FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended July 31, 1997
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 September 8, 1997, there were 2,808,566 shares of Common
Stock, $.50 Par Value, outstanding.
TOROTEL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheet as of July 31, 1997 1
Consolidated Statements of Operations for the three months
ended July 31, 1997 and 1996 2
Consolidated Statements of Cash Flows for the three months
ended July 31, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET (Unaudited)
As of July 31, 1997
<TABLE>
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ASSETS
Current assets:
Cash $ 136,000
Accounts receivable, net 1,881,000
Inventories (Note 3) 2,978,000
Prepaid expenses and other current assets 155,000
5,150,000
Property, plant and equipment, net 1,756,000
Deferred tax asset (Note 4) 228,000
Other assets 35,000
$ 7,169,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) $ 1,119,000
Current maturity of note payable to former
officer (Note 6) 148,000
Trade accounts payable 1,025,000
Accrued liabilities 536,000
2,828,000
Long-term debt, less current maturities (Note 5) 1,085,000
Note payable to former officer (Note 6) 236,000
Commitments and contingency (Note 6) 486,000
Stockholders' equity (Note 7): common stock,
at par value 1,440,000
Capital in excess of par value 8,672,000
Accumulated deficit (7,373,000)
2,739,000
Less treasury stock, at cost 205,000
2,534,000
$ 7,169,000
</TABLE>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended July 31,
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1997 1996
(Note 2)
Net sales $ 3,377,000 $ 4,067,000
Cost of goods sold 2,451,000 2,947,000
Gross profit 926,000 1,120,000
Operating expenses:
Engineering 207,000 195,000
Selling, general and
administrative 604,000 728,000
811,000 923,000
Earnings from operations 115,000 197,000
Other income (expense):
Interest expense (67,000) (70,000)
Other, net (70,000) (11,000)
(137,000) (81,000)
Earnings (loss) before
provision for income
taxes and cumulative
effect of change in
method
of accounting (22,000) 116,000
Provision for income
taxes (Note 4) - 40,000
Earnings (loss) before
cumulative effect of
change in
method of accounting (22,000) 76,000
Cumulative effect of
change in method of
accounting - (506,000)
Net earnings (loss) $ (22,000) $ (430,000)
Earnings (loss) per
common and common
equivalent share:
Earnings (loss) before
cumulative effect $ (.01) $ .03
Cumulative effect - (.18)
$ (.01) $ (.15)
Weighted average common
and common equivalent
shares outstanding 2,808,000 2,810,000
</TABLE>
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended July 31,
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1997 1996
(Note 2)
Cash flows from operating activities:
Net earnings (loss) $ (22,000) $ (430,000)
Adjustments to reconcile net earnings to net cash
provided by operations:
Loss from estimated government penalty 70,000 -
Depreciation and amortization 85,000 75,000
Deferred tax asset - 40,000
Increase (decrease) in cash flows from operations
resulting from changes in:
Accounts receivable 239,000 1,124,000
Inventories (184,000) (508,000)
Prepaid expenses and other assets (64,000) (73,000)
Trade accounts payable 72,000 151,000
Accrued liabilities 64,000 (23,000)
282,000 786,000
Net cash provided by operating activities 260,000 356,000
Cash flows from investing activities:
Capital expenditures (26,000) (31,000)
Net cash used in investing activities (26,000) (31,000)
Cash flows from financing activities:
Borrowings against credit line 100,000 2,929,000
Payments against credit line (370,000) (3,104,000)
Principal payments on long-term debt (21,000) (18,000)
Payments on capital lease obligations (4,000) (3,000)
Proceeds from issuance of common stock 1,000 1,000
Net cash used in financing activities (294,000) (195,000)
Net increase (decrease) in cash $ (60,000) $ 130,000
Cash at beginning of year 196,000 149,000
Cash at end of July $ 136,000 $ 279,000
Supplemental Disclosures of Cash Flow
Information
Cash paid during the period for:
Interest $ 55,000 $ 108,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
3
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 July 31, 1997, and the results of operations for
the three months ended July 31, 1997.
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, 1997.
Note 2 - Restatement for Change in Accounting Method
The amounts shown on the accompanying consolidated
statements of operations for the three months ended July 31, 1996,
differ from those reported originally due to the retroactive application
of the change in method of accounting which was adopted during the
second quarter of the fiscal year ended
April 30, 1997. The effect of retroactive application of the new
method is summarized in the following table:
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Three Months Ended
July 31, 1996
As Restated As Reported
Net sales $ 4,067,000 $ 3,917,000
Gross profit 1,120,000 1,019,000
Earnings before cumulative effect of change in
method of accounting 76,000 10,000
Cumulative effect of change in method of accounting (506,000) -
Net earnings (loss) $ (430,000) $ 10,000
Earnings (loss) per share:
Earnings (loss) before cumulative effect $ .03 $ .00
Cumulative effect (.18) -
$(.15) $ .00
</TABLE>
Note 3 - Inventories
The components of inventories are summarized as follows:
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Raw materials, less allowance for obsolescence of $801,000 $ 1,692,000
Work in process 869,000
Finished goods 417,000
$ 2,978,000
</TABLE>
4
Note 4 - Income Taxes
The net deferred tax asset included in the accompanying
consolidated balance sheet at July 31, 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:
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Net operating loss carryforwards $ 1,954,000
Inventory valuation reserve 245,000
Tax credit carryforwards 406,000
Property, plant and equipment 188,000
Other 60,000
2,853,000
Less valuation allowance 2,625,000
$ 228,000
</TABLE>
The tax credit and operating loss carryforwards expire in
various amounts in the years 1997 through 2012.
Note 5 - Long-term Debt
On September 2, 1997, the company renewed its revolving
credit agreement with Phillipsburg National Bank & Trust Company
(PNBT). The credit agreement, which provides a $2,500,000
revolving credit line, expires August 31, 1998. Advances under the
credit line are limited to the sum of 75% of eligible billed receivables
and 50% of inventories, net of reserves. The revolving credit line is
collateralized by trade accounts receivable, inventories, and a third
lien 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 lending rate. As of July 31, 1997, the
company had utilized $586,000 of the revolving credit line and the
effective borrowing rate was 9%. The company is required to
comply with certain covenants including restrictions on the payment
of cash dividends.
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. Under the terms
of the note, the company is required to comply with certain financial
covenants. At April 30, 1997 and 1996, the company was in
violation of an annual financial coverage ratio covenant contained in
the note, and at October 31, 1996, January 31, 1997, April 30, 1997,
and July 31, 1997, the company was in violation of a quarterly net
worth covenant contained in the note. As of the filing of this Form
10-QSB, the bank has not waived compliance with the subject
provisions as of July 31, 1997. One of the remedies available to the
bank is to demand full payment of the outstanding balance, which is
$457,000 at July 31, 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 will be
in place on or before the maturity date of the note.
5
Note 6 - 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 thermal shock 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. Because the investigation has been
ongoing, the company recently determined that there also were
some deficiencies in performing some required electrical testing as
frequently as required. As a result, the company recorded an
additional estimated charge of $70,000 against earnings in its fiscal
first quarter ended July 31, 1997. The aggregate amount of the
estimated penalty 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 next twelve months. As
a result, the entire $486,000 has been classified as a long-term
liability in the accompanying consolidated balance sheet.
The company believes that certain of its former officers may
have been responsible for the misconduct related to the test failures,
and continues to evaluate ways of recovering the damages. In the
meantime, the company has suspended all payments under a note
payable to a former officer.
Note 7 - Employee Stock Options
Employee stock options are accounted for under APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. 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. 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 the three months ended July 31, 1997 and
1996, are summarized as follows:
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1997 1996
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding at
beginning of year 150,000 $1.00 - -
Granted - - - -
Exercised - - - -
Forfeited - - - -
Outstanding at
end of July 150,000 $1.00 - -
</TABLE>
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1997 1996
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Options exercisable
at end of July - - - -
Weighted average fair
value of options
granted during the
year - -
</TABLE>
The following information applies to options outstanding at July 31, 1997:
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Number outstanding 150,000
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 8.4 years
</TABLE>
7
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.
THREE MONTHS ENDED JULY 31, 1997 VERSUS THREE
MONTHS ENDED JULY 31, 1996
Net sales decreased 17%. The net sales of Torotel
Products decreased 10% from $1,761,000 to $1,576,000 due
primarily to a lower shippable backlog position at the beginning of
the quarter and the elimination of some lower-margin jobs for non-
major customers. These decreases were offset partially by a
$113,000 increase in sales of the potted coil assembly for the
Hellfire II missile system. OPT's net sales decreased 22% from
$2,306,000 to $1,801,000 due primarily to lower sales of immersion
power supplies to a major customer.
Gross profit as a percentage of net sales decreased slightly.
The gross profit percentage of Torotel Products increased 4% due
primarily to lower material costs and lower fixed production costs.
The gross profit percentage of OPT decreased 4% due primarily to
lower sales volume without a comparable decrease in fixed
production costs.
Engineering expenses increased 6%. The engineering
expenses of Torotel Products increased 3% from $71,000 to
$73,000 due primarily to education and training costs. The
engineering expenses of OPT increased 8% from $124,000 to
$134,000 due primarily to a $5,000 increase in depreciation, a
$3,000 increase in travel costs, and a cost of $2,000 for recruiting
expenses.
Selling, general and administrative (SG&A) expenses
decreased 17%. The SG&A expenses of Torotel, Inc. decreased
24% from $70,000 to $53,000 due primarily to a $9,000 decrease in
professional fees, a $4,000 decrease in travel costs, and a $4,000
decrease in consulting charges. The SG&A expenses of Torotel
Products decreased 20% from $376,000 to $299,000 due primarily
to a $107,000 decrease in payroll costs due to a reduction in
personnel, a $12,000 decrease in bank charges, a $5,000 decrease
in sales commissions, and a $3,000 decrease in advertising costs.
These decreases were offset partially by a $50,000 increase in
professional fees. The SG&A expenses of OPT decreased 11%
from $282,000 to $252,000 due primarily to a $9,000 decrease in
payroll costs, a $7,000 decrease in bank charges, a $4,000 decrease
in advertising costs, a $4,000 decrease in professional fees, a
$4,000 decrease in computer maintenance costs, and a $2,000
decrease in office supplies.
Interest expense decreased 4%. The interest expense of
Torotel, Inc. decreased 9% from $11,000 to $10,000 due to a lower
interest-bearing balance on the note payable to a former officer.
The interest expense of Torotel Products increased 38% from
$21,000 to $29,000 due to a higher aggregate borrowing level. The
interest expense of OPT decreased 26% from $38,000 to $28,000
due to a lower aggregate borrowing level.
Sundry non-operating expense increased due to a $70,000
charge in the current fiscal quarter for an estimated penalty as
discussed in Note 6 of Notes to Consolidated Financial Statements.
For the reasons discussed above, consolidated pretax
earnings decreased from a profit of $116,000
8
to a loss of $22,000. The pretax loss of Torotel, Inc. decreased from
a loss of $81,000 to a loss of $63,000. The pretax earnings of
Torotel Products increased from $38,000 to $49,000. The pretax
earnings of OPT decreased from a profit of $159,000 to a loss of
$8,000.
Provision for income taxes decreased due to lower 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. As discussed in
Note 5 of Notes to Consolidated Financial Statements, the company
has renewed its revolving credit line with Phillipsburg National Bank
& Trust Company through August 31, 1998.
During the three months ended July 31, 1997, the
company's operating activities generated $260,000 in cash flow.
Corporate related matters used $67,000. The operations of Torotel
Products provided $143,000 due primarily to pretax earnings plus
non-cash charges. OPT's operations provided $184,000 due
primarily to a lower level of receivables. Management's objective is
to continue strengthening the company's liquidity position through
improved operations and asset management.
Investing activities used $26,000 in cash flow for capital
expenditures for production and engineering equipment. For the
balance of the fiscal year, the company anticipates additional
investments of approximately $300,000 for capital expenditures.
Financing activities used $294,000 in cash flow due
primarily to reductions in the revolving credit line. At July 31, 1997,
the company had used $586,000 of its revolving credit line and had
$1,914,000 available for future cash requirements, based on the
lender's borrowing base formula. As discussed in
Note 5 of Notes to Consolidated Financial Statements, the company
is in violation of certain financial covenants under the terms of a
note payable to NationsBank. As of the filing of this Form 10-QSB,
the bank has not waived compliance with the subject provisions.
One of the remedies available to the bank is to demand full payment
of the outstanding balance, which is $457,000 at July 31, 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 will be in place on or before the maturity
date of the note.
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 (see Note 6 of Notes to Consolidated Financial
Statements).
9
PART II. OTHER INFORMATION
Item 1. 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 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, the company has recorded
an estimated charge of $486,000. This estimated penalty 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.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 -- Financial Data Schedule (electronic filings only)
b) Reports on Form 8-K --
There was one report filed on Form 8-K during the
three months ended July 31, 1997, as required by
Item 5 of Form 8-K. The report, filed May 14, 1997,
included information on the terminated stock sale to
Brockson Technologies Group LLC.
10
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: September 11, 1997 /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
11
<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
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 136,000
<SECURITIES> 0
<RECEIVABLES> 1,966,000
<ALLOWANCES> 85,000
<INVENTORY> 2,978,000
<CURRENT-ASSETS> 5,150,000
<PP&E> 4,575,000
<DEPRECIATION> 2,819,000
<TOTAL-ASSETS> 7,169,000
<CURRENT-LIABILITIES> 2,828,000
<BONDS> 0
<COMMON> 1,440,000
0
0
<OTHER-SE> 1,807,000
<TOTAL-LIABILITY-AND-EQUITY> 7,169,000
<SALES> 3,377,000
<TOTAL-REVENUES> 3,377,000
<CGS> 2,451,000
<TOTAL-COSTS> 3,262,000
<OTHER-EXPENSES> 70,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,000
<INCOME-PRETAX> (22,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
