**FORM 10-QSB**

 

 

 

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

 

**For thequarterly period ended January 31, 2005**

 

**CommissionFile No. 1-8125**

 

 

**TOROTEL, INC.**

(Exactname of small business issuer as specified in its charter)

 

 

| **MISSOURI**                     | ** ** | **44-0610086**                        |
|----------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)  |       |                                  |

 

 

**620NORTH LINDENWOOD DRIVE, OLATHE, KANSAS 66062**

(Addressof principal executive offices)

 

 

**(913)747-6111**

(Issuer’stelephone number)

 

 

**NONE**

(Formername, former address and former fiscal year, if changed since last report)

 

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý   No o

 

 

As of April 26, 2005, there were 5,111,590shares 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, 2005                                          |   |
|       |                  |                                                                                        |   |
|       |                  | Consolidated Statements of  Operations for the nine months ended January 31, 2005 and 2004  |   |
|       |                  |                                                                                        |   |
|       |                  | Consolidated Statements  of Operations for the three months ended January 31, 2005 and 2004 |   |
|       |                  |                                                                                        |   |
|       |                  | Consolidated Statements of Cash Flows for  the nine months ended January 31, 2005 and 2004  |   |
|       |                  |                                                                                        |   |
|       |                  | 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 5.               | Other Information                                                                           |   |
|       |                  |                                                                                        |   |
|       | Item 6.               | Exhibits and Reports on Form 8-K                                                            |   |
|       |                  |
| SIGNATURES |                  |
|            |                       |                                                                                             |  |  |

 

----

 

PART I.  FINANCIALINFORMATION

 

 

Item 1.    FinancialStatements

 

CONSOLIDATEDBALANCE SHEET (Unaudited)

As of January 31, 2005

 

 
| ASSETS                                           |   |        |      |
|--------------------------------------------------|--------|-------------|-----------|
|                                             |   |        |      |
| Current assets                                   |   |        |      |
| Cash                                             |   | $           | 140,000   |   |
| Accounts receivable, net                         |   | 598,000     |      |
| Inventories                                      |   | 361,000     |      |
| Prepaid expenses and other current assets        |   | 20,000      |      |
|                                             |   | 1,119,000   |      |
|                                             |   |        |      |
| Property, plant and equipment, net               |   | 1,062,000   |      |
|                                             |   |        |      |
| Real estate held for sale                        |   | 248,000     |      |
| Intangible assets, net                           |   | 797,000     |      |
| Equity investment                                |   | 11,000      |      |
| Other assets                                     |   | 21,000      |      |
|                                             |   |        |      |
|                                             |   | $           | 3,258,000 |   |
|                                             |   |        |      |
| LIABILITIES AND STOCKHOLDERS’ EQUITY        |   |        |      |
|                                             |   |        |      |
| Current liabilities                              |   |        |      |
| Current maturities of long-term debt             |   | $           | 54,000    |   |
| Trade accounts payable                           |   | 113,000     |      |
| Accrued liabilities                              |   | 228,000     |      |
| Accrued interest on note payable to shareholders |   | 5,000       |      |
|                                             |   | 400,000     |      |
|                                             |   |        |      |
| Long-term debt, less current maturities          |   | 1,177,000   |      |
|                                             |   |        |      |
| Note payable to stockholders                     |   | 750,000     |      |
|                                             |   |        |      |
| Stockholders’ equity                        |   |        |      |
| Common stock, at par value                       |   | 52,000      |      |
| Capital in excess of par value                   |   | 12,362,000  |      |
| Accumulated deficit                              |   | (11,278,000 | )         |
|                                             |   | 1,136,000   |      |
| Less treasury stock, at cost                     |   | 205,000     |      |
|                                             |   | 931,000     |      |
|                                             |   |        |      |
|                                             |   | $           | 3,258,000 |   |

 

Theaccompanying notes are an integral part of this statement.

 

1

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CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)

Nine Months Ended January 31,

 

 
| ** **                             | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------|------------|-----------|------------|-----------|------------|
| Net sales                              |       | $         | 3,297,000  |      | $          | 3,203,000 |   |
| Cost of goods sold                     |       | 2,103,000 |       | 2,005,000 |       |
|                                   |       |      |       |      |       |
| Gross profit                           |       | 1,194,000 |       | 1,198,000 |       |
|                                   |       |      |       |      |       |
| Operating expenses                     |       |      |       |      |       |
| Engineering                            |       | 152,000   |       | 143,000   |       |
| Selling, general and administrative    |       | 859,000   |       | 734,000   |       |
| Amortization of intangible assets      |       | 64,000    |       | 115,000   |       |
|                                   |       | 1,075,000 |       | 992,000   |       |
|                                   |       |      |       |      |       |
| Earnings from operations               |       | 119,000   |       | 206,000   |       |
|                                   |       |      |       |      |       |
| Other expense (income)                 |       |      |       |      |       |
| Interest expense                       |       | 102,000   |       | 53,000    |       |
| Equity in loss of investee             |       | 139,000   |       | 178,000   |       |
| Impairment of intangible assets        |       | —    |       | 610,000   |       |
| Gain on settlement of debt             |       | —    |       | (440,000  | )          |
| Other, net                             |       | 1,000     |       | 1,000     |       |
|                                   |       | 242,000   |       | 402,000   |       |
|                                   |       |      |       |      |       |
| Loss before provision for income taxes |       | (123,000  | )          | (196,000  | )          |
|                                   |       |      |       |      |       |
| Provision for income taxes             |       | —    |       | 7,000     |       |
|                                   |       |      |       |      |       |
| Net loss                               |       | $         | (123,000   | )         | $          | (203,000 | ) |
|                                   |       |      |       |      |       |
| Basic and diluted loss per share       |       | $         | (.02       | )         | $          | (.04 | ) |

 

 

 

Theaccompanying notes are an integral part of these statements.

 

2

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CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

Three Months Ended January31,

 

 
| ** **                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                         |       | $        | 1,125,000  |     | $          | 1,006,000 |   |
| Cost of goods sold                                |       | 653,000  |       | 624,000  |       |
|                                              |       |     |       |     |       |
| Gross profit                                      |       | 472,000  |       | 382,000  |       |
|                                              |       |     |       |     |       |
| Operating expenses                                |       |     |       |     |       |
| Engineering                                       |       | 50,000   |       | 49,000   |       |
| Selling, general and administrative               |       | 297,000  |       | 243,000  |       |
| Amortization of intangible assets                 |       | 28,000   |       | 38,000   |       |
|                                              |       | 375,000  |       | 330,000  |       |
|                                              |       |     |       |     |       |
| Earnings from operations                          |       | 97,000   |       | 52,000   |       |
|                                              |       |     |       |     |       |
| Other expense (income)                            |       |     |       |     |       |
| Interest expense                                  |       | 33,000   |       | 18,000   |       |
| Equity in loss of investee                        |       | 63,000   |       | 110,000  |       |
| Impairment of intangible assets                   |       | —   |       | 610,000  |       |
| Gain on settlement of debt                        |       | —   |       | (440,000 | )          |
| Other, net                                        |       | 1,000    |       | 1,000    |       |
|                                              |       | 97,000   |       | 299,000  |       |
|                                              |       |     |       |     |       |
| Earnings (loss) before provision for income taxes |       | —   |       | (247,000 | )          |
|                                              |       |     |       |     |       |
| Provision for income taxes                        |       | —   |       | 7,000    |       |
| Net earnings (loss)                               |       | $        | —     |     | $          | (254,000 | ) |
|                                              |       |     |       |     |       |
| Basic and diluted earnings (loss) per share       |       | $        | .00        |     | $          | (.05 | ) |

 

 

 

Theaccompanying notes are an integral part of these statements.

 

3

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Ended January 31,

 

 
| ** **                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities                                                     |       |     |       |     |       |
| Net loss                                                                                  |       | $        | (123,000   | )        | $          | (203,000 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities |       |     |       |     |       |
| Loss on equity in loss of investee                                                        |       | 139,000  |       | 178,000  |       |
| Impairment of intangible assets                                                           |       | —   |       | 610,000  |       |
| Gain on settlements of debt                                                               |       | —   |       | (440,000 | )          |
| Depreciation and amortization                                                             |       | 113,000  |       | 132,000  |       |
| Disposition of assets                                                                     |       | 1,000    |       | —   |       |
| Increase (decrease in cash flows from operations) resulting from  changes in              |       |     |       |     |       |
| Accounts receivable                                                                       |       | (285,000 | )          | (14,000  | )          |
| Inventories                                                                               |       | (34,000  | )          | (99,000  | )          |
| Prepaid expenses and other assets                                                         |       | 4,000    |       | (26,000  | )          |
| Trade accounts payable                                                                    |       | (246,000 | )          | (42,000  | )          |
| Accrued liabilities                                                                       |       | 110,000  |       | (15,000  | )          |
|                                                                                      |       |     |       |     |       |
| Net cash provided by (used in) operating activities                                       |       | (321,000 | )          | 81,000   |       |
|                                                                                      |       |     |       |     |       |
| Cash flows from investing activities                                                      |       |     |       |     |       |
| Capital expenditures                                                                      |       | (32,000  | )          | (27,000  | )          |
| Apex acquisition costs                                                                    |       | —   |       | (89,000  | )          |
|                                                                                      |       |     |       |     |       |
| Net cash used in investing activities                                                     |       | (32,000  | )          | (116,000 | )          |
|                                                                                      |       |     |       |     |       |
| Cash flows from financing activities                                                      |       |     |       |     |       |
| Principal payments on long-term debt                                                      |       | (39,000  | )          | (41,000  | )          |
|                                                                                      |       |     |       |     |       |
| Net cash used in financing activities                                                     |       | (39,000  | )          | (41,000  | )          |
|                                                                                      |       |     |       |     |       |
| Net increase (decrease) in cash                                                           |       | (392,000 | )          | (76,000  | )          |
| Cash, beginning of period                                                                 |       | 532,000  |       | 701,000  |       |
|                                                                                      |       |     |       |     |       |
| Cash, end of period                                                                       |       | $        | 140,000    |     | $          | 625,000 |   |
|                                                                                      |       |     |       |     |       |
| Supplemental disclosures of cash flow Information                                         |       |     |       |     |       |
| Cash paid during the period for                                                           |       |     |       |     |       |
| Interest                                                                                  |       | $        | 102,000    |     | $          | 53,000 |   |
| Income taxes                                                                              |       | $        | —     |     | $          | 7,000 |   |

 

 

Theaccompanying notes are an integral part of these statements.

 

4

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NOTESTO CONSOLIDATED FINANCIAL 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 97% 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 January 31, 2005, and theresults of operations for the nine months ended January 31, 2005.

 

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, 2004.

 

 

Note 2 - Inventories

 

                Thecomponents of inventories are summarized as follows:

 

| Raw materials   |   | $       | 78,000  |   |
|-----------------|--------|---------|---------|--------|
| Work in process |   | 216,000 |    |
| Finished goods  |   | 67,000  |    |
|            |   | $       | 361,000 |   |

 

 

Note 3 - Income Taxes

 

Torotel has netoperating 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 determinedquarterly.  Deferred income taxes andliabilities are computed for those differences that have future taxconsequences using the currently enacted tax laws and rates that apply to theperiods in which they are expected to affect taxable income.  Valuation allowances are established, ifnecessary, to reduce the deferred tax asset to the amount that will, morelikely than not, be realized.  Income taxexpense is the current tax payable or refundable for the period plus or minusthe net change in the deferred tax assets or liabilities.  The following table summarizes the componentsof the net deferred tax asset:

 

| Net operating loss carryforwards |   | $         | 1,768,000 |   |
|----------------------------------|--------|-----------|-----------|--------|
| Inventory valuation reserve      |   | 188,000   |      |
| Depreciation and amortization    |   | 313,000   |      |
| Disposal of ECH liabilities      |   | 137,000   |      |
| Tax credit carryforwards         |   | 19,000    |      |
| Other                            |   | 18,000    |      |
|                             |   | 2,443,000 |      |
| Less valuation allowance         |   | 2,443,000 |      |
|                             |   | $         | —    |   |

 

5

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Note 4 - Earnings Per Share

 

Statement ofFinancial Accounting Standards (SFAS) No. 128, Earnings per Share, requiresdual presentation of basic and diluted EPS on the face of the statement ofearnings regardless of whether basic and diluted EPS are the same; and requiresa reconciliation of the numerator and denominator used in computing basic anddiluted EPS.  Basic EPS excludes dilutionand is computed by dividing earnings available to common stockholders by theweighted average number of common shares outstanding for the period.  Diluted EPS is computed similarly to fullydiluted EPS pursuant to APB Opinion 15. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock or resulted in the issuance of common stock that then sharedin the earnings of the entity.  Pursuantto SFAS No. 128, the basic and diluted earnings per common share were computedas follows:

 

# **Year-to-DateEPS Calculations**

 

| ** **                                 | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|
| Net loss                                   |       | $         | (123,000   | )         | $          | (203,000 | ) |
| Weighted average common shares outstanding |       | 5,111,590 |       | 5,111,590 |       |
| Incremental shares                         |       | —    |       | —    |       |
|                                       |       |      |       |      |       |
| Basic and diluted loss per share           |       | $         | (.02       | )         | $          | (.04 | ) |

 

No incremental shares are included in theYear-to-Date EPS calculations because of the net loss incurred in each of theperiods.

# ** **

# **QuarterlyEPS Calculations**

 

| ** **                                 | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings (loss)                        |       | $         | —     |      | $          | (254,000 | ) |
| Weighted average common shares outstanding |       | 5,111,590 |       | 5,111,590 |       |
| Incremental shares                         |       | —    |       | —    |       |
|                                       |       |      |       |      |       |
| Basic and diluted loss per share           |       | $         | .00        |      | $          | (.05 | ) |

 

No incrementalshares are included in the 2005 Quarterly EPS calculation because the marketprice of Torotel’s common stock being lower than the exercise price of thestock equivalents under contract.

 

No incrementalshares are included in the 2004 Quarterly EPS calculations because of the netloss incurred in the period.

 

 

Note 5 - Employee Stock Options

 

In accordance withthe 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 Stock Issued to Employees, and relatedinterpretations.  The incentive stockoptions have a term of five years when issued and vest 50% per year at the endof each of the first two years.  Thenon-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 themarket price of Torotel’s

 

6

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common stock on the date of grant.  Accordingly, no compensation cost has beenrecognized for the Plan.  Hadcompensation cost for the Plan been determined based on the fair value of theoptions at the grant dates consistent with the method of Statement of FinancialAccounting Standards No. 123, *Accounting forStock-Based Compensation,*Torotel’s operating results would havebeen reduced to the pro forma amounts indicated below.

 

# **Year-to-Date**

| ** **                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | ** **  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Net loss                                    |       | As Reported |       | $          | (123,000   | )          | $          | (203,000 | ) |
|                                        |       | Pro Forma   |       | $          | (123,000   | )          | $          | (207,000 | ) |
|                                        |       |        |       |       |       |       |       |
| Basic and diluted loss per share            |       | As Reported |       | $          | (.02       | )          | $          | (.04 | ) |
|                                        |       | Pro Forma   |       | $          | (.02       | )          | $          | (.04 | ) |
|                                        |       |        |       |       |       |       |       |
| Quarterly                                   |
|                                        |
| ** **                                  | ** ** | ** **  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Net earnings (loss)                         |       | As Reported |       | $          | —     |       | $          | (254,000 | ) |
|                                        |       | Pro Forma   |       | $          | —     |       | $          | (254,000 | ) |
|                                        |       |        |       |       |       |       |       |
| Basic and diluted earnings (loss) per share |       | As Reported |       | $          | .00        |       | $          | (.05 | ) |
|                                        |       | Pro Forma   |       | $          | .00        |       | $          | (.05 | ) |

 

The fair value of theincentive stock options granted was estimated on the date of grant using theBlack-Scholes options-pricing model.  Thefair value of the options was determined using the following weighted averageassumptions: no dividend payments over the life of the options; expectedvolatility of 551.0%; risk-free interest rate of 3.50%; and expected life offive years.

 

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

 

| ** **                                                     | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                     | ** ** | **Weighted** | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Shares**   | ** ** | **Average**  | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                                                     | ** ** | **Under**    | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** |
| ** **                                                     | ** ** | **Option**   | ** ** | **Price**    | ** ** | **Option** | ** ** | **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        |   | 40,000 |   | $ | .37 |   |
| Weighted average fair value of options granted during the year |       |         |       | —       |       |   |   | — |   |

 

The following information applies to optionsoutstanding at January 31, 2005:

 

| Number outstanding                          |   |   |   |   |   | 40,000     |   |
|---------------------------------------------|--------|--------|--------|--------|--------|------------|--------|
| Range of exercise prices                    |   |   |   |   |   | $          | .37    |   |
| Weighted average exercise price             |   |   |   |   |   | $          | .37    |   |
| Weighted average remaining contractual life |   |   |   |   |   | 1.75  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:

 

| ** **                                                      | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                      | ** ** | **Weighted** | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Shares**   | ** ** | **Average**  | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | **Under**    | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** |
| ** **                                                      | ** ** | **Option**   | ** ** | **Price**    | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding at  beginning of period                             |       | —       |       | —       |       | 100,000 |   | $ | .75 |   |
| Granted                                                         |       | —       |       | —       |       | — |   | — |   |
| Exercised                                                       |       | —       |       | —       |       | — |   | — |   |
| Forfeited                                                       |       | —       |       | —       |       | (100,000 | ) | $ | .75 |   |
| Outstanding at end of period                                    |       | —       |       | —       |       | — |   | — |   |
|                                                            |       |         |       |         |       |   |   |   |   |
| Warrants exercisable at end of period                           |       | —       |       | —       |       | — |   | — |   |
| Weighted average fair value of warrants granted during the year |       |         |       | —       |       |   |   | — |   |

 

 

Note 7 - Amortization of Intangibles

 

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*:

 

| ** **          | ** ** | ** **      | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|---------------------|------------|-----------------|------------|--------------|------------|------------------|------------|
| ** **          | ** ** | **Average**     | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **Amortizable** | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **          | ** ** | **Life**        | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Order backlog       |       | 1               |       | $            | 205,000    |             | $          | 205,000 |   | $ | 205,000 |   | $ | 205,000 |   |
| Aircraft - ballasts |       | 3               |       | 1,148,000    |       | 351,000          |       | 1,348,000 |   | 249,000 |   |
|                |       |            |       |         |       |             |       |   |   |   |   |
|                |       |            |       |         | $          | 1,353,000        |       | $ | 556,000 |   | $ | 1,553,000 |   | $ | 454,000 |   |
|                     |            |                 |            |              |            |                  |            |  |  |  |  |  |  |  |  |  |

 

The total intangible amortization expense forthe nine months ended January 31, 2005, was $64,000.  The estimated aggregate amortization expensefor each of the next five years is as follows:

 

| **April 30,** | ** ** | **Amount** | ** ** |
|---------------|------------|------------|------------|
| 2005          |       | $          | 91,000     |   |
| 2006          |       | 63,000     |       |
| 2007          |       | 42,000     |       |
| 2008          |       | —     |       |
| 2009          |       | —     |       |
|          |       |       |       |
|          |       | $          | 196,000    |   |

 

8

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The carrying valueof the intangible assets is supported by the estimated amount recoverable fromthe selling shareholders of Electronika (the Caloyeras FamilyPartnership).  The selling shareholderscontractually guaranteed that the aggregate sales from Electronika’s existingballast designs over the first five (5) full fiscal years, specifically fiscalyears 2003-2007, would be at least $2,500,000, which based on the terms of theManufacturing Agreement with Magnetika, Inc., would result in an aggregategross profit of $1,500,000 before any operating expenses.  Aggregate sales since fiscal 2003 have been$1,057,000.

 

 

Note 8 - Equity Investment

 

Torotel owns4,355,637 common shares (16.47%) of Apex Innovations, Inc. (“Apex”).  These shares were purchased at a cost of 25cents per share.  This investment isaccounted for using the equity method. Because of Apex’s operating losses since inception, and the projectedlosses in the near term, Torotel reduced the carrying value of this investmentat the end of fiscal 2004.

 

The accompanyingconsolidated statements of operations include a loss of $139,000 and $178,000for the nine months ended January 31, 2005 and 2004, respectively, which resultfrom Torotel’s proportionate share of Apex’s operating results for the ninemonths ended November 30, 2004 and 2003. Condensed financial statements for Torotel’s investment in Apex are asfollows:

 

CondensedBalance Sheet

 

| ** **                | ** ** | **November 30,** | ** ** |
|---------------------------|------------|------------------|------------|
| ** **                | ** ** | **2004**         | ** ** |
| Current assets            |       | $                | 477,000    |   |
| Other assets              |       | 6,696,000        |       |
|                      |       | $                | 7,173,000  |   |
|                      |       |             |       |
| Current liabilities       |       | $                | 1,564,000  |   |
| Other liabilities         |       | 3,318,000        |       |
| Stockholders’ equity |       | 2,291,000        |       |
|                      |       | $                | 7,173,000  |   |

 

CondensedStatements of Operations

 

| ** **   | ** ** | **9-Mos. Ended** | ** ** | **9-Mos. Ended** | ** ** | **3-Mos. Ended** | ** ** | **3-Mos Ended**  | ** ** |
|--------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **   | ** ** | **November 30,** | ** ** | **November 30,** | ** ** | **November 30,** | ** ** | **November 30,** | ** ** |
| ** **   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Net sales    |       | $                | 1,870,000  |             | $          | 3,395,000        |       | $                | 448,000    |   | $ | 910,000 |   |
| Gross profit |       | $                | 1,348,000  |             | $          | 1,257,000        |       | $                | 303,000    |   | $ | 235,000 |   |
| Net loss     |       | $                | (842,000   | )                | $          | (1,001,000       | )          | $                | (382,000   | ) | $ | (618,000 | ) |

 

 

Note 9 – Stock Appreciation Rights (SARs)

 

On September 10,2004, the board of directors of Torotel approved the Directors StockAppreciation Rights Plan (the “Plan”) for non-employee directors.  Each SAR is equal to one share of common stockof Torotel, and the aggregate number of SARs which may be granted under thePlan shall not exceed 500,000.

 

9

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The effective dateof the Plan is October 1, 2004.  The SARsare accounted for under Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation.*

 

Pursuant to the Plan, 20,000SARs were granted on the effective date to each of the three currentnon-employee directors.  The initialprice at which each SAR was granted was $.35, which equals the market price ofTorotel’s common stock on the date of grant. Accordingly, no compensation cost was recognized at the time of grant,but compensation costs will be recognized in future periods in which the marketprice of Torotel’s common stock increases above the grant price.

 

SARs shallautomatically be granted in the future as follows: (1) each person who iselected as a director, who was not a director on the effective date of thePlan, shall be granted 10,000 SARs on the date such person is elected adirector; and (2) on each May 1 following the effective date during the term ofthe Plan, each person serving as a director on such date shall be granted10,000 SARs.    After the intitial grant,the price at which each SAR is granted shall be the average of the closing price of Torotel’s common stock forthe ten consecutive days immediately preceding the date of grant.  Upon exercise of a SAR, Torotel will pay thegrantee an amount (the “Spread”) equal to the excess of the Exercise Price overthe SAR grant price multiplied by the number of shares being exercised.  The Exercise Price shall be the average ofthe closing price of Torotel’s common stock for the ten consecutive daysimmediately preceding the notice of exercise. For any payments that exceed $10,000, Torotel has the option to makequarterly payments over three years with interest payable quarterly at theprime rate of Torotel’s primary bank.

 

SARs transactions for eachperiod are summarized as follows:

 

| ** **                         | ** ** | **2005**     | ** ** | **2004**    | ** ** |
|------------------------------------|------------|--------------|------------|-------------|------------|
| ** **                         | ** ** | **Weighted** | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **SARs**     | ** ** | **Average** | ** ** | **SARs** | ** ** | **Average** | ** ** |
| ** **                         | ** ** | **Under**    | ** ** | **Grant**   | ** ** | **Under** | ** ** | **Grant** | ** ** |
| ** **                         | ** ** | **Option**   | ** ** | **Price**   | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding at beginning of period |       | —       |       | —      |       | — |   | — |   |
| Granted                            |       | 60,000       |       | $           | .35        |   | — |   | — |   |
| Exercised                          |       | —       |       | —      |       | — |   | — |   |
| Forfeited                          |       | —       |       | —      |       | — |   | — |   |
| Outstanding at end of period       |       | 60,000       |       | $           | .35        |   | — |   | — |   |
|                               |       |         |       |        |       |   |   |   |   |
| SARs exercisable at end of period  |       | —       |       | —      |       | — |   | — |   |
| Weighted average fair value of     |       |         |       |        |       |   |   |   |   |
| SARs granted during the year       |       |         |       | —      |       |   |   | — |   |

 

The following information applies to SARsoutstanding at January 31, 2005:

 

| Number outstanding                          |   | 60,000     |   |
|---------------------------------------------|--------|------------|--------|
| Range of grant prices                       |   | $          | .35    |   |
| Weighted average grant price                |   | $          | .35    |   |
| Weighted average remaining contractual life |   | 9.67  yrs. |   |

 

10

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Item 2.    Management’sDiscussion and Analysis or Plan of Operation

 

 

Overview

 

Torotel, Inc. (“Torotel”) conducts business primarily through twowholly owned subsidiaries, Torotel Products, Inc. (“Torotel Products”) andElectronika, Inc. (“Electronika”).  Inaddition, Torotel has a 16.47% equity interest in Apex Innovations, Inc. (“Apex”).

 

Torotel Products designs and manufactures a wide variety of magneticcomponents for use in military, aerospace and industrial electronicapplications.  These magnetic components,which consist of transformers, inductors, reactors, chokes, and toroidal coils,are used to modify and control electrical voltages and currents in electronicdevices.  For example, if equipment containingone of these components receives an electrical voltage or current which is toohigh for proper operation of the equipment, the component would modify andcontrol the electrical voltage or current to allow proper operation of theequipment.  While Torotel Productsprimarily manufactures the components in accordance with pre-developedmechanical and electrical requirements, in some cases it will be responsiblefor both the overall design and manufacture of the components.  The magnetic components are sold tomanufacturers who incorporate them into an end product.  The major applications include aircraftnavigational equipment, voice and data secure communications, medicalequipment, avionics equipment, and conventional missile guidance systems.  Torotel Products markets its componentsprimarily through a direct sales force and one independent manufacturers’representative paid on a commission basis. In addition, Torotel Products is an approved source on numerousapplications, and generally is automatically solicited for any procurementneeds for such applications.  Themagnetic components manufactured by Torotel Products are sold primarily in theUnited States, and most sales are awarded on a competitive bid basis.  The markets in which Torotel Productscompetes are highly competitive.  A substantialnumber of companies sell components of the type manufactured and sold byTorotel Products.  In addition, TorotelProducts sells to a number of customers who have the capability ofmanufacturing their own electronic components. The ability of Torotel Products to compete depends, among other things,upon its on-time delivery performance, customized product engineering andtechnical support, marketing capabilities, quality assurance and manufacturingefficiency.  While magnetic componentsare not susceptible to rapid technological change, Torotel Products’ marketshare is susceptible to decline given the highly competitive nature of themarket.

 

Electronika is a marketing and licensing company selling ballasttransformers to the airline industry. These transformers activate and control the lights in commercialairplane cockpits.  Electronika’s ballasttransformers are approved as spare and replacement parts in DC-8, DC-9, DC-10,MD-80, and MD-88 aircraft.  However,sales of ballast transformers have been made primarily for use in DC-8 and DC-9aircraft.  As a result, the business ofElectronika is subject to various risks including, without limitation, anydecline in use of the referenced aircraft, and competition for the availablespare parts business.  Electronika’ssales do not represent a significant portion of any particular market.  Electronika’s requirements for the ballasttransformers are outsourced pursuant to a Manufacturing Agreement withMagnetika, Inc. (“Magnetika”), a corporation owned by Peter B. Caloyeras andhis family.  Under the terms of theagreement, Magnetika provides all necessary raw material, labor, testing,packaging and related services required to complete the manufacture, deliveryand sale of the ballast transformers. Electronika retains ownership of all designs, drawings, specificationsand intellectual property rights associated with the ballast transformers.

 

11

 

Torotel’s management is not involved in the daily operations of Apex.  Dale H. Sizemore, Jr., Torotel’s chairman and chief executive officer, served as a member of Apex’s board of directors from March 2002 until his resignation in October 2004.  ***i***-**INFO** is Apex’s umbrella term for a foundational system architecture of patented information management software products created by Apex primarily for government entities.  The success of Apex depends, among other things, its ability to market its products to government entities.  Because of Apex’s operating losses since inception, and the projected losses in the near term, Torotel reduced the carrying value of this investment at the end of fiscal 2004.

 

Business Outlook

 

The industry mix of fiscal 2005 year-to-date sales is 52% defense, 33% aerospace and 15% commercial/industrial.  This mix should continue through the balance of the fiscal year.  The rate of new order bookings did decline in the second fiscal quarter, but January bookings were significantly better and this trend should continue over the next few months as additional military contracts are expected.  Torotel’s aerospace markets, specifically the components used in retrofitting and upgrading instrumentation and communication systems in existing aircraft, have started to generate some activity, which contributed to higher sales in the third fiscal quarter.  The primary factors that drive gross profit and net earnings for Torotel Products are sales volume and product mix.  The gross profits on mature products/programs and larger transformer devices tend to be higher than those that are still in the prototyping or early production stages and simpler inductor devices.  As a result, in any given accounting period the mix of product shipments between higher and lower margin jobs has a significant impact on the gross profit and net earnings of Torotel Products.  Electronika’s net sales continue to be impacted by the decline in the number of active DC-8 and DC-9 aircraft.

 

Results of Operations

 

The following managementcomments regarding Torotel’s results of operations and outlook should be readin conjunction with the Consolidated Financial Statements included pursuant toItem 1 of this Quarterly Report.

 

The discussion and analysisof the results of operations include the operations of Torotel, Inc. and itssubsidiaries, Torotel Products, Inc. and Electronika, Inc.  While each company’s results are included inthe following discussion, segment reporting is not applicable because theproducts offered are similar in form and function, and target similar markets.

 

 

Nine Months Ended January 31, 2005 Compared With NineMonths Ended January 31, 2004

 

Net sales increased 3%. Thenet sales of Torotel Products increased nearly 6% from $2,992,000 to$3,155,000. This increase was attributable to higher demand from Torotel’smilitary markets. The net sales of Electronika decreased 33% from $211,000 to$142,000. While Electronika’s sales have been impacted by the soft conditionsin the aerospace market, the bigger impact going forward will be the decline inthe number of active DC-8 and DC-9 aircraft.

 

Gross profit as apercentage of net sales decreased 1%. The gross profit percentage of Torotel Products decreased 5% primarilybecause of higher labor costs in the first half of the year associated withovertime and inefficiencies encountered with the training of new production personnelin the winding area.

 

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Electronika’s gross profit as a percentage of net sales increased 60%because of the labor and overhead savings associated with the discontinuedassembly operation of Electronika-Kansas.

 

Engineering expenses,applicable only to Torotel Products, increased 6% from $143,000 to $152,000because of higher payroll costs associated with more hours worked by part-timepersonnel and higher travel and training costs. Management does anticipate an increase in the present level ofengineering expenses, as the plan is to hire an additional engineer.

 

Selling, general andadministrative (SG&A) expenses increased 17%.  The SG&A expenses of Torotel, Inc.decreased 46% from $207,000 to $112,000 primarily because of transferring theCEO’s payroll costs of $81,000 to Torotel Products and a $14,000 decrease inprinting costs due to the delay in processing the 2004 annual report toshareholders and proxy materials.  TheSG&A expenses of Torotel Products increased 46% from $494,000 to $723,000primarily because of transferring the CEO’s payroll costs of $81,000 fromTorotel, Inc., a $67,000 increase in payroll costs for an inside salesassociate and clerical help, a $26,000 increase in depreciation, an $18,000increase in property taxes, a $12,000 increase in utilities costs, an $11,000increase building maintenance and repairs, an $8,000 increase in property andcasualty insurance costs, and a $6,000 increase in training costs.  The SG&A expenses of Electronikadecreased 27% from $33,000 to $24,000 because of administrative costs savingsassociated with the discontinued assembly operation of Electronika-Kansas.  Management does not anticipate anysignificant increase in the present level of SG&A expenses.

 

Amortization costs, entirelyattributable to Electronika, decreased 44% from $115,000 to $64,000 (see Note 7of Notes to Consolidated Financial Statements).

 

Interest expense increased 92%. The interest expense of Torotel, Inc. decreased 5% from $41,000 to$39,000 because of a lower debt balance. The interest expense of Torotel Products increased from $12,000 to$63,000 because of a higher debt balance associated with the building purchasein March 2004.

 

Equity in loss of investeewas $139,000 compared to $178,000 in the prior year (see Note 8 of Notes toConsolidated Financial Statements).

 

Impairment costs, entirely attributable to Electronika, decreased$610,000 because of no impairment charges incurred in fiscal 2005.

 

Gain on settlement of debtdecreased because of the $440,000 gain in 2004 that resulted from thedissolution of East Coast Holdings, Inc., a wholly-owned subsidiary of Torotel,and its remaining liabilities.

 

For the reasons discussed above, the consolidated pretax loss decreasedfrom $196,000 to $123,000.  The pretaxearnings of Torotel, Inc. decreased from a profit of $14,000 to a loss of$290,000.  The pretax earnings of TorotelProducts decreased from $555,000 to $170,000. The pretax loss of Electronika decreased from $765,000 to $3,000.

 

 

Three Months Ended January 31, 2005 ComparedWith Three Months Ended January 31, 2004

 

Net sales increased12%.  The net sales of Torotel Productsincreased 13% from $930,000 to $1,055,000. This increase was attributable to higher demand from Torotel’s aerospaceand industrial markets.  The net sales ofElectronika decreased 8% from $76,000 to $70,000 primarily because of thedecline in the number of active DC-8 and DC-9 aircraft.

 

Gross profit as a percentageof net sales increased 4%.  The grossprofit percentage of Torotel Products decreased slightly.  Electronika’s gross profit as a percentage ofnet sales increased 60% because of the labor and overhead savings associatedwith the discontinued assembly operation of Electronika-Kansas.

 

13

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Engineering expenses, applicable only to Torotel Products, increasedslightly from $49,000 to $50,000. Management does anticipate an increase in the present level ofengineering expenses, as the plan is to hire an additional engineer.

 

Selling, general and administrative (SG&A) expenses increased22%.  The SG&A expenses of Torotel,Inc. decreased 39% from $66,000 to $40,000 primarily because of transferringthe CEO’s payroll costs to Torotel Products. The SG&A expenses of Torotel Products increased 51% from $165,000 to$249,000 primarily because of transferring the CEO’s payroll costs of $26,000from Torotel, Inc., a $26,000 increase in payroll costs for an inside salesassociate and clerical help, a $9,000 increase in depreciation costs, a $7,000increase in property taxes, a $5,000 increase in professional fees, a $3,000increase in employee benefits costs, a $3,000 increase in repair andmaintenance costs, a $2,000 increase in customer fast-pay discounts, a $2,000increase in travel costs, and a $1,000 increase in bank charges.  The SG&A expenses of Electronikadecreased 33% from $12,000 to $8,000 because of administrative costs savingsassociated with the discontinued assembly operation of Electronika-Kansas.  Management does not anticipate anysignificant increase in the present level of SG&A expenses.

 

Amortization costs, entirely attributable to Electronika, decreased 26%from $38,000 to $28,000 (see Note 7 of Notes to Consolidated FinancialStatements).

 

Interest expense increased 83%. The interest expense of Torotel, Inc. decreased 7% from $14,000 to$13,000 because of a lower debt balance. The interest expense of Torotel Products increased from $4,000 to $20,000because of a higher debt balance associated with the building purchase in March2004. 

 

Equity in loss of investee was $63,000 compared to $110,000 in theprior year (see Note 8 of Notes to Consolidated Financial Statements).

 

Impairment costs, entirely attributable to Electronika, decreased$610,000 because of no impairment charges incurred in fiscal 2005.

 

Gain on settlement of debt decreased because of the $440,000 gain in2004 that resulted from the dissolution of East Coast Holdings, Inc., a wholly-ownedsubsidiary of Torotel, and its remaining liabilities.

 

For the reasons discussed above, the consolidated pretax earningsincreased from a loss of $247,000 to breakeven. The pretax earnings of Torotel, Inc. decreased from a profit of $250,000to loss of $116,000.  The pretax earningsof Torotel Products decreased from $164,000 to $110,000.  The pretax earnings of Electronika increasedfrom a loss of $661,000 to a profit of $6,000.

 

Liquidity and Capital Resources

 

The table below presents the summary of cash flow for the nine month periods indicated.

 

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Net cash provided by (used in) operating activities |       | $        | (321,000   | )        | $          | 81,000 |   |
| Net cash used in investing activities               |       | $        | (32,000    | )        | $          | (116,000 | ) |
| Net cash used in financing activities               |       | $        | (39,000    | )        | $          | (41,000 | ) |

 

Net cash provided byoperating activities fluctuates between periods primarily as a result ofdifferences in operating earnings, the timing of shipments and the collectionof accounts receivable, changes in inventory, level of sales and payment ofaccounts payable.  The decrease in netcash used in investing activities is primarily because of the additional$89,000 investment made in Apex in 2004. Capital expenditures were $32,000 during the first half of fiscal2005.  Management anticipatesapproximately $5,000 in capital expenditures during the balance of fiscal2005.  Net cash used in financingactivities is

 

14

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because of payments on long-term debt.  Management believes that the projected cashflow generated from operations, combined with its existing cash balances, willbe sufficient to meet its funding requirements for the foreseeable future.  Torotel does have a $200,000 bank line ofcredit available, which could be utilized, if required, to help fund growth.

 

Management believes thatinflation will have only a minimal effect on future operations since sucheffects will be offset by sales price increases, which are not expected to havea significant effect upon demand.

 

Forward-Looking Information

 

This report, as well as ourother reports filed with the Securities and Exchange Commission (“SEC”), and inpress releases and other public communications throughout the year, containsforward-looking statements made pursuant to the safe harbor provisions of ThePrivate 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 based onassumptions 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 and other investments, decreased demand forproducts, delays in developing new products, expected orders that do not occur,loss of key customers, the impact of competition and price erosion as well assupply and manufacturing constraints, issues involved in relocatingmanufacturing operations, 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.    Controlsand Procedures

 

Torotel’s Chief ExecutiveOfficer and Chief Financial Officer (collectively, the “Certifying Officers”) areresponsible for establishing and maintaining disclosure controls andprocedures.  Such officers have concluded(based upon their evaluation of these controls and procedures as of a datewithin 90 days of the filing of this report) that Torotel’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed in this report is accumulated and communicated to Torotel’smanagement, including its principal executive officers as appropriate, to allowtimely decisions regarding required disclosure. The Certifying Officers also have indicated that there were no changesin Torotel’s internal controls during the reporting period.

 

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PART II.                OTHERINFORMATION

 

 

Item 5.    Other Information

 

Because the annual reporton Form 10-KSB for the fiscal year ended April 30, 2004, was not filed untilFebruary 16, 2005, the Board of Directors of Torotel elected to forego holdinga late 2004 Annual Meeting of Shareholders and instead to proceed with theCompany’s regularly scheduled 2005 Annual Meeting of Shareholders on September19, 2005.

 

Based on currentlyavailable information, the Company intends to file its definitive proxystatement with the Securities and Exchange Commission, and begin mailing proxystatements to shareholders, on or about August 17, 2005.  The deadline for submitting shareholderproposals for inclusion in the proxy statement for the 2005 Annual Meeting ofShareholders is May 31, 2005.  Any shareholderproposal received after that date will not be considered for inclusion in theproxy statement for the 2005 Annual Meeting of Shareholders.  Moreover, such a proposal will also beconsidered untimely and therefore, not be admitted for discussion at the 2005Annual Meeting of Shareholders.

 

 

Item 6.   Exhibits andReports 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 no reports filed on Form 8-Kduring the three months ended

January31, 2005.

 

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SIGNATURES

 

 

                Inaccordance with the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

Torotel, Inc.

(Registrant)

 

 

 
| /s/ Dale H. Sizemore, Jr. |   |
|---------------------------|--------|
| Dale H. Sizemore, Jr.     |   |
| Chief Executive Officer   |   |
| Date: April 28, 2005      |   |
|                      |   |
| /s/ H. James Serrone      |   |
| H. James Serrone          |   |
| Chief Financial Officer   |   |
| Date: April 28, 2005      |   |

 

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