
exercised from time to time and as often as may be deemed expedient. In order to
entitle the Issuer or the Trustee to exercise any remedy reserved to it in this
Article, it shall not be necessary to give any notice, other than such notice as
may be required in this Article. Such rights and remedies as are given the
Issuer hereunder shall also extend to the Trustee, and the Trustee, the Standby
Purchaser and the Owners of the Bonds, subject to the provisions of the
Indenture, shall be entitled to the benefit of all covenants and agreements
herein contained.
Section 8.4. Agreement to Pay Attorneys' Fees and Expenses. In the event
the Company should default under any of the provisions of this Agreement and the
Issuer, the Standby Purchaser or the Trustee should reasonably employ attorneys
or reasonably incur other expenses for the collection of payments required
hereunder or the enforcement of performance or observance of any obligation or
agreement on the part of the Company herein contained, the Company agrees that
it will on demand therefor pay to the Issuer, the Standby Purchaser or the
Trustee the reasonable fee of such attorneys and such other expenses so incurred
by the Issuer, the Standby Purchaser or the Trustee.
Section 8.5. No Additional Waiver Implied by One Waiver; Consent of Standby
Purchaser Required for Waivers. In the event any agreement contained in this
Agreement should be breached by either party and thereafter waived by the other
party, such waiver shall be limited to the particular breach so waived and shall
not be deemed to waive any other breach hereunder. Neither the Issuer nor the
Trustee may waive any provision hereunder without the prior written consent of
the Standby Purchaser.
* END OF ARTICLE VIII *
<PAGE>
ARTICLE IX
OPTIONS TO TERMINATE AGREEMENT
Section 9.1. Option to Terminate Upon the Occurrence of Certain Events. The
Company shall have, and is hereby granted, the option to terminate its
obligations under this Agreement if any of the events set forth below shall
occur:
(a) The Project shall have been damaged or destroyed (i) to
such extent that it cannot, in the Company's judgment, be reasonably
restored within a period of six (6) months to the condition thereof
immediately preceding such damage or destruction, or (ii) to such
extent that the Company is thereby prevented, in the Company's
judgment, from carrying on its normal operations at the Project for a
period of six (6) months or more.
(b) Title to, or the temporary use for a period of six (6)
months or more of, all or substantially all the Project, or such part
thereof as shall materially interfere, in the Company's judgment, with
the operation of the Project for the purpose for which the Project is
designed, shall have been taken under the exercise of the power of
eminent domain by any governmental body or by any person, firm or
corporation acting under governmental authority (including such a
taking or takings as results in the Company being thereby prevented
from carrying on its normal operations at the Project for a period of
six (6) months or more).
(c) Changes which the Company cannot reasonably control or
overcome in the economic availability of materials, supplies, labor,
equipment and other properties and things necessary for the efficient
operation of the Project for the purposes contemplated by this
Agreement shall have occurred which in the judgment of the Company
render the continued operation of the Project uneconomic for such
purposes.
(d) As a result of any changes in the Constitution of the
State or the Constitution of the United States of America or of
legislative or administrative action (whether state or federal) or by
final decree, judgment or order of any court or administrative body
(whether state or federal) entered after the contest thereof by the
Company in good faith, this Agreement shall have become void or
unenforceable or impossible of performance in accordance with the
intent and purposes of the parties as expressed in this Agreement, or
unreasonable burdens or excessive liabilities shall have been imposed
on the Company in respect to the Project, including, without
limitation, federal, state or other ad valorem, property, income, or
other taxes not being imposed on the date of this Agreement.
To exercise such option, the Company shall within ninety (90) days following the
event authorizing such termination, give written notice to the Issuer, the
Standby Purchaser and the Trustee and shall specify therein the date of
redemption of Bonds pursuant to Section 3.01 of the Indenture, which date shall
be the next interest payment date in respect of the Bonds for which the required
notice of redemption can practicably be given, and shall make arrangements
satisfactory to the Trustee for the giving of the required notice of redemption.
In order to exercise such option, the Company shall pay, or cause to be paid, on
or prior to the applicable redemption date, to the Trustee, an amount equal to
the sum of the following:
(1) An amount of money which, when added to the amount then on
deposit and available in the Bond Fund, will be sufficient to retire
and redeem all the Outstanding Bonds on the earliest possible
redemption date after notice as provided in the Indenture, including,
without limitation, the principal amount thereof, all interest to
accrue to said redemption date, and the applicable redemption premium,
if any, plus
(2) An amount of money equal to the Trustee's fees and
expenses under the Indenture accrued and to accrue until such final
payment and redemption of the Bonds, plus
(3) An amount of money equal to the Issuer's fees and expenses
under this Agreement accrued and to accrue until such final payment and
redemption of the Bonds.
Section 9.2. Optional Prepayment. The Company shall be permitted
to prepay the Loan to the extent and
in the manner permitted by the Indenture. No other prepayment is permitted.
* END OF ARTICLE IX *
<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.1. Term of Agreement. This Agreement shall remain in full force
and effect from the date hereof to and including such time as all of the Bonds
and the fees and expenses of the Issuer, the Standby Purchaser and the Trustee
shall have been fully paid or provision made for such payments.
Section 10.2. Notices. All notices, certificates or other communications
hereunder shall be sufficiently given and shall be deemed given when delivered
or mailed by registered mail, postage prepaid, or sent by a reputable over-night
courier service capable of providing a receipt, addressed as follows: if to the
Issuer, to the Oklahoma Industries Authority, 123 Park Avenue, Oklahoma City,
Oklahoma 73102; if to the Trustee, to Boatmen's National Bank of Oklahoma, P.O.
Box 25189, Oklahoma City, Oklahoma 73125, Attention: Corporate Trust Department;
if to the Company, to Tower Tech, Inc., P.O. Box 1838, Chickasha, Oklahoma,
73023, Attention: President; and if to the Standby Purchaser, Oklahoma Gas and
Electric Company, 101 North Robinson, Oklahoma City, Oklahoma 73102, Attention:
Treasurer. A duplicate copy of each notice, certificate or other communication
given hereunder by the Issuer or the Company shall also be given to the Trustee
and the Standby Purchaser. The Issuer, the Company, the Trustee and the Standby
Purchaser may, by written notice given hereunder, designate any further or
different addresses to which subsequent notices, certificates or other
communications shall be sent.
Section 10.3. Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon the Issuer, the Company, the Standby Purchaser, the
Trustee, the Owners of Bonds and their respective successors and assigns,
subject, however, to the limitations contained in Section 2.2(b) hereof.
Section 10.4. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
Section 10.5. Amounts Remaining in Funds. Subject to the provisions of
Section 6.10 of the Indenture, it is agreed by the parties hereto that any
amounts remaining in the Bond Fund, the Construction Fund or any other fund
created under the Indenture upon expiration or earlier termination of this
Agreement, as provided in this Agreement, after payment in full of the Bonds (or
provision for payment thereof having been made in accordance with the provisions
of the Indenture) and the fees and expenses of the Trustee in accordance with
the Indenture, shall belong to and be paid to the Company by the Trustee.
Section 10.6. Amendments, Changes and Modifications. Subsequent to the
issuance of Bonds and prior to their payment in full (or provision for the
payment thereof having been made in accordance with the provisions of the
Indenture), and except as otherwise herein expressly provided, this Agreement
may not be effectively amended, changed, modified, altered or terminated without
the written consent of the Trustee and the Standby Purchaser and payment of all
amounts payable to the Standby Purchaser in accordance with the provisions of
the Indenture.
Section 10.7. Execution in Counterparts. This Agreement may be
simultaneously executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument.
Section 10.8. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State.
Section 10.9. Captions. The captions and headings in this Agreement are
for convenience only and in no way define, limit or describe the scope or
intent of any provisions or Sections of this Agreement.
* END OF ARTICLE X *
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Agreement to be executed
in its name and the Company has caused this Agreement to be executed in its name
all as of the date first above written.
OKLAHOMA INDUSTRIES AUTHORITY
By:__________________________
Chairman
(Seal)
Attest:
- ------------------------
Assistant Secretary
TOWER TECH, INC.
By:______________________
President
<PAGE>
EXHIBIT "A"
PROJECT SITE
A part of the Southeast Quarter (SE/4) of Section Eleven (11), Township
Ten (10) North, Range Four (4) West of the Indian Meridian, Cleveland
County, Oklahoma, being more particularly described as follows:
COMMENCING at the Southeast corner of said SE/4, THENCE South
89(Degree)42'04" West along the South line of said SE/4 a distance of
1,780.60 feet to the POINT OF BEGINNING; THENCE continuing South
89(Degree)42'04" West along the South line a distance of 843.24 feet to
the Southwest Corner of said SE/4; THENCE North 00(Degree)07'35" West
along the West line of said SE/4 a distance of 1,764.49 feet to a point
880.00 feet South of the Northwest Corner of said SE/4; THENCE North
89(Degree)42'07" East parallel to and 880.00 feet South of the North
line of said SE/4 a distance of 490.00 feet; THENCE South
00(Degree)07'35" East and parallel with the West line of said SE/4 a
distance of 450.00 feet; THENCE North 89(Degree)42'07" East and
parallel with the North line of said SE/4 a distance of 1,380.65 feet
to a point on the West right-of-way line of Will Rogers West Expressway
(Interstate Highway No. 44); THENCE South 18(Degree)12'00" West along
the West right-of-way line of said Expressway for a distance of 501.74
feet to a point of curvature; THENCE Southwesterly along the West
right-of-way line of said Expressway and on the arc of a curve to the
right having a radius of 681.20 feet and a chord bearing of South
33(Degree)11'53" West for an arc distance of 356.68 feet to a point of
tangency; THENCE South 48(Degree)12'00" West along the West
right-of-way line of said Expressway a distance of 515.05 feet; THENCE
South 89(Degree)42'04" West and parallel with the South line of said
SE/4 a distance of 200.00 feet; THENCE South 48(Degree)11'34" West and
parallel to the Westerly right-of-way line of said Expressway for a
distance of 3.15 feet to a point of curvature; THENCE Southwesterly and
parallel to the Westerly right-of-way line of said Expressway and on
the arc of a curve to the left having a radius of 185.78 feet, and a
chord bearing of South 23(Degree)56'51" West for a distance of 157.23
feet; THENCE South 42(Degree)39'21" West a distance of 39.62 feet to a
point 33.00 feet North of the South line of said SE/4; THENCE South
00(Degree)17'56" East a distance of 33.00 feet to the POINT OR PLACE OF
BEGINNING. Said described tract contains 50.1586 acres, more or less.
<PAGE>
EXHIBIT "B"
PROJECT BUILDING
105,000 Square Foot Manufacturing Facility located on the real property
described on Exhibit "A" hereto.
<PAGE>
EXHIBIT "C"
REQUISITION NO. _____
To: Boatmen's National Bank Re: $4,405,000 Oklahoma
Bank of Oklahoma, as Industries Authority
P.O. Adjustable Rate Taxable
Oklahoma City, OK 73125 Industrial Revenue
Bonds (Tower Tech, Inc.
Project) Series 1996
Amount Requested:
Total Disbursements to Date:
1. Each obligation for which a disbursement is hereby requested is
described in reasonable detail in Exhibit A hereto together with the name and
address of the person, firm or corporation to whom payment is due.
2. The bills, invoices or statements of account for each obligation
referenced in Exhibit A are attached hereto as Exhibit B.
3. The Company hereby certifies that:
(a) each obligation mentioned in Exhibit A is a Cost of the
Project, has been properly incurred, is a proper charge against the
Construction Fund and has not been the basis of any previous
disbursement;
(b) no part of the disbursement requested hereby
will be used to pay for materials or equipment not yet
incorporated into the Project or for services not yet
performed in connection therewith;
(c) the expenditure of the amount requested under this
Requisition, when added to all disbursements under previous
Requisitions, will result in the total of such disbursements, other
than disbursements for reasonable expenses incurred in connection with
the issuance of the Bonds, having been used (i) for the acquisition,
rehabilitation, reconstruction or improvement of land or property or
equipping of the Project of a character subject to the allowance for
depreciation under the Code, or (ii) for payment of amounts which are,
for federal income tax purposes, chargeable to the Project's capital
account or would be so chargeable either with a proper election by the
Company or but for a proper election by the Company to deduct such
amounts.
4. All capitalized terms herein shall have the meanings assigned to
them in the Loan Agreement dated as of October 1, 1996 between Oklahoma
Industries Authority and Tower Tech, Inc.
TOWER TECH, INC.
By:___________________________
Company Representative
<PAGE>
EXHIBIT "D"
COMPLETION CERTIFICATE
TO: Oklahoma Industries Authority ("Authority")
Boatmen's National Bank of Oklahoma ("Trustee")
FROM: Tower Tech, Inc. ("Company")
SUBJECT: Loan Agreement dated as of the 1st day of October, 1996, between
the Company and the Authority (the "Loan Agreement").
Capitalized terms used herein are defined in the Loan Agreement.
The undersigned does hereby certify:
1. The acquisition, rehabilitation and installation of the Project have
been substantially completed in accordance with the Plans and in such manner as
to conform with all applicable zoning, planning and building regulations of the
governmental authorities having jurisdiction of the Project, as of
_________________, 19_____ (the "Completion Date").
2. The Costs of the Project have been paid in full except for those not yet
due and payable, which are described below and for which moneys for payment
thereof are being held in the Construction Fund:
Costs of the Project not yet due and payable:
Description Amount
$----------------
Total $________________
3. No event of default has occurred under the Loan Agreement or the
Indenture nor has any event occurred which with the giving of notice or lapse of
time or both shall become such an event of default. Nothing has occurred to the
knowledge of the Company that would prevent the performance of its obligations
under the Loan Agreement or the Indenture.
This certificate is given without prejudice to any rights against third
parties which exist at the date hereof or which may subsequently come into
being.
Executed this ______ day of __________________, 19_____.
TOWER TECH, INC.
By:___________________________
Its Authorized Representative
<PAGE>
EXHIBIT "E"
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Tower Tech, Inc. on Form S-8 (File No. 333-07337) of our report dated
February 12, 1997, on our audit of the financial statements of Tower Tech,
Inc. as of November 30, 1996 and for the year then ended, which report is
included in this Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
February 26, 1997
E-37
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-07337) of Tower Tech, Inc. of our report dated
February 6, 1996 appearing on page F-3 on this Form 10-KSB.
PRICE WATERHOUSE LLP
Houston, Texas
February 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDTED
STATEMENTS OF OPERATIONS FOUND ON PAGES F-3 THROUGH F-6 OF THE COMPANY'S FORM
10-KSB FOR THE FISCAL YEAR 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 850,332
<SECURITIES> 0
<RECEIVABLES> 5,026,698
<ALLOWANCES> 22,645
<INVENTORY> 2,919,264
<CURRENT-ASSETS> 9,718,863
<PP&E> 3,774,209
<DEPRECIATION> 419,085
<TOTAL-ASSETS> 18,310,336
<CURRENT-LIABILITIES> 6,571,737
<BONDS> 0
0
0
<COMMON> 3,371
<OTHER-SE> 3,957,228
<TOTAL-LIABILITY-AND-EQUITY> 18,310,336
<SALES> 17,796,554
<TOTAL-REVENUES> 18,636,527
<CGS> 14,740,210
<TOTAL-COSTS> 17,679,713
<OTHER-EXPENSES> 2,939,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (465,776)
<INCOME-PRETAX> 565,118
<INCOME-TAX> 0
<INCOME-CONTINUING> 565,118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565,118
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
