FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended January 31, 1996
Commission File No. 2-33256
TOROTEL, INC.
(Exact name of small business issuer as specified in its charter)
MISSOURI 44-0610086
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13402 SOUTH 71 HIGHWAY, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices)
(816) 761-6314
(Issuer's telephone number)
NONE
(Former name, former address and former fiscal year, if change since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
As of March 8, 1996, there were 2,785,011 shares of Common Stock,
$.50 Par Value, outstanding.
TOROTEL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of January 31, 1996 3
Consolidated Statements of Operations for
the nine months ended January 31, 1996 and 1995 4
Consolidated Statements of Operations for the
three nonths ended January 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
nine months ended January 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET (Unaudited)
As of January 31, 1996
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash $ 84,000
Accounts receivable, net (Note 2) 3,404,000
Inventories (Note 3) 2,652,000
Prepaid expenses and other current assets 179,000
6,319,000
Property, plant and equipment, net 1,888,000
Deferred tax asset (Note 4) 228,000
Other assets 32,000
$ 8,467,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) $ 790,000
Trade accounts payable 1,234,000
Accrued liabilities 473,000
Accrued interest on note payable to former officer 22,000
2,519,000
Long-term debt, less current maturities (Note 5) 1,804,000
Subordinated note and interest payable to former officer 429,000
Contingencies (Note 6) -
Stockholders' equity:
Common stock, at par value 1,412,000
Capital in excess of par value 8,647,000
Retained earnings (deficit) (6,189,000)
3,870,000
Less treasury stock, at cost 155,000
3,715,000
$ 8,467,000
</TABLE>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended October 31,
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<S> <C> <C>
1996 1995
Net sales $11,943,000 $11,488,000
Cost of goods sold 8,788,000 8,322,000
Gross profit 3,155,000 3,166,000
Operating expenses:
Engineering 695,000 707,000
Selling, general
and administrative (Note 6) 2,228,000 2,098,000
2,923,000 2,805,000
Earnings from operations 232,000 361,000
Other expense (income):
Interest expense 244,000 231,000
Other, net (Note 7) (516,000) 20,000
(272,000) 251,000
Earnings before provision
for income taxes 504,000 110,000
Provision for income taxes (Note 4) 172,000 37,000
Net earnings $ 332,000 $ 73,000
Earnings per common and common
equivalent share $ .12 $ .03
Weighted average common and common equivalent
shares outstanding 2,808,000 2,784,000
</TABLE>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended January 31,
<TABLE>
<S> <C> <C>
1996 1995
Net sales $ 3,688,000 $ 3,846,000
Cost of goods sold 2,869,000 2,775,000
Gross profit 819,000 1,071,000
Operating expenses:
Engineering 229,000 230,000
Selling, general
and administrative (Note 6) 853,000 740,000
1,082,000 970,000
Earnings (loss) from operations (263,000) 101,000
Other expense (income):
Interest expense 75,000 85,000
Other, net (Note 7) (519,000) 10,000
(444,000) 95,000
Earnings before provision
for income taxes 181,000 6,000
Provision for income taxes (Note 4) 62,000 2,000
Net earnings $ 119,000 $ 4,000
Earnings per common and common
equivalent share $ .04 $ .00
Weighted average common and common equivalent
shares outstanding 2,847,000 2,812,000
</TABLE>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended October 31,
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<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net earnings $ 332,000 $ 73,000
Adjustments to reconcile net earnings to net cash
provided by operations:
Gain from disposition of asset (1,000) -
Depreciation 214,000 187,000
Increase (decrease) in cash flows from
operations resulting from changes in:
Accounts receivable 676,000 (534,000)
Inventories (29,000) 167,000
Prepaid expenses and other assets (75,000) 26,000
Deferred tax asset 172,000 37,000
Trade accounts payable (118,000) 30,000
Accrued liabilities (64,000) 36,000
Accrued interest on note
to former officer (60,000) 35,000
715,000 (16,000)
Net cash provided by operating activities 1,047,000 57,000
Cash flows from investing activities:
Capital expenditures (161,000) (65,000)
Proceeds from involuntary conversion 1,000 -
Net cash used in investing activities (160,000) (65,000)
Cash flows from financing activities:
Borrowings against credit line 12,533,000 10,988,000
Payments against credit line (13,058,000) (11,304,000)
Proceeds from issuance of long-term debt - 500,000
Principal payments on long-term debt (405,000) (243,000)
Payments on capital leases obligations (10,000) (2,000)
Proceeds from issuance of common stock 36,000 26,000
Acquisition of treasury stock - (9,000)
Net cash used in financing activities (904,000) (44,000)
Net increase (decrease) in cash $ (17,000) $ (52,000)
Cash at beginning of year 101,000 90,000
Cash at end of January $ 84,000 $ 38,000
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 308,000 $ 197,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
reflect the normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the company's financial position
at January 31, 1996, and the results of operations for the three and nine
months ended January 31, 1996.
The financial statements contained herein should be read in
conjunction with the company's financial statements and related notes
filed on Form 10-KSB for the year ended April 30, 1995.
Note 2 - Accounts Receivable
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Accounts receivable are summarized as follows:
Billed $ 2,373,000
Recoverable costs and accrued profit on progress
completed not billed, net of unliquidated
progress payments of $40,000 1,124,000
Other receivables 1,000
3,498,000
Less allowance for doubtful accounts 94,000
$ 3,404,000
</TABLE>
Note 3 - Inventories
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The components of inventories are summarized as follows:
Raw materials $ 1,729,000
Work in process 739,000
Finished goods 184,000
$ 2,652,000
</TABLE>
Note 4 - Income Taxes
The net deferred tax asset included in the accompanying
consolidated balance sheet at January 31, 1996, includes the tax effects
of temporary differences and carryforwards which are the source of the
deferred asset, less a valuation allowance.
The components of the net deferred tax asset are summarized as
follows:
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Net operating loss carryforwards $ 1,221,000
Inventory valuation reserve 563,000
Tax credit carryforwards 378,000
Property, plant and equipment 223,000
Other 96,000
2,481,000
Less valuation allowance 2,253,000
$ 228,000
</TABLE>
The tax credit and operating loss carryforwards expire in
various amounts in the years 1997 through 2010.
Note 5 - Long-term Debt
Effective August 7, 1995, Mercantile Business Credit, Inc. (MBCI)
and Bank IV Missouri, N.A. agreed to amend their respective credit
agreements with the company for the purpose of modifying a net worth
covenant beginning with the quarter ended July 31, 1995. As of
January 31, 1996, the company's financial statements are in compliance
with the financial covenants.
The original term of the revolving credit agreement with MBCI
expires on September 1, 1996. The agreement automatically renews itself
from year to year unless terminated by either party by giving written
notice at least 395-days prior to the expiration date. Since the
company did not receive any such termination notice from MBCI, the
outstanding balances of the revolving credit line continue to be
classified as long-term in the accompanying consolidated balance sheet.
OPT Industries, Inc.'s first mortgage loan with the New Jersey
Economic Development Authority had a final payment of $560,000 which was
due on January 1, 1996. This note has been renewed on a month to month
basis with no other changes in the terms and conditions. The company
has arranged to refinance this note through Phillipsburg National Bank
& Trust Company with closing tentatively set for March 19, 1996.
Note 6 - Contingencies
A lawsuit seeking injunctive relief and unspecified damages
against the company's two operating subsidiaries (Torotel Products, Inc.
and OPT) concerning the subsidiaries' product advertising was dismissed
with prejudice on or about November 15, 1995. Settlement of the
litigation in the U.S. District Court for the Southern District of
New York was obtained prior to trial without any payment to plaintiff.
The company believed, based on a letter from its insurance
company dated November 10, 1995, that most of the legal fees resulting
from the litigation would be borne by the company's insurance carrier.
In a subsequent letter dated January 17, 1996, the insurance company
reversed its position and advised that coverage for legal fees would
not be provided. In yet another subsequent letter dated February 12,
1996, the insurance company reversed itself again and offered to pay
approximately $89,000el continue to pursue this claim with the expectation
of the insurance company covering a larger portion of the legal fees.
Since the coverage issue is not resolved, the company has expensed all
but $89,000 of the legal fees.
The legal fees expensed for this litigation during the three
and nine months ended January 31, 1996, were $126,000 and $202,000,
respectively.
Note 7 - Insurance Settlement
On March 25, 1995, Torotel Products' facility was struck by
lightning which resulted in significant fire and water damage to the
machine shop and shipping department, and caused a significant
curtailment in production during the last five weeks of fiscal 1995.
Other, net as presented in the accompanying consolidated statements of
operations for the three and nine months ended January 31, 1996,
includes a $510,000 gain from the final settlement for business income
and contents insurance.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The discussion and analysis of the results of operations includes
the operations of Torotel, Inc., and its subsidiaries, Torotel Products, Inc.
and OPT Industries, Inc.
NINE MONTHS ENDED JANUARY 31, 1996 VERSUS NINE MONTHS ENDED JANUARY 31, 1995
Net sales increased 4%. The net sales of Torotel Products
decreased 2% from $5,109,000 to $5,034,000 due primarily to lower sales
bookings during the current year. The effect of the lower bookings has
been offset partially by sales generated from the contract with Lockheed
Martin for the headcoil assembly on the Hellfire II missile system. OPT's
net sales increased 8% from $6,379,000 to $6,909,000 due to an improved
backlog position at the beginning of the fiscal year; however, OPT's sales
in the current year have been adversely impacted by a raw material shortage
caused by a vendor's failure to deliver as contractually committed. An
alternate source was obtained and initial deliveries were received in
December.
Gross profit as a percentage of net sales decreased 1%. The
gross profit percentage of Torotel Products decreased 9% due to higher
material, labor and fixed production costs. The gross profit percentage
of OPT increased 5% due to improved labor efficiencies and lower fixed
production costs.
Engineering expenses decreased 2%. The engineering expenses
of Torotel Products decreased 2% from $333,000 to $326,000 due to lower
payroll costs. The engineering expenses of OPT decreased 1% from $374,000
to $369,000 due to lower development costs associated with completing the
design of the immersion power supply.
Selling, general and administrative (SG&A) expenses increased 6%.
The SG&A expenses of Torotel, Inc. increased 11% from $183,000 to $204,000
due primarily to a non-recurring cost of $26,000 associated with the
company's 401(k) plan for non-union employees. The SG&A expenses of
Torotel Products increased 14% from $1,129,000 to $1,284,000 due primarily
to a $177,000 increase in legal fees (see Note 6 of Notes to Consolidated
Financial Statements), and a $33,000 increase in payroll costs. These in
ased 6% from $786,000 to $740,000 due primarily to lower payroll and rental
costs.
Interest expense increased 6%. The interest expense of
Torotel, Inc. was unchanged at $35,000. The interest expense of Torotel
Products increased 49% from $51,000 to $76,000 due to a higher aggregate
borrowing level and the effect of higher interest rates associated with
increases in the prime lending rate. The interest expense of OPT decreased
8% from $145,000 to $133,000 due to a lower aggregate borrowing level which
was offset partially by higher interest rates associated with increases in t
Sundry nonoperating income increased due to a $510,000 gain from
the final settlement on the business income and contents insurance claim
which resulted from the fire in March 1995.
For the reasons discussed above, consolidated pretax earnings
increased from $110,000 to $504,000. The pretax results of Torotel, Inc.
decreased from a loss of $218,000 to a loss of $239,000. The pretax
earnings of Torotel Products decreased from $306,000 to $185,000. The
pretax earnings of OPT increased from $22,000 to $558,000.
Provision for income taxes increased due to higher pretax earnings.
THREE MONTHS ENDED JANUARY 31, 1996 VERSUS THREE MONTHS ENDED JANUARY 31, 1995
Net sales decreased 4%. The net sales of Torotel Products
decreased 29% from $1,971,000 to $1,403,000 due primarily to lower sales
bookings during the current year. The effect of the lower bookings has
been offset partially by sales generated from the contract with Lockheed
Martin for the headcoil assembly on the Hellfire II missile system. OPT's
net sales increased 22% from $1,875,000 to $2,285,000 due primarily to
increased shipments of the immersion power supply.
Gross profit as a percentage of net sales decreased 6%. The
gross profit percentage of Torotel Products decreased 14% due to higher
labor and fixed production costs. The gross profit percentage of OPT
increased 3% due primarily to improved labor efficiencies and lower
fixed production costs.
Engineering expenses were relatively unchanged. The engineering
expenses of Torotel Products decreased 12% from $113,000 to $100,000 due
to lower payroll costs. The engineering expenses of OPT increased 10%
from $117,000 to $129,000 due to higher design costs associated with new
product development.
Selling, general and administrative (SG&A) expenses increased 15%.
The SG&A expenses of Torotel, Inc. increased 12% from $73,000 to $82,000
due primarily to a non-recurring cost of $26,000 associated with the
company's 401(k) plan for non-union employees. This increase was offset
partially by a $9,000 decrease in consulting fees. The SG&A expenses of
Torotel Products increased 22% from $419,000 to $511,000 due primarily to
a $101,000 increase in legal fees (see Note 6 of Notes to Consolidated
Financial Statements). The SG&A expenses of OPT increased 5% from
$248,000 to $260,000 due primarily to higher selling costs.
Interest expense decreased 12%. The interest expense of
Torotel,Inc. remained unchanged at $11,000. The interest expense of Torotel
Products decreased 8% from $25,000 to $23,000 due to a lower aggregate
borrowing level which was offset partially by higher interest rates
associated with increases in the prime lending rate. The interest expense
of OPT decreased 16% from $49,000 to $41,000 due to a lower aggregate
borrowing level which was offset partially by higher interest rates
associated with
Sundry nonoperating income increased due to a $510,000 gain
from the final settlement on the business income and contents insurance
claim which resulted from the fire in March 1995.
For the reasons discussed above, consolidated pretax earnings
increased from $6,000 to $181,000. The pretax results of Torotel, Inc.
decreased from a loss of $84,000 to a loss of $93,000. The pretax earnings
of Torotel Products increased from $131,000 to $179,000. The pretax
earnings of OPT increased from a loss of $41,000 to a profit of $95,000.
Provision for income taxes increased due to higher pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the company has relied on funds generated internally
and bank borrowings to meet its normal operating requirements and to
service bank indebtedness. The company has a $560,000 mortgage payment
that was due in January 1996. The company has arranged to refinance
this note through a new lender with funding to take place in mid-March
(see Note 5 of Notes to Consolidated Financial Statements).
During the nine months ended January 31, 1996, the company's
operating activities generated $1,047,000 in cash flow. Of this amount,
corporate related matters used $308,000; Torotel Products' operations
provided $848,000 due primarily to lower levels of receivables and
inventories; and OPT's operations provided $507,000 due primarily to
higher pretax earnings. Management's objective is to continue improving
asset management to strengthen the company's liquidity position.
Investing activities used $161,000 in cash flow for capital
expenditures for production equipment. For the balance of the fiscal
year, the company anticipates additional investments of approximately
$50,000 for capital expenditures.
Financing activities used $904,000 in cash flow due primarily
to reductions in the revolving credit line and long-term debt. At
January 31, 1996, the company had used $1,012,000 of its revolving
credit line and had $1,167,000 available for future cash requirements,
based on the lender's borrowing base formula.
The company believes that inflation will have only a minimal
effect on future operations since such effects will be offset by sales
price increases which are not expected to have a significant effect
upon demand.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit seeking injunctive relief and unspecified damages
against the company's two operating subsidiaries concerning the
subsidiaries' product advertising was dismissed with prejudice on or
about November 15, 1995. Settlement of the litigation in the U.S. District
Court for the Southern District of New York was obtained prior to trial
without any payment to plaintiff.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Stockholders' Meeting was held in Kansas City,
Missouri, on September 18, 1995, to elect a Board of Directors. At the
meeting, there were 2,216,337 shares voting in the election, with nominees
needing 1,108,170 shares to be elected.
Shareholders elected the following individuals to a one-year
term on the Board of Directors, with the number of shares voting "FOR"
each nominee indicated.
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Dale H. Sizemore, Jr., Chairman 2,193,848
Jack C. Beecroft 2,191,483
Ron L. Benjamin 2,168,318
Victor K. Brewer, Jr. 2,194,731
Christian T. Hughes 2,180,468
Dr. Thomas L. Lyon, Jr. 2,168,317
Richard A. Sizemore 2,193,848
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a) Financial Data Schedule - Exhibit 27
b) Reports on Form 8-K -- There were no reports filed on
Form 8-K during the three months ended January 31, 1996.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Torotel, Inc.
(Registrant)
Date: March 12, 1996 /s/ H. James Serrone
H. James Serrone, Vice President
Principal Financial Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOROTEL, INC. AND SUBSIDIARIES CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED
JANUARY 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JAN-31-1996
<CASH> 84,000
<SECURITIES> 0
<RECEIVABLES> 3,498,000
<ALLOWANCES> 94,000
<INVENTORY> 2,652,000
<CURRENT-ASSETS> 6,630,000
<PP&E> 4,290,000
<DEPRECIATION> 2,402,000
<TOTAL-ASSETS> 8,467,000
<CURRENT-LIABILITIES> 2,519,000
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 2,303,000
<TOTAL-LIABILITY-AND-EQUITY> 8,467,000
<SALES> 11,943,000
<TOTAL-REVENUES> 11,943,000
<CGS> 8,788,000
<TOTAL-COSTS> 11,711,000
<OTHER-EXPENSES> (516,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,000
<INCOME-PRETAX> 504,000
<INCOME-TAX> 172,000
<INCOME-CONTINUING> 332,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
