**FORM 10-QSB**

 

**QuarterlyReport Under Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended October 31,2003**

 

**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  incorporation or organization)                     |   | (I.R.S. Employer 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 changed since  last report) |

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý   No  o

 

As of December 11, 2003, therewere 5,111,590 shares of Common Stock, $.01 Par Value, outstanding.

 

 

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TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

 
| PART I.    | FINANCIAL INFORMATION |                                                                                         |
|------------|-----------------------|----------------------------------------------------------------------------------------------|
|       |                  |
|       | Item 1.               | Financial Statements                                                                         |   |
|       |                  |                                                                                         |
|       |                  | Consolidated Balance Sheet as of October 31, 2003                                            |   |
|       |                  |                                                                                         |   |
|       |                  | Consolidated Statements of Operations for  the six months  ended October 31, 2003 and 2002   |   |
|       |                  |                                                                                         |   |
|       |                  | Consolidated Statements of Operations for  the three months  ended October 31, 2003 and 2002 |   |
|       |                  |                                                                                         |   |
|       |                  | Consolidated Statements of Cash Flows for  the six months  ended October 31, 2003 and 2002   |   |
|       |                  |                                                                                         |   |
|       |                  | Notes to Consolidated Financial Statements                                                   |   |
|       |                  |                                                                                         |
|       | Item 2.               | Management’s Discussion and Analysis or  Plan of Operation                              |   |
|       |                  |                                                                                         |   |
|       | Item 3.               | Controls and Procedures                                                                      |   |
|       |                  |
| PART II.   | OTHER INFORMATION     |                                                                                         |
|       |                  |
|       | Item  1.              | Legal  Proceedings                                                                           |   |
|       |                  |                                                                                         |   |
|       | Item 4.               | Submission of Matters to a Vote of Security  Holders                                         |   |
|       |                  |                                                                                         |   |
|       | Item 6.               | Exhibits and Reports on Form 8-K                                                             |   |
|       |                  |
| SIGNATURES |                  |
|            |                       |                                                                                              |  |  |

 

----

 

PART I.          FINANCIAL INFORMATION

 

Item 1.                  Financial Statements

 

CONSOLIDATEDBALANCE SHEET (Unaudited)

As of October 31, 2003

 
| ASSETS                                            |   |       |      |
|---------------------------------------------------|--------|------------|-----------|
|                                              |   |       |      |
| Current assets:                                   |   |       |      |
| Cash                                              |   | $          | 491,000   |   |
| Accounts receivable, net                          |   | 671,000    |      |
| Inventories                                       |   | 256,000    |      |
| Prepaid expenses and other current assets         |   | 58,000     |      |
|                                              |   | 1,476,000  |      |
|                                              |   |       |      |
| Property, plant and equipment, net                |   | 298,000    |      |
|                                              |   |       |      |
| Other assets                                      |   | 6,000      |      |
|                                              |   |       |      |
| Intangible assets, net                            |   | 1,747,000  |      |
|                                              |   |       |      |
| Equity investment                                 |   | 997,000    |      |
|                                              |   |       |      |
|                                              |   | $          | 4,524,000 |   |
|                                              |   |       |      |
| LIABILITIES AND STOCKHOLDERS’ EQUITY         |   |       |      |
|                                              |   |       |      |
| Current liabilities:                              |   |       |      |
| Current maturities of long-term debt              |   | $          | 53,000    |   |
| Trade accounts payable                            |   | 696,000    |      |
| Accrued liabilities                               |   | 171,000    |      |
| Accrued interest on note payable to  shareholders |   | 5,000      |      |
|                                              |   | 925,000    |      |
|                                              |   |       |      |
| Long-term debt, less current maturities           |   | 305,000    |      |
|                                              |   |       |      |
| Note payable to shareholders                      |   | 750,000    |      |
|                                              |   |       |      |
| Stockholders’ equity:                        |   |       |      |
| Common stock, at par value                        |   | 52,000     |      |
| Capital in excess of par value                    |   | 12,362,000 |      |
| Accumulated deficit                               |   | (9,665,000 | )         |
|                                              |   | 2,749,000  |      |
| Less treasury stock, at cost                      |   | 205,000    |      |
|                                              |   | 2,544,000  |      |
|                                              |   |       |      |
|                                              |   | $          | 4,524,000 |   |

 

The accompanying notes are an integral part of this statement.

 

1

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CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)

Six Months Ended October 31,

 

 
|                                       |   | **2003**  |      | **2002**  | ** ** |
|--------------------------------------------|--------|-----------|-----------|-----------|------------|
| Net sales                                  |   | $         | 2,197,000 |      | $          | 2,428,000 |   |
| Cost of goods sold                         |   | 1,381,000 |      | 1,382,000 |       |
|                                       |   |      |      |      |       |
| Gross profit                               |   | 816,000   |      | 1,046,000 |       |
|                                       |   |      |      |      |       |
| Operating expenses:                        |   |      |      |      |       |
| Engineering                                |   | 94,000    |      | 97,000    |       |
| Selling, general and administrative        |   | 491,000   |      | 487,000   |       |
| Amortization of intangible assets          |   | 77,000    |      | 166,000   |       |
|                                       |   | 662,000   |      | 750,000   |       |
|                                       |   |      |      |      |       |
| Earnings from operations                   |   | 154,000   |      | 296,000   |       |
|                                       |   |      |      |      |       |
| Other expense (income):                    |   |      |      |      |       |
| Interest expense                           |   | 35,000    |      | 41,000    |       |
| Interest income                            |   | —    |      | (5,000    | )          |
| Equity in loss (earnings) of investee      |   | 68,000    |      | (1,000    | )          |
| Other, net                                 |   | —    |      | (1,000    | )          |
|                                       |   | 103,000   |      | 34,000    |       |
|                                       |   |      |      |      |       |
| Earnings before provision for income taxes |   | 51,000    |      | 262,000   |       |
|                                       |   |      |      |      |       |
| Provision for income taxes                 |   | —    |      | —    |       |
|                                       |   |      |      |      |       |
| Net earnings                               |   | $         | 51,000    |      | $          | 262,000 |   |
|                                       |   |      |      |      |       |
| Basic and diluted earnings per share       |   | $         | .01       |      | $          | .05 |   |

 

The accompanying notes are an integral part of these statements.

 

2

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CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)

Three Months EndedOctober 31,

 
|                                       |   | **2003** |      | **2002** |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|
| Net sales                                  |   | $        | 1,119,000 |     | $      | 1,288,000 |   |
| Cost of goods sold                         |   | 706,000  |      | 759,000  |   |
|                                       |   |     |      |     |   |
| Gross profit                               |   | 413,000  |      | 529,000  |   |
|                                       |   |     |      |     |   |
| Operating expenses:                        |   |     |      |     |   |
| Engineering                                |   | 49,000   |      | 49,000   |   |
| Selling, general and administrative        |   | 247,000  |      | 249,000  |   |
| Amortization of intangible assets          |   | 39,000   |      | 83,000   |   |
|                                       |   | 335,000  |      | 381,000  |   |
|                                       |   |     |      |     |   |
| Earnings from operations                   |   | 78,000   |      | 148,000  |   |
|                                       |   |     |      |     |   |
| Other expense (income):                    |   |     |      |     |   |
| Interest expense                           |   | 18,000   |      | 20,000   |   |
| Interest income                            |   | —   |      | (2,000   | )      |
| Equity in loss of investee                 |   | 42,000   |      | 9,000    |   |
|                                       |   | 60,000   |      | 27,000   |   |
|                                       |   |     |      |     |   |
| Earnings before provision for income taxes |   | 18,000   |      | 121,000  |   |
|                                       |   |     |      |     |   |
| Provision for income taxes                 |   | —   |      | —   |   |
|                                       |   |     |      |     |   |
| Net earnings                               |   | $        | 18,000    |     | $      | 121,000 |   |
|                                       |   |     |      |     |   |
| Basic and diluted earnings per share       |   | $        | —    |     | $      | .02 |   |

 

The accompanying notes are an integral part of these statements.

 

3

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CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

Six Months Ended October 31,

 
|                                                                                           |   | **2003** |    | **2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Cash flows  from operating activities:                                                         |   |     |    |     |   |
| Net earnings                                                                                   |   | $        | 51,000  |     | $      | 262,000 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used in) operating activities: |   |     |    |     |   |
| Equity in loss (earnings) of investee                                                          |   | 68,000   |    | (1,000   | )      |
| Depreciation and amortization                                                                  |   | 89,000   |    | 187,000  |   |
| Increase (decrease) in cash flows from  operations resulting from changes in:                  |   |     |    |     |   |
| Accounts receivable                                                                            |   | (179,000 | )       | (65,000  | )      |
| Inventories                                                                                    |   | (69,000  | )       | 11,000   |   |
| Prepaid expenses and other assets                                                              |   | (36,000  | )       | (49,000  | )      |
| Trade accounts payable                                                                         |   | 33,000   |    | 41,000   |   |
| Accrued liabilities                                                                            |   | (27,000  | )       | (22,000  | )      |
| Income taxes payable                                                                           |   | —   |    | (8,000   | )      |
|                                                                                           |   |     |    |     |   |
| Net cash provided by (used in) operating  activities                                           |   | (70,000  | )       | 356,000  |   |
|                                                                                           |   |     |    |     |   |
| Cash flows provided by (used in) investing  activities:                                        |   |     |    |     |   |
| Capital expenditures                                                                           |   | (24,000  | )       | (6,000   | )      |
| Proceeds from note receivable                                                                  |   | —   |    | 79,000   |   |
| Electronika acquisition costs                                                                  |   | —   |    | (53,000  | )      |
| Apex investment costs                                                                          |   | (89,000  | )       | (35,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net cash used in investing activities                                                          |   | (113,000 | )       | (15,000  | )      |
|                                                                                           |   |     |    |     |   |
| Cash flows from financing activities:                                                          |   |     |    |     |   |
| Principal payments on long-term debt                                                           |   | (27,000  | )       | (75,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net cash used in financing activities                                                          |   | (27,000  | )       | (75,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net increase (decrease) in cash                                                                |   | (210,000 | )       | 266,000  |   |
| Cash, beginning of period                                                                      |   | 701,000  |    | 338,000  |   |
|                                                                                           |   |     |    |     |   |
| Cash, end of period                                                                            |   | $        | 491,000 |     | $      | 604,000 |   |
|                                                                                           |   |     |    |     |   |
| Supplemental Disclosures of Cash Flow  Information                                             |   |     |    |     |   |
| Cash paid during the period for:                                                               |   |     |    |     |   |
| Interest                                                                                       |   | $        | 35,000  |     | $      | 41,000 |   |
| Income taxes payable                                                                           |   | $        | —  |     | $      | 8,000 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)

 

Note 1 - Basis of Presentation

 

Torotelspecializes in the custom design and manufacture of a wide variety of precisionmagnetic components, consisting of transformers, inductors, reactors, chokesand toroidal coils, for use in commercial, industrial and militaryelectronics.  Torotel also designs anddistributes ballast transformers for the airline industry.  Approximately 96% of Torotel’s sales arederived from domestic customers.  Theaccompanying unaudited consolidated financial statements reflect the normalrecurring adjustments, which are, in the opinion of management, necessary topresent fairly Torotel’s financial position at October 31, 2003, and theresults of operations for the six months ended October 31, 2003.

 

The financialstatements contained herein should be read in conjunction with Torotel’sfinancial statements and related notes filed on Form 10-KSB for the year endedApril 30, 2003.

 

Note 2 - Inventories

 

The componentsof inventories are summarized as follows:

 
| Raw materials   |   | $       | 40,000  |   |
|-----------------|--------|---------|---------|--------|
| Work in process |   | 197,000 |    |
| Finished goods  |   | 19,000  |    |
|            |   | $       | 256,000 |   |

 

Note 3 - Income Taxes

 

Torotel hasnet operating loss carryforwards available as benefits to reduce future incometaxes, subject to applicable limitations. These operating loss carryforwards expire in various amounts in theyears 2007 through 2014.

 

The differencebetween the financial and tax bases of assets and liabilities is determined annually.  Deferred income taxes and liabilities arecomputed for those differences that have future tax consequences using thecurrently enacted tax laws and rates that apply to the periods in which theyare expected to affect taxable income. Valuation allowances are established, if necessary, to reduce thedeferred tax asset to the amount that will, more likely than not, berealized.  Income tax expense is thecurrent tax payable or refundable for the period plus or minus the net changein the deferred tax assets or liabilities. The following table summarizes the components of the net deferred taxasset:

 
| Net operating loss carryforwards |   | $         | 1,963,000 |   |
|----------------------------------|--------|-----------|-----------|--------|
| Inventory valuation reserve      |   | 189,000   |      |
| Depreciation and amortization    |   | 151,000   |      |
| Disposal of ECH liabilities      |   | 137,000   |      |
| Tax credit carryforwards         |   | 19,000    |      |
| Other                            |   | 18,000    |      |
|                             |   | 2,477,000 |      |
| Less valuation allowance         |   | 2,477,000 |      |
|                             |   | $         | —    |   |

 

5

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Note 4 - Earnings Per Share

 

Statement ofFinancial Accounting Standards (SFAS) No. 128, *Earningsper Share*, requires dual presentation of basic and diluted EPS onthe face of the statement of earnings regardless of whether basic and dilutedEPS are the same; and requires a reconciliation of the numerator anddenominator used in computing basic and diluted EPS.  Basic EPS excludes dilution and is computed by dividing earningsavailable to common stockholders by the weighted average number of commonshares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APBOpinion 15.  Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the entity.  Pursuant to SFAS No. 128, the basic anddiluted earnings per common share were computed as follows:

 

# **Year-to-Date EPS Calculations**

 
|                                       |   | **2003**  |   | **2002**  |   |
|--------------------------------------------|--------|-----------|--------|-----------|--------|
| Net earnings                               |   | $         | 51,000 |      | $      | 262,000 |   |
| Weighted average common shares outstanding |   | 5,111,590 |   | 5,111,590 |   |
| Incremental shares                         |   | 1,104     |   | 38,531    |   |
|                                       |   |      |   |      |   |
| Basic earnings per share                   |   | $         | .01    |      | $      | .05 |   |
| Diluted earnings per share                 |   | $         | .01    |      | $      | .05 |   |

 

# **Quarterly EPS Calculations**

 
|                                       |   | **2003**  |   | **2002**  |   |
|--------------------------------------------|--------|-----------|--------|-----------|--------|
| Net earnings                               |   | $         | 18,000 |      | $      | 121,000 |   |
| Weighted average common shares outstanding |   | 5,111,590 |   | 5,111,590 |   |
| Incremental shares                         |   | 1,757     |   | 36,185    |   |
|                                       |   |      |   |      |   |
| Basic earnings per share                   |   | $         | — |      | $      | .02 |   |
| Diluted earnings per share                 |   | $         | — |      | $      | .02 |   |

 

Note 5 - Employee Stock Options

 

In accordancewith the Incentive Compensation Plan approved by shareholders in 1994, Torotelreserved 400,000 common shares for issuance to key employees pursuant to theexercise of incentive and non-qualified stock options granted prior to June 20,2004.  The options are accounted forunder APB Opinion 25, *Accounting for StockIssued to Employees*, and related interpretations.  The incentive stock options have a term offive years when issued and vest 50% per year at the end of each of the firsttwo years.  The non-qualified stockoptions have a term of ten years when issued and vest 25% per year at the endof each of the first four years.  Theexercise price of each option equals the market price of Torotel’s common stockon the date of grant.  Accordingly, nocompensation cost has been recognized for the Plan.  Had compensation cost for the Plan been determined based on thefair value of the options at the grant dates consistent with the method ofStatement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation,*Torotel’s operatingresults would have been reduced to the pro forma amounts indicated below.

 

6

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# **Year-to-Date**

 
|                       |   |        |   | **2003** |   | **2002** |   |
|----------------------------|--------|-------------|--------|----------|--------|----------|--------|
| Net earnings               |   | As Reported |   | $        | 51,000 |     | $      | 262,000 |   |
|                       |   | Pro Forma   |   | $        | 47,000 |     | $      | 255,000 |   |
|                       |   |        |   |     |   |     |   |
| Basic earnings per share   |   | As Reported |   | $        | .01    |     | $      | .05 |   |
|                       |   | Pro Forma   |   | $        | .01    |     | $      | .05 |   |
|                       |   |        |   |     |   |     |   |
| Diluted earnings per share |   | As Reported |   | $        | .01    |     | $      | .05 |   |
|                       |   | Pro Forma   |   | $        | .01    |     | $      | .05 |   |

 

# **Quarterly**

 
|                       |   |        |   | **2003** |   | **2002** |   |
|----------------------------|--------|-------------|--------|----------|--------|----------|--------|
| Net earnings               |   | As Reported |   | $        | 18,000 |     | $      | 121,000 |   |
|                       |   | Pro Forma   |   | $        | 18,000 |     | $      | 121,000 |   |
|                       |   |        |   |     |   |     |   |
| Basic earnings per share   |   | As Reported |   | $        | — |     | $      | .02 |   |
|                       |   | Pro Forma   |   | $        | — |     | $      | .02 |   |
|                       |   |        |   |     |   |     |   |
| Diluted earnings per share |   | As Reported |   | $        | — |     | $      | .02 |   |
|                       |   | Pro Forma   |   | $        | — |     | $      | .02 |   |

 

The fair valueof the incentive stock options granted was estimated on the date of grant usingthe Black-Scholes options-pricing model. The fair value of the options was determined using the followingweighted average assumptions: no dividend payments over the life of theoptions; expected volatility of 551.0%; risk-free interest rate of 3.50%; andexpected life of five years.

 

Stock optiontransactions under the 1994 Incentive Compensation Plan for each period aresummarized as follows:

 
|                                                            |   | **2003**                            |   | **2002**                     |   |
|-----------------------------------------------------------------|--------|-------------------------------------|--------|------------------------------|--------|
|                                                            |   | **Weighted  Shares  Under  Option** |   | **Average  Exercise  Price** |   | **Weighted  Shares  Under  Option** |   | **Average  Exercise  Price** |   |
| Outstanding  at beginning of period                             |   | 40,000                              |   | $                            | .37    |   | 40,000 |   | $ | .37 |   |
| Granted                                                         |   | —                              |   | —                       |   | — |   | — |   |
| Exercised                                                       |   | —                              |   | —                       |   | — |   | — |   |
| Forfeited                                                       |   | —                              |   | —                       |   | — |   | — |   |
| Outstanding at end of period                                    |   | 40,000                              |   | $                            | .37    |   | 40,000 |   | $ | .37 |   |
|                                                            |   |                                |   |                         |   |   |   |   |   |
| Options exercisable at end of period                            |   | 40,000                              |   | $                            | .37    |   | 20,000 |   | $ | .37 |   |
| Weighted average fair value of options  granted during the year |   |                                |   | —                       |   |   |   | — |   |

 

The following informationapplies to options outstanding at October 31, 2003:

 
| Number outstanding                          |   | 40,000 |       |
|---------------------------------------------|--------|--------|------------|
| Range of exercise prices                    |   | $      | .37        |   |
| Weighted average exercise price             |   | $      | .37        |   |
| Weighted average remaining contractual life |   | 3.00   |  yrs. |

 

7

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Note 6 - Stock Warrants

 

A warrantcertificate issued in May 1998 to purchase 100,000 shares of Torotel, Inc.common stock at 75 cents per share expired on May 4, 2003.  Stock warrant transactions for each periodare summarized as follows:

 
|                                                             |   | **2003**                            |       | **2002**                     |       |
|------------------------------------------------------------------|--------|-------------------------------------|------------|------------------------------|------------|
|                                                             |   | **Weighted  Shares  Under  Option** | ** ** | **Average  Exercise  Price** | ** ** | **Weighted  Shares  Under  Option** | ** ** | **Average  Exercise  Price** | ** ** |
| Outstanding at beginning of period                               |   | 100,000                             |       | $                            | .75        |   | 100,000 |   | $ | .75 |   |
| Granted                                                          |   | —                              |       | —                       |       | — |   | — |   |
| Exercised                                                        |   | —                              |       | —                       |       | — |   | — |   |
| Forfeited                                                        |   | (100,000                            | )          | $                            | .75        |   | — |   | — |   |
| Outstanding at end of period                                     |   | —                              |       | —                       |       | 100,000 |   | $ | .75 |   |
|                                                             |   |                                |       |                         |       |   |   |   |   |
| Warrants exercisable at end of period                            |   | —                              |       | —                       |       | — |   | — |   |
| Weighted average fair value of warrants  granted during the year |   |                                |       | —                       |       |   |   | — |   |

 

Note 7 - Amortization ofIntangibles

 

The followingtable provides the gross carrying value and accumulated amortization for eachmajor class of intangible asset based on Torotel’s reassessment of previouslyrecognized intangible assets and their remaining amortization lives inaccordance with the adoption of Statement of Financial Accounting Standards No.142, *Goodwill and Other Intangible Assets*:

 
|                 |   |                           |   | **2003**                    |      | **2002**                      |   |
|----------------------|--------|--------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                 |   | **Average  Amortizable  Life** |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Order  backlog       |   | 1                              |   | $                           | 205,000   |                          | $      | 205,000 |   | $ | 205,000 |   | $ | 102,000 |   |
| Aircraft -  ballasts |   | 12                             |   | 1,958,000                   |      | 211,000                       |   | 2,177,000 |   | 64,000 |   |
|                 |   |                           |   |                        |      |                          |   |   |   |   |   |
|                 |   |                           |   | $                           | 2,163,000 |                          | $      | 416,000 |   | $ | 2,382,000 |   | $ | 166,000 |   |

 

The total intangibleamortization expense for the six months ended October 31, 2003, was$77,000.  The estimated aggregateamortization expense for each of the next five years is as follows:

 

| **Year  Ending****April 30,** |   | **Amount** |    |
|-------------------------------|--------|------------|---------|
| 2004                          |   | $          | 153,000 |   |
| 2005                          |   | 153,000    |    |
| 2006                          |   | 153,000    |    |
| 2007                          |   | 153,000    |    |
| 2008                          |   | 153,000    |    |
|                          |   |       |    |
|                          |   | $          | 765,000 |   |

 

8

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Note 8 - DiscontinuedSubsidiary

 

The operationsof East Coast Holdings, Inc. (formerly named OPT Industries, Inc.), awholly-owned subsidiary of Torotel, were discontinued in April 1999, andsubstantially all of the assets were sold to Shared Information GroupManagement Associates, L.L.C. (“SIGMA”) for approximately $2.7 million.  The remaining assets and liabilities relatedto this subsidiary as of October 31, 2003, are included in the accompanyingconsolidated balance sheet under the following captions and in the amountsshown:

 

| Trade accounts payable |   | $ | 393,000 |   |
|------------------------|--------|---|---------|--------|
| Accrued liabilities    |   | $ | 48,000  |   |

 

Note 9 - Equity Investment

 

On May 23,2003, Torotel purchased an additional 355,637 common shares of ApexInnovations, Inc. (“Apex”) at 25 cents per share.  Torotel now owns 4,355,637 common shares of Apex.  Torotel’s ownership position remains at17.8%.  The equity investment in Apex isaccounted for using the equity method of accounting.  As of October 31, 2003, there was a $408,000 difference betweenthe $996,000 carrying value of the investment as reflected on the accompanyingconsolidated balance sheet and the underlying equity in the net assets of Apexof $588,000.  This difference is treatedas non-amortizing goodwill.

 

Theaccompanying consolidated statements of operations include a $68,000 loss and a$1,000 profit for the six months ended October 31, 2003 and 2002, respectively,which result from Torotel’s portion of Apex’s operating results for the sixmonths ended August 31, 2003 and 2002. Condensed financial statements for Torotel’s investment in Apex are asfollows:

 

**Condensed Balance Sheet**

 
|                      |   | **August 31,  2003** |      |
|---------------------------|--------|----------------------|-----------|
| Current assets            |   | $                    | 1,071,000 |   |
| Other assets              |   | 7,244,000            |      |
|                      |   | $                    | 8,315,000 |   |
|                      |   |                 |      |
| Current liabilities       |   | $                    | 1,190,000 |   |
| Other liabilities         |   | 3,819,000            |      |
| Stockholders’ equity |   | 3,306,000            |      |
|                      |   | $                    | 8,315,000 |   |

 

**Condensed Statements of Operations**

 
|                |   | **6-Mos.  Ended  August 31,  2003** |      | **6-Mos.  Ended  August 31,  2002** |   | **3-Mos.  Ended  August 31,  2003** |   | **3-Mos  Ended  August 31,  2002** |      |   |
|---------------------|--------|-------------------------------------|-----------|-------------------------------------|--------|-------------------------------------|--------|------------------------------------|-----------|--------|
| Net sales           |   | $                                   | 2,485,000 |                                | $      | 2,749,000                           |   | $                                  | 1,142,000 |   | $ | 1,366,000 |   |
| Gross profit        |   | $                                   | 1,022,000 |                                | $      | 1,192,000                           |   | $                                  | 459,000   |   | $ | 593,000 |   |
| Net earnings (loss) |   | $                                   | (383,000  | )                                   | $      | 3,000                               |   | $                                  | (239,000  | )      | $ | (55,000 | ) |
|                     |        |                                     |           |                                     |        |                                     |        |                                    |           |        |  |  |  |  |  |

 

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Item 2.                  Management’s Discussion and Analysisor Plan of Operation

 

The followingmanagement comments regarding Torotel’s results of operations and outlookshould be read in conjunction with the Consolidated Financial Statementsincluded pursuant to Item 1 of this Quarterly Report.

 

The discussionand analysis of the results of operations include the operations of Torotel,Inc. and its subsidiaries, Torotel Products, Inc. and Electronika, Inc.

 

Six Months Ended October 31,2003 Compared With Six Months Ended October 31, 2002

 

Net salesdecreased nearly 10%.  The net sales ofTorotel Products increased 3% from $2,004,000 to $2,062,000.  This increase is attributable to higherdemand from Torotel’s military markets. This trend is expected to continue. Torotel’s aerospace markets remain very soft and are expected to remainas such during the next few quarters. The net sales of Electronika decreased 68% from $424,000 to$135,000.  This decrease is alsoattributable to the soft conditions in the aerospace market.  Because of the decline in Electronika’ssales, management is now targeting $4,300,000 in consolidated sales for fiscal2004, down from $4,500,000 projected earlier in the year.

 

Gross profitas a percentage of net sales decreased 8%. The gross profit percentage of Torotel Products increased slightly.  Electronika’s gross profit as a percentageof net sales decreased 60% because of the labor and overhead costs incurred atthe manufacturing facility in Olathe, Kansas.

 

Engineeringexpenses, applicable only to Torotel Products, decreased 3% from $97,000 to$94,000 because of lower payroll costs associated with fewer hours worked bypart-time personnel and lower travel costs. Management does not anticipate any significant increase in the presentlevel of engineering expenses.

 

Selling,general and administrative (SG&A) expenses increased slightly.  The SG&A expenses of Torotel, Inc.increased slightly from $137,000 to $141,000 primarily because of higherdirector fees associated with the addition of two new members to the board ofdirectors.  The SG&A expenses ofTorotel Products decreased slightly from $334,000 to $329,000 primarily becauseof an $11,000 decrease in incentive compensation awards, a $5,000 decrease indepreciation costs, and a $4,000 decrease in repairs and maintenancecosts.  These decreases were offset byan $8,000 increase in professional fees and a $6,000 increase in property and liabilityinsurance costs.  The SG&A expensesof Electronika increased 31% from $16,000 to $21,000 because of administrativecosts associated with the Olathe manufacturing facility.  Management does not anticipate anysignificant increase in the present level of SG&A expenses.

 

Amortizationcosts, entirely attributable to Electronika, decreased 54% from $166,000 to$77,000 (see Note 7 of Notes to Consolidated Financial Statements).

 

Interestexpense decreased 15%.  The interestexpense of Torotel, Inc. decreased 13% from $31,000 to $27,000 because of alower debt balance.  The interestexpense of Torotel Products decreased 20% from $10,000 to $8,000 because of alower debt balance and a lower annual interest rate on the mortgage payable toUnited Trust Bank.

 

Interestincome decreased  $5,000 due to thepayoff of the note receivable from SIGMA.

 

Equity in lossof investee was $68,000 compared with a profit of $1,000 in the prior year (seeNote 9 of Notes to Consolidated Financial Statements).

 

For thereasons discussed above, the consolidated pretax earnings decreased from$262,000 to $51,000.  The pretax loss ofTorotel, Inc. increased from $161,000 to $236,000.  The pretax earnings of Torotel Products increased from $350,000to $391,000.  The pretax earnings ofElectronika decreased from a profit of $73,000 to a loss of $104,000.

 

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Three Months Ended October 31,2003 Compared With Three Months Ended October 31, 2002

 

Net salesdecreased 13%.  The net sales of TorotelProducts increased slightly from $1,046,000 to $1,048,000.  The net sales of Electronika decreased 71%from $242,000 to $71,000.  This decreaseis attributable to the soft conditions in the aerospace market.  Management continues to target $4,500,000 asa consolidated sales goal for fiscal 2004.

 

Gross profitas a percentage of net sales decreased 4%. The gross profit percentage of Torotel Products increased 3% because ofthe overhead costs absorbed into work in process inventory.  Electronika’s gross profit as a percentageof net sales decreased 60% because of the labor and overhead costs incurred atthe manufacturing facility in Olathe, Kansas.

 

Engineeringexpenses, applicable only to Torotel Products, were unchanged at $49,000.  Management does not anticipate anysignificant increase in the present level of engineering expenses.

 

Selling,general and administrative (SG&A) expenses decreased slightly.  The SG&A expenses of Torotel, Inc.increased 4% from $78,000 to $81,000 primarily because of higher director feesassociated with the addition of two new members to the board of directors.  The SG&A expenses of Torotel Productsdecreased 5% from $163,000 to $155,000 primarily because of a $3,000 decrease indepreciation costs and a $2,000 decrease in repairs and maintenance costs.  The SG&A expenses of Electronikaincreased 37% from $8,000 to $11,000 because of administrative costs associatedwith the Olathe manufacturing facility. Management does not anticipate any significant increase in the presentlevel of SG&A expenses.

 

Amortizationcosts, entirely attributable to Electronika, decreased 53% from $83,000 to$39,000 (see Note 7 of Notes to Consolidated Financial Statements).

 

Interestexpense decreased 10%.  The interestexpense of Torotel, Inc. decreased 7% from $15,000 to $14,000 because of alower debt balance.  The interestexpense of Torotel Products decreased 20% from $5,000 to $4,000 because of alower debt balance and a lower annual interest rate on the mortgage payable toUnited Trust Bank.

 

Interestincome decreased  $2,000 due to thepayoff of the note receivable from SIGMA.

 

Equity in lossof investee was $42,000 compared with a loss of $9,000 in the prior year (seeNote 9 of Notes to Consolidated Financial Statements).

 

For thereasons discussed above, the consolidated pretax earnings decreased from$121,000 to $18,000.  The pretax loss ofTorotel, Inc. increased from $100,000 to $137,000.  The pretax earnings of Torotel Products increased from $166,000to $212,000.  The pretax earnings ofElectronika decreased from a profit of $55,000 to a loss of $57,000.

 

Liquidity and Capital Resources

 

Torotel relieson funds generated internally to meet its normal operating requirements and toservice bank indebtedness.  Managementcontinues to evaluate ways of improving Torotel’s liquidity position andfunding future investments.

 

During the sixmonths ended October 31, 2003, Torotel’s operations used $70,000 in cash flowbecause of lower operating earnings. The lower earnings resulted from Electronika’s lower sales volume, andthe labor and overhead costs associated with the manufacturing facility inOlathe.  Electronika-Kansas, Inc., whichis the Olathe facility, originally was started to manufacture Electronika’sballast transformers.  This plan was puton hold because soft conditions developed in the airline industry.  However, the facility has evolved into acontract manufacturing source for Torotel Products.  This is particularly important, since Torotel

 

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Products has lost 10% of itsproduction workforce to retirement in past six months, and another 17% will beeligible to retire over the next 15 months. With more than 90% of Torotel Products’ business generated by custommanufactured, labor-intensive products, investing in production personnel isessential to maintain an ample level of manufacturing skills.  Earnings and cash flow may suffer in theshort term as a result.  Over the longterm, management believes this is the best approach for our customers.  In addition, the investment puts TorotelProducts in a better position to respond to higher demand when militarycontracts are awarded, and conditions improve in the aerospace market.  In the coming months, management will beevaluating whether to remain in the existing facilities in Grandview andOlathe, or to consolidate them.

 

Investingactivities used $113,000 in cash flow because of the additional $89,000investment in Apex (see Note 9 of Notes to Consolidated Financial Statements)and capital expenditures of $24,000. Management anticipates approximately $15,000 in capital expendituresduring the balance of fiscal 2004.

 

Financingactivities used $27,000 in cash flow because of decreases in long-term debt.

 

Managementbelieves that inflation will have only a minimal effect on future operationssince such effects will be offset by sales price increases, which are notexpected to have a significant effect upon demand*.*

 

Forward-Looking Information

 

This report,as well as our other reports filed with the Securities and Exchange Commission(“SEC”), and in press releases and other public communications throughout theyear, contains forward-looking statements made pursuant to the safe harborprovisions of The Private Securities Litigation Reform Act of 1995.  Forward-looking statements include allinformation on our expected financial position, results of operations, cashflows, strategy, budgets and management’s plans and objectives.  These forward-looking statements are basedon assumptions about a number of important factors and involve risks anduncertainties that could cause actual results to be different from what appearhere.  These risk factors include:impairment of intangible assets, decreased demand for products, delays indeveloping new products, expected orders that do not occur, loss of keycustomers, the impact of competition and price erosion as well as supply andmanufacturing constraints, and other risks and uncertainties.  In light of these risks and uncertainties,there can be no assurance that the forward-looking information contained inthis report will prove accurate, and our actual results may differ materiallyfrom these forward-looking statements.

 

Item 3.                  Controls and Procedures

 

Torotel’sChief Executive Officer and Chief Financial Officer (collectively, the“Certifying Officers”) are responsible for establishing and maintainingdisclosure controls and procedures. Such officers have concluded (based upon their evaluation of thesecontrols and procedures as of a date within 90 days of the filing of thisreport) that Torotel’s disclosure controls and procedures are effective toensure that information required to be disclosed in this report is accumulatedand communicated to Torotel’s management, including its principal executiveofficers as appropriate, to allow timely decisions regarding requireddisclosure.  The Certifying Officersalso have indicated that there were no significant changes in Torotel’sinternal controls or other factors that could significantly affect suchcontrols subsequent to the date of their evaluation, and there were nocorrective actions with regard to significant deficiencies and materialweaknesses.

 

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PART II.      OTHER INFORMATION

 

Item 1.                  Legal Proceedings

 

The remainingliabilities related to the discontinued operations of ECH include tradeaccounts payable of $393,000 (see Note 8 of Notes to Consolidated FinancialStatements).  Several claims were filedduring fiscal years 2000-2002 by ECH vendors for collection of amounts due, andmore still could be filed.  However, ECHhas no source of income to satisfy its trade debt obligations.  This trade debt remains the sole responsibilityof ECH.  Neither Torotel nor TorotelProducts has assumed these obligations. While some of the claims by ECH vendors have resulted in judgmentsagainst ECH, neither Torotel or Torotel Products intends to provide any fundsto satisfy the judgments nor, in the opinion of legal counsel, are theyobligated to do so.

 

Item 4.                  Submission of Matters to a Vote ofSecurity Holders

 

The annualmeeting of stockholders was held in Grandview, Missouri, on Monday, September15, 2003, to elect a Board of Directors. At the meeting, there were 3,178,489 shares voting, with nominees needing1,589,246 shares to be elected. Stockholders elected the following individuals to a one-year term on theBoard of Directors, with the number of shares voting “FOR” each nomineeindicated.

 

| Anthony H. Lewis      |   | 3,148,346 |   |
|-----------------------|--------|-----------|--------|
| H. James Serrone      |   | 3,148,346 |   |
| Dale H. Sizemore, Jr. |   | 3,178,087 |   |
| Richard A. Sizemore   |   | 3,178,086 |   |
| Stephen K. Swinson    |   | 3,148,345 |   |

 

Item 6.                  Exhibits and Reports on Form 8-K

 

a)              Exhibits

 
| Exhibit 31.1 |   | Officer  Certification                                                                                                  |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.2 |   | Officer  Certification                                                                                                  |
| Exhibit 32.1 |   | Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 |   | Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

b)             Reports on Form 8-K                            There were three reportsfiled on Form 8-K during the three months ended October 31, 2003.

 

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SIGNATURES

 

In accordancewith the requirements of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
| Torotel,  Inc.                            |
|-------------------------------------------|
| (Registrant)                              |
|                                      |
|                                      |
| /s/  Dale H. Sizemore, Jr.           |   |
| Dale H.  Sizemore, Jr.                    |
| Chief  Executive Officer                  |
| Date:   December  11, 2003 |
|                                      |
|                                      |
| /s/  H. James Serrone                |   |
| H. James  Serrone                         |
| Chief  Financial Officer                  |
| Date:   December  11, 2003 |

 

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