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, 1998
[ ] 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 (IRS Employer Identification No.)
incorporation or organization)
11935 South I-44 Service Road, Oklahoma City, Oklahoma 73173
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 405/290-7788
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class -- Common Stock, par value $.001
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 ____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [ X ]
State issuer's revenues for its most recent fiscal year. $21,044,304.
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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). $6,012,216 based on 2,004,072 shares at $3.00 per share, the last sale
price of the Common Stock on February 25, 1999. (For purposes of calculating
this amount only, all the directors and executive officers of the issuer have
been treated as affiliates.)
(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. 3,576,311 shares as of
February 25, 1999.
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 listed documents should be clearly described for identification purposes.
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 30,
1999.
Transitional Small Business Disclosure Format (check one). Yes No X
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TABLE OF CONTENTS
Part I PAGE
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holder. 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . 11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 11
Item 7. Financial Statements. . . . . . . . . . . . . . . 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . .18
Part III
Items 9 - 12. Incorporated by reference from the Company's prox
statement to be filed on or before March 30, 1999 . 19
Part IV
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . 20
Financial Statements . . . . . . . . . . . . . . . .F-1
Index to Exhibits. . . . . . . . . . . . . . . . . .25
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PART I
Item 1. Description of Business.
The Company is an Oklahoma corporation formed on February 27, 1984 and is
in the business of manufacturing and selling modular cooling towers. To signify
that the Company has redesigned and has begun to manufacture the main components
of its factory assembled modular cooling tower, the Company changed the "TTMT"
designation to "TTEF". The factory assembled TTEF Series cooling tower is made
primarily of non-corrosive materials, and is sold in both the air conditioning
and industrial segments of the cooling tower market. The field erected TTCT
Series modular concrete cooling tower was introduced in 1995 for the industrial
and utility segments of the cooling tower market. The Company's TTEF Series
cooling tower utilizes several innovative design features, including the Rotary
Spray Nozzle(TM), a bottom-mounted direct drive motor fan assembly, and a
modular design to create a compact, efficient cooling tower which management
believes reduces many of the deficiencies common to conventional design cooling
towers, which do not incorporate all of these innovative design features.
Individual modules can be utilized for air conditioning and light industrial
applications. The modular design also allows a number of modules to be connected
in series for large industrial and utility applications. The compact design of
TTEF Series modules permits them to be factory assembled, inventoried for
immediate shipment, easily transported and quickly installed. The design of the
TTEF Series cooling tower also allows it to be transported as a complete module
on a standard low-boy trailer. The TTCT Series modular concrete cooling tower
features pre-cast concrete construction and incorporates many of the innovative
design characteristics of the TTEF Series cooling tower.
In December 1998 the Company sold its rental division assets to Aggreko,
Inc., the U.S. subsidiary of United Kingdom-based Aggreko plc, and licensed
Aggreko as the Company's exclusive global licensee for the rental of the
Company's cooling towers. The Company also sells accessory equipment and
non-chemical water treatment equipment. The Company also develops technology for
the cooling tower industry and markets that technology either directly through
licensing arrangements or in the form of products as above stated.
The Cooling Tower Market
The market for cooling towers is divided 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 1,000 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, with one ton approximately equal to three GPM. Because
of shipping and other technical constraints, factory assembled units ordinarily
range in size from 30 to 1,000 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 or more.
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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
built 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 such. 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 $300 million to
$380 million and that the total annual worldwide market ranges from $1.5 billion
to $2.0 billion.
The TTEF Series Cooling Tower
Cooling towers come in a variety of sizes, prices, designs and quality.
Small capacity cooling towers intended for HVAC applications typically are
forced draft or induced draft towers which may be constructed of wood,
galvanized metal, plastic 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 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 TTEF 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 TTEF Series cooling tower is unique in the industrial
segment of the market. The TTEF Series cooling tower is efficient,
corrosion-free, low maintenance and usually is available for immediate delivery.
The modular design of the TTEF Series cooling tower allows a number of
units to be interconnected to meet almost any cooling requirement. Other
manufacturers offer small factory assembled cooling towers, including units
which incorporate plastic and fiberglass components and which can be
interconnected. However, most factory assembled units are forced draft towers
and interconnection of some models of such towers exacerbates recirculation,
resulting in thermal performance 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 industrial segment of the market. Most segments of
the cooling tower market can be served by the TTEF Series cooling tower, from
light HVAC applications to large petrochemical, refinery and utility operations.
Immediate delivery of the TTEF Series cooling tower is possible because
the modules are factory assembled and can be inventoried. Usually, only one hour
of installation time is required per module, excluding electrical and piping
connections. The concrete basin of most field erected cooling towers is replaced
in the TTEF Series cooling tower by an internal water basin. The TTEF Series
cooling tower is supported on a substructure which can either be
customer-provided fabricated metal, concrete piers, or the Company's own
fiberglass reinforced plastic substructure. The modular design also lends itself
to shipping via standard trucking without special permits. TTEF Series modules
are readily shipped to international customers as well, either in unassembled
kits or fully assembled.
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Management believes that a problem with many cooling towers manufactured
today arises from water distribution nozzles which tend to clog. Most nozzles
used in cooling towers today utilize a fixed orifice/splash plate combination in
an attempt to minimize the clogging problem. This design often creates void
areas in the water distribution pattern which causes inefficient operation and
performance deficiencies. These deficiencies can be mitigated to some degree by
installing additional fill media and/or designing a higher air inlet area in the
cooling tower, although these steps result in additional capital investment and
higher operating costs due to increased pump head and fan horsepower
requirements.
To address this problem, Mr. Harold Curtis designed and patented the
Rotary Spray Nozzle(TM) primarily for use in the Company's cooling towers. The
Rotary Spray Nozzle(TM) is designed to operate clog-free even in severe
operating conditions. This nozzle utilizes a rotating disc that floats on a
water bearing to evenly distribute the flow of water throughout the entire fill
area while generating a self-cleaning action. The radial discharge design allows
the nozzle to operate as low as one inch above the fill media and at lower
pressure than most conventional nozzles. Since conventional nozzles typically
operate at distances up to two feet or more above the fill media, the Rotary
Spray Nozzle(TM) increases tower performance and significantly reduces pump head
requirements.
In addition to reduced pump head requirements attributable to the Rotary
Spray Nozzle(TM), the pump head requirement in the TTEF Series cooling tower is
reduced because the circulating water is collected in an elevated water basin
above the air inlet. This results in reduced pump operating costs for the TTEF
Series cooling tower compared with a comparable size conventional cooling tower.
The TTEF Series cooling tower is 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, or pulleys. Depending on the size
of the module, each module has a number of fans which can be zoned on and off
automatically to deliver more efficient cooling. The mechanical equipment is
located in the cool, dry air stream and is 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 fans until repairs
could be made, thus the TTEF Series cooling tower has built-in redundancy not
typically seen in other companies' cooling towers.
The TTEF Series cooling tower has a water collection system installed
just below the fill media and above the fans. The water collection system
consists of a network of parallel chevron type blades positioned in a canopy
over the fans. As cooled water falls from the fill media, it is discharged into
hollow support beams which serve as the cooling tower's water basin. The fill
media is nestled on top of the water collector vanes and is easily installed or
removed. The water distribution system, consisting of a PVC header pipe and
laterals, is connected to the top of the module. The drift (or mist) eliminators
are supported by the water distribution piping header and laterals and locked
into the molded perimeter wall channel.
The materials of construction of the TTEF Series cooling tower virtually
eliminate all significant corrosion problems. Conventionally designed wood
cooling towers contain wood structural components which usually are treated with
chemicals and thus may be environmentally undesirable. Conventionally designed
galvanized metal cooling towers contain zinc and lead which also may be
environmentally undesirable. Corrosion and deterioration of the wood and metal
parts of a conventionally designed cooling tower often lead to costly
maintenance, repair, and ultimately replacement.
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<PAGE>
The TTEF Series cooling tower is produced in several sizes. The basic
units range in size from a seven foot by eight foot module to a twelve foot by
thirty foot module. The individual module capacities range from 50 nominal tons
to approximately 1,000 nominal tons, or approximately 150 GPM to 3,000 GPM.
These ranges of cooling duty are 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 series to satisfy the specific cooling
requirements of customers.
The Modular Concrete Cooling Tower
In 1995, the Company introduced its TTCT Series concrete cooling tower
for the industrial and utility segments of the cooling tower market. The design
of the concrete cooling tower incorporates some of the patented technology used
in the Company's TTEF Series cooling tower, as well as technology unique to the
concrete product. The TTCT Series cooling tower gives the Company added
capabilities to penetrate the large utility, petro-chemical and industrial
markets. The same technological advances made with the TTEF Series cooling
towers are utilized in the concrete tower. The concrete cooling tower is built
using a pre-cast construction method which substantially reduces construction
time as compared with a similar size wood or conventional concrete tower.
Modular Cooling Tower Rental Program
Until December 1998, the Company also rented modular cooling towers to
customers. Because of the compact size and other design features of the
Company's factory assembled cooling tower, they could be easily mounted on skids
and equipped with necessary electrical connections to produce a mobile cooling
tower which could be transported by truck to the desired location. The Company's
rented towers were used to augment customer's existing 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.
In December 1998, the Company sold its fleet of rental cooling towers to
Aggreko, Inc., the United States subsidiary of Aggreko, plc, a London Stock
Exchange Company in the business of renting industrial temperature control
equipment, electrical power generators, and oil-free compressed air equipment.
In the transaction, Aggreko purchased Tower Tech's rental operation for $13.5
million and also entered into a strategic long-term alliance with the Company.
The Company will receive a three (3) percent royalty from the rental of its
technology by Aggreko. See further discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Patents
The Company owns patents (U.S. Patent No. 5,227,095) covering the basic
design of the TTEF Series cooling tower and the TTCT Series 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 TTEF Series and TTCT Series cooling
towers. Mr. Harold Curtis has also granted an exclusive, royalty-free license to
the Company for the Rotary Spray Nozzle(TM) 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. Mr. Curtis has retained all rights with respect
to the patents in all applications other than cooling towers.
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<PAGE>
Product Design and Research and Development
The Company spent $1,810,985, $667,222, $386,474, and $108,183 on
research and development during fiscal years 1998, 1997, 1996 and 1995,
respectively. A significant portion of the 1998 costs were related to the
redesign of the TTMT Series tower to the TTEF Series tower in order to lower
future production costs. The Company is continuously evaluating its products and
manufacturing methods. The Company has not developed any significant products
other than the TTEF Series and TTCT Series cooling towers, and related
technology, at this time. The Company plans to continue to research refinements
in cooling tower design and construction. Although the Company has no fixed
research and development budget, such costs are anticipated to be less than
current levels.
Assembly of Products
The Company's TTEF Series modular cooling towers are currently assembled
at its new manufacturing and assembly plant in Oklahoma City, Oklahoma. (See
Item 2. Description of Property). In addition to assembly, the Company has
brought "in-house" the manufacturing of substantially all component parts which
were previously manufactured by other companies using pultrusion or extrusion
molding technology. The Company believes that bringing these manufacturing
processes in-house will help ensure and control quality and supply, as well as
substantially reduce costs of production of these parts. The Company also
pre-casts most of the concrete component parts of its TTCT Series modular
concrete cooling towers.
Suppliers and Vendors
The Company relies upon suppliers for materials and parts used to
manufacture and assemble its products. Most materials and parts purchased from
suppliers are available from multiple sources. The Company has invested in tools
and dies which in a few cases are used by suppliers in the manufacture of
components for the Company. However, as noted above, the Company has moved
substantially all of these manufacturing processes "in-house." 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.
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 opened direct
offices or 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, Mexico and the Mediterranean
region. Negotiations are in process for similar arrangements for Spain, Peru,
New Zealand, Australia, and the United Kingdom. Sales representatives typically
market the Company's products along with a variety of other products related to
cooling towers.
In addition to its direct sales activities, the Company markets its
products in a number of other ways, including exhibiting at 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 photography and computer animation. These media and compact
discs are distributed to engineering firms, contractors, manufacturers and
specialized mailing lists in the HVAC and industrial cooling tower markets. The
Company also has a full-time marketing manager who is responsible for
publicizing the product, identifying marketing opportunities and developing a
marketing strategy.
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Warranties and Customer Service
The Company provides a limited warranty on its products. In 1998, the
Company incurred $671,267 of expenses to retrofit and service towers, as
compared to $426,699 during fiscal 1997. 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 and Environmental Laws
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, 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 largest
manufacturers, Marley Cooling Tower Co. and Baltimore Air Coil, collectively
account for 60 percent 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. The
Company estimates that its share of the United States cooling tower market for
1998 is approximately 5%.
A number of the Company's competitors manufacture and market cooling
towers which use fiberglass and other composite materials, PVC cellular fill
media and other construction and design refinements which are similar to the
TTEF Series cooling tower. Several competitors manufacture factory assembled
fiberglass cooling towers, including units which can be connected in a series.
Management believes that its TTEF Series cooling tower offers several 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.
Employees
As of November 30, 1998, the Company had 125 full-time employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that relations with its employees are good.
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<PAGE>
Item 2. Description of Property.
The Company's principal place of business is located in South Oklahoma
City, Oklahoma, on a 50-acre tract. The new manufacturing facility of
approximately 98,000 square feet houses its manufacturing and assembly
operations as well as interim office facilities. The Company began to occupy the
facility in January 1998 and began production operations in the fourth quarter
1998. A new administrative office facility of approximately 20,000 square feet
is under construction on the site and should be completed in March 1999. The
Company will move its general headquarters to this new facility when it is
completed. The Oklahoma Industries Authority ("OIA") partially financed the new
manufacturing plant through an industrial revenue bond issuance in the amount of
$4,405,000. Management estimates the Company's total investment in the new
manufacturing facility will be $11.5 million, including $6.0 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 Company's facilities also 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 plans to lease or sell this
property.
The new Oklahoma City (OKC) plant is expected to increase efficiency of
the Company's production and assembly process. The ceiling height and
configuration of the Chickasha plant limited production methods. The OKC plant
should be adequate to support annual TTEF Series cooling tower sales of
approximately $100 million, which should be adequate for several years. The OKC
plant is closer to major transportation routes and facilities, particularly the
Will Rogers World Airport.
Item 3. Legal Proceedings
Commencing in 1997 and continuing into December 1998, the Company was a
party to litigation styled Tower Tech, Inc. v. Goodyear Rubber & Tire Company,
U.S.D.C. Western District Court of Oklahoma Case No. CIV-97-1682-T. The Company
and Goodyear have resolved and compromised their disputes in such lawsuit.
Pursuant to a Settlement Agreement and Conditional Release, the lawsuit has been
dismissed without prejudice, and both Goodyear and the Company have denied the
claims made by both parties in the lawsuit.
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 SmallCap system under the symbol "TTMT". The following table shows the
high and low closing bid prices for the Common Stock as reported by NASDAQ for
each quarter during the last three fiscal years. Bid prices represent prices
between dealers, do not include retail mark-ups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Ended High Low
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
February 28, 1997 11 1/4 10
May 31, 1997 9 5/8 8
August 31, 1997 9 3/8 7 3/8
November 30, 1997 8 5/8 7
February 28, 1998 7 1/4 6 1/4
May 31, 1998 6 7/8 6 1/8
August 31, 1998 5 1/2 4 1/2
November 30, 1998 3 4/5 3 1/2
</TABLE>
On February 25, 1999, the last sale price of the Common Stock as reported
by NASDAQ was $3.00 per share. On February 25, 1999, the Common Stock was held
of record by 55 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 of Financial Condition and
Results of Operations.
General
The following discussion should be read in conjunction with the company's
financial statements and the related notes thereto.
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, and 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 largely completed during 1994. To signify that the Company has
redesigned and is now manufacturing the main components of the modular cooling
tower, the Company changed the "TTMT" designation to "TTEF". The Company also
developed the TTCT Series concrete cooling tower during 1995. This product was
introduced to the market in 1995. The Company also sells
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<PAGE>
cooling tower components, cooling tower accessory equipment, and Fre-Dox(TM)
water treatment equipment; and during FY 1998 and FY 1997 rented cooling towers
to customers. Additionally, the Company develops technology for the cooling
tower industry and markets that technology either directly through licensing
agreements or in the form of its products.
The Company derives revenue from the following principal sources: TTEF
Series cooling tower sales; TTCT Series cooling tower construction projects;
modular cooling tower rentals; other tower revenue consisting of parts sales and
service, accessory equipment sales, water treatment equipment sales; and other
operating revenue consisting of fees for the licensing of its technology to
others, primarily internationally. TTEF Series cooling towers typically are sold
on a bid basis and revenue is generally recognized when towers are shipped to
customers. TTCT Series concrete cooling tower projects are typically sold on a
fixed-price basis. Revenue and related costs for TTCT Series cooling tower
projects are recognized under the percentage of completion method of accounting.
Rental towers were rented under short-term or month-to-month agreements and
revenue was recognized when earned. Revenues from licensing agreements are
recognized when a non-cancelable contract is signed specifying a fixed
non-refundable licensing fee, technology materials are delivered to the licensee
and governmental approval has been obtained when required.
Results of Operations
Twelve Months Ended November 30, 1998 Compared to Twelve Months Ended
November 30, 1997
For the twelve months ended November 30, 1998, total tower revenues
increased to $21,044,304 from $18,690,454 for the comparable period in the prior
year. During the current twelve month period, 44 percent of total tower revenues
was derived from sales of 275 modular fiberglass cooling towers, 27 percent of
total tower revenues was derived from design and construction of the TTCT Series
concrete cooling towers, 26 percent of total tower revenues was derived from
rental of modular fiberglass cooling towers, and 3 percent of total tower
revenues was derived from other tower revenue. In the comparable twelve month
period in 1997, 65 percent of total tower revenues was derived from sales of 317
modular cooling towers, 19 percent of total tower revenues was derived from
design and construction of modular concrete towers, 7 percent of total tower
revenues was derived from rental of modular cooling towers, and 9 percent of
total tower revenues were derived from other tower revenue. The decrease in
tower sales revenue for 1998 is due not only to the decrease in the quantity of
units sold but also to the sales of smaller capacity, less expensive units. The
decrease in the number of units sold is due primarily to the delays in the
completion and occupancy of the Oklahoma City manufacturing plant combined with
delays in the delivery of the manufacturing equipment and tooling. It is
estimated that these delays will have a negative impact through second quarter
1999. The increase in concrete tower revenues is due to the increase in the
number and size of jobs completed and in process. The increase in tower rentals
is due mainly to one rental contract for 80 of the Company's largest modular
fiberglass cooling towers in the third quarter of 1998. Other tower revenue is
down from the previous year due to the same reasons that tower sales decreased
combined with less sales of proprietary parts to licensees. No new licensing
agreements were finalized in 1998 although negotiations are continuing for
agreements for Spain, Peru, New Zealand, Australia, and the United Kingdom.
Other operating revenue for the twelve months ended November 30, 1997, consists
of technology transfer fees which were realized as a result of international
license agreements with Tecno Procesos Industriales covering the Republic of
Mexico. 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 modular
cooling towers.
-12-
<PAGE>
The Company's cost of goods sold and constructed during the twelve-month
period ended November 30, 1998 was $17,594,126 or 84 percent of total tower
revenues, as compared to $13,842,816 or 74 percent, during the comparable period
in 1997. Overall margin decreased as a result of concrete cooling tower cost
overruns on certain jobs and lower margins incurred in the modular fiberglass
cooling tower line due to the additional costs associated with the plant,
equipment and tooling delays. However, these decreases in margin were mostly
offset by an increase in rental revenues, which is a higher margin operation.
Included in the cost of goods sold for the twelve month period ended November
30, 1998, is $671,267 to retrofit and service towers previously sold. This
compares to retrofit and warranty costs of $426,699 during the fiscal year ended
November 30, 1997. The Company has a complete quality control system in place
which management believes will control such expenditures in future periods.
The twelve-month period ended November 30, 1998 reflected an increase
in general and administrative expenses from $1,703,896 in 1997 to $3,033,369 in
1998. The increase is due mainly to the addition of office staff and related
expenses, additional expenses related to the OKC facility, and an increase in
bad debt expense. Selling expenses increased from $1,309,292 to $1,989,322. The
increase is due to increased sales and marketing efforts for both cooling tower
lines, water treatment equipment, accessory equipment and rental towers. This
includes an increase in sales staff and expenses related primarily to the
opening of direct domestic and international sales offices. Due to the downturn
in certain international economies, the Company has taken steps to curtail
expenses in those areas. Management expects the overall increased investment in
selling expenses to have a continued positive impact on revenues in future
periods.
Research and development expenses increased from $667,222 in fiscal
1997 to $1,810,985 in fiscal 1998. A significant portion of the increase in R &
D costs is related to the redesign of the TTMT Series tower to the TTEF Series
tower in order to lower future production costs. With the redesign of the tower
combined with manufacturing of component parts in-house, management believes
that the Company has positioned itself to grow its share of the cooling tower
market. With the lower production costs, management believes that it will be
able to lower prices to its customers and, at the same time, increase margins.
Management expects to continue to conduct research to develop refinements in
cooling tower design and construction. Although the Company has no fixed
research and development budget, such costs are anticipated to be significantly
less than 1998 expenditures.
The Company's loss from operations for the year ended November 30,
1998, was $3,383,498 as compared to income from operations of $2,027,723 for the
prior year. The Company's net loss was $2,671,232 compared to a net income of
$2,062,951 for the year ended November 30, 1997.
The Company recognized an income tax benefit of $1,670,088 for the year
ended November 30, 1998, compared to an income tax benefit of $615,919 for the
comparable period in 1997. FAS 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. Management has determined that, based
on the Company's ability to generate taxable income in two consecutive years
(1997 and 1996), and the gain from the sale of the rental operation in December
1998, it is more likely than not that the Company will realize the net deferred
tax assets.
-13-
<PAGE>
As of February 1, 1999, the Company's estimated backlog of $6.9 million
includes two contracts for TTCT Series modular concrete cooling towers totaling
$1.6 million. One concrete tower contract is scheduled for completion in the
second quarter of 1999 and the remaining contract is projected to be completed
in the fourth quarter of 1999. Estimated backlog for the TTEF Series modular
cooling towers is $5.3 million. $2.2 million is scheduled for delivery in
February 1999, with the balance scheduled for delivery in the second quarter of
fiscal year 1999.
Liquidity and Capital Resources
At November 30, 1998, the Company had a working capital deficit of
$3,890,374. Pro forma working capital at November 30, 1998, considering the sale
of the Company's rental operations, as described below, was $6,725,000. Working
capital at November 30, 1997 was $6,904,910. The Company's cash flow provided by
(used in) its operating, investing and financing activities during fiscal years
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities ($495,572) ($571,023)
Investing activities ($11,912,145) ($3,695,164)
Financing activities $11,859,561 $3,967,809
</TABLE>
In 1998, the Company used capital of $5,012,935 to increase the rental
tower fleet. 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. 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. Although bringing the manufacturing processes in-house has taken over a
year longer than expected and has cost substantially more than anticipated, it
will enable the Company to better manage inventory levels and reduce costs when
the new manufacturing facility is fully operational and efficient. However,
fluctuations in inventory levels are still expected due to the size of planned
production runs of components. Management also 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 an effect on working capital requirements. At November 30, 1998, costs
in excess of billings and earnings on uncompleted contracts were $437,207 as
compared to costs in excess of billings and estimated earnings on uncompleted
contracts of $719,447 at November 30, 1997. 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. However, in an effort
to control costs and profits on future concrete cooling tower projects, the
Company will utilize precast panels in lieu of "tilt-up" on site construction.
Scheduled principal payments on capital leases will total $166,683 over
the next twelve months. In addition, $11,029,319 of principal payments will
become due on the Company's debt during the next twelve months. Such payments
are expected to be satisfied primarily from the proceeds of the sale of the
rental operations.
-14-
<PAGE>
Substantially all of the Company's planned capital expenditures during
1999 will be related to the completion of the new manufacturing facility and
construction of the new office facility in south Oklahoma City. Management
estimates the Company's total investment in the new manufacturing facility will
be $11.5 million, including $6.0 million to equip the facility. As of November
30, 1998, the Company had incurred approximately $9 million related to the
manufacturing facility. Construction of the new office facility is expected to
be completed in March 1999. At November 30, 1998, construction expenditures were
$1.1 million. The manufacturing facility includes equipment to allow the Company
to produce parts used in the modular cooling towers which have been purchased
from outside vendors. Management believes that product costs can be reduced by
producing these parts in-house. However, the Company has incurred, and may
continue to incur, unforeseen costs and production problems, particularly in the
short term, in finalizing the bringing of these processes in-house and becoming
efficient at manufacturing.
The new manufacturing facility has been partially financed with a $4.4
million loan from the Oklahoma Industries Authority (the "OIA") and a portion of
the proceeds of a private placement of $6 million, 10% Convertible Subordinated
Debentures (the "Debentures"). The industrial revenue bonds were issued by the
OIA in October 1996. The bonds are payable in quarterly installments of
principal and interest in the amount of approximately $157,000. A debt service
reserve fund of $157,000 was also set aside from the bond proceeds. The OIA
holds a mortgage on the facility to collateralize the bond indebtedness.
The Debentures were issued by the Company during the third quarter of
1997, providing net proceeds of approximately $5,467,000. The Debentures bear
interest at 10 percent, which is payable semiannually, and mature on June 10,
2000. The principal balance of each Debenture is convertible into shares of
common stock at a price of $8.75 per share at the option of each Debenture
holder or at the option of the Company if the closing price of the common stock
is at least 175% of the conversion price for 20 of 30 consecutive trading days
and certain other conditions are satisfied.
In September 1997, the Company entered into a loan agreement with the
City of Oklahoma City under which a HUD Section 108 loan in the amount of
$1,250,000 for start-up expenses of the manufacturing facility and associated
working capital requirements. As of November 30, 1998, all of these funds had
been advanced to the Company. Initially the loan bears interest at 20 basis
points above the LIBOR rate, adjusted monthly, and interest only is payable
quarterly. When HUD provides permanent financing, the interest rate becomes
fixed at the rate charged by HUD to the City and principal and interest are
payable quarterly based on an eight-year amortization period. The loan is
collateralized by a second mortgage on the manufacturing facility.
The Company has entered into an agreement with a lending institution for
a total funding of $1,775,815 for equipment and tooling for the new
manufacturing facility. Principal and interest, at 9.25%, is paid monthly with
the final payment due in July 2004 and is collateralized by equipment.
Effective December 31, 1997, the Company entered into a $3,500,000 line
of credit agreement with a financial institution for working capital
requirements and completion of the Company's manufacturing facility in Oklahoma
City. This line was increased to $8,500,000 to help fund increases in the
Company's rental fleet. The outstanding balance at November 30, 1998 was
$8,333,721. Interest was payable monthly at a variable rate of two basis points
over national prime rate. The agreement is collateralized by certain accounts
receivable, inventory, rental fleet and patents. This credit facility was paid
off in December 1998 with proceeds from the sale of the rental operations.
-15-
<PAGE>
The Company has a line of credit at Chickasha Bank in the amount of
$400,000 for short-term cash flow needs, of which $330,000 was outstanding at
November 30, 1998. This line of credit matures April 1, 1999 and has an interest
rate of 10%.
In April 1998, the Company finalized a $2,000,000 construction loan for
the Oklahoma City office facility which is expected to cost approximately $2.4
million. The loan matures in April 1999 and bears interest at 9.75% payable
monthly. At November 30, 1998, $1,069,813 was outstanding. The Company is
negotiating with the lender to increase this loan to $2.4 million and convert
this loan to permanent financing when construction is complete.
In December 1998, the company consummated the sale of its industrial
modular cooling tower rental operations (the "Rental Operations") to Aggreko
Inc., an unrelated party, for $13,500,000, with $12,150,000 paid in cash at
closing and the remaining $1,350,000 paid by delivery of Aggreko Inc.'s
promissory note (the "Note"). The Note bears interest at 1% above prime. The
outstanding principal balance of the Note, together with accrued interest, is
due and payable in December 1999. The assets sold included the modular cooling
tower rental fleet, other rental fleet equipment, and certain assets used in the
operation of the Rental Operations. Due to the sale of the Rental Operations,
the private placement of 10% Convertible Debentures that was in progress at
August 31, 1998, was cancelled. The Company expects to record a pre-tax gain of
approximately $6.7 million in the first quarter of fiscal 1999.
In connection with the sale of assets described above, Aggreko Inc., the
Company, and Harold D. Curtis, the Company's Chief Executive Officer, entered
into a Noncompetition Agreement. The Noncompetition Agreement generally
prohibits the Company and Mr. Curtis from conducting any business in competition
with the Rental Operations, as well as hiring certain of the Company's prior
employees who worked in the Rental Operations.
Additionally, in connection with the sale of assets described above, the
Company and Aggreko Inc. entered into a License Agreement and a Supply
Agreement. The License Agreement grants to Aggreko Inc. an exclusive license to
use for a limited time period the patents, trademarks, trade names and other
proprietary rights related to the Rental Operations. The Supply Agreement
describes the terms upon which the Company has agreed to sell to Aggreko Inc.,
and Aggreko Inc. has agreed to purchase from the Company, all modular cooling
tower units and replacement parts necessary for future operations of the Rental
Operations.
In December 1998, the Company entered into a $4,000,000 line of credit
agreement with a financial institution for working capital requirements.
Interest is payable monthly at a variable rate of 1.5% over national prime. This
line of credit matures in January 2000. This credit facility is collateralized
by certain accounts receivable, inventory and general intangibles, and as of
February 23, 1999, $3.3 million was outstanding.
Management recognizes that the Company is highly leveraged and that while
financial leverage can increase the Company's return on equity, it also
increases the risk presented to equity owners of the Company. Management
believes that the proceeds from the sale of the Rental Operations combined with
the $4,000,000 line of credit will provide sufficient capital to fund the
Company's requirements for the next four quarters. However, the Company has
positioned itself to aggressively grow revenues, and accordingly, increasing
accounts receivable and inventory levels would require additional financing.
However, there can be no assurance that the Company will be able to obtain
additional financing, and failure to do so would curtail the Company's growth
and operating results.
-16-
<PAGE>
Year 2000 Compliance
More than twenty months ago the Company developed a plan to address the
Year 2000 (Y2K) issue. The plan consists of the following steps and is ongoing:
Testing of all computer equipment, plant production equipment, hardware
and/or software.
Upgrading or replacing, as needed, any component found
to not be Y2K compliant.
Contacting our vendors, customers and business partners to ensure that they
are also addressing the Y2K issue. And, if any are found to not be
addressing the Y2K issue, establish alternative sources for those goods
and/or services supplied by the non-Y2K compliant party.
Accordingly, the Company has upgraded its accounting systems and main
application software to the latest versions available from the software
developers at a cost of approximately $100,000. Each of these various software
developers has stated that the version(s) of software to which the Company
upgraded is or will be Y2K compliant. Any computer equipment, plant production
equipment, hardware or software found to not be Y2K compliant has been, or will
be upgraded or replaced as needed in order to insure uninterrupted normal
operation of production and office processes. As a result of our Y2K plan and
information furnished to us by our business partners, the Company does not
expect to be materially affected by the Y2K problem.
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 both domestic and international 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, including timely and efficient
production of its products and utilization of the new OKC plant.
Earnings Per Share
In February 1997, the financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earning Per Share ("FAS
128"). FAS 128 changes the computation, presentation and disclosure requirements
for earnings per share. FAS 128 requires presentation of "basic" and "diluted"
earnings per share, as defined, on the face of the income statement for all
entities with complex capital structures. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share amounts. The Company has
adopted FAS 128 and restated 1997 earnings per share with only a minimal impact.
-17-
<PAGE>
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.
None.
-18-
<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 30, 1999.
-19-
<PAGE>
PART IV
Item 1. Exhibits
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
4.1-7 Form of 10% Subordinated Convertible Debenture
4.2 Omitted
4.3-1 Form of Stock Certificate
4.4 Omitted
4.5-8 Form of Placement Agent Warrants
4.10 Omitted
10.1-3 Promissory Note between Tower Tech, Inc., and Local Federal
Bank, dated June 24, 1998.
10.2-9 Loan Agreement between Tower Tech, Inc., and the City of
Oklahoma City, dated September 8, 1997.
10.3-9 Form of Loan Agreement between Tower Tech, Inc., and
Chickasha Bank & Trust, dated September 22, 1997.
10.4-6 Loan Agreement between Tower Tech, Inc., and Oklahoma
Industries Authority dated October 1, 1997
10.5-7 Form of Debenture Purchase Agreement among the Company,
Taglich Brothers, D'Amadeo Wagner & Company, Incorporated
and various lenders.
10.6-9 Promissory Note between Tower Tech, Inc. and Electrical
Constructors, dated May 8, 1996
-20-
<PAGE>
10.7-9 Promissory Note between Tower Tech, Inc., as Maker, and
Electrical Constructors, as Payee, dated May 8, 1997, and
amendment extending maturity date.
10.8-9 Promissory Note between Tower Tech, Inc., and Electrical
Constructors, dated March 25, 1997, and amendment extending
maturity date.
10.9-11 Promissory Note between Tower Tech, Inc., and People First
Bank, dated December 7, 1998.
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
10.17-4 1993 Stock Option Plan, as amended
10.18-11 Loan Agreement between Tower Tech, Inc. and People First
Bank dated December 7, 1998.
10.19-6 Water Line Agreement between the City of Oklahoma City and
Tower Tech, Inc. dated November 1997
10.20-6 Master Security Agreement between CIT Group/Equipment
Financing, Inc. and Tower Tech, Inc. dated October 31, 1997
-21-
<PAGE>
10.21-2 Promissory Note between Tower Tech, Inc. and Southwestern
Bank & Trust Company, dated April 30, 1998.
10.22-2 Business Loan Agreement between Tower Tech, Inc. and
Southwestern Bank & Trust Company, dated April 30, 1998
10.23-2 Commercial Security Agreement between Tower Tech, Inc. and
Southwestern Bank & Trust Company, dated April 30, 1998
10.24-2 Promissory Note between Tower Tech, Inc. and Local Federal
Bank, dated June 10, 1998
10.25-2 Promissory Note between Tower Tech, Inc. and Local Federal
Bank, dated February 18, 1998
10.26-10 Promissory Note dated as of December 4, 1998 to the Company
from Aggreko Inc.
10.27-10 Noncompetition Agreement dated as of December 4, 1998
between the Company, Harold D. Curtis and Aggreko Inc.
10.28-10 License Agreement dated as of December 4, 1998 between the
Company and Aggreko Inc.
10.29-10 Supply Agreement dated as of December 4, 1998 between the
Company and Aggreko Inc.
10.30-5 Asset Purchase Agreement dated as of December 4, 1998
between the Company and Aggreko Inc.
10.31 Omitted
10.32 Omitted
21.1-11 Tower Tech, Inc. subsidiaries
23.1-11 Consent of PricewaterhouseCoopers LLP
-22-
<PAGE>
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 May 31, 1998.
3 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended August 31, 1998.
4 Incorporated by reference from the same numbered exhibit to Registration
Statement No. 333-07337 on Form S-8.
5 Incorporated by reference from exhibit number 99.1 to Form 8-K filed
December 18, 1998.
6 Incorporated by reference from the same numbered exhibit to Form 10-KSB
for the year ended November 30, 1997.
7 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended May 31, 1997.
8 Incorporated by reference from the same numbered exhibit to Registration
Statement No. 333-36501, Form S-3, as filed with the Commission on
September 26, 1997.
9 Incorporated by reference from the same numbered exhibit to Form 10-QSB
for the quarter ended August 31, 1997.
10 Incorporated by reference from the same numbered exhibit to Form 8-K filed
December 18, 1998. 11 Filed herewith.
b. The company filed a report on Form 8-K on December 18, 1998.
-23-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant
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
ss/HAROLD CURTIS Chief Executive Officer Director March 1, 1999
- -------------
Harold Curtis (Principal Executive Officer)
ss/ROBERT BRINK President March 1, 1999
- ------------
Robert Brink (Principal Operating Officer)
ss/CHARLES D. WHITSITT Chief Financial Officer March 1, 1999
- -------------------
Charles D. Whitsitt (Principal Financial Officer
and Principal Accounting Officer)
ss/LINCOLN E. WHITAKER Director March 1, 1999
- -------------------
Lincoln E. Whitaker
ss/LEON POAG Director March 1, 1999
- ---------
Leon Poag
-24-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of November 30, 1998 and 1997. . . . . . . . . . . . F-3
Statements of Operations for the years ended November 30, 1998
and November 30, 1997. . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity for the years ended November 30, 1998
and November 30, 1997. . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended November 30, 1998
and November 30, 1997. . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-8
F-1
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Stockholders of
Tower Tech, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Tower Tech, Inc., at November 30, 1998 and
1997 and results of its operations and its cash flows for the years 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 19, 1999
F-2
<PAGE>
Tower Tech, Inc.
Balance Sheets
November 30,
1998 1997
-----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash $ 3,798 $ 551,954
Accounts receivable, net of allowance of
$275,000 and $172,645 respectively 4,678,685 5,740,404
Accounts receivable, affiliate 432,216 327,295
Notes receivable, current 238,621 208,624
Receivables from officers and employees 32,261 69,547
Costs in excess of billings and estimated
earnings on uncompleted contracts 437,207 719,447
Inventory 5,468,702 3,027,656
Restricted assets, current 158,794 160,468
Prepaid expenses 176,430 129,273
Deferred tax asset 2,674,530 67,147
------------- -------------
Total current assets 14,301,244 11,001,815
Property, plant and equipment, net 16,630,165 9,604,258
Rental fleet, net 6,789,217 2,023,738
Patents, net 230,327 213,092
Notes receivable, non-current, net of
unamortized discount of $39,669 489,443 719,371
Deferred tax asset - 577,873
Other assets 616,335 716,258
-------------- -------------
Total assets $39,056,731 $24,856,405
=========== ===========
Liabilities and Stockholders' Equity Current liabilities:
Current maturities of long-term debt $11,029,319 $ 439,308
Current portion of obligations under
capital lease 166,683 129,079
Accounts payable 5,092,629 2,261,228
Accounts payable, affiliate - 10,577
Book overdraft 235,319 193,999
Accrued liabilities 1,030,692 601,039
Interest payable 501,530 318,540
Customer deposits 135,446 114,034
Income tax payable - 29,101
-------------- --------------
Total current liabilities 18,191,618 4,096,905
------------ -------------
Deferred tax liability 359,422 -
-------------- -------------
Long-term debt, net of current maturities 15,832,228 13,688,803
------------ ------------
Obligations under capital lease, net of
current maturities 154,751 171,907
------------ ------------
Liability for equity share of investment 78,946 -
-------------- -------------
Commitments and Contingencies (Notes 6, 8,
9, 12, and 16) Stockholders' equity:
Preferred stock, $.001 par value; 2,000,00
shares authorized; no shares issued
and outstanding at November 30, 1998
and 1997 - -
Common stock, $.001 par value; 10,000,000
shares authorized; 3,576,311 and
3,526,311outstanding at November 30,
1998 and 1997, respectively 3,577 3,527
Capital in excess of par 8,278,561 8,066,403
Accumulated deficit (3,842,372) (1,171,140)
------------- -------------
Total stockholders' equity 4,439,766 6,898,790
------------- -------------
Total liabilities and stockholders'
equity $39,056,731 $24,856,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
Tower Tech, Inc.
Statements of Operations
Year Ended
November 30,
1998 1997
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------
Revenues:
Tower sales $ 9,235,101 $12,127,978
Concrete tower construction 5,716,664 3,596,569
Tower rentals 5,462,758 1,214,403
Other tower revenue 629,781 1,751,504
------------- ------------
Total tower revenue 21,044,304 18,690,454
Other operating revenue - 860,495
------------ -------------
Total revenue 21,044,304 19,550,949
----------- ------------
Costs and expenses:
Cost of goods sold and
constructed 17,594,126 13,842,816
General and administrative 3,033,369 1,703,896
Selling expenses 1,989,322 1,309,292
Research and development 1,810,985 667,222
------------ -------------
Total costs and expenses 24,427,802 17,523,226
------------ -------------
(Loss)income from
operation (3,383,498) 2,027,723
------------- ------------
Other income (expense):
Interest, net (899,066) (646,947)
Miscellaneous 20,190 66,256
Equity share of loss before
taxes of investee company (78,946) -
-------------- -------------
Total other income (expense) (957,822) (580,691)
------------- -------------
(Loss) income before income taxes (4,341,320) 1,447,032
Income tax benefit 1,670,088 615,919
------------ -------------
Net (loss) income $(2,671,232) $ 2,062,951
=========== ===========
Weighted average shares outstanding -
basic 3,556,010 3,420,378
============ ============
Net (loss) income per common share -
basic $ (0.75) $ 0.60
============== ============
Weighted average shares outstanding -
fully diluted 3,556,010 3,538,113
============ ============
Net (loss) income per common share -
fully diluted $ (0.75) $ 0.58
============= ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
Tower Tech, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended
November 30,
1998 1997
-------------------------------------
<S> <C> <C>
Common stock
Balance at beginning of period $ 3,527 $ 3,371
Exercise of warrants and options 50 156
-------------- -------------
Balance at end of period 3,577 3,527
--------------- -------------
Capital in excess of par
Balance at beginning of period 8,066,403 7,187,948
Exercise of warrants and options 212,158 878,455
------------- -------------
Balance at end of period 8,278,561 8,066,403
------------ ------------
Accumulated deficit
Balance at beginning of period (1,171,140) (3,234,091)
Net (loss) income (2,671,232) 2,062,951
------------ ------------
Balance at end of period (3,842,372) (1,171,140)
----------- -----------
Total stockholders' equity $ 4,439,766 $ 6,898,790
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Tower Tech, Inc.
Statements of Cash Flows
Year Ended
November 30,
1998 1997
<S> <C> <C>
------------------------------------
Cash flows from operating activities:
Net (loss) income $ (2,671,232) $ 2,062,951
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation and amortization 971,390 677,839
Bad debt expense 546,125 150,000
Equity share of loss of investee 78,946 -
Deferred tax benefit (1,670,088) (645,020)
Increase in notes receivable - (840,495)
Payment on note receivable 199,932 37,500
(Increase) decrease in accounts
receivable 515,594 (1,313,136)
Increase in accounts receivable,
affiliate (104,921) (2,865)
(Increase) decrease in costs in excess
of billings 282,240 (247,731)
(Increase) decrease in receivables
from officers & employees 37,286 (20,680)
Increase in inventory (2,441,047) (108,392)
Increase in prepaid expenses (47,156) (100,819)
(Increase) decrease in other assets 381,580 (14,003)
Increase (decrease) in accounts payable 2,831,400 (293,514)
Increase (decrease) in accounts payable,
affiliate (10,577) 10,577
Increase in accrued liabilities 612,644 62,744
Increase (decrease) in customer deposits 21,413 (15,080)
Increase (decrease) in income tax payable (29,101) 29,101
------------- -----------
Net cash used in operating activities (495,572) (571,023)
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment (6,868,872) (6,041,602)
Decrease in restricted assets 1,673 3,785,680
Additions to rental fleet (5,012,935) (1,372,109)
Increase in patent costs (32,011) (67,133)
-------------- -------------
Net cash used in investing activities (11,912,145) (3,695,164)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings, net of costs 32,917,003 12,319,554
Increase in book overdraft 41,320 193,999
Repayments of long-term debt and capital
lease obligations (21,310,970) (9,424,355)
Proceeds from exercise of options and
warrants 212,208 878,611
------------- -------------
Net cash provided by financing activities 11,859,561 3,967,809
------------ ------------
Net decrease in cash (548,156) (298,378)
Cash at beginning of year 551,954 850,332
------------- ------------
Cash at end of year $ 3,798 $ 551,954
============== ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-6
<PAGE>
Tower Tech, Inc.
Statements of Cash Flows (continued)
Supplemental Disclosure of Cash Flow Information
Cash paid for interest during the years ended November 30, 1998 and 1997 was
$1,831,306 and $760,656, respectively.
Supplemental Schedule of Non-Cash Investing and Financing Activities
The Company acquired certain property, plant and equipment under capital
lease obligations of $176,358 and $49,427 for the years ended November 30, 1998
and 1997, respectively.
The Company acquired certain real estate and improvements, and property, plant
and equipment during 1998 and 1997 by executing notes payable in the aggregate
amount of $418,658 and $139,219, respectively.
The accompanying notes are an integral part of
these financial statements.
F-7
<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. In
1996, the Company began marketing its technology by entering into licensing
agreements with international cooling tower companies. In 1998, the Company
changed the TTMT designation to "TTEF" to signify the redesign of its towers.
Revenue and cost recognition
Revenue from 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 were rented under short-term or month-to-month rental 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 fee, the related technology
materials are delivered and government approval has been obtained by the
licensee, when required. License fees 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-8
<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.
Interest costs incurred on borrowed funds during a period of construction are
capitalized as a component of the costs of construction of qualifying assets.
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 debt
obligations. Debt issue 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 estimated liability for warranty costs is included in
accrued liabilities in the accompanying balance sheets.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 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 basis of assets and liabilities, and
for loss carryforwards and tax credit carryforwards.
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.
F-9
<PAGE>
Notes to Financial Statements, continued
1. General and Summary of Significant Accounting Policies, continued
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.
Estimates are used when accounting for construction contracts, the allowance for
doubtful accounts and warranty reserve. It is reasonably possible that actual
results could differ significantly from the estimates in the near term.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, 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 is 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 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
Financial instruments which potentially subject the Company to credit risk
consist of cash and cash equivalents, accounts receivable and notes receivable.
The Company maintains its cash balances in high credit quality financial
institutions. From time-to-time, the Company's cash and cash equivalents may
exceed federally insured limits although management believes any possible credit
risk is minimal.
The Company sells cooling towers and related parts to customers throughout the
U.S. and enters into licensing agreements with international companies. The
Company extends credit based upon an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to losses on
accounts receivable and notes receivable is principally dependent on each
customer's financial condition and economic conditions in countries where they
operate. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
Reclassifications
Certain November 30, 1997 amounts have been reclassified to conform with
November 30, 1998 presentation.
F-10
<PAGE>
Notes to Financial Statements, continued
2. Contract Receivables
Contract receivables consist of the following at November 30:
1998 1997
--------------------------------------
Completed contracts, including retainage $ 224,917 $ 419,904
Contracts in progress:
Current accounts 612,330 190,141
Retainage 377,467 59,411
------------ ------------
$1,214,714 $ 669,456
============ ============
Contract receivables are included in accounts receivable in the accompanying
balance sheets.
3. Costs in Excess of Billings and Estimated Earnings on Uncompleted Contracts
The following is a summary of costs and estimated earnings on uncompleted
projects at November 30:
1998 1997
---------------- ------------------
Cost incurred on uncompleted projects $ 3,716,410 $ 2,010,501
Estimated earnings 565,132 22,356
------------ -------------
4,281,542 2,032,857
Less: Billings to date (3,844,335) (1,313,410)
----------- -------------
$ 437,207 $ 719,447
============ ============
4. Inventories
Inventories consist of the following at November 30:
1998 1997
-------------------------------------------------
Raw materials $ 4,234,498 $ 2,070,717
Work in process 731,992 476,498
Finished goods 502,212 480,441
------------- -------------
$ 5,468,702 $ 3,027,656
=========== ===========
F-11
<PAGE>
Notes to Financial Statements, continued
5. Restricted Assets
Restricted assets consist of investments held by a trustee in connection with
financing obtained to fund construction of the Company's new manufacturing and
office facilities. See Note 6. 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, is set forth in the following table:
1998 1997
---------------------------------
Under bond indenture agreements--held by trustee:
Cash and cash equivalents $ 1,698 $ 1,917
U.S. Treasury Notes 157,096 158,551
------------ ------------
Total restricted assets 158,794 160,468
Amount required for current liabilities (158,794) (160,468)
------------ ------------
Noncurrent restricted assets $ - $ -
============= ============
6. Property, Plant and Equipment
Following is a summary of property, plant and equipment at November 30:
1998 1997
-----------------------------------------------
Building and plant improvements $ 1,833,830 $ 1,824,683
Shop equipment 781,607 767,798
Office furniture and equipment 977,260 663,122
Molds and dies 1,436,062 1,274,782
Trucks and vehicles 30,180 9,744
Assets under capital lease 732,993 556,633
Construction in progress 11,297,609 5,554,826
Capitalized interest 1,451,049 380,304
------------ -------------
18,540,590 11,031,892
Accumulated depreciation (1,718,212) (1,292,965)
Accumulated depreciation,
capital leases (192,213) (134,669)
------------- -------------
$16,630,165 $ 9,604,258
=========== ===========
Construction in progress consists primarily of construction on the Company's new
manufacturing facility in south Oklahoma City, Oklahoma. The new facility has
been partially financed through an industrial revenue bond issuance by the
Oklahoma Industries Authority in the original amount of $4,405,000. See Note 8.
Depreciation of property, plant and equipment, and rental fleet was $718,201 and
$586,062 for the years ended November 30, 1998 and 1997, respectively, of which
$483,678 and $425,872 was included in costs of good sold and constructed.
F-12
<PAGE>
Notes To Financial Statements, Continued
7. Rental Fleet
The Company has a fleet of TTEF 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:
1998 1997
---------------------------------------
Rental fleet $ 7,361,623 $ 2,386,687
Accumulated depreciation (572,406) (362,949)
------------ ------------
$ 6,789,217 $ 2,023,738
=========== ===========
The rental division was sold subsequent to November 30, 1998. See Note 18.
8. Long-Term Debt
The following is a summary of long-term debt at November 30:
1998 1997
----------------------------
10% Convertible Subordinated Debentures
("Debentures") as discussed below. $6,000,000 $6,000,000
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,
along with all building, structures,
fixtures and improvements on said real
estate; bonds are eligible for early
redemption subject to certain restrictions. 4,035,000 4,335,000
Line of credit payable to an individual;
credit limit of $2,000,000; principal and
interes due May 31, 1998; interest rate of
13%; collateralized by accounts receivable,
inventory, equipment, and personal guarantee
of the Company's C.E.O.and his wife. - 499,507
Notes payable to an individual; principl
payments of $1,500,000 and $500,000 due
on June 14, 2000, respectively; interest at
bank prime + 3% (10.75% at November 30,
1998), and fixed rate at 13%, respectively;
collateralized by a first lien and right
of assignment on certain patents. 2,000,000 2,000,000
Line of credit with a bank for $400,000;
principal and interest due April 1, 1999;
interest at a floating rate (10% at
November 30, 1998); collateralized by real
estate. 330,000 251,625
Note payable to a bank; 35 monthly payments
of principal and interest of $1,557 with
remaining principal due September 1999;
interest at a floating rate (10% at
November 30, 1998); collateralized by real
estate. 86,706 96,223
Note payable to a bank; semi-annual payments
of principal and interest of $1,557 with
final payment due September, 2000; interest
at a floating rate (10% at November 30, 1998);
collateralized by real estate. 62,944 71,879
F-13
<PAGE>
Notes To Financial Statements, Continued
8. Long-Term Debt, continued
1998 1997
---------------------------
Note payable to a lending institution;
principaland interest payments of
$13,651 with final payment due July 9,
2004; interest at 9.25%;
collateralized by certain equipment. 1,681,663 731,890
Notes payable to an institution; monthly
principal and interest payments of $977,
with final payment due November 4, 2017;
interest at 7.72%, collateralized by
certain improvements. 117,062 119,219
Construction loan payable to a bank of
$2,000,000; principal and interest due
April 14, 1999; interest at bank prime
plus 1% (8.75% at November 30, 1998);
collateralized by real estate. 1,069,813 -
Line of credit with a bank; principal
and interest due June 30, 1999, interest
at bank prime plus 2% (9.75% at November
30, 1998); collateralized by certain accounts
receivable, inventory, rental fleet and
patents. Paid off in December 1998. See
Note 18. 8,333,721 -
Note payable to a bank; principal and interest
due February 16, 1999 at 9%; collateralized
by inventory. 900,000 -
Note payable to an individual; principal and
interest due upon maturity on December 7,
1998, interest at 16.8% and is uncollateralized. 500,000 -
Line of credit; principal due November 10,
2003, interest at LIBOR plus .2% (5.5125% at
November 30, 1998) collateralized by real estate. 1,250,000 -
Various notes payable to financial institutions;
principal and interest due monthly;
collateralized by vehicles and equipment. 494,638 22,768
------------ -----------
26,861,547 14,128,111
Current portion (11,029,319) (439,308)
------------ -----------
Long-term debt, net $15,832,228 $13,688,803
=========== ===========
Principal amounts maturing on long-term debt for each year is as follows at
November 30, 1998:
1999 $11,029,319
2000 9,065,982
2001 965,304
2002 1,036,129
2003 1,046,834
Thereafter 3,717,979
-------------
$26,861,547
F-14
<PAGE>
Notes To Financial Statements, Continued
8. Long-Term Debt, continued
The Debentures were issued by the Company during the third quarter of 1997,
yielding net proceeds of approximately $5,467,000. The Debentures bear interest
at 10 percent, which is payable semiannually, and mature on June 10, 2000. The
principal balance of each Debenture is convertible into shares of common stock
at a price of $8.75 per share at the option of each Debenture holder or at the
option of the Company if the closing price of the common stock is at least 175%
of the conversion price for 20 of 30 consecutive trading days and certain other
conditions are satisfied.
Some of the debt agreements contain financial covenants such as tangible net
worth restrictions. The Company was either in compliance with covenants or
related debt was paid subsequent to November 30, 1998.
9. 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, 1998:
1999 $ 182,069
2000 68,360
2001 53,012
2002 37,747
2003 8,872
------------
Total minimum lease payments 350,060
Amount representing interest (28,626)
Present value of net minimum lease payments 321,434
Current portion (166,683)
$ 154,751
10. Retirement Plan
Effective June 8, 1990, the Company implemented the Tower Tech, Inc., 401(k)
Retirement Plan (the "Plan"), a voluntary, contributory 401(k) savings plan. The
Plan currently permits employees of the Company to commence participation in the
Plan as of the first January 1 or July 1 following the completion of twelve
months of service and the attainment of 18 years of age. Participants may make
tax-deferred contributions from their compensation during each year, subject to
statutory limits imposed under Section 401(k) and other applicable sections of
the Internal Revenue Code of 1986, as amended. The Plan provides for a
discretionary matching contribution by the Company. The matching contribution,
if any, is allocated to participants based on a percentage of participant's
eligible contributions compared to total eligible contributions. Eligible
contributions are the participant's contributions not to exceed 6% of
compensation.
Participants in the Plan are at all times fully vested in their contributions
and in the earnings attributable to their contributions and become fully vested
in Company contributions made on their behalf after seven years of service. The
Plan permits withdrawals during employment in the event of proven financial
hardship. In the case of termination of employment, disability, or death, a
participant's account balance is distributed to the participant (or his
beneficiary) in either a lump sum or part lump sum and part installments
depending on the participant's vested balance. The Company has not made any
contributions to the Plan.
F-15
<PAGE>
Notes To Financial Statements, Continued
11. Income Taxes
The (benefit) provision for income taxes for the years ended November 30 are
comprised of the following:
1998 1997
-------------------------------------
Current provision:
Federal $ - $ 29,101
--------------- -------------
Deferred benefit:
Federal (1,569,883) (552,976)
State (100,205) (92,044)
------------- ------------
Total deferred benefit (1,670,088) (645,020)
------------ -----------
Income tax benefit $(1,670,088) $ (615,919)
============ ===========
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective income tax rate:
1998 1997
---------------------------
Statutory federal income tax rate (34%) 34%
Utilization of net operating loss carryforwards - (29%)
Change in valuation allowance - (52%)
Other ( 4%) 4%
------------ ---------
Effective income tax rate (38%) (43%)
Deferred tax liabilities and assets
at November 30 are comprised of the
following:
1998 1997
---------------------------------
Deferred tax liabilities:
Depreciation $ 359,422 $ 289,743
Workers' compensation 21,712 40,984
------------ ------------
Total deferred tax liability 381,134 330,727
------------ -----------
Deferred tax assets:
Accounts receivable allowance 109,065 68,471
Warranty reserve 79,320 39,660
Other 88,058 7,848
Net operating loss carryforward 2,387,544 827,513
AMT credit 32,255 32,255
----------- ------------
Total deferred tax assets before
valuation allowance 2,696,242 975,747
Valuation allowance for deferred tax
assets - -
----------- -----------
Total deferred tax asset 2,696,242 975,747
----------- -----------
Net deferred tax asset $2,315,108 $ 645,020
========== ==========
At November 30, 1998, the Company had a net operating loss carryforward (NOL)
for regular tax purposes of approximately $6,000,000 expiring in 2009 to 2011.
F-16
<PAGE>
Notes To Financial Statements, Continued
11. Income Taxes, continued
FAS 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. In
the fourth quarter of fiscal 1997, Management determined that, based on the
Company's ability to generate taxable income in two consecutive years (1996 and
1997), it is more likely than not that the Company will realize the deferred tax
assets. Therefore, the valuation allowance previously established against the
net deferred tax asset was reversed in 1997. Management has also determined that
based on the sale of the rental operations in December 1998, it is more likely
than not that the Company will realize the deferred tax assets in 1998. See Note
18.
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%.
12. 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. During 1998
and 1997, R&B purchased $16,760 and $29,086, respectively, of products from the
Company and earned $14,255 and $7,872 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 Company and J-Tech have
agreed to share equally in all profits and losses. Accordingly, Tower Tech has
recognized a loss of $78,946 as of November 30, 1998, for 50% of the accumulated
losses of TTSE. 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 $790,276 and $741,240 during fiscal year 1998 and 1997,
respectively.
The following represents the summarized unaudited financial data of TTSE at
November 30:
1998 1997
--------------------------------------------
Balance sheet data
Assets $ 455,672 $ 531,307
Liabilities $ 533,564 $ 463,002
(Deficit) equity $ ( 77,892) $ 68,305
1998 1997
--------------------------------------------
Statement of operations data
Sales $ 1,306,675 $ 1,172,410
Cost of Sales 1,015,555 814,797
Other expenses 441,558 356,649
------------- -------------
Net (loss) income $ (150,438) $ 964
============= ==============
F-17
<PAGE>
Notes To Financial Statements, Continued
13. Net Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128"). FAS 128 requires presentation of "basic" and "diluted"
earnings per share, as defined, on the face of the income statement for
all entities with complex capital structures. FAS 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period earnings per share amounts. The
Company has adopted FAS 128 and has restated all prior periods. FAS 128
requires a reconciliation of the numerators and denominators of the basic
and diluted EPS computations. Options and warrants to purchase 371,356
shares of common stock at a weighted average price of $5.79 were
outstanding during the period ended November 30, 1998 but were not
included in the computation of diluted EPS because the effect of these
outstanding options would be antidilutive. A reconciliation for the period
ended November 30, 1997 is as follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
For the period ended November 30, 1997:
Basic EPS
Income available to common stockholders $2,062,951 3,420,378 $ .60
Effect of dilutive securities
Employee stock options and warrants - 117,735
---------- ---------
Diluted EPS
Income available to common stockholders
and assumed conversions $2,062,951 3,538,113 $.58
---------- --------- ----
14. Stockholders' Equity
At November 30, 1998, and 1997, the Company had outstanding warrants and options
allowing the holders to purchase a total of approximately 371,356 and 344,065
shares, respectively, of the Company's Common Stock at an average price of $5.79
and $6.81 per share, respectively, expiring at various periods through July
2007. 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 15). Warrants for 50,000 and 150,000
shares of common stock were exercised at an average exercise price of $4.50 and
$5.88 during 1998 and 1997, respectively.
15. Stock Option Plan
In October 1997, 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. There have been
no stock options issued with an exercise price less than the market price of
common stock at the date of issuance. All stock options granted during 1998 and
1997 have a term of ten years and vest incrementally 20% each year. Vested
options may be exercised after five years of employment or upon termination from
the Company. The Company has elected to follow APB No. 25, Accounting for Stock
Issued to Employees and related Interpretations in accounting for its employee
stock options. Under APB No. 25, compensation expense is recognized for the
difference between the option price and market value on the measurement date. No
compensation expense has been recognized because the exercise price of the stock
options equaled the market price of the underlying stock on the date of grant.
F-18
<PAGE>
Notes To Financial Statements, Continued
15. Stock Option Plan, continued
Pro forma information regarding net income and earnings per share is required by
FAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
1998 and 1997, respectively: interest rates (zero-coupon U.S. government issues
with a remaining life equal to the expected term of the options) of 5.50% and
6.12%; dividend yields of 0.0% and 0.0%; volatility factors of the expected
market price of the Company's common stock of 45.13% and 43.95%; and
weighted-average expected life of the options of six years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company's pro forma information follows for November 30:
1998 1997
------------------------------------------
Net (loss) income as reported $ (2,671,232) $ 2,062,951
Pro forma $ (2,701,459) $ 2,006,279
(Loss) earnings per share as reported $ (.75) $ 58
Pro forma $ (.76) $.57
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is five
years. Because the Company's stock options vest generally over five years and
additional awards are typically made each year, the above pro forma disclosures
are not likely to be representative of the effects on pro forma net income for
future years. A summary of the Company's stock option activity and related
information follows for November 30:
1998 1997
------------------------------------------------
Options Weighted Avg. Options Weighted Avg.
Exercise Price Exercise Price
Outstanding - Beginning of year 210,894 $ 6.67 210,880 $ 6.28
Granted 124,700 6.25 34,894 8.75
Exercised - - (5,120) 6.25
Forfeited (33,809) 6.61 (29,760) 6.46
--------- ---------
Outstanding - End of year 301,785 6.50 210,894 6.67
======== ========
Exercisable - End of year 103,705 6.40 83,175 6.25
======== =========
The following table summarizes information about stock options outstanding at
November 30, 1998:
Weighted Avg.
Range of Number Remaining Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price
- ------------------ --------------- ---------------- ----------------
$ 6.25 - $ 8.25 287,850 7.67 $ 6.37
$ 9.00 - $10.00 14,705 8.64 $ 9.27
$ 6.25 - $10.00 301,785 7.71 $ 6.50
F-19
<PAGE>
Notes To Financial Statements, Continued
16. Commitments and Contingencies
Included in cost of goods sold and constructed for the years ended November 30,
1998 and 1997 are $671,267 and $426,699, respectively, of expense to retrofit
and service towers previously sold. The Company has recorded a liability for
estimated warranty costs of $200,000 and $100,000 at November 30, 1998 and 1997,
respectively. Management believes the warranty reserve is sufficient to cover
future warranty costs.
The Company is a defendant in certain litigation arising in the normal course of
business. Management is of the opinion that liabilities, if any, arising from
these actions will not have a material effect on the Company's financial
position and results of operations.
17. Licensing Agreements
During 1997, the Company entered into certain license agreements with various
international 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 Mexico, 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, 1997 totaled $860,495.
Pursuant to certain agreements, the Company will earn continuing royalties for
all Licensed Products promoted by the licensee, although no such royalties have
been earned through November 30, 1998.
The agreements with two international cooling tower companies give the Company
an option to purchase 49% of a company set up to market cooling towers using the
TTEF technology in specified regions. At November 30, 1998, the Company has not
exercised these options.
18. Subsequent Events
Effective December 7, 1998, the Company entered into a $4,000,000 line of credit
agreement with a financial institution for working capital requirements.
Interest is payable monthly at a rate of one and a half basis points over
National Prime. All outstanding principal and unpaid interest is due January 7,
2000. The agreement is collateralized by accounts receivable, inventory, and
general intangibles and contains certain financial covenants such as tangible
net worth requirements.
In December 1998, the Company consummated the sale of certain assets
constituting the rental operations to Aggreko Inc., an unrelated party, for
$13,500,000, with $12,150,000 paid in cash at closing and the remaining
$1,350,000 paid by delivery of Aggreko Inc.'s promissory note. The note bears
interest at 1% above prime. The outstanding principal balance of the note,
together with accrued interest, is due and payable December 1999. The Company
also entered into a long-term strategic alliance with Aggreko and will receive a
three percent royalty for the rental of technology. Proceeds will be used for a
reduction in short-term debt and for working capital. The Company expects to
record a pre-tax gain of approximately $6.7 million in the first quarter of
fiscal 1999.
The following unaudited selected condensed pro forma balance sheet information
summarizes the balance sheet effect of the sale and pay-off of the bank line of
credit as though the transactions had occurred on November 30, 1998 (in 000's):
Historical Pro forma
(Unaudited)
-----------------------------------
Current assets $ 14,301 $ 16,792
Property, plant and equipment, ne 23,420 16,631
Total assets 39,057 34,719
Current liabilities 18,192 10,067
Stockholders' equity 4,440 8,427
F-20
<PAGE>
INDEX TO EXHIBITS
Page
10.9 Promissory Note between Tower Tech, Inc. and People First Bank
dated December 7, 1998. . . . . . . . . . . . . . . . . . . . . . E-1
. . . . .
10.18 Loan Agreement between Tower Tech, Inc. and People First Bank
dated December 7, 1998. . . . . . . . . . . . . . . . . . . . . . E-2
. . . .
21.1 Tower Tech, Inc. subsidiaries. . . . . . . . . . . . . . . . . . . E-3
23.1 Consent of PricewaterhouseCoopers LLP. . . . . . . . . . . . . . . E-4
. . . . . .
-25-
COMMERCIAL LINE OF CREDIT AGREEMENT
DATE OF AGREEMENT
12/07/1998
DEBTOR'S NAME(S) LENDER'S NAME AND ADDRESS
- -------------------------------------------------------------------------------
TOWER TECH, INC. People First Bank
Edmond
P.O. Box 5258
Enid, OK 73702
DEBTOR'S ADDRESS
11935 S. 1-44 SERVICE ROAD
OKLAHOMA CITY, OK 73173
AMOUNT OF CREDIT LINE EXPIRATION DATE COMMITMENT FEE INTEREST RATE
$4,000,000.00 01 07, 2000 $.00 9.25%
COLLATERAL
Accounts Receivable Inventory
- -------------------------------------------------------------------------------
FOR VALUE RECEIVED, the undersigned Lender as of the date of this Agreement,
agrees to make loans from time to time to the undersigned Debtor subject to the
following terms and conditions of this Commercial Line of Credit Agreement
("Agreement"):
1. AMOUNT OF CREDIT LINE. The aggregate unpaid balance of all loans
outstanding at any one time under this Agreement shall not exceed the
Amount of Credit Line indicated above.
All Loans made hereunder shall reference this Agreement.
2. EXPIRATION DATE. No loan under this Agreement shall be made on a date beyond
the Expiration Date stated above. Individual loans made pursuant to this
Agreement may have a maturity date subsequent to the Expiration Date.
Both parties recognize that Lender as of date of this Agreement may have
loans outstanding to Debtor which are not made under this Agreement and
Lender may in the future make loans other than loans made pursuant to this
Agreement.
3. INTEREST RATE. The Interest Rate on loans made under this Agreement shall
be as stated above. Debtor agrees to pay the above Commitment Fee upon
signing this Agreement. The commitment Fee is earned when paid.
4. COLLATERAL. The Collateral for loans made under this Agreement is indicated
above and, as applicable, by signed security agreements, mortgages/deeds of
trust, and any necessary financing statements on forms provided by Lender.
Loans may be further supported by endorsers, separate quantities by third
parties, and by loan agreements and other undertakings as mutually agreed
by Lender and by Debtor.
5. NOTE FORM PROVISIONS. Loans made under this Agreement shall be on
promissory note forms satisfactory to and provided by Lender.
6. PAYMENTS. Debtor shall have the right at any time to prepay without penalty
any or all loans outstanding under this Agreement. All payments will not be
deemed to have been made until such payments are received in collected
funds.
7. OBLIGATION TO LEND. Lender shall be under no obligation to make loans under
this Agreement upon the existence or occurrence of any event or condition
whereby Debtor is in default on any indebtedness to Lender or to others, or
whereby the provisions of any acceleration clause have become operative
with respect to any promissory note, obligation or undertaking to Lender or
to others. If any condition or event occurs that permits the Lender to
decline to make loans under this Agreement. Lender may also terminate this
Agreement by sending notice to Debtor and exercise all right and remedies
provided in any promissory note, mortgage/deed of trust, security agreement
or related document and under law, including the right to demand the Debtor
immediately pay all amounts owed to the Lender...
8. NOTICES. Notices to Debtor are effective when sent postage prepaid to the
address received by Lender, or when delivered. Notice to Lender occurs upon
receipt by an officer of the Lender. If any conflict occurs between this
Agreement and any promissory note, mortgage/deed of trust, security
agreement or related document, this Agreement will control. Otherwise this
Agreement is an addition to and not in limitation of the provision of any
other document.
9. GOVERNING LAW. This Agreement and related notes and documents are to be
construed and governed by the laws of the sate indicated in the address of
the Lender shown above.
Debtor acknowledges receipt of a copy of this Agreement.
DEBTORS' SIGNATURES(S)
TOWER TECH, INC.
By: CHARLES WHITSITT, CHIEF FINANCIAL OFFICER
<PAGE>
LOAN AGREEMENT DATE OF AGREEMENT
12/07/1998
DEBTOR'S NAME(S) LENDER'S NAME AND ADDRESS
- -------------------------------------------------------------------------------
TOWER TECH, INC.
People First Bank, Edmond
P.O. Box 5258
Enid, OK 73702
DEBTOR'S ADDRESS
- -------------------------------------------------------------------------------
11935 S. 1-44 SERVICE ROAD
OKLAHOMA CITY, OK 73173
The undersigned Debtor with principal office, place of record keeping and
mailing address as shown above, hereby acknowledges receipt of proceeds, or some
part thereof, or renewal thereof, of the following described loan and/or
extension of credit from the Lender named in this Agreement:
Loan # 124436 dated 12/07/1998 in the amount of $4,000,000.00 with a
maturity date of 01/07/2000.
IN CONSIDERATION of Lender making such loan and or extension of credit, or any
part thereof, Debtor agrees as follows:
A. Financial Information. To deliver to Lender within the stated time
limits the following financial information and income tax returns as
of the dates and for the period indicated: Borrower to provide
Borrowing Base certificate with detailed accounts receivable aging
within 15 days of each month's end. Borrower to provide quarterly
10-QSB reports within 5 days of filing. Borrower to provide audited
annual financial statements on Tower Tech, Inc. and annual financial
statements on guarantor, Harold Curtis.
B. Litigation. To inform Lender promptly of any litigation, or of any
claim or controversy which might become the subject of litigation,
against Debtor or affecting any of Debtor's property, if such
litigation, in the event of an unfavorable outcome, would have a
material adverse effect on Debtor's financial condition;
C. Taxes. To pay promptly when due any and all taxes, assessments and
governmental charges against Debtor or against any of Debtor's
property, unless the same is being contested in good faith by
appropriate proceedings and reserves deemed adequate by Lender have
been established therefore:
D. Labor and Material. To pay promptly all lawful claims whether for
labor, materials or otherwise, which ;might or could, if unpaid,
become a lien or charge on any property or assets of Debtor, unless
and to the extent only that the same are being contested in good
faith by appropriate proceedings and reserves deemed adequate by
Lender have been established therefore:
E. Insurance. To maintain with financially sound and reputable insurance
organizations approved by Lender, insurance of the kinds and covering
the risks and in the amounts usually carried by companies engaged in
businesses similar to that of Debtor, which insurance in all events
shall be satisfactory to Lender and provide suitable loss payable
clauses in favor of Lender, and, at Lender's request deliver to
Lender evidence of the maintenance of such insurance; and
F. Accounting Records. To maintain adequate records in accordance with
generally accepted accounting principles of all transactions so that
at any time and from time to time the true and complete financial
condition of the Debtor may be readily determined.
G. Additional Terms. See Attached Exhibit "B".
LENDER'S SIGNATURE DEBTOR'S SIGNATURE(S)
CONFIRMED
People first Bank TOWER TECH, INC.
Edmond
BY: ss/DAN R. BALES BY: ss/ CHARLES D. WHITSITT
- --------------------- -----------------------------
Dan R. Bales Charles D. Whitsitt
Sr. Vice President Chief Financial Officer
EXHIBIT "B"
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1) Borrower to maintain a tangible net worth of no less than $15,000,000.00
tested quarterly. Tangible net worth defined as assets (less loans and
advances to employees, goodwill and intangibles) less total liabilities
(minus subordinated debt.)
2) Borrower to move operating account to People First Bank and establish lock
box.
3) Borrower will pay an annual non-usage fee of .25 of 1.00% which will be
calculated on the average unused portion of the line and paid by the
borrower quarterly.
4) All reasonable expenses incurred by the Bank pertaining to this
transaction, including legal expenses, are to be paid by Tower Tech, Inc.
5) Tower Tech, Inc. agrees to carry on its business activities in
substantially the manner such activities are conducted on the date of this
agreement, with the exception of the rental fleet division sale, and not
make any material change in the nature of its business. Tower Tech, Inc.
By: ss/CHARLES WHITSITT
------------------------
Charles Whitsitt
Chief Financial Officer
Dated: December 7, 1998
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Tower Tech, Inc. on Form S-3 (File No. 333-36501) and Form S-8 (File No.
333-07337) of our report dated February 19, 1999, on our audits of the financial
statements of Tower Tech, Inc. as of November 30, 1998 and 1997 and for the
years then ended, which report is included in this Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Consolidated statements of operations found on pages F3-F6 of the Company's Form
10-KSB for the fiscal year 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 3,798
<SECURITIES> 0
<RECEIVABLES> 4,678,685
<ALLOWANCES> 275,000
<INVENTORY> 5,468,702
<CURRENT-ASSETS> 14,301,244
<PP&E> 16,630,165
<DEPRECIATION> 971,390
<TOTAL-ASSETS> 39,056,731
<CURRENT-LIABILITIES> 18,191,618
<BONDS> 0
0
0
<COMMON> 3,577
<OTHER-SE> 4,439,766
<TOTAL-LIABILITY-AND-EQUITY> 39,056,731
<SALES> 21,044,304
<TOTAL-REVENUES> 21,044,304
<CGS> 17,594,126
<TOTAL-COSTS> 24,427,802
<OTHER-EXPENSES> 6,833,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 899,066
<INCOME-PRETAX> (4,341,320)
<INCOME-TAX> 1,670,088
<INCOME-CONTINUING> (2,671,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,671,232)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
PROMISSORY NOTE Fixed or Variable Rate Commercial REVOLVING Date of Note
12/07/1998
DEBTOR'S NAME(S) LENDER'S NAME AND ADDRESS
_______________________________________________________________________________
TOWER TECH, INC. People First Bank
Edmond
PO Box 5258
Enid, OK 73702
_______________________________________________________________________________
DEBTOR'S ADDRESS
11935 S. I-44 Service Road
Oklahoma City, OK 73173
_______________________________________________________________________________
NOTE NUMBER: MATURITY DATE: PRINCIPAL AMOUNT: CUSTOMER NUMBER:
124436 January 07, 2000 $4,000,000.00 10066566
OFFICER: SOCIAL SECURITY NUMBER: 360 DAY X VARIABLE RATE X
DRB 73-1210013
PRESENT INDEX RATE 7.750 VARIABLE INDEX RATE:
MARGIN OVER INDEX RATE 1.500 Wall Street Prime
INITIAL PER ANNUM RATE 9.250
PURPOSE FOR LOAN:
MARLOC FOR WORKING CAPITAL
NEW LOAN X COLLATERAL CATEGORIES:
ACCOUNTS RECEIVABLE, INVENTORY, GENERAL INTANGIBLES
PAYMENT TERMS:
Accrued interest due and payable monthly, beginning January 07,1999 and
monthly thereafter, with outstanding principal balance plus unpaid accrued
interest due and payable January 07, 2000.
** Default: See Attached Exhibit "A" for additional provisions.
** Collateral: See Attached Exhibit "A" for additional provisions.
PROMISE TO PAY. For value received, the undersigned Debtor, whether one or
more, and jointly and severally if more than one, agrees to the terms of this
Note and promises to pay to the order of the Lender named above at its place of
business as indicated in this Note or at such other places as may be designated
in writing by Lender, the Principal Amount of this Note together with interest
on the unpaid Principal Amount until Maturity at the per annum interest rate or
rates stated above and according to the Payment Terms stated in this Note.
Interest on this Note is calculated on the actual number of days elapsed on a
basis of a 360 or 365 day year, as indicated above. For purposes of computing
interest and determining the date principal and interest payments are received,
all payments will be deemed made only when received in collected funds. Payments
are applied first to accrued and unpaid interest and other charges, and then to
unpaid Principal Amount. In this Note, "Debtor" includes any party liable under
this Note, including endorsers, co-makers, guarantors and otherwise, and
"Lender" includes all subsequent holders.
VARIABLE RATE. If this is a Variable Rate transaction as indicated above,
the interest rate shall vary from time to time with changes (whether increases
or decreases) in the Index Rate shown above. The interest rate on this Note will
be the Index Rate plus a Margin, if any, as indicated above. Each change will
become effective on the same date the index Rate changes unless a different
effective date is indicated above. If the Index Rate is Lender's base or prime
rate, it is determined by Lender in its sole discretion, primarily on a basis of
its cost of funds, is not necessarily the lowest rate Lender is charging its
customers, and is not necessarily a published rate.
PAYMENTS NOT MADE WHEN DUE. Any principal and/or interest amount not paid
when due shall bear interest at a rate 6 percent per annum greater than the per
annum interest rate prevailing on this Note at the time the unpaid amount came
due, but in no event at a rate less than 15 percent per annum. In addition or in
the alternative to the interest rate provided for in this paragraph Lender may
assess a charge of $10.00 times the number of days late to cover cost of past
due notices and other added expenses. In no event shall the interest rate and
related charges either before or after maturity be greater than permitted by
law
ALL PARTIES PRINCIPAL. All Debtors shall each be regarded as a principal
and each Debtor agrees that any Debtor, with Lender's approval and without
notice to any other Debtor, may from time to time renew this Note or consent to
one or more extensions or deferrals of the Maturity Date for any term(s) or to
any other modification(s), and all Debtors shall be liable in same manner as the
original Note.
ADVANCES AND PAYMENTS. It is agreed that the sum of all advances under this
Note may exceed the Principal Amount as shown above, but the unpaid balance
shall never exceed said Principal Amount. Advances and payments on this Note
shall be recorded on records of Lender and such records shall be prima facie
evidence of such advances, payments and unpaid principal balance. Subsequent
advances and the procedures described in this Note shall not be construed or
interpreted as granting a continuing line of credit for Principal Amount. Lender
reserves the right to apply any payment by Debtor, or for account of Debtor,
toward this Note or any other obligation of Debtor to Lender.
PREPAYMENT. Except as otherwise provided in this Note, Debtor shall have
the right to prepay all or any part of principal due under this Note at any time
without penalty, subject to the following conditions: (a) all interest must be
paid through the date of any prepayment; and (b) if this Note provides for
monthly or other periodic payments, there will be no changes in the due dates or
amounts following any partial prepayment unless Lender agrees to such changes in
writing.
COLLATERAL. This Note and all other obligations of Debtor to Lender,
including renewals and extensions, are secured by al collateral securing this
Note and by all other security interests and mortgages previously or later
granted to Lender and by all money, deposits and other property owned by any
Debtor and in Lender's possession or control.
ACCELERATION. At option of Lender, the unpaid balance of this Note and all
other obligations of Debtor to Lender, whether direct or indirect, absolute or
contingent, now existing or later arising, shall become immediately due and
payable without notice or demand, upon or after the occurrence or existence of
any of the following events or conditions: (a) Any payment required by this Note
or by any other note or obligation of Debtor to Lender or to others is not made
when due, or any event of condition occurs or exists which results in
acceleration of the maturity of any Debtor's obligation to Lender or it others
is not made when due, or any event of condition occurs or exists which results
in acceleration of the maturity of any Debtor's obligation to Lender or to
others under any promissory note, agreement or undertaking; (b) Debtor defaults
in performing any covenant, obligation, warranty or provision contained in any
loan agreement or in any instrument or document securing or relating to this
Note or any other note or obligation of Debtor to Lender or to others; (c) any
warranty, representation, financial information or statement made or furnished
to Lender by or on behalf of Debtor proves to have been false in any material
respect when made or furnished; (d) any levy, seizure, garnishment or attachment
is made against any asset of any Debtor; (e) Lender determines, at any time and
in Lender's sole discretion, that the prospect of payment of this Note is
impaired; (f) whenever, in Lender's sole judgement, the collateral for the debt
evidenced by this Note becomes unsatisfactory or insufficient either in
character or value and, upon request, Debtor fails to provide additional
collateral as required by Lender; (g) all or any part of the collateral for the
debt evidenced by this Note is lost, stolen, substantially damaged or destroyed;
(h) death, incompetency, dissolution, change in ownership or senior management,
or termination of existence of any Debtor; or (I) a receiver is appointed over
all or part of any Debtor's property, or any Debtor makes an assignment for the
benefit of creditors, files for relief under any bankruptcy or insolvency laws,
or becomes subject to an involuntary proceeding under such laws.
RIGHT OF OFFSET. Except as otherwise restricted by law, any indebtedness
due from Lender to Debtor, including, without limitation, any deposits or credit
balances due from Lender, is pledged to secure payment of this Note and any
other obligation to Lender of Debtor, and may at any time while the whole or any
part of such obligation(s) remain(s) unpaid, either before or after Maturity of
this Note, be set off, appropriated, held or applied toward the payment of this
Note or any other obligation to Lender by an Debtor.
ADDITIONAL PROVISIONS. (1) Debtor agrees, if requested, to furnish to
Lender copies of income tax returns as well as balance sheets and income
statements for each fiscal year following Date of Note and at more frequent
intervals as Lender may require. (2) No waiver by Lender of any payment or other
right under this Note or any related agreement or documentation shall operate as
a waiver of any other payment or right. All Debtors waive presentment, notice of
acceleration, notice of dishonor and protest and consent to substitutions,
releases and failure to perfect as to collateral and to additions or releases of
any Debtor. (3) This Note and the obligations evidenced by it are to be
construed and governed by the laws of the state indicated in Lender's address
shown in this Note. (4) All Debtors agree to pay costs of collection, including,
as allowed by law, an attorney's fee equal to a minimum of 15% of all sums due
upon default or such other maximum feel as allowed by law. (5) All parties
signing below acknowledge receiving a completed copy of this Note and related
documents, which contain the complete and entire agreement between Lender and
any party liable for payment under this Note. No variation, condition,
modification, change, amendment, extension or renewal(collectively referred to
as a "Revision") of this Note or related documents shall be binding unless in
writing and signed by Lender and Debtor. If there is more than one Debtor, any
Debtor may agree to a Revision of this Note and/or related documents, and all
Debtors agree to be bound by such Revision. No legal relationship is created by
the execution of this Note and related documents except that of debtor and
creditor or as stated in writing.
DEBTOR'S SIGNATURE(S)
TOWER TECH, INC.
ss/CHARLES WHITSITT
----------------------
Charles Whitsitt,
Chief Financial Officer
EXHIBIT 21.3
LIST OF SUBSIDIARIES OF TOWER TECH, INC.
J Tech Enterprises, Inc., a Florida corporation dba Tower Tech SE. *
Tower Tech do Brasil, a Brazilian corporation. **
Note: * 50% owned by Tower Tech, Inc.
** 90% owned by Tower Tech, Inc.
