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, 2000
Commission File No. 1-8125
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 1, 2000, there were 2,811,590 shares of Common
Stock, $.01 Par Value, outstanding.
TOROTEL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of January 31, 2000 1
Consolidated Statements of Operations for the nine
Months ended January 31, 2000 and 1999 2
Consolidated Statements of Operations for the three
Months ended January 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the nine
Months ended January 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of
Operation 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CONSOLIDATED BALANCE SHEET (Unaudited)
As of January 31, 2000
ASSETS
Current assets:
<S> <C>
Cash $ 121,000
Accounts receivable, net 307,000
Inventories (Note 3) 216,000
Prepaid expenses and other current assets 29,000
673,000
Property, plant and equipment, net 424,000
Note receivable (Note 10) 441,000
Other assets 8,000
$ 1,546,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt (Notes 5 and 10) $ 396,000
Trade accounts payable (Note 10) 944,000
Accrued liabilities (Note 10) 220,000
1,560,000
Long-term debt, less current maturities (Notes 5 and 10) 409,000
Note and interest payable to former officer (Note 9) 510,000
Estimated government penalty (Note 9) 486,000
Commitments and contingencies (Note 9) -
Stockholders' deficit (Notes 6, 7, 8 and 12):
Common stock, at par value 29,000
Capital in excess of par value 10,085,000
Accumulated deficit (11,328,000)
(1,214,000)
Less treasury stock, at cost 205,000
(1,419,000)
$ 1,546,000
</TABLE>
The accompanying notes are an integral part of this statement.
1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended January 31,
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net sales $ 2,485,000 $ 3,808,000
Cost of goods sold 1,767,000 3,026,000
Gross profit 718,000 782,000
Operating expenses:
Engineering 138,000 187,000
Selling, general and administrative 580,000 1,038,000
718,000 1,225,000
Earnings (loss) from operations - (443,000)
Other expense (income):
Interest expense 83,000 68,000
Interest income (27,000) -
56,000 68,000
Loss from continuing operations before
provision for income taxes (56,000) (511,000)
Provision for income taxes (Note 4) - -
Loss from continuing operations (56,000) (511,000)
Discontinued operations (Notes 10 and 11):
Loss from operations of discontinued subsidiary - (1,467,000)
Gain on sale of product line - 984,000
- (483,000)
Net loss $ (56,000) $ (994,000)
Basic loss per share (Note 6):
Continuing operations $ (.02) $ (.18)
Discontinued operations - (.17)
$ (.02) $ (.35)
Diluted loss per share (Note 6):
Continuing operations $ (.02) $ (.18)
Discontinued operations - (.17)
$ (.02) $ (.35)
</TABLE>
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended January 31,
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net sales $ 822,000 $ 931,000
Cost of goods sold 562,000 784,000
Gross profit 260,000 147,000
Operating expenses:
Engineering 48,000 61,000
Selling, general and administrative 194,000 420,000
242,000 481,000
Earnings (loss) from operations 18,000 (334,000)
Other expense (income):
Interest expense 27,000 23,000
Interest income (9,000) -
18,000 23,000
Earnings (loss) from continuing operations before
provision for income taxes - (357,000)
Provision for income taxes (Note 4) - -
Earnings (loss) from continuing operations - (357,000)
Discontinued operations (Notes 10 and 11):
Loss from operations of discontinued subsidiary - (495,000)
Gain on sale of product line - -
- (495,000)
Net earnings (loss) - $ (852,000)
Basic earnings (loss) per share (Note 6):
Continuing operations $ - $ (.13)
Discontinued operations - (.17)
$ - $ (.30)
Diluted earnings (loss) per share (Note 6):
Continuing operations $ - $ (.13)
Discontinued operations _ (.17)
$ - $ (.30)
</TABLE>
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended January 31,
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from continuing
operating activities:
Net loss $ (56,000) $ (994,000)
Adjustments to reconcile net loss to net
cash provided by continuing operations:
Loss from operations of discontinued
subsidiary - 1,467,000
Gain on sale of product line - (984,000)
Depreciation and amortization 84,000 110,000
Increase (decrease) in cash flows from
continuing operations resulting from
changes in:
Accounts receivable 130,000 983,000
Inventories 206,000 197,000
Prepaid expenses and other assets (17,000) (17,000)
Trade accounts payable (40,000) 8,000
Accrued liabilities (46,000) (191,000)
Net cash provided by continuing
operating activities 261,000 579,000
Cash flows from investing activities:
Capital expenditures (2,000) (46,000)
Proceeds from sale of product line - 1,250,000
Net cash provided by (used in) investing
activities (2,000) 1,204,000
Cash flows from financing activities:
Borrowings against credit line - 2,189,000
Payments against credit line - (2,050,000)
Principal payments on long-term debt (207,000) (135,000)
Payments on capital lease obligations (13,000) (18,000)
Note and interest payable to former officer 31,000 31,000
Proceeds from issuance of common stock - 1,000
Net cash provided by (used in) financing
activities (189,000) 18,000
Net cash used in discontinued operations - (1,536,000)
Net increase in cash 70,000 265,000
Cash at beginning of year 51,000 46,000
Cash at end of January $ 121,000 $ 311,000
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 52,000 $ 215,000
Income taxes $ - $ -
Non-cash investing activities:
Settlement of litigation paid with
asset held for sale $ - $ 76,000
</TABLE>
The accompanying notes are an integral part of these statements.
4
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 90% of
Torotel's 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 Torotel's financial position at January 31, 2000, and the results of
operations for the three and nine months ended January 31, 2000.
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 Torotel's 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 Torotel's
continuing operations have provided cash in the last two years and in the first
nine months 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 Torotel'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 Torotel be unable to continue in existence.
5
Note 3 - Inventories
The components of inventories are summarized as follows:
Raw materials $ 27,000
Work in process 117,000
Finished goods 72,000
$ 216,000
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
January 31, 2000, Torotel was not in compliance with a maximum leverage ratio,
a quick ratio and a current ratio covenant. However, PNBT has committed to
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 $279,000 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
6
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>
Year-to-Date EPS Calculations
<CAPTION>
2000 1999
<S> <C> <C>
Net loss $ (56,000) $ (994,000)
Weighted average common shares outstanding 2,811,590 2,811,388
Incremental shares - -
Basic loss per share $ (.02) $ (.35)
Diluted loss per share $ (.02) $ (.35)
</TABLE>
No incremental shares are included in the EPS calculations due to the lack of
earnings in either period.
<TABLE>
Quarterly EPS Calculations
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings (loss) $ - $ (852,000)
Weighted average common shares outstanding 2,811,590 2,811,590
Incremental shares - -
Basic earnings per share $ - $ (.30)
Diluted earnings per share $ - $ (.30)
</TABLE>
No incremental shares are included in the EPS calculations due to the lack of
earnings in either period.
Note 7 - Employee Stock Options
In accordance with the Incentive Compensation Plan approved by shareholders
7
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 Torotel's 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, Torotel's operating results
would have been reduced to the pro forma amounts indicated as follows:
<TABLE>
Year-to-Date
<CAPTION>
2000 1999
<S> <C> <C> <C>
Loss from continuing
operations As Reported $ (56,000) $ (511,000)
Pro Forma $ (56,000) $ (546,000)
Basic loss per share from
continuing operations As Reported $ (.02) $ (.18)
Pro Forma $ (.02) $ (.19)
Diluted loss per share from
continuing operations As Reported $ (.02) $ (.18)
Pro Forma $ (.02) $ (.19)
</TABLE>
<TABLE>
Quarterly
<CAPTION>
2000 1999
<S> <C> <C> <C>
Earnings (loss) from
continuing operations As Reported $ - $ (357,000)
Pro Forma $ - $ (357,000)
Basic earnings (loss) per share
from continuing operations As Reported $ - $ (.13)
Pro Forma $ - $ (.13)
Diluted earnings (loss) per share
from continuing operations As Reported $ - $ (.13)
Pro Forma $ - $ (.13)
</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 expecte
life of ten years.
Stock option transactions under the 1994 Incentive Compensation Plan for
each period are summarized as follows:
8
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C> <C> <C>
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 January 7,500 $1.00 150,000 $1.00
Options exercisable at end
of January 7,500 $1.00 - -
Weighted average fair value of
options granted during the year - -
</TABLE>
The following information applies to options outstanding at January 31, 2000:
<TABLE>
<S> <C>
Number outstanding 7,500
Range of exercise prices $1.00
Weighted average exercise price $1.00
Weighted average remaining contractual life 1.8 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 company's
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>
<CAPTION>
2000 1999
<S> <C> <C> <C> <C>
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 January 100,000 $ .75 100,000 $ .75
Warrants exercisable at end of
January - - - -
Weighted average fair value of
warrants granted during the year - $ .33
</TABLE>
9
The following information applies to warrants outstanding at January 31, 2000:
<TABLE>
<S> <C>
Number outstanding 100,000
Range of exercise prices $ .75
Weighted average exercise price $ .75
Weighted average remaining contractual life 3.2 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 Torotel's 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.
Torotel'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.
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. 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 January 31,
2000, the aggregate amount due of $510,000, which consists of the outstanding
principal of $384,000 plus the accrued interest of $126,000, 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 $3,000
during the current fiscal year, $1,000 in fiscal 1999, and $275,000 in aggregat
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 dicontinued in April 1999, and
10
the assets sold to SIGMA Associates, L.L.C.
OPT's 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 January 31, 2000, are included in the
accompanying consolidated balance sheet under the following captions and in the
amounts shown:
<TABLE>
<S> <C>
Cash $ 3,000
Note receivable $ 441,000
Trade accounts payable $ 497,000
Accrued liabilities $ 147,000
Long-term debt $ 279,000
</TABLE>
OPT's net sales for the three and nine months ended January 31, 1999, were
$585,000 and $2,357,000, 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.
Note 12 - Reduction in Par Value and Stated Capital
On January 17, 2000, shareholders approved a proposal to reduce the par
value of Torotel's Common Stock from $.50 per share to $.01 per share and to
reduce the stated capital of Torotel pursuant to Missouri law. A Certificate
of Amendment to Torotel's Articles of Incorporation and Statement of Reduction
of Capital was filed with the Secretary of State of Missouri on February 4,
2000. The accompanying consolidated balance sheet reflects the reduction in par
value and stated capital. The affect of the change was to decrease the balance
sheet caption "Common stock, at par value" and to increase the caption "Capital
in excess of par value" in the amount of $1,413,000.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following management comments regarding Torotel's 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.
NINE MONTHS ENDED JANUARY 31, 2000 VERSUS NINE MONTHS ENDED JANUARY 31, 1999
Net sales decreased 35% from $3,808,000 to $2,485,000 due to less demand for
Torotel's 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 8% 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 26% from $187,000 to $138,000 due to lower
payroll costs associated with a reduction in personnel. Management anticipates
lower engineering expenses during the next quarter.
Selling, general and administrative (SG&A) expenses decreased 44%. The SG&A
expenses of Torotel, Inc. decreased 72% from $321,000 to $89,000 due to a
$149,000 decrease in professional fees primarily associated with last year's
terminated merger with Electronika, Inc., a $29,000 decrease in accounting/
auditing fees, an $18,000 decrease in consulting costs, a $14,000 decrease in
real estate taxes, a $9,000 decrease in directors fees, a $6,000 decrease in
AMEX fees, a $4,000 decrease in investor relations costs, and a $3,000 decrease
in travel costs. The SG&A expenses of Torotel Products decreased nearly 32%
from $717,000 to $491,000 due to a concerted effort to reduce costs and preserve
cash. Major spending changes include an $70,000 decrease in payroll costs due
to a reduction in personnel, a $25,000 decrease in workers' compensation
insurance costs due to a surplus distributed by the insurance fund, a $15,000
decrease in professional fees due to the settlement of the litigation that was
ongoing in the prior year, a $15,000 decrease in advertising costs, a $14,000
decrease in building maintenance costs, and a $13,000 decrease in utilities
costs. Other reductions include a $16,000 decrease in depreciation expense, a
$9,000 decrease in sales commissions due to lower sales volume, an $8,000
decrease in educational costs, an $8,000 decrease in insurance costs for a
return premium, a $6,000 decrease in copier costs due to a restructured lease,
a $3,000 decrease in travel costs, and other smaller spending decreases.
Management does anticipate lower SG&A expenses during the next quarter.
12
Interest expense increased 22%. The interest expense of Torotel, Inc.
increased 61% from $31,000 to $50,000 due to the interest incurred on the
guaranteed note with PNBT. The interest expense of Torotel Products decreased
11% from $37,000 to $33,000 due to a lower aggregate borrowing level.
Interest income increased $27,000 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 from
continuing operations decreased from $511,000 to $56,000. The pretax loss of
Torotel, Inc. decreased from $352,000 to $112,000. The pretax earnings of
Torotel Products increased from a loss of $159,000 to a profit of $56,000.
THREE MONTHS ENDED JANUARY 31, 2000 VERSUS THREE MONTHS ENDED JANUARY 31, 1999
Net sales decreased 12% from $931,000 to $822,000 due primarily to no
shipments of the potted coil assembly for the Hellfire II missile system in the
current quarter. 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 16% 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.
Engineering expenses decreased 21% from $61,000 to $48,000 due to lower
payroll costs associated with a reduction in personnel. Management anticipates
lower engineering expenses during the next quarter
Selling, general and administrative (SG&A) expenses decreased 54%. The SG&A
expenses of Torotel, Inc. decreased 84% from $226,000 to $36,000 due to a
$151,000 decrease in professional fees primarily associated with last year's
terminated merger with Electronika, Inc., an $18,000 decrease in consulting
costs, an $11,000 decrease in real estate taxes, a $6,000 decrease in
accounting/auditing fees, a $3,000 decrease in directors fees, and a $1,000
decrease in investor relations costs. The SG&A expenses of Torotel Products
decreased nearly 19% from $194,000 to $158,000 due primarily to an $8,000
decrease in insurance costs for a return premium, a $6,000 decrease in payroll
costs due to a reduction in personnel, a $6,000 decrease in depreciation, a
$6,000 decrease in advertising costs, a $4,000 decrease in utilities costs, a
$3,000 decrease in building maintenance costs, a $1,000 decrease in sales
commissions due to lower sales volume, and other smaller spending decreases.
Management anticipates lower SG&A expenses during the next quarter.
Interest expense increased nearly 17%. The interest expense of Torotel,
Inc. increased 45% from $11,000 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.).
13
For the reasons discussed above, the consolidated pretax earnings from
continuing operations increased from a loss of $357,000 to breakeven. The
pretax loss of Torotel, Inc. decreased from $237,000 to $43,000. The pretax
earnings of Torotel Products increased from a loss of $120,000 to a profit of
$43,000.
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 Torotel's 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 was held on Monday, January 17, 2000.
Shareholders approved lowering the par value of Torotel's Common Stock from 50
cents per share to 1 cent per share. Management encouraged shareholders to vote
for this change to give Torotel the flexibility to pursue various options for
raising additional capital to payoff debt and finance growth.
During the nine months ended January 31, 2000, Torotel's continuing
operations provided $261,000 in cash flow due primarily to lower levels of
receivables and inventories.
Investing activities used $2,000 in cash flow. Management does not
anticipate any further capital expenditures for the balance of the year.
Financing activities used $189,000 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 Update
Torotel did not experience any Year 2000 difficulties as of January 1, 2000,
nor from that date through the filing date of this report. Management had
determined that Torotel's hardware and software applications were Year 2000
compliant based on extensive testing and vendor certifications. In addition,
management had polled its significant suppliers and customers and, based on
these responses, had determined that its operation did not appear to be
vulnerable to a third parties' failure to remediate their own Year 2000 issues.
Management also tested various equipment items to verify their Year 2000
functionality.
14
Torotel did not incur any external costs for its Year 2000 readiness reviews and
assessments. Internal costs were not tracked separately; however, these costs
were minimal, and were limited to the related payroll costs for certain internal
employees and postage for the mailing of questionnaires to suppliers and
customers.
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.
15
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 Torotel's investigation into the testing
deficiencies, Torotel has recorded an estimated charge of $486,000 against
earnings. Torotel'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. 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held in Grandview, Missouri, on
Monday, January 17, 2000, to elect a Board of Directors and to consider and vote
upon a proposal to reduce the par value of Torotel's Common Stock from $.50 per
share to $.01 per share and to reduce Torotel's stated capital effective upon
the close of business on the day a Certificate of Amendment to Torotel's
Ariticles of Incorporation and Statement of Reduction of Capital are filed with
the Secretary of State of Missouri. At the meeting, there were 2,383,420 shares
voting, with nominees needing 1,191,711 shares to be elected, and the reduction
in par value and stated capital needing 1,874,394 shares to be approved.
Shareholders elected the following individuals to a one-year term on the
Board of Directors, with the number of shares voting "FOR" each nominee
indicated.
<TABLE>
<S> <C>
Dale H. Sizemore 2,348,336
Richard A. Sizemore 2,348,336
H. James Serrone 2,348,258
</TABLE>
Shareholders approved the reduction in par value and stated capital with
2,339,632 shares voting "FOR" the proposal.
16
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (electronic filings only)
Exhibit 3 Articles of Incorporation of Torotel, Inc. (amended
February 4, 2000)
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K -- There were no reports filed on Form 8-K during the
three months ended January 31, 2000.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Torotel, Inc.
(Registrant)
Date: March 10, 2000 /s/ H. James Serrone
H. James Serrone
Vice President of Finance and
Chief Financial Officer
17
EXHIBIT 3
ARTICLES OF INCORPORATION
OF
TOROTEL, INC.
ARTICLE ONE
The name of the Corporation is TOROTEL, INC.
ARTICLE TWO
The address of its registered office in the State of Missouri is 1200 Main
Street, Suite 3100, Kansas City, Missouri 64105 and the name of its registered
agent at such address is SHB Registered Agent, Inc.
ARTICLE THREE
The aggregate number of shares which the Corporation shall have authority to
issue shall be Six Million (6,000,000) shares of common stock of par value of
One Cent ($.01) per share, and there shall be no preemptive rights for any
shareholder arising therefrom and no preferences or qualifications or
limitations or restrictions or special rights of any character whatsoever in
respect to said shares.
The Board of Directors is authorized in its discretion to determine, fix and
approve the consideration other than money for shares which may be issued, and
to determine the fair value to the Corporation of such consideration.
ARTICLE FOUR
The number of shares to be issued before the Corporation shall commence
business is Fifty (50) shares having a total value of $5,000.00. Five Thousand
and No/100 Dollars ($5,000.00) has been paid up in lawful money of the United
States.
ARTICLE SIX
The number of directors for the Corporation who shall be elected from time
to time by the Shareholders is seven (7).
ARTICLE SEVEN
The duration of the Corporation is perpetual.
18
ARTICLE EIGHT
The Corporation is formed for the following purposes:
A. To buy, utilize, lease, rent, import, export, franchise, operate,
manufacture, produce, design, prepare, assemble, fabricate, improve,
develop, sell, lease, mortgage, pledge, hypothecate, distribute and
otherwise deal in, at wholesale, retail or otherwise, and as
principal, agent or otherwise, all commodities, goods, wares,
merchandise, devices, apparatus, equipment and all other personal
property, whether tangible or intangible, of every kind, without
limitation as to description, location or amount, including
specifically, but not limited to, electronic component parts and
telecommunication component parts.
B. To apply for, obtain, purchase, lease, take licenses in respect of
or otherwise acquire, and to hold, own use, operate, enjoy, turn to
account, grant franchise or licenses in respect of, manufacture
under, introduce, sell, assign, mortgage, pledge or otherwise
dispose of:
(1) Any and all inventions, devices, method, processes and
formulae and any improvements and modifications thereof;
(2) Any and all letters patent of the United States or of any
other country, state or locality, and all rights connected
therewith or appertaining thereto;
(3) Any and all copyrights, granted by the United States or any
other country, state or locality, and
(4) Any and all trademarks, trade names, trade symbols and other
indications or origin and ownership granted by or recognized
under the laws of the United States or of any other country,
state or locality; and to conduct and carry on its business
in any or all of its various branches under any trade name or
trade names.
C. To engage in, carry on and conduct research, experiments,
investigations, analyses, studies and laboratory work, for the
purpose of discovering new products or to improve products or
services.
D. To buy, lease, rent or otherwise acquire, own, hold, use, divide,
partition, develop, improve, operate and sell, lease, mortgage or
otherwise dispose of, deal in and turn to account, real estate,
leaseholds and any and all interests or estates appertaining
thereto.
E. To enter into any lawful contract or contracts with persons, firms,
corporations, other entities, governments or any agencies or
subdivision thereof, including guaranteeing the performance of any
contract or any obligation of any person, firm, corporation or other
entity.
F. To purchase and acquire, as a going concern or otherwise, and to
carry on, maintain and operate all or any part of the property or
business of any corporation, firm, association, entity, syndicate or
persons whatsoever, deemed to be of benefit to the Corporation, or
of use in any manner in connection with any of its purposes; and to
dispose thereof upon such terms as may seem advisable to the
Corporation.
G. To invest, lend and deal with monies of the Corporation in any
lawful manner, and to acquire by purchase, by the exchange of stock
or other securities of the Corporation, by subscription or
otherwise, and to invest in, to hold for investment or for any other
purpose, and to use, sell, pledge or otherwise dispose of, and in
general to deal in any interest concerning, or enter into any
transaction with respect to (including "long" and "short" sales of),
any stocks, bonds, notes, debentures, certificates, receipts and
other securities and obligations of any government, state,
municipality, corporation, association or other entity, including
individuals and partnership and, while owner thereof, to excercise
19
all of the rights, powers and privileges of ownership, including,
among other things, the right to vote thereon for any and all
purposes and to give consents with respect thereto.
H. To borrow or raise money for any purpose of the Corporation and to
secure any loan, indebtedness or obligation of the Corporation and
the interest accruing thereon, and for that or any other purpose,to
mortgage, pledge, hypothecate or change all or any part of the
present or hereafter acquired property, rights and franchises of the
Corporation, real, personal, mixed or of any character whatever,
subject only to limitations specifically imposed by law.
I. To do any or all of the things herein above enumerated, alone for
its own account, or for the account of others, or as the agent for
others, or in association with others or by or through others, and
to enter into all lawful contracts and undertakings in respect
thereof.
J. To have one or more offices, to conduct its business, carry on its
operations and promote its objects within and without the State of
Missouri, in other states, the District of Columbia, the
territories, colonies and dependencies of the United States, in
foreign countries and anywhere in the world, without restriction as
to place, manner or amount, but subject to the laws applicable
thereto; and to do any or all of the things herein set forth to the
same extent as a natural person might or could do and in any part of
the world, either alone or in company with others.
K. In general to carry on any other business in connection with each
and all of the foregoing or incidental thereto, and to carry on,
transact and engage in any and every lawful business or other lawful
thing calculated to be of gain, profit or benefit to the
Corporation, as fully and freely as a natural person might do, to
the extent and in the manner, and any where within and without the
State of Missouri, as it may from time to time determine; and to
have and exercise each and all of the powers and privileges, either
direct or incidental, which are given and provided by or are
available under the laws of the State of Missouri in respect of
general business corporations organized for profit thereunder;
provided, however, that the Corporation shall not engage in any
activity for which a corporation may not be formed under the laws of
the State of Missouri.
L. It is intended that each of the purposes and powers specified in
each of the paragraphs of this ARTICLE EIGHT shall be in no way
limited or restricted by reference to or inference from the term of
any other paragraph, but that the purposes and powers specified in
each of the paragraphs of this ARTICLE EIGHT shall be regarded as
independent purposes and powers. The enumeration of specific
purposes and powers in this ARTICLE EIGHT shall not be construed to
restrict in any manner the general purposes and powers of this
Corporation, nor shall the expression of one thing be deemed to
exclude another, although it be of like nature. The enumeration of
purposes and powers herein shall not be deemed to exclude or in any
way limit by inference any purposes or powers which this Corporation
has power to exercise, whether expressly by the laws of the State of
Missouri, now or hereafter in effect, or implied by any reasonable
construction of such laws.
ARTICLE NINE
Both the Shareholders and the Board of Directors shall have equal power to
make, alter, amend, suspend or repeal By-laws for the Corporation from time to
time; provided, however, that the power of the Directors to alter, amend,
20
suspend or repeal the By-laws or any portion thereof may be denied as to any
By-laws or portion thereof enacted by the Shareholders if at the time of such
enactment the shareholders shall so expressly provide.
ARTICLE TEN
These Articles of Incorporation may be amended in any respect from time to
time by the Shareholders as provided by the laws of the State of Missouri.
21
<TABLE> <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 off Form 10-QSB for the quarterly period ended January 31,
2000, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JAN-31-2000
<CASH> 121,000
<SECURITIES> 0
<RECEIVABLES> 809,000
<ALLOWANCES> 61,000
<INVENTORY> 216,000
<CURRENT-ASSETS> 673,000
<PP&E> 1,792,000
<DEPRECIATION> 1,548,000
<TOTAL-ASSETS> 1,546,000
<CURRENT-LIABILITIES> 1,560,000
<BONDS> 1,405,000
0
0
<COMMON> 29,000
<OTHER-SE> (1,448,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,546,000
<SALES> 2,485,000
<TOTAL-REVENUES> 2,485,000
<CGS> 1,767,000
<TOTAL-COSTS> 2,485,000
<OTHER-EXPENSES> (27,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,000
<INCOME-PRETAX> (56,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (56,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,000)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
