UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 1998
TOROTEL, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction of incorporation)
2-33256 44-0610086
(Commission File Number) (IRS Employer Identification No.)
13402 SOUTH 71 HIGHWAY, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices) (Zip Code)
(816) 761-6314
Registrant's telephone number, including area code
N/A
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS.
Torotel, Inc. announced today that it had entered into a letter of intent
for a possible merger with Caloyeras, Inc. d/b/a Electronika, Inc. (which will
also include the business and assets of its affiliate, Magnetika/East). This
manufacturer of magnetic components had sales of $1.8 million, and normalized
and adjusted pretax profits of $575,000 for its last fiscal year. These
unaudited results provided by Caloyeras, Inc.
In connection with this merger, Torotel would exchange (i) 1,800,000
shares of its common stock and (ii) $2,500,000 of a new class of preferred
stock (5% cumulative, non-participating), for 100% of the outstanding
securities of Caloyeras, Inc. In addition, the founder's family shareholders
of Torotel would form a voting trust or similar arrangement, pursuant to
which Peter Caloyeras would be allowed to vote 525,165 shares of common stock
of Torotel owned by such shareholders. As a result of these transactions,
Caloyeras would acquire more than fifty percent (50%) of the voting control
of Torotel, which presently has 2,811,590 outstanding shares. This
transaction is subject to, among other things, due dilligence, the negotiation
and execution of definitive agreements, and the approval of Torotel's
shareholders.
The statements contained herein 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. There can be no assurance
that the parties will consummate the transaction contemplated by the letter
of intent.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
Exhibit Description
1. Press Release dated July 28, 1998
2. Letter Agreemeoting control of Torotel, wh
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TOROTEL, INC.
By: /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
Date: July 29, 1998
EXHIBIT INDEX
EXHIBIT Description Page
1. Press release dated July 28, 1998 1
2. Letter Agreement dated July 24, 1998 2
Exhibit 1
NEWS BULLETIN
TOROTEL, INCORPORATED
FOR IMMEDIATE RELEASE
TUESDAY, JULY 28, 1998
TOROTEL REPORTS
LOWER SALES, AND LOSS FOR 1998;
SIGNS LETTER OF INTENT FOR
POSSIBLE MERGER WITH CALOYERAS, INC.;
DROPS BELOW AMEX GUIDELINES FOR CONTINUED LISTING
KANSAS CITY, MO, JULY 28 -- Torotel, Inc. (AMEX:TTL), a manufacturer of power
supplies and magnetic components for power conversion, today announced that,
as expected, lower sales and special charges resulted in a loss for its
fourth quarter and fiscal year ended April 30, 1998. The company also said
it signed a letter of intent for a possible merger with Caloyeras, Inc.,
using Torotel common and a new class of preferred shares to purchase 100
percent of Caloyeras' outstanding securities.
LOWER RESULTS FOR YEAR AND QUARTER
For fiscal 1998, net sales were $11.7 million compared with $14.7 million for
the prior year, down 20 percent. Sales at the Torotel Products subsidiary
were flat, at $6.1 million for both years. Increased sales of the potted
coil assembly for the Hellfire II missile nearly offset the affect of lower
shippable bookings seen in the last six months, and production inefficiencies
and technical design problems that delayed the shipment of other orders. The
OPT Industries subsidiary saw a 34 percent sales decrease. This primarily was
due to lower sales of power supplies to a major customer, which was disclosed
in the third quarter.
Consolidated gross profit as a percentage of net sales decreased 6 percent
due to labor inefficiencies at Torotel Products and lower sales volume
without a comparable decrease in fixed production costs at OPT.
While the company's selling, general and administrative expenses decreased 24
percent primarily due to the special charges described below, the decrease
was not enough to offset the lower sales and special charges. The result was
a consolidated net loss of $1.5 million, equal to 54 cents per diluted share,
for the latest year, compared with a loss of $1.2 million, equal to 42 cents
per diluted share, for fiscal 1997.
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TOROTEL, INC.
ADD ONE
Both years included unusual items. The current year contained $505,000 in
special charges: $68,000 in special legal fees resulting from Torotel
Products' ongoing Department of Defense (DOD) investigation first reported in
November 1996; a $70,000 charge for an additional estimated penalty arising
from the DOD investigation; $91,000 for legal fees and claim notice
publications associated with the class-action discrimination lawsuit; and
$276,000 to settle the suit. The company does not anticipate any additional
major charges related to the DOD investigation. (The aggregate amount of the
estimated penalty is $486,000, which has been accruedm and still is subject to
fluctuation as further evidence is investigated. The company does not expect
to pay any of the accrued penalty during the next 12 months) Unusual charges
of $1.5 million in fiscal 1997 included: $277,000 for restructuring Torotel
Products; $203,000 in legal fees and the $416,000 estimated penalty both
related to the DOD investigation; a $506,000 non-cash charge for the
cumulative effect of a change in accounting method for revenue recognition;
and assorted costs of $107,000 involved in a proposed majority ownership by
Brockson Technologies (which was terminated).
For the three months ended April 30, 1998, net sales were $2.6 million, down
21% from $3.3 million for last year's fourth quarter. Gross profit as a
percentage of net sales was down 13 percent primarily due to OPT's lower
sales volume. Selling, general and administrative expenses were 26 percent
lower due to the special charges in fiscal 1997. The net loss for the latest
quarter was $1.0 million, equal to 36 cents per diluted share, compared with
a loss of $616,000, equal to 22 cents per diluted share, at this time last
year. The most recent quarter was affected by $333,000 in special charges,
while the 1997 quarter saw $610,000.
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. The bank has waived compliance with these provision
through August 31, 1998, which is the expiration date of the revolving credit
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. If the bank decides not to renew the credit line, it could
affect Torotel's ability to continue as a going concern; this statement will
also be reflected on the independent auditor's report to be filed with form
10-KSB. While the company may be able to find an alternate source for
financing, it would likely be short-term in nature, carry substantially higher
costs and lending rates, and be much more restrictive for liquidity purposes.
OUTLOOK IMPROVES FOR SECOND HALF OF FISCAL 1999
Chief Operating Officer Christian (Chris) T. Hughes said, "As expected, the
effects of lower sales, fixed expenses and special charges more than offset
the benefits from our cost controls, and we posted a loss for the year.
"We believe the operational problems faced by Torotel Products' conversion to
the computerized Information/MRP System, which caused delays in shipping, are
behind us,"
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TOROTEL, INC.
ADD TWO
Hughes continued. "This system already has helped us get a better handle on
manpower and work scheduling, which will increase our efficiency goin
forward. In addition, this operation should not see the level of unusual
items and charges in fiscal 1999 that it experienced in 1997 and 1998, which
means it should post a profit for the coming year.
"The outlook for OPT is not quite as clear. Sales to its largest customer
have been put on hold indefinitely. This means its performance in the first
quarter will be similar to the fourth. While OPT's new line of power supplies
have generated bookings, we will not begin to see revenues from this until
the second half and, for the near term, this business cannot offset the loss
of our major customer. In the meantime, we are working hard to keep costs
under control and book new business," said Hughes.
LETTER OF INTENT SIGNED FOR POSSIBLE MERGER
The company also announced today it 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.
These unaudited results provided by Caloyeras, Inc.
In connection with this merger, Torotel 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 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 owned by such shareholders. As a result of transactions, the
Caloyeras family would acquire more than 50 percent of the voting control of
Torotel, which presently has 2,811,590 outstanding shares. This transaction
is subject to, among other things, due dilligence, the negotiation and
execution of definitive agreements, and the approval of Torotel's
shareholders. There can be no assurance that the parties will consumate the
transaction contemplated be the letter of intent.
ADDITIONAL DISCLOSURES
Torotel announced it would be filing a Form 12b-25, Notification of Late
Filing, as its annual report on Form 10-KSB would not be filed until
August 12, 1998 (if not sooner). This occurred because information required
from third parties was not received in a timely manner for management to
prepare certain disclosures plus allow time for the company's independent
auditors to review them. In addition, company personnel have spent time
researching and preparing materials for use in negotiating the proposed
transaction with Caloyeras, Inc.
The company also stated that based on its operating results and balance
sheet for the fiscal year ended April 30, 1998, it is below the American
Stock Exchange's guidelines for continued listing. There is no assurance
that Torotel's common stock will continue to be listed.
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TOROTEL, INC.
ADD THREE
Torotel, Inc. specializes in the design and manufacture of high-power, high
reliability, high density switching power supplies, rack mounted power
systems, and a broad range of precision magnetic components used in
commercial, industrial and military electronics. Torotel's products are sold
to original equipment manufacturers for use in computers, telecommunications
systems, digital control devices, and avionics equipment. The company has a
base of more than 700 customers, most in the U.S.
This news release includes 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
U.S. Department of Defense calling for payment of current thermal testing
penalties and assessing additional fees. Other risk factors are detailed from
time to time in Torotel's Securities and Exchange Commission Filings.
FINANCIAL TABLES FOLLOW
TOROTEL, INC.
ADD FOUR
TOROTEL, INC.
CONDENSED STATEMENT OF OPERATIONS
(In Thousands, Except per Share)
<TABLE>
Condensed Statement of Operation
<CAPTION>
(Audited) (Unaudited)
Fiscal Year Ended Three Months Ended
April 30, April 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $11,738 $14,670 $ 2,619 $ 3,329
Gross profit $ 2,437 $ 3,892 $ 324 $ 846
Selling, General and Administrative Expenses $ 2,345 $ 3,084 $ 572 $ 770
Earnings (Loss) from Operations $ (671) $ 36 $ (430) $ (126)
Earnings (Loss) Before Income Taxes
and Cumulative Effect of Change
in Method of Accounting $ (1,295) $ (659) $ (779) $ (616)
Cumulative Effect of Accounting Change $ - $ (506) $ - $ -
Net Earnings (Loss) $ (1,523) $ (1,165) $ (1,007) $ (616)
Basic Earnings (Loss) per Share:
Earnings (Loss) Before Cumulative Effect $ (.54) $ (.24) $ (.36) $ (.22)
Cumulative Effect $ - $ (.18) $ - $ -
$ (.54) $ (.42) $ (.36) $ (.22)
Diluted Earnings (Loss) per Share:
Earnings (Loss) Before Cumulative Effect $ (.54 $ (.24) $ (.36 $ (.22)
Cumulative Effect $ - $ (.18) $ - $ -
$ (.54) $ (.42) $ (.36) $ (.22)
</TABLE>
<TABLE>
Condensed Balance Sheet
(Audited)
<CAPTION>
April 30,
1998 1997
<S> <C> <C>
Working Capital $ 1,943 $ 2,259
Current Ratio 1.65:1 1.77:1
Total Assets $ 6,521 $ 7,279
Short-term Debt $ 1,845 $ 1,516
Long-term Debt $ 2,019 $ 1,367
Total Liabilities $ 5,487 $ 4,724
Debt-to-Equity 5.31:1 1.85:1
Stockholders' Equity $ 1,034 $ 2,555
</TABLE>
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Exhibit 2
LETTER AGREEMENT
Letter Agreement dated as of July 24, 1998, by and between Torotel, Inc., a
Missouri corporation, and Caloyeras, Inc. a California corporation.
1. General. The Proposed Terms Sheet attached to this letter and
incorporated herein by reference sets forth the proposal discussed between us
for a merger of a newly created subsidiary of Torotel, Inc. with Caloyeras,
Inc. (Caloyeras, Inc., d/b/a Electronika, Inc., will also include the
business and assets operating under the name of Magnetika/East). This
letter, and the Proposed Terms Sheet (collectively, the "Proposal"),
represents the parties' intention to negotiate in good faith a definitive
Merger Agreement and all of the documents ancillary thereto (the Definitive
Agreements), which will reflect in substance the Proposed Terms Sheet. The
parties acjknowledge that tax and accounting issues may require modification
of the structure contemplated by the Proposed Terms Sheet.
2. Due Diligence Access. The parties agree to allow each other and their
respective representatives access to the books and records (including without
limitation information related to financial, accounting, commercial, legal,
environmental, regulatory and employee benefits matters) of each other for
purposes of conducting a due diligence review and confirming their
understandings as to the status of each other's business, assets and related
liabilities. In connection therewith, the parties and their respective
representatives will be promptly introduced to, and thereafter permitted to
contact and communicate with, upon prior notice to and consent of each other
(which consent shall not be unreasonably withheld, delayed or conditioned),
the other's officers, employees and agents.
3. Definitive Agreements. The parties will proceed diligently and in good
faith to negotiate, execute and deliver the Definitive Agreements, subject in
all respects to (i) the approval of the parties hereto, (ii) verification of
legal and factual issues deemed relevant by the parties, (iii) receipt of
requisite regulatory and other third party approvals and consents and (iv)
the satisfaction of the conditions precedent described in the Proposed Terms
Sheet. The Definitive Agreements will contain such representations and
warranties, agreements and covenants, conditions and indemnification
provisions as are customarily found in agreements for a transaction of the
size, type and complexity contemplated by this Proposal.
4. Expenses. Each party will bear its own respective costs and expenses in
connection with the proposed transaction, including without limitation the
negotiation and preparation of this Proposal, the negotiation and drafting
of the Definitive Agreements, financial advisory fees, finders fees and the
obtaining of all regulatory and other approvals or consents.
5. No Binding Obligation. This proposal is an expression of the intent of
the parties only and is subject to due diligence review and to the other
terms and conditions set forth herein. Except as expressly set forth in
Paragraph 2 and 4, this Proposal does not constitute or create, and shall not
be deemed to constitute or create, legally binding or enforceable obligations
on the part of any party hereto. No such obligation shall be created, except
by the execution and delivery of the Definitive Agreements containing such
terms and conditions of the proposed transaction as shall be agreed upon by
the parties, and then only in accordance with the terms and conditions of the
Definitive Agreements.
Torotel, Inc.
By: /s/ Dale H. Sizemore, Jr.
Name: Dale H. Sizemore, Jr.
Title: Chairman of the Board
Caloyeras, Inc.
By: /s/ W. Edgar Jessup, Jr.
Name: W. Edgar Jessup, Jr.
Title: Assistant Secretary
TOROTEL, INC.
Proposed Terms Sheet
(July 24, 1998)
BUYER: Torotel, Inc. ("TTL")
SELLER(S): Caloyeras, Inc., (dba Electronika, Inc.) which will include the
business and assets operating under the name of Magnetika/East
("Target").
PROPOSED
TRANSACTION: A newly created subsidiary of TTL will merge with the Target in
a Forward Triangular Merger (as a tax free reorganization under
Section 368 (a) (2) (D) with the Target being the surviving
entity.The Target will own all business assets of Caloyeras,
Inc. (dba Electonika, Inc.) including the business and assets
operating under the name of Magnetika/East free and clear of all
liens and encumbrances, except for accruals and payables
incurred in the normal course of business. TTL will exchange (1)
1,800,000 shares of TTL's common stock and (2) $2,500,000 of
TTL's new Class A Preferred Stock (5%, Cumulative,
non-participating Preferred, callable at 110%, escrowed - see
below) for 100% of the outstanding stock of Target.
PRICE: The value of the Common Stock (1,800,000 x $.75 = $1,350,000)
plus the $2,500,000 in Preferred Stock [escrowed - see below]
equals a total purchase price for Target of Three Million, Eight
Hundred Fifty Thousand Dollars ($3,850,000).
EARNINGS
PROTECTION: In order to protect the shareholders of TTL, the operations of
Target will be accounted separately for the balance of the fiscal
year of closing plus three full fiscal years after the year in
which the closing occurs ("Escrow Period"). At closing, the
$2,500,000 of Preferred Stock will be placed in escrow subject to
the performance of Target during the Escrow Period. At the end
of each fiscal year in the Escrow Period, the Preferred Stock
will be released from escrow as follows:
The amount of EBIT-DA generated by Target, after the merger, during each
fiscal year, will be calculated and verified by the independent auditors.
B) For each One Dollar ($1) of EBIT-DA calculated in (A) One Dollar ($1)
of Preferred Stock will be released from escrow within 30 days
following the independent auditors verification of the calculation.
3) After final year end of the Escrow Period, any Preferred Stock
remaining in escrow, will be returned to TTL and canceled.
REPS &
WARRANTIES: In the definitive agreements, both parties will make normal and
customary Representations and Warranties for a transaction of this type. In
addition, Target will warrant that they will own at least Four Hundred
Thousand Dollars ($400,000) of Cash, Accounts Receivable, Inventory, Work In
Process and Deposits, in excess of liabilities, at the time of closing.
Within twelve months after closing, any amount of assets at closing that are
determined to have been worthless or any liability of Target that was not
disclosed, will reduce EBITDA for purposes of the calculation of the amount
of Preferred Stock to be released from escrow.
VOTING
TRUST: At closing, a voting trust (or similar arrangement) will be formed to
allow Peter Caloyeras to vote 525,165 shares of common stock owned by the
Sizemore Family. This trust will provide that Mr Caloyeras has the power to
vote these shares for the Escrow Period. At the end of the escrow period,
the trust will be liquidated and the voting rights will revert to the
Sizemore Family. Both the Sizemore Family and Mr. Caloyeras will mutually
agree on the trustee of the trust and on a list of specific matters on which
Mr. Caloyeras may not vote the trusts shares.
REQUIRED
STEPS: The transaction is subject to the following steps:
A) Further Due Diligence by both parties.
B) Mutually acceptable definitive agreements.
C) A fairness opinion from an independent Investment Banker.
D) Approval by both parties Board of Directors.
E) Approval by the Securities and Exchange Commission.
F) A shareholder vote approving the transaction
EXPECTED
CLOSING DATE: October 1, 1998 or as soon as possible.
SCOPE OF
TERMS SHEET: The scope of this Proposed Terms Sheet is limited to being a
basis on which to discuss and negotiate a potential transaction between the
parties. It is not intended, nor is it to be considered, an offer to buy or
sell stock of any party.
CONFIDENTIALITY: This document and all discussions surrounding it are
Strictly Confidential and subject to the written confidentiality agreement
between the parties.
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0488749.01
