FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1999
Commission File No. 1-8125
TOROTEL, INC.
(Exact name of small business issuer as
specified 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, MISSOURI 64030
(Address of principal executive offices)
(816) 761-6314
(Issuers telephone number)
NONE
(Former name, former address and former fiscal year,
if change since last report)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of November 30, 1999, there were 2,811,590 shares of
Common Stock, $.50 Par Value, outstanding.
TOROTEL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1999
Consolidated Statements of Operations for
the six months ended October 31, 1999 and 1998
Consolidated Statements of Operations for
the three months ended October 31, 1999 and 1998
Consolidated Statements of Cash Flows for
the six months ended October 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Managements Discussion and Analysis or
Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET (Unaudited)
As of October 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 127,000
Accounts receivable, net 305,000
Interest income receivable (Note 10) 3,000
Inventories (Note 3) 248,000
Prepaid expenses and other current assets 62,000
745,000
Property, plant and equipment, net 452,000
Note receivable (Note 10) 441,000
Other assets 7,000
$ 1,645,000
LIABILITIES AND STOCKHOLDERS DEFICIT
Current liabilities:
Current maturities of long-term
debt (Notes 5 and 10) $ 425,000
Trade accounts payable (Note 10) 989,000
Accrued liabilities (Note 10) 249,000
1,663,000
Long-term debt, less current maturities
(Notes 5 and 10) 415,000
Note and interest payable to former
officer (Note 9) 500,000
Estimated government penalty (Note 9) 486,000
Commitments and contingencies (Note 9) -
Stockholders deficit (Notes 6, 7 and 8):
Common stock, at par value 1,442,000
Capital in excess of par value 8,672,000
Accumulated deficit (11,328,000)
(1,214,000)
Less treasury stock, at cost 205,000
(1,419,000)
$ 1,645,000
</TABLE>
The accompanying notes are an integral
part of this statement.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended October 31,
<TABLE>
<S> <C> <C>
1999 1998
Net sales $ 1,663,000 $ 2,877,000
Cost of goods sold 1,205,000 2,242,000
Gross profit 458,000 635,000
Operating expenses:
Engineering 90,000 126,000
Selling, general
and administrative 386,000 618,000
476,000 744,000
Loss from operations (18,000) (109,000)
Other expense (income):
Interest expense 56,000 45,000
Interest income (18,000) -
38,000 45,000
Loss from continuing
operations before
provision for income
taxes (56,000) (154,000)
Provision for income
taxes (Note 4) - -
Loss from continuing
operations (56,000) (154,000)
Discontinued operations
(Notes 10 and 11):
Loss from operations of
discontinued subsidiary - (972,000)
Gain on sale of
product line - 984,000
- 12,000
Net loss $ (56,000) $ (142,000)
Basic loss per share
(Note 6):
Continuing operations $ (.02) $ (.05)
Discontinued operations - .00
$ (.02) $ (.05)
Diluted loss per share
(Note 6):
Continuing operations $ (.02) $ (.05)
Discontinued operations - .00
$ (.02) $ (.05)
</TABLE>
The accompanying notes are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended October 31,
<TABLE>
<S> <C> <C>
1999 1998
Net sales $ 874,000 $ 1,285,000
Cost of goods sold 597,000 968,000
Gross profit 277,000 317,000
Operating expenses:
Engineering 45,000 62,000
Selling, general and
administrative 194,000 287,000
239,000 349,000
Earnings (loss) from
operations 38,000 (32,000)
Other expense (income):
Interest expense 27,000 22,000
Interest income (9,000) -
18,000 22,000
Earnings (loss) from
continuing operations
before provision for
income taxes 20,000 (54,000)
Provision for income
taxes (Note 4) - -
Earnings (loss) from
continuing operations 20,000 (54,000)
Discontinued operations
(Notes 10 and 11):
Loss from operations of
discontinued subsidiary - (476,000)
Gain on sale of product
line - 984,000
- 508,000
Net earnings $ 20,000 $ 454,000
Basic earnings (loss)
per share (Note 6):
Continuing operations $ .01 $ (.02)
Discontinued operations - .18
$ .01 $ .16
Diluted earnings (loss)
per share (Note 6):
Continuing operations $ .01 $ (.02)
Discontinued operations - .18
$ .01 $ .16
</TABLE>
The accompanying notes are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended October 31,
<TABLE>
<S> <C> <C>
1999 1998
Cash flows from
continuing operating
activities:
Net loss $ (56,000) $ (142,000)
Adjustments to
reconcile net loss to
net cash provided by
continuing operations:
Loss from operations
of discontinued
subsidiary - 972,000
Gain on sale of product
line - (984,000)
Depreciation and
amortization 56,000 73,000
Increase (decrease) in
cash flows from
continuing operations
resulting from changes
in:
Accounts receivable 132,000 689,000
Interest income receivable (3,000) -
Inventories 174,000 44,000
Prepaid expenses and
other assets (49,000) (144,000)
Trade accounts payable 5,000 (41,000)
Accrued liabilities (17,000) (129,000)
Net cash provided by
continuing operating
activities 242,000 338,000
Cash flows from
investing activities:
Capital expenditures (2,000) (37,000)
Proceeds from sale of
product line - 1,250,000
Net cash provided by
(used in) investing
activities (2,000) 1,213,000
Cash flows from financing
activities:
Borrowings against credit
line - 1,692,000
Payments against credit
line - (2,050,000)
Principal payments on
long-term debt (175,000) (90,000)
Payments on capital lease
obligations (10,000) (12,000)
Note and interest payable
to former officer 21,000 20,000
Proceeds from issuance of
common stock - 1,000
Net cash used in
financing activities (164,000) (439,000)
Net cash used in
discontinued operations - (1,085,000)
Net increase in cash 76,000 27,000
Cash at beginning of year 51,000 46,000
Cash at end of October $ 127,000 $ 73,000
Supplemental Disclosures
of Cash Flow Information
Cash paid during the
period for:
Interest $ 36,000 $ 150,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral
part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
Torotel specializes in the custom design and
manufacture of a wide variety of precision magnetic
components, consisting of transformers, inductors, reactors,
chokes and toroidal coils. Approximately 97% of Torotels
sales are derived from domestic customers. The accompanying
unaudited consolidated financial statements reflect the
normal recurring adjustments which are, in the opinion of
management, necessary to present fairly Torotels financial
position at October 31, 1999, and the results of operations
for the three and six months ended October 31, 1999.
Certain reclassifications have been made to the
previous years consolidated financial statements in order to
conform to the presentations made in the current year.
The financial statements contained herein should be
read in conjunction with Torotels financial statements and
related notes filed on Form 10-KSB for the year ended April
30, 1999.
Note 2 - Realization of Assets
The accompanying consolidated financial statements have
been prepared in conformity with generally accepted
accounting principles, which contemplate continuation of
Torotel as a going concern. Torotel has sustained
substantial operating losses in the last three fiscal years,
and has used, rather than provided, cash in its overall
operations in the last two years. While Torotels continuing
operations have provided cash in the last two years and in
the first half of fiscal year 2000, the operation does not
anticipate any substantial change in its current sales
volume. In addition, Torotel incurred substantial
liabilities as a result of the terminated merger with
Electronika, Inc., and its discontinued subsidiary, East
Coast Holdings, Inc. (formerly named OPT Industries, Inc.),
has a significant amount of trade debt remaining from its
operations (see Note 10 of Notes to Consolidated Financial
Statements). At the present time, Torotel is operating
without a revolving credit line, and there is no assurance
that such a lending arrangement will be attained in the near
future. Management believes that achieving profitability
from the lower sales volume will be the most critical
component for continuing as a going concern. Management
believes it has developed a business strategy that offers
the best chance for long-term success.
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 the continued operations of Torotel,
which in turn is dependent upon Torotels ability to meet its
financing requirements on a continuing basis, to maintain
present financing, and to succeed in its future operations.
The consolidated financial statements do not include any
adjustment relating to the recoverability and classification
of recorded asset amounts or amounts and classification of
liabilities that might be necessary should Torotel be unable
to continue in existence.
Note 3 - Inventories
The components of inventories are summarized as
follows:
<TABLE>
<S> <C>
Raw materials $ 33,000
Work in process 126,000
Finished goods 89,000
$ 248,000
</TABLE>
Note 4 - Income Taxes
The company has net operating loss carryforwards
available as benefits to reduce future income taxes, subject
to applicable limitations. These operating loss
carryforwards expire in various amounts in the years 2000
through 2014.
The difference between the financial and tax bases of
assets and liabilities is determined annually. Deferred
income taxes and liabilities are computed for those
differences that have future tax consequences using the
currently enacted tax laws and rates that apply to the
periods in which they are expected to effect taxable income.
Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will, more
likely than not, be realized. Income tax expense is the
current tax payable or refundable for the period plus or
minus the net change in the deferred tax assets or
liabilities.
The following table summarizes the components of the
net deferred tax asset:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 3,043,000
Inventory valuation reserve 181,000
Tax credit carryforwards 55,000
Other 50,000
3,329,000
Less valuation allowance 3,329,000
$ -
</TABLE>
Note 5 - Financing Agreements
Under the terms of a loan agreement with Phillipsburg
National Bank & Trust Company (PNBT), Torotel is required to
comply with certain covenants. As of October 31, 1999,
Torotel was not in compliance with a maximum leverage ratio,
a quick ratio and a current ratio covenant. However, PNBT
will be reviewing and resetting these financial ratio
covenants for fiscal year 2000 based on the revised
corporate structure subsequent to the sale of OPT assets.
For reporting purposes, the outstanding loan balance of
$308,000 is classified as a current maturity of long-term
debt in the accompanying consolidated balance sheet.
As part of the 1998 settlement that ended a class action,
Torotel entered into an unsecured promissory note for
$200,000. The terms of the note require eight quarterly
installments of $25,000, the first six of which were to be
interest-free. Torotel has paid four of the installments
plus $16,000 toward the fifth installment. In an effort to
preserve cash, Torotel has reached an agreement with the
Torotel Settlement Fund to defer installment payments
presently due in the amount of $34,000 in return for bi-
monthly interest payments at an annual rate of 4.6% on the
deferred portion. Per the agreement, Torotel shall pay the
deferred amount as its cash flow permits, but no later than
May 4, 2003, which is the maturity date of the note.
Note 6 - Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, requires dual presentation of basic
and diluted EPS on the face of the statement of earnings
regardless of whether basic and diluted EPS are the same;
and requires a reconciliation of the numerator and
denominator used in computing basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion 15. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared
in the earnings of the entity. Pursuant to SFAS No. 128,
the basic and diluted loss per common share were computed as
follows:
<TABLE>
<S> <C> <C>
Year-to-Date EPS Calculations 1999 1998
Net loss $ (56,000) $ (142,000)
Weighted average common
shares outstanding 2,811,590 2,811,288
Incremental shares - -
Basic loss per share $ (.02) $ (.05)
Diluted loss per share $ (.02) $ (.05)
</TABLE>
No incremental shares are included in the EPS calculations
due to the net loss in each period.
<TABLE>
<S> <C> <C>
Quarterly EPS Calculations 1999 1998
Net earnings $ 20,000 $ 454,000
Weighted average common
shares outstanding 2,811,590 2,811,590
Incremental shares - 85,766
Basic earnings per share $ .01 $ .16
Diluted earnings per share $ .01 $ .16
</TABLE>
No incremental shares are included in the EPS calculations
for 1999 since the exercise price of the common stock
equivalents is substantially higher than the current market
value of Torotels common stock.
Note 7 - Employee Stock Options
In accordance with the Incentive Compensation Plan
approved by shareholders on September 19, 1994, Torotel
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. 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 Torotels common stock on
the date of grant. Accordingly, no compensation cost will
be recognized upon the grant of any options. Had
compensation cost for the Plan been determined based on the
fair value of the options at the grant dates consistent with
the method of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, Torotels
operating results would have been reduced to the pro forma
amounts indicated as follows:
<TABLE>
<S> <C> <C> <C>
Year-to-Date 1999 1998
Loss from
continuing
operations As Reported $ (56,000) $ (154,000)
Pro Forma $ (56,000) $ (189,000)
Basic loss
per share
from
continuing
operations As Reported $ (.02) $ (.05)
Pro Forma $ (.02) $ (.07)
Diluted loss
per share
from
continuing
operations As Reported $ (.02) $ (.05)
Pro Forma $ (.02) $ (.07)
Quarterly 1999 1998
Earnings (loss)
from
continuing
operations As Reported $ 20,000 $ (54,000)
Pro Forma $ 20,000 $ (54,000)
Basic earnings
(loss) per
share from
continuing
operations As Reported $ .01 $ (.02)
Pro Forma $ .01 $ (.02)
Diluted
Earnings
(loss) per
share from
continuing
operations As Reported $ .01 $ (.02)
Pro Forma $ .01 $ (.02)
</TABLE>
The fair values of the options granted were estimated on the
date of grant using the Black-Scholes options-pricing model.
The fair value of the incentive stock options was determined
using the following weighted average assumptions: no
dividend payments over the life of the options; expected
volatility of 106.1%; risk-free interest rate of 6.94%; and
expected life of five years. The fair value of the non-
qualified stock options was determined using the following
weighted average assumptions: no dividend payments over the
life of the options; expected volatility of 106.1%; risk-
free interest rate of 6.6%; and expected life of ten years.
Stock option transactions under the 1994 Incentive
Compensation Plan for each period are summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding at
beginning of year 7,500 $1.00 150,000 $1.00
Granted - - - -
Exercised - - - -
Forfeited - - - -
Outstanding at
end of October 7,500 $1.00 150,000 $1.00
Options exercisable
at end of October 7,500 $1.00 - -
Weighted average
fair value of
options granted
during the year - -
</TABLE>
The following information applies to options outstanding at
October 31, 1999:
<TABLE>
<S> <C>
Number outstanding 7,500
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 2.1 yrs.
</TABLE>
Note 8 - Stock Warrants
Pursuant to a settlement that ended a class action
alleging racial discrimination in hiring by Torotel
Products, Inc., Torotel agreed to issue a warrant
certificate to the Torotel Settlement Fund to purchase
100,000 shares of Torotel, Inc. common stock at $.75 per
share. The warrant is 100% vested upon issuance and cannot
be exercised until the market price of the companys common
stock reaches $2.00 per share. The warrant expires on May
4, 2003.
The $33,000 fair value of the warrant was estimated on
the date of grant using the Black-Scholes options-pricing
model using the following weighted average assumptions: no
dividend payments over the life of the warrant; expected
volatility of 75.9%; risk-free interest rate of 5.8%; and
expected life of two years.
Stock warrant transactions for each period are
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding at
beginning of year 100,000 $ .75 - -
Granted - - 100,000 $ .75
Exercised - - - -
Forfeited - - - -
Outstanding at
end of October 100,000 $ .75 100,000 $ .75
Warrants
exercisable at
end of October - - - -
Weighted average
fair value of
warrants granted
during the year - $ .33
</TABLE>
The following information applies to warrants outstanding at
October 31, 1999:
<TABLE>
<S> <C>
Number outstanding 100,000
Range of exercise prices $ .75
Weighted average exercise price $ .75
Weighted average remaining contractual life 3.5 yrs.
</TABLE>
Note 9 - Contingency for Estimated Penalty
On May 6, 1997, Torotel Products, Inc. was accepted
into the Voluntary Disclosure Program of the United States
Department of Defense, resulting from its failure to perform
some required thermal shock testing as frequently as
required, and inaccurately certifying that all required
testing had been performed. As a result of Torotels
investigation into the thermal shock deficiencies, which was
first reported in November 1996, Torotel 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, Torotel subsequently
determined that there also were some deficiencies in
performing some required electrical testing as frequently as
required. As a result, Torotel recorded an additional
estimated charge of $70,000 against earnings in the first
quarter of its fiscal year ended April 30, 1998.
Torotels investigation included a review of historical sales
and pricing data, labor bid sheets, and interviews with past
and present employees, to arrive at a best estimate of the
cost impact to the government. The aggregate amount of the
estimated penalty is still subject to fluctuation until the
government completes its investigation, and a definitive
amount is determined. Torotel believes the methodology it
used to determine the amount of the estimate is reasonable.
As a result, the amount of any additional charges (or the
possible range of any fluctuation in the estimated penalty)
cannot be estimated at this time.
At this time, Torotel is not certain when payment of
the damage amount will be required; however, it does not
anticipate making any payments during the next twelve
months. As a result, the entire $486,000 has been
classified as a long-term liability in the accompanying
consolidated balance sheet.
Torotel 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, Torotel has suspended all principal and
interest payments due under a note payable to a former
officer, and does not anticipate making any further payments
during the next twelve months. As a result, as of October
31, 1999, the aggregate amount due of $500,000, which
consists of the outstanding principal of $384,000 plus the
accrued interest of $116,000, 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 $2,000 during the current fiscal year,
$1,000 in fiscal 1999, and $274,000 in aggregate since the
investigation started in the third quarter of the fiscal
year ended April 30, 1997.
Note 10 - Discontinued Subsidiary
The operations of East Coast Holdings, Inc. (formerly named
OPT Industries, Inc.), a wholly owned subsidiary of Torotel,
were discontinued in April 1999, and the assets sold to
SIGMA Associates, L.L.C.
OPTs operating results are shown separately as
discontinued operations in the accompanying consolidated
statements of operations. The remaining assets and
liabilities related to OPT as of
October 31, 1999, are included in the accompanying
consolidated balance sheet under the following captions and
in the amounts shown:
<TABLE>
<S> <C>
Cash $ 1,000
Interest income receivable $ 3,000
Note receivable $ 441,000
Trade accounts payable $ 496,000
Accrued liabilities $ 145,000
Long-term debt $ 308,000
</TABLE>
OPTs net sales for the three and six months ended
October 31, 1998, were $731,000 and $1,772,000,
respectively.
Note 11 - Product Line Sale
On September 18, 1998, OPT completed the sale of its
ultra-miniature transformer and inductor product line to
Pico Electronics, Inc. of Pelham, New York. Pursuant to the
Asset Purchase Agreement, OPT received cash proceeds of
$1,250,000 in return for all assets related to the product
line including inventory, raw materials, work in process,
finished goods, backlog, fixed assets, intellectual
property, goodwill, contracts and rights, whether tangible
and intangible of every kind and description.
As part of the Agreement, Torotel agreed that neither
it nor any related entity shall re-establish any of the
product line sold to Pico, nor shall Torotel nor any related
entity modify any of its existing products to render the
same mechanically and/or electrically interchangeable or
substantially interchangeable with any of the products sold
to Pico. The sale of the product line resulted in a gain of
$984,000.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The following management comments regarding Torotels
results of operations and outlook should be read in
conjunction with the Consolidated Financial Statements
included pursuant to Item 1 of this Quarterly Report.
Due to the sale of substantially all of the assets of East
Coast Holdings, Inc. (see Note 10 of Notes to Consolidated
Financial Statements), the discussion and analysis of the
results of operations includes only the continuing
operations of Torotel, Inc. and its subsidiary, Torotel
Products, Inc.
SIX MONTHS ENDED OCTOBER 31, 1999 VERSUS SIX MONTHS ENDED
OCTOBER 31, 1998
Net sales decreased 42% from $2,877,000 to $1,663,000
due to less demand for Torotels magnetics products. The
decrease in demand is the result of fewer ongoing Department
of Defense programs for missile systems, and a cyclical
decline in the aerospace industry. In recent years, sales
of the potted coil assembly for the Hellfire II missile
system accounted for about 25% of Torotel Products total
sales; however, future sales of the potted coil assembly
will be significantly lower and limited only to the number
of Hellfire II missiles sold to foreign countries by the
prime contractor(s). As a result of this factor, plus the
lower demand for magnetics products, lower sales are
expected in fiscal year 2000.
Gross profit as a percentage of net sales increased
nearly 6% due to improved labor productivity resulting from
better training efforts, plus greater emphasis on cycle time
reduction and building fewer overages. The improved labor
performance was offset partially by the affect of lower
sales volume without a comparable decrease in fixed
production costs.
Engineering expenses decreased nearly 29% from $126,000
to $90,000 due to a decrease in payroll costs due to a
reduction in personnel. Management does not anticipate any
significant change in the present level of engineering
expenses during the next quarter, but does anticipate a
reduction in the fourth quarter.
Selling, general and administrative (SG&A) expenses
decreased nearly 38%. The SG&A expenses of Torotel, Inc.
decreased 44% from $95,000 to $53,000 due to a $22,000
decrease in professional fees, a $6,000 decrease in
directors fees, a $4,000 decrease in real estate taxes, a
$4,000 decrease in AMEX fees, a $3,000 decrease in investor
relations costs, and a $3,000 decrease in travel costs. The
SG&A expenses of Torotel Products decreased 36% from
$523,000 to $333,000 due to a concerted effort to reduce
costs and preserve cash. Major spending changes include an
$88,000 decrease in payroll costs due to a reduction in
personnel, a $16,000 decrease in professional fees due to
the settlement of the litigation that was ongoing in the
prior year, a $10,000 decrease in hazardous waste disposal
costs, a $9,000 decrease in advertising costs, a $9,000
decrease in utilities costs, and a $9,000 decrease in
building maintenance costs. Other reductions include an
$11,000 decrease in depreciation expense, an $8,000 decrease
in sales commissions due to lower sales volume, a $6,000
decrease in copier costs due to a restructured lease, a
$5,000 decrease in supervisory and diversity training, and
other smaller spending decreases. Management does not
anticipate any significant change in the present level of
SG&A expenses during the next quarter, but does anticipate a
reduction in the fourth quarter.
Interest expense increased nearly 24%. The interest
expense of Torotel, Inc. increased 70% from $20,000 to
$34,000 due to the interest incurred on the guaranteed note
with PNBT. The interest expense of Torotel Products
decreased 12% from $25,000 to $22,000 due to a lower
aggregate borrowing level.
Interest income increased $18,000 due to the interest
earned on the note receivable from SIGMA Associates, L.L.C.
which was part of the consideration received from the sale
of substantially all the assets of East Coast Holdings, Inc.
(formerly named OPT Industries, Inc.).
For the reasons discussed above, the consolidated
pretax loss decreased from $154,000 to $56,000. The pretax
loss of Torotel, Inc. decreased from $115,000 to $69,000.
The pretax earnings of Torotel Products increased from a
loss of $39,000 to a profit of $13,000.
THREE MONTHS ENDED OCTOBER 31, 1999 VERSUS THREE MONTHS
ENDED OCTOBER 31, 1998
Net sales decreased 32% from $1,285,000 to $874,000 due
to less demand for Torotels magnetics products. The
decrease in demand is the result of fewer ongoing Department
of Defense programs for missile systems, and a cyclical
decline in the aerospace industry. In recent years, sales
of the potted coil assembly for the Hellfire II missile
system accounted for about 25% of Torotel Products total
sales; however, future sales of the potted coil assembly
will be significantly lower and limited only to the number
of Hellfire II missiles sold to foreign countries by the
prime contractor(s). As a result of this factor, plus the
lower demand for magnetics products, lower sales are
expected in fiscal year 2000.
Gross profit as a percentage of net sales increased 7%
due to lower material costs associated with the product mix,
improved labor productivity resulting from better training
efforts, plus greater emphasis on cycle time reduction and
building fewer overages. These improvements were offset
partially by the affect of lower sales volume without a
comparable decrease in fixed production costs.
Engineering expenses decreased 27% from $62,000 to
$45,000 due to a decrease in payroll costs due to a
reduction in personnel. Management does not anticipate any
significant change in the present level of engineering
expenses during the next quarter, but does anticipate a
reduction in the fourth quarter.
Selling, general and administrative (SG&A) expenses
decreased 32%. The SG&A expenses of Torotel, Inc. decreased
55% from $51,000 to $23,000 due to a $13,000 decrease in
professional fees, a $3,000 decrease in directors fees, a
$3,000 decrease in investor relations costs, a $3,000
decrease in travel costs, a $2,000 decrease in AMEX fees, a
$2,000 decrease in liability insurance costs, and a $2,000
decrease in real estate taxes. The SG&A expenses of Torotel
Products decreased nearly 28% from $236,000 to $171,000 due
to a concerted effort to reduce costs and preserve cash.
Major spending changes include a $36,000 decrease in payroll
costs due to a reduction in personnel. Other reductions
include a $6,000 decrease in depreciation, a $5,000 decrease
in hazardous waste disposal costs, a $4,000 decrease in
utilities costs, a $3,000 decrease in sales commissions due
to lower sales volume, a $3,000 decrease in building
maintenance costs, a $2,000 decrease in advertising costs,
and other smaller spending decreases. Management does not
anticipate any significant change in the present level of
SG&A expenses during the next quarter, but does anticipate a
reduction in the fourth quarter.
Interest expense increased nearly 23%. The interest
expense of Torotel, Inc. increased 60% from $10,000 to
$16,000 due to the interest incurred on the guaranteed note
with PNBT. The interest expense of Torotel Products
decreased 8% from $12,000 to $11,000 due to a lower
aggregate borrowing level.
Interest income increased $9,000 due to the interest
earned on the note receivable from SIGMA Associates, L.L.C.
which was part of the consideration received from the sale
of substantially all the assets of East Coast Holdings, Inc.
(formerly named OPT Industries, Inc.).
For the reasons discussed above, the consolidated
pretax earnings increased from a loss of $54,000 to a profit
of $20,000. The pretax loss of Torotel, Inc. decreased from
$61,000 to $30,000. The pretax earnings of Torotel Products
increased from $7,000 to $50,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Torotel has relied on funds generated
internally and bank borrowings to meet its normal operating
requirements and to service bank indebtedness; however,
Torotel has sustained substantial operating losses in the
last three fiscal years, and has used, rather than provided,
cash in its overall operations in the last two fiscal years.
While Torotels continuing operations have provided cash in
the last two years and in the first half of fiscal year
2000, the operation does not anticipate any substantial
change in its current sales volume. In addition, Torotel
incurred substantial liabilities as a result of the
terminated merger with Electronika, Inc., and its
discontinued subsidiary, East Coast Holdings, Inc. (formerly
named OPT Industries, Inc.), has a significant amount of
trade debt remaining from its operations (see Note 10 of
Notes to Consolidated Financial Statements). At the present
time, Torotel is operating without a revolving credit line,
and there is no assurance that such a lending arrangement
will be attained in the near future. Management believes
that achieving profitability from the lower sales volume is
the most critical component for continuing as a going
concern. Management has implemented a business strategy
that offers the best chance for long-term success. In the
short-term, the focus remains improving cash flow and
liquidity.
The annual meeting of shareholders will be held on
Monday, January 17, 2000. At the meeting, shareholders will
be asked to vote on lowering the par value of Torotels
Common Stock from 50 cents per share to 1 cent per share.
Management encourages shareholders to vote for this proposal
because without it, Torotel cannot raise additional equity
funds to pay debt or finance its growth since the stock
currently trades well below the par value.
During the six months ended October 31, 1999, Torotels
continuing operations provided $242,000 in cash flow due
primarily to lower levels of receivables and inventories.
Investing activities used $2,000 in cash flow. Capital
expenditures for production and engineering equipment for
the balance of the year are projected to be about $20,000.
Financing activities used $164,000 in cash flow due to
decreases in long-term debt.
Torotel 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
Based on extensive testing and vendor certifications,
management has determined that Torotels hardware and
software applications are Year 2000 compliant. In addition,
management has polled its significant suppliers and
customers and, based on these responses, has determined that
its operation does not appear to be vulnerable to a third
parties failure to remediate their own Year 2000 issues.
Management also has tested various equipment to verify its
Year 2000 functionality.
Torotel has not incurred any external costs for its
Year 2000 readiness reviews and assessments. Internal costs
have not been tracked separately; however, these costs have
been minimal, and have been limited to the related payroll
costs for certain internal employees and postage for the
mailing of questionnaires to suppliers and customers.
A most reasonably likely worst case Year 2000 scenario
is not known at this time. Management believes all
necessary steps have been taken to assure a smooth
transition to the Year 2000. While there is no reason to
believe that there will be any undue disruptions of goods or
services, there is no guarantee that the systems of major
suppliers and customers will be timely converted (even if
their questionnaires indicate they are, or will be, Year
2000 compliant) and would not have a material adverse
effect.
Management has not completed a contingency plan and nor
does it intend to unless a potential problem is uncovered.
Other
Except for historical information contained herein,
certain of the matters discussed above are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act. These statements are based on
assumptions about a number of important factors and involve
risks and uncertainties that could cause actual results to
be different from what is stated here. These risk factors
include: decreased demand for products, delays in developing
new products, expected orders that do not occur, loss of key
customers, the DOD calling for payment of the accrued
penalty and assessing additional fees, the impact of
competition and price erosion as well as supply and
manufacturing constraints, and other risks and
uncertainties.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 1997, Torotel Products, Inc. was accepted
into the Voluntary Disclosure Program by the Inspector
General of the United States Department of Defense,
resulting from its failure to perform some required testing
as frequently as required, and inaccurately certifying that
all required testing had been performed. As a result of
Torotels investigation into the testing deficiencies,
Torotel has recorded an estimated charge of $486,000 against
earnings. Torotels investigation included a review of
historical sales and pricing data, labor bid sheets, and
interviews with past and present employees, to arrive at a
best estimate of the cost impact to the government. The
aggregate amount of the estimated penalty is still subject
to fluctuation until the government completes its
investigation, and a definitive amount is determined.
Torotel believes the methodology it used to determine the
amount of the estimate is reasonable. As a result, the
amount of any additional charges (or the possible range of
any fluctuation in the estimated penalty) cannot be
estimated at this time.
Torotel 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, Torotel has suspended all payments under a
note payable to a former officer.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 -- Financial Data Schedule (electronic
filings only)
b) Reports on Form 8-K -- There were no reports filed on
Form 8-K during the three months ended October 31, 1999.
SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the Registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Torotel, Inc.
(Registrant)
Date: December 10, 1999 /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF TOROTEL, INC. AND
SUBSIDIARIES CONTAINED IN ITS QUARTERLY REPORT ON FORM 10-
QSB FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<PERIOD-TYPE> 6-MOS
<FISCAL YEAR-END> APR-30-2000
<PERIOD-END> OCT-31-1999
<CASH> 127,000
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<NOTES AND ACCOUNTS RECEIVABLES> 810,000
<ALLOWANCES> 61,000
<INVENTORY> 248,000
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<COMMON STOCK> 1,442,000
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<CGS> 1,205,000
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