**FORM 10-QSB**

 

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

 

**Forthe quarterly period ended July 31, 2003**

 

**CommissionFile No. 1-8125**

 

**TOROTEL,INC.**

(Exact name of small business issuer asspecified in its charter)

 

| **MISSOURI**                                                                        |   | **44-0610086**                       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |                                 |
| **13402 SOUTH 71 HIGHWAY, GRANDVIEW,  MISSOURI  64030**                        |
| (Address of principal executive offices)                                            |
|                                                                                |   |                                 |
| **(816) 761-6314**                                                                  |
| (Issuer’s telephone number)                                                    |
|                                                                                |   |                                 |
| **NONE**                                                                            |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months and (2)has been subject to such filing requirements for the past 90 days.

 

Yes  ý    No o

 

As of September 11, 2003, there were 5,111,590 shares of CommonStock, $.01 Par Value, outstanding.

 

 

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TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

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

 

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PART I.                             FINANCIAL INFORMATION

 

Item 1.                                     Financial Statements

 

CONSOLIDATEDBALANCE SHEET (Unaudited)As of July 31, 2003

 
| ASSETS                                            |   |       |      |
|---------------------------------------------------|--------|------------|-----------|
|                                              |   |       |      |
| Current  assets:                                  |   |       |      |
| Cash                                              |   | $          | 534,000   |   |
| Accounts receivable, net                          |   | 562,000    |      |
| Inventories                                       |   | 199,000    |      |
| Prepaid expenses and other current assets         |   | 71,000     |      |
|                                              |   | 1,366,000  |      |
|                                              |   |       |      |
| Property, plant and equipment, net                |   | 290,000    |      |
|                                              |   |       |      |
| Other assets                                      |   | 6,000      |      |
|                                              |   |       |      |
| Intangible assets, net                            |   | 1,786,000  |      |
|                                              |   |       |      |
| Equity investment                                 |   | 1,039,000  |      |
|                                              |   |       |      |
|                                              |   | $          | 4,487,000 |   |
|                                              |   |       |      |
| LIABILITIES AND STOCKHOLDERS’ EQUITY         |   |       |      |
|                                              |   |       |      |
| Current liabilities:                              |   |       |      |
| Current maturities of long-term debt              |   | $          | 56,000    |   |
| Trade accounts payable                            |   | 642,000    |      |
| Accrued liabilities                               |   | 193,000    |      |
| Accrued interest on note payable to  shareholders |   | 5,000      |      |
|                                              |   | 896,000    |      |
|                                              |   |       |      |
| Long-term debt, less current maturities           |   | 315,000    |      |
|                                              |   |       |      |
| Note payable to shareholders                      |   | 750,000    |      |
|                                              |   |       |      |
| Stockholders’ equity:                        |   |       |      |
| Common stock, at par value                        |   | 52,000     |      |
| Capital in excess of par value                    |   | 12,362,000 |      |
| Accumulated deficit                               |   | (9,683,000 | )         |
|                                              |   | 2,731,000  |      |
| Less treasury stock, at cost                      |   | 205,000    |      |
|                                              |   | 2,526,000  |      |
|                                              |   |       |      |
|                                              |   | $          | 4,487,000 |   |

 

The accompanying notes are an integral partof this statement.

 

1

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CONSOLIDATED STATEMENTSOF OPERATIONS (Unaudited)Three Months Ended July 31,

 
|                                       |   | **2003** |      | **2002** |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|
| Net sales                                  |   | $        | 1,078,000 |     | $      | 1,140,000 |   |
| Cost of goods sold                         |   | 675,000  |      | 623,000  |   |
|                                       |   |     |      |     |   |
| Gross profit                               |   | 403,000  |      | 517,000  |   |
|                                       |   |     |      |     |   |
| Operating expenses:                        |   |     |      |     |   |
| Engineering                                |   | 45,000   |      | 48,000   |   |
| Selling, general and administrative        |   | 244,000  |      | 238,000  |   |
| Amortization of intangible assets          |   | 38,000   |      | 83,000   |   |
|                                       |   |     |      |     |   |
|                                       |   | 327,000  |      | 369,000  |   |
|                                       |   |     |      |     |   |
| Earnings from operations                   |   | 76,000   |      | 148,000  |   |
|                                       |   |     |      |     |   |
| Other expense (income):                    |   |     |      |     |   |
| Interest expense                           |   | 17,000   |      | 21,000   |   |
| Interest income                            |   | —   |      | (3,000   | )      |
| Equity in loss (earnings) of investee      |   | 26,000   |      | (10,000  | )      |
| Other, net                                 |   | —   |      | (1,000   | )      |
|                                       |   |     |      |     |   |
|                                       |   | 43,000   |      | 7,000    |   |
|                                       |   |     |      |     |   |
| Earnings before provision for income taxes |   | 33,000   |      | 141,000  |   |
|                                       |   |     |      |     |   |
| Provision for income taxes                 |   | —   |      | —   |   |
|                                       |   |     |      |     |   |
| Net earnings                               |   | $        | 33,000    |     | $      | 141,000 |   |
|                                       |   |     |      |     |   |
| Basic and diluted earnings per share       |   | $        | .01       |     | $      | .03 |   |

 

The accompanying notes are an integral partof these statements.

 

2

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CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)Three Months Ended July 31,

 
|                                                                                           |   | **2003** |    | **2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Cash flows  from operating activities:                                                         |   |     |    |     |   |
| Net earnings                                                                                   |   | $        | 33,000  |     | $      | 141,000 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used in) operating activities: |   |     |    |     |   |
| Equity in loss (earnings) of investee                                                          |   | 26,000   |    | (10,000  | )      |
| Depreciation and amortization                                                                  |   | 44,000   |    | 94,000   |   |
| Increase (decrease) in cash flows from  operations resulting from changes in:                  |   |     |    |     |   |
| Accounts receivable                                                                            |   | (70,000  | )       | (40,000  | )      |
| Inventories                                                                                    |   | (12,000  | )       | (63,000  | )      |
| Prepaid expenses and other assets                                                              |   | (49,000  | )       | (42,000  | )      |
| Trade accounts payable                                                                         |   | (21,000  | )       | 32,000   |   |
| Accrued liabilities                                                                            |   | (5,000   | )       | 16,000   |   |
| Income taxes payable                                                                           |   | —   |    | (8,000   | )      |
|                                                                                           |   |     |    |     |   |
| Net cash provided by (used in) operating  activities                                           |   | (54,000  | )       | 120,000  |   |
|                                                                                           |   |     |    |     |   |
| Cash flows from investing activities:                                                          |   |     |    |     |   |
| Capital expenditures                                                                           |   | (10,000  | )       | (4,000   | )      |
| Proceeds from note receivable                                                                  |   | —   |    | 39,000   |   |
| Electronika acquisition costs                                                                  |   | —   |    | (53,000  | )      |
| Apex investment costs                                                                          |   | (89,000  | )       | (35,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net cash used in investing activities                                                          |   | (99,000  | )       | (53,000  | )      |
|                                                                                           |   |     |    |     |   |
| Cash flows from financing activities:                                                          |   |     |    |     |   |
| Principal payments on long-term debt                                                           |   | (14,000  | )       | (37,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net cash used in financing activities                                                          |   | (14,000  | )       | (37,000  | )      |
|                                                                                           |   |     |    |     |   |
| Net increase (decrease) in cash                                                                |   | (167,000 | )       | 30,000   |   |
| Cash, beginning of period                                                                      |   | 701,000  |    | 338,000  |   |
|                                                                                           |   |     |    |     |   |
| Cash, end of period                                                                            |   | $        | 534,000 |     | $      | 368,000 |   |
|                                                                                           |   |     |    |     |   |
| Supplemental Disclosures of Cash Flow  Information                                             |   |     |    |     |   |
| Cash paid during the period for:                                                               |   |     |    |     |   |
| Interest                                                                                       |   | $        | 17,000  |     | $      | 21,000 |   |
| Income taxes payable                                                                           |   | $        | —  |     | $      | 8,000 |   |

 

The accompanying notes are an integral partof these statements.

 

3

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NOTES TOCONSOLIDATED 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 96% of Torotel’s sales arederived from domestic customers.  Theaccompanying unaudited consolidated financial statements reflect the normalrecurring adjustments, which are, in the opinion of management, necessary topresent fairly Torotel’s financial position at July 31, 2003, and theresults of operations for the three months ended July 31, 2003.

 

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

 

Note 2 - Inventories

 

The componentsof inventories are summarized as follows:

 
| Raw  materials  |   | $       | 31,000  |   |
|-----------------|--------|---------|---------|--------|
| Work in process |   | 144,000 |    |
| Finished goods  |   | 24,000  |    |
|            |   | $       | 199,000 |   |

 

Note 3 - Income Taxes

 

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

 

The differencebetween the financial and tax bases of assets and liabilities is determinedannually.  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.  Incometax expense is the current tax payable or refundable for the period plus orminus the net change in the deferred tax assets or liabilities.  The following table summarizes thecomponents of the net deferred tax asset:

 
| Net  operating loss carryforwards |   | $         | 1,970,000  |   |
|-----------------------------------|--------|-----------|------------|--------|
| Inventory  valuation reserve      |   | 189,000   |       |
| Depreciation  and amortization    |   | 151,000   | ** ** |
| Disposal  of ECH liabilities      |   | 137,000   | ** ** |
| Tax credit carryforwards          |   | 19,000    |       |
| Other                             |   | 18,000    |       |
|                              |   | 2,484,000 |       |
| Less valuation allowance          |   | 2,484,000 |       |
|                              |   | $         | —     |   |

 

4

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Note 4 - Earnings Per Share

 

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

 

**Year-to-Date EPS Calculations**

 
|                                       |   | **2003**  |   | **2002**  |   |
|--------------------------------------------|--------|-----------|--------|-----------|--------|
| Net earnings                               |   | $         | 33,000 |      | $      | 141,000 |   |
| Weighted average common shares outstanding |   | 5,111,590 |   | 5,111,590 |   |
| Incremental shares                         |   | 428       |   | 40,773    |   |
|                                       |   |      |   |      |   |
| Basic earnings per share                   |   | $         | .01    |      | $      | .03 |   |
| Diluted earnings per share                 |   | $         | .01    |      | $      | .03 |   |

 

Note 5 - Employee Stock Options

 

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

 

**Year-to-Date**

 
|                               |   |        |   | **2003** |   | **2002** |   |
|------------------------------------|--------|-------------|--------|----------|--------|----------|--------|
| Earnings before extraordinary item |   | As Reported |   | $        | 33,000 |     | $      | 141,000 |   |
|                               |   | Pro Forma   |   | $        | 29,000 |     | $      | 134,000 |   |
|                               |   |        |   |     |   |     |   |
| Basic earnings per share           |   | As Reported |   | $        | .01    |     | $      | .03 |   |
|                               |   | Pro Forma   |   | $        | .01    |     | $      | .03 |   |
|                               |   |        |   |     |   |     |   |
| Diluted earnings per share         |   | As Reported |   | $        | .01    |     | $      | .03 |   |
|                               |   | Pro Forma   |   | $        | .01    |     | $      | .03 |   |

 

5

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

 

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

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

 

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

 
| Number outstanding                          |   | 40,000 |   |
|---------------------------------------------|--------|--------|--------|
| Range of exercise prices                    |   | $      | .37    |   |
| Weighted average exercise price             |   | $      | .37    |   |
| Weighted average remaining contractual life |   | 3.25   | yrs.   |

 

Note 6 - Stock Warrants

 

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

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

 

6

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Note 7 - Amortization of Intangibles

 

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

 
|                |   |                           |   | **2003**                    |       | **2002**                      |       |
|---------------------|--------|--------------------------------|--------|-----------------------------|------------|-------------------------------|------------|
|                |   | **Average  Amortizable  Life** |   | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Order backlog       |   | 1                              |   | $                           | 205,000    |                          | $          | 205,000 |   | $ | 205,000 |   | $ | 51,000 |   |
| Aircraft - ballasts |   | 12                             |   | 1,958,000                   |       | 172,000                       |       | 2,177,000 |   | 32,000 |   |
|                |   |                           |   |                        |       |                          |       |   |   |   |   |
|                |   |                           |   | $                           | 2,163,000  |                          | $          | 377,000 |   | $ | 2,382,000 |   | $ | 83,000 |   |

 

The total intangibleamortization expense for the three months ended July 31, 2003, was$38,000.  The estimated aggregateamortization expense for each of the next five years is as follows:

 

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

 

Note 8 - Discontinued Subsidiary

 

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

 
| Trade  accounts payable |   | $ | 394,000 |   |
|-------------------------|--------|---|---------|--------|
| Accrued  liabilities    |   | $ | 48,000  |   |

 

Note 9 - Equity Investment

 

On May 23, 2003, Torotel purchased an additional 355,637 commonshares of Apex Innovations, Inc. (“Apex”) at 25 cents per share.  Torotel now owns 4,355,637 common shares ofApex.  Torotel’s ownership positionremains at 17.8%.  The equity investmentin Apex is accounted for using the equity method of accounting.  As of July 31, 2003, there was a$422,000 difference between the $1,039,000 carrying value of the investment asreflected on the accompanying consolidated balance sheet and the underlyingequity in the net assets of Apex of $617,000. This difference is treated as non-amortizing goodwill.

 

Theaccompanying consolidated statements of operations include a $26,000 loss and a$10,000 profit for the three months ended July 31, 2003 and 2002,respectively, which result from Torotel’s portion of Apex’s

 

7

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operating results for the threemonths ended May 31, 2003 and 2002. Condensed financial statements for Torotel’s investment in Apex are asfollows:

 

Condensed Balance Sheet

 
|                      |   | **May 31,  2003** | ** ** |
|---------------------------|--------|------------------------|------------|
| Current assets            |   | $                      | 1,569,000  |   |
| Other assets              |   | 4,725,000              |       |
|                      |   | $                      | 6,294,000  |   |
|                      |   |                   |       |
| Current liabilities       |   | $                      | 410,000    |   |
| Other liabilities         |   | 2,407,000              |       |
| Stockholders’ equity |   | 3,477,000              |       |
|                      |   | $                      | 6,294,000  |   |

 

Condensed Statements of Operations

 
|                |   | **3-Mos.  Ended  May 31,  2003** |      | **3-Mos.  Ended  May 31,  2002** | ** ** |
|---------------------|--------|---------------------------------------|-----------|---------------------------------------|------------|
| Net sales           |   | $                                     | 1,343,000 |                                  | $          | 1,383,000 |   |
| Gross profit        |   | $                                     | 563,000   |                                  | $          | 599,000 |   |
| Net earnings (loss) |   | $                                     | (144,000  | )                                     | $          | 58,000 |   |

 

8

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

 

The following management comments regarding Torotel’s results ofoperations and outlook should be read in conjunction with the ConsolidatedFinancial Statements included pursuant to Item 1 of this Quarterly Report.

 

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

 

Three Months Ended July 31, 2003 Compared With Three Months EndedJuly 31, 2002

 

Net salesdecreased 5%.  The net sales of TorotelProducts increased 6% from $958,000 to $1,014,000.  This increase is attributable to higher demand from Torotel’smilitary markets.  This trend isexpected to continue as a major defense contract award is expectedshortly.  Torotel’s aerospace marketsremain very soft and are expected to remain as such during the next fewquarters.  The net sales of Electronikadecreased 65% from $182,000 to $64,000. This decrease is also attributable to the soft conditions in theaerospace market.  Management continuesto target $4,500,000 as a consolidated sales goal for fiscal 2004.

 

Gross profitas a percentage of net sales decreased 8%. The gross profit percentage of Torotel Products decreased 3% because ofhigher labor costs associated with the product mix.  Electronika’s gross profit as a percentage of net sales decreased60% because of the labor and overhead costs incurred at the manufacturingfacility in Olathe, Kansas.

 

Engineering expenses, applicable only to Torotel Products, decreased 3%from $48,000 to $45,000 because of lower payroll costs associated with fewerhours worked by part-time personnel and lower travel costs.  Management does not anticipate anysignificant increase in the present level of engineering expenses.

 

Selling,general and administrative (SG&A) expenses increased nearly 3%.  The SG&A expenses of Torotel, Inc.increased slightly from $59,000 to $60,000. The SG&A expenses of Torotel Products increased slightly from$171,000 to $174,000 primarily because of an $8,000 increase in professionalfees, a $3,000 increase in property and liability insurance costs, a $2,000increase in customer fast-pay discounts, and a $2,000 increase in employeebenefit costs.  These increases wereoffset by an $11,000 decrease in incentive compensation awards.  The SG&A expenses of Electronikaincreased 25% from $8,000 to $10,000 because of administrative costs associatedwith the Olathe manufacturing facility. Management does not anticipate any significant increase in the presentlevel of SG&A expenses.

 

Amortization costs, entirely attributable to Electronika, decreased 54%from $83,000 to $38,000 (see Note 7 of Notes to Consolidated FinancialStatements).

 

Interest expense decreased 19%. The interest expense of Torotel, Inc. decreased 19% from $16,000 to$13,000 because of a lower debt balance. The interest expense of Torotel Products decreased 20% from $5,000 to$4,000 because of a lower debt balance and a lower annual interest rate on themortgage payable to United Trust Bank.

 

Interest income decreased $3,000 due to the payoff of the note receivable from SIGMA.

 

Equity in loss of investee was $26,000 compared with a profit of$10,000 in the prior year (see Note 9 of Notes to Consolidated FinancialStatements).

 

For thereasons discussed above, the consolidated pretax earnings decreased from$141,000 to $33,000.  The pretax loss ofTorotel, Inc. increased from $61,000 to $99,000.  The pretax earnings of Torotel Products decreased from $184,000to $179,000.  The pretax earnings ofElectronika decreased from $18,000 to a loss of $47,000.

 

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Liquidity and Capital Resources

 

Torotel relies on funds generated internally to meet its normaloperating requirements and to service bank indebtedness.  Management continues to evaluate ways of improvingTorotel’s liquidity position and funding future investments.

 

#### **Duringthe three months ended July 31, 2003, Torotel’s operations used $54,000 incash flow because of lower operating earnings. The lower earnings resulted from Electronika’s lower sales volume, andthe labor and overhead costs associated with the manufacturing facility inOlathe.  Electronika-Kansas, Inc., whichis the Olathe facility, originally was started to manufacture Electronika’sballast transformers.  This plan was puton hold because soft conditions developed in the airline industry.  However, the facility has evolved into acontract manufacturing source for Torotel Products.  This is particularly important, since Torotel Products lost 10%of its production workforce to retirement in past three months, and another 17%will be eligible to retire over the next 18 months.  With more than 90% of Torotel Products’ business generated bycustom manufactured, labor-intensive products, investing in productionpersonnel is essential to maintain an ample level of manufacturing skills.  Earnings and cash flow may suffer in theshort term as a result.  Over the longterm, management believes this is the best approach for our customers.  In addition, the investment puts TorotelProducts in a better position to respond to higher demand when militarycontracts are awarded, and conditions improve in the aerospace market.  In the coming months, management will beevaluating whether to remain in the existing facilities in Grandview andOlathe, or to consolidate them.**

 

Investing activities used $99,000 in cash flow because of theadditional $89,000 investment in Apex (see Note 9 of Notes to ConsolidatedFinancial Statements).  Torotel hadcapital expenditures of $10,000 during the three months ended July 31,2003, and anticipates approximately $40,000 in capital expenditures during thebalance of fiscal 2003.

 

Financing activities used $14,000 in cash flow because of decreases inlong-term debt.

 

Management believes that inflation will have only a minimal effect onfuture operations since such effects will be offset by sales price increases,which are not expected to have a significant effect upon demand*.*

 

Forward-Looking Information

 

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

 

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Item 3.                                     Controls and Procedures

 

Torotel’s Chief Executive Officer and Chief Financial Officer(collectively, the “Certifying Officers”)are responsible for establishing and maintaining disclosure controls andprocedures.  Such officers haveconcluded (based upon their evaluation of these controls and procedures as of adate within 90 days of the filing of this report) that Torotel’s disclosurecontrols and 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 nosignificant changes in Torotel’s internal controls or other factors that couldsignificantly affect such controls subsequent to the date of their evaluation,and there were no corrective actions with regard to significant deficienciesand material weaknesses.

 

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PART II.                         OTHERINFORMATION

 

Item 1.                                     Legal Proceedings

 

The remaining liabilities related to the discontinued operations of ECHinclude trade accounts payable of $394,000 (see Note 8 of Notes to ConsolidatedFinancial Statements).  Several claimshave been filed by ECH vendors for collection of amounts due, and more stillcould be filed.  However, ECH has nosource of income to satisfy its trade debt obligations.  This trade debt remains the sole responsibilityof ECH.  Neither Torotel nor TorotelProducts has assumed these obligations. While some of the claims by ECH vendors have resulted in judgmentsagainst ECH, neither Torotel or Torotel Products intends to provide any fundsto satisfy the judgments nor, in the opinion of legal counsel, are theyobligated to do so.

 

Item 6.                                     Exhibits and Reports on Form 8-K

 

a)              Exhibits

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

 
| b) | Reports on  Form 8-K | There was  one report filed on Form 8-K during the three months ended July 31,  2003. |
|----|----------------------|--------------------------------------------------------------------------------------------|

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

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

 

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