U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
Commission File No. 2-33256
TOROTEL, INC.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number (816) 761-6314
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, $.50 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
NONE
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 12 months and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this Form 10-KSB, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
statements incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. X
The issuer's revenues for the most recent fiscal year were $14,670,000.
The aggregate market value of the voting stock held by non-affiliates,
based on the closing sale price of the American Stock Exchange on July
10, 1997, was $1,814,000. As of July 10, 1997, there were 2,808,749
shares of Common Stock, $.50 Par Value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders on September 15, 1997, are incorporated by reference into
Part III.
TOROTEL, INC.
FORM 10-KSB
Fiscal Year Ended April 30, 1997
TABLE OF CONTENTS
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PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 7
Item 6. Management's Discussion and Analysis or Plan of Operation 8
Item 7. Financial Statements and Supplementary Data 12
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the
Exchange Act 30
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial Owners and
Management 30
Item 12. Certain Relationships and Related Transactions 30
PART IV
Item 13. Exhibits and Reports on Form 8-K 31
SIGNATURES 36
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PART I
ITEM 1. Business
Torotel, Inc. (the "company") conducts business through two
wholly-owned subsidiaries, Torotel Products, Inc. ("Torotel Products") and
OPT Industries, Inc. ("OPT").
Torotel Products specializes in the custom design and
manufacture of precision magnetic components, consisting of transformers,
inductors, reactors, chokes and toroidal coils. Torotel Products sells these
magnetic components to original equipment manufacturers, who use them
in products such as aircraft navigational equipment, voice and data secure
communications, telephone and avionics equipment, and conventional
missile guidance systems.
OPT specializes in the custom design and manufacture of high
power, switching power supplies and a broad line of magnetic components.
OPT sells these products to a predominantly U.S. customer base in the
computer, telecommunications, industrial and military markets.
The company acquired 100% of the common stock of OPT on
September 1, 1993. The total purchase price of $404,000 consisted of
$200,000 for a fund used to retire all of the pre-merger outstanding shares
of OPT, and $204,000 for professional fees. In addition, warrants to
purchase 66,667 shares of the company's common stock at $1.50 per share
were issued to Chemical Bank New Jersey N.A. (see Note I of Notes to
Consolidated Financial Statements). In connection with the acquisition,
the company agreed to guarantee OPT's continuing mortgage obligations
which amounted to $1,188,000 on the date of acquisition. The acquisition
was accounted for under the purchase method of accounting.
The company was incorporated under the laws of the State of
Missouri in 1956. Its offices are located at 13402 South 71 Highway,
Grandview, Missouri, and its telephone number is (816) 761-6314. The
term "company" as used herein includes Torotel, Inc. and its subsidiaries,
unless the context otherwise requires.
TOROTEL PRODUCTS
Products
Torotel Products designs and manufactures a broad line of
magnetic components for use by the military and industry in electronic
applications. These components, which are used to modify and control
electrical voltages and currents in electronic devices, consist of
transformers, inductors, reactors, chokes, and toroidal coils. The major
applications for these components are aircraft navigational systems, voice
and data secure communications, telephone and avionics equipment, and
conventional missile guidance systems.
In 1992, Torotel Products attempted to expand its product base by
bidding on defense contracts for complete electrical assemblies that use
many magnetic components. One contract for $605,000 was awarded in
January 1993, with production concluding in early fiscal 1998.
Management is no longer bidding on contracts of this type.
In 1995, Torotel Products expanded its product base with the
introduction of five new lines of miniature power inductors for the military
and commercial markets. These lines provided only a small portion of the
revenues in fiscal 1997.
Marketing and Customers
Historically, nearly all sales have been to the military market. In
recent years, efforts to diversify have been successful as approximately
35% of the sales now come from select commercial markets. The magnetic
components are sold to manufacturers who incorporate them into an end-
product.
Torotel Products markets its components through a direct sales
force, through independent manufacturers' representatives who are paid on
a commission basis, and through advertising. The products are sold
primarily in the United States, and most sales are awarded on a
competitive bid basis. Although all existing orders are subject to schedule
changes or cancellation, adequate financial compensation is usually
provided in such instances to protect from suffering a loss on a contract.
Torotel Products, which has been under new management since
October 1996, recently implemented a customer-focused sales strategy.
Torotel Products has a primary base of 40 customers, including many
"Fortune 100" prime defense contractors, that provide over 90% of its sales
volume. The new strategy focuses on providing superior service to this
core group of customers, including engineering support and new product
design. The objective is to expand the business with these customers, or
other targeted companies that possess the potential for inclusion into the
core group.
During the year ended April 30, 1997, sales to two major
customers amounted to 16% and 11% of the net sales of Torotel Products.
Competition
Torotel Products' business is highly competitive, but it is not
susceptible to rapid technological change. A substantial number of
companies sell components of the type manufactured and sold by Torotel
Products. It also sells to customers who have the capability of
manufacturing their own electronic components.
The ability of Torotel Products to compete depends, among other
things, upon its on-time delivery performance, customized product
engineering and technical support, marketing capabilities, quality
assurance and manufacturing efficiency. Torotel Products maintains a
qualified environmental laboratory which enables it to perform tests on a
product's ability to withstand various environmental conditions as may be
specified by customers.
Manufacturing
A major portion of Torotel Products' sales consist of electronic
components manufactured to customers' specifications. Consequently, only
a limited inventory of finished goods is maintained. Although special
wire-winding machines and molding machines are used in the production
process, the various electronic components are manually assembled with
numerous employees and subcontractors contributing to the completion of
the components.
Essential materials used by Torotel Products in the manufacturing
process include magnetic materials, copper wire, and plastic housings.
These materials are available from many sources. Major suppliers include
Magnetics, Inc., Electrical Insulation Suppliers, Inc., and Mod & Fab.
Torotel Products has not experienced any significant curtailment of
production because of material shortages, but longer lead times for
magnetic cores could have an impact on sales bookings.
Engineering, Research and Development
Torotel Products does not engage in significant research and
development activities, but does incur engineering expense in designing
products to meet customer specifications.
Employees
Torotel Products presently employs approximately 110 full-time
employees. An adequate supply of qualified personnel is available in the
facility's immediate vicinity. Its production employees were represented by
the Torotel Employees Association, a non-affiliated labor union, since
1967. On December 10, 1996, members of the Torotel Employees
Association voted to affiliate with the International Association of
Machinists and Aerospace Workers, AFL-CIO, District Lodge No. 71. The
current labor contract expires on December 31, 1997. There have been no
interruptions of production as a result of labor disputes.
OPT INDUSTRIES
Products
OPT designs and manufactures switching power supplies and a
broad line of magnetic components. The switching power supplies convert
available power to low-medium voltage outputs at various load currents up
to 2200Adc. OPT offers air cooled, conduction cooled, and immersion
cooled power supply modules and relay rack mounted, N+1 redundant DC
power systems. Most of the power supplies utilize a proprietary ultra-low
leakage converter transformer designed and patented by OPT, and all have
full safety agency approval. The major applications for these power
supplies are in the high power computer and emergency DC systems
markets. New product development is critical for continued sales growth
in power supplies, as many of the existing products in this line have a
remaining life cycle of approximately three years. Two new products,
targeted for the telecommunications and emergency DC systems markets,
will be introduced in fiscal 1998. More products are in the planning stage
and likely will include a new air cooled standard power supply line, as well
as other products for the telecommunications and emergency DC systems
markets.
OPT's magnetic components consist of toroidal coils, bobbin and
layer wound transformers, and ultra-miniature transformers and inductors.
The major applications for these components are voice and data secure
communications, computers, aircraft navigational systems, and
conventional missile guidance systems. New magnetics products in
various stages of development include high-end consumer audio
components and high voltage transformers used in ultra-violet and anti-
static applications. Many of the new products are scheduled for
introduction in fiscal 1998.
Marketing and Customers
OPT markets its products primarily through a direct sales force.
OPT also markets its magnetic components through independent
manufacturers' representatives who are paid on a commission basis, and
through distributors. All of these products are sold primarily in the United
States. Although all existing orders are subject to schedule changes or
cancellation, adequate financial compensation is usually provided in such
instances to protect OPT from suffering a loss on a contract.
OPT has a customer base of over 300 companies including many
"Fortune 100" companies. During the year ended April 30, 1997, sales to a
major customer amounted to 48% of the net sales of OPT.
Competition
OPT is one of the smaller companies in the high power, custom
design power supply market, but its technology provides greater packaging
density, power transfer efficiency and operating reliability than a number
of its competitors. As a result, OPT has limited competition in its
switching power supply business.
OPT's magnetics business is highly competitive, but it is not
susceptible to rapid technological change. A substantial number of
companies sell components of the type manufactured and sold by OPT,
except for ultra-miniature transformers which have a unique construction
common only to one competitor.
The ability of OPT to compete depends, among other things, upon
its customized product engineering and technical support, marketing
capabilities, and manufacturing efficiency.
Manufacturing
Most of the sales of OPT consist of products manufactured to
customers' specifications. In these instances, only a limited inventory of
finished goods is maintained; however, a finished goods inventory is
maintained for the magnetic components sold through distributors.
Although special wire-winding machines, molding machines, and wave
soldering machines are used in the production process, the products are
manually assembled, with numerous employees and subcontractors
contributing to the completion of the product.
Essential materials used by OPT in the manufacture of switching
power supplies include printed circuit board assemblies, solid state power
electronic components, power semiconductors and fabricated sheet metal
housings. These materials are available from many sources. Major
suppliers include GP Precision, General Aviation Company, and Advanced
Power Technology.
Essential materials used in the manufacture of magnetic
components include magnetic materials, copper wire, and plastic housings.
These materials are available from many sources. Major suppliers include
National Arnold and Rea Magnet Wire.
Historically, OPT has not experienced any significant curtailment
of production because of material shortages; however, OPT did experience
production delays during the third quarter of fiscal 1996 due to a shortage
of a custom component part used in the immersion power supply. OPT did
obtain an alternate source and initial deliveries were received in December
1995. OPT has not incurred any further shortages of this component part.
Engineering, Research and Development
Historically, OPT has not engaged in significant research and
development activities, but has incurred engineering expense in designing
products to meet customer specifications. Management does anticipate
more expenses in this area as new power supply products are developed for
the telecommunications and emergency DC systems markets.
Employees
OPT presently employs approximately 110 full-time employees.
An adequate supply of qualified personnel is available in the facility's
immediate vicinity. Its production employees have been represented by the
United Steelworkers of America, AFL-CIO Local 8169 since 1972;
however, Local 8169 recently has merged into Local 5503. The current
labor contract expires on September 16, 1999. There have been no
interruptions of production as a result of labor disputes.
ITEM 2. Properties
The company owns a two-building complex with approximately
29,000 square feet located in Grandview, Missouri. This facility is
occupied by Torotel Products, and also serves as the company's executive
offices. The company also owns 17 acres of unimproved land in an airport
industrial park in Kansas City, Missouri. As of April 30, 1997, these
properties were subject to a first deed of trust securing indebtedness in the
amount of $462,000.
OPT owns a two-building complex with approximately 55,000
square feet located in Phillipsburg, New Jersey. As of April 30, 1997, this
facility was subject to a first deed of trust securing indebtedness in the
amount of $608,000, and a second and third lien mortgage collateralizing
the credit agreement discussed in Note D of Notes to Consolidated
Financial Statements.
The company believes that its existing facilities and equipment
are well maintained and in good operating condition. Present utilization of
the existing facilities is less than 70% of maximum capacity.
ITEM 3. Legal Proceedings
There are two legal proceedings involving the company. In the
first matter, Torotel, Inc. and Torotel Products, Inc. have both been named
as defendants in a lawsuit brought by Joseph Turner in the U.S. District
Court for the Western District of Missouri. The case number is 96-0646-
CV-W-5 and was
filed on June 18, 1996. Plaintiff alleges a racially motivated failure to
hire. The company believes it has a meritorious defense and is vigorously
defending the case. Plaintiff has moved to have the case certified as a class
action. A hearing on the class certification motion was held on May 21,
1997, but there has been no ruling to date on that motion.
In the second matter, on May 6, 1997, Torotel Products, Inc. was
accepted into the Voluntary Disclosure Program by the Inspector General
of the United States Department of Defense, resulting from its failure to
perform some required "thermal shock" testing as frequently as required,
and inaccurately certifying that all required testing had been performed.
As a result of the company's investigation into the testing deficiencies,
which was first reported in November 1996, the company recorded an
estimated charge of $416,000 against earnings in its fiscal fourth quarter
ended April 30, 1997. This amount is still subject to fluctuation as further
evidence is investigated. The company continues to cooperate as the
government conducts its investigation, and continues to pursue the
existence of other damages. The company believes that certain of its
former officers may have been responsible for the misconduct related to the
test failures, and is evaluating ways of recovering the damages. In the
meantime, the company has suspended all payments under a note payable
to a former officer (see Note K to Notes to Consolidated Financial
Statements).
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
The Company's common stock is traded on the American Stock
Exchange (AMEX) under the symbol "TTL".
Price Range of Common Stock
The following table sets forth the high and low sales prices as
reported on the AMEX.
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1997 1996
Fiscal Period High Low High Low
First Quarter 1-11/16 1-1/8 1-5/16 1-1/16
Second Quarter 1-5/8 1-1/8 2-3/8 1-1/16
Third Quarter 1-3/8 1 1-13/16 1-7/16
Fourth Quarter 1-3/8 1-1/16 1-3/4 1-7/16
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(b) Approximate Number of Equity Security Holders
Approximate Number of
Record Holders
Title of Class as of April 30, 1997
Common Stock, $.50 par value 2,000 (1)
(1) Included in the number of stockholders of record are shares held in
"nominee" or "street" name.
(c) Dividend History and Restrictions
The company has never paid a cash dividend on its common stock
and has no present intention of paying cash dividends in the foreseeable
future. The company's credit agreement prohibits the payment of cash
dividends without the prior consent of the lender.
(d) Dividend Policy
Future dividends, if any, will be determined by the Board of
Directors in light of the circumstances then existing, including the
company's earnings, financial requirements, general business conditions
and credit agreement restrictions.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
The following management comments regarding the company's
results of operations and outlook should be read in conjunction with the
Consolidated Financial Statements included pursuant to Item 7 of this
Annual Report.
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.
1997 Compared to 1996
Net sales decreased 7%. The net sales of Torotel Products
decreased 8% from $6,597,000 to $6,062,000 due primarily to a $188,000
decrease in sales of the potted coil assembly for the Hellfire II missile
system, the elimination of some lower-margin jobs, and lower shippable
bookings during the first six months of fiscal 1997. OPT's net sales
decreased 7% from $9,225,000 to $8,608,000 due primarily to lower sales
of magnetic components associated with less favorable market conditions
for the products being sold.
Gross profit as a percentage of net sales increased nearly 1%. The
gross profit percentage of Torotel Products increased 3% due primarily to
lower fixed production costs. The gross profit percentage of OPT
decreased nearly 2% due primarily to higher material costs associated with
the product mix. This increase was offset partially by lower fixed
production costs.
Engineering expenses decreased 17%. The engineering expenses
of Torotel Products decreased 35% from $433,000 to $283,000 due to
lower payroll costs associated with a cutback in personnel. The
engineering expenses of OPT decreased 2% from $500,000 to $489,000
due primarily to a $37,000 decrease in depreciation and a $12,000 decrease
in utilities. These decreases were offset partially by a $35,000 increase in
payroll costs associated with new personnel for the new power supplies
products for the telecommunications market.
Selling, general and administrative (SG&A) expenses increased
7%. The SG&A expenses of Torotel, Inc. increased 53% from $278,000 to
$424,000 due primarily to costs of $107,000 associated with the terminated
stock sale to Brockson Technologies Group, LLC., a $36,000 bonus award
pursuant to the Incentive Compensation Plan, a $23,000 increase in travel
costs, and a $6,000 increase in professional fees. These increases were
offset partially by a $26,000 decrease in contributions to the company's
401(k) plan for non-union employees. The SG&A expenses of Torotel
Products increased nearly 1% from $1,595,000 to $1,605,000 due
primarily to a restructuring charge of $277,000, an $86,000 increase in
legal fees, a $15,000 charge for proper disposal of certain outdated
hazardous materials, a $9,000 increase in advertising costs, and an $8,000
increase in education and training costs. These increases were offset
partially by a $255,000 decrease in payroll and fringe benefits costs
associated with a reduction in personnel and a $128,000 decrease in sales
commissions. The SG&A expenses of OPT increased 4% from $1,013,000
to $1,055,000 due primarily to a $15,000 increase in equipment
maintenance, a $12,000 increase in advertising costs, and a $12,000
increase in consulting fees.
Interest expense decreased 14%. The interest expense of Torotel,
Inc. decreased 9% from $45,000 to $41,000. The interest expense of
Torotel Products increased slightly from $94,000 to $95,000 due to a
higher aggregate borrowing level. This increase was offset partially by
lower interest rates associated with decreases in the prime lending rate and
in the rate above prime being charged by a new lender. The interest
expense of OPT decreased nearly 25% from $163,000 to $123,000 due to a
lower aggregate borrowing level, and lower interest rates associated with
decreases in the prime lending rate and in the rate above prime being
charged by a new lender.
Sundry nonoperating expense increased due to a $416,000 charge
in fiscal 1997 for an estimated penalty as discussed in Note M of Notes to
Consolidated Financial Statement, and the $510,000 non-recurring gain in
fiscal 1996 from the final settlement of the business income and contents
insurance claim which resulted from a March 1995 fire at Torotel
Products' facility.
For the reasons discussed above, consolidated pretax earnings
decreased from a profit of $507,000 to a loss of $659,000. The pretax loss
of Torotel, Inc. increased from $323,000 to $465,000. The pretax earnings
of Torotel Products decreased from a profit of $148,000 to a loss of
$590,000. The pretax earnings of OPT decreased from $682,000 to
$396,000.
Provision for income taxes decreased due to the pretax loss.
The cumulative effect of adopting FASB Statement No. 109,
"Accounting for Income Taxes", in fiscal 1994 was a benefit of $400,000.
At the date of adoption, a valuation allowance was recorded to net the total
deferred asset of $1,532,000 to an amount the company estimated was
more likely than not to be realized. The allowance relates to operating loss
carryforwards, and reflects the lower amount of business available from
Torotel Products' traditional defense markets and the risks inherent in
penetrating commercial markets. The earnings at OPT in fiscal 1996
enabled the company to realize a portion of the net deferred tax asset.
While a consolidated pretax loss was incurred in fiscal 1997, the
consolidated operations actually generated higher earnings than in fiscal
1996, before the special charges and credits. With the restructuring of
Torotel Products, management anticipates profitable years from both
Torotel Products and OPT, which should enable the consolidated group to
be profitable in fiscal 1998. Accordingly, management expects the
remaining deferred tax asset of $228,000 to be realizable.
1996 Compared to 1995
Net sales increased 5%. The net sales of Torotel Products
increased 2% from $6,439,000 to $6,597,000 due primarily to a $682,000
increase in sales of the headcoil assembly for the Hellfire II missile system
and increased sales to commercial markets. These increases offset lower
sales associated with less favorable market conditions for other magnetic
components for the military market. OPT's net sales increased 7% from
$8,624,000 to $9,225,000 due primarily to higher sales of its immersion
power supply; however, these sales in the current year were 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 1995.
Gross profit as a percentage of net sales increased 2%. The gross
profit percentage of Torotel Products decreased 1% due primarily to higher
cost of materials associated with the production of the headcoil assembly.
The gross profit percentage of OPT increased 5% due to improved labor
efficiencies and lower fixed production costs.
Engineering expenses increased 3%. The engineering expenses of
Torotel Products decreased 1% from $438,000 to $433,000 due to lower
payroll costs. The engineering expenses of OPT increased 8% from
$464,000 to $500,000 due to higher development costs associated with new
power supplies products for the telecommunications market.
Selling, general and administrative (SG&A) expenses increased
4%. The SG&A expenses of Torotel, Inc. increased 13% from $245,000 to
$278,000 due to a non-recurring cost of $26,000 associated with the
company's 401(k) plan for non-union employees and a $6,000 increase in
the aggregate of the directors fees associated with the annual retainer for
an additional outside director. The SG&A expenses of Torotel Products
increased 5% from $1,522,000 to $1,595,000 due primarily to a $118,000
increase in legal fees associated with an advertising lawsuit that was settled
prior to trial without any payment to the plaintiff, a $27,000 increase in
payroll costs, a $7,000 increase in facility costs, a $6,000 increase in
mailing costs, and a $4,000 increase in advertising costs. These increases
were offset partially by a $93,000 decrease in sales commissions. The
SG&A expenses of OPT decreased slightly from $1,018,000 to $1,013,000.
Interest expense decreased 7%. The interest expense of Torotel,
Inc. decreased slightly from $46,000 to $45,000. The interest expense of
Torotel Products increased 13% from $83,000 to $94,000 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 16% from $195,000 to $163,000 due to a lower aggregate
borrowing level which was offset partially by higher interest rates
associated with increases in the prime lending rate.
Sundry nonoperating income increased due to a $510,000 non-
recurring gain from the final settlement of the business income and
contents insurance claim which resulted from the fire in March 1995 (see
Note M of Notes to Consolidated Financial Statements).
For the reasons discussed above, consolidated pretax earnings
increased from a loss of $396,000 to a profit of $507,000. The pretax loss
of Torotel, Inc. increased from $291,000 to $323,000. The pretax earnings
of Torotel Products increased from a loss of $183,000 to a profit of
$148,000. The pretax earnings of OPT increased from $78,000 to
$682,000.
Provision for income taxes increased due to a change in deferred
tax assets (see Note E of Notes to Consolidated Financial Statements).
Liquidity and Capital Resources
Historically, the company has relied on funds generated internally
and bank borrowings to meet its normal operating requirements, such as
accounts payable, payroll, and to service bank indebtedness and other
liabilities. Management believes the credit agreement discussed in Note D
of Notes to Consolidated Financial Statements provides greater flexibility
and improved liquidity.
The company's operating activities generated $458,000 in cash
flow during fiscal 1997. Corporate related matters used $515,000. The
operations of Torotel Products provided $245,000 in cash flow due
primarily to a lower level of receivables and higher levels of payables and
other liabilities. OPT's operations provided $728,000 in cash flow due
primarily to its pretax earnings and lower levels of receivables and
inventories. Management's objective is to continue strengthening the
company's liquidity position through improved operations and asset
management.
Investing activities used $292,000 in cash flow for capital
expenditures for production equipment and building improvements. The
company expects investments of approximately $330,000 for capital
expenditures in fiscal 1998.
Financing activities used $119,000 in cash flow due primarily to
reductions in the revolving credit line. At April 30, 1997, the company
had used $856,000 of its revolving credit line and had $1,558,000 available
for future cash requirements, based on the lender's borrowing base formula.
As discussed in Note D of Notes to Consolidated Financial Statements, the
credit line with Phillipsburg National Bank & Trust Company expired July
5, 1997. The bank has indicated that it intends to renew the credit line;
however, the company has not received a formal commitment from the
bank. As also discussed in Note D of Notes to Consolidated Financial
Statements, the company was in violation of two financial covenants under
the terms of a note payable to NationsBank (formerly Boatmen's Bank IV).
As of the filing of this Annual Report, the bank has not waived compliance
with the subject provisions as of April 30, 1997. One of the remedies
available to the bank is to demand full payment of the outstanding balance,
which is $462,000 at April 30, 1997. Since the note matures on November
29, 1997, the company does not expect the bank to make such a demand.
While the company has the liquidity available to pay-off the note,
management believes another source of financing can be obtained.
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.
Other
Except for historical information contained herein, certain of the matters
discussed above are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statements, including the
company's dependence on timely development, introduction and customer
acceptance of new products, the impact of competition and price erosion as
well as supply and manufacturing constraints, and other risks and
uncertainties.
ITEM 7. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Certified Public Accountants 13
Consolidated Balance Sheet as of April 30, 1997 14
Consolidated Statements of Operations for the years ended
April 30, 1997 and 1996 15
Consolidated Statement of Changes in Stockholders' Equity for
the period May 1, 1995 through April 30, 1997 16
Consolidated Statements of Cash Flows for the years ended
April 30, 1997 and 1996 17
Notes to Consolidated Financial Statements 18
Supplementary Quarterly Financial Data 29
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ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Torotel, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Torotel, Inc. and Subsidiaries as of April 30, 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash
flows for each of the two years in the period ended April 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Torotel, Inc. and Subsidiaries as of April 30, 1997 and the
consolidated results of their operations and their consolidated cash
flows for each of the two years in the period ended April 30, 1997
in conformity with generally accepted accounting principles.
As discussed in Note B to the financial statements, the Company
changed its method of revenue recognition during the year ended
April 30, 1997.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Kansas City, Missouri
June 17, 1997
CONSOLIDATED BALANCE SHEET
As of April 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 196,000
Trade and other receivables, less
allowance for doubtful accounts
of $76,000 (Notes A, B, and D) 2,120,000
Inventories, less allowance for
obsolescence of $801,000 (Notes A, C, and D) 2,794,000
Prepaid expenses and other current assets 90,000
5,200,000
Property, plant and equipment (Notes A and D):
Land 368,000
Buildings and improvements 1,475,000
Equipment 2,706,000
4,549,000
Less accumulated depreciation and amortization 2,734,000
1,815,000
Deferred tax asset (Note E) 228,000
Other assets 36,000
$ 7,279,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note D) $ 1,394,000
Current maturity of note payable to
former officer (Notes K and M) 122,000
Trade accounts payable 953,000
Accrued liabilities (Note J) 472,000
2,941,000
Long-term debt, less current maturities (Note D) 1,105,000
Note payable to former officer, less current
maturity (Notes K and M) 262,000
Commitments and contingency (Notes F and M) 416,000
Stockholders' equity (Notes D, G, H, I, and L):
Common stock, $.50 par value; 6,000,000 shares
authorized; 2,879,473 shares issued 1,440,000
Capital in excess of par value 8,671,000
Accumulated deficit (7,351,000)
2,760,000
Less cost of treasury stock, 71,205 shares 205,000
2,555,000
$ 7,279,000
</TABLE>
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,
<TABLE>
<S> <C> <C>
1997 1996
Net sales (Note B) $14,670,000 $15,822,000
Cost of goods sold 10,778,000 11,714,000
Gross profit 3,892,000 4,108,000
Operating expenses:
Engineering 772,000 933,000
Selling, general and administrative (Note N) 3,084,000 2,886,000
3,856,000 3,819,000
Earnings from operations 36,000 289,000
Other income (expense):
Interest expense (259,000) (302,000)
Other income (expense), net (Notes M and N) (436,000) 520,000
(695,000) 218,000
Earnings (loss) before provision for
income taxes and cumulative effect of
change in method of accounting (Note B) (659,000) 507,000
Provision for income taxes (Note E) - 172,000
Earnings (loss) before cumulative effect of
change in method of accounting (Note B) (659,000) 335,000
Cumulative effect of change in method of
accounting (Note B) (506,000) -
Net earnings (loss) $ (1,165,000) $ 335,000
Earnings (loss) per common and common
equivalent share (Notes H and I):
Earnings (loss) before cumulative
effect $ (.24) $ .12
Cumulative effect (.18) -
$ (.42) $ .12
The pro forma amounts assuming the new method of accounting had been applied
retroactively are as follows:
Net earnings (loss) $ (659,000) $ 677,000
Earnings (loss) per share $ (.24) $ .24
</TABLE>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Capital in Treasury Total
Common Excess of Accumulated Stock, Stockholders'
Shares Stock Par Value Deficit at cost Equity
Balance,
May 1,
1995 2,797,185 $1,399,000 $8,624,000 $(6,521,000) $(155,000) $3,347,000
Net
earnings - - - 335,000 - 335,000
Issuance
of common
stock to
employee
stock
purchase
plan
(Note G) 5,616 3,000 4,000 - - 7,000
Issuance
of common
stock to
incentive
compen-
sation
plan
(Note G) 21,310 10,000 19,000 - - 29,000
Balance,
April 30,
1996 2,824,111 $1,412,000 $8,647,000 $(6,186,000) $(155,000) $3,718,000
Net loss - - - (1,165,000) - (1,165,000)
Issuance
of common
stock to
employee
stock
purchase
plan
(Note G) 1,554 1,000 1,000 - - 2,000
Issuance
of common
stock to
incentive
compen-
sation
plan
(Note G) 53,808 27,000 23,000 - - 50,000
Acquisition
of 37,121
shares
of treasury
stock - - - - (50,000) (50,000)
Balance,
April 30,
1997 2,879,473 $1,440,000 $8,671,000 $(7,351,000) $(205,000) $2,555,000
</TABLE>
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
<TABLE>
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net earnings (loss) $ (1,165,000) $ 335,000
Adjustments to reconcile net earnings
(loss) to net cash provided by operations:
Loss from estimated government
penalty (Note M) 416,000 -
Gain from disposition of assets - (27,000)
Depreciation and amortization 318,000 293,000
Deferred tax asset - 172,000
Increase (decrease) in cash flows from
operations resulting from changes in:
Trade and other receivables 1,182,000 778,000
Inventories (326,000) 155,000
Prepaid expenses and other assets 4,000 6,000
Trade accounts payable 67,000 (466,000)
Accrued liabilities (38,000) (27,000)
Accrued interest on note payable
to officer - (82,000)
1,623,000 802,000
Net cash provided by operations 458,000 1,137,000
Cash flows from investing activities:
Capital expenditures (292,000) (197,000)
Proceeds from disposition of assets - 31,000
Net cash used in investing activities (292,000) (166,000)
Cash flows from financing activities:
Borrowings against credit line 5,134,000 16,895,000
Payments against credit line (5,249,000) (17,427,000)
Proceeds from issuance of long-term debt 113,000 620,000
Principal payments on long-term debt (107,000) (1,034,000)
Payments on capital lease obligations (12,000) (13,000)
Proceeds from issuance of common stock 52,000 36,000
Acquisition of treasury stock (50,000) -
Net cash used in financing activities (119,000) (923,000)
Net increase in cash $ 47,000 $ 48,000
Cash at beginning of year 149,000 101,000
Cash at end of year $ 196,000 $ 149,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 279,000 $ 358,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements, with the exception of the change in method of
accounting discussed in Note B of Notes to Consolidated Financial
Statements.
Principles of Consolidation
The consolidated financial statements include the accounts of
Torotel, Inc. and its wholly-owned subsidiaries, Torotel Products, Inc. and
OPT Industries, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Historically, nearly all of Torotel Products' business came from
U.S. military contracts, which were accounted for using the percentage of
completion method for revenue recognition. Effective
May 1, 1996, Torotel Products changed its method of accounting for these
contracts, and began to recognize revenue using the accrual method (see
Note B of Notes to Consolidated Financial Statements), which is the same
method used for commercial customers. OPT also recognizes revenue
using the accrual method.
Both historically and currently, less than 5% of the company's
annual consolidated sales arise from contracts which are performed over a
period of more than one year.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using a moving average cost method of valuation which
currently and historically approximates the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation
and amortization are provided for in amounts sufficient to relate the costs
of depreciable assets to operations primarily using the straight-line method
over estimated useful lives of three to ten years for property and equipment,
and twenty years for buildings and improvements.
Cash Flows
For purposes of the statement of cash flows, the company
considers all short-term investments purchased with a maturity of three
months or less to be cash equivalents.
Employee Stock Option Plan
The employee stock option plan is accounted for under
Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations.
Fair Value of Financial Instruments
Cost approximates market for all financial instruments as of April
30, 1997 and 1996.
Future Effect of Recently Issued Accounting Pronouncement
In February 1997, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which
replaces the presentation of primary earnings per share (EPS) with a
presentation of basic EPS; requires dual presentation of basic and diluted
EPS on the face of the statement of earnings regardless of whether basic
and diluted EPS are the same; and requires a reconciliation of the
numerator and denominator used in computing basic and diluted EPS.
Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion 15. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. This statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted. On adoption, restatement of
all prior-period EPS data presented is required.
NOTE B - CHANGE IN ACCOUNTING METHOD FOR REVENUE RECOGNITION
Historically, nearly all of Torotel Products' business came from
U.S. military contracts, which were accounted for using the percentage of
completion method for revenue recognition. However, as Torotel Products
continues to successfully move into the commercial market, its military
business has decreased. Because of this market shift, management believes
it is more practical to use the accrual method to recognize revenue. In
addition, management believes that the new method will standardize the
accounting functions between the company's subsidiaries so that a common
computer system can be used.0
The new method has been applied to contracts in process effective
May 1, 1996, resulting in a cumulative effect charge of $506,000 (18 cents
per share), which has been included in the net loss for the year ended April
30, 1997. The effect of the change on the year ended April 30, 1997, was to
increase the loss before the cumulative effect of change in method of
accounting by approximately $270,000 (10 cents per share). The pro forma
amounts as shown in the consolidated statements of operations include the
effect of retroactive application of the new method on net sales, cost of
goods sold, sales commissions, and related income taxes.
NOTE C - INVENTORIES
The following table summarizes the components of inventories:
<TABLE>
<S> <C>
Raw materials, less allowance for obsolescence of $801,000 $1,419,000
Work in process 1,123,000
Finished goods 252,000
$2,794,000
</TABLE>
NOTE D - FINANCING AGREEMENTS
At April 30, 1997, the company, through its OPT subsidiary, was
operating under a credit agreement with Phillipsburg National Bank &
Trust Company (PNBT). The credit agreement provides a $2,500,000
revolving credit line and a $475,000 term loan. The revolving line expires
on July 5, 1997,
and the term loan expires on July 5, 2006. PNBT has expressed its
intention of renewing the revolving credit line, but the company has not
received a formal commitment. Advances under the credit line are limited
to the sum of 75% of eligible billed receivables and 50% of inventories, net
of reserves. The aggregate credit line is collateralized by trade accounts
receivable, inventories, equipment, and a second and third mortgage on
OPT's facility.
Under the terms of the agreement, the outstanding balance of the
revolving line bears interest at 1/2% over the bank's prime rate. As of
April 30, 1997, the company had utilized $856,000 of the revolving credit
line and the effective borrowing rate was 9%. The outstanding balance of
the term loan bears interest at a fixed rate of 8-3/4% per annum during the
first five years, thereafter the rate will be fixed for one-year intervals at
1/2% over the bank's prime rate. The term loan requires monthly principal
and interest payments of $5,986 during the first five years. At the end of
the fifth year and every year thereafter, the payments will be automatically
adjusted to reflect the change in the interest rate and the remaining term of
the loan. As of April 30, 1997, the outstanding balance of the term loan
was $452,000. The company is required to comply with certain covenants
including restrictions on the payment of cash dividends.
In September 1996, the company entered into an arrangement
with PNBT whereby PNBT will individually finance 90 percent of the total
cost of any capital equipment purchases. Under the terms of the
arrangement, each individual loan will have a five-year term, the
outstanding balance will bear interest at a annual fixed rate equivalent to
1% over the bank's prime rate at the inception of each loan, and each loan
will require monthly principal and interest payments. In addition, any
funds borrowed under this arrangement will reduce the aggregate amount
of the revolving credit line as provided under the credit agreement. As of
April 30, 1997, the company had two equipment loans under this
arrangement. These loans originated on September 12, 1996, and October
25, 1996, in the amount of $39,000 and $54,000, respectively. The
outstanding balances of these loans bear interest at 9.25% per annum. The
loan dated September 12 requires monthly principal and interest payments
of $817, and expires September 12, 2001. The loan dated October 25
requires monthly principal and interest payments of $1,140, and expires
October 24, 2001. As of April 30, 1997, the outstanding balances of the
loans dated September 12 and October 25 were $36,000 and $50,000,
respectively. As a result of these loans, funds available under the
company's revolving credit line have been reduced from $2,500,000 to
$2,414,000.
OPT has a $620,000 promissory note with PNBT. Under the
terms of the note, the outstanding balance bears interest at a fixed rate of
9% per annum during the first five years, thereafter the rate will fluctuate
at 1/2% over the bank's prime rate. The note requires monthly principal
and interest payments of $5,632 during the first five years. At the end of
the fifth year and for the remaining term of the note, the monthly principal
and interest payments will be $5,548. The note, which is guaranteed by
Torotel, Inc., has a maturity date of March 19, 2016, and is collateralized
by a first mortgage on OPT's land and buildings. As of April 30, 1997, the
outstanding balance on the note was $608,000.
The company has a $500,000 note with NationsBank (formerly
Boatmen's Bank IV) dated November 29, 1994. The note is collateralized
by the land and buildings in Grandview, Missouri, and the unimproved
land in Kansas City, Missouri. The note is payable in monthly
installments of $5,207 including interest at an annual rate of 9-1/4%
through November 29, 1997, whereupon the remaining principal balance
of $451,000 will be due and payable. Under the terms of the note, the
company is required to comply with certain covenants including
restrictions on the payment of cash dividends. At April 30, 1996 and
1997, the company was in violation of a financial coverage ratio covenant
contained in the note, and at October 31, 1996, January 31, 1997, and
April 30, 1997, the company was in violation of a quarterly net worth
covenant contained in the note. As of the filing of this Annual Report, the
bank has not waived compliance with the subject provisions as of April 30,
1997. One of the remedies available to the bank is to demand full payment
of the outstanding balance, which is $462,000 at
April 30, 1997. Since the note matures on November 29, 1997, the
company does not expect the bank to make such a demand. While the
company has the liquidity available to pay-off the note, management
believes another source of financing can be obtained.
Information concerning the company's long-term indebtedness,
classified to reflect borrowings under the new credit agreement, is as
follows:
<TABLE>
<S> <C>
Revolving line payable to PNBT, maturing July 1997 $ 856,000
Term loan payable to PNBT, maturing July 2006 452,000
Note payable to PNBT, maturing March 2016 608,000
Note payable to PNBT, maturing September 2001 36,000
Note payable to PNBT, maturing October 2001 50,000
Note payable to NationsBank, on demand 462,000
Installment contract payable 18,000
Capitalized lease obligations (Note F) 17,000
2,499,000
Less current maturities 1,394,000
$1,105,000
</TABLE>
The amount of long-term debt maturing in each of the five years subsequent
to April 30, 1997, classified to reflect the borrowings under the new credit
agreement, is as follows:
<TABLE>
<S> <C>
April 30, Amount
1998 $1,394,000
1999 78,000
2000 80,000
2001 86,000
2002 586,000
Thereafter 275,000
$2,499,000
</TABLE>
NOTE E - INCOME TAXES
The provision for income taxes reflected in the consolidated
statements of operations differs from the amounts computed at the federal
statutory tax rates. The principal differences between the statutory income
tax expense and the effective provision for income taxes are summarized as
follows:
<TABLE>
<S> <C> <C>
1997 1996
Computed tax expense (benefit) at statutory rates $ - $ -
Change in deferred tax assets 435,000 247,000
Change in valuation allowance (435,000) (75,000)
$ - $ 172,000
</TABLE>
The company has available as benefits to reduce future income taxes, subject
to applicable limitations, the following estimated net operating loss ("NOL")
and credit carryforwards:
<TABLE>
<S> <C> <C> <C> <C>
Investment
Year of NOL Tax R & D Job Target
Expiration Carryforward Credit Tax Credit Tax Credit
1998 - 42,000 103,000 13,000
1999 - 17,000 38,000 1,000
2000 471,000 16,000 - -
2001 1,420,0 4,000 - -
2002 - - - -
2003 1,416,000 - - -
2008 1,000 - - -
2009 819,000 - - -
2010 366,000 - - -
2011 308,000 - - -
2012 1,462,000 - - -
$ 6,263,000 $ 79,000 $ 141,000 $ 14,000
</TABLE>
Effective May 1, 1993, the company adopted The Financial
Accounting Standards Board ("FASB") Statement No. 109, "Accounting
for Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. The difference
between the financial and tax basis of assets and liabilities is determined
annually.
Deferred income taxes and liabilities are computed for those
differences that have future tax consequences using the currently enacted
tax laws and rates that apply to the periods in which they are expected to
effect taxable income. Valuation allowances are established, if necessary,
to reduce the deferred tax asset to the amount that will, more likely than
not, be realized. Income tax expense is the current tax payable or
refundable for the period plus or minus the net change in the deferred tax
assets or liabilities.
The net deferred tax asset included in the accompanying balance
sheet at April 30, 1997, 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:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 1,942,000
Inventory valuation reserve 245,000
Tax credit carryforwards 406,000
Property, plant and equipment 188,000
Other 60,000
2,841,000
Less valuation allowance 2,613,000
$ 228,000
</TABLE>
The valuation allowance was increased by $435,000 as of April 30, 1997, due
to changes in the deferred tax assets.
NOTE F - COMMITMENTS
The company is party to a non-cancelable operating lease used in
the performance of its business. In addition, the company entered into two
lease financing arrangements in fiscal 1995 for an office phone system and
test equipment. These two leases are presented in the financial statements
as capital leases. The aggregate initial capitalized cost of this equipment
was $52,000 with a discount rate of 16% implicit in each of the lease
agreements.
Future minimum lease payments subsequent to April 30, 1997, are as follows:
<TABLE>
<S> <C> <C>
Capital Operating
April 30, Leases Leases
1998 $ 14,000 $ 24,000
1999 9,000 24,000
2000 2,000 7,000
$ 25,000 $ 55,000
</TABLE>
The future minimum capital lease payments of $25,000 include
amounts representing interest of $8,000 which results in a present value of
$17,000 for net minimum capital lease payments (see Note D of Notes to
Consolidated Financial Statements). Equipment recorded under capital
leases amounted to $26,000, net of accumulated depreciation of $26,000 as
of April 30, 1997.
Total rent expense for all operating leases for each of the years
ended April 30, 1997 and 1996 was $24,000.
NOTE G - EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
On September 19, 1994, the shareholders approved the Incentive
Compensation Plan. All key employees are eligible to participate in the
Plan. The Plan provides for participants to receive incentive payments in
cash and/or company common stock based on targeted pretax earnings, as
defined in the
Plan. Awards under the Plan during the year ended April 30, 1997, was
$36,000. There were no awards under the Plan during the year ended
April 30, 1996.
Employee Stock Purchase Plan
The company has an Employee Stock Purchase Plan which
permits employees of both operating subsidiaries to purchase common
stock of the company at a formula price which approximates market value.
The Plan enables employees to purchase stock through payroll deductions
of up to 10% of their compensation. The company matches one-half of the
employee's contribution. Stock purchased under the Plan is restricted from
transfer for one year after the date of issuance. Expenses of the Plan in
each of the years ended April 30, 1997 and 1996 were $1,000.
Employee Stock Option Plans
In accordance with the 1982 Incentive Compensation Plan, the
company reserved 630,000 common shares for issuance to key employees
pursuant to the exercise of incentive and non-qualified stock options
granted prior to May 20, 1992. At April 30, 1997, no options were
available for future grants, but options to purchase 18,207 shares were
exercisable.
Stock option transactions under the 1982 Incentive Compensation
Plan for each period are summarized as follows:
<TABLE>
<S> <C> <C>
Shares Under Option Price
Option Per Share
Balance, May 1, 1995 311,363 $.75 to $2.00
Exercised (21,310) $1.38
Forfeited (131,537) $.75 to $2.00
Balance, April 30, 1996 158,516 $.75 to $2.00
Exercised (53,808) $.75 to $1.25
Forfeited (86,501) $1.25 to $2.00
Balance, April 30, 1997 18,207 $1.70 to $2.00
</TABLE>
In accordance with the Incentive Compensation Plan approved by
shareholders on
September 19, 1994, the company reserved 400,000 common shares for
issuance to key employees pursuant to the exercise of incentive and non-
qualified stock options granted prior to June 20, 2004. The options are
accounted for under APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for this Plan. The
incentive stock options have a term of five years when issued and vest 50%
per year at the end of each of the first two years. The non-qualified stock
options have a term of ten years when issued and vest 25% per year at the
end of each of the first four years. The exercise price of each option equals
the market price of the company's common stock on the date of grant.
Accordingly, no compensation cost has been recognized for the Plan. The
company chose not to adopt Statement of Financial Accounting Standards
123, Accounting for Stock-Based Compensation. The difference in the two
methods of accounting for stock options is not deemed to have a material
effect on the fair value of the options at the grant date.
Stock option transactions under the 1994 Incentive Compensation
Plan for fiscal 1997 (the only year with transactions under the Plan) are
summarized as follows:
<TABLE>
<S> <C> <C>
1997
Weighted
Shares Average
Under Exercise
Option Price
Outstanding at beginning of year - -
Granted 150,000 $1.00
Exercised - -
Forfeited - -
Outstanding at end of year 150,000 $1.00
Options exercisable at year-end - -
Weighted average fair value of
options granted during the year -
</TABLE>
The following information applies to options outstanding at April 30, 1997:
<TABLE>
<S> <C>
Number outstanding 150,000
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 8.6 years
</TABLE>
401(k) Retirement Plans
The company has a 401(k) Retirement Plan for non-union
employees of both operating subsidiaries. Employer contributions to the
Plan, which are at the Discretion of the Board of Directors, were $8,000 and
$35,000 for the years ended April 30, 1997 and 1996, respectively. Torotel
Products has a separate 401(k) Retirement Plan for union
employees. Employer contributions to this Plan, which also are at the
discretion of the Board of Directors, were $2,000 in each of the years ended
April 30, 1997 and 1996. OPT also has a separate 401(k) Retirement Plan for
its union employees. Pursuant to a collective bargaining agreement with the
United Steelworkers of America, AFL-CIO Local 5503, employer contributions to
this Plan for the years ended April 30, 1997 and 1996 were $33,000 and $37,000,
respectively.
NOTE H - EARNINGS PER SHARE
Earnings per common and common equivalents share have been
computed using the weighted average shares of common stock and
common stock equivalents outstanding during the periods. The weighted
average shares outstanding for the periods presented were as follows:
<TABLE>
<S> <C> <C> <C>
Weighted Weighted
Average Average
Shares of Common Stock Shares
Year Ended Common Stock Equivalents Outstanding
April 30, 1996 2,781,132 31,703 2,812,835
April 30, 1997 2,802,871 - 2,802,871
</TABLE>
The common stock equivalents, consisting of shares issuable upon
assumed exercise of the incentive and non-qualified stock options, are
accounted for under the treasury stock method using the average price of
the company's shares during the periods. Fully diluted earnings per share
are the same as the earnings per share indicated on the accompanying
consolidated statements of operations.
NOTE I - STOCK WARRANTS
In connection with the acquisition of OPT, warrants to purchase
66,667 shares of the company's common stock at $1.50 per share were
issued to Chemical Bank New Jersey N.A. The warrants expire on
September 1, 2003. As of April 30, 1996 and 1997, there was no dilutive
effect from these warrants.
NOTE J - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Employee related expenses $ 371,000
Other, including interest 101,000
$ 472,000
</TABLE>
NOTE K - NOTE PAYABLE TO FORMER OFFICER
The company has a $429,000 promissory note with Alfred F.
Marsh, former President of Torotel, Inc., dated July 10, 1996. The amount
of this note consists of the principal sum of $250,000 from a note executed
in April 1986, plus $179,000 of accrued unpaid interest. For the year
ended April 30, 1997, the company incurred $41,000 in interest on the
note. The outstanding balance of this unsecured note bears interest at a
fixed rate of 10% per annum. The note requires monthly principal and
interest payments of $10,881, and matures on July 1, 2000. Under the
terms of the note, no payments shall be made to Mr. Marsh as long as any
default condition exists under the terms of the company's credit agreement
with PNBT, unless the bank has waived the default condition prior to any
payment. As of April 30, 1997, the outstanding balance of the note was
$384,000. The company has suspended all payments under the note due to
the reasons discussed in Note M of Notes to Consolidated Financial
Statements.
The amount of the debt maturing in each of the five years
subsequent to April 30, 1997, is as follows:
<TABLE>
<S> <C>
April 30, Amount
1998 $ 122,000
1999 109,000
2000 121,000
2001 32,000
2002 -
$ 384,000
</TABLE>
NOTE L - DIVIDEND RESTRICTIONS
The company's credit agreement prohibits the payment of cash
dividends without the prior consent of PNBT and NationsBank.
NOTE M - CONTINGENCY FOR ESTIMATED PENALTY
On May 6, 1997, Torotel Products, Inc. was accepted into the
Voluntary Disclosure Program of the United States Department of Defense,
resulting from its failure to perform some required "thermal shock" testing
as frequently as required, and inaccurately certifying that all required
testing had been performed. As a result of the company's investigation
into the testing deficiencies, which was first reported in November 1996,
the company recorded an estimated charge of $416,000 against earnings in
its fiscal fourth quarter ended April 30, 1997. This amount is still subject
to fluctuation as further evidence is investigated. The company continues
to cooperate as the government conducts its investigation and continues to
pursue the existence of other damages. At this time, the company is not
certain when payment of the damage amount will be required; however,
the company does not anticipate making any payments during the fiscal
year ending April 30, 1998. As a result, the entire $416,000 has been
classified as a long-term liability in the accompanying consolidated
balance sheet. For the year ended April 30, 1997, the company incurred
legal costs of $203,000 for this investigation.
The company believes that certain of its former officers may have
been responsible for the misconduct related to the test failures, and is
evaluating ways of recovering the damages. In the meantime, the company
has suspended all payments under a note payable to a former officer (see
Note K to Notes to Consolidated Financial Statements).
NOTE N - SPECIAL CHARGES AND CREDITS
For the year ended April 30, 1997, selling, general and
administrative expenses as presented in the accompanying consolidated
statements of operations included special charges of $587,000, which
consisted of $107,000 for expenses associated with the terminated stock
sale to Brockson Technologies Group, LLC.; $277,000 for charges
associated with the restructuring of Torotel Products' operations; and
$203,000 for legal fees associated with the DOD investigation discussed in
Note M of Notes to Consolidated Financial Statements; other income
(expense) as presented in the accompanying consolidated statements of
operations included a special charge of $416,000 for the estimated penalty
discussed in Note M of Notes to Consolidated Financial Statements. For
the year ended April 30, 1996, other income (expense) included a
$510,000 gain from the final settlement for business income and contents
insurance resulting from a March 1995 fire at Torotel Products' facility.
NOTE O - INDUSTRY SEGMENT INFORMATION
The following table summarizes industry segment information for
1997 and 1996. The components segment includes the magnetic
components product lines of Torotel Products and OPT, while the
telecommunications segment includes OPT's switching power supplies.
<TABLE>
<S> <C> <C>
1997 1996
Sales to unaffiliated customers:
Components $10,060,000 $11,563,000
Telecommunications 4,610,000 4,259,000
$14,670,000 $15,822,000
Earnings (loss) from operations:
Components $ 64,000 $ 112,000
Telecommunications 396,000 455,000
Corporate (424,000) (278,000)
$ 36,000 $ 289,000
Identifiable assets:
Components $ 4,800,000 $ 5,816,000
Telecommunications 2,147,000 1,990,000
Corporate 332,000 312,000
$ 7,279,000 $ 8,118,000
Capital expenditures:
Components $ 133,000 $ 49,000
Telecommunications 159,000 148,000
$ 292,000 $ 197,000
Depreciation and amortization expense:
Components $ 212,000 $ 213,000
Telecommunications 106,000 80,000
$ 318,000 $ 293,000
</TABLE>
The effect of the change in accounting method (see Note B of Notes to
the Consolidated Financial Statements) was to decrease earnings from
operations of the components segment by approximatley $270,000 for the year
ended April 30, 1997.
For the year ended April 30, 1997, the components segment did
not have any major customers that accounted for more than 10% of
consolidated net sales; sales by the telecommunications segment to Silicon
Graphics (formerly Cray Research) were 28% of consolidated net sales.
For the year ended April 30, 1996, sales by the components segment to
Lockheed Martin were 13% of consolidated net sales; sales by the
telecommunications segment to Cray Research were 27% of consolidated
net sales. Intersegment and export sales were not significant. Sales of the
components segment to defense contractors for conventional military
applications for each of the years ended April 30, 1997 and 1996, were
approximately 65%.
SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited)
The following tables summarize certain selected quarterly
unaudited consolidated financial data for the last two fiscal years and
should be read in conjunction with the Consolidated Financial Statements
for the years ended April 30, 1997 and 1996, included herein, with special
consideration given to Note B of Notes to Consolidated Financial
Statements (in thousands, except per share data):
Fiscal 1997 by Quarter
<TABLE>
<S> <C> <C> <C> <C>
4th 3rd 2nd 1st
Net sales $3,329 $3,506 $3,768 $4,067
Gross profit $ 846 $ 909 $1,017 $1,120
Earnings (loss) before
cumulative effect of
change in method of
accounting $ (616) $ 81 $ (200) $ 76
Earnings (loss) per share
before cumulative
effect $ (.22) $ .03 $ (.07) $ .03
Fiscal 1996 by Quarter
4th 3rd 2nd 1st
Net sales $3,879 $3,688 $4,021 $4,234
Gross profit $ 953 $ 819 $1,039 $1,297
Net earnings $ 3 $ 119 $ 36 $ 177
Earnings per share $ .00 $ .04 $ .01 $ .06
</TABLE>
The pro forma amounts assuming the new method of accounting had been applied
retroactively are as follows:
Fiscal 1997 by Quarter
<TABLE>
<S> <C> <C> <C> <C>
4th 3rd 2nd 1st
Net earnings (loss) $ (616) $ 81 $ (200) $ 76
Earnings (loss) per share $ (.22) $ .03 $ (.07) $ .03
Fiscal 1996 by Quarter
4th 3rd 2nd 1st
Net earnings $ 20 $ 353 $ 8 $ 296
Earnings per share $ .01 $ .12 $ .00 $ .11
</TABLE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act
Information required under this Item is contained in the company's 1997
Proxy Statement, which is herein incorporated by reference.
ITEM 10. Executive Compensation
Same as Item 9 above.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Same as Item 9 above.
ITEM 12. Certain Relationships and Related Transactions
Indebtedness to Former Officer
The company has a $429,000 promissory note with Alfred F.
Marsh, former President of Torotel, Inc., dated July 10, 1996. The amount
of this note consists of the principal sum of $250,000 from a note executed
in April 1986, plus $179,000 of accrued unpaid interest. For the year
ended April 30, 1997, the company incurred $41,000 in interest on the
note. The outstanding balance of this unsecured note bears interest at a
fixed rate of 10% per annum. The note requires monthly principal and
interest payments of $10,881, and matures on July 1, 2000. Under the
terms of the note, no payments shall be made to Mr. Marsh as long as any
default condition exists under the terms of the company's credit agreement
with PNBT, unless the bank has waived the default condition prior to any
payment. As of April 30, 1997, the outstanding balance of the note was
$384,000. The company has suspended all payments under the note due to
the reasons discussed in Note M of Notes to Consolidated Financial
Statements.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Included in Part IV of this report:
Exhibit 21 Subsidiaries of the Registrant 32
Exhibit 23 Consent of Independent Certified Public Accountants 33
Exhibit 99 Undertakings 34
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended
April 30, 1997.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
(a) Subsidiary (wholly-owned)
Torotel Products, Inc. (a Missouri corporation)
(b) Subsidiary (wholly-owned)
OPT Industries, Inc. (a New Jersey corporation)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 17, 1997, accompanying
the consolidated financial statements incorporated by reference
or included in the Annual Report of Torotel, Inc. on Form 10-
KSB for the year ended April 30, 1997. We hereby consent to
the incorporation by reference of said report in the Registration
Statements of Torotel, Inc. on Form S-8 (File Nos. 2-88012, 2-
54748, 2-78819, and 2-78896).
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Kansas City, Missouri
July 25, 1997
EXHIBIT 99
To Be Incorporated by Reference Into Form S-8 Registration Statements
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement: (i)
to include any prospectus required by section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
Provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Torotel, Inc.
(Registrant)
By: /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
Date: July 25, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Dale H. Sizemore, Jr. By: /s/ Richard A. Sizemore
Dale H. Sizemore, Jr. Richard A. Sizemore
Chairman of the Board, Director
Chief Executive Officer
and Director Date: July 25, 1997
Date: July 25, 1997
By: /s/ Christian T. Hughes By: /s/ H. James Serrone
Christian T. Hughes H. James Serrone
President, Chief Operating Vice President of Finance and
Officer and Director Chief Financial Officer
Date: July 25, 1997 Date: July 25, 1997
By: /s/ Ronald L. Benjamin
Ronald L. Benjamin
Director
Date: July 25, 1997
By: /s/ Dr. Thomas L. Lyon, Jr.
Dr. Thomas L. Lyon, Jr.
Director
Date: July 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOROTEL, INC. AND SUBSIDIARIES CONTAINED IN ITS
ANNUAL REPORT IN FORM 10-KSB FOR THE YEAR ENDED APRIL 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 196,000
<SECURITIES> 0
<RECEIVABLES> 2,120,000
<ALLOWANCES> 76,000
<INVENTORY> 2,794,000
<CURRENT-ASSETS> 5,200,000
<PP&E> 4,549,000
<DEPRECIATION> 2,734,000
<TOTAL-ASSETS> 7,279,000
<CURRENT-LIABILITIES> 2,941,000
<BONDS> 0
<COMMON> 1,440,000
0
0
<OTHER-SE> 8,671,000
<TOTAL-LIABILITY-AND-EQUITY> 7,279,000
<SALES> 14,670,000
<TOTAL-REVENUES> 14,670,000
<CGS> 10,778,000
<TOTAL-COSTS> 3,856,000
<OTHER-EXPENSES> 436,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,000
<INCOME-PRETAX> (659,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (659,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (506,000)
<NET-INCOME> (1,165,000)
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
