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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 August 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 __________ TO _________
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 Identification No.)
incorporation or organization)
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 3,976,311 shares as of October 18, 2000
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
INDEX
TOWER TECH, INC.
<TABLE><CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet - August 31, 2000 F-1
Statements of Operations -- Three months ended August 31, 2000 and
1999 F-2 Nine months ended August 31,
2000 and 1999 F-3
Statements of Cash Flows -- Nine months ended August 31, 2000 and 1999 F-4
Notes to Financial Statements -- August 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 6. Exhibits and Reports on Form 8-K 11
Signatures 13
</TABLE>
<PAGE>
TOWER TECH, INC.
BALANCE SHEET (UNAUDITED)
AUGUST 31, 2000
ASSETS
Current assets:
Cash $ 526
Accounts receivable, net of allowance
for doubtful accounts of $550,000 2,121,351
Notes receivable, current 196,070
Receivables from officers and employees 185,093
Inventory 7,676,894
Prepaid expenses 68,467
Restricted assets 757
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Total current assets 10,249,158
Property, plant and equipment, net 18,548,580
Patents, net 233,697
Goodwill, net 401,686
Notes receivable, non-current, net of unamortized
discount of $4,956 424,011
Other assets 230,878
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Total assets $ 30,088,010
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LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Current maturities of long-term debt $ 23,662,318
Current maturities of obligations under capital lease 1,948,023
Accounts payable 6,426,079
Book overdraft 161,271
Billings in excess of costs and estimated earnings
on uncompleted contracts 5,331
Accrued liabilities 986,697
Interest payable 1,277,010
Customer deposits 324,333
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Total current liabilities 34,791,062
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Stockholders' 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 (12,985,190)
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Total stockholders' deficit (4,703,052)
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Total liabilities and stockholders' deficit $ 30,088,010
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The accompanying notes are an integral part of these financial statements.
F-1
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TOWER TECH, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
2000 1999
Sales and other operating revenue:
Tower sales $ 1,043,939 $ 2,488,709
Other tower revenue 356,838 148,503
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Total tower revenue 1,400,777 2,637,212
Other operating revenue 28,056 31,472
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Total revenue 1,428,833 2,668,684
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Costs and expenses:
Cost of goods sold and constructed 2,116,693 3,872,399
General and administrative 707,268 708,655
Selling expenses 226,025 368,638
Research and development 13,183 1,155,810
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Total cost and expenses 3,063,169 6,105,502
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Loss from operations (1,634,336) (3,436,818)
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Other income (expense):
Interest, net (630,785) (564,966)
Miscellaneous 14,534 22,198
Loss on sale -- (27,400)
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Total other expense (616,251) (570,168)
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Loss before income taxes (2,250,587) (4,006,986)
Income tax benefit -- 593,926
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Net loss ($2,250,587) ($2,413,060)
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Weighted average shares outstanding - basic 3,576,311 3,576,311
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Net loss per common share - basic ($ .63) ($ .68)
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Weighted average shares outstanding - diluted 3,576,311 3,576,311
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Net loss per common share - diluted ($ .63) ($ .68)
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The accompanying notes are an integral part of these financial statements.
F-2
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TOWER TECH, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
2000 1999
Sales and other operating revenue:
Tower sales $ 11,793,216 $ 9,915,991
Concrete tower construction 981,807 1,028,575
Tower rentals -- 31,239
Other tower revenue 750,343 670,654
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Total tower revenue 13,525,366 11,646,459
Other operating revenue 169,448 41,998
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Total revenue 13,694,814 11,688,457
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Costs and expenses:
Cost of goods sold and constructed 11,386,237 13,227,576
General and administrative 1,763,552 1,726,661
Selling expenses 639,472 1,108,005
Research and development 101,808 2,033,385
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Total cost and expenses 13,891,069 18,095,627
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Loss from operations (196,255) (6,407,170)
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Other income (expense):
Interest, net (2,019,859) (1,586,621)
Gain on sale of rental operations -- 6,661,270
Income from equity investee - TTSE -- 21,205
Miscellaneous 57,784 58,711
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Total other (expense) income (1,962,075) 5,154,565
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Loss before income taxes (2,158,330) (1,252,605)
Income tax benefit -- 492,046
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Net loss ($ 2,158,330) ($ 760,559)
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Weighted average shares outstanding - basic 3,576,311 3,576,311
============ ============
Net loss per common share - basic ($ .60) ($ .21)
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Weighted average shares outstanding - diluted 3,576,311 3,576,311
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Net loss per common share - diluted ($ .60) ($ .21)
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The accompanying notes are an integral part of these financial statements.
F-3
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TOWER TECH, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE><CAPTION>
NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 2,158,330) ($ 760,559)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 1,018,401 822,539
Net gain on disposal of equipment -- (6,661,270)
Equity share of income of investee -- (21,205)
Bad debt expense 508,003 131,052
Increase in deferred taxes -- (509,687)
Decrease in accounts receivable 40,475 1,287,687
Decrease in trade notes receivable 47,518 17,000
Decrease in accounts receivable, affiliate -- 17,215
Decrease in cost in excess of billings 85,120 382,197
Increase in inventory (228,962) (2,722,682)
Decrease (increase) in prepaid expenses 39,574 (39,004)
Decrease in other assets 131,358 166,988
(Decrease) increase in accounts payable (727,435) 1,910,446
Increase in accounts payable, affiliate -- 26,583
Increase in billings in excess of costs 5,331 --
Increase (decrease) in interest payable and
accrued liabilities 690,963 (367,051)
Increase in deposits 29,025 62,662
Decrease in income tax payable (2,468) --
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Net cash used in operating activities (521,427) (6,257,089)
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Cash flows from investing activities:
Cash paid for acquisition of joint venture, net -- (99,096)
Purchase of property and equipment (228,231) (2,636,199)
Payment of note receivable from sale of rental operation 1,350,000 --
Decrease in restricted assets 156,856 510
Proceeds from sale of assets 439,930 12,150,000
Increase in patent costs (16,282) (48,240)
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Net cash provided from investing activities 1,702,273 9,366,975
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Cash flows from financing activities:
Proceeds from borrowings, net of costs 10,230,305 21,391,079
Repayments of long-term debt and capital lease obligations (11,823,791) (24,185,114)
Increase (decrease) in book overdraft 161,271 (235,318)
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Net cash used by financing activities (1,432,215) (3,029,353)
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Net (decrease) increase in cash (251,369) 80,533
Cash at beginning of period 251,895 3,798
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Cash at end of period $ 526 $ 84,331
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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 August 31, 2000, and the related statements of
operations for the three and nine month periods ended August 31, 2000 and
1999 and the statements of cash flows for the nine month period ended
August 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 and warrants to purchase 634,905 and 469,197 shares of common
stock at weighted average prices of $4.09 and $5.30 were outstanding
during the three and nine month periods ended August 31, 2000
respectively. Options and warrants to purchase 295,474 shares of common
stock at a weighted average price of $6.41 was outstanding for both the
three and none month periods ended August 31, 1999. These options 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
nine months ended August 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 since then the Company entered into
forbearance agreements which among other things, extends the maturity to
October 31, 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 August 31, 2000,
$4,822,479 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 have matured/or will mature through October 2000. The
Company is in payment default, or has cross-default provisions, in
substantially all its debt and capital lease agreements, and therefore,
has classified all debt and capital leases as current at August 31, 2000.
Currently, the Company does not have sufficient cash flow to satisfy these
obligations.
In a continuing effort to address the Company's financial condition, the
Company has engaged a New York investment banking company to procure
additional equity or equity-type capital of approximately $6 million to
finance its operations and settle some of the Company's current
obligations. The placement agent for the proposed private placement is
requiring the Company to complete certain transactions to effect a
"restructuring" which is critical to the success of the private placement.
The certain transactions critical to the success of the private
placement are:
1) The Company's operating lender must extend the current credit
facility for a minimum of one year;
2) A $2 million debt obligation that matures in November 2000 must
be extended for a minimum of one year;
3) A $2 million debt obligation that matured in June 2000 must
accept, as payment in full, including accrued interest, an
assignment of future royalty payments due to the Company;
4) Holders of the $6 million convertible subordinate debentures
which matured in June 2000 must agree to convert their debentures
including accrued interest into common equity of the Company;
5) Vendors must agree to accept a substantially reduced cash
settlement payable at closing of the private placement or a
larger cash settlement payable over a 5-year period. These
arrangements would settle approximately $6 million in vendor
accounts payable.
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 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 over $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 flows are key to regaining the level of sales orders necessary to sustain
the operations of the Company.
Although the Company has seen market acceptance of its technology, past
extensive investment in research and development and warranty costs have
depleted 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 be come
operational over a year later than anticipated. The delays
contributed significantly to the Company's losses in FY 1998 and
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. From 1995 through 1997, the
Company 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 have been 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 of 1999 so extrusion and injection
molding tools could be modified. As a result, fiscal 1999 and year to
date 2000 tower sales were negatively impacted. Additionally, fiscal
1999 and year to date 2000 cost of goods sold (including warranty
expense), and fiscal 1999 research and development costs were also
negatively impacted. Management believes that these design
deficiencies have been corrected in new towers being produced.
3
<PAGE>
Losses resulting from the foregoing business setbacks have resulted in
a significant capital deficit and have negatively impacted cash flows. The
Company had a $24,541,904 deficit in working capital at August 31, 2000. As a
result, the Company is presently not in compliance with the net worth covenants
in some of its loan agreements and is in payment default of substantially all
its debt and capital lease agreements. The Company is operating under a
forbearance agreement for its operating line of credit, which expires October
31, 2000. 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 ($4,822,479 outstanding at August 31, 2000), $6,000,000 of
convertible subordinate debentures, and $2,000,000 of other debt which have
matured/or will mature through October 2000. Also, the Company is in payment
default of substantially all of its other debt and capital lease agreements
(totaling $12,787,862) and, therefore, all of these obligations have been
classified as current at August 31, 2000. Currently, the Company does not have
sufficient cash flow to satisfy these obligations.
In a continuing effort to address the Company's financial condition,
the Company has engaged an investment banker to procure additional equity or
equity-type capital of approximately $6 million to finance its operations and
settle some of the Company's current obligations. The investment banker for the
proposed private placement is requiring the Company to complete certain
transactions to effect a "restructuring" which is critical to the success of the
private placement.
The certain transactions critical to the success of the private
placement are:
1) The Company's operating lender must extend the current credit
facility for a minimum of one year;
2) A $2 million debt obligation that matures in November 2000 must
be extended for a minimum of one year;
3) The holder of a $2 million debt obligation that matured in June
2000 must accept, as payment in full, including accrued interest,
an assignment of future royalty payments due to the Company;
4) Holders of the $6 million convertible subordinate debentures that
matured in June 2000 must agree to convert their debentures
including accrued interest into common stock of the Company;
5) Vendors must agree to accept a substantially reduced cash
settlement payable at closing of the private placement or a
larger cash settlement payable over a 5-year period. These
arrangements would settle approximately $6 million in vendor
accounts payable.
The Company is currently negotiating the above items and, therefore,
management believes that the plan will be successful. However, management cannot
assure that the plan will be consummated in its current form; or if consummated,
that it will return the Company to profitability. The objective of the plan is
to resuscitate a failing enterprise and lead the Company to a position of
relative stability on which an aggressive sales and marketing plan can be based
in order to regain market share which is critical in order to return to
profitable operations.
4
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended August 31, 2000 Compared to Three
Months Ended August 31, 1999
----------------------------------------------------
For the three months ended August 31, 2000, total tower revenues
decreased to $1,400,777 from $2,637,212 for the comparable period in the prior
year. During the current three-month period, 75 percent of total tower revenue
was derived from sales of 28 modular factory-assembled cooling towers; and 25
percent of total tower revenue was derived from other tower revenue. In the
comparable three month period ended August 31, 1999, 94 percent of total tower
revenue was derived from sales of 70 modular factory-assembled cooling towers;
and 6 percent of total tower revenues were derived from other tower revenue. The
decrease in tower sales revenue for the three months ended August 31, 2000 is
due to a decrease in the quantity, size and price of units sold. The decline in
tower sales is due mainly to the current financial condition of the Company.
Customer service has not been as responsive due to lack of funding available and
sales representatives have taken a "wait and see" attitude regarding the
Company's ability to resolve both past product quality problems and the current
financial problems. Other tower revenue is up from the previous year due to
increased sales of proprietary parts and service sales.
Other operating revenue, which was relatively stable from the 1999
third quarter to the current quarter, consists of royalties received from
Aggreko Inc related to the License Agreement for the leasing or rental of
cooling towers purchased from the Company.
The Company's cost of goods sold and constructed for the three months
ended August 31, 2000 was $2,116,693, or 151 percent of total tower revenue as
compared to $3,872,399, or 147 percent during the comparable period in 1999.
Overall margin in the factory-assembled cooling tower line was negatively
impacted by the decrease in the quantity, size and price of units sold. Included
in cost of goods sold for the three month period ended August 31, 2000 is
$452,066 to retrofit and service towers previously sold. This compares to three
month retrofit and warranty costs of $523,396 during the same period in 1999.
The balance in the accrual to cover estimated future costs to retrofit and
service towers previously sold is $550,000 at August 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 August 31, 2000 reflected a slight
decrease in general and administrative expenses from $708,655 in 1999 to
$707,268 in 2000. Bad debt expense increased $92,000 while all other general and
administrative expenses decreased $93,000 due mainly to decreases in salaries
through staff and wage reductions. Selling expenses decreased from $368,638 to
$226,025. The decrease is due mainly to a reduction in salaries through staff
and wage reductions. Research and development expenses decreased from $1,155,810
in 1999 to $13,183 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. 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 August 31, 2000.
Net interest expense increased from $564,966 to $630,785 primarily due
to a decrease in interest earnings.
The Company recognized an income tax benefit of $1,593,926 for the
three months ended August 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
5
<PAGE>
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 factory tower design flaws and resultant difficulties have caused management
to believe that a full valuation allowance is required at November 30, 1999, and
August 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 that the Company will not realize the net deferred tax assets at
November 30, 1999 and August 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 $13,000,000 expiring
2009 to 2019.
Currently, the Company's estimated backlog is $1.4 million for the TTEF
Series modular cooling towers and is scheduled for delivery in fourth quarter of
FY 2000.
Nine Months Ended August 31, 2000 Compared to Nine
Months Ended August 31, 1999
--------------------------------------------------
For the nine months ended August 31, 2000, total tower revenues
increased to $13,525,366 from $11,646,459 for the comparable period in the prior
year. During the current nine month period, 87 percent of total tower revenues
was derived from sales of 230 modular factory-assembled cooling towers, 7
percent of total tower revenues was derived from design and construction of the
TTCT series modular concrete towers and 6 percent of total tower revenues was
derived from other tower revenue. In the comparable nine month period in 1999,
85 percent of total tower revenues was derived from sales of 306 modular
factory-assembled cooling towers, 9 percent of total tower revenues was derived
from design and construction of modular concrete towers and 6 percent of total
tower revenues were derived from other tower revenue. The increase in tower
sales revenue for the nine months ended August 31, 2000 is due to an increase in
the 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. Most of the
towers under this contract were delivered in the second quarter of FY2000 with
the remaining towers delivered in the third quarter. 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 nine-month period due to
more 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 cooling towers
purchased from the Company.
The Company's cost of goods sold and constructed during the nine month
period ended August 31, 2000, was $11,386,237 or 84 percent of total tower
revenues as compared to $13,227,576 or 114 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 nine month period ended August 31, 2000
is $779,835 to retrofit and service towers previously sold. This compares to
nine month retrofit and warranty costs of $977,000 during the same period in
1999.
The nine-month period ended August 31, 2000 reflected a small increase
in general and administrative expenses from $1,726,661 in 1999 to $1,763,552 in
2000. Bad debt expense increased $226,951 while all other general and
administrative expenses decreased $190,000 due mainly to decreases in salaries
through staff and wage reductions. Selling expenses decreased from $1,108,005 to
$639,472 due mainly to a reduction in salaries through staff and wage
reductions.
6
<PAGE>
Research and development expenses decreased from $2,033,385 in the
first nine months of 1999 to $101,808 for the first nine 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.
Net interest expense increased from $1,586,621 for the nine months
ended August 31, 1999 to $2,019,859 for the nine months ended August 31, 2000
primarily due to the increase in total debt and a decrease in interest earnings.
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 nine months ended August 31, 1999. Proceeds were used to
reduce debt and for working capital.
The Company recognized an income tax benefit of $492,046 for the
nine months ended August 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.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2000, the Company had a working capital deficit of
$24,541,904 as compared to a working capital deficit of $19,765,265 at May 31,
2000. The Company's cash provided by (used in) its operating, investing and
financing activities during the nine months ended August 31, 2000 and 1999 are
as follows:
2000 1999
---- ----
Operating activities ($ 521,427) ($ 6,257,089)
Investing activities $ 1,702,273 $ 9,366,975
Financing activities ($ 1,432,215) ($ 3,029,353)
The Company's capital requirements for its continuing operations
consist of its general working capital needs and scheduled payments on its debt
obligations. 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. 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.
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.
Due to the Company's financial condition, it has been unable to
maintain required debt service and accordingly is several payments in arrears on
substantially all debt and capital lease obligations as of August 31, 2000.
Accordingly, all debt and capital leases have been classified as current at
August 31, 2000. The Company does not have sufficient capital resources to fund
its debt service requirements.
Virtually all of the Company's capital expenditures during the nine
months ended August 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.
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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. 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. A mortgage exists on the Oklahoma
City facility to collateralize the bond indebtedness. The balance outstanding
was $3,530,000 at August 31, 2000. The Company is in default of the bond
agreement because the principal and interest payment due July 1, 2000 was not
paid.
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 matured 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 convert the Debentures at a substantially reduced conversion price.
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. 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 which
is August 1, 2008. The loan is collateralized by a second mortgage on the
manufacturing facility. The Company was unable to make the August 1, 2000
payment.
The Company 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 payable monthly with the final
payment due in July 2004 and is collateralized by equipment. The outstanding
balance at August 31, 2000, was $1,397,970. The Company is not in compliance
with net worth requirements in the loan agreement and is not current on
payments.
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
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notes are variable at Wall Street Journal prime rate plus .5%. The balances on
the loans at August 31, 2000, are $1,972,338 and $237,472, respectively. The
Company is past due on these note payments.
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. Since then
the Company has entered into forbearance agreements which, among other things,
extends the maturity date to October 31, 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 August 31, 2000,
$4,822,479 was outstanding.
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.
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
August 31, 2000. These notes are collateralized by certain patents and bear
interest ranging from 10.75% to 13% and matured June 14, 2000. The Company has
not paid these notes and related accrued interest and is currently negotiating
to settle 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 reclaim the patents.
In September 2000, the Company entered into five separate loan
agreements totaling $500,000. These promissory notes are interest free for 90
days. After 90 days, the notes bear interest at 12% until paid in full. The
principal amount of the notes, together with all accrued and unpaid interest, if
any, is due and payable in full on the earlier of (a) the Company's sale of a
minimum of $4,000,000 of its securities or (b) September 14, 2001.
As inducement to each of the five lenders, the Company agreed to issue
to each lender one share of the Company's common stock for each $1.25 loaned to
the Company. Accordingly, 400,000 shares were issued subsequent to August 31,
2000. The placement agent for this funding was issued a three-year common stock
purchase warrant for 100,000 shares of the Company's stock at a $.001 per share
exercise price.
The Company does not have sufficient capital resources to fund its debt
service and operating requirements for the next four quarters. Operating losses
have increased the Company's funding requirements and require it to obtain
additional capital. Accordingly, the Company has engaged an investment banker to
seek additional sources of capital. There can be no assurances that management's
nor the investment banker's efforts will be successful. (See discussion in the
"General" section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.)
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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.
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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
a. Notes payable to a company totaling $2,000,000 collateralized by
certain patents plus accrued, unpaid interest of $335,965. The
Company is in default in the payment of this debt, which matured
June 14, 2000.
b. Notes payable to a financial institution totaling $2,209,810
collateralized by mortgages on the Oklahoma City office facility,
plus accrued, unpaid interest of $45,474. The Company is in
default in the payment of monthly principal and interest
payments.
c. Oklahoma Industries Authority industrial revenue bonds totaling
$3,530,000, collateralized by a mortgage on the Company's plant
facility, plus accrued, unpaid interest of $117,207. The Company
is in default in the payment of the quarterly principal and
interest payment due July 1, 2000.
d. Convertible subordinate debentures totaling $6,000,000 plus
accrued, unpaid interest of $401,781. The Company is in default
in the payment of these debentures, which matured June 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits have been filed as part of this report:
Exhibit No. Description
----------- -----------
10.41 Loan Modification Agreement between Tower Tech, Inc. and
People First Bank dated September 15, 2000
10.42 Security Agreement between Tower Tech, Inc. and Taglich
Brothers, Inc. as collateral agent dated September 15, 2000
10.43 Tower Tech, Inc. Common Stock Purchase Warrant to purchase
100,000 shares of Common Stock issued to Taglich Brothers,
Inc. dated September 15, 2000
10.44 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and Taglich Brothers, Inc. dated September 15,
2000
10.45 $50,000 Promissory Note between Tower Tech, Inc. and EBS
Microcap Partners, L.P. dated September 19, 2000
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10.46 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and EBS Microcap Partners, L.P. dated September
19, 2000
10.47 $200,000 Promissory Note between Tower Tech, Inc. and
Dolphin Offshore Partners, L.P. dated September 27, 2000
10.48 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and Dolphin Offshore Partners, L.P. dated
September 27, 2000
10.49 $50,000 Promissory Note between Tower Tech, Inc. and Robert
Taglich dated September 15, 2000
10.50 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and Robert Taglich dated September 15, 2000
10.51 $50,000 Promissory Note between Tower Tech, Inc. and
Michael Taglich dated September 15, 2000
10.52 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and Michael Taglich dated September 15, 2000
10.53 $150,000 Promissory Note between Tower Tech, Inc. and
Shadow Capital LLC dated September 21, 2000
10.54 Piggy-Back Registration Rights Agreement between Tower
Tech, Inc. and Shadow Capital LLC dated September 21, 2000
27 Financial Data Schedule
b. The Company filed a report on Form 8-K during the quarter for
which this report is filed announcing the retirement of Harold
Curtis from his CEO position with the Company. The report was
dated September 27, 2000.
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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/ROBERT BRINK
--------------------------------------------
Robert Brink, President and CEO
Date: July 14, 2000 /s/CHARLES D. WHITSITT
--------------------------------------------
Charles D. Whitsitt, Chief Financial Officer
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