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** **

 

** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**x****               ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended October 31, 2009**

 

**o****                  ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from [    ] to [    ]**

 

**CommissionFile No. 1-8125**

 

**TOROTEL, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **MISSOURI**                                                    | ** ** | **44-0610086**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **620  NORTH LINDENWOOD DRIVE, OLATHE, KANSAS**                 | ** ** | **66062**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

** **

**(913)747-6111**

(Registrant’stelephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yesx  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§229.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes o   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o                                              |   | Accelerated  filer o         |
|-------------------------------------------------------------------------|--------|------------------------------|
|                                                                    |   |                         |
| Non-accelerated  filer o  (Do not check if a smaller reporting company) |   | Smaller  reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934.)    Yes o  No x

 

As of December 10,2009, there were 5,873,100 shares of Common Stock, $.01 par value, outstanding.

 

 

 

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TOROTEL, INC. ANDSUBSIDIARIES

 

INDEX

 
| PART I.  | FINANCIAL INFORMATION                                                                            |   |
|---------------|--------------------------------------------------------------------------------------------------|--------|
|          |                                                                                             |   |
| Item 1.       | Financial Statements                                                                             |   |
|          |                                                                                             |   |
|          | Consolidated Condensed Balance Sheets as of  October 31, 2009 and April 30, 2009       | 1      |
|          |                                                                                             |   |
|          | Consolidated Statements of Operations for the six  months ended October 31, 2009 and 2008   | 2      |
|          |                                                                                             |   |
|          | Consolidated Statements of Operations for the three  months ended October 31, 2009 and 2008 | 3      |
|          |                                                                                             |   |
|          | Consolidated Statements of Cash Flows for the six  months ended October 31, 2009 and 2008   | 4      |
|          |                                                                                             |   |
|          | Notes to Consolidated Condensed Financial Statements                                             | 5      |
|          |                                                                                             |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      | 12     |
|          |                                                                                             |   |
| Item 4T.      | Controls and  Procedures                                                                         | 19     |
|          |                                                                                             |   |
| PART II. | OTHER INFORMATION                                                                                |   |
|          |                                                                                             |   |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                             | 20     |
|          |                                                                                             |   |
| Item 6.       | Exhibits                                                                                         | 21     |
|          |                                                                                             |   |
| SIGNATURES    | 22                                                                                               |
|               |                                                                                                  |        |  |

 

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**PART I.****    ****FINANCIAL INFORMATION**

 

**Item1.****      ****Financial Statements**

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 
| ** **                                 | ** ** | **(Unaudited)**      | ** **      | ** **         | ** ** |
|--------------------------------------------|------------|----------------------|-----------------|--------------------|------------|
| ** **                                 | ** ** | **As of**            | ** **      | **As of**          | ** ** |
| ** **                                 | ** ** | **October 31,** | ** **      | **April 30,** | ** ** |
| ** **                                 | ** ** | **2009**             | ** **      | **2009**           | ** ** |
| ASSETS                                     |       |                 |            |               |       |
|                                       |       |                 |            |               |       |
| Current  assets:                           |       |                 |            |               |       |
| Cash                                       |       | $                    |  477,000   |               | $          |  656,000 |   |
| Trade  receivables, net                    |       | 619,000              |            | 559,000            |       |
| Inventories,  net                          |       | 806,000              |            | 822,000            |       |
| Prepaid  expenses and other current assets |       | 48,000               |            | 19,000             |       |
|                                       |       | 1,950,000            |            | 2,056,000          |       |
|                                       |       |                 |            |               |       |
| Property,  plant and equipment, net        |       | 973,000              |            | 970,000            |       |
|                                       |       |                 |            |               |       |
|                                       |       | $                    |  2,923,000 |               | $          |  3,026,000 |   |
|                                       |       |                 |            |               |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY |       |                 |            |               |       |
|                                       |       |                 |            |               |       |
| Current  liabilities:                      |       |                 |            |               |       |
| Current  maturities of long-term debt      |       | $                    |  93,000    |               | $          |  78,000 |   |
| Trade  accounts payable                    |       | 218,000              |            | 180,000            |       |
| Accrued  liabilities                       |       | 179,000              |            | 211,000            |       |
|                                       |       | 490,000              |            | 469,000            |       |
|                                       |       |                 |            |               |       |
| Long-term  debt, less current maturities   |       | 552,000              |            | 588,000            |       |
|                                       |       |                 |            |               |       |
| Stockholders’  equity                 |       | 1,881,000            |            | 1,969,000          |       |
|                                       |       |                 |            |               |       |
|                                       |       | $                    |  2,923,000 |               | $          |  3,026,000 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                         | ** ** | **Six Months Ended** | ** **      |
|----------------------------------------------------|------------|----------------------|-----------------|
| ** **                                         | ** ** | **October 31,** | ** **      | **October 31,** | ** ** |
| ** **                                         | ** ** | **2009**             | ** **      | **2008** | ** ** |
| Net  sales                                         |       | $                    |  3,294,000 |   | $ |  3,960,000 |   |
| Cost  of goods sold                                |       | 2,134,000            |            | 2,512,000 |   |
|                                               |       |                 |            |   |   |
| Gross  profit                                      |       | 1,160,000            |            | 1,448,000 |   |
|                                               |       |                 |            |   |   |
| Operating  expenses:                               |       |                 |            |   |   |
| Engineering                                        |       | 170,000              |            | 177,000 |   |
| Selling,  general and administrative               |       | 1,091,000            |            | 993,000 |   |
|                                               |       | 1,261,000            |            | 1,170,000 |   |
|                                               |       |                 |            |   |   |
| Earnings  (loss) from operations                   |       | (101,000             | )               | 278,000 |   |
|                                               |       |                 |            |   |   |
| Other  expense:                                    |       |                 |            |   |   |
| Interest  expense                                  |       | 23,000               |            | 29,000 |   |
|                                               |       |                 |            |   |   |
| Earnings  (loss) before provision for income taxes |       | (124,000             | )               | 249,000 |   |
|                                               |       |                 |            |   |   |
| Provision  for income taxes                        |       | —               |            | — |   |
|                                               |       |                 |            |   |   |
| Net  earnings (loss)                               |       | $                    |  (124,000  | ) | $ |  249,000 |   |
|                                               |       |                 |            |   |   |
| Basic  earnings (loss) per share                   |       | $                    |  (.02      | ) | $ |  .05 |   |
|                                               |       |                 |            |   |   |
| Diluted  earnings (loss) per share                 |       | $                    |  (.02      | ) | $ |  .04 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net  sales                                         |       | $                      | 1,757,000  |   | $ | 1,989,000 |   |
| Cost  of goods sold                                |       | 1,150,000              |       | 1,300,000 |   |
|                                               |       |                   |       |   |   |
| Gross  profit                                      |       | 607,000                |       | 689,000 |   |
|                                               |       |                   |       |   |   |
| Operating  expenses:                               |       |                   |       |   |   |
| Engineering                                        |       | 78,000                 |       | 79,000 |   |
| Selling,  general and administrative               |       | 533,000                |       | 488,000 |   |
|                                               |       | 611,000                |       | 567,000 |   |
|                                               |       |                   |       |   |   |
| Earnings  (loss) from operations                   |       | (4,000                 | )          | 122,000 |   |
|                                               |       |                   |       |   |   |
| Other  expense (income):                           |       |                   |       |   |   |
| Interest  expense                                  |       | 11,000                 |       | 15,000 |   |
| Other,  net                                        |       | —                 |       | (1,000 | ) |
|                                               |       | 11,000                 |       | 14,000 |   |
|                                               |       |                   |       |   |   |
| Earnings  (loss) before provision for income taxes |       | (15,000                | )          | 108,000 |   |
|                                               |       |                   |       |   |   |
| Provision  for income taxes                        |       | —                 |       | — |   |
|                                               |       |                   |       |   |   |
| Net  earnings (loss)                               |       | $                      | (15,000    | ) | $ | 108,000 |   |
|                                               |       |                   |       |   |   |
| Basic  earnings (loss) per share                   |       | $                      | (.00       | ) | $ | .02 |   |
|                                               |       |                   |       |   |   |
| Diluted  earnings (loss) per share                 |       | $                      | (.00       | ) | $ | .02 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                                             | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                             | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
| ** **                                                                                             | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                                                 |       |                 |       |   |   |
| Net  earnings (loss)                                                                                   |       | $                    | (124,000   | ) | $ | 249,000 |   |
| Adjustments  to reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |       |                 |       |   |   |
| Loss  on disposal of assets                                                                            |       | —               |       | 1,000 |   |
| Cost  of restricted stock cancelled                                                                    |       | 12,000               |       | — |   |
| Stock  compensation earned                                                                             |       | 24,000               |       | 32,000 |   |
| Depreciation                                                                                           |       | 51,000               |       | 52,000 |   |
| Change  in value of stock appreciation rights                                                          |       | 4,000                |       | (2,000 | ) |
| Increase  (decrease) in cash flows from operations resulting from changes in:                          |       |                 |       |   |   |
| Trade  receivables                                                                                     |       | (60,000              | )          | 30,000 |   |
| Inventories                                                                                            |       | 16,000               |       | (181,000 | ) |
| Prepaid  expenses and other assets                                                                     |       | (29,000              | )          | (30,000 | ) |
| Trade  accounts payable                                                                                |       | 38,000               |       | (106,000 |   |
| Accrued  liabilities                                                                                   |       | (36,000              | )          | 35,000 |   |
|                                                                                                   |       |                 |       |   |   |
| Net  cash provided by (used in) operating activities                                                   |       | (104,000             | )          | 80,000 |   |
|                                                                                                   |       |                 |       |   |   |
| Cash  flows from investing activities:                                                                 |       |                 |       |   |   |
| Capital  expenditures                                                                                  |       | (54,000              | )          | (21,000 | ) |
|                                                                                                   |       |                 |       |   |   |
| Net  cash used in investing activities                                                                 |       | (54,000              | )          | (21,000 | ) |
|                                                                                                   |       |                 |       |   |   |
| Cash  flows from financing activities:                                                                 |       |                 |       |   |   |
| Proceeds  from long-term debt                                                                          |       | 21,000               |       | — |   |
| Principal  payments on long-term debt                                                                  |       | (36,000              | )          | (31,000 | ) |
| Payments  on installment and capital lease obligations                                                 |       | (6,000               | )          | (4,000 | ) |
|                                                                                                   |       |                 |       |   |   |
| Net  cash used in financing activities                                                                 |       | (21,000              | )          | (35,000 | ) |
|                                                                                                   |       |                 |       |   |   |
| Net  increase (decrease) in cash                                                                       |       | (179,000             | )          | 24,000 |   |
| Cash,  beginning of period                                                                             |       | 656,000              |       | 410,000 |   |
|                                                                                                   |       |                 |       |   |   |
| Cash,  end of period                                                                                   |       | $                    | 477,000    |   | $ | 434,000 |   |
|                                                                                                   |       |                 |       |   |   |
| Supplemental  Disclosures of Cash Flow Information                                                     |       |                 |       |   |   |
| Cash  paid during the period for:                                                                      |       |                 |       |   |   |
| Interest                                                                                               |       | $                    | 23,000     |   | $ | 29,000 |   |
| Income  taxes payable                                                                                  |       | $                    | —     |   | $ | — |   |
|                                                                                                   |       |                 |       |   |   |
| Non-cash  investing and financing activities:                                                          |       |                 |       |   |   |
| Capital  expenditure                                                                                   |       | $                    | —     |   | $ | (27,000 | ) |
| Proceeds  from capital lease                                                                           |       | $                    | —     |   | $ | 27,000 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)**

 

**Note 1 —Basis of Presentation**

 

The consolidatedcondensed balance sheet as of April 30, 2009, which has been derived fromaudited financial statements, is accompanied by the unaudited interimconsolidated condensed financial statements, which reflect the normal recurringadjustments that in the opinion of management are necessary to present fairly Torotel’sfinancial position at October 31, 2009, and the results of operations forthe three and six months ended October 31, 2009.

 

The unaudited interimconsolidated condensed financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and note disclosuresnormally included in the annual financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant to those rules and regulations, although management believes thedisclosures made are adequate to make the information not misleading.

 

The financial statementscontained herein should be read in conjunction with Torotel’s financialstatements and related notes filed on Form 10-K for the year ended April 30,2009.

 

**Note 2 —Nature of Operations**

 

Torotel, Inc. (“Torotel”)conducts business through two wholly owned subsidiaries, Torotel Products, Inc.(“Torotel Products”) and Electronika, Inc. (“Electronika”).  Torotel specializes in the custom design andmanufacture of a wide variety of precision magnetic components, consisting oftransformers, inductors, reactors, chokes and toroidal coils, for use incommercial, industrial and military electronics.  Torotel also designs and distributes ballasttransformers for the airline industry. Approximately 97% of Torotel’s sales during the first six months offiscal 2010 have been derived from domestic customers.

 

**Note 3****— Inventories**

 

The components ofinventories are summarized as follows:

 

| ** **       | ** ** | **October 31,** | ** **    | **April 30,** | ** ** |
|------------------|------------|----------------------|---------------|--------------------|------------|
| ** **       | ** ** | **2009**             | ** **    | **2009**           | ** ** |
| Raw  materials   |       | $                    | 503,000       |               | $          | 567,000 |   |
| Work  in process |       | 172,000              |          | 141,000            |       |
| Finished  goods  |       | 131,000              |          | 114,000            |       |
|             |       | $                    |  806,000 |               | $          | 822,000 |   |

 

**Note 4 —Income Taxes**

 

As of October 31,2009, the federal tax returns for the fiscal years ended 2005 through 2009 willremain open to audit until the statute of limitations closes for the years inwhich the net operating losses are utilized. Torotel would recognize interest and penalties accrued on unrecognized taxbenefits as well as interest received from favorable tax settlements withinincome tax expense.  As of October 31,2009, Torotel recorded no accrued interest or penalties related to uncertaintax positions.  Management expects nosignificant change in the amount of unrecognized tax benefit, accrued interestor penalties within the next twelve months.

 

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**Note 5 —Financing Agreements**

 

OnJune 1, 2009, Torotel Products refinanced its mortgage debt with the Bankof Blue Valley.  Under the terms of therefinancing, the outstanding balance bears interest at a fixed rate of 6.5% perannum and requires monthly principal and interest payments of $9,543.  The note, which is guaranteed by Torotel, Inc.and Electronika, Inc., has a maturity date of May 25, 2014, may beprepaid without penalty and is collateralized by substantially all assets ofTorotel.

 

On September 30, 2009,Torotel Products renewed its $500,000 revolving credit agreement with Bank ofBlue Valley.  Advances under the creditline are limited to 75% of eligible billed receivables.  The revolving line is collateralized by theland and buildings in Olathe, Kansas. Under the terms of the agreement, the outstanding balance of therevolving line bears interest at 1.00% over the bank’s corporate base rate withan interest rate floor of 6.00% and has a maturity date of September 30,2010.  As of October 31, 2009, theeffective borrowing rate was 6.00% and the entire credit line was available.

 

**Note6 — Restricted Stock Agreements**

 

RestrictedStock Agreements are authorized by the Compensation and Nominating Committee (“Committee”)and the Board of Directors of Torotel. The Committee and the Board have determined that the interests ofTorotel and its stockholders will be promoted by hiring talented individualsand, to induce such individuals to accept employment with Torotel, theCommittee and the Board believe a key component of such individuals’compensation should be granting equity ownership opportunities based upon theacceptance of employment and the continuing employment of such individual,subject to certain conditions and restrictions. The Restricted Stock Agreements afford the grantees all of the rights ofa stockholder with respect to the award shares, including the right to votesuch shares and to receive dividends and other distributions payable withrespect to such shares since the Date of Award. Under the terms of each agreement, the non-vested shares are restrictedas to disposition and subject to forfeiture under certain circumstances.  The agreements further provide, subject tocertain conditions, that if prior to all of the restricted shares having beenreleased, Torotel undergoes a change in control, then all of the restrictedshares shall be released and no longer subject to restrictions under theagreements.  Upon issuance of therestricted stock, the aggregate number of shares issued is credited to commonstock at $.01 par value per share and the excess of the market price of thecommon stock on the date of issuance over the par value is credited to capitalin excess of par value.  The restrictedshares are treated as non-vested stock; accordingly, the fair value of therestricted stock at the date of award is offset against capital in excess ofpar value in the accompanying consolidated balance sheets under stockholders’equity.

 

Torotel has RestrictedStock Agreements dated August 7, 2007, with nine (9) key employeespursuant to the Stock Award Plan (“SAP”). The SAP provides key employees the opportunity to acquire common stockof Torotel pursuant to awards earned for accomplishing goals that promote thelong-term financial performance of Torotel. Under the terms of the SAP, which was filed as Exhibit 10.9 of Form 10-KSBfor the fiscal year ended April 30, 2007, the restricted stock awards havea five (5) year restriction period, which shall lapse based on certainconditions as outlined in the SAP.  As ofOctober 31, 2009, the aggregate amount of the existing restricted stockawards was 391,510 shares.  Stockcompensation cost of $10,000 for the existing restricted stock awards will berecorded per quarter during the remaining five-year vesting period provided thefinancial performance metrics as outlined in the SAP are likely to be attained.

 

On September 2,2009, Torotel entered into Restricted Stock Agreements with two (2) keyemployees (Messrs. Sizemore and Serrone) pursuant to the SAP.  The aggregate amount of the restricted stockawards was 250,000 shares of common stock, $.01 par value per share.  Based on the market price of $.27 for

 

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Torotel’s common stock asof September 2, 2009, the fair value of the restricted stock at the dateof award was $67,500.  Stock compensationcost of $3,375 will be recorded per quarter during the five-year vesting periodprovided the financial performance metrics as outlined in the SAP are likely tobe attained.

 

Total stock compensationcost for the three months ended October 31, 2009 and 2008 was $25,000 and$16,000, respectively.  Total stockcompensation cost for the six months ended October 31, 2009 and 2008 was$36,000 and $32,000, respectively.

 

Restricted stock activityfor each six month period through October 31 is summarized as follows:

 

| ** **                 | ** ** | **2009**       | ** ** | **2008**     | ** ** |
|----------------------------|------------|----------------|------------|--------------|------------|
| ** **                 | ** ** | **Restricted** | ** ** | **Weighted** | ** ** | **Restricted** | ** ** | **Weighted** | ** ** |
| ** **                 | ** ** | **Shares**     | ** ** | **Average**  | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                 | ** ** | **Under**      | ** ** | **Grant**    | ** ** | **Under** | ** ** | **Grant** | ** ** |
| ** **                 | ** ** | **Option**     | ** ** | **Price**    | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding  at May 1 |       | 434,910        |       | $            | .500       |   | 686,750 |   | $ | .453 | ** ** |
| Granted                    |       | 250,000        |       | $            | .270       |   | — |   | — | ** ** |
| Vested                     |       | —         |       | —       |       | (40,000 | ) | $ | .300 |   |
| Forfeited                  |       | (43,400        | )          | $            | .500       |   | — |   | — |   |
| Outstanding  at October 31 |       | 641,510        |       | $            | .410       |   | 646,750 |   | $ | .463 |   |

 

**Note 7 —Stockholders’ Equity**

 

The components ofstockholders’ equity are summarized as follows:

 
| ** **                      | ** ** | **October 31,** | ** **      | **April 30,** | ** ** |
|---------------------------------|------------|----------------------|-----------------|--------------------|------------|
| ** **                      | ** ** | **2009**             | ** **      | **2009**           | ** ** |
| Common  stock, at par value     |       | $                    | 60,000          |               | $          | 60,000 |   |
| Capital  in excess of par value |       | 12,508,000           |            | 12,472,000         |       |
| Accumulated  deficit            |       | (10,597,000          | )               | (10,473,000        | )          |
|                            |       | 1,971,000            |            | 2,059,000          |       |
| Less  treasury stock, at cost   |       | 90,000               |            | 90,000             |       |
|                            |       | $                    |  1,881,000 |               | $          | 1,969,000 |   |

 

Torotelhas 6,000,000 shares of common stock, $.01 par value, authorized and 5,873,100shares issued and outstanding.  Thechanges in shares of common stock outstanding as of October 31 of eachperiod are summarized as follows:

 
| ** **                 | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|----------------------------|------------|-----------|------------|-----------|------------|
| Balance,  May 1       |       | 5,666,500 |       | 5,878,340 |       |
| Restricted  stock activity |       | 250,000   |       | —    |       |
| Treasury  stock activity   |       | (43,400   | )          | —    |       |
|                       |       |      |       |      |       |
| Balance,  October 31       |       | 5,873,100 |       | 5,878,340 |       |

 

**Note8 — Earnings Per Share**

 

Torotel utilizes adual presentation of basic and diluted earnings per share (“EPS”) on the faceof the consolidated statements of operations and provides a reconciliation ofthe numerator and denominator used in computing basic and diluted EPS.  Basic EPS excludes dilution and is computedby dividing earnings available to common stockholders by the weighted averagenumber of common shares outstanding for the period.  Diluted EPS is computed similarly to fullydiluted EPS.  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.  The 641,510

 

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shares issuedpursuant to the Restricted Stock Agreements (see Note 6 of Notes toConsolidated Condensed Financial Statements) meet the definition ofcontingently issuable shares; as a result, these shares will not be included inthe basic EPS calculation until the performance measurements have beensatisfied.  The restricted shares will betreated as a common stock equivalent for the diluted EPS calculation.

 

The basic anddiluted earnings per common share were computed as follows:

 

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

# ** **

| ** **                                                   | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net  earnings (loss)                                         |       | $         | (124,000   | )         | $          | 249,000 |   |
|                                                         |       |      |       |      |       |
| Weighted  average common shares outstanding for basic EPS    |       | 5,231,590 |       | 5,211,807 |       |
| Incremental  shares for effect of restricted stock           |       | —    |       | 666,533   |       |
| Weighted  average common shares outstanding for dilutive EPS |       | 5,231,590 |       | 5,878,340 |       |
|                                                         |       |      |       |      |       |
| Basic earnings (loss) per share                              |       | $         | (.02       | )         | $          | .05 |   |
| Diluted earnings (loss) per share                            |       | $         | (.02       | )         | $          | .04 |   |

 

No incrementalshares are included in the 2009 EPS calculations for the 641,510 shares ofrestricted common stock since the effect would be anti-dilutive.

 

# **Quarterly EPS Calculations**

# ** **

| ** **                                                   | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net  earnings (loss)                                         |       | $         | (15,000    | )         | $          | 108,000 |   |
|                                                         |       |      |       |      |       |
| Weighted  average common shares outstanding for basic EPS    |       | 5,231,590 |       | 5,231,590 |       |
| Incremental  shares for effect of restricted stock           |       | —    |       | 646,750   |       |
| Weighted  average common shares outstanding for dilutive EPS |       | 5,231,590 |       | 5,878,340 |       |
|                                                         |       |      |       |      |       |
| Basic earnings (loss) per share                              |       | $         | (.02       | )         | $          | .02 |   |
| Diluted earnings (loss) per share                            |       | $         | (.02       | )         | $          | .02 |   |

 

No incrementalshares are included in the 2009 EPS calculations for the 641,510 shares ofrestricted common stock since the effect would be anti-dilutive.

 

**Note9 — Stock Appreciation Rights**

 

The board of directors of Torotel approved the Directors StockAppreciation Rights Plan (the “Plan”) for non-employee directors in September 2004.  Each stock appreciation right (“SAR”) isequal to one share of common stock of Torotel, and the aggregate number of SARsthat may be granted under the Plan shall not exceed 500,000.  The effective date of the Plan is October 1,2004, and the Plan has a term of ten (10) years.

 

Pursuant to the Plan,20,000 SARs were granted on the effective date to each of the three currentnon-employee directors serving at that time. The initial price at which each SAR was granted was $.35, which equaledthe market price of Torotel’s common stock on the date of grant.  Accordingly, no compensation cost wasrecognized at the time of grant.

 

SARs shall automatically be granted in the future as follows: (1) eachperson who is elected as a director, who was not a director on the effectivedate of the Plan, shall be granted 10,000 SARs on the date such person iselected a director; and (2) on each May 1 following the effectivedate during the term of the Plan, each person serving as a director on suchdate shall be granted 10,000 SARs.  Afterthe initial grant the price at which each SAR is granted shall be the averageof the closing price of Torotel’s common stock for the ten consecutive daysimmediately preceding the date of grant. Upon exercise of a SAR, Torotel will pay the grantee an amount (the “Spread”)equal to the excess of the Exercise Price over the SAR grant price

 

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multiplied by the number of shares beingexercised.  The Exercise Price shall bethe average of the closing price of Torotel’s common stock for the tenconsecutive days immediately preceding the notice of exercise.  For any payments that exceed $10,000, Torotelhas the option to make quarterly payments over three years with interestpayable quarterly at the prime rate of Torotel’s primary bank.

 

EachSAR granted hereunder may be exercised to the extent that the grantee is vestedin such SAR.  The SARs will vestaccording to the following schedule:

 
| **Number of Years the Grantee has  remained**    | ** ** | **Shares represented**  | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| **a Torotel director of the  Company following** | ** ** | **by a SAR in which**   | ** ** |
| **the Date of Grant**                            | ** ** | **a Grantee is Vested** | ** ** |
| Under  one                                       |       | 0                       | %          |
| At  least one but less than two                  |       | 33                      | %          |
| At  least two but less than three                |       | 67                      | %          |
| **Three or more**                                | ** ** | **100**                 | **%**      |

## ** **

A grantee shallbecome fully (100%) vested in each of their SARs under the followingcircumstances: (i) upon termination of the grantee’s service as a directorof Torotel for reasons of death, disability or retirement; (ii) if theCompensation and Nominating Committee (the “Committee”), in its solediscretion, determines that acceleration of the SAR vesting schedule would bedesirable for Torotel; or (iii) if Torotel shall, pursuant to action byits Board of Directors, at any time propose to merge into, consolidate with, orsell or otherwise transfer all or substantially all of its assets to anothercorporation, and provision is not made pursuant to the terms of suchtransaction for the assumption by the surviving, resulting or acquiringcorporation of outstanding SARs or for substitution of new SARs therefore, theCommittee shall cause written notice of the proposed transaction to be given toeach grantee not less than twenty days prior to the anticipated effective dateof the proposed transaction, and his or her SARs shall become fully (100%)vested and, prior to a date specified in such notice, which shall be not morethan ten days prior to the anticipated effective date of the proposedtransaction, each grantee shall have the right to exercise his or her SARs.

 

Compensation expense is recognized over the vesting period based uponthe estimated fair value of the SARs pursuant to the terms of the Plan usingthe Black-Scholes options-pricing model as of the end of each financialreporting period.  As of October 31,2008, the fair value of the SARs was determined using the followingassumptions: no dividend payments over the life of the SARs since Torotel hasnot issued any form of dividend since 1985; an expected volatility of 166.2%based on Torotel’s historical volatility using the weekly closing price overthe past three years; a risk-free interest rate of 3.00%; and an expected lifeof three years based on the length of service estimated to be served.  As of October 31, 2009, the fair valueof the SARs was determined using the following assumptions: no dividendpayments over the life of the SARs since Torotel has not issued any form ofdividend since 1985; an expected volatility of 114.0% based on Torotel’shistorical volatility using the weekly closing price over the past three years;a risk-free interest rate of 2.50%; and an expected life of three years basedon the length of service estimated to be served.  Based on these assumptions, the fair valueprices per share of the outstanding SARs as of October 31, 2009, aresummarized as follows:

 
| ** **            | ** ** | **SARs**   | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** | **Aggregate**  | ** **    | **Aggregate** | ** ** |
|-----------------------|------------|------------|------------|--------------|------------|----------------|------------|------------|------------|----------------|---------------|---------------|------------|
| ** **            | ** ** | **Under**  | ** ** | **Exercise** | ** ** | **Fair Value** | ** ** | **%**      | ** ** | **Vested**     | ** **    | **Intrinsic** | ** ** |
| **Grant Date**        | ** ** | **Option** | ** ** | **Price**    | ** ** | **Price**      | ** ** | **Vested** | ** ** | **Fair Value** | ** **    | **Value**     | ** ** |
| October 1,  2004 |       | 60,000     |       | $            | .350       |           | $          | .138       |       | 100            | %   | $             | 8,000      |   | $ | — |   |
| May 1,  2005     |       | 30,000     |       | $            | .302       |           | $          | .143       |       | 100            | %             | $             | 4,000      |   | $ | — |   |
| May 1,  2006     |       | 30,000     |       | $            | .695       |           | $          | .110       |       | 100            | %             | $             | 3,000      |   | $ | — |   |
| May 1,  2007     |       | 30,000     |       | $            | .500       |           | $          | .124       |       | 67             | %             | $             | 3,000      |   | $ | — |   |
| June 4,  2007    |       | 10,000     |       | $            | .412       |           | $          | .132       |       | 67             | %             | $             | 1,000      |   | $ | — |   |
| May 1,  2008     |       | 40,000     |       | $            | .550       |           | $          | .119       |       | 33             | %             | $             | 2,000      |   | $ | — |   |
| May 1,  2009     |       | 40,000     |       | $            | .208       |           | $          | .157       |       | 0              | %             | $             | —     |   | $ | 1,000 |   |

 

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The vested portionrepresents 160,000 SARs.  As of October 31,2009, the total aggregate intrinsic value of these exercisable SARs was $1,000.

 

SARs transactions for each six month period through October 31 aresummarized as follows:

 
| ** **                                                     | ** ** | **2009**   | ** ** | **2008**     | ** ** |
|----------------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                     | ** ** | **SARs**   | ** ** | **Average**  | ** ** | **SARs** | ** ** | **Average** | ** ** |
| ** **                                                     | ** ** | **Under**  | ** ** | **Grant**    | ** ** | **Under** | ** ** | **Grant** | ** ** |
| ** **                                                     | ** ** | **Option** | ** ** | **Price**    | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding  at May 1                                     |       | 200,000    |       | $            | .460       |   | 160,000 |   | $ | .438 |   |
| Granted                                                        |       | 40,000     |       | $            | .208       |   | 40,000 |   | $ | .550 |   |
| Exercised                                                      |       | —     |       | —       |       | — |   | — |   |
| Forfeited                                                      |       | —     |       | —       |       | — |   | — |   |
| Outstanding  at October 31                                |       | 240,000    |       | $            | .418       |   | 200,000 |   | $ | .460 |   |
|                                                           |       |       |       |         |       |   |   |   |   |
| SARs  exercisable at end of period                             |       | 160,000    |       | $            | .444       |   | 123,300 |   | $ | .408 |   |
| Weighted  average fair value of SARs granted during the period |       |       |       | $            | .157       |   |   |   | $ | .342 |   |

 

The following informationapplies to SARs outstanding for each six month period through October 31:

 
| ** **                                   | ** ** | **2009**      | ** ** | **2008**      | ** ** |
|----------------------------------------------|------------|---------------|------------|---------------|------------|
| Number  outstanding                          |       | 240,000       |       | 200,000       |       |
| Range  of grant prices                       |       | $.208 - $.695 |       | $.302 - $.695 |       |
| Weighted  average grant price                |       | $.418         |       | $.460         |       |
| Weighted  average remaining contractual life |       | 6.98 yrs.     |       | 7.48 yrs.     |       |

 

Total compensationexpense for the outstanding SARs for the six months ended October 31, 2009and 2008 was an expense of $4,000 and a credit of $2,000, respectively.  Total compensation expense for theoutstanding SARs for the three months ended October 31, 2009 and 2008 wasa credit of $5,000 and an expense of $1,000, respectively.  As of October 31, 2009, there was $11,000of total unrecognized compensation expense related to non-vested SARs grantedunder the Plan.  That cost is expected tobe recognized over a weighted average period of .75 years.  The liability for SARs on the consolidatedbalance sheets as of October 31, 2009 and April 30, 2009, was $21,000and $17,000, respectively.

 

**Note 10 —****Concentrations ofCredit Risk**

 

Financial instruments that potentially subject Torotelto concentrations of credit risk consist principally of cash and accountsreceivable.  Torotel grants unsecuredcredit to most of its customers. Management does not believe that it is exposed to any extraordinarycredit risk as a result of this policy. Torotel deposits all monies at the Bank of Blue Valley.  These accounts are secured up to $250,000 bythe Federal Deposit Insurance Corporation through December 31, 2013.  At various times and at October 31,2009, these cash balances exceed federally insured limits.  Torotel has not experienced any losses insuch accounts.  Management does notbelieve Torotel is exposed to any significant credit risk with respect to itscash.

 

**Note 11 —****New AccountingPronouncement**

 

Torotel adopted *The FASB Accounting Standards Codification andthe Hierarchy of Generally Accepted Accounting Principles*effective August 1,2009.  The FASB Accounting StandardsCodification (“Codification”) is identified as the source of authoritative U.S.GAAP recognized by the FASB to be applied by

 

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non-governmental entities.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existingnon-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not includedin the Codification will become non-authoritative.  The Codification officially launched on July 1,2009, and is effective for financial statements issued for interim and annualperiods ending after September 15, 2009.

 

**Note 12 —****Subsequent Events**

 

Management has performed an evaluation of events that have occurredsubsequent to October 31, 2009, and as of December 14, 2009 (the dateof the filing of this Form 10-Q). There have been no other subsequent events that occurred during suchperiod that would require disclosure in this Form 10-Q or would berequired to be recognized in the consolidated financial statements as of or forthe three and six month periods ended October 31, 2009.

 

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**Item 2.       Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*Overview*

 

Torotel conducts business primarily through two whollyowned subsidiaries, Torotel Products, Inc. (“Torotel Products”) andElectronika, Inc. (“Electronika”).

 

Torotel Products designs and manufactures a widevariety of magnetic components for use in military, aerospace and industrialelectronic applications.  These magneticcomponents, which consist of transformers, inductors, reactors, chokes, andtoroidal coils, are used to modify and control electrical voltages and currentsin electronic devices.  For example, ifequipment containing one of these components receives an electrical voltage orcurrent which is too high for proper operation of the equipment, the componentwould modify and control the electrical voltage or current to allow properoperation of the equipment.  WhileTorotel Products primarily manufactures the components in accordance withpre-developed mechanical and electrical requirements, in some cases it will beresponsible for 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, down-hole drilling and conventional missile guidancesystems.  As part of its growth strategy,Torotel Products has been actively pursuing opportunities in electro-mechanicalassemblies.  These efforts resulted innearly $800,000 of new business from two new customers in fiscal 2009 and anadditional $320,000 in fiscal 2010. Assemblies will continue to be a major market focus going forward.

 

Torotel Products markets its components primarilythrough a 4-person internal sales force and four independent manufacturers’representatives paid on a commission basis. These commissions are earned when a product is sold and/or shipped to acustomer within the representative’s assigned territory.  Torotel Products also utilizes its 4-personengineering department in its direct sales efforts for the purpose of expandingits reach into new markets and/or customers.

 

Torotel Products is an approved source for magneticcomponents used in numerous military and aerospace systems, which means TorotelProducts is automatically solicited for any procurement needs for suchapplications.  The magnetic componentsmanufactured by Torotel Products are sold primarily in the United States, andmost sales are awarded on a competitive bid basis.  The markets in which Torotel Productscompetes are highly competitive.  Asubstantial number of companies sell components of the type manufactured andsold by Torotel Products.  In addition,Torotel Products sells to a number of customers who have the capability ofmanufacturing their own electronic components. The principal methods of competition for electronic products in themarkets served by Torotel Products include, among other factors, price, on-timedelivery performance, lead times, customized product engineering and technicalsupport, marketing capabilities, quality assurance, manufacturing efficiency,and existing relationships with customers’ engineers.  While magnetic components are not susceptibleto rapid technological change, Torotel Products’ sales, which do not representa significant share of the industry’s market, are susceptible to decline giventhe competitive nature of the market.

 

Electronika is a marketing and licensing companyselling ballast transformers to the airline industry.  These transformers activate and control thelights in commercial airplane cockpits. Electronika’s ballast transformers are approved as spare and replacementparts in DC-8, DC-9, DC-10, MD-80 and MD-88 aircraft; however, sales of ballasttransformers have been made primarily for use in DC-8 and DC-9 aircraft.  As a result, the business of Electronika issubject to various risks including, without limitation, any decline in use ofthe referenced aircraft, and competition for the available spare partsbusiness.  Electronika’s sales do notrepresent a significant portion of any particular market.

 

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Electronika’s requirements for the ballasttransformers are outsourced pursuant to a Manufacturing Agreement withMagnetika, a corporation owned by the Caloyeras family.  Under the terms of the agreement, Magnetikaprovides all necessary raw material, labor, testing, packaging and relatedservices required to complete the manufacture, delivery and sale of the ballasttransformers.  Electronika retainsownership of all designs, drawings, specifications and intellectual propertyrights associated with the ballast transformers.  Magnetika is a manufacturing company that, inaddition to the aforementioned ballast transformers, manufactures various otherproducts similar to those of Torotel for other unrelated customers.  Magnetika’s annual sales are estimated to beabout two times the annual sales of Torotel. Total purchases of goods from Magnetika by Electronika amounted to$2,000 for the six months ended October 31, 2009.

 

*Business Outlook*

 

The overall business outlook in fiscal 2010 remainsfavorable because of the higher demand for the potted coil assembly for theHellfire II missile system projected in the second half of the fiscal 2010;however, this higher demand will likely be offset partially by less demand formagnetic components because of the current economic climate and the uncertaintysurrounding the next U.S. defense budget, as well as the ongoing delays inaircraft orders and production.  As of October 31,2009, the order backlog was $7.5 million. This amount is comprised of $5.8 million for the potted coil assembly,$1.5 million in magnetic components and $200,000 in electro-mechanicalassemblies.  A new long-term contractvalued at $4.7 million for the potted coil assembly was received in June 2009,with deliveries scheduled into the latter part of fiscal 2011.  New order bookings during the first sixmonths of fiscal 2010, exclusive of the potted coil assembly, decreased 7% to$2.3 million, which is indicative of the anticipated lower demand for magneticcomponents.

 

The industry mix of Torotel Products’ net sales forthe first six months in fiscal 2010 was 49% defense, 30% aerospace and 21%industrial compared to 40% defense, 33% aerospace and 27% industrial for thesame period last year.  This shift towarddefense follows the trend expected for fiscal 2010 because of the higher demandfor the potted coil assembly.

 

The primary factors that drive gross profit and netearnings for Torotel Products are sales volume and product mix.  The gross profits on mature products/programsand complex transformer devices tend to be higher than those that are still inthe prototyping or early production stages and simpler inductor devices.  As a result, in any given accounting periodthe mix of product shipments between higher and lower margin jobs has asignificant impact on the gross profit and net earnings of TorotelProducts.  Torotel’s operating plancontinues to focus on expanding the product base beyond electronic components.

 

Electronika’s net sales continue to be impacted by thedecline in the number of active DC-8 and DC-9 aircraft.  Management expects these sales to continue todecline and eventually phase out.

 

*Resultsof Operations*

 

The following managementcomments regarding Torotel’s results of operations and outlook should be readin conjunction with the Consolidated Condensed Financial Statements includedpursuant to Item 1 of this Quarterly Report.

 

The discussion and analysis of the results ofoperations include the operations of Torotel, Inc. and its subsidiaries,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.

 

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**SixMonths Ended October 31, 2009 Compared With Six Months Ended October 31,2008**

 

Consolidated net sales decreased 17%.  The net sales of Torotel Products decreased 15% from $3,858,000 to $3,289,000.  This decrease was attributable to the lower demand for magnetic components, molded coils and lower shipments of various assemblies.  This lower sales volume was offset partially by the higher demand for the potted coil assembly.  The net sales of Electronika decreased 95% from $102,000 to $5,000, which is consistent with the sales volume expected from Electronika.

 

Consolidated gross profit as a percentage of net sales decreased1%.  The gross profit percentage ofTorotel Products decreased 1% becauseof lower sales volume without a comparable change in production overheadcosts.  Electronika’s gross profit as apercentage of net sales remained unchanged.

 

Engineering expenses, applicable only to Torotel Products, decreased 4%from $177,000 to $170,000   because of a $7,000 decrease in payroll costsdue to fewer engineering college interns employed during the current period anda $6,000 decrease in training costs. These decreases were offset partially by a $6,000 increase in travelcosts.  Management does not anticipateany significant increase in the present level of engineering expenses.

 

Consolidatedselling, general and administrative (“SG&A”) expenses increased 10%.  The SG&A expenses of Torotel increased29% from $190,000 to $246,000 primarily because of a $25,000 increase in  professional fees, a $9,000 increase inconsulting fees, a $7,000 increase in directors fees, a $6,000 increase in the fair value of stock appreciation rights, a $5,000increase in auditing fees and a $4,000 increase in annual report andproxy costs.  The SG&A expenses ofTorotel Products increased nearly 5% from $803,000 to $845,000 primarily because of a $37,000 increase in payrollcosts and a $37,000 increase in recruiting costs.  These increases were offset partially by a$25,000 decrease in sales commissions and a $7,000 decrease in consultingcosts.  Electronika did not incur anySG&A expenses in either period. Management does not anticipate any significant increase in the presentlevel of SG&A expenses.

 

Interest expense, entirely attributable to Torotel Products, decreasednearly 21% because of a lower debtlevel and a lower effective borrowing rate as a result of a refinancing of themortgage debt (see Note 5 of Notes to Consolidated Condensed FinancialStatements).

 

For the reasonsdiscussed above, the consolidated pretax earnings decreased from a profit of$249,000 to a loss of $124,000.  Thepretax loss of Torotel increased from $190,000 to $246,000.  The pretax earnings of Torotel Productsdecreased from $378,000 to $119,000.  Thepretax earnings of Electronika decreased from $61,000 to $3,000.

 

**ThreeMonths Ended October 31, 2009 Compared With Three Months Ended October 31,2008**

 

Consolidated net sales decreased 12%. The net sales of Torotel Products decreased 8% from $1,908,000 to$1,753,000.  This decrease wasattributable to the lower demand for magnetic components and molded coils.  This lower sales volume was offset partiallyby the higher demand for the potted coil assembly.  The net sales of Electronika decreased 94%from $81,000 to $4,000, which is consistent with the sales volume expected fromElectronika.

 

Consolidated gross profit as a percentage of net sales decreased lessthan 1%.  The gross profit percentage ofTorotel Products increased 1% primarily because of a lower labor contentassociated with the product mix.  Thisgross profit improvement was offset partially by the effect of lower salesvolume without a comparable change in production overhead costs.  Electronika’s gross profit as a percentage ofnet sales remained unchanged.

 

Engineering expenses, applicable only to Torotel Products, decreased slightlyfrom $79,000 to $78,000.   Managementanticipates the present level of engineering expenses to remain relativelyconstant during the next few quarters.

 

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Consolidated selling, general and administrative (SG&A) expensesincreased 9%.  The SG&A expenses ofTorotel increased 36% from $72,000 to $98,000 primarily because of a $12,000 increase in  professional fees, a $9,000 increase inconsulting fees, a $5,000 increase inauditing fees, a $4,000 increase in directors fees and a $4,000 increase in annual reportand proxy costs.  These increases were offset partially by a $6,000 decrease in the fairvalue of stock appreciation rights and a $2,000 decrease in liability insurancecosts.  The SG&A expenses of TorotelProducts increased nearly 5% from $416,000 to $435,000 primarily because of a$21,000 increase in recruiting costs, a $10,000 increase in payroll costs and a$9,000 increase in stock compensation costs. These increases were offset partially by a $15,000 decrease inmembership fees to the Supplier Advisory Council for the Suppliers ExcellenceAlliance and a $6,000 decrease in building maintenance costs.  Electronika did not incur any SG&Aexpenses in either period.  Managementdoes not anticipate any significant increase in the present level of SG&Aexpenses.

 

Interest expense,entirely attributable to Torotel Products, decreased 27% because of a lower debt level and a lower effective borrowing rate as aresult of a refinancing of the mortgage debt (see Note 5 of Notes toConsolidated Condensed Financial Statements).

 

For the reasons discussed above, the consolidated pretax earningsdecreased from $108,000 to a loss of $15,000. The pretax loss of Torotel increased from $72,000 to $98,000.  The pretax earnings of Torotel Productsdecreased from $132,000 to $81,000.  Thepretax earnings of Electronika decreased from $48,000 to $2,000.

 

**Liquidityand Capital Resources**

 

As of October 31,2009, Torotel had $477,000 in cash compared to $656,000 as of April 30,2009 and $434,000 as of October 31, 2008. Management anticipates cash flow from operations will improve during thesecond half of fiscal 2010 given the increasing demand for the potted coilassembly and expected lower administrative costs during the remainder of thefiscal year.

 

The table below presentsthe summary of cash flow for the six month periods indicated through October 31.

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net  cash provided by (used in) operating activities |       | $        | (104,000   | )        | $          | 80,000 |   |
| Net  cash used in investing activities               |       | $        | (54,000    | )        | $          | (21,000 | ) |
| Net cash used in  financing activities               |       | $        | (21,000    | )        | $          | (35,000 | ) |

 

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 $54,000 of cashused in investing activities in fiscal 2010 was the result of capitalexpenditures.  Management anticipatesapproximately $50,000 of capital expenditures during the remainder of fiscal2010.  The $21,000 of cash used infinancing activities in fiscal 2010 is the net effect of long-term debtpayments on the mortgage and installment and capital lease obligations with theBank of Blue Valley less proceeds from a new equipment loan.  Management believes that the projected cashflow from operations, combined with its existing cash balances, will besufficient to meet its funding requirements for the foreseeable future.  Torotel does have a $500,000 bank line ofcredit available, which management anticipates could be utilized to help fundany working capital requirements.

 

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*.*

 

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Return on CapitalEmployed (“ROCE”) is the primary tool for managing Torotel’s business.  ROCE measures what you get out (EBIT) versuswhat you put in (NOA = Capital Employed). For these purposes, NOA is defined as “accounts receivable + inventory +net fixed assets + miscellaneous operating assets – accounts payable –miscellaneous operating liabilities”. The performance of Torotel’s management and the majority of its decisionswill be measured by whether Torotel’s ROCE improves.  For the fiscal years ended April 30,2007, 2008 and 2009, Torotel’s ROCE was -7.55%, 12.25% and 18.19%,respectively.  The ROCE for the 12-monthtrailing period ended October 31, 2009 was -.88%.

 

**Critical Accounting Policies**

 

*Use of Estimates*

 

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect certain reported amounts anddisclosures.  Significant estimates usedin preparing these consolidated financial statements include those assumed incomputing the carrying value of equipment, allowance for doubtful accountsreceivable, the valuation allowance on deferred tax assets and the reserve forwarranty costs.  Accordingly, actualresults could differ from those estimates. Any changes in estimates arerecorded in the period in which they become known.

 

*Credit Risk*

 

Financial instrumentsthat potentially subject Torotel to concentrations of credit risk consistprincipally of cash and accounts receivable. Torotel grants unsecured credit to substantially all of its customers.  Management does not believe that it isexposed to any extraordinary credit risk as a result of this policy.  Torotel deposits all monies at the Bank ofBlue Valley.  These accounts are securedup to $250,000 by the Federal Deposit Insurance Corporation through December 31,2013.  At various times and at October 31,2009, these cash balances exceed federally insured limits.  Torotel has not experienced any losses insuch accounts.  Management does notbelieve Torotel is exposed to any significant credit risk with respect to itscash.

 

*Fair Value of Financial Instruments*

 

Effective May 1,2009, Torotel determines fair value by utilizing a fair value hierarchy thatprioritizes observable and unobservable inputs used to measure fair value intothree levels as follows:

 

·                       Level 1.  Inputs to the valuationmethodology are quoted prices (unadjusted) for identical assets or liabilitiesin active markets.

 

·                       Level 2. Inputs to the valuationmethodology include quoted prices for similar assets and liabilities in activemarkets, and inputs that are observable for the asset or liability, eitherdirectly or indirectly, for substantially the full term of the financialinstrument.

 

·                       Level 3.  Inputs to the valuationmethodology are unobservable and significant to the fair value measurement.

 

The fair value hierarchygives the highest priority to Level 1 inputs and the lowest priority to Level 3inputs.  In determining fair value,Torotel utilizes valuation techniques that maximize the use of observable inputsand minimize the use of unobservable inputs to the extent possible as well asconsider counterparty credit risk in the assessment of fair value.

 

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The carrying amounts ofcertain financial instruments, including cash, trade receivables, prepaidexpenses and other current assets, trade accounts payable and accruedliabilities approximate fair value due to their short maturities.  As of October 31, 2009, the amount ofTorotel’s long-term debt approximates fair value based on the present value ofestimated future cash flows using a discount rate commensurate with a borrowingrate available to Torotel.

 

*Treasury Stock*

 

Torotel utilizes the weightedaverage cost method in accounting for its treasury stock transactions.

 

*Revenue Recognition*

 

Revenue is recognizedwhen a fixed price contract or purchase order exists; delivery has occurred;and collection is reasonably assured. Selling terms are FOB Shipping Point so Torotel considers its productsdelivered once they have been shipped and title and risk of loss have beentransferred.  Torotel’s consolidated netsales arising from contracts having deliveries scheduled over a period of morethan one year for the six month periods ended October 31, 2009 and 2008,were approximately 34% and 20%, respectively, because of the contracts for thepotted coil assembly.

 

*Allowance for Doubtful Accounts*

 

Gross trade accountsreceivable are offset with an allowance for doubtful accounts.  The allowance for doubtful accounts ismanagement’s best estimate of the amount of probable credit losses in Torotel’sexisting accounts receivable.  Managementreviews the allowance for doubtful accounts on a regular basis, and all pastdue balances are reviewed individually for collectability.  Account balances are charged against the allowancewhen placed for collection.  Recoveriesof receivables previously written off are recorded when received.  The majority of the customer accounts areconsidered past due after the invoice becomes older than the customer’s creditterms.  Interest is not charged on pastdue accounts.  The allowance for doubtfulaccounts as of October 31, 2009 and April 30, 2009, was $6,000.

 

*Inventories*

 

Inventories are stated atthe lower of cost or market.  Cost isdetermined using a moving average cost method of valuation that currently andhistorically approximates the first-in, first-out method.  Torotel’s industry is characterized byshort-term customer commitments and changes in demand, as well as other marketconsiderations.  Provisions for obsoleteand excess inventory are based on reviews of inventory usage, quantities onhand and latest product demand information from customers.  Inventories are reviewed in detail utilizinga 12-month time horizon.  Individual partnumbers that have not had any usage in a 12-month time period are categorizedas obsolete; individual part numbers having more than a 12-month supply basedon the current year’s usage are categorized as excess.  Once specific inventory has been identifiedas excess or obsolete, the cost of the identified inventory is fully reservedand the cost of the inventory is not recovered until it is sold.  The reserve balance is analyzed for adequacyalong with the inventory review each quarter.

 

*Property, Plant and Equipment*

 

Property, plant andequipment are carried at cost. Depreciation and amortization are provided in amounts sufficient torelate the costs of depreciable assets to operations primarily using thestraight-line method over estimated useful lives of three to five years for equipmentand ten to twenty years for buildings and improvements.

 

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*Cash Flows*

 

For purposes of thestatements of cash flows, Torotel considers all short-term investmentspurchased with original maturity dates of three months or less to be cashequivalents.

 

*Warranty Costs*

 

Torotel has a reserve forestimated warranty costs associated with products returned from customers.  A limited warranty is provided for a periodof one year which requires Torotel to repair or replace defective products atno cost to the customer.  The warrantyreserve is based on historical experience and reflects management’s bestestimate of probable liability under the product warranties.

 

*Stock-based Compensation*

 

Torotel follows the fairvalue recognition provisions in accounting for transactions involving stockappreciation rights and restricted stock.

 

*New Accounting Pronouncements*

 

Effective May 1,2009, Torotel adopted general standards of accounting for and disclosures ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued (see Note 12 of Notes to ConsolidatedCondensed Financial Statements).  These standards require the disclosureof the date through which an entity has evaluated subsequent events and thebasis for that date.  The adoption didnot have any effect on Torotel’s results of operations, financial position andcash flow.

 

Torotel adopted *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples*effective August 1, 2009 (see Note 11 of Notes toConsolidated Condensed Financial Statements). The FASB Accounting Standards Codification (“Codification”) isidentified as the source of authoritative U.S. GAAP recognized by the FASB tobe applied by non-governmental entities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SECregistrants.  On the effective date, theCodification will supersede all then-existing non-SEC accounting and reportingstandards.  All other non-grandfatherednon-SEC accounting literature not included in the Codification will becomenon-authoritative.  The Codificationofficially launched on July 1, 2009, and is effective for financialstatements issued for interim and annual periods ending after September 15,2009.

 

**Forward-LookingInformation**

 

*This report, as well as our otherreports filed with the Securities and Exchange Commission (“SEC”), and in pressreleases and other public communications throughout the year, contains forwardlooking statements made pursuant to the safe harbor provisions of The PrivateSecurities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,”“plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict”and similar expressions are intended to identify forward lookingstatements.  This report containsforward-looking statements regarding, among other topics, our expectedfinancial position, results of operations, cash flows, strategy, budgets andmanagement’s plans and objectives. Accordingly, these forward-looking statements are based on assumptionsabout a number of important factors. While we believe that our assumptions about such factors are reasonable,such factors involve risks and uncertainties that could cause actual results tobe different from what appear here. These risk factors include: generaleconomic conditions in the United States and specifically, economic conditionsaffecting the defense and aerospace industries, the ability to adequately passthrough to*

 

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*customersunanticipated future increases in raw material costs, 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, the availability of credit, and otherrisks and uncertainties.  In light ofthese risks and uncertainties, there can be no assurance that theforward-looking information contained in this report will prove accurate, andour actual results may differ materially from these forward-lookingstatements.  We assume no obligation toupdate any forward-looking statements made herein.*

 

**Item 4T.    Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

Torotel’smanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of Torotel’s disclosurecontrols and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the period covered by this report.  Based on such evaluation, these officers haveconcluded that Torotel’s disclosure controls and procedures are effective.

 

*Changesin Internal Controls*

 

There were no significantchanges in Torotel’s internal controls over financial reporting or in otherfactors that in management’s estimates have materially affected, or arereasonably likely to materially affect, Torotel’s internal controls overfinancial reporting subsequent to the date of the evaluation.

 

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**PART II.****  ****OTHER INFORMATION**

 

**Item 4.****      ****Submission of Matters to a Voteof Security Holders**

 

The annual meeting of shareholders was held in Kansas City, Missouri,on Monday, September 21, 2009, to vote on:

 

a.       The following two management proposals:

 

(1)     To elect two members to serve on theBoard of Directors for a three-year term; with those nominees receiving thegreatest number of votes being elected; and

 

(2)    To approve an amendment to Torotel’sArticles of Incorporation to change the number of directors from seven (7) toa range of not less than three (3) or more than seven (7); with the affirmativevote of a majority of the shares of common stock present, in person or byproxy, and entitled to vote required to approve this proposed amendment.

 

b.      The following shareholder proposal:

 

(3)    To consider and vote upon a shareholderproposal that requires a majority of the elected directors for the Corporationto be independent; with the affirmative vote of a majority of the shares ofcommon stock present, in person or by proxy required to approve this proposedamendment.

 

c.       The following shareholder proposal wassubmitted outside of the Rule 14a-8 process and therefore not included inthe Proxy Statement:

 

(4)    To consider and vote upon a shareholderproposal that permits only shareholders to make, alter, amend, suspend orrepeal the Corporation’s By-Laws.

 

A majority of the outstanding shares of common stock entitled to bevoted at the meeting, represented in person or by proxy, was necessary toconstitute a quorum to transact business at the meeting.  At the meeting, there were 3,585,057 shares representedwhich was 63.27% of the shares outstanding and eligible to vote.  The voting results were as follows:

 

***Proposal 1***.        Shareholders elected thefollowing individuals to three-year terms on the Board of Directors, with thenumber of shares voting “FOR” each nominee indicated.

 

| Dale  H. Sizemore, Jr. |   | 2,602,356 |   |
|-----------------------------|--------|-----------|--------|
| Richard  A. Sizemore        |   | 2,602,356 |   |

 

In addition to thedirectors elected above, S. Kirk Lambright, Jr., Anthony H. Lewis, H.James Serrone, and Stephen K. Swinson also serve as directors.  The current three-year terms for Messrs. Lewisand Swinson end in 2010, while the three-year terms for Messrs. Lambrightand Serrone end in 2011.

 

***Proposal 2.       ***Shareholders approved the amendment tothe Articles of Incorporation to change the number of directors from seven (7) toa range of not less than three (3) or more than seven (7), with the numberof shares voting “FOR”, “AGAINST”, and “ABSTAIN” indicated below.

 

| FOR     |   | 3,542,291 |   |
|---------|--------|-----------|--------|
| AGAINST |   | 42,314    |   |
| ABSTAIN |   | 452       |   |

 

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***Proposal 3.       ***Shareholders rejected the shareholderproposal recommending that a majority of the elected directors for theCorporation to be independent, with the number of shares voting “FOR”, “AGAINST”,“ABSTAIN” and “BROKER NON VOTES” indicated below.  Only 49.09% of votes were cast in favor ofthis proposal, so it was not approved.

 

| FOR              |   | 1,146,182 |   |
|------------------|--------|-----------|--------|
| AGAINST          |   | 877,062   |   |
| ABSTAIN          |   | 311,679   |   |
| BROKER NON VOTES |   | 1,250,134 |   |

 

***Proposal 4.***        A fourth proposal, whichwas submitted outside of the proxy statement process, was considered by theshareholders.  The proposal recommendedthat only shareholders be permitted to make, alter, amend, suspend or repealthe Corporation’s By-Laws.  The proposalwas not approved, with the number of shares voting “FOR”, “AGAINST”, “ABSTAIN”and “BROKER NON VOTES” indicated below.

 

| FOR              |   | 153,295   |   |
|------------------|--------|-----------|--------|
| AGAINST          |   | 3,431,762 |   |
| ABSTAIN          |   | 0         |   |
| BROKER NON VOTES |   | 0         |   |

 

**Item6.   Exhibits**

 

a)   Exhibits

 
| Exhibit 3.1  |   | Articles of  Incorporation                                                                                                         |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| 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 |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
| ** **              | ** ** | **Torotel, Inc.**          |
|-------------------------|------------|---------------------------------|
| ** **              | ** ** | **(Registrant)**                |
|                    |       |                            |
| December 14,  2009 |       | /s/ Dale H.  Sizemore, Jr. |
| Date                    |       | Dale H.  Sizemore, Jr.     |
|                    |       | Chief Executive Officer         |
|                    |       |                            |
| December 14,  2009 |       | /s/ H. James Serrone            |
| Date                    |       | H. James Serrone.               |
|                    |       | Chief Financial Officer         |

 

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