FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1999
Commission File No. 2-33256
TOROTEL, INC.
(Exact name of small business issuer as specified
in its charter)
MISSOURI 44-0610086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13402 SOUTH 71 HIGHWAY, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices)
(816) 761-6314
(Issuer's telephone number)
NONE
(Former name, former address and former fiscal year,
if change since last report)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of March 11, 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 January 31, 1999
Consolidated Statements of Operations for the nine
months ended January 31, 1999 and 1998
Consolidated Statements of Operations for the three
months ended January 31, 1999 and 1998
Consolidated Statements of Cash Flows for the nine
months ended January 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's 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 January 31, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 311,000
Accounts receivable, net 581,000
Inventories (Note 3) 2,898,000
Prepaid expenses and other current assets 87,000
3,877,000
Property, plant and equipment, net 1,388,000
Other assets 21,000
$ 5,286,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term revolving credit line (Note 5) $ 1,700,000
Current maturities of long-term debt 208,000
Trade accounts payable 703,000
Accrued liabilities 251,000
2,862,000
Long-term debt, less current maturities 1,428,000
Note and interest payable to former officer
(Note 6) 469,000
Commitments and contingencies (Notes 6 and 10) 486,000
Stockholders' equity (Notes 7, 8, 9, 10 and 12):
Common stock, at par value 1,441,000
Capital in excess of par value 8,673,000
Accumulated deficit (9,868,000)
246,000
Less treasury stock, at cost 205,000
41,000
$ 5,286,000
</TABLE>
The accompanying notes are an integral part of
these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended January 31,
<TABLE>
1999 1998
<S> <C> <C>
Net sales $ 6,165,000 $ 9,119,000
Cost of goods sold 5,556,000 7,006,000
Gross profit 609,000 2,113,000
Operating expenses:
Engineering 646,000 581,000
Selling, general and administrative 1,695,000 1,773,000
2,341,000 2,354,000
Loss from operations (1,732,000) (241,000)
Other expense (income):
Interest expense 246,000 204,000
Other, net (Note 11) (984,000) 71,000
(738,000) 275,000
Loss before provision for
income taxes (994,000) (516,000)
Provision for income taxes
(Note 4) - -
Net loss $ (994,000) $ (516,000)
Basic loss per share (Note 7) $ (.35) $ (.18)
Diluted loss per share (Note 7) $ (.35) $ (.18)
</TABLE>
The accompanying notes are an integral part
of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended January 31,
<TABLE>
1999 1998
<S> <C> <C>
Net sales $ 1,516,000 $ 2,477,000
Cost of goods sold 1,450,000 2,005,000
Gross profit 66,000 472,000
Operating expenses:
Engineering 229,000 185,000
Selling, general and
administrative 612,000 608,000
841,000 793,000
Loss from operations (775,000) (321,000)
Other expense (income):
Interest expense 77,000 71,000
Other, net (Note 11) - -
77,000 71,000
Loss before provision
for income taxes (852,000) (392,000)
Provision for income taxes
(Note 4) - -
Net loss $ (852,000) $ (392,000)
Basic loss per share (Note 7) $ (.30) $ (.14)
Diluted loss per share
(Note 7) $ (.30) $ (.14)
</TABLE>
The accompanying notes are an integral part
of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended January 31,
<TABLE>
1999 1998
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (994,000) $ (516,000)
Adjustments to reconcile
net loss to net cash
provided by operations:
Gain on sale of product line (984,000) -
Loss from estimated govern-
ment penalty - 70,000
Depreciation and amortization 236,000 263,000
Disposition of asset held
for disposal 76,000 -
Increase (decrease) in cash
flows from operations resulting
from changes in:
Accounts receivable 983,000 798,000
Inventories (28,000) (271,000)
Prepaid expenses and
other assets 23,000 (70,000)
Trade accounts payable 8,000 (311,000)
Accrued liabilities (191,000) (89,000)
Net cash used in operating
activities (871,000) (126,000)
Cash flows from investing
activities:
Capital expenditures (56,000) (105,000)
Proceeds from product line sale 1,250,000 -
Net cash provided by (used in)
investing activities 1,194,000 (105,000)
Cash flows from financing
activities:
Borrowings against credit line 2,189,000 1,155,000
Payments against credit line (2,050,000) (890,000)
Proceeds from issuance of
long-term debt - 451,000
Principal payments on long-term
debt (214,000) (507,000)
Payments on capital lease
obligations (15,000) (16,000)
Note and interest payable
to former officer 31,000 32,000
Proceeds from issuance of
common stock 1,000 -
Acquisition of treasury stock - 1,000
Net cash provided by
(used in) financing activities (58,000) 226,000
Net increase (decrease)
in cash $ 265,000 $ (5,000)
Cash at beginning of year 46,000 196,000
Cash at end of January $ 311,000 $ 191,000
Supplemental Disclosures
of Cash Flow Information
Cash paid during the
period for:
Interest $ 215,000 $ 172,000
Income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part
of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial
statements reflect the normal recurring adjustments which
are, in the opinion of management, necessary to present
fairly the company's financial position at January 31, 1999,
and the results of operations for the three and nine months
ended January 31, 1999.
The financial statements contained herein should be read
in conjunction with the company's financial statements and
related notes filed on Form 10-KSB for the year ended April
30, 1998.
Note 2 - Realization of Assets
The accompanying consolidated financial statements have
been prepared in conformity with generally accepted
accounting principles, which contemplate continuation of the
company as a going concern. However, the company has
sustained substantial operating losses in the first nine
months of fiscal 1999, and in fiscal years 1998 and 1997.
In addition, in the first nine months of fiscal 1999 and for
fiscal year 1998, the company has used, rather than
provided, cash in its operations. The company's line of
credit with Phillipsburg National Bank & Trust Company
(PNBT) expires April 30, 1999 (see Note 5 of Notes to
Consolidated Financial Statements). If the bank does not
renew the credit line, it could affect the company's ability
to continue as a going concern.
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 adjustment relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should
the company be unable to continue in existence.
Note 3 - Inventories
The components of inventories are summarized as follows:
<TABLE>
<S> <C>
Raw materials $ 1,740,000
Work in process 708,000
Finished goods 450,000
$ 2,898,000
</TABLE>
Note 4 - Income Taxes
The company has net operating loss and credit
carryforwards available as benefits to reduce future income
taxes, subject to applicable limitations. These tax credit
and operating loss carryforwards expire in various amounts
in the years 1999 through 2013.
The difference between the financial and tax bases of
assets and liabilities is determined annually. Deferred
income taxes and liabilities are computed for those
differences that have future tax consequences using the
currently enacted tax laws and rates that apply to the
periods in which they are expected to effect taxable income.
Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will, more
likely than not, be realized. Income tax expense is the
current tax payable or refundable for the period plus or
minus the net change in the deferred tax assets or
liabilities.
The following table summarizes the components of the net
deferred tax asset:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 2,595,000
Inventory valuation reserve 229,000
Tax credit carryforwards 406,000
Property, plant and equipment 106,000
Other 52,000
$ 3,388,000
Less valuation allowance 3,388,000
$ -
</TABLE>
Note 5 - Short-term Revolving Credit Line
The company renewed its revolving credit agreement with
PNBT through April 30, 1999. The credit agreement
originally provided a $2,500,000 revolving credit line;
however, this amount was reduced to $1,700,000 upon closing
of the product line sale discussed in Note 11 of Notes to
Consolidated Financial Statements.
Advances under the credit line are limited to the sum of
75% of eligible billed receivables and 50% of inventories,
net of reserves. The revolving credit line is
collateralized by trade accounts receivable, inventories,
and a third lien mortgage on OPT's facility. Under the
terms of the agreement, the outstanding balance of the
revolving line bears interest at 1/2% over the bank's prime
lending rate. As of January 31, 1999, the company had
utilized all of the revolving credit line and the effective
borrowing rate was 8.25%. The company is required to comply
with certain covenants including restrictions on the payment
of cash dividends. As of January 31, 1999, the company was
in violation of three financial covenants under the terms of
the credit agreement with PNBT; however, the bank has waived
compliance with the subject provisions through April 30,
1999, which is the expiration date of the credit line.
Note 6 - Contingency for Estimated Penalty
On May 6, 1997, Torotel Products, Inc. was accepted into
the Voluntary Disclosure Program of the United States
Department of Defense, resulting from its failure to perform
some required thermal shock testing as frequently as
required, and inaccurately certifying that all required
testing had been performed. As a result of the company's
investigation into the thermal shock deficiencies, which was
first reported in November 1996, the company recorded an
estimated charge of $416,000 against earnings in the fourth
quarter of its fiscal year ended April 30, 1997. Because
the investigation was ongoing, the company subsequently
determined that there also were some deficiencies in
performing some required electrical testing as frequently as
required. As a result, the company recorded an additional
estimated charge of $70,000 against earnings in the first
quarter of its fiscal year ended April 30, 1998.
The company's 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. The
company 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, the company is not certain when payment of
the damage amount will be required; however, the company
does not anticipate making any payments during the next
twelve months. As a result, the entire $486,000 has been
classified as a long-term liability in the accompanying
consolidated balance sheet.
The company believes that certain of its former officers
may have been responsible for the misconduct related to the
test failures, and will evaluate ways of recovering the
damages once the government completes its investigation. In
the meantime, the company has suspended all principal and
interest payments due under a note payable to a former
officer, and does not anticipate making any further payments
during the next twelve months. As a result, as of January
31, 1999, the aggregate amount due of $469,000, which
consists of the outstanding principal of $384,000 plus the
accrued interest of $85,000, has been classified as a long-
term liability in the accompanying consolidated balance
sheet.
The legal fees associated with the DOD investigation have
amounted to $1,000 during the current fiscal year, and
$272,000 in aggregate since the investigation started in the
third quarter of the fiscal year ended April 30, 1997.
Note 7 - Earnings Per Share
In February 1997, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share,
which replaces the presentation of primary earnings per
share (EPS) with a presentation of basic EPS; requires dual
presentation of basic and diluted EPS on the face of the
statement of earnings regardless of whether basic and
diluted EPS are the same; and requires a reconciliation of
the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the
weighted average number of common shares outstanding for the
period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion 15. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The
statement became effective for financial statements issued
for periods ending after December 15, 1997, and requires
restatement of all prior-period EPS data presented.
Pursuant to the new statement, the basic and diluted loss
per common share were computed as follows:
<TABLE>
<S> <C> <C>
Year-to-Date EPS Calculations 1999 1998
Net loss $ (994,000) $ (516,000)
Weighted average common
shares outstanding 2,811,388 2,808,978
Incremental shares - -
Basic loss per share $ (.35) $ (.18)
Diluted loss per share $ (.35) $ (.18)
</TABLE>
No incremental shares are included in the year-to-date EPS
calculations due to the net loss in each period.
<TABLE>
<S> <C> <C>
Quarterly EPS Calculations 1999 1998
Net loss $ (852,000) $ (392,000)
Weighted average common
shares outstanding 2,811,590 2,809,364
Incremental shares - -
Basic loss per share $ (.30) $ (.14)
Diluted loss per share $ (.30) $ (.14)
</TABLE>
No incremental shares are included in the quarterly EPS
calculations due to the net loss in each period.
Note 8 - Employee Stock Options
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. 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
will be recognized upon the grant of any options. No
options have been granted since December 1996.
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 begin-
ning of
year 150,000 $1.00 150,000 $1.00
Granted - - - -
Exercised - - - -
Forfeited - - - -
Outstanding
at end of
January 150,000 1.00 150,000 $1.00
Options
exercisable
at end of
January - - - -
Weighted
average
fair value
of options
granted
during the
year - - - -
</TABLE>
The following information applies to options outstanding at
January 31, 1999:
<TABLE>
<S> <C>
Number outstanding 150,000
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 6.9 yrs.
</TABLE>
Note 9 - Stock Warrants
Pursuant to a settlement that ended a class action
alleging racial discrimination in hiring by Torotel
Products, Inc., the company agreed to issue a warrant
certificate to the Torotel Settlement Fund to purchase
100,000 shares of Torotel, Inc. common stock at $.75 per
share. The warrant is 100% vested upon issuance and cannot
be exercised until the market price of the company's common
stock reaches $2.00 per share. The warrant expires on May
4, 2003.
The warrant is deemed non-compensatory under Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. 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 percent; risk-free
interest rate of 5.8 percent; 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 begin-
ning of
year - - - -
Granted 100,000 $ .75 - -
Exercised - - - -
Forfeited - - - -
Outstanding
at end of
January 100,000 $ .75 - -
Warrants
exercisable
at end of
January - - - -
Weighted
average
fair value
of warrants
granted
during the
year - - - -
</TABLE>
The following information applies to warrants outstanding at
January 31, 1999:
<TABLE>
<S> <C>
Number outstanding 100,000
Range of exercise prices $ .75
Weighted average exercise price $ .75
Weighted average remaining contractual life 4.2 yrs.
</TABLE>
Note 10 - Termination of Definitive Merger Agreement
The company and Electronika, Inc. have mutually agreed to
cancel their merger plans due to increased regulatory
obstacles and higher than anticipated losses of Torotel. In
addition, Peter B. Caloyeras has resigned as Chief Executive
Officer of Torotel, Inc. and Dale H. (Herb) Sizemore, Jr.,
the son of the founder of Torotel, Inc., was named as
Caloyeras' replacement. Both Torotel and Electronika
continue to discuss other alternatives to enhance the
shareholder value of their respective companies through a
possible relationship in the future.
Note 11 - Product Line Sale
On September 18, 1998, Torotel's wholly-owned subsidiary,
OPT Industries, Inc., completed the sale of its ultra-
miniature transformer and inductor product line to Pico
Electronics, Inc. of Pelham, New York. Pursuant to the
Asset Purchase Agreement, the company 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, the company agreed that neither
it nor any related entity shall re-establish any of the
product line sold to Pico, nor shall the company 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.
Note 12 - Market for Common Equity
Since the company no longer fully satisfied all of the
continued listing guidelines of the American Stock Exchange
(AMEX), the company consented to the removal of its common
stock from the AMEX. The last day for trading in Torotel's
stock on the AMEX was March 12, 1999. Trading in the
company's common stock will now be conducted on the over-
the-counter pink sheets market under the symbol TTLO.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The discussion and analysis of the results of operations
includes the operations of Torotel, Inc., and its
subsidiaries, Torotel Products, Inc. and OPT Industries,
Inc.
NINE MONTHS ENDED JANUARY 31, 1999 VERSUS NINE MONTHS ENDED
JANUARY 31, 1998
Net sales decreased 32%. The net sales of Torotel
Products decreased 13% from $4,356,000 to $3,808,000 due to
lower sales of the potted coil assembly for the Hellfire II
missile system and lower overall magnetics sales. In recent
years, sales of the potted coil assembly have accounted for
about 25% of Torotel Products' total sales; however, future
sales of the potted coil assembly will be significantly
lower and limited only to the number of Hellfire II missiles
sold to foreign countries by the prime contractor(s). As a
result of this factor, plus the sluggish demand for
magnetics products, lower sales are expected at Torotel
Products. OPT's net sales decreased nearly 51% from
$4,763,000 to $2,357,000 due to lower sales of power
supplies to a major customer, and lower overall magnetics
sales arising from sluggish demand and the sale of the
product line discussed in Note 11 of Notes to Consolidated
Financial Statements. In fiscal years 1997 and 1998, sales
of power supplies to this major customer accounted for 48%
and 29% of OPT's net sales, respectively. No significant
orders are expected from this customer at this time. As
discussed in Note 11 of Notes to Consolidated Financial
Statements, OPT sold its ultra-miniature transformer and
inductor product line. Sales from this product line for the
nine months ended January 31, 1999 and 1998, were 30% and
20% of OPT's total net sales, respectively. As a result of
these two factors, plus the sluggish demand for its other
magnetics products, OPT does not expect any significant
increase in sales in the next few months. OPT is premiering
a line of SM Series Power Supplies, complete with
computerized control, for the telecommunications and direct
current systems market. Initial customer feedback on this
line has been very positive. OPT hopes to see higher sales
bookings in the fourth quarter of this fiscal year, with
shipments beginning in fiscal year 2000.
Gross profit as a percentage of net sales decreased 13%.
The gross profit percentage of Torotel Products decreased 5%
due primarily to negative labor variances from established
standards. In addition to better training efforts, Torotel
Products is attempting to improve its direct labor
performance by splitting its manufacturing operation into
two segments. The first group specializes in outsourced
products while the second group handles the more complex
products, which are built internally. The gross profit
percentage of OPT decreased 28% due primarily to negative
labor variances from established standards and lower sales
volume without a comparable decrease in fixed production
costs. The negative variances are primarily a result of
start-up problems incurred in manufacturing the new power
supplies.
Engineering expenses increased 11%. The engineering
expenses of Torotel Products decreased 10% from $207,000 to
$187,000 due primarily to a $9,000 decrease in payroll costs
due to a reduction in personnel, an $8,000 decrease in
equipment rental costs due to the purchase of the equipment,
and a $3,000 decrease in education costs associated with a
tuition reimbursement benefit. The engineering expenses of
OPT increased 23% from $374,000 to $459,000 due to a $48,000
increase in consulting costs for testing and qualification
efforts on new products, a $32,000 increase in payroll costs
due to additional personnel for the new power supply
products, and a $5,000 increase in equipment maintenance and
repair costs. Management anticipates lower engineering
expenses during the next few months.
Selling, general and administrative (SG&A) expenses
decreased 4%. The SG&A expenses of Torotel, Inc. increased
80% from $178,000 to $321,000 due primarily to higher
professional fees associated with the terminated merger
agreement discussed in Note 10 of Notes to Consolidated
Financial Statements. The SG&A expenses of Torotel Products
decreased 17% from $865,000 to $717,000 due primarily to a
$95,000 decrease in professional fees due to the settlement
of the litigation that was ongoing in the prior year, a
$30,000 decrease in payroll costs due to a reduction in
personnel, a $14,000 decrease in computer maintenance costs
due to completing the conversion to OPT's computer system,
and a $9,000 decrease in sales commissions due to lower
sales volume. The SG&A expenses of OPT decreased 10% from
$730,000 to $657,000 due primarily to an $34,000 decrease in
sales commissions due to lower sales volume, a $27,000
decrease in payroll costs due to a reduction in personnel,
an $8,000 decrease in equipment maintenance and repair
costs, and a $4,000 decrease in travel costs. Management
anticipates lower SG&A expenses during the next few months.
Interest expense increased nearly 21%. The interest
expense of Torotel, Inc. remained unchanged at $31,000. The
interest expense of Torotel Products increased 25% from
$97,000 to $121,000 due to a higher aggregate borrowing
level. The interest expense of OPT increased 24% from
$76,000 to $94,000 due to a higher aggregate borrowing
level.
Sundry non-operating income increased due to a $984,000
gain from the product line sale discussed in Note 11 of
Notes to Consolidated Financial Statements. The nine-month
period last year had a sundry non-operating expense of
$71,000 which included a $70,000 charge for an estimated
penalty as discussed in Note 6 of Notes to Consolidated
Financial Statements.
For the reasons discussed above, the consolidated pretax
loss increased from $516,000 to $994,000. The pretax loss
of Torotel, Inc. increased from $209,000 to $352,000. The
pretax loss of Torotel Products increased from $121,000 to
$243,000. The pretax loss of OPT increased from $186,000 to
$399,000.
THREE MONTHS ENDED JANUARY 31, 1999 VERSUS THREE MONTHS
ENDED JANUARY 31, 1998
Net sales decreased 39%. The net sales of Torotel
Products decreased nearly 30% from $1,322,000 to $931,000
due to lower sales of the potted coil assembly for the
Hellfire II missile system and lower overall magnetics
sales. In recent years, sales of the potted coil assembly
have accounted for about 25% of Torotel Products' total
sales; however, future sales of the potted coil assembly
will be significantly lower and limited only to the number
of Hellfire II missiles sold to foreign countries by the
prime contractor(s). As a result of this factor, plus the
sluggish demand for its magnetics products, lower sales are
expected at Torotel Products. OPT's net sales decreased 49%
from $1,155,000 to $585,000 due to lower sales of power
supplies to a major customer, and lower overall magnetics
sales arising from sluggish demand and the sale of the
product line discussed in Note 11 of Notes to Consolidated
Financial Statements. In fiscal years 1997 and 1998, sales
of power supplies to this major customer accounted for 48%
and 29% of OPT's net sales, respectively. No significant
orders are expected from this customer at this time. As
discussed in Note 11 of Notes to Consolidated Financial
Statements, OPT sold its ultra-miniature transformer and
inductor product line in September 1998. As a result, there
were no sales from this product line for the three months
ended January 31, 1999. Sales from this product line for
the three months ended January 31, 1998 were 26% of OPT's
total net sales. As a result of these two factors, plus the
sluggish demand for its other magnetics products, OPT does
not expect any significant increase in sales in the next few
months. OPT is premiering a line of SM Series Power
Supplies, complete with computerized control, for the
telecommunications and direct current systems market.
Initial customer feedback on this line has been very
positive. OPT hopes to see higher sales bookings in the
fourth quarter of this fiscal year, with shipments beginning
in fiscal year 2000.
Gross profit as a percentage of net sales decreased 15%.
The gross profit percentage of Torotel Products decreased
nearly 6% due primarily to higher material costs associated
with the product mix. The gross profit percentage of OPT
decreased 30% due primarily to higher material costs
associated with the product mix and lower sales volume
without a comparable decrease in fixed production costs.
Engineering expenses increased 24%. The engineering
expenses of Torotel Products decreased 8% from $66,000 to
$61,000 due primarily to a $4,000 decrease in payroll costs
due to a reduction in personnel and a $1,000 decrease in
equipment rental costs due to the purchase of the equipment.
The engineering expenses of OPT increased 41% from $119,000
to $168,000 due primarily to a $39,000 increase in
consulting costs for testing and qualification efforts on
new products, a $4,000 increase in payroll costs due to
additional personnel for the new power supply products, a
$4,000 increase in small tools and supplies expenditures,
and a $2,000 increase in recruiting costs. Management
anticipates lower engineering expenses during the next few
months.
Selling, general and administrative (SG&A) expenses
increased 1%. The SG&A expenses of Torotel, Inc. increased
270% from $61,000 to $226,000 due primarily to higher
professional fees associated with the terminated merger
agreement discussed in Note 10 of Notes to Consolidated
Financial Statements. The SG&A expenses of Torotel Products
decreased 37% from $309,000 to $194,000 due primarily to a
$61,000 decrease in professional fees due to the settlement
of the litigation that was ongoing in the prior year, a
$28,000 decrease in payroll costs due to a reduction in
personnel, a $7,000 decrease in computer maintenance costs
due to completing the conversion to OPT's computer system, a
$7,000 decrease in travel costs, a $6,000 decrease in bank
charges associated with a mortgage refinancing in the prior
year, and a $6,000 decrease in sales commissions due to
lower sales volume. The SG&A expenses of OPT decreased 19%
from $238,000 to $192,000 due primarily to a $21,000
decrease in payroll costs due to a reduction in personnel,
an $11,000 decrease in advertising costs, a $10,000 decrease
in sales commissions due to lower sales volume, and a $4,000
decrease in travel costs. Management anticipates lower SG&A
expenses during the next few months.
Interest expense increased nearly 9%. The interest
expense of Torotel, Inc. increased slightly from $10,000 to
$11,000. The interest expense of Torotel Products increased
8% from $37,000 to $40,000 due to a higher aggregate
borrowing level. The interest expense of OPT increased 8%
from $24,000 to $26,000 due to a higher aggregate borrowing
level.
For the reasons discussed above, consolidated pretax loss
increased from a $392,000 to $852,000. The pretax loss of
Torotel, Inc. increased from $71,000 to $237,000. The
pretax loss of Torotel Products increased from $131,000 to
$148,000. The pretax loss of OPT increased from $190,000 to
$467,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the company has relied on funds generated
internally and bank borrowings to meet its normal operating
requirements and to service bank indebtedness. For the
fiscal year ended April 30, 1998, the company incurred a
pretax loss of $1,295,000. For the nine months ended
January 31, 1999, the company incurred an additional
operating loss of $1,978,000; however, this loss was offset
partially by the $984,000 gain from the product line sale
discussed in Note 11 of Notes to Consolidated Financial
Statements. Management does not anticipate any significant
increase in the present rate of sales during the next few
months. As a result, management will be evaluating various
alternatives for minimizing future operating losses and
improving its liquidity position. As of January 31, 1999,
the company was in violation of three financial covenants
under the terms of its credit agreement with PNBT (see Note
5 of Notes to Consolidated Financial Statements); however,
the bank has waived compliance with the subject provisions
through April 30, 1999, which is the expiration date of the
credit line. If the bank does not renew the credit line, it
could affect the company's ability to continue as a going
concern (see Note 2 of Notes to Consolidated Financial
Statements).
During the nine months ended January 31, 1999, the
company's operating activities used $871,000 in cash flow.
Corporate related matters used $303,000. The operations of
Torotel Products provided $621,000 due primarily to lower
levels of receivables and inventories. OPT's operations
used $1,189,000 due primarily to the losses from operations.
Investing activities provided $1,194,000 in cash flow due
to the product line sale discussed in Note 11 of Notes to
Consolidated Financial Statements. For the nine months
ended January 31, 1999, capital expenditures for production
and engineering equipment were $56,000. For the balance of
the fiscal year, the company anticipates minimal investments
for capital expenditures.
Financing activities used $58,000 in cash flow due
primarily to decreases in long-term debt. At January 31,
1999, the company had used all of its revolving credit line.
The company believes that inflation will have only a
minimal effect on future operations since such effects will
be offset by sales price increases which are not expected to
have a significant effect upon demand.
YEAR 2000 READINESS
Management is presently assessing both operating companies
for their Year 2000 readiness. Extensive testing has been
performed on the main operating system and its software
applications (which serves both operating companies), and it
has been determined that both hardware and software are Year
2000 compliant.
Both operations are in the process of polling significant
suppliers and customers to determine the extent to which
either operation is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. In
addition, various equipment is being tested to verify its
Year 2000 functionality. These assessments should be
completed no later than August 1999.
The company 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 (and should continue to be) minimal, and have been
limited to the related payroll costs for its Director of MIS
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. The company believes all necessary
steps are being taken to assure a smooth transition to the
Year 2000. While the company has 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
completed questionnaires indicate they are, or will be, Year
2000 compliant) and would not have a material adverse effect
on the company.
The company has not completed a contingency plan and nor
does it intend to unless the assessment process uncovers
potential problems.
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
There is one legal proceeding involving the company. On May
6, 1997, Torotel Products, Inc. was accepted into the
Voluntary Disclosure Program by the Inspector General of the
United States Department of Defense, resulting from its
failure to perform some required testing as frequently as
required, and inaccurately certifying that all required
testing had been performed. As a result of the company's
investigation into the testing deficiencies, the company has
recorded an estimated charge of $486,000 against earnings.
The company's 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. The
company 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.
The company believes that certain of its former officers may
have been responsible for the misconduct related to the test
failures, and will evaluate ways of recovering the damages
once the government completes its investigation. In the
meantime, the company has suspended all payments under a
note payable to a former officer.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 -- Financial Data Schedule (electronic
filings only)
b) Reports on Form 8-K -- There was one report filed on
Form 8-K during the three months ended January 31, 1999.
The report was dated December 1, 1998, and included
information on the definitive merger agreement with
Electronika, Inc., as required by Item 5 of Form 8-K.
SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the Registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Torotel, Inc.
(Registrant)
Date: March 15, 1999 /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF TOROTEL, INC. AND
SUBSIDIARIES CONTAINED IN ITS QUARTERLY REPORT ON FORM 10-
QSB FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 311,000
<SECURITIES> 0
<RECEIVABLES> 664,000
<ALLOWANCES> 83,000
<INVENTORY> 2,898,000
<CURRENT-ASSETS> 3,877,000
<PP&E> 4,199,000
<DEPRECIATION> 2,811,000
<TOTAL-ASSETS> 5,286,000
<CURRENT-LIABILITIES> 2,862,000
<BONDS> 0
0
0
<COMMON> 1,441,000
<OTHER-SE> 2,383,000
<TOTAL-LIABILITY-AND-EQUITY> 5,286,000
<SALES> 6,165,000
<TOTAL-REVENUES> 6,165,000
<CGS> 5,556,000
<TOTAL-COSTS> 7,897,000
<OTHER-EXPENSES> (984,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 246,000
<INCOME-PRETAX> (994,000)
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<INCOME-CONTINUING> (994,000)
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<EXTRAORDINARY> 0
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<EPS-PRIMARY> (.35)
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