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**UNITEDSTATES 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 July 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’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas 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                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                         |

 

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 September 10,2009, there were 5,916,500 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 July 31, 2009 and April 30, 2009                                           | 1      |
|                                                                                                                              |   |
| Consolidated Statements of  Operations for the three months ended July 31, 2009 and 2008                                     | 2      |
|                                                                                                                              |   |
| Consolidated Statements of  Cash Flows for the three months ended July 31, 2009 and 2008                                     | 3      |
|                                                                                                                              |   |
| Notes to Consolidated Condensed Financial Statements                                                                              | 4      |
|                                                                                                                              |   |
| Item 2.      Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10     |
|                                                                                                                              |   |
| Item 4T.   Controls  and Procedures                                                                                     | 16     |
|                                                                                                                              |   |
| PART II.    OTHER INFORMATION                                                                                 |   |
|                                                                                                                              |   |
| Item 6.      Exhibits                                                                                    | 18     |
|                                                                                                                              |   |
| SIGNATURES                                                                                                                        | 19     |

 

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**PART I.     FINANCIAL INFORMATION**

 

**Item1.       Financial Statements**

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 

 
| ** **                                 | ** ** | **(Unaudited)**   | ** ** | ** **         | ** ** |
|--------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **As of**         | ** ** | **As of**          | ** ** |
| ** **                                 | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
| ** **                                 | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| ASSETS                                     |       |              |       |               |       |
|                                       |       |              |       |               |       |
| Current  assets:                           |       |              |       |               |       |
| Cash                                       |       | $                 | 520,000    |               | $          | 656,000 |   |
| Trade  receivables, net                    |       | 588,000           |       | 559,000            |       |
| Inventories,  net                          |       | 799,000           |       | 822,000            |       |
| Prepaid  expenses and other current assets |       | 72,000            |       | 19,000             |       |
|                                       |       | 1,979,000         |       | 2,056,000          |       |
|                                       |       |              |       |               |       |
| Property,  plant and equipment, net        |       | 975,000           |       | 970,000            |       |
|                                       |       |              |       |               |       |
|                                       |       | $                 | 2,954,000  |               | $          | 3,026,000 |   |
|                                       |       |              |       |               |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY |       |              |       |               |       |
|                                       |       |              |       |               |       |
| Current  liabilities:                      |       |              |       |               |       |
| Current  maturities of long-term debt      |       | $                 | 91,000     |               | $          | 78,000 |   |
| Trade  accounts payable                    |       | 295,000           |       | 180,000            |       |
| Accrued  liabilities                       |       | 121,000           |       | 211,000            |       |
|                                       |       | 507,000           |       | 469,000            |       |
|                                       |       |              |       |               |       |
| Long-term  debt, less current maturities   |       | 576,000           |       | 588,000            |       |
|                                       |       |              |       |               |       |
| Stockholders’  equity                 |       | 1,871,000         |       | 1,969,000          |       |
|                                       |       |              |       |               |       |
|                                       |       | $                 | 2,954,000  |               | $          | 3,026,000 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **July 31,**      | ** ** | **July 31,** | ** ** |
| ** **                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net  sales                                         |       | $                      | 1,537,000  |   | $ | 1,971,000 |   |
| Cost  of goods sold                                |       | 984,000                |       | 1,212,000 |   |
|                                               |       |                   |       |   |   |
| Gross  profit                                      |       | 553,000                |       | 759,000 |   |
|                                               |       |                   |       |   |   |
| Operating  expenses:                               |       |                   |       |   |   |
| Engineering                                        |       | 92,000                 |       | 98,000 |   |
| Selling,  general and administrative               |       | 558,000                |       | 505,000 |   |
|                                               |       | 650,000                |       | 603,000 |   |
|                                               |       |                   |       |   |   |
| Earnings  (loss) from operations                   |       | (97,000                | )          | 156,000 |   |
|                                               |       |                   |       |   |   |
| Other  expense:                                    |       |                   |       |   |   |
| Interest  expense                                  |       | 12,000                 |       | 14,000 |   |
| Other,  net                                        |       | —                 |       | 1,000 |   |
|                                               |       |                   |       |   |   |
|                                               |       | 12,000                 |       | 15,000 |   |
|                                               |       |                   |       |   |   |
| Earnings  (loss) before provision for income taxes |       | (109,000               | )          | 141,000 |   |
|                                               |       |                   |       |   |   |
| Provision  for income taxes                        |       | —                 |       | — |   |
|                                               |       |                   |       |   |   |
| Net  earnings (loss)                               |       | $                      | (109,000   | ) | $ | 141,000 |   |
|                                               |       |                   |       |   |   |
| Basic  earnings (loss) per share                   |       | $                      | (.02       | ) | $ | .03 |   |
|                                               |       |                   |       |   |   |
| Diluted earnings (loss) per share                  |       | $                      | (.02       | ) | $ | .02 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                             | ** ** | **July 31,**      | ** ** | **July 31,** | ** ** |
| ** **                                                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                                                 |       |                   |       |   |   |
| Net  earnings (loss)                                                                                   |       | $                      | (109,000   | ) | $ | 141,000 |   |
| Adjustments  to reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |       |                   |       |   |   |
| Loss  on disposal of assets                                                                            |       | —                 |       | 1,000 |   |
| Stock  compensation earned                                                                             |       | 11,000                 |       | 16,000 |   |
| Depreciation                                                                                           |       | 25,000                 |       | 25,000 |   |
| Change  in value of stock appreciation rights                                                          |       | 9,000                  |       | (3,000 | ) |
| Increase  (decrease) in cash flows from operations resulting from changes in:                          |       |                   |       |   |   |
| Trade  receivables                                                                                     |       | (29,000                | )          | (126,000 | ) |
| Inventories                                                                                            |       | 23,000                 |       | (207,000 | ) |
| Prepaid  expenses and other assets                                                                     |       | (53,000                | )          | (45,000 | ) |
| Trade  accounts payable                                                                                |       | 115,000                |       | 193,000 |   |
| Accrued  liabilities                                                                                   |       | (99,000                | )          | 81,000 |   |
|                                                                                                   |       |                   |       |   |   |
| Net  cash provided by (used in) operating activities                                                   |       | (107,000               | )          | 76,000 |   |
|                                                                                                   |       |                   |       |   |   |
| Cash  flows from investing activities:                                                                 |       |                   |       |   |   |
| Capital  expenditures                                                                                  |       | (30,000                | )          | (20,000 | ) |
|                                                                                                   |       |                   |       |   |   |
| Net  cash used in investing activities                                                                 |       | (30,000                | )          | (20,000 | ) |
|                                                                                                   |       |                   |       |   |   |
| Cash  flows from financing activities:                                                                 |       |                   |       |   |   |
| Proceeds  from long-term debt                                                                          |       | 21,000                 |       | — |   |
| Principal  payments on long-term debt                                                                  |       | (18,000                | )          | (16,000 | ) |
| Payments  on capital lease obligations                                                                 |       | (2,000                 | )          | (1,000 | ) |
|                                                                                                   |       |                   |       |   |   |
| Net  cash provided by (used in) financing activities                                                   |       | 1,000                  |       | (17,000 | ) |
|                                                                                                   |       |                   |       |   |   |
| Net  increase (decrease) in cash                                                                       |       | (136,000               | )          | 39,000 |   |
| Cash,  beginning of period                                                                             |       | 656,000                |       | 410,000 |   |
|                                                                                                   |       |                   |       |   |   |
| Cash,  end of period                                                                                   |       | $                      | 520,000    |   | $ | 449,000 |   |
|                                                                                                   |       |                   |       |   |   |
| Supplemental  Disclosures of Cash Flow Information                                                     |       |                   |       |   |   |
| Cash  paid during the period for:                                                                      |       |                   |       |   |   |
| Interest                                                                                               |       | $                      | 12,000     |   | $ | 16,000 |   |
| 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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**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unaudited)**

 

**Note1 — Nature of Operations**

 

Torotel, Inc.(“Torotel”) conducts business through two wholly owned subsidiaries, TorotelProducts, 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.  Approximately98% of Torotel’s sales during the first three months of fiscal 2010 have beenderived from domestic customers.

 

**Note2 — Basis of Presentation**

 

Theconsolidated condensed balance sheet as of April 30, 2009, which has beenderived from audited financial statements, is accompanied by the unauditedinterim consolidated condensed financial statements, which reflect the normalrecurring adjustments that in the opinion of management are necessary topresent fairly Torotel’s financial position at July 31, 2009, and theresults of operations for the three months ended July 31, 2009.

 

Theunaudited interim consolidated condensed financial statements have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission.  Certain informationand note disclosures normally included in the annual financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to those rules and regulations, althoughmanagement believes the disclosures made are adequate to make the informationnot misleading.

 

Thefinancial statements contained herein should be read in conjunction withTorotel’s financial statements and related notes filed on Form 10-K forthe year ended April 30, 2009.

 

**Note 3****— Inventories**

 

Thecomponents of inventories are summarized as follows:

 
| ** **      | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-----------------|------------|-------------------|------------|--------------------|------------|
| ** **      | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| Raw materials   |       | $                 | 498,000    |               | $          | 567,000 |   |
| Work in process |       | 178,000           |       | 141,000            |       |
| Finished goods  |       | 123,000           |       | 114,000            |       |
|            |       | $                 | 799,000    |               | $          | 822,000 |   |

 

**Note4 — Income Taxes**

 

As of July 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 unrecognizedtax benefits as well as interest received from favorable tax settlements withinincome tax expense.  As of July 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.

 

**Note5 — Financing Agreements**

 

On June 1, 2009, Torotel Products refinancedits mortgage debt with the Bank of Blue Valley. Under the terms of the refinancing, the outstanding balance bearsinterest at a fixed rate of 6.5% per annum and

 

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requiresmonthly 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.

 

**Note 6 — Restricted Stock Agreements**

 

Restricted Stock Agreements are authorized by theCompensation and Nominating Committee (“Committee”) and the Board of Directorsof Torotel.  The Committee and the Boardhave determined that the interests of Torotel and its stockholders will bepromoted by hiring talented individuals and, to induce such individuals toaccept employment with Torotel, the Committee and the Board believe a keycomponent of such individuals’ compensation should be granting equity ownershipopportunities based upon the acceptance of employment and the continuingemployment of such individual, subject to certain conditions andrestrictions.  The Restricted StockAgreements afford the grantees all of the rights of a stockholder with respectto the award shares, including the right to vote such shares and to receivedividends and other distributions payable with respect to such shares since theDate of Award.  Under the terms of eachagreement, the non-vested shares are restricted as to disposition and subjectto forfeiture under certain circumstances. The agreements further provide, subject to certain conditions, that ifprior to all of the restricted shares having been released, Torotel undergoes achange in control, then all of the restricted shares shall be released and nolonger subject to restrictions under the agreements.  Upon issuance of the restricted stock, theaggregate number of shares issued is credited to common stock at $.01 par valueper share and the excess of the market price of the common stock on the date ofissuance over the par value is credited to capital in excess of par value.  The restricted shares are treated asnon-vested stock pursuant to SFAS 123(R); 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 presently has Restricted Stock Agreements with10 key employees pursuant to the Stock Award Plan (“SAP”).  The SAP provides key employees theopportunity to acquire common stock of Torotel pursuant to awards earned foraccomplishing goals that promote the long-term financial performance ofTorotel.  Under the terms of the SAP,which was filed as Exhibit 10.9 of Form 10-KSB for the fiscal yearended April 30, 2007, the restricted stock awards have a five (5) yearrestriction period, which shall lapse based on certain conditions as outlinedin the SAP.  As of July 31, 2009,the aggregate amount of the existing restricted stock awards was 434,910shares.  Stock compensation cost of$11,000 for the existing restricted stock awards will be recorded per quarterduring the remaining five-year vesting period provided the financialperformance metrics as outlined in the SAP are likely to be attained.

 

Totalstock compensation cost for the three months ended July 31, 2009 and 2008was $11,000 and $16,000, respectively. Restricted stock activity for each three month period through July 31is 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                     |       | —         |       | —       |       | — |   | — |   |
| Vested                      |       | —         |       | —       |       | (40,000 | ) | $ | .300 |   |
| Forfeited                   |       | —         |       | —       |       | — |   | — |   |
| Outstanding at July 31 |       | 434,910        |       | $            | .500       |   | 646,750 |   | $ | .463 |   |

 

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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 Torotel’scommon stock as of September 2, 2009, the fair value of the restrictedstock at the date of award was $67,500. Going forward, stock compensation cost of $3,375 will be recorded perquarter during the five-year vesting period provided the financial performancemetrics as outlined in the SAP are likely to be attained.

 

**Note7 — Stockholders’ Equity**

 

Thecomponents of stockholders’ equity are summarized as follows:

 
| ** **                     | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| Common stock, at par value     |       | $                 | 60,000     |               | $          | 60,000 |   |
| Capital in excess of par value |       | 12,483,000        |       | 12,472,000         |       |
| Accumulated deficit            |       | (10,582,000       | )          | (10,473,000        | )          |
|                           |       | 1,961,000         |       | 2,059,000          |       |
| Less treasury stock, at cost   |       | 90,000            |       | 90,000             |       |
|                           |       | $                 | 1,871,000  |               | $          | 1,969,000 |   |

 

Torotel has 6,000,000 shares of common stock, $.01 parvalue, authorized and 5,666,500 shares issued and outstanding.  The changes in shares of common stockoutstanding as of July 31 of each period are summarized as follows:

 
| ** **                | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------------|------------|-----------|------------|-----------|------------|
| Balance, May 1       |       | 5,666,500 |       | 5,878,340 |       |
| Restricted stock activity |       | —    |       | —    |       |
| Treasury stock activity   |       | —    |       | —    |       |
|                      |       |      |       |      |       |
| Balance, July 31     |       | 5,666,500 |       | 5,878,340 |       |

 

**Note 8 — Earnings Per Share**

 

Statementof Financial Accounting Standard No. 128 (“SFAS 128”), *Earnings per Share*, requires dual presentation of basic anddiluted earnings per share (“EPS”) on the face of the consolidated statementsof operations.  It also requires areconciliation of the numerator and denominator used in computing basic anddiluted EPS.  Basic EPS excludes dilutionand is computed by dividing earnings available to common stockholders by theweighted average number of common shares outstanding for the period.  Diluted EPS is computed similarly to fullydiluted EPS pursuant to Accounting Principles Board (“APB”) Opinion No. 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.  The 434,910 shares issued pursuant to theRestricted Stock Agreements (see Note 6 of Notes to Consolidated CondensedFinancial Statements) meet the definition of contingently issuable shares asoutlined in SFAS 128; as a result, these shares will not be included in thebasic EPS calculation until the performance measurements have beensatisfied.  The restricted shares will betreated as a common stock equivalent for the diluted EPS calculation.

 

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Pursuant to SFAS 128, the basic and diluted earningsper common share were computed as follows:

 

# **Year-to-DateEPS Calculations**

 
| ** **                                                   | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings (loss)                                          |       | $         | (109,000   | )         | $          | 141,000 |   |
|                                                         |       |      |       |      |       |
| Weighted average common shares outstanding for basic  EPS    |       | 5,231,590 |       | 5,192,025 |       |
| Incremental shares for effect of restricted stock            |       | —    |       | 686,315   |       |
| Weighted average common shares outstanding for  dilutive EPS |       | 5,231,590 |       | 5,878,340 |       |
|                                                         |       |      |       |      |       |
| Basic earnings (loss) per share                              |       | $         | (.02       | )         | $          | .03 |   |
| Diluted earnings (loss) per share                            |       | $         | (.02       | )         | $          | .02 |   |

 

No incremental shares are included in the 2009 EPS calculations for the434,910 shares of restricted common stock since the effect would beanti-dilutive.

 

**Note 9 — Stock Appreciation Rights**

 

The board of directors of Torotel approved theDirectors Stock Appreciation Rights Plan (the “Plan”) for non-employeedirectors in September 2004.  Eachstock appreciation right (“SAR”) is equal to one share of common stock ofTorotel, and the aggregate number of SARs that may be granted under the Planshall not exceed 500,000.  The effectivedate of the Plan is October 1, 2004, and the Plan has a term of ten (10) years.  The SARs are now accounted for under SFAS No. 123(R),*Accounting for Stock-Based Compensation.*

 

Pursuantto the Plan, 20,000 SARs were granted on the effective date to each of thethree current non-employee directors serving at that time.  The initial price at which each SAR wasgranted was $.35, which equaled the market price of Torotel’s common stock onthe date of grant.  Accordingly, nocompensation cost was recognized at the time of grant in accordance with APBOpinion 25, prior to the adoption of SFAS No. 123(R) on May 1,2006.

 

SARs shall automatically be granted in the future asfollows: (1) each person who is elected as a director, who was not adirector on the effective date of the Plan, shall be granted 10,000 SARs on thedate such person is elected a director; and (2) on each May 1following the effective date during the term of the Plan, each person servingas a director on such date shall be granted 10,000 SARs.  After the initial grant, the price at whicheach SAR is granted shall be the average of the closing price of Torotel’scommon stock for the ten consecutive days immediately preceding the date ofgrant.  Upon exercise of a SAR, Torotelwill pay the grantee an amount (the “Spread”) equal to the excess of theExercise Price over the SAR grant price multiplied by the number of sharesbeing exercised.  The Exercise Priceshall be the 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 shall become fully (100%) vested in each of their SARs underthe following circumstances: (i) upon termination of the grantee’s serviceas a director of Torotel for reasons of death, disability or retirement; (ii) ifthe Compensation and Nominating Committee (the “Committee”), in its solediscretion,

 

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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 more thanten days prior to the anticipated effective date of the proposed transaction,each grantee shall have the right to exercise his or her SARs.

 

In accordance with SFAS 123(R), compensation expenseis recognized over the vesting period based upon the estimated fair value ofthe SARs pursuant to the terms of the Plan using the Black-Scholesoptions-pricing model as of the end of each financial reporting period.  As of July 31, 2008, the fair value ofthe SARs was determined using the following assumptions: no dividend paymentsover the life of the SARs since Torotel has not issued any form of dividendsince 1985; an expected volatility of 175.3% based on Torotel’s historicalvolatility using the weekly closing price over the past three years; arisk-free interest rate of 3.50%; and an expected life of three years based onthe length of service estimated to be served. As of July 31, 2009, the fair value of the SARs was determinedusing the following assumptions: no dividend payments over the life of the SARssince Torotel has not issued any form of dividend since 1985; an expectedvolatility of 114.9% based on Torotel’s historical volatility using the weeklyclosing price over the past three years; a risk-free interest rate of 2.50%;and an expected life of three years based on the length of service estimated tobe served.  Based on these assumptions,the fair value prices per share of the outstanding SARs as of July 31,2009, are summarized 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       |           | $          | .171       |       | 100            | %          | $             | 10,000     |   | $ | — |   |
| May 1, 2005     |       | 30,000     |       | $            | .302       |           | $          | .178       |       | 100            | %          | $             | 6,000      |   | $ | — |   |
| May 1, 2006     |       | 30,000     |       | $            | .695       |           | $          | .139       |       | 100            | %          | $             | 4,000      |   | $ | — |   |
| May 1, 2007     |       | 30,000     |       | $            | .500       |           | $          | .154       |       | 67             | %          | $             | 3,000      |   | $ | — |   |
| June 4, 2007    |       | 10,000     |       | $            | .412       |           | $          | .163       |       | 67             | %          | $             | 1,000      |   | $ | — |   |
| May 1, 2008     |       | 40,000     |       | $            | .550       |           | $          | .150       |       | 33             | %          | $             | 2,000      |   | $ | — |   |
| May 1, 2009     |       | 40,000     |       | $            | .208       |           | $          | .192       |       | 0              | %          | $             | —     |   | $ | 2,000 |   |

 

The vested portion represents 160,000 SARs.  As of July 31, 2009, the total aggregateintrinsic value of these exercisable SARs was $2,000.

 

SARs transactions for each three month period through July 31are summarized 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 July 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 |       |       |       | $            | .192       |   |   |   | $ | .339 |   |

 

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The following informationapplies to SARs outstanding for each three month period through July 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 |       | 7.23 yrs.     |       | 7.73 yrs.     |       |

 

Total compensationexpense for the outstanding SARs for the three months ended July 31, 2009and 2008 was an expense of $9,000 and a credit of $3,000, respectively.  As of July 31, 2009, there was $14,000of total unrecognized compensation expense related to non-vested SARs grantedunder the Plan.  That cost is expected tobe recognized over a weighted average period of .88 years.  The liability for SARs on the consolidatedbalance sheets as of July 31, 2009 and April 30, 2009, was $26,000and $17,000, respectively.

 

**Note 10 —****Concentrationsof Credit Risk**

 

Financial instrumentsthat potentially subject Torotel to concentrations of credit risk consistprincipally of cash and accounts receivable. Torotel grants unsecured credit to most 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 July 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 —****SubsequentEvents**

 

Management has performed an evaluationof events that have occurred subsequent to July 31, 2009, and as of September 14,2009 (the date of the filing of this Form 10-Q).  Other than the issuance of restricted stockawards to Messrs. Sizemore and Serrone on September 2, 2009 (see Note6 of Notes to the Consolidated Condensed Financial Statements), there have beenno other subsequent events that occurred during such period that would requiredisclosure in this Form 10-Q or would be required to be recognized in theconsolidated financial statements as of or for the three month period ended July 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 $311,000 (received in August 2009) in fiscal 2010.  Assemblies will continue to be a major marketfocus 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 with Magnetika,a corporation owned by the Caloyeras family. Under the terms of the agreement, Magnetika provides all necessary rawmaterial, labor, testing, packaging and related services required to completethe manufacture, delivery and sale of the ballast transformers.  Electronika retains ownership of all designs,drawings, specifications and intellectual property rights associated with theballast transformers.  Magnetika is amanufacturing company that, in addition to the aforementioned ballasttransformers, manufactures various other products similar to those of Torotelfor other unrelated customers.  Magnetika’sannual sales are estimated to be about two times the annual sales ofTorotel.  Total purchases of goods fromMagnetika by Electronika amounted to less than $1,000 for the three monthsended July 31, 2009.

 

*Business Outlook*

 

The overall business outlook in fiscal 2010 remainsfavorable because of the higher demand projected for the potted coil assemblyfor the Hellfire II missile system; however, this higher demand will likely beoffset partially by less demand for magnetic components because of the currenteconomic climate and the uncertainty surrounding the next U.S. defense budget,as well as the ongoing delays in aircraft orders and production.  As of July 31, 2009, the order backlogwas $7.7 million.  This amount iscomprised of $6.4 million for the potted coil assembly, $1.2 million inmagnetic components and $100,000 in electro-mechanical assemblies.  A new long-term contract valued at $4.7million for the potted coil assembly was received in June 2009, withdeliveries scheduled into the latter part of fiscal 2011.  New order bookings during the first threemonths of fiscal 2010, exclusive of the potted coil assembly, decreased 32% to$800,000, which is indicative of the anticipated lower demand for magneticcomponents.

 

The industry mix of Torotel Products’ net sales forthe first three months in fiscal 2010 was 43% defense, 36% aerospace and 21%industrial compared to 37% industrial, 33% defense and 30% aerospace 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 operating results for the first three months offiscal 2010 include $90,000 in auditing and tax fees associated with the auditof fiscal 2009.  Significantly lowerauditing and tax fees are anticipated during the balance of fiscal 2010.  Future annual earnings will continue to beimpacted by increased auditing costs associated with complying with SECregulations, the standards of the Public Company Accounting Oversight Board(United States) and Section 404 of the Sarbanes-Oxley Act of 2002.

 

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

 

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followingdiscussion, segment reporting is not applicable because the products offeredare similar in form and function, and target similar markets.

 

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

 

Consolidated net sales decreased 22%. The net sales of Torotel Products decreased 21% from $1,950,000 to$1,536,000.  This decrease wasattributable to the lower demand for magnetic components and molded coils andlower shipments of the ballast assembly. This lower sales volume was offset partially by the higher demand forthe potted coil assembly.  The net salesof Electronika decreased 95% from $21,000 to $1,000, which is consistent withthe sales volume expected from Electronika.

 

Consolidated gross profit as a percentage of net sales decreased nearly3%.  The gross profit percentage ofTorotel Products decreased 2% because of lower sales volume without acomparable change in production overhead costs. Electronika’s gross profit as a percentage of net sales remainedunchanged.

 

Engineering expenses, applicable only to Torotel Products, decreased 6%from $98,000 to $92,000 because of a $5,000 decrease in payroll costs due tofewer engineering college interns employed during the current period and $4,000decrease in training costs.  Thesedecreases were offset partially by a $3,000 increase in travel costs.  Management anticipates a similar level ofengineering expenses during the next few quarters.

 

Consolidated selling, general and administrative (SG&A) expensesincreased nearly 11%.  The SG&Aexpenses of Torotel increased 25% from $118,000 to $148,000 primarily becauseof a $13,000 increase in  professionalfees, a $12,000 increase in the value of stock appreciation rights, a $3,000increase in directors fees and a $2,000 increase in directors and officersliability insurance.  The SG&Aexpenses of Torotel Products increased 6% from $387,000 to $410,000 primarilybecause of a $27,000 increase in payroll costs, a $16,000 increase in recruitingcosts and a $9,000 increase in building and equipment maintenance costs.  These increases were offset partially by a$23,000 decrease in sales commissions and a $6,000 decrease in training costs.  Electronika did not incur any SG&Aexpenses in either period.  Managementanticipates a lower level of SG&A expenses during the next few quarters.

 

Interest expense, entirely attributable to Torotel Products, decreased14% 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 a profit of $141,000 to a loss of $109,000.  The pretax loss of Torotel increased from$118,000 to $148,000.  The pretaxearnings of Torotel Products decreased from $246,000 to $38,000.  The pretax earnings of Electronika decreasedfrom $13,000 to $1,000.

 

**Liquidityand Capital Resources**

 

As of July 31, 2009,Torotel had $520,000 in cash compared to $656,000 as of April 30, 2009 and$449,000 as of July 31, 2008. Management anticipates cash flow from operations will improve duringfiscal 2010 given the increasing demand for the potted coil assembly andexpected lower administrative costs during the remainder of the fiscal year.

 

The table below presentsthe summary of cash flow for the three month periods indicated.

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net  cash provided by (used in) operating activities |       | $        | (107,000   | )        | $          | 76,000 |   |
| Net  cash used in investing activities               |       | $        | (30,000    | )        | $          | (20,000 | ) |
| Net  cash provided by (used in) financing activities |       | $        | 1,000      |     | $          | (17,000 | ) |

 

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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 $30,000 of cashused in investing activities in fiscal 2010 was the result of capitalexpenditures.  Management anticipatesapproximately $100,000 of capital expenditures during the remainder of fiscal2010.  The $1,000 of cash provided byfinancing activities in fiscal 2010 is the net effect of proceeds from a newequipment loan less long-term debt payments on the mortgage and capital leaseobligations with the Bank of Blue Valley. Management believes that the projected cash flow from operations,combined with its existing cash balances, will be sufficient to meet itsfunding 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*.*

 

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 itsdecisions will 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 July 31, 2009 was 5.35%.

 

**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 itscustomers.  Management does not believethat it is exposed to any extraordinary credit risk as a result of thispolicy.  Torotel deposits all monies atthe Bank of Blue Valley.  These accountsare secured up to $250,000 by the Federal Deposit Insurance Corporation throughDecember 31, 2013.  At various timesand at July 31, 2009, these cash balances exceed federally insuredlimits.  Torotel has not experienced anylosses in such accounts.  Management doesnot believe Torotel is exposed to any significant credit risk with respect toits cash.

 

*Fair Value of Financial Instruments*

 

Statement of FinancialAccounting Standard No. 157 (“SFAS 157”), *Fair ValueMeasurements*, defines

 

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fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles (“GAAP”), andexpands disclosures about fair value measurements.  Torotel adopted SFAS157 on May 1, 2008.  In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-2(“FSP 157-2”), *Effective Date of FASB Statement No. 157*,which****delayed the effective date of SFAS 157for all non-financial assets and liabilities, except those that are recognizedor disclosed at fair value in the financial statements on a recurring basis, atleast annually, FSP 157-2 partially deferred the effective date of SFAS 157 tofiscal years beginning after November 15, 2008.  As a result, Torotel adopted FSP 157-2 on May 1,2009.  These standards did not materiallyaffect how Torotel determines fair value, but resulted in certain additionaldisclosures.   SFAS 157 establishes afair value hierarchy that prioritizes observable and unobservable inputs usedto measure fair value into three levels as follows:

 

·                  Level 1.  Inputs to the valuation methodology arequoted prices (unadjusted) for identical assets or liabilities in activemarkets.

 

·                  Level 2. Inputs to the valuation methodology includequoted prices for similar assets and liabilities in active markets, and inputsthat are observable for the asset or liability, either directly or indirectly,for substantially the full term of the financial instrument.

 

·                  Level 3.  Inputs to the valuation methodology areunobservable 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.

 

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 July 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 theweighted average 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 three month periods ended July 31, 2009 and 2008,were approximately 32% and 17%, 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

 

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past due balances are reviewed individually forcollectability.  Account balances arecharged against the allowance when placed for collection.  Recoveries of receivables previously writtenoff are recorded when received.  Themajority of the customer accounts are considered past due after the invoicebecomes older than the customer’s credit terms. Interest is not charged on past due accounts.  The allowance for doubtful accounts as of July 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 forequipment and ten to twenty years for buildings and improvements.

 

*Cash Flows*

 

For purposes of thestatements of cash flows, Torotel considers all short-term investments purchasedwith original maturity dates of three months or less to be cash equivalents.

 

*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 of Statement of Financial Accounting Standards No. 123(revised 2004) (“SFAS 123(R)”), *Share-Based Payment,*inaccounting for transactions involving stock appreciation rights and restrictedstock.

 

*New Accounting Pronouncements*

 

Effective May 1,2009, Torotel adopted Statement of Financial Accounting Standard No. 165 (“SFAS165”), *Subsequent Events.*SFAS165 establishes general standards of accounting for and disclosures of

 

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events that occur after the balance sheet date butbefore financial statements are issued or are available to be issued.  Itrequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date. The adoption did not have any effect on Torotel’s results of operations,financial position and cash flow.

 

In June 2009, theFASB issued Statement of Financial Accounting Standard No. 168 (“SFAS 168”),*The FASBAccounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles,*a replacement of FASB Statement No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples*.  SFAS 168 identifies the FASBAccounting Standards Codification (“Codification”) as the source ofauthoritative U.S. GAAP recognized by the FASB to be applied by nongovernmentalentities.  Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede allthen-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SECaccounting literature not included in the Codification will becomenon-authoritative.  SFAS 168 willofficially launch on July 1, 2009, and is effective for financialstatements issued for interim and annual periods ending after September 15,2009.  Torotel will adopt SFAS 168 on August 1,2009.

 

**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 customers unanticipated future increases in raw material costs,decreased demand for products, delays in developing new products, expectedorders that do not occur, loss of key customers, the impact of competition andprice erosion as well as supply and manufacturing constraints, the availabilityof credit, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance thatthe forward-looking information contained in this report will prove accurate,and our 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.

 

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*Changesin Internal Controls*

 

There were no significantchanges in Torotel’s internal controls over financial reporting or in otherfactors that in management’s estimates are reasonably likely to materiallyaffect Torotel’s internal controls over financial reporting subsequent to thedate of the evaluation.

 

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**PART II.   OTHERINFORMATION**

 

**Item 6.    Exhibits**

 

a)    Exhibits

 
| Exhibit 3.2  |   | By-Laws                                                                                                                            |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| 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)**

 

 
| /s/ Dale H.  Sizemore, Jr. |                    |   |
|---------------------------------|-------------------------|--------|
| Dale H.  Sizemore, Jr.     |                    |   |
| Chief Executive Officer         |                    |   |
| Date:                           | September 14, 2009 |   |   |
|                            |                    |   |   |
|                            |                    |   |
| /s/ H. James Serrone            |                    |   |
| H. James Serrone                |                    |   |
| Chief Financial Officer         |                    |   |
| Date:                           | September 14, 2009 |   |   |

 

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