FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1998
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
incorporation or organization) Identification No.)
13402 SOUTH 71 HIGHWAY, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices)
(816) 761-6314
(Issuers 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 December 11, 1998, there were 2,811,590 shares
of Common Stock, $.50 Par Value, outstanding.
TOROTEL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1998
Consolidated Statements of Operations for the six
months ended October 31, 1998 and 1997
Consolidated Statements of Operations for the three
months ended October 31, 1998 and 1997
Consolidated Statements of Cash Flows for the six
months ended October 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Managements Discussion and Analysis
or Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET (Unaudited)
As of October 31, 1998
ASSETS
Current assets:
Cash $ 73,000
Accounts receivable, net 875,000
Inventories (Note 3) 3,047,000
Prepaid expenses and
other current assets 156,000
Asset held for disposal 76,000
4,227,000
Property, plant and equipment, net 1,438,000
Other assets 105,000
$ 5,770,000
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Short-term revolving credit line
(Note 5) $ 1,203,000
Current maturities of long-term debt 284,000
Trade accounts payable 654,000
Accrued liabilities 313,000
2,454,000
Long-term debt, less current maturities 1,479,000
Note and interest payable to former
officer (Note 6) 458,000
Commitments and contingencies
(Notes 6 and 10) 486,000
Stockholders equity
(Notes 7, 8, 9 and 10):
Common stock, at par value 1,441,000
Capital in excess of par value 8,673,000
Accumulated deficit (9,016,000)
1,098,000
Less treasury stock, at cost 205,000
893,000
$ 5,770,000
The accompanying notes are an integral part of these
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended October 31,
1998 1997
Net sales $ 4,649,000 $ 6,642,000
Cost of goods sold 4,106,000 5,001,000
Gross profit 543,000 1,641,000
Operating expenses:
Engineering 417,000 396,000
Selling, general and
administrative 1,083,000 1,165,000
1,500,000 1,561,000
Earnings (loss)
from operations (957,000) 80,000
Other income (expense):
Interest expense (169,000) (133,000)
Other, net (Note 11) 984,000 (71,000)
815,000 (204,000)
Loss before provision
for income taxes (142,000) (124,000)
Provision for income
taxes (Note 4) - -
Net loss $ (142,000) $ (124,000)
Basic loss per share
(Note 7) $ (.05) $ (.04)
Diluted loss per share
(Note 7) $ (.05) $ (.04)
The accompanying notes are an integral part of these
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended October 31,
1998 1997
Net sales $ 2,016,000 $ 3,265,000
Cost of goods sold 1,744,000 2,550,000
Gross profit 272,000 715,000
Operating expenses:
Engineering 215,000 189,000
Selling, general and
administrative 501,000 561,000
716,000 750,000
Loss from operations (444,000) (35,000)
Other income (expense):
Interest expense (86,000) (66,000)
Other, net (Note 11) 984,000 (1,000)
898,000 (67,000)
Earnings (loss) before
provision for income
taxes 454,000 (102,000)
Provision for income taxes
(Note 4) - -
Net earnings (loss) $ 454,000 $(102,000)
Basic earnings (loss) per
share (Note 7) $ .16 $ (.04)
Diluted earnings (loss)
per share (Note 7) $ .16 $ (.04)
The accompanying notes are an integral part of these
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended October 31,
1998 1997
Cash flows from operating
activities:
Net loss $ (142,000) $ (124,000)
Adjustments to reconcile net loss to net cash
provided by operations:
Gain on sale of product
line (984,000) -
Loss from estimated government
penalty - 70,000
Depreciation and amortization 171,000 172,000
Increase (decrease) in cash
flows from operations
resulting from changes in:
Accounts receivable 689,000 228,000
Inventories (177,000) (219,000)
Prepaid expenses and
other assets (130,000) (72,000)
Trade accounts payable (41,000) (107,000)
Accrued liabilities (129,000) (53,000)
Net cash used in operating
activities (743,000) (105,000)
Cash flows from investing
activities:
Capital expenditures (41,000) (79,000)
Proceeds from product line
sale 1,250,000 -
Net cash provided by (used in)
investing activities 1,209,000 (79,000)
Cash flows from financing
activities:
Borrowings against
credit line 1,692,000 785,000
Payments against
credit line (2,050,000) (670,000)
Principal payments
on long-term debt (90,000) (42,000)
Payments on capital
lease obligations (12,000) (7,000)
Note and interest payable
to former officer 20,000 34,000
Proceeds from issuance
of common stock 1,000 2,000
Net cash provided by (used in)
financing activities (439,000) 102,000
Net increase (decrease)
in cash $ 27,000 $ (82,000)
Cash at beginning of year 46,000 196,000
Cash at end of October $ 73,000 $ 114,000
Supplemental Disclosures
of Cash Flow Information
Cash paid during the period for:
Interest $ 150,000 $ 110,000
Income taxes $ - $ -
The accompanying notes are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial
statements reflect the normal recurring adjustments
which are, in the opinion of management, necessary to
present fairly the companys financial position at
October 31, 1998, and the results of operations for
the three and six months ended October 31, 1998.
The financial statements contained herein should
be read in conjunction with the companys financial
statements and related notes filed on Form 10-KSB for
the year ended April 30, 1998.
Note 2 - Realization of Assets
The accompanying consolidated financial
statements have been prepared in conformity with
generally accepted accounting principles, which
contemplate continuation of the company as a going
concern. However, the company has sustained
substantial operating losses in the first half of
fiscal 1999, and in fiscal years 1998 and 1997. In
addition, in the first half of fiscal 1999 and for
fiscal year 1998, the company has used, rather than
provided, cash in its operations. The companys line
of credit with Phillipsburg National Bank & Trust
Company (PNBT) expires January 31, 1999 (see Note 5 of
Notes to Consolidated Financial Statements). If the
bank does not renew the credit line, the entire
outstanding balance would become due and payable.
While management believes the bank has an interest in
continuing as the companys primary lender, renewal of
the credit line will be subject to, among other
things, satisfactory review of the companys operating
plans, cash needs, available collateral, and the
status of the possible acquisition (see Note 10 of
Notes to Consolidated Financial Statements).
In view of the matters described in the preceding
paragraph, recoverability of a major portion of the
recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued
operations of the company, which in turn is dependent
upon the companys ability to meet its financing
requirements on a continuing basis, to maintain
present financing, and to succeed in its future
operations. The consolidated financial statements do
not include any adjustment relating to the
recoverability and classification of recorded asset
amounts or amounts and classification of liabilities
that might be necessary should the company be unable
to continue in existence.
Note 3 - Inventories
The components of inventories are summarized as
follows:
Raw materials $ 1,690,000
Work in process 903,000
Finished goods 454,000
$ 3,047,000
Note 4 - Income Taxes
The company has net operating loss and credit
carryforwards available as benefits to reduce future
income taxes, subject to applicable limitations.
These tax credit and operating loss carryforwards
expire in various amounts in the years 1999 through
2013.
The difference between the financial and tax
bases 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 following table summarizes the components of
the net deferred tax asset:
Net operating loss carryforwards $ 2,305,000
Inventory valuation reserve 229,000
Tax credit carryforwards 406,000
Property, plant and equipment 106,000
Other 52,000
$ 3,098,000
Less valuation allowance 3,098,000
$ -
Note 5 - Short-term Revolving Credit Line
In September 1998, the company renewed its
revolving credit agreement with PNBT through December
31, 1998; however, at the time of filing this Form 10-
QSB, the bank has verbally extended this expiration
date to January 31, 1999. The credit agreement
originally provided a $2,500,000 revolving credit
line; however, this amount was reduced to $1,700,000
upon closing of the product line sale discussed in
Note 11 of Notes to Consolidated Financial Statements.
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 OPTs
facility. Under the terms of the agreement, the
outstanding balance of the revolving line bears
interest at 1/2% over the banks prime lending rate.
As of October 31, 1998, the company had utilized
$1,203,000 of the revolving credit line and the
effective borrowing rate was 8.5%. The company is
required to comply with certain covenants including
restrictions on the payment of cash dividends. As of
October 31, 1998, the company was in violation of two
financial covenants under the terms of the credit
agreement with PNBT; however, the bank has waived
compliance with the subject provisions through January
31, 1999, which is the verbal expiration date of the
credit line.
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 companys 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 the
fourth quarter of its fiscal year ended April 30,
1997. Because the investigation was ongoing, the
company subsequently 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 the first
quarter of its fiscal year ended April 30, 1998. The
company does not anticipate incurring any additional
major charges related to the investigation; however,
the aggregate amount of the estimated penalty is still
subject to fluctuation as further evidence is
investigated.
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 will evaluate ways
of recovering the damages once the government
completes its investigation. In the meantime, the
company has suspended all principal and interest
payments due under a note payable to a former officer,
and does not anticipate making any further payments
during the next twelve months. As a result, as of
October 31, 1998, the aggregate amount due of
$458,000, which consists of the outstanding principal
of $384,000 plus the accrued interest of $74,000, has
been classified as a long-term liability in the
accompanying consolidated balance sheet.
The legal fees associated with the DOD
investigation have amounted to $1,000 during the
current fiscal year, and $272,000 in aggregate since
the investigation started in the third quarter of the
fiscal year ended April 30, 1997.
Note 7 - Earnings Per Share
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. The statement
became effective for financial statements issued for
periods ending after December 15, 1997, and requires
restatement of all prior-period EPS data presented.
Pursuant to the new statement, the basic and
diluted earnings (loss) per common share were computed
as follows:
Year-to-Date EPS Calculations 1998 1997
Net loss $(142,000) $(124,000)
Weighted average
common shares outstanding 2,811,288 2,808,785
Incremental shares - -
Basic loss per share $ (.05) $ (.04)
Diluted loss per share $ (.05) $ (.04)
No incremental shares are included in the year-to-date
EPS calculations due to the net loss in each period.
Quarterly EPS Calculations 1998 1997
Net earnings (loss) $ 454,000 $ (102,000)
Weighted average common
shares outstanding 2,811,590 2,809,003
Incremental shares 85,766 -
Basic earnings (loss) per share $ .16 $ (.04)
Diluted earnings (loss)
per share $ .16 $ (.04)
No incremental shares are included in the quarterly
EPS calculations for 1997 due to the net loss in the
period.
Note 8 - 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
companys 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 No. 123, Accounting for Stock-
Based Compensation. The fair value of the options
under SFAS No. 123 is approximately $70,000 which is
not deemed significant to earnings.
Stock option transactions under the 1994
Incentive Compensation Plan for each period are
summarized as follows:
1998 1997
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding at
beginning of
year 150,000 $1.00 150,000 $1.00
Granted - - - -
Exercised - - - -
Forfeited - - - -
Outstanding at
end of October 150,000 $1.00 150,000 $1.00
Options exercisable
at end of October - - - -
Weighted average fair
value of options
granted during the
year - - - -
The following information applies to options
outstanding at October 31, 1998:
Number outstanding 150,000
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 7.2 yrs.
Note 9 - Stock Warrants
Pursuant to a settlement that ended a class
action alleging racial discrimination in hiring by
Torotel Products, Inc., the company agreed to issue a
warrant certificate to the Torotel Settlement Fund to
purchase 100,000 shares of Torotel, Inc. common stock
at $.75 per share. The warrant is 100% vested upon
issuance and cannot be exercised until the market
price of the companys common stock reaches $2.00 per
share. The warrant expires on May 4, 2003.
The warrant is deemed non-compensatory under
Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation.
Stock warrant transactions for each period are
summarized as follows:
1998 1997
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding at
beginning of
year - - - -
Granted 100,000 $.75 - -
Exercised - - - -
Forfeited - - - -
Outstanding at
end of October 100,000 $.75 - -
Warrants exercisable
at end of October - - - -
Weighted average fair
value of options
granted during the
year - - - -
The following information applies to warrants
outstanding at October 31, 1998:
Number outstanding 100,000
Range of exercise prices $.75
Weighted average exercise price $.75
Weighted average remaining
contractual life 4.5 yrs
Note 10 - Acquisition
On November 24, 1998, the company signed a
definitive merger agreement with Electronika, Inc.
(formerly Caloyeras, Inc.), a private manufacturer of
magnetic components. Completion of the merger will
depend upon a review of Torotels preliminary Proxy
Statement by the Securities and Exchange
Commission (SEC), and approval by Torotels
shareholders. The completion of the merger also is
dependent on the satisfactory completion of customary
due diligence investigations by Torotel and
Electronika, and the receipt and approval of the
disclosure schedules required by the merger agreement
by December 24, 1998. The date of the shareholders
meeting, as well as the Record Date for voting at the
meeting, should be announced by mid-December. If all
of the approvals are obtained, the merger should be
finalized by mid-February 1999. These dates are
subject to timely clearance by the SEC. The terms of
the merger include:
* Torotel exchanging 1,800,000 of its common shares
for all the outstanding Electronika shares.
* Torotel depositing 2,500,000 shares of a new Class
A $1.00 Preferred Stock (5 percent cumulative, non-
participating, non-convertible) into escrow for the
benefit of the Electronika shareholders. The
Preferred Stock will be distributed annually over a
five-year period based on Electronikas earnings
performance following the merger.
* Torotels founding family shareholders (the
Sizemore Family) will form a Voting Trust or similar
arrangement, allowing Peter Caloyeras (Electronikas
founder) to vote 525,165 shares of common stock held
by the Sizemore Family, which will represent 11.4% of
Torotels outstanding common stock after the merger.
After giving effect to the Merger and the Voting
Trust, the Caloyeras family will hold, or direct the
voting of, 54.9% of Torotels outstanding common stock.
The term of the Voting Trust will coincide with the
term of the Preferred Stock Escrow Period.
Note 11 Product Line Sale
On September 18, 1998, Torotels wholly-owned
subsidiary, OPT Industries, Inc., completed the sale
of its ultra-miniature transformer and inductor
product line to Pico Electronics, Inc. of Pelham, New
York. The company received cash proceeds of
$1,250,000 from the sale, which resulted in a gain of
$984,000, net of the value of the inventory and
equipment associated with the product line.
Item 2. MANAGEMENTS 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.
SIX MONTHS ENDED OCTOBER 31, 1998 VERSUS SIX MONTHS
ENDED OCTOBER 31, 1997
Net sales decreased 30%. The net sales of
Torotel Products decreased 5% from $3,036,000 to
$2,877,000 due primarily to lower sales of the potted
coil assembly for the Hellfire II missile system. In
recent years, sales of the potted coil assembly have
accounted for about 25% of Torotel Products total
sales; however, future sales of the potted coil
assembly will be significantly lower and limited only
to the number of Hellfire II missiles sold to foreign
countries by the prime contractor(s). As a result,
lower sales are expected at Torotel Products. OPTs
net sales decreased 51% from $3,606,000 to $1,772,000
due primarily to lower sales of power supplies to a
major customer. No significant orders are expected
from this customer at this time. As discussed in Note
11 of Notes to Consolidated Financial Statements, OPT
sold its ultra-miniature transformer and inductor
product line. Sales from this product line for the
six months ended October 31, 1997 and 1998, were 18%
and 40% of OPTs total net sales, respectively. As a
result, OPT does not expect any significant increase
in sales in the next few months.
Gross profit as a percentage of net sales
decreased 13%. The gross profit percentage of Torotel
Products decreased 6% due primarily to labor
inefficiencies. The gross profit percentage of OPT
decreased nearly 28% due primarily to labor
inefficiencies and lower sales volume without a
comparable decrease in fixed production costs.
Engineering expenses increased 5%. The
engineering expenses of Torotel Products decreased 10%
from $141,000 to $126,000 due primarily to a $6,000
decrease in equipment rental costs, a $6,000 decrease
in payroll costs, and a $3,000 decrease in travel
costs. The engineering expenses of OPT increased 14%
from $255,000 to $291,000 due to a $28,000 increase in
payroll costs and an $8,000 increase in consulting
costs.
Selling, general and administrative (SG&A)
expenses decreased 7%. The SG&A expenses of Torotel,
Inc. decreased 19% from $117,000 to $95,000 due
primarily to a $14,000 decrease in professional fees
and an $8,000 decrease in directors fees. The SG&A
expenses of Torotel Products decreased 6% from
$556,000 to $523,000 due primarily to a $37,000
decrease in professional fees, an $8,000 decrease in
sales commissions, and an $8,000 decrease in computer
maintenance costs. These decreases were offset
partially by an $8,000 management fee charge from OPT,
an $8,000 increase in disposal costs for hazardous
materials, and a $4,000 increase in copier rental
costs. The SG&A expenses of OPT decreased nearly 6%
from $492,000 to $465,000 due primarily to an $23,000
decrease in sales commissions, an $8,000 management
fee credit from Torotel Products, a $5,000 decrease in
payroll costs, and a $2,000 decrease in travel costs.
These decreases were offset partially by an $11,000
increase in advertising costs.
Interest expense increased 27%. The interest
expense of Torotel, Inc. decreased slightly from
$21,000 to $20,000. The interest expense of Torotel
Products increased nearly 35% from $60,000 to $81,000
due to a higher aggregate borrowing level. The
interest expense of OPT increased 31% from $52,000 to
$68,000 due to a higher aggregate borrowing level.
Sundry non-operating income increased due to a
$984,000 gain from the product line sale discussed in
Note 11 of Notes to Consolidated Financial Statements.
The six-month period last year had a sundry non-
operating expense of $71,000 which included a $70,000
charge for an estimated penalty as discussed in Note 6
of Notes to Consolidated Financial Statements.
For the reasons discussed above, the consolidated
pretax loss increased from $124,000 to $142,000. The
pretax loss of Torotel, Inc. decreased from $138,000
to $115,000. The pretax earnings of Torotel Products
decreased from a profit of $10,000 to a loss of
$95,000. The pretax earnings of OPT increased from
$4,000 to $68,000.
THREE MONTHS ENDED OCTOBER 31, 1998 VERSUS THREE
MONTHS ENDED OCTOBER 31, 1997
Net sales decreased 38%. The net sales of
Torotel Products decreased 12% from $1,458,000 to
$1,285,000 due primarily to lower sales of the potted
coil assembly for the Hellfire II missile system. In
recent years, sales of the potted coil assembly have
accounted for about 25% of Torotel Products total
sales; however, future sales of the potted coil
assembly will be significantly lower and limited only
to the number of Hellfire II missiles sold to foreign
countries by the prime contractor(s). As a result,
lower sales are expected at Torotel Products. OPTs
net sales decreased nearly 60% from $1,807,000 to
$731,000 due to lower sales of power supplies to a
major customer. No significant orders are expected
from this customer at this time. As discussed in Note
11 of Notes to Consolidated Financial Statements, OPT
sold its ultra-miniature transformer and inductor
product line. Sales from this product line for the
three months ended October 31, 1997 and 1998, were 16%
and 40% of OPTs total net sales, respectively. As a
result, OPT does not expect any significant increase
in sales in the next few months.
Gross profit as a percentage of net sales
decreased 8%. The gross profit percentage of Torotel
Products increased 3% due primarily to lower fixed
production costs. The gross profit percentage of OPT
decreased 28% due primarily to labor inefficiencies
and lower sales volume without a comparable decrease
in fixed production costs.
Engineering expenses increased 14%. The
engineering expenses of Torotel Products decreased 9%
from $68,000 to $62,000 due primarily to a $3,000
decrease in payroll costs and a $3,000 decrease in
equipment rental costs. The engineering expenses of
OPT increased 26% from $121,000 to $153,000 due
primarily to a $28,000 increase in payroll costs and
an $8,000 increase in consulting costs. These
increases were offset partially by a $4,000 decrease
in small tools and supplies expenditures.
Selling, general and administrative (SG&A)
expenses decreased 11%. The SG&A expenses of Torotel,
Inc. decreased 20% from $64,000 to $51,000 due
primarily to a $7,000 decrease in professional fees, a
$3,000 decrease in directors fees, and a $3,000
decrease in consulting costs. The SG&A expenses of
Torotel Products decreased 8% from $257,000 to
$236,000 due primarily to a $6,000 decrease in payroll
costs, a $4,000 decrease in sales commissions, a
$4,000 decrease in advertising costs, a $4,000
decrease in computer maintenance costs, and a $3,000
decrease in professional fees. The SG&A expenses of
OPT decreased 11% from $240,000 to $214,000 due
primarily to a $14,000 decrease in sales commissions,
an $8,000 decrease in payroll costs, and a $4,000
decrease in travel costs.
Interest expense increased 30%. The interest
expense of Torotel, Inc. decreased slightly from
$11,000 to $10,000. The interest expense of Torotel
Products increased 26% from $31,000 to $39,000 due to
a higher aggregate borrowing level. The interest
expense of OPT increased 54% from $24,000 to $37,000
due to a higher aggregate borrowing level.
Sundry non-operating income increased due to a
$984,000 gain from the product line sale discussed in
Note 11 of Notes to Consolidated Financial Statements.
For the reasons discussed above, consolidated
pretax earnings increased from a loss of $124,000 to a
profit of $454,000. The pretax loss of Torotel, Inc.
decreased from $75,000 to $61,000. The pretax loss of
Torotel Products decreased from $39,000 to $20,000.
The pretax earnings of OPT increased from $12,000 to
$535,000.
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. For the fiscal year ended April 30,
1998, the company incurred a pretax loss of
$1,295,000. For the six months ended October 31,
1998, the company incurred an additional operating
loss of $1,126,000; however, this loss was offset
substantially by the $984,000 gain from the product
line sale discussed in Note 11 of Notes to
Consolidated Financial Statements. Management does
not anticipate any significant increase in the present
rate of sales during the next few months. As a
result, further operating losses are expected. As of
October 31, 1998, the company was in violation of two
financial covenants under the terms of its credit
agreement with PNBT (see Note 5 of Notes to
Consolidated Financial Statements); however, the bank
has waived compliance with the subject provisions
through January 31, 1999, which is the verbal
expiration date of the credit line. PNBT is in the
process of reviewing the entire credit arrangement,
along with the anticipated benefits to be derived from
the possible acquisition discussed in Note 10 to Notes
to Consolidated Financial Statements. While
management believes the bank has an interest in
continuing as the companys primary lender, renewal of
the credit line will be subject to, among other
things, satisfactory review of the companys operating
plans, cash needs, available collateral, and the
status of the acquisition. If the bank does not renew
the credit line, it could affect the companys ability
to continue as a going concern (see Note 2 of Notes to
Consolidated Financial Statements).
During the six months ended October 31, 1998, the
companys operating activities used $743,000 in cash
flow. Corporate related matters used $248,000. The
operations of Torotel Products provided $455,000 due
primarily to a lower level of receivables. OPTs
operations used $950,000 due primarily to the losses
from operations.
Investing activities provided $1,209,000 in cash
flow due to the product line sale discussed in Note 11
of Notes to Consolidated Financial Statements. For
the six months ended October 31, 1998, capital
expenditures for production and engineering equipment
were $41,000. For the balance of the fiscal year, the
company anticipates additional investments of
approximately $15,000 for capital expenditures.
Financing activities used $439,000 in cash flow
due primarily to decreases in the revolving credit
line and long-term debt. At October 31, 1998, the
company had used $1,203,000 of its revolving credit
line and had $497,000 available for future cash
requirements, based on the lenders borrowing base
formula.
The company believes that inflation will have
only a minimal effect on future operations since such
effects will be offset by sales price increases which
are not expected to have a significant effect upon
demand.
YEAR 2000 READINESS
Management is presently assessing both operating
companies for their Year 2000 readiness. Extensive
testing has been performed on the main operating
system and its software applications (which serves
both operating companies), and it has been determined
that both hardware and software are Year 2000
compliant. Both operations are in the process of
polling significant suppliers and customers to
determine the extent to which either operation is
vulnerable to those third parties failure to remediate
their own Year 2000 issues. In addition, various
equipment is being tested to verify its Year 2000
functionality. The cost of these efforts has been and
should continue to be minimal.
The company believes all necessary steps are
being taken to assure a smooth transition to the Year
2000. However, there is no guarantee that the systems
of major suppliers and customers will be timely
converted and would not have a material adverse effect
on the company.
OTHER
Except for historical information contained
herein, certain of the matters discussed above are
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and
are subject to the safe harbor created by that Act.
These statements are based on assumptions about a
number of important factors and involve risks and
uncertainties that could cause actual results to be
different from what is stated here. These risk
factors include: decreased demand for products, delays
in developing new products, expected orders that do
not occur, loss of key customers, the DOD calling for
payment of the accrued penalty and assessing
additional fees, the impact of competition and price
erosion as well as supply and manufacturing
constraints, approvals not obtained for the proposed
acquisition and that the required disclosure schedules
may be disapproved by either Torotel or Electronika,
and other risks and uncertainties.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There is one legal proceeding involving the
company. 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 companys
investigation into the testing deficiencies, the
company has recorded an estimated charge of $486,000
against earnings. The estimated penalty is still
subject to fluctuation as further evidence is
investigated. The company believes that certain of
its former officers may have been responsible for the
misconduct related to the test failures, and will
evaluate ways of recovering the damages once the
government completes its investigation. 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 October 31,
1998. The report was dated August 17, 1998, and
included information on the product line sale to Pico
Electronics, Inc., as required by Item 5 of Form 8-K.
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: December 11, 1998 /s/ H. James Serrone
H. James Serrone
Vice President of
Finance and
Chief Financial Officer
