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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended May 31, 2000
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1210013
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11935 South I-44 Service Road, Oklahoma City, Oklahoma 73173
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 405/290-7788
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date:
Common Stock $.001 par value 3,576,311 shares as of July 14, 2000
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
INDEX
TOWER TECH, INC.
<TABLE><CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet - May 31, 2000 F-1
Statements of Operations - Three months ended May 31, 2000 and 1999 F-2
Six months ended May 31, 2000 and 1999 F-3
Statements of Cash Flows - Six months ended May 31, 2000 and 1999 F-4
Notes to Financial Statements - May 31, 2000 F-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 3
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 16
</TABLE>
<PAGE>
TOWER TECH, INC.
BALANCE SHEET (UNAUDITED)
<TABLE><CAPTION>
MAY 31, 2000
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<S> <C>
ASSETS
Current assets:
Cash $ 61,838
Accounts receivable, net of allowance for doubtful
accounts of $1,000,000 4,016,566
Receivables from officers and employees 225,175
Notes receivable, current 144,733
Inventory 7,251,862
Prepaid expenses 129,157
Restricted assets 686
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Total current assets 11,830,017
Property, plant and equipment, net 18,783,689
Patents, net 235,369
Goodwill, net 408,179
Notes receivable, non-current, net of unamortized
discount of $9,915 470,395
Other assets 255,425
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Total assets $ 31,983,074
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt $ 20,917,685
Current maturities of obligations under capital lease 538,323
Accounts payable 7,643,077
Billings in excess of costs and estimated earnings on
uncompleted contracts 5,331
Accrued liabilities 1,445,263
Interest payable 765,699
Customer deposits 279,904
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Total current liabilities 31,595,282
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Long-term debt, net 1,418,181
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Obligations under capital lease 1,422,085
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Stockholders' equity (deficit):
Common stock, $.001 par value; 10,000,000 shares
authorized; 3,576,311 shares issued and outstanding 3,577
Capital in excess of par 8,278,561
Deficit (10,734,612)
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Total stockholders' equity (deficit) (2,452,474)
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Total liabilities and stockholders' equity (deficit) $ 31,983,074
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
TOWER TECH, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS ENDED
MAY 31, MAY 31,
2000 1999
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<S> <C> <C>
Sales and other operating revenue:
Tower sales $ 8,091,673 $ 3,602,542
Concrete tower construction 679,008 842,358
Other tower revenue 331,428 229,242
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Total tower revenue 9,102,109 4,674,142
Other operating revenue 114,863 4,324
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Total revenue 9,216,972 4,678,466
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Costs and expenses:
Cost of goods sold and constructed 6,212,330 4,868,437
General and administrative 610,245 526,317
Selling expenses 196,031 375,895
Research and development 12,505 431,678
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Total cost and expenses 7,031,111 6,202,327
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Income (loss) from operations 2,185,861 (1,523,861)
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Other income (expense):
Interest (697,120) (562,025)
Miscellaneous 5,694 44,331
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Total other income (expense) (691,426) (517,694)
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Income (loss) income before taxes 1,494,435 (2,041,555)
Income tax benefit -- 817,060
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Net income (loss) $ 1,494,435 $(1,224,495)
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Weighted average shares outstanding - basic 3,576,311 3,576,311
=========== ===========
Net (loss) income per common share - basic $ .42 $ (.34)
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Weighted average shares outstanding - diluted 3,576,311 3,576,311
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Net (loss) income per common share - diluted $ .42 $ (.34)
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</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TOWER TECH, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS ENDED
MAY 31, MAY 31,
2000 1999
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<S> <C> <C>
Sales and other operating revenue:
Tower sales $10,749,278 $ 7,427,280
Concrete tower construction 981,806 1,107,966
Tower rentals 2,313 31,239
Other tower revenue 391,193 442,760
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Total tower revenue 12,124,590 9,009,245
Other operating revenue 141,392 10,526
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Total revenue 12,265,982 9,019,771
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Costs and expenses:
Cost of goods sold and constructed 9,269,543 9,355,174
General and administrative 1,056,284 1,018,006
Selling expenses 413,447 739,368
Research and development 88,627 877,575
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Total cost and expenses 10,827,901 11,990,123
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Income (loss) from operations 1,438,081 (2,970,352)
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Other income (expense):
Interest (1,389,075) (1,068,721)
Gain on sale of rental operations -- 6,688,670
Miscellaneous 43,244 104,784
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Total other (expense) income (1,345,831) 5,724,733
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Income before taxes 92,250 2,754,381
Income tax expense -- (1,101,880)
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Net income $ 92,250 $ 1,652,501
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Weighted average shares outstanding - basic 3,576,311 3,576,311
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Net income per common share - basic $ .03 $ .46
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Weighted average shares outstanding - diluted 3,576,311 3,576,311
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Net income per common share - diluted $ .03 $ .46
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</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TOWER TECH, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS ENDED
MAY 31, MAY 31,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 92,250 $ 1,652,501
Adjustments to reconcile net (loss) income
to net cash used by operating activities:
Depreciation and amortization 678,934 545,037
Equity share of loss of investee -- (21,205)
Gain on sale of rental operations -- (6,688,670)
Bad debt expense 200,300 65,000
Decrease in deferred taxes -- 1,088,066
(Increase) in accounts receivable (1,587,119) (518,229)
Decrease (increase) in trade notes receivable 52,477 (9,918)
Decrease in accounts receivable, affiliate -- 17,215
Decrease in cost in excess of billings 85,120 289,041
Decrease (increase) in inventory 196,064 (2,085,029)
Increase in prepaid expenses (21,116) (72,414)
Decrease in other assets 124,163 110,191
Decrease in accounts payable 489,563 348,787
Increase in accounts payable, affiliate -- 26,583
Increase (decrease) in interest payable and
accrued liabilities 638,218 (455,886)
(Decrease) increase in deposits (15,404) 54,065
Decrease in income tax payable (2,468) --
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Net cash provided (used) in operating activities 930,982 (5,654,865)
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Cash flows from investing activities:
Cash paid for acquisition of joint venture, net -- (99,096)
Purchase of property and equipment (148,662) (1,882,649)
Payment of note receivable from sale of rental operation 1,350,000 --
Decrease (increase) in restricted assets 156,927 (990)
Proceeds from sale of assets 439,930 12,150,000
Increase in patent costs (11,682) (10,298)
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Net cash provided from investing activities 1,786,513 10,156,967
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Cash flows from financing activities:
Proceeds from borrowings 5,865,266 16,888,594
Repayments of long-term debt (8,772,818) (20,979,387)
Decrease in book overdraft -- (235,319)
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Net cash used by financing activities (2,907,552) (4,326,112)
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Net (decrease) increase in cash (190,057) 175,990
Cash at beginning of period 251,895 3,798
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Cash at end of period $ 61,838 $ 179,788
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</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TOWER TECH, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the first quarter of fiscal 2000, the Company acquired equipment
of $1,219,840 with the execution of capital lease agreements.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TOWER TECH, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The balance sheet as of May 31, 2000, and the related statements of
operations for the three and six month periods ended May 31, 2000 and 1999
and the statements of cash flows for the six month period ended May 31,
2000 and 1999 are unaudited; in the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included.
These financial statements and notes are presented as permitted by Form
10-QSB and should be read in conjunction with the Company's financial
statements and notes included in the annual report on Form 10-KSB.
2. EARNINGS PER SHARE
The Company has adopted FAS 128. FAS 128 requires a reconciliation of the
numerators and denominators of the basic and diluted EPS computations.
Options to purchase 317,605 and 354,584 shares of common stock at weighted
average prices of $6.88 and $6.43 were outstanding during the three and
six month periods ended May 31, 2000 and 1999 respectively, but were not
included in the computation of diluted EPS because the effect of these
outstanding options would be antidilutive. In addition, the convertible
debentures were not included in the computation of diluted EPS because at
the conversion price of $8.75, the effect of the potential conversion
would be antidilutive.
3. SALE OF RENTAL OPERATIONS
In December 1998, the Company consummated the sale of its industrial
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, was due and paid 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.
Accordingly, the Company recorded a pre-tax gain of $6,688,670 for the six
months ended May 31, 1999. Proceeds were used to reduce debt and for
working capital.
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.
F-6
<PAGE>
TOWER TECH, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. DEBT
The Company has a line of credit of $5,088,160 for working capital
requirements. Interest is payable monthly at a variable rate of 2.0% over
national prime. The agreement contains a financial covenant that provides
for a minimum tangible net worth. However, in April 2000, the loan
agreement was modified and reduced the net worth requirement, among other
things, which brought the Company into compliance. The loan modification
agreement expired June 26, 2000 and on June 27, 2000, the Company entered
into a forbearance agreement which among other things, extends the
maturity to July 13, 2000; prohibits payments of principal or interest on
the debentures and certain other debt; provides for assessment of monthly
administrative fees; and increases the interest rate to 3% above national
prime. This credit facility is collateralized by certain accounts\notes
receivable, inventory and general intangibles and as of May 31, 2000,
$3,507,312 was outstanding.
The Company has significant amounts of debt, including its operating line
of credit, $6,000,000 of convertible subordinate debentures and $2,000,000
of other debt which mature through June 2000. Currently, the Company does
not have sufficient cash flow to satisfy these obligations but is
negotiating to restructure this debt, which may include converting some of
the debt to equity.
F-7
<PAGE>
ITEM 2. 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 began the extensive effort of introducing new technology to
the cooling tower industry in 1991. From 1991 through 1999, the Company has
focused significant efforts on research and development. As the Company's
technology evolved, the market's acceptance of its factory-assembled and
field-erected lines of cooling towers accelerated. To date, the Company and its
international licensees have sold approximately $100,000,000 of products
containing the Company's technology. Now that the Company's research and
development stage is substantially completed, management is optimistic that the
Company's technology will continue to gain acceptance in international markets
and that domestic market share will increase going forward. Financial stability
and sufficient cash flow are key to continuing this positive trend in sales
orders.
Although the Company has seen market acceptance of its technology, past
extensive investment in research and development and warranty costs have limited
operating capital and cash reserves. Several setbacks have exerted tremendous
financial strain on the Company:
o In 1996, in an effort to reduce costs and improve profit margins, the
Company redesigned its TTMT Series of factory-assembled towers,
started construction on a new manufacturing plant in Oklahoma City,
and began bringing the production of certain component parts
in-house. Product development delays, coupled with construction and
tooling delays, caused the new manufacturing plant to become
operational over a year later than anticipated. The delays
contributed significantly to the Company's losses in FY 1998 and FY
1999.
o Another major setback was the downturn of several Asian economies,
which rapidly spread throughout our international markets in 1998.
This economic downturn resulted in the cancellation or postponement
of cooling tower projects. Since 1995, the Company has invested
considerable resources in the development of international markets.
The Company had anticipated significant revenues from international
activities. As a direct result of the international market downturn,
the Company's actual revenues from international activities were
significantly lower than anticipated.
o The Company's new Oklahoma City manufacturing plant was put into
production at the beginning of 1999. At that time, the Company began
shipping the first factory-assembled cooling towers of the new
design. From February 1999 to May 1999, the Company shipped
approximately 145 TTEF Series cooling towers with all in-house
extruded wall panels. When put into service, a number of these units
contained unforeseen design or quality defects that caused water
leaks, and the larger size units had an additional undetected
structural deficiency. To effect permanent solutions to these
problems, the Company ceased its assembly operations for forty-two
days during the third quarter 1999 so extrusion and injection molding
tools could be modified. As a result, fiscal 1999 and first quarter
2000 tower sales were negatively impacted. Additionally, fiscal 1999
cost of goods sold (including warranty expense), and research and
development costs were also negatively impacted. Management believes
that these design deficiencies have been corrected.
3
<PAGE>
Losses resulting from the foregoing business setbacks have reduced equity
and have negatively impacted cash flow. The Company had a $19,765,265 deficit in
working capital at May 31, 2000. As a result, the Company is presently not in
compliance with the net worth covenants in some of its loan agreements. However,
in April 2000, the Company modified the loan agreement for its operating line of
credit and is in compliance with the net worth covenant in that agreement. The
Company is also unable to pay past-due balances owed to materials suppliers, and
consequently is now required to pay for new materials on a
cash-in-advance-basis, which compounds cash flow problems.
The Company has significant amounts of debt, including its operating line
of credit ($3,507,312 outstanding at May 31, 2000), $6,000,000 of convertible
subordinate debentures, and $2,000,000 of other debt which mature through June
2000. Currently, the Company does not have sufficient cash flow to satisfy these
obligations but is negotiating to restructure this debt.
Management has formulated a plan to address obstacles to the Company's
financial health. If the plan is successfully implemented, management believes
that the Company's financial condition will improve. However, management cannot
assure that the plan will be consummated, consummated in its current form; or if
consummated, that it will return the Company to profitability.
The plan consists of several phases. The objective of the initial phase is
to resuscitate what then was a failing enterprise and to lead it to a position
of relative stability from which a long-range plan can be launched. The initial
phase consists of the following steps:
o Sales orders need to be rekindled and average $400,000 or more per
week. This goal was substantially met in the period from September
15, 1999 to May 31, 2000. Sales orders have fallen since May 31,
2000.
o Trade creditors need to give temporary forbearance and agree to
supply materials on a cash-in-advance basis. A few trade creditors,
most having little prospects for ongoing business with the Company,
have filed suit for payment. The remaining trade creditors have shown
tremendous patience and forbearance. Still, the cash-in-advance
arrangements have exerted tremendous pressure on cash flow.
o The Company needed its primary lender to temporarily waive the breach
of net worth covenant in its loan agreement. This was accomplished in
April 2000 with a loan modification agreement. See "Liquidity and
Capital Resources".
o The Company needed to obtain working capital of at least $1,500,000.
A $2,000,000 loan was obtained from the City of Oklahoma City in
November 1999. Virtually all of the loan proceeds were used to make
payments due on secured obligations, for materials and labor to
manufacture cooling towers, and for overhead expenses.
4
<PAGE>
o The Company needed to resolve the remaining technical issues related
to its new line of factory-assembled cooling towers and the Company's
production. Management believes that virtually all the technical
issues are now resolved, and the Company is producing a quality
product.
o The Company needs to reduce its breakeven point by reducing costs and
increasing cooling tower selling prices. Opportunities to reduce
costs are being pursued, and cooling tower selling prices were
increased in October 1999 by an average of 30%.
The objectives of the second phase are to:
o Restore liquidity.
o Secure additional working capital, or a suitable combination of
working capital and credit guarantees, so the Company can move away
from cash-in-advance purchasing arrangements.
o Return to compliance with net worth covenants in loan agreements. o
Restore financial strength needed to win large cooling tower
projects.
o Reduce debt and increase equity, including conversion of the
Debentures and/or extension of maturity dates on debt agreements.
The Company is negotiating with the Debenture holders to convert the
Debentures into equity. Additionally the Company is considering an additional
equity offering to reduce current debt obligations and to provide additional
funding for inventory and working capital needs. These transactions, coupled
with the recovery steps described above will be a significant step toward
restoring the Company's financial health. In addition, the Company is optimistic
that these transactions will increase customer and distributor confidence
resulting in increased sales. However, there can be no assurance that these
objectives will be accomplished, including being able to meet the Company's
current debt obligations.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000 Compared to Three Months Ended May 31, 1999
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For the three months ended May 31, 2000, total tower revenues increased to
$9,102,109 from $4,674,142 for the comparable period in the prior year. During
the current three month period, 89 percent of total tower revenue was derived
from sales of 127 modular factory-assembled cooling towers; 8 percent of total
tower revenue was derived from design and construction of the TTCT Series
concrete cooling towers; and 3 percent of total tower revenue was derived from
other tower revenue. In the comparable three month period ended May 31, 1999, 77
percent of total tower revenue was derived from sales of 114 modular cooling
towers; 18 percent of total tower revenue was derived from design and
construction of the TTCT series concrete towers; and 5 percent of total tower
revenues were derived from other tower revenue. The increase in tower sales
revenue for the three months ended May 31, 2000 is due to an increase in the
quantity, size and price of units sold. In April 2000, the Company was awarded a
$5.2 million contract for 60 of the Company's factory assembled towers. As of
May 31, 2000, 97% of this contract was delivered. The decrease in concrete
revenues is due to the decrease in the number and size of jobs completed and in
process. Other tower revenue is up from the previous year due to increased sales
of proprietary parts and service sales.
Other operating revenue consists of royalties received from Aggreko Inc
related to the License Agreement for the leasing or rental of the Company's
cooling towers.
5
<PAGE>
The Company's cost of goods sold and constructed for the three months
ended May 31, 2000 was $6,212,330, or 68 percent of total tower revenue as
compared to $4,868,437, or 104 percent during the comparable period in 1999.
Overall margin in the factory-assembled cooling tower line was positively
impacted by the increase in the quantity, size and price of units sold,
including the $5.2 million contract for 60 factory assembled cooling towers.
Included in cost of goods sold for the three month period ended May 31, 2000 is
$192,203 to retrofit and service towers previously sold. This compares to three
month retrofit and warranty costs of $306,023 during the same period in 1999.
The balance in the accrual to cover estimated future costs to retrofit and
service towers previously sold is $441,225 at May 31, 2000. The Company
continually evaluates and revises, as necessary, the reserve for costs to
retrofit and service towers previously sold.
The three-month period ended May 31, 2000 reflected an increase in general
and administrative expenses from $526,317 in 1999 to $610,245 in 2000. The
increase is due mainly to an increase in bad debt expense. Selling expenses
decreased from $375,895 to $196,031. The decrease is due mainly to a reduction
in salaries through staff and wage reductions. Research and development expenses
decreased from $431,678 in 1999 to $12,505 in 2000. A significant portion of the
decrease is related to the completion of the redesign of the TTMT Series tower
to the TTEF Series tower. With the redesign of the tower and with manufacturing
of component parts in-house, management believes that the Company will be able
to reduce future production costs. Although the Company has no research and
development budget, such future quarterly costs are anticipated to be comparable
to those incurred in the three months ended May 31, 2000.
Interest expense increased from $562,025 to $697,120 primarily due to the
increase in total debt.
The Company recognized an income tax benefit of $817,060 for the three
months ended May 31, 1999, compared to no income tax expense or benefit for the
comparable period in 2000. 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. The sale of the Rental Operations in
the first quarter of 1999 allowed the Company to conclude that the deferred tax
assets at November 30, 1998 and the first three quarters of 1999 were
realizable. The severity of the design flaws and resultant difficulties
discussed above have caused management to believe that a full valuation
allowance is required at November 30, 1999, and May 31, 2000. Management has
determined that based on the Company's inability to generate taxable income in
the last two years (1999 and 1998), it is more likely than not the Company will
not realize the net deferred tax assets at November 30, 1999 and May 31, 2000.
Therefore, a valuation allowance in the amount of $4,082,451 was established in
the fourth quarter of 1999. The Company has a net operating loss carry forward
of approximately $10,500,000 expiring 2009 to 2019.
Currently, the Company's estimated backlog is $1.6 million for the TTEF
Series modular cooling towers scheduled for delivery in third quarter of FY
2000.
Six Months Ended May 31, 2000 Compared to Six Months Ended May 31, 1999
-----------------------------------------------------------------------
For the six months ended May 31, 2000, total tower revenues increased to
$12,124,590 from $9,009,245 for the comparable period in the prior year. During
the current six month period, 89 percent of total tower revenues was derived
from sales of 202 modular factory-assembled cooling towers, 8 percent of total
tower revenues was derived from design and construction of the TTCT series
modular concrete towers and 3 percent of total tower revenues was derived from
other tower revenue. In the comparable six month period in 1999, 82 percent of
total tower revenues was derived from sales of 236 modular factory-assembled
cooling towers, 12 percent of total tower
6
<PAGE>
revenues was derived from design and construction of modular concrete towers and
5 percent of total tower revenues were derived from other tower revenue. The
decrease in quantity of factory assembled towers sold for 2000 was more than
offset by an increase in the size and price of units sold. The decrease in
concrete revenues is due to the decrease in the number and size of jobs
completed and in process. Other tower revenue is down from the previous six
month period due to fewer sales of proprietary parts and service sales.
Other operating revenue consists of royalties received from Aggreko Inc
related to the Licensing Agreement for the leasing or rental of the Company's
cooling towers.
The Company's cost of goods sold and constructed during the six month
period ended May 31, 2000, was $9,269,543 or 77 percent of total tower revenues
as compared to $9,355,174 or 104 percent during the comparable period in 1999.
Overall margin in the factory-assembled cooling tower line was positively
impacted by the increase in the size and price of units sold, including the $5.2
million contract for 60 factory assembled cooling towers. Included in cost of
goods sold for the six month period ended May 31, 2000 is $377,768 to retrofit
and service towers previously sold. This compares to six month retrofit and
warranty costs of $453,608 during the same period in 1999.
The six-month period ended May 31, 2000 reflected an increase in general
and administrative expenses from $1,018,006 in 1999 to $1,056,284 in 2000. The
increase is due mainly to an increase in bad debt expense of $200,000 partially
offset by a decrease in salaries through staff and wage reductions. Selling
expenses decreased from $739,368 to $413,447 due to a reduction in salaries
through staff and wage reductions.
Research and development expenses decreased from $877,575 in the first six
months of 1999 to $88,627 for the first six months of 2000. A significant
portion of the decrease is related to the completion of the redesign of the TTMT
Series tower to the TTEF Series tower.
Interest expense increased from $1,068,721 for the six months ended May
31, 1999 to $1,389,075 for the six months ended May 31, 2000 primarily due to
the increase in total debt.
In December 1998, the Company consummated the sale of its industrial
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 provided for interest at 1% above prime. The outstanding
principal balance of the Note, together with accrued interest, was paid 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. Accordingly, the Company recorded a pre-tax gain of
$6,688,670 for the six months ended May 31, 1999. Proceeds were used to reduce
debt and for working capital.
The Company recognized an income tax expense of $1,101,880 for the six
months ended May 31, 1999, compared to no income tax expense or benefit for the
comparable period in 2000. See discussion above relating to the ultimate
realization of deferred tax assets.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2000, the Company had a working capital deficit of $19,765,265
as compared to a working capital deficit of $16,036,603 at February 29, 2000.
The Company's cash provided by (used in) its operating, investing and financing
activities during the six months ended May 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Operating activities $ 930,982 ($ 5,654,865)
Investing activities $ 1,786,513 $10,156,967
Financing activities ($ 2,907,552) ($ 4,326,112)
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, management believes
that it will enable the Company to better manage inventory levels and reduce
costs. 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
tower construction projects will have an effect on working capital requirements.
At May 31, 2000, billings in excess of costs and estimated earnings on
uncompleted contracts were $5,331 as compared to $299,370 at February 29, 2000.
Normally, concrete tower construction projects provide for progress payments of
the contract price with a retainage of 10 to 15 percent payable after completion
of the project.
Scheduled principal payments on capital leases will total $538,323 over
the next twelve months. In addition, $20,917,685 of principal payments are due
on the Company's debt during the next twelve months. The Company does not have
sufficient capital resources to fund its debt service and capital requirements.
Virtually all of the Company's capital expenditures during the six months
ended May 31, 2000 were related to additional equipment and tooling for the new
manufacturing facility. As of November 30, 1999, the manufacturing facility was
substantially complete with a total investment of $11.5 million. However, to
finalize the process of producing all component parts in-house, the Company
acquired through a capital lease a 2200 ton injection-molder, at a cost of $1.2
million in December 1999. Management anticipates additional capital expenditures
of $1.0 million in FY 2000 to complete the final tooling requirements of the
production process. The manufacturing facility includes equipment and tooling to
allow the Company to produce parts used in its modular cooling towers which
previously had been purchased from outside vendors. Management believes
manufacturing these parts in-house can reduce product costs.
The new manufacturing facility was 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 in 1997 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,
with final payment due October 1, 2007. A debt service reserve fund of $157,000
was also set aside from the bond proceeds. The reserve fund was used to pay the
April 1, 2000 principal and interest payment. The OIA holds a mortgage on the
Oklahoma City facility to collateralize the bond indebtedness. The balance
outstanding was $3,530,000 at May 31, 2000. The Company is in default of the
bond
8
<PAGE>
agreement because the principal and interest payment due July 1, 2000 was not
paid. Accordingly, this debt is classified as current in the Company's financial
statements.
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 30,
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. The Debentures and final interest
due have not been paid. The Company is currently negotiating with Debenture
holders to either convert the Debentures or extend the maturity date up to two
years.
In September 1997, the Company entered into a loan agreement with the City
of Oklahoma City in the form of 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 May 31, 2000, all of these funds had been
advanced to the Company and were outstanding. The loan bears interest at 5.5%.
Principal and interest payments are due annually beginning August 1, 2000, in
the amount of $140,000. An interest only payment is due each February 1 until
maturity on August 1, 2008. 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. The outstanding
balance at May 31, 2000, was $1,397,970. The Company is not in compliance with
net worth requirements in the loan agreement and accordingly this debt is
classified as current in the Company's financial statements.
The Company had a line of credit at Chickasha Bank, secured by the
Chickasha property, in the amount of $380,000 for short-term cash flow needs. In
March 2000, the Company closed the sale of the Chickasha plant and the proceeds
were used to pay off this loan.
In April 1998, the Company finalized a $2,000,000 construction loan for
the Oklahoma City office facility that cost approximately $2.4 million. This
loan was converted to a first mortgage loan in June 1999 in the amount of
$2,010,000. Initially, the loan bears interest at 8.25%. Principal and interest
payments of $17,127 are due monthly. The note matures in June 2002. Also, in
June 1999, a second mortgage in the amount of $253,000 was finalized. Initially,
the loan bears interest at 8.25%. Principal and interest payments of $3,103 are
due monthly. The note matures in June 2002. The interest rates on both of these
notes are variable at Wall Street Journal prime rate plus .5%. The balances on
the loans at May 31, 2000, are $1,972,338 and $237,472, respectively. The
Company is past due on these note payments and accordingly, these notes are
classified as current in the Company's financial statements.
The Company has a line of credit of $5,088,160 with a financial
institution for working capital requirements. Interest is payable monthly at a
variable rate of 2.0% over national prime. The agreement contains a financial
covenant that provides for a minimum tangible net worth. At February 29, 2000,
the Company was not in compliance with this covenant. However, in April 2000,
the loan agreement was modified and reduced the net worth requirement, among
other things, which brought the Company into compliance. The loan modification
agreement expired June 26, 2000 and on June 27, 2000, the Company entered into a
forbearance agreement which, among other things, extends the maturity date to
July 13, 2000; prohibits payments of principal or interest on the Debentures and
certain other debt; provides for assessment of monthly administrative fees; and
increases the interest rate to 3% above national prime. This credit facility is
collateralized by certain accounts/notes receivable, inventory and general
intangibles and as of
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<PAGE>
May 31, 2000, $3,507,312 was outstanding. The Company will attempt to negotiate
a new forbearance agreement after July 13, 2000.
In November 1999, the Company entered into a loan agreement with the City
of Oklahoma City in the amount of $2,000,000 for working capital purposes. As of
May 31, 2000, $2,000,000 of these funds had been advanced to the Company. The
loan bears interest at 6%. Interest and principal is due at maturity on November
2, 2000. This note is collateralized by accounts receivable, inventory and a
mortgage on the Oklahoma City plant facility.
Total notes payable of $2,000,000 to a company were outstanding at May 31,
2000. These notes are secured by certain patents and bear interest ranging from
10.75% to 13% and mature June 14, 2000. The Company has not paid these notes and
related accrued interest and is currently negotiating to restructure this debt.
Under the terms of the note agreements, the Company is entitled to nonexclusive
use of the certain patents for a period of one year from maturity date during
which time the Company can repay the note with interest and redeem the patents.
The Company does not have sufficient capital resources to fund its debt
service and capital requirements for the next four quarters. Operating losses
have increased the Company's funding requirements and require it to obtain
additional capital. Accordingly, management is negotiating for increases in its
credit facilities, as well as term extensions. The Company has also engaged an
investment advisor to seek additional sources of capital. There can be no
assurances that management's nor the investment advisor's efforts will be
successful.
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 and
equipment.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in numerous legal proceedings which allege that
the Company is in default of payments owed on open accounts. See Form 10-KSB for
a general description of those proceedings as well as other legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Liquidity and Capital Resources" for discussion of potential defaults
upon senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Tower Tech, Inc. was held on May 24,
2000 at 10:30 a.m. at the OKC office facility. A total of 3,405,495 shares of
common stock, which is 95 percent of the shares outstanding on April 9, 2000,
were represented at the meeting, either in person or by proxy.
The following incumbent directors were re-elected for the next year.
VOTE TABULATION:
DIRECTORS: FOR AGAINST ABSTAIN
Leon Poag 3,375,928 0 29,567
Lincoln Whitaker 3,375,928 0 29,567
Harold Curtis 3,375,928 0 29,567
PricewaterhouseCoopers LLP was approved as independent accountants for Tower
Tech, Inc. for the next year. The vote tabulation was as follows:
VOTE TABULATION: FOR AGAINST ABSTAIN
PricewaterhouseCoopers LLP 3,241,495 162,500 1,500
These were all the matters submitted for a vote to the shareholders at the
annual stockholders meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits have been filed as part of this report:
Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Certificate of
Incorporation of Tower Tech, Inc.
3.2(1) Amended Bylaws of Tower Tech, Inc.
3.3(1) Amendment to Bylaws
4.1(7) Form of 10% Subordinated Convertible Debenture
11
<PAGE>
4.2 Omitted
4.3(1) Form of Stock Certificate
4.4 Omitted
4.5 Omitted
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 Deferral Agreement between Tower Tech,
Inc., and Chickasha Bank & Trust, dated June
16, 1999.
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
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) Master Lease Agreement between Tower Tech,
Inc. and HPM Corporation, dated June 16, 1999.
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
12
<PAGE>
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, 1999.
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.
10.21(11) Modification and Extension Agreement between
Tower Tech, Inc. and First United Bank and
Trust Company, dated June 17, 1999.
10.22(11) Commercial Mortgage, Security Agreement,
Financing Statement and Assignment of Rents
between Tower Tech, Inc. and First United Bank
and Trust Company, dated June 17, 1999.
10.23(11) Commercial Promissory Note between Tower Tech,
Inc. and First United Bank and Trust Company,
dated June 17, 1999.
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
13
<PAGE>
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(11) Agreement and Plan of Dissolution between the
Company and J-Tech Enterprises dated April 30,
1999.
10.32(11) Security Agreement between Tower Tech, Inc.
and HPM Corporation dated June 16, 1999.
10.33(12) Security Agreement between Tower Tech, Inc.
and HPM Corporation dated November 30, 1999.
10.34(12) Master Lease Agreement between Tower Tech,
Inc. and U.S. Bancorp dated August 4, 1999.
10.35(12) Lease Agreement between Tower Tech, Inc. and
JACOM Leasing dated September 22, 1999.
10.36(12) Secured Promissory Note between Tower Tech,
Inc. and the City of Oklahoma City dated
November 2, 1999.
10.37(12) Mortgage between Tower Tech, Inc. and the City
of Oklahoma City dated November 2, 1999.
10.38(12) Loan Agreement between Tower Tech, Inc. and
the City of Oklahoma City dated November 2,
1999.
10.39(12) Security Agreement between Tower Tech, Inc.
and the City of Oklahoma City dated November
2, 1999.
10.40(13) Loan Modification Agreement between Tower
Tech, Inc. and People First Bank dated April
3, 2000.
14
<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 Incorporated by reference from the same numbered exhibit to
10-QSB for the quarter ended August 31, 1999.
12 Incorporated by reference from the same numbered exhibit to
10-KSB for the year ended November 30, 1999.
13 Incorporated by reference from the same numbered exhibit to
10-QSB for the quarter ended February 29, 2000.
b. The Company has not filed any reports on Form 8-K during the
quarter for which this report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWER TECH, INC.
--------------------------------
(Registrant)
Date: July 14, 2000 /s/ HAROLD CURTIS
----------------------------------
Harold Curtis, Chief Executive
Officer
Date: July 14, 2000 /s/ ROBERT BRINK
----------------------------------
Robert Brink, President
Date: July 14, 2000 /s/ CHARLES D. WHITSITT
----------------------------------
Charles D. Whitsitt, Chief
Financial Officer
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWER TECH, INC.
----------------------------------
(Registrant)
Date:
------------------- ----------------------------------
Harold Curtis, Chief Executive
Officer
Date:
------------------- ----------------------------------
Robert Brink, President
Date:
------------------- ----------------------------------
Charles D. Whitsitt, Chief
Financial Officer
16
