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, 1998
Commission File No. 2-33256
TOROTEL, INC.
(Name of small business issuer in its charter)
MISSOURI 44-0610086
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
13402 SOUTH 71 HIGHWAY, GRANDVIEW, MO 64030
(Address of principal exec. 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 $11,738,000.
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 30, 1998, was $1,649,000. As of July 30,
1998, there were 2,811,590 shares of Common
Stock, $.50 Par Value, outstanding.
TOROTEL, INC.
FORM 10-KSB
Fiscal Year Ended April 30, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a
Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 10
Item 6. Management's Discussion and
Analysis or Plan of Operation 12
Item 7. Financial Statements and
Supplementary Data 19
Item 8. Changes In and Disagreements
With Accountants on Accounting
and Financial Disclosure 19
PART III
Item 9. Directors, Executive Officers,
Promoters and Control Persons,
Compliance With Section 16(a)
of the Exchange Act 49
Item 10. Executive Compensation 51
Item 11. Security Ownership of Certain
Beneficial Owners and Management 53
Item 12. Certain Relationships and
Related Transactions 55
Item 13. Exhibits and Reports on Form 8-K 36
SIGNATURES 61
</TABLE>
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 J 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.
On July 24, 1998, the company entered into a
letter of intent for a possible merger with
Caloyeras, Inc., d/b/a Electronika, Inc. (which
also will include the business and assets of
its affiliate, Magnetika/East). This
manufacturer of magnetic components had net
sales of $1.8 million, and normalized and
adjusted pretax profits of $575,000 for its
last fiscal year ended December 31, 1997.
These are unaudited results provided by
Caloyeras, Inc. In connection with this
merger, Torotel, Inc. would exchange 1.8
million shares of its common stock, and
1
$2.5 million of a new class of preferred stock
(5 percent cumulative, non-participating), for
100 percent of the outstanding securities of
Caloyeras, Inc. In addition, the founder's
family shareholders of Torotel, Inc. would form
a voting trust or similar arrangement,
pursuant to which Peter B. Caloyeras would be
allowed to vote 525,165 shares of common stock
of Torotel, Inc. owned by the Sizemore family.
As a result of these transactions, the
Caloyeras family would acquire more than 50
percent of the voting control of Torotel, Inc.
This transaction is subject to, among other
things, due diligence, the negotiation and
execution of definitive agreements, and the
approval of Torotel, Inc.'s shareholders.
There can be no assurance that the parties will
consummate the transaction contemplated by the
letter of intent.
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.
2
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.
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, implemented a
customer-focused sales strategy early in fiscal
1997. 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, 1998, sales
to two major customers amounted to 24% and 10%
of the net sales of Torotel Products.
3
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.
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 97 full-
time employees. An adequate supply of
qualified personnel is available in the
facility's immediate vicinity. From 1967-1996,
4
Torotel Products' production employees were
represented by the Torotel Employees
Association, a non-affiliated labor union. 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 May
31, 2001. 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 less
than two years. Two new products, targeted for
the telecommunications and emergency DC systems
markets, were introduced in late 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 were introduced in
late fiscal 1998.
5
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, 1998, sales to a major
customer amounted to 29% 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.
6
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 one of its power
supply products. 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 tele-
communications and emergency DC systems
markets.
Employees
OPT presently employs 94 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 now
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.
7
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;
however, this parcel of real estate will be
transferred to a settlement fund established as
part of the settlement of the class-action
litigation discussed in Note P of Notes to
Consolidated Financial Statements. As of
April 30, 1998, these properties were subject
to a first deed of trust securing indebtedness
in the amount of $446,000.
OPT owns a two-building complex with
approximately 55,000 square feet located in
Phillipsburg, New Jersey. As of April 30,
1998, this facility was subject to a first deed
of trust securing indebtedness in the amount of
$595,000, and a second and third lien mortgage
collateralizing the credit agreement discussed
in Note E 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 50% of maximum capacity.
ITEM 3. Legal Proceedings
There are two legal proceedings involving the
company. In the first matter, at a hearing
held on July 23, 1998, the U.S.. District Court
for the Western District of Missouri gave final
approval to a settlement that ended a class
action alleging racial discrimination in hiring
by Torotel Products, Inc. The lawsuit, Turner
v. Torotel, Inc., et al., Case No. 96-0646-CV-
W-5, was filed on June 18, 1996. The
plaintiff, Joseph Turner, alleged a racially
motivated failure to hire and that Torotel
Products, Inc. discriminated against minorities
in its hiring practices at its facility in
Grandview, Missouri. Plaintiff's motion to
have the case certified as a class action was
approved by the court on September 30, 1997.
As part of the settlement, Torotel agreed to
provide monetary compensation to the class. A
settlement fund will be established, to which
Torotel will contribute: (1) $200,000 in cash,
which will be paid in eight quarterly
8
installments of $25,000; (2) warrants to
purchase 100,000 shares of Torotel, Inc. common
stock at $.75 per share; and (3) the 17-acre
parcel of industrial real estate, located in
Kansas City, Missouri, having a book cost of
$76,000. Torotel is entitled to 75% of any net
proceeds in excess of $250,000 from the sale of
the real estate. The total cost recorded for
the settlement was approximately
$276,000, or 10 cents per diluted share, which
was recorded in the company's fourth fiscal
quarter ended April 30, 1998. Torotel Products
has further agreed to implement changes to
improve its hiring process and to give
preferential treatment to class members for any
entry-level job openings in production.
Torotel Products expressly denies any
wrongdoing in conjunction with this litigation;
however, the economics of the case made the
settlement a better option. The company was
facing a lengthy court case and high litigation
costs. In addition, this litigation was
becoming an impediment for moving
forward with future plans.
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 $486,000 against earnings,
of which $70,000 was recorded in the fiscal
year ended April 30, 1998. 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 (see Note L of Notes to Consolidated
Financial Statements).
ITEM 4. Submission of Matters to a Vote of
Security Holders
None.
9
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". Based on the consolidated operating
results and balance sheet for the fiscal year
ended April 30, 1998, the company has fallen
below the AMEX's guidelines for continued
listing. Company officials will be meeting
with the AMEX on September 24, 1998, to discuss
the company's financial position, its future
operating plans, and to discuss the reasons why
the company's common stock should not be
removed from listing. There is no assurance
that the company's common stock will continue
to be listed on the AMEX.
Price Range of Common Stock
The following table sets forth the high and
low sales prices as reported on the AMEX.
<TABLE>
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1998 1997
Fiscal Period High Low High Low
First Quarter 1-1/8 11/16 1-11/16 1-1/8
Second Quarter 1-1/16 3/4 1-5/8 1-1/8
Third Quarter 7/8 1/2 1-3/8 1
Fourth Quarter 13/16 5/16 1-3/8 1-1/16
</TABLE>
(b) Approximate Number of Equity Security
Holders
<TABLE>
<S> <C>
Approximate Number
of Record Holders
Title of Class as of April 30, 1998
Common Stock, $.50 par value 2,000 (1)
</TABLE>
(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.
10
(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.
11
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.
1998 Compared to 1997
Net sales decreased 20%. The net sales of
Torotel Products decreased slightly from
$6,062,000 to $6,059,000. While sales of the
potted coil assembly for the Hellfire II
missile system increased $740,000, shipments of
other magnetics products decreased due to lower
shippable bookings during the last six months
of fiscal 1998, and production inefficiencies
and technical design problems which contributed
to delays in the shipment of other orders.
OPT's net sales decreased 34% from $8,608,000
to $5,679,000 due primarily to lower sales of
power supplies to a major customer. No
significant orders are expected from this
customer in the near future, which will
continue to impact sales in the near term.
OPT recently has booked over $1.0 million in
orders for its new power supplies products,
which will contribute to higher sales in the
second half of fiscal 1999.
Gross profit as a percentage of net sales
decreased 6%. The gross profit percentage of
Torotel Products decreased 4% due primarily to
labor inefficiencies resulting from certain
technical design problems and the conversion to
a computerized Information/MRP System. The
gross profit percentage of OPT decreased 9% due
primarily to lower sales volume without a
comparable decrease in fixed production costs.
This percentage decrease in gross profit was
offset partially by lower material and labor
costs attributable to a change in the mix of
product shipments.
Engineering expenses decreased 1%. The
engineering expenses of Torotel Products
decreased 5% from $283,000 to $269,000 due
primarily to a reduction in clerical personnel.
The engineering expenses of OPT increased 1%
from $489,000 to $494,000 due primarily to an
increase in depreciation on computer equipment.
12
Selling, general and administrative (SG&A)
expenses decreased 24%. The SG&A expenses of
Torotel, Inc. decreased 46% from $424,000 to
$227,000 due primarily to costs of $107,000
associated with the terminated stock sale to
Brockson Technologies Group, LLC in fiscal
1997, a $36,000 bonus award pursuant to the
Incentive Compensation Plan in fiscal 1997, a
$27,000 decrease in professional fees, a
$22,000 decrease in travel costs, and a $5,000
decrease in investor relations expense. The
SG&A expenses of Torotel Products decreased
nearly 28% from $1,605,000 to $1,156,000 due
primarily to a restructuring charge of $277,000
in fiscal 1997, a $79,000 decrease in payroll
and fringe benefits costs, a $70,000 decrease
in professional fees, a $27,000 decrease in
sales commissions, and a $15,000 charge in
fiscal 1997 for proper disposal of certain
outdated hazardous materials. These decreases
were offset partially by a $21,000 management
fee charge from OPT. The SG&A expenses of OPT
decreased 9% from $1,055,000 to $962,000 due
primarily to a $26,000 decrease in sales
commissions, a $21,000 decrease in professional
fees, a $21,000 management fee credit from
Torotel Products, a $12,000 increase in
equipment maintenance, a $7,000 decrease in
advertising costs, and a $6,000 decrease in
bank charges.
Interest expense increased 8%. The interest
expense of Torotel, Inc. remained unchanged at
$41,000. The interest expense of Torotel
Products increased 46% from $95,000 to $139,000
due to a higher aggregate borrowing level. The
interest expense of OPT decreased nearly 20%
from $123,000 to $99,000 due to a lower
aggregate borrowing level.
Sundry non-operating expense decreased 21%
due to the $416,000 charge in fiscal 1997 for
an estimated penalty as discussed in Note N of
Notes to Consolidated Financial Statement. In
fiscal 1998, an additional $70,000 charge was
incurred as discussed in Note N of Notes to
Consolidated Financial Statement, as well as
the $276,000 charge for the settlement of the
lawsuit discussed in Note P of Notes to
Consolidated Financial Statements.
For the reasons discussed above, the
consolidated pretax loss increased from
$659,000 to $1,295,000. The pretax loss of
Torotel, Inc. decreased from $465,000 to
$268,000. The pretax loss of Torotel Products
decreased from $590,000 to $322,000. The
pretax earnings of OPT decreased from a profit
of $396,000 to a loss of $705,000.
13
Provision for income taxes increased due to
an increase in the valuation allowance for the
deferred tax asset (see Note F of Notes to
Consolidated Financial Statements).
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 reflected the
lower amount of business available from Torotel
Products' traditional defense markets and the
risks inherent in penetrating commercial
markets. The earnings generated by 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 anticipated profitable years from
both Torotel Products and OPT, which would
enable the consolidated group to be
profitable in fiscal 1998. While Torotel
Products' generated earnings from operations,
special charges of $505,000 put the operation
in a loss position. In addition, lower sales
from a major customer at OPT resulted in a loss
from this operation. Accordingly, management
decided to write-off the remaining
deferred tax asset of $228,000 in fiscal 1998.
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.
14
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.
15
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 non-operating expense increased due to
a $416,000 charge in fiscal 1997 for an
estimated penalty as discussed in Note N 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.
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. This amount
consisted of $790,000 in actual operating
losses and $505,000 in special charges (see
Note O of Notes to Consolidated Financial
Statements). While management does not
anticipate any further significant special
charges, it also does not anticipate any
substantial increase in the present rate of
sales during the next few months. As a result,
further operating losses are likely. As of
April 30, 1998, the company was in violation of
two financial covenants under the terms of the
credit agreement with Phillipsburg National
Bank & Trust Company (PNBT) (see Note E of
Notes to Consolidated Financial Statements).
The bank has waived compliance with the subject
provisions through August 31, 1998, which is
the expiration date of the revolving credit
16
line. While the bank has expressed a
willingness to continue as the company's
primary lender, the renewal of the credit line
will be subject to, among other things,
satisfactory review of the company's operating
plans, cash needs, available collateral, and
pro forma information on the Caloyeras
transaction (see Note Q of Notes to
Consolidated Financial Statements). If the
bank decides not to renew the credit line, it
could affect the company's ability to continue
as a going concern (see Note B of Notes to
Consolidated Financial Statements). While the
company may be able to find an alternate source
for financing, most likely it would be short-
term in nature, carry substantially higher
costs and lending rates, and be much more
restrictive for liquidity purposes.
The company's operating activities used
$678,000 in cash flow during fiscal 1998.
Corporate related matters used $265,000. The
operations of Torotel Products used $494,000 in
cash flow due primarily to a higher level of
receivables and inventories. OPT's operations
provided $81,000 in cash flow due primarily to
a lower level of receivables.
Investing activities used $134,000 in cash
flow for capital expenditures for production
equipment and building improvements. The
company expects investments of approximately
$125,000 for capital expenditures in fiscal
1999.
Financing activities provided $662,000 in
cash flow due primarily to increases in the
revolving credit line. At April 30, 1998, the
company had used $1,561,000 of its revolving
credit line and had $939,000 available for
future cash requirements, based on the lender's
borrowing base formula and subject to
compliance with the financial covenants
contained in the credit agreement with PNBT, as
discussed above.
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
17
software applications (which serves both
operating companies), and it has been
determined that both are Year 2000 compliant.
Both operations now 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 functionability. 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, and 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, and other risks and
uncertainties.
18
ITEM 7. Financial Statements and Supplementary
Data
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
<S> <C>
Report of Independent Certified Public
Accountants 20
Consolidated Balance Sheet as of
April 30, 1998 22
Consolidated Statements of Operations
for the years ended April 30, 1998
and 1997 24
Consolidated Statement of Changes in
Stockholders' Equity for the years
ended April 30, 1998 and 1997 26
Consolidated Statements of Cash Flows
for the years ended April 30, 1998
and 1997 28
Notes to Consolidated Financial Statements 30
Supplementary Quarterly Financial
Data (Unaudited) 48
</TABLE>
ITEM 8. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure
None.
19
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, 1998, and the related
consolidated statements of operations,
stockholders' equity, and cash flows for the
years ended April 30, 1998 and 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, 1998 and the consolidated results
of their operations and their consolidated cash
flows for the years ended April 30, 1998 and
1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial
statements have been prepared assuming that the
Company will continue as a going concern. As
discussed in Note B to the consolidated
financial statements, the Company has sustained
substantial losses in 1998 and 1997 and its
ability to obtain adequate financing is
uncertain. Because of these factors,
substantial doubts are raised about the
Company's ability to continue as a going
20
concern. The consolidated financial statements
do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Kansas City, Missouri
June 19, 1998
21
CONSOLIDATED BALANCE SHEET
As of April 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 46,000
Trade and other receivables,
less allowance for doubtful
accounts of $89,000 (Notes A,
C, and E) 1,564,000
Inventories (Notes A, D, and E) 3,136,000
Prepaid expenses and other
current assets 103,000
Asset held for disposal (Note P) 76,000
4,925,000
Property, plant and equipment
(Notes A and E):
Land 292,000
Buildings and improvements 1,489,000
Equipment 2,556,000
4,337,000
Less accumulated depreciation
and amortization 2,769,000
1,568,000
Other assets 28,000
$ 5,521,000
</TABLE>
The accompanying notes are an integral part
of this statement.
22
CONSOLIDATED BALANCE SHEET - CONTINUED
As of April 30, 1998
LIABILITIES AND STOCKHOLDERS'
EQUITY
<TABLE>
<S> <C>
Current liabilities:
Short-term revolving credit
line (Note E) $ 1,561,000
Current maturities of long-term
debt (Notes E and P) 284,000
Trade accounts payable 695,000
Accrued liabilities (Note K) 442,000
2,982,000
Long-term debt, less current
maturities (Notes E and P) 1,581,000
Note and interest payable to
former officer (Notes L and N) 438,000
Commitments and contingencies
(Notes G, N and Q) 486,000
Stockholders' equity
(Notes H, I, J, M, P and Q):
Common stock, $.50 par value;
6,000,000 shares authorized;
2,880,569 shares issued 1,441,000
Capital in excess of par value 8,672,000
Accumulated deficit (8,874,000)
1,239,000
Less cost of treasury stock,
71,205 shares 205,000
1,034,000
$ 6,521,000
</TABLE>
The accompanying notes are an integral part
of this statement.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,
<TABLE>
<S> <C> <C>
1998 1997
Net sales (Note C) $11,738,000 $14,670,000
Cost of goods sold 9,301,000 10,778,000
Gross profit 2,437,000 3,892,000
Operating expenses:
Engineering 763,000 772,000
Selling, general
and administrative
(Note O) 2,345,000 3,084,000
3,108,000 3,856,000
Earnings (loss)
from operations (671,000) 36,000
Other expense:
Interest expense 279,000 259,000
Other expense, net
(Note O) 345,000 436,000
624,000 695,000
Loss before
provision for
income taxes and
cumulative effect
of change in
method of
accounting
(Note C) (1,295,000) (659,000)
Provision for income
taxes (Note F) 228,000 -
Loss before
cumulative effect of
change in method of
accounting (Note C) (1,523,000) (659,000)
Cumulative effect of
change in method of
accounting (Note C) - (506,000)
Net loss $(1,523,000) $(1,165,000)
</TABLE>
The accompanying notes are an integral part
of these statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS -
Continued
Years ended April 30,
<TABLE>
<S> <C> <C>
1998 1997
Basic loss per share
(Notes I and J):
Loss before
cumulative
effect $ (.54) $ (.24)
Cumulative
effect - (.18)
$ (.54) $ (.42)
Diluted loss per
share (Notes I and J):
Loss before
cumulative effect $ (.54) $ (.24)
Cumulative effect - (.18)
$ (.54) $ (.42)
</TABLE>
The accompanying notes are an integral part
of these statements.
25
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
Years ended April 30, 1998 and 1997
<TABLE>
<S> <C> <C> <S>
Capital in
Common Excess of
Share Stock Par Value
Balance,
May 1, 1996 2,824,111 $1,412,000 $8,647,000
Net loss - - -
Issuance of
common stock
to employee
stock pur-
chase plan
(Note H) 1,554 1,000 1,000
Issuance of
common stock
to incentive
compensation
plan (Note H) 53,808 27,000 23,000
Acquisition of
37,121 shares
of treasury
stock - - -
Balance,
April 30,
1997 2,879,473 $1,440,000 $8,671,000
Net loss - - -
Issuance of
common stock
to employee
stock pur-
chase plan
(Note H) 1,096 1,000 1,000
Balance,
April 30,
1998 2,880,569 $1,441,000 $8,672,000
</TABLE>
The accompanying notes are an integral part
of this statement.
26
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - CONTINUED
Years ended April 30, 1998 and 1997
<TABLE>
<S> <S> <C> <C>
Accum- Treasury Total
ulated Stock, Stockholders'
Deficit at cost Equity
Balance,
May 1,
1996 $(6,186,000) $(155,000) $ 3,718,000
Net loss (1,165,000) - (1,165,000)
Issuance of
common stock
to employee
stock pur-
chase plan
(Note H) - - 2,000
Issuance of
common stock
to incentive
compensation
plan (Note H) - - 50,000
Acquisition of
37,121 shares
of treasury
stock - (50,000) (50,000)
Balance,
April 30,
1997 $(7,351,000) $(205,000) $ 2,555,000
Net loss (1,523,000) - (1,523,000)
Issuance of
common stock
to employee
stock pur-
chase plan
(Note H) - - 2,000
Balance,
April 30,
1998 $(8,874,000) $(205,000) $ 1,034,000
</TABLE>
The accompanying notes are an integral part
of this statement.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
<TABLE>
<S> <C> <C>
1998 1997
Cash flows from
operating activities:
Net loss $(1,523,000) $(1,165,000)
Adjustments to
reconcile net loss
to net cash pro-
vided by operations:
Loss from estimated
government penalty 70,000 416,000
Loss from settle-
ment of litigation 276,000 -
Depreciation and
amortization 350,000 318,000
Deferred tax asset 228,000 -
Increase (decrease)
in cash flows from
operations resulting
from changes in:
Trade and other
receivables 556,000 1,182,000
Inventories (342,000) (326,000)
Prepaid expenses
and other assets (5,000) 4,000
Trade accounts
payable (258,000) 67,000
Accrued liabilities (30,000) (38,000)
Net cash provided by
(used in) operations (678,000) 458,000
Cash flows from
investing activities:
Capital expenditures (134,000) (292,000)
Cash flows from
financing activities:
Borrowings against
credit line 1,785,000 5,134,000
Payments against
credit line (1,080,000) (5,249,000)
Proceeds from
issuance of long-
term debt 451,000 113,000
</TABLE>
The accompanying notes are an integral part
of these statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED
Years ended April 30,
<TABLE>
<S> <C> <C>
1998 1997
Principal payments
on long-term debt $ (533,000) $ (107,000)
Payments on capital
lease obligations (17,000) (12,000)
Note and interest
payable to former
officer 54,000 -
Proceeds from
issuance of common
stock 2,000 52,000
Acquisition of
treasury stock - (50,000)
Net cash provided by
(used in) financing
activities 662,000 (119,000)
Net increase (decrease)
in cash $ (150,000) $ 47,000
Cash at beginning of year 196,000 149,000
Cash at end of year $ 46,000 $ 196,000
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Cash paid during the
year for:
Interest $ 235,000 $ 279,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part
of these statements.
29
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 C 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.
Fair Value of Financial Instruments
Cost approximates market for all financial
instruments as of April 30, 1998 and 1997.
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 C of Notes to
Consolidated Financial Statements), which is
the same method used for commercial customers.
30
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.
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.
NOTE B - 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 losses in fiscal years
1998 and 1997. In addition, in fiscal 1998 the
company has used, rather than provided, cash in
its operations. The company's line of credit
agreement with PNBT expires August 31, 1998.
If the bank does not renew the credit line, the
entire outstanding balance would become due and
payable. Although management believes the bank
has an interest in continuing as the company's
primary lender, the renewal of the credit
line will be subject to, among other things,
satisfactory review of the company's operating
plans, cash needs, available collateral, and
information relating to the possible
31
acquisition (see Note Q 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
company's 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 adjust-
ment 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 C - 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.
The new method was applied to contracts in
process effective May 1, 1996, resulting in a
cumulative effect charge of $506,000 (18 cents
per diluted share), which was 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
cumulative effect of change in method of
accounting by approximately $270,000 (10 cents
per diluted share).
32
NOTE D - INVENTORIES
The following table summarizes the components
of inventories:
<TABLE>
<S> <C>
Raw materials $1,690,000
Work in process 1,064,000
Finished goods 382,000
$3,136,000
</TABLE>
NOTE E - FINANCING AGREEMENTS
At April 30, 1998, 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 August 31, 1998, and the term loan
expires on July 5, 2006. 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, 1998, the company had utilized
$1,561,000 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, 1998, the outstanding balance of the
term loan was $419,000. The company is
required to comply with certain covenants
including restrictions on the payment of cash
dividends. At April 30, 1998, the company was
in violation of a maximum leverage ratio and a
quick ratio covenant. The bank has waived
compliance with the subject provisions through
August 31, 1998, which is the expiration date
of the revolving credit line. While the bank
33
has expressed a willingness to continue as the
company's primary lender, the renewal of the
credit line will be subject to, among other
things, satisfactory review of the company's
operating plans, cash needs, available
collateral, and pro forma information on the
Caloyeras transaction (see Note Q of Notes to
Consolidated Financial Statements).
OPT has two equipment loans with PNBT. 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, 1998, the outstanding balances of the
loans dated September 12 and October 25 were
$28,000 and $41,000, respectively.
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, 1998, the
outstanding balance on the note was $595,000.
On December 23, 1997, Torotel Products, Inc.
executed a $451,000 promissory note with PNBT.
Under the terms of the note, the outstanding
balance bears interest at a fixed rate of 9-
1/4% per annum through March 18, 2001,
thereafter the rate will be adjusted annually
and will fluctuate at 1/2% over the bank's base
lending rate. The note requires monthly
principal and interest payments of $4,678. The
note, which is guaranteed by Torotel, Inc. and
OPT Industries, Inc., has a maturity date of
December 23, 2012, and is collateralized by a
first mortgage on the land and buildings in
Grandview, Missouri. As of April 30, 1998, the
outstanding balance on the note was $446,000.
Information concerning the company's long-
term indebtedness is as follows:
34
<TABLE>
<S> <C>
Revolving line payable to PNBT,
maturing August 1998 $1,561,000
Term loan payable to PNBT,
maturing July 2006 419,000
Note payable to PNBT,
maturing March 2016 595,000
Note payable to PNBT,
maturing September 2001 28,000
Note payable to PNBT,
maturing October 2001 41,000
Note payable to PNBT,
maturing December 2012 446,000
Note payable to Settlement Fund,
maturing February 2000 (Note P) 276,000
Installment contract payable 15,000
Capitalized lease obligations
(Note G) 45,000
3,426,000
Less current maturities 1,845,000
$1,581,000
</TABLE>
The amount of long-term debt maturing in each
of the five years subsequent to April 30, 1998,
classified to reflect the borrowings under the
new credit agreement, is as follows:
<TABLE>
<S> <C>
April 30, Amount
1999 $1,845,000
2000 207,000
2001 113,000
2002 103,000
2003 92,000
Thereafter 1,066,000
$3,426,000
</TABLE>
NOTE F - 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:
35
<TABLE>
<S> <C> <C>
1998 1997
Computed tax expense at
statutory rates $ - $ -
Increase in deferred
tax assets (209,000) (435,000)
Increase in valuation
allowance 437,000 435,000
$ 228,000 $ -
</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>
Invest-
Year of NOL ment Job
Expira- Carry- Tax R & D Target
tion forward Credit Tax Credit Tax Credit
1999 $ - $17,000 $38,000 $1,000
2000 471,000 16,000 - -
2001 1,420,000 4,000 - -
2002 - - - -
2003 1,416,000 - - -
2008 1,000 - - -
2009 819,000 - - -
2010 366,000 - - -
2011 308,000 - - -
2012 1,462,000 - - -
2013 1,018,000 - - -
$7,281,000 $37,000 $38,000 $1,000
</TABLE>
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.
36
The following table summarizes the components
of the net deferred tax asset:
<TABLE>
<S> <C>
Net operating loss carryforwards $2,257,000
Inventory valuation reserve 229,000
Tax credit carryforwards 406,000
Property, plant and equipment 106,000
Other 52,000
3,050,000
Less valuation allowance 3,050,000
$ -
</TABLE>
NOTE G - COMMITMENTS AND CONTINGENCIES
The company is party to two non-cancelable
operating leases used in the performance of its
business. In addition, in fiscal 1995, the
company entered into a lease financing
arrangement for an office phone system at OPT.
The initial capitalized cost of this equipment
was $30,000 with a discount rate of 16%
implicit in the lease agreement. In fiscal
1998, the company entered into two lease
financing arrangements for a thermal shock
chamber and a phone system at Torotel Products.
The aggregate initial capitalized cost of this
equipment was $56,000 with a discount rate of
19% and 15% implicit in the respective lease
agreements. All three leases are presented in
the financial statements as capital leases.
Future minimum lease payments subsequent to
April 30, 1998, are as follows:
<TABLE>
<S> <C> <C>
Capital Operating
April 30, Leases Leases
1999 $28,000 $26,000
2000 16,000 12,000
2001 10,000 5,000
2002 4,000 5,000
2003 - 1,000
$58,000 $49,000
</TABLE>
The future minimum capital lease payments of
$58,000 include amounts representing interest
of $13,000 which results in a present value of
$45,000 for net minimum capital lease payments
(see Note E of Notes to Consolidated Financial
Statements). Equipment recorded under capital
leases amounted to $62,000, net of accumulated
depreciation of $24,000 as of April 30, 1998.
Total rent expense for all operating leases
for the years ended April 30, 1998 and 1997
was $38,000 and $24,000, respectively.
37
NOTE H - 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. There were
no awards under the Plan during the year ended
April 30, 1998. Awards under the Plan during
the year ended April 30, 1997, were $36,000.
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, 1998 and 1997
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, 1998, no options were
available for future grants, but options to
purchase 3,357 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, 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
Forfeited (14,850) $2.00
Balance, April 30, 1998 3,357 $1.70
</TABLE>
38
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 (SFAS 123), Accounting
for Stock-Based Compensation. The fair value of
the options under SFAS 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:
<TABLE>
<S> <C> <C> <C> <C>
1998 1997
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding
at begin-
ning of year 150,000 $1.00 - -
Granted - - 150,000 $1.00
Exercised - - - -
Forfeited - - - -
Outstanding
at end
of year 150,000 $1.00 150,000 $1.00
Options
exercisable
at year-end - - - -
Weighted
average fair
value of
options
granted
during the
year - - - -
</TABLE>
39
The following information applies to options
outstanding at April 30, 1998:
<TABLE>
<S> <C>
Number outstanding 150,000
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contrac-
tual life 7.6 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 $9,000 and $8,000 for the
years ended April 30, 1998 and 1997,
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 $1,000 and $2,000 for the years
ended April 30, 1998 and 1997, respectively.
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, 1998 and 1997 were
$28,000 and $33,000, respectively.
NOTE I - 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
40
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 loss per common share were
computed as follows:
<TABLE>
<S> <C> <C>
1998 1997
Net loss $(1,523,000) $(1,165,000)
Weighted average
common shares
outstanding 2,809,072 2,802,871
Incremental shares - -
Basic loss per share $ (.54) $ (.42)
Diluted loss per share $ (.54) $ (.42)
</TABLE>
No incremental shares are included in the EPS
calculations due to the net loss in each of the
fiscal years.
NOTE J - STOCK WARRANTS
In connection with the acquisition of OPT in
1994, 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, 1997 and 1998, there was no dilutive
effect from these warrants.
NOTE K - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Employee related expenses $338,000
Other, including interest 104,000
$442,000
</TABLE>
41
NOTE L - 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, 1998, 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, 1998, the aggregate amount due under the
note is $438,000, which consists of the
outstanding principal balance of $384,000 plus
accrued interest of $54,000. The company has
suspended all payments under the note due to
the reasons discussed in Note N of Notes to
Consolidated Financial Statements.
NOTE M - DIVIDEND RESTRICTIONS
The company's credit agreement prohibits the
payment of cash dividends without the prior
consent of PNBT.
NOTE N - 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
(DOD), 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 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.
42
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 fiscal year ending April 30, 1999.
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 payments under a note payable
to a former officer (see Note L of Notes to
Consolidated Financial Statements), and does
not anticipate making any further payments
during the next twelve months. As a result, as
of April 30, 1998, the aggregate amount due of
$438,000, which consists of the outstanding
principal of $384,000 plus the accrued interest
of $54,000, 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 $68,000 during
the fiscal year ended April 30, 1998, and
$203,000 in fiscal 1997.
NOTE O - SPECIAL CHARGES AND CREDITS
For the year ended April 30, 1998, selling,
general and administrative expenses as
presented in the accompanying consolidated
statements of operations included special
charges of $159,000, which consisted of $91,000
for legal fees and claim notice publications
associated with the lawsuit discussed in Note P
of Notes to Consolidated Financial Statements,
and $68,000 for legal fees associated with the
DOD investigation discussed in Note N of Notes
to Consolidated Financial Statements; other
expense, net as presented in the accompanying
consolidated statements of operations included
special charges of $346,000, which consisted of
$276,000 for the settlement of the lawsuit
43
discussed in Note P of Notes to Consolidated
Financial Statements, and $70,000 for the
additional estimated penalty discussed in Note
N of Notes to Consolidated Financial
Statements.
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 N of Notes to Consolidated Financial
Statements; other expense, net as presented in
the accompanying consolidated statements of
operations included a special charge of
$416,000 for the estimated penalty discussed in
Note N of Notes to Consolidated Financial
Statements.
NOTE P - SETTLEMENT OF LITIGATION
At a hearing held on July 23, 1998, the U.S..
District Court for the Western District of
Missouri gave final approval to a settlement
that ended a class action alleging racial
discrimination in hiring by Torotel Products,
Inc. The lawsuit, Turner v. Torotel, Inc., et
al., Case No. 96-0646-CV-W-5, was filed on June
18, 1996. The plaintiff, Joseph Turner,
alleged a racially motivated failure to hire
and that Torotel Products, Inc. discriminated
against minorities in its hiring practices at
its facility in Grandview, Missouri.
Plaintiff's motion to have the case certified
as a class action was approved by the court on
September 30, 1997.
As part of the settlement, Torotel agreed to
provide monetary compensation to the class. A
settlement fund will be established, to which
Torotel will contribute: (1) $200,000 in cash,
which will be paid in eight quarterly
installments of $25,000; (2) warrants to
purchase 100,000 shares of Torotel, Inc. common
stock at $.75 per share; and (3) the 17-acre
parcel of industrial real estate, located in
Kansas City, Missouri, having a book cost of
$76,000. Torotel is entitled to 75% of any net
proceeds in excess of $250,000 from the sale of
the real estate. The total cost recorded for
44
the settlement was approximately $276,000, or
10 cents per diluted share, which was recorded
in the company's fourth fiscal quarter ended
April 30, 1998. Torotel Products has further
agreed to implement changes to improve its
hiring process and to give preferential
treatment to class members for any entry-level
job openings in production.
Torotel Products expressly denies any
wrongdoing in conjunction with this litigation;
however, the economics of the case made the
settlement a better option. The company was
facing a lengthy court case and high litigation
costs. In addition, this litigation was
becoming an impediment for moving forward with
future plans.
NOTE Q - ACQUISITION
On July 24, 1998, the company entered into a
letter of intent for a possible business
combination with Caloyeras, Inc., d/b/a
Electronika, Inc. (which also will include the
business and assets of its affiliate,
Magnetika/East). This manufacturer of magnetic
components had net sales of $1.8 million, and
normalized and adjusted pretax profits of
$575,000 for its last fiscal year. These are
unaudited results provided by Caloyeras, Inc.
In connection with this business combination,
Torotel, Inc. would exchange 1.8 million shares
of its common stock, and $2.5 million of a new
class of preferred stock (5 percent cumulative,
non-participating), for 100 percent of the
outstanding securities of Caloyeras, Inc. In
addition, the founder's family shareholders of
Torotel, Inc. would form a voting trust or
similar arrangement, pursuant to which Peter B.
Caloyeras would be allowed to vote 525,165
shares of common stock of Torotel, Inc. owned
by the Sizemore family. As a result of these
transactions, the Caloyeras family would
acquire more than 50 percent of the voting
control of Torotel, Inc. This transaction is
subject to, among other things, due diligence,
the negotiation and execution of definitive
agreements, and the approval of Torotel, Inc.'s
shareholders. There can be no assurance that
the parties will consummate the transaction
contemplated by the letter of intent.
45
NOTE R - INDUSTRY SEGMENT INFORMATION
The following industry information consists
of the components segment, which includes the
magnetic components product lines of Torotel
Products and OPT, and the telecommunications
segment, which includes OPT's switching power
supplies.
For the year ended April 30, 1998, sales by
the components segment to Boeing Space &
Defense were 13% of consolidated net sales;
sales by the telecommunications segment to
Silicon Graphics (formerly Cray Research) were
14% of consolidated net sales. 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 were 28% of consolidated net
sales. Intersegment and export sales were not
significant. Sales of the components segment
to defense contractors for conventional
military applications for years ended April 30,
1998 and 1997, were approximately 65%.
The following table summarizes certain
industry segment information for the year
ending April 30, 1998 and 1997.
<TABLE>
<S> <C> <C>
1998 1997
Sales to unaffiliated
customers:
Components $ 9,527,000 $10,060,000
Telecommunications 2,211,000 4,610,000
$11,738,000 $14,670,000
Earnings (loss)
from operations:
Components $ (184,000) $ 64,000
Telecommunications (260,000) 396,000
Corporate (227,000) (424,000)
$ (671,000) $ 36,000
Identifiable assets:
Components $ 5,202,000 $ 4,800,000
Telecommunications 1,235,000 2,147,000
Corporate 84,000 332,000
$ 6,521,000 $ 7,279,000
Capital expenditures:
Components $ 90,000 $ 133,000
Telecommunications 44,000 159,000
$ 134,000 $ 292,000
Depreciation and
amortization
expense:
Components $ 227,000 $ 212,000
Telecommunications 123,000 106,000
$ 350,000 $ 318,000
</TABLE>
46
The effect of the change in accounting method
(see Note C of Notes to Consolidated Financial
Statements) was to decrease earnings from
operations of the components segment by
approximately $270,000 for the year ended April
30, 1997.
47
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, 1998 and 1997, included herein,
with special consideration given to Note C of
Notes to Consolidated Financial Statements (in
thousands, except per share data):
<TABLE>
Fiscal 1998 by Quarter
<CAPTION>
<S> <C> <C> <C> <C>
4th 3rd 2nd 1st
Net sales $ 2,619 $2,477 $3,265 $3,377
Gross profit $ 324 $ 472 $ 715 $ 926
Net loss $(1,007) $ (392) $ (102) $ (22)
Basic loss
per share $ (.36) $ (.14) $ (.03) $ (.01)
Diluted loss
per share $ (.36) $ (.14) $ (.03) $ (.01)
</TABLE>
<TABLE>
Fiscal 1997 by Quarter
<CAPTION>
<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
Basic earnings
(loss) per share
before cumulative
effect $ (.22) $ .03 $ (.07) $ .03
Diluted earnings
(loss) per share
before cumulative
effect $ (.22) $ .03 $ (.07) $ .03
</TABLE>
48
PART III
ITEM 9. Directors, Executive Officers,
Promoters and Control Persons,
Compliance With Section 16(a)
of the Exchange Act
As of the date of this Annual Report, all
directors and officers are in compliance with
the reporting requirements of Section 16(a) of
the Securities Exchange Act of 1934.
Biographical summaries concerning individuals
serving on the Board of Directors, the
company's executive officers and significant
employees, are shown below. Dale H. Sizemore,
Jr., both a Director and executive officer, and
Richard A. Sizemore, a Director, are brothers.
Dale H. Sizemore, Jr., age 46
Chairman of the Board and Chief Executive
Officer of Torotel, Inc.
Mr. Sizemore became a Director of the
Corporation in 1984. He has served as Chairman
since 1995, and served as President from 1995
to 1996. He was President of Kansas
Communications in Lenexa, Kansas from 1983 to
1995, and served as their Chairman of the Board
and Treasurer from 1995 to 1998.Mr. Sizemore is
presently self-employed.
Christian T. Hughes, age 49
President and Chief Operating Officer of
Torotel, Inc.,
President of Torotel Products, Inc. and OPT
Industries, Inc.
Mr. Hughes became a Director of the Corporation
in 1995. He became President and Chief
Operating Officer in 1996. He became President
of Torotel Products in 1996, and President of
OPT Industries in 1995. He joined OPT in 1992
as Vice President of Sales and Marketing, and
became Executive Vice President in 1993. Prior
to joining OPT, Mr. Hughes was Vice President
of Sales for Hitran Corporation in Flemington,
New Jersey, from 1987 to 1992.
49
Ronald L. Benjamin, age 53
President of Resource and Development Group,
Inc.
Mr. Benjamin became a Director of the
Corporation in 1993. He has been President of
Resource and Development Group in Lenexa,
Kansas, since 1985. Mr. Benjamin is also a 50%
owner of Robinson Potato Supply. He holds a
B.S. degree in electrical engineering from
Bucknell University and received his
M.B.A. from Harvard University.
Dr. Thomas L. Lyon, Jr., age 54
Professor and Academic Chair of the Executive
Fellows Program at Rockhurst College
Dr. Lyon became a Director of the Corporation
in 1993. He is a professor and Academic Chair
of the Executive Fellows Program at Rockhurst
College in Kansas City, Missouri. Dr. Lyon is
a past director of the Graduate and
Undergraduate Business Division, has served as
the Acting Dean of the School of Management,
and was the first director of Rockhurst's
M.B.A. Program. He has been at Rockhurst since
1975. He holds his B.A. in economics from
Rockhurst, and his M.A. in economics and Ph.D.
in economics and finance from the University of
Missouri.
Richard A. Sizemore, age 38
President of Interactive Design, Inc.
Mr. Sizemore became a Director of the
Corporation in 1995. He has been owner and
President of Interactive Design, Inc. in
Lenexa, Kansas, since 1987. He holds a B.S.
degree in electrical engineering and an M.B.A.
from the University of Kansas.
50
H. James Serrone, age 43
Vice President of Finance, Chief Financial
Officer, and Secretary of Torotel, Inc.,
Vice President of Finance and Acting General
Manager of Torotel Products, Inc.
Vice President of Finance of OPT Industries,
Inc.
Mr. Serrone joined Torotel in 1979, became
Controller in 1982, and was named Vice
President in 1993. He has served as Secretary
since 1996. Mr. Serrone has served as Vice
President of Torotel Products since 1992, and
as Acting General Manager since August 1996.
He became Vice President of OPT Industries in
1993.
ITEM 10. Executive Compensation
The following table sets forth the
compensation of the named executive officers
for each of the company's last three completed
fiscal years.
<TABLE>
Summary Compensation Table
<CAPTION>
<S> <C> <C> <C> <C> <C>
Long
Term
Name Compensa- All
and tion Other
Principal Annual Compensation Options Compen
Position Year Salary Bonus Awarded saation
Dale H.
Sizemore,
Jr. (a) 1998 $ -0- $ -0- -0- $ -0-
Chief 1997 $ -0- $ -0- -0- $ -0-
Executive 1996 $ -0- $ -0- -0- $ -0-
Officer
Christian T.
Hughes (b) 1998 $124,216 $ -0- -0- $ -0-
President 1997 $126,676 $36,000 37,500 $ 7,500
and Chief
Operating
Officer
Alfred F.
Marsh (c) 1996 $ 24,078 $ -0- -0- $ -0-
Former
President
and Chief
Executive
Officer
</TABLE>
51
(a) Dale H. Sizemore, Jr. became Chief
Executive Officer effective August 4,
1996.
(b) Christian T. Hughes became President and
Chief Operating Officer effective
September 16, 1996.
(c) Alfred F. Marsh served as President and
Chief Executive Officer during the period
of May 1 to August 3 of fiscal 1996.
Option Grants
There were no grants of stock options made to
any executive officers during the company's
last completed fiscal year.
Aggregated Option Exercises and Fiscal Year-End
Option Value Table
The following table sets forth the aggregate
stock option exercises made during the last
completed fiscal year and the fiscal year-end
option values for each of the named executive
officers.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<S> <C> <C> <C> <C>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Year- Fiscal Year-
Acquired Value End End
on Real- Exercisable/ Exercisable/
Name Exercise ized Unexercisable Unexercisable
Dale H.
Sizemore,
Jr. -0- $ -0- -0- $ -0-
-0- $ -0-
Christian T.
Hughes -0- $ -0- -0- $ -0-
37,500 $ -0-
</TABLE>
52
Compensation of Directors
During the fiscal year ended April 30, 1998,
Christian T. Hughes was compensated at the rate
of $100 per Board meeting attended. Ronald L.
Benjamin, Dr. Thomas L. Lyon, Jr., Dale H.
Sizemore, Jr., and Richard A. Sizemore were
compensated at the rate of $6,000 per fiscal
year, plus $600 per Board meeting attended, and
$400 per Committee meeting attended.
ITEM 11. Security Ownership of Certain
Beneficial Owners and Management
Certain Beneficial Owners
The following persons beneficially owned more
than 5% of the outstanding common stock of the
company as of August 7, 1998.
<TABLE>
<S> <C> <C> <C>
Name and Address Amount
of Beneficial Title of Beneficially Percent
Owner Class Owned of Class
Richard A. Sizemore Common 203,634 (a) 7.2%
Linda V. Sizemore
8356 Hallet
Lenexa, KS 66215
Sizemore Enterprises Common 200,506 (b) 7.1%
2705 W. 121st Terrace
Leawood, KS 66209
Gregory M. Sizemore Common 200,432 (c) 7.1%
Julie Sizemore
12735 Mohawk Circle
Lenexa, KS 66209
Peter B. Caloyeras Common 198,900 (d) 7.1%
Caloyeras Family
Partnership
2041 W. 139th Street
Gardena, CA 90249
Dale H. Sizemore, Jr. Common 177,923 (e) 6.3%
Carol J. Sizemore
2705 W. 121st Terrace
Leawood, KS 66209
Thomas E. Foster Common 176,600 (f) 6.3%
5506 Brite Drive
Bethesda, MD 20817
Paulette A. Durso Common 165,437 (g) 5.9%
3917 N.E. 59th St.
Kansas City, MO 64119
</TABLE>
53
(a) Richard A. Sizemore and Linda V. Sizemore
are husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 140,256 and
15,666 shares, respectively. Mr. Sizemore's
indirect ownership is 47,712 shares, which are
owned by Mr. Sizemore as trustee for his
children.
(b) Sizemore Enterprises is a general
partnership. The general partners are Dale H.
Sizemore, Jr., Paulette Durso, Gregory M.
Sizemore, and Richard A. Sizemore, who are
brothers and sister.
(c) Gregory M. Sizemore and Julie Sizemore are
husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 137,654 and
15,666 shares, respectively. Mr. Sizemore's
indirect ownership is 47,112 shares, which are
owned by Mr. Sizemore as trustee for his
children.
(d) Mr. Caloyeras' is the beneficial owner and
has the sole power to vote or to direct the
vote of the 198,900 shares held by the
Caloyeras Family Partnership (see Note Q of
Notes to the Consolidated Financial
Statements).
(e) Dale H. Sizemore, Jr. and Carol J. Sizemore
are husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 130,964 and
4,351 shares, respectively. Mr. Sizemore's
indirect ownership is 32,608 shares, which are
owned by Mr. Sizemore as trustee for his
children.
(f) Mr. Foster's direct ownership is 176,600
shares.
(g) Ms. Durso's direct ownership is 131,749
shares. Her indirect ownership is 33,688
shares, which are owned by Ms. Durso as trustee
for her children.
54
Management
The following table sets forth the
individuals serving on the Board of Directors,
the company's executive officers and
significant employees, and information with
respect to the number of shares of the
company's common stock beneficially owned by
each of them directly or indirectly, as of
August 7, 1998. The number of shares
beneficially owned includes shares, if any,
held in the name of the spouse, minor children,
or other relative of the individual living in
his home, as well as shares, if any, held in
the name of another person under an arrangement
whereby the individual enjoys the right to vote
or the use of the income, or whereby the
individual can vest or revest title in himself
at once or at some future time. The business
address of each person listed below is 13402
South 71 Highway, Grandview, Missouri 64030.
Dale H. Sizemore, Jr., both a Director and
executive officer, and Richard A. Sizemore, a
Director, are brothers (see Note Q of Notes to
Consolidated Financial Statements).
<TABLE>
<S> <C> <C> <C>
Name and Address Amount
of Beneficial Title of Beneficially Percent
Owner Class Owned of Class
Dale H Sizemore, Jr. Common 378,429 (a) 13.5%
Chairman of the Board
and Chief Executive
Officer
Christian T. Hughes Common -0- 0.0%
Director
President and Chief
Operating Officer
Ronald L. Benjamin Common -0- 0.0%
Director
Dr. Thomas L.
Lyons, Jr. Common 210 0.0%
Director
Richard A. Sizemore Common 404,140 (b) 14.4%
Director
H. James Serrone Common 10,273 (c) 0.4%
Vice President and
Chief Financial
Officer
Directors and
Executive Common 592,435 (d) 21.1%
Officers as a Group
(6 persons)
</TABLE>
54
(a) Dale H. Sizemore, Jr.'s beneficial
ownership includes 200,506 shares owned by
Sizemore Enterprises, a General Partnership in
which Mr. Sizemore is a general partner.
(b) Richard A. Sizemore's beneficial ownership
includes 200,506 shares owned by Sizemore
Enterprises, a General Partnership in which Mr.
Sizemore is a general partner.
(c) H. James Serrone's beneficial ownership
includes 3,357 shares which are acquirable
within 60 days pursuant to the exercise of
outstanding stock options.
(d) The beneficial ownership of all directors
and executive officers as a group includes
3,357 shares which are acquirable within 60
days pursuant to the exercise of outstanding
stock options. In addition, the percentage
ownership of the individuals identified in the
above table does not equal the percentage
ownership of all directors and executive
officers as a group because the 200,506 shares
owned by Sizemore Enterprises, a General
Partnership in which Dale H. Sizemore, Jr. and
Richard A. Sizemore are general partners, is
only included once in the total beneficial
ownership of 592,546 shares.
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, 1998, 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
55
the company's credit agreement with PNBT,
unless the bank has waived the default
condition prior to any payment. As of April
30, 1998, the aggregate amount due under the
note is $438,000, which consists of the
outstanding principal balance of $384,000 plus
accrued interest of $54,000. The company has
suspended all payments under the note due to
the reasons discussed in Note N of Notes to
Consolidated Financial Statements.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C> <C>
Page
Exhibit 21 Subsidiaries of
the Registrant 40
Exhibit 23 Consent of Independent
Certified Public
Accountants 41
Exhibit 99 Undertakings 42
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during
the fourth quarter of the year ended April 30,
1998.
56
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)
57
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
We have issued our report dated June 19, 1998,
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,
1998. 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
Kansas City, Missouri
August 11, 1998
58
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.
59
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.
60
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: August 11, 1998
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.
Dale H. Sizemore, Jr.
Chairman of the Board,
Chief Executive Officer
and Director
Date: August 11, 1998
By:: /s/ Christian T. Hughes
Christian T. Hughes
President, Chief Operating
Officer and Director
Date: August 11, 1998
By:: /s/ Ronald L. Benjamin
Ronald L. Benjamin
Director
Date: August 11, 1998
By:: /s/ Dr. Thomas L. Lyon, Jr.
Dr. Thomas L. Lyon, Jr.
Director
Date: August 11, 1998
61
By:: /s/ Richard A. Sizemore
Richard A. Sizemore
Director
Date: August 11, 1998
By:: /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
Date: August 11, 1998
62
