ITEM 1. Business
Torotel, Inc. ("Torotel") conducts business primarily through three wholly owned subsidiaries, Torotel Products, Inc. ("Torotel Products"), Torotel Manufacturing Corporation, and Electronika, Inc. ("Electronika"). Torotel Manufacturing Corporation provides manufacturing services to Torotel Products. Electronika also had a wholly owned subsidiary, Electronika-Kansas, Inc. ("Electronika-Kansas") that provided contract manufacturing services for Torotel Products. Torotel no longer conducts business through its Electronika-Kansas subsidiary and its employees were transferred to Torotel Products in April 2004.
Torotel Products specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes and toroidal coils. These components modify and control electrical voltages and currents in electronic devices. Torotel Products sells these magnetic components to original equipment manufacturers, which use them in products such as aircraft navigational equipment, digital control devices, voice and data secure communications, medical equipment, avionics equipment, down-hole drilling, and conventional missile guidance systems.
Electronika is a marketing and licensing company selling ballast transformers to the airline industry. These transformers activate and control the lights in airplane cockpits and passenger compartments. Electronika's ballast transformers are used as spare and replacement parts in DC-8, DC-9, DC-10, MD-80, and MD-88 aircraft.
Torotel was incorporated under the laws of the State of Missouri in 1956. Torotel's offices are located at 620 North Lindenwood Drive, Olathe, Kansas 66062. Its telephone number is (913) 747-6111. The terms "we," "us," "our," and the "Company" as used herein include Torotel and its subsidiaries, unless the context otherwise requires.
The following discussion includes the business operations of Torotel Products and Electronika.
TOROTEL PRODUCTS
Principal Products
Torotel Products designs and manufactures a wide variety of magnetic components for use in military, aerospace and industrial electronic applications. These magnetic components, which consist of transformers, inductors, reactors, chokes, and toroidal coils, are used to modify and control electrical voltages and currents in electronic devices. For example, if equipment containing one of these components receives an electrical voltage or current which is too high for proper operation of the equipment, the component would modify and control the electrical voltage or current to allow proper operation of the equipment. While Torotel Products primarily manufactures the components in accordance with pre-developed mechanical and electrical requirements, in some cases it will be responsible for both the overall design and manufacture of the components. The magnetic components are sold to manufacturers who incorporate them into an end-product. The major applications include aircraft navigational equipment, digital control devices, voice and data secure communications, medical equipment, avionics equipment, down-hole drilling and conventional missile guidance systems. Torotel Products has a line of 400 Hz miniature power transformers listed on the Qualified Products List ("QPL") of the Department of Defense ("DOD"), which requires re-qualification with the DOD every five years. The most recent re-qualification approval was received in 2007. Torotel Products anticipates re-qualification approval in 2012. Sales of the 400 Hz QPL products represent approximately 5% of the net sales of Torotel Products.
Marketing and Customers
Torotel Products' sales do not represent a significant portion of any particular market. While approximately 43% of annual sales in fiscal 2010 came from select commercial markets, such as aerospace, airport lighting, oil drilling, and telecommunications, historically Torotel Products has primarily focused its activities toward the military market. As a result, the business of Torotel Products is subject to various risks including, without limitation, dependence on government appropriations and program allocations, potential cutbacks in military spending, the requirement that some of our products be approved and qualified by the government before we can sell them, and the competition for available military business. As part of its growth strategy, Torotel Products has been actively pursuing opportunities in electro-mechanical assemblies. In addition, Torotel has been engaged in fact-finding efforts regarding an injection molding product capability. Pursuing this opportunity further would require an investment in equipment and a leased facility. Both assemblies and injection molding products will continue to be major market priorities going forward.
Torotel Products maintains a website at www.torotelproducts.com. Torotel Products markets its products primarily through an internal sales force and independent manufacturers' representatives paid on a commission basis. These commissions are earned when a product is sold and/or shipped to a customer within the representative's assigned territory. Torotel Products also utilizes its engineering department in its direct sales efforts for the purpose of expanding its reach into new markets and/or customers. Other distribution methods may include visits to customers, lunch and learn presentations to customers' engineers, catalog brochures, magazine ads, trade show exhibits and/or speaker presentations at trade shows.
Torotel Products is an approved source for magnetic components used in numerous military and aerospace systems, which means Torotel Products is automatically solicited for any procurement needs for such applications. The magnetic components manufactured by Torotel Products are sold primarily in the United States, and most sales are awarded on a competitive bid basis.
Torotel Products has a primary base of about 25 customers that provide nearly 90% of its annual sales volume. This customer base includes many "Fortune 100" prime defense and aerospace companies. Torotel Products' primary strategy focuses on providing superior service to this core group of customers, including engineering support and new product design. The objective is to achieve growth with these customers, or other targeted companies that possess the potential for inclusion into the core group. During the fiscal year ended April 30, 2010, sales to a major customer accounted for 43% of the net sales of Torotel Products. A loss or material reduction in orders from this customer could have a material adverse affect on us.
Competition
The markets in which Torotel Products competes are highly competitive. A substantial number of companies utilizing similar resources sell components of the type manufactured and sold by Torotel Products. In addition, Torotel Products sells to a number of customers who have the capability of manufacturing their own electronic components.
The principal methods of competition for electronic products in the markets served by Torotel Products include, among other factors, price, on-time delivery performance, lead times, customized product engineering and technical support, marketing capabilities, quality assurance, manufacturing efficiency, and existing relationships with customers' engineers. While magnetic components are not susceptible to rapid technological change, Torotel Products' sales, which do not represent a significant share of the industry's market, are susceptible to decline given the competitive nature of the market.
Manufacturing
Nearly all of Torotel Products' sales consist of electronic products manufactured to customers' specifications. Aside from contractually required finished goods buffers, only a limited inventory of finished goods is maintained. Although special wire-winding machines and molding machines are used in the production process, the various electronic products are manually assembled, with numerous employees and some subcontractors contributing to the completion of the products.
Essential materials used by Torotel Products in the manufacturing process include magnetic materials, copper wire, plastic housings and epoxies. We believe these materials are available from many sources. Major suppliers include Allstar Magnetics Inc., Electrical Insulation Suppliers, Inc., Mod & Fab and Magnetic Metals-Western Division. Special copper contact plates and polycarbonate materials are used in manufacturing the potted coil assembly for the Hellfire II missile system. The plates are purchased from Fotofabrication Corporation, which is the only qualified approved source. The polycarbonate materials are purchased from Spectrum Plastics, which is the only qualified source. Torotel Products has not experienced any significant curtailment of production because of material shortages, but any long lead times or high dollar minimum orders could have an adverse impact on sales bookings. To mitigate any potential losses associated with a significant disruption in delivery, Torotel Products maintains contingent business interruption insurance on both suppliers. The polycarbonate materials are purchased from Spectrum Plastics, which is also the only qualified approved source. Torotel Products maintains contingent business interruption insurance on both suppliers' facilities to insure against loss of business income associated with a disruption in production at either supplier as a result of a fire, tornado, explosion or other similar type loss.
Torotel Products has not experienced any significant curtailment of production because of material shortages, but any long lead times or high dollar minimum orders could have an adverse impact on sales bookings.
Engineering, Research and Development
Torotel Products does not engage in research and development activities, but it does incur engineering expense in designing products to meet customer specifications.
Governmental Regulations
A significant portion of Torotel Products' business is derived from subcontracts with prime contractors of the U.S. government. As a U.S. subcontractor, Torotel Products is subject to federal contracting regulations. These subcontracts provide that they may be terminated at the convenience of the U.S. government. Upon such termination, adequate financial compensation is usually provided in such instances to protect from suffering a loss on a contract. These subcontracts also provide that they may be terminated for default for failure to perform a material obligation in a subcontract. In the event of a termination for default, the customer may have the unilateral right at any time to require Torotel Products to pay the excess, if any, of the cost of purchasing a substitute item from a third party. If the customer has suffered other ascertainable damages as a result of a sustained default, the customer could demand payment of such damages. Torotel Products has never experienced any terminations for default.
As a supplier of products for military applications, Torotel must comply with laws concerning the export of material used exclusively for military purposes. The export of those types of materials is covered under the International Traffic in Arms Regulations ("ITAR") and the Arms Export Control Act ("AECA"). Torotel Products has a 1-year license from the U.S. Department of State making it eligible to provide defense-related components pursuant to ITAR and AECA. Torotel Products expects to renew this license in October 2010.
Intellectual Property
The products sold by Torotel Products are not protected by patents or licenses. Torotel Products relies on the expertise of its employees in both the design and manufacture of its products. Because of the highly competitive nature of the industry, it is possible that a competitor may also learn to design and produce products with similar performance characteristics. Torotel has been issued U.S. Trademark Registration #1,123,071 for "TOROTEL". This trademark registration expires July 24, 2019.
Environmental Laws
In fiscal 2010, Torotel Products incurred costs of approximately $1,000 to ensure compliance with federal, state and local regulations on the proper handling, storage, disposal, and discharge of hazardous materials into the environment, or otherwise relating to the protection of employees, the community, and the environment. Torotel Products anticipates similar costs to be incurred in the fiscal year ending April 30, 2011.
Employees
Torotel Products presently employs 99 full-time and 14 part-time employees. We believe an adequate supply of qualified personnel is available in the facility's immediate vicinity. Effective June 1, 2005, Torotel Products' production employees became non-union as they no longer are represented by the International Association of Machinists and Aerospace Workers, AFL-CIO, Lodge No. 778.
ELECTRONIKA
Principal Products
Electronika sells ballast transformers to the airline industry. These transformers activate and control the lights in airplane cockpits and passenger compartments. Electronika's ballast transformers are used as spare and replacement parts in DC-8, DC-9, DC-10, MD-80 and MD-88 aircraft.
Marketing and Customers
Sales of ballast transformers have been made to the airline industry primarily for use in DC-8 and DC-9 aircraft. As a result, the business of Electronika is subject to various risks including, without limitation, the age of the fleet that uses Electronika's products, the eventual retirement of that fleet, and its replacement with newer aircraft, and competition for the available spare parts business. Electronika's sales do not represent a significant portion of any particular market.
The Federal Aviation Administration has approved Electronika as a source for ballasts on the DC-8, DC-9, DC-10, MD-80, and MD-88 aircraft, and Electronika generally is automatically solicited for any procurement needs for such applications. The ballast transformers are sold primarily in the United States, and most sales are awarded on a competitive bid basis. Although all existing orders are subject to schedule changes or cancellation, adequate financial compensation is usually provided in such instances to protect the contractor from suffering a loss on a contract.
Electronika has a primary base of approximately five customers, which are contacted from time to time for sales and marketing purposes. In the fiscal year ended April 30, 2010, sales to two customers accounted for 55% and 28% of the net sales of Electronika.
Competition
The market in which Electronika competes is not highly competitive, but it is shrinking due to the age and retirement of the aircraft that use the ballasts sold by Electronika and due to the lack of usage of these ballasts on newer aircraft. A limited number of companies sell ballasts of the type sold by Electronika. The ability of Electronika to compete depends, among other factors, on price, lead times, on-time delivery performance and quality assurance.
Manufacturing
Electronika's requirements for ballast transformers are outsourced pursuant to a Manufacturing Agreement with Magnetika, Inc. ("Magnetika"), a corporation owned by the Caloyeras family, which presently owns approximately 43% of the common shares of Torotel. Under the terms of the agreement, Magnetika provides all necessary raw material, labor, testing, packaging and related services required to complete the manufacture, delivery and sale of the ballast transformers, and Electronika is obligated to order all of its ballast transformer requirements exclusively from Magnetika. Electronika retains ownership of all designs, drawings, specifications and intellectual property rights associated with the ballast transformers. In exchange for the services provided to Electronika under the Manufacturing Agreement, Magnetika receives 40 percent of the net sales price of all ballast transformers sold by Electronika. The Manufacturing Agreement continues in effect until April 1, 2012. In the fiscal year ended April 30, 2010, Electronika incurred costs of $6,000 for goods purchased on trade terms of net 20 days pursuant to the Manufacturing Agreement. Of the amount purchased, $6,000 was due and payable as of April 30, 2010.
Engineering, Research and Development
Electronika does not engage in research and development activities, but it may incur engineering expense on a contract basis in designing any new ballasts.
Environmental Laws
Since Electronika purchases the ballast transformers from Magnetika, Electronika does not incur any costs for compliance with federal, state and local regulations on the proper handling, storage, disposal, and discharge of hazardous materials into the environment, or otherwise relating to the protection of employees, the community, and the environment.
Employees
Electronika has no employees because of the outsourcing arrangement with Magnetika as discussed above under "Manufacturing". All accounting related matters for Electronika are handled by Torotel employees.
ITEM 2.
ITEM 2. Properties
We own a 24,000 square foot building located in Olathe, Kansas. This facility is occupied by Torotel Products, and also serves as Torotel's executive offices, as well as the business office of Electronika and Torotel Manufacturing Corporation. The purchase cost of the building, along with the improvements, was $1,027,000. This property is subject to a first deed of trust securing indebtedness with the Bank of Blue Valley in the amount of $572,000. We completed a refinancing of this debt on June 1, 2009. The outstanding balance bears interest at a fixed rate of 6.5% per annum and requires monthly principal and interest payments of $9,543. The note has a maturity date of May 25, 2014, may be prepaid without penalty, and is collateralized by substantially all assets of Torotel.
We believe the Olathe facility and its equipment are well maintained, in good operating condition and adequately insured. Present utilization of the facility is less than 50% of maximum capacity.
ITEM 3.
ITEM 3. Legal Proceedings
None.
ITEM 4.
ITEM 4. (Removed and Reserved)
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Trading in Torotel's common stock is conducted in the over-the-counter market pink sheets under the symbol "TTLO.PK".
Price Range of Common Stock
The following table sets forth the high and low sales prices of Torotel's common stock as obtained from the Yahoo Finance website at www.finance.yahoo.com. These prices reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
(b) Approximate Number of Equity Security Holders
(c) Dividend History and Restrictions
We have never paid a cash dividend on our common stock and have no present intention of paying cash dividends in the foreseeable future. Our present borrowing agreements do not prohibit the payment of cash dividends.
(d) Dividend Policy
Future dividends, if any, will be determined by our Board of Directors in light of the circumstances then existing, including Torotel's earnings, financial requirements, general business conditions and credit agreement restrictions.
(e) Securities Authorized for Issuance under Equity Compensation Plans
Torotel has a long-term incentive plan which includes a Stock Award Plan (see Note F of Notes to Consolidated Financial Statements). The table below includes the number of shares authorized for the Stock Award Plan.
Equity Compensation Plan Information
Torotel also has a Directors Stock Appreciation Rights Plan for non-employee directors (see Note L of Notes to Consolidated Financial Statements).
There were no unregistered sales of securities or any share repurchases during the fiscal year ended April 30, 2010.
ITEM 6.
ITEM 6. Selected Financial Data
Information not required.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Torotel, Inc. ("Torotel") conducts business primarily through three wholly owned subsidiaries, Torotel Products, Inc. ("Torotel Products"), Torotel Manufacturing Corporation, and Electronika, Inc. ("Electronika"). Torotel Manufacturing Corporation provides manufacturing services to Torotel Products.
Business Outlook
Notwithstanding the current economic climate and the uncertainty surrounding the next U.S. defense budget, we believe our overall business outlook remains favorable due to higher demand for the potted coil assembly for the Hellfire II missile system, the award of a $1.1 million long-term industrial contract in February 2010 with deliveries scheduled through July 2011, and improved quoting activity for various magnetic components. Additionally, we believe a new long-term contract in excess of $5.0 million for the potted coil assembly will be awarded later in calendar 2010, although there can be no assurance the contract will be awarded or when sales under the contract would commence. As of April 30, 2010, the consolidated order backlog was nearly $7.4 million. This amount is comprised of $4.0 million for the potted coil assembly, $2.7 million in magnetic components and $700,000 in electro-mechanical assemblies. New order bookings in fiscal 2010 increased 102% to $10.7 million. These bookings included a $4.7 million long-term contract for the potted coil assembly. New order bookings exclusive of the potted coil assembly increased nearly 23% to $6.0 million. This amount consisted of $5.1 million in magnetic components and $900,000 for electro-mechanical assemblies.
The industry mix of Torotel Products' net sales in fiscal 2010 was 57% defense, 27% aerospace and 16% industrial compared to 43% defense, 34% aerospace and 23% industrial in fiscal 2009. We believe the mix in fiscal 2011 will remain weighted primarily towards defense, but with an increase in the industrial category due to a significant contract signed in February, 2010.
The primary factors that drive gross profit and net earnings for Torotel Products are sales volume and product mix. The gross profits on mature products/programs and complex transformer devices tend to be higher than those that are still in the prototyping or early production stages and simpler inductor devices. As a result, in any given accounting period the mix of product shipments between higher and lower margin jobs has a significant impact on the gross profit and net earnings of Torotel Products. Torotel's operating plan continues to focus on expanding the product base beyond electronic components.
Electronika's net sales continue to be impacted by the decline in the number of active DC-8 and DC-9 aircraft. We expect these sales to continue to decline and eventually phase out with the expiration of the manufacturing agreement.
Results of Operations
The following management comments regarding Torotel's results of operations and outlook should be read in conjunction with the Consolidated Financial Statements included pursuant to Item 8
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 30, 2010 and
Consolidated Statements of Operations for the years ended April 30, 2010 and
Consolidated Statement of Changes in Stockholders' Equity for the period May 1, 2008 through April 30, 2010
Consolidated Statements of Cash Flows for the years ended April 30, 2010 and 2009
Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Torotel's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Torotel's disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on such evaluation, these officers have concluded that Torotel's disclosure controls and procedures are effective.
Management's Report on Internal Control over Financial Reporting
Torotel's management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Management has assessed Torotel's internal control over financial reporting in relation to criteria described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Based on this assessment using those criteria, management concluded that, as of April 30, 2010, Torotel's internal control over financial reporting was effective.
This Annual Report does not include an attestation report of Torotel's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by Torotel's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Torotel to provide only management's report in this Annual Report.
Changes in Internal Controls
There were no changes in Torotel's internal control over financial reporting or in other factors that have materially affected, or in management's estimates are reasonably likely to materially affect Torotel's internal control over financial reporting subsequent to the date of the evaluation.
ITEM 9B.
ITEM 9B. Other Information
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
TOROTEL, INC.
We have audited the accompanying consolidated balance sheets of Torotel, Inc and Subsidiaries (the "Company") as of April 30, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended April 30, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Torotel, Inc. and Subsidiaries as of April 30, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the two years in the period ended April 30, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ MAYER HOFFMAN McCANN P.C.
Leawood, Kansas
July 15, 2010
CONSOLIDATED BALANCE SHEETS
As of April 30,
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Torotel, Inc. ("Torotel") conducts business through three wholly owned subsidiaries, Torotel Products, Inc. ("Torotel Products"), Torotel Manufacturing Corporation, and Electronika, Inc. ("Electronika"). Torotel specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes and toroidal coils, for use in commercial, industrial and military electronics. Torotel also designs and distributes ballast transformers for the airline industry. Approximately 96% of Torotel's sales during fiscal 2010 have been derived from domestic customers. Torotel Manufacturing provides manufacturing services to Torotel Products.
The following summarizes the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Torotel, Inc. and its wholly owned subsidiaries, Torotel Products, Inc., Torotel Manufacturing Corporation, and Electronika, Inc. and subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these consolidated financial statements include those assumed in computing the carrying value of equipment, allowance for doubtful accounts receivable, the valuation allowance on deferred income tax assets, and the reserve for warranty costs. Accordingly, actual results could differ from those estimates. Any changes in estimates are recorded in the period in which they become known.
Credit Risk
Financial instruments that potentially subject Torotel to concentrations of credit risk consist principally of cash and accounts receivable. Torotel grants unsecured credit to most of its customers. Management does not believe that it is exposed to any extraordinary credit risk as a result of this policy. At various times, and at April 30, 2010, cash balances exceeded federally insured limits. Torotel has not experienced any losses in the cash accounts and management does not believe Torotel is exposed to any significant credit risk with respect to its cash.
Fair Value of Financial Instruments
Torotel determines fair value by utilizing a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels as follows:
•Level 1. Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2. Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
•Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, Torotel utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value.
The carrying amounts of certain financial instruments, including cash, trade receivables, prepaid expenses and other current assets, trade accounts payable and accrued liabilities approximate fair value due to their short maturities. As of April 30, 2010, the amount of Torotel's long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to Torotel.
Treasury Stock
Torotel utilizes the weighted average cost method in accounting for its treasury stock transactions.
Revenue Recognition
Revenue is recognized when 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 products delivered once they have been shipped and title and risk of loss have been transferred. Torotel's consolidated net sales arising from contracts having deliveries scheduled over a period of more than one year for fiscal years 2010 and 2009 were approximately 41% and 23%, respectively, primarily because of the contract for the potted coil assembly.
Allowance for Doubtful Accounts
Gross trade accounts receivable are offset with an allowance for doubtful accounts. The allowance for doubtful accounts is management's best estimate of the amount of probable credit losses in Torotel's existing accounts receivable. Management reviews the allowance for doubtful accounts on a regular basis, and all past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when placed for collection. Recoveries of receivables previously written off are recorded when received. The majority of the customer accounts are considered past due after the invoice becomes older than the customer's credit terms. Interest is not charged on past due accounts. The allowance for doubtful accounts as of April 30, 2010 and 2009 was $6,000 and $6,000, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using a moving average cost method of valuation that currently and historically approximates the first-in, first-out method. Torotel's industry is characterized by short-term customer commitments and changes in demand, as well as other market considerations. Provisions for obsolete and excess inventory are based on reviews of inventory usage, quantities on hand and latest product demand information from customers. Inventories are reviewed in detail utilizing a 12-month time horizon. Individual part numbers that have not had any usage or purchases in a 12-month time period and do not have any known usage requirements are categorized as obsolete; individual part numbers having more than a 12-month supply based on the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
current year's usage are categorized as excess. Once specific inventory has been identified as excess or obsolete, the cost of the identified inventory is fully reserved and the cost of the inventory is not recovered until it is sold. The reserve balance is analyzed for adequacy as part of the inventory review each quarter.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are provided in amounts sufficient to relate the costs of depreciable assets to operations primarily using the straight-line method over estimated useful lives of three to five years for equipment and ten to twenty years for buildings and improvements.
Cash Flows
For purposes of the statements of cash flows, Torotel considers all short-term investments and demand deposits purchased with original maturity dates of three months or less to be cash equivalents.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended April 30, 2010 and 2009 advertising costs were $1,000 and $14,000, respectively.
Warranty Costs
Torotel maintains a reserve for estimated warranty costs associated with products returned from customers. A limited warranty is provided for a period of one year which requires Torotel to repair or replace defective products at no cost to the customer. The warranty reserve is based on historical experience and reflects management's best estimate of probable liability under the product warranties.
Share-Based Compensation
Torotel has share-based compensation plans that include restricted stock and stock appreciation rights, which are described more fully in Notes G and L in the Notes to the Consolidated Financial Statements. Torotel accounts for its share-based compensation plans in accordance with authoritative guidance under which the estimated fair value of share-based awards granted under the Torotel's share-based compensation plans is recognized as compensation expense over the vesting period of the award.
New Accounting Pronouncements
In September 2006, the FASB issued ASC 820 "Fair Value Measurement and Disclosure" ("ASC 820"). ASC 820 establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. Torotel adopted this guidance at the beginning of the first quarter of fiscal 2009, except for those non-recurring measurements for non-financial assets and non-financial liabilities subject to partial deferral. The adoption of this guidance did not have an impact on Torotel's financial position or operating results. Torotel adopted non-recurring measurements for non-financial assets and non-financial liabilities at the beginning of fiscal 2010. The adoption of this guidance for non-financial assets and liabilities did not have a material impact on Torotel's consolidated financial position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 2009, the FASB issued ASC 105 "FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" (the "Codification") concerning the organization of authoritative guidance under U.S. GAAP. The Codification has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification became effective for the Company in its second quarter of fiscal 2010. As the Codification is not intended to change or alter existing U.S. GAAP, it did not have any impact on Torotel's consolidated financial statements. References to specific accounting standards in the footnotes to the consolidated financial statements have been changed to refer to the appropriate section of the ASC.
In April 2009, the FASB issued ASC 825 "Disclosure About Fair Value of Financial Instruments" ("ASC 825"), previously referred to as FSP FAS No. 107-1. This guidance extends the disclosure requirements to interim period financial statements, in addition to the existing requirements for annual periods, and reiterates the requirement to disclose the methods and significant assumptions used to estimate fair value. Torotel adopted this guidance in the first quarter of fiscal 2010. The adoption of this guidance did not have a material impact on Torotel's consolidated financial position or results of operations.
In May 2009, the FASB issued ASC 855 "Subsequent Events" ("ASC 855"), previously referred to as SFAS No. 165. This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date-that is, whether that date represents the date the financial statements were issued or were available to be issued. Torotel adopted this guidance in the first quarter of fiscal 2010. The adoption of this guidance did not have any impact on Torotel's consolidated financial position or results of operations.
In February 2010, the FASB released ASU 2010-09 under ASC 855. This update provides amendments to subtopic 855-10 to remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. This update is effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors. Torotel adopted this update in the third quarter of fiscal 2010. The adoption of this update did not have any impact on Torotel's consolidated financial position or results of operations.
NOTE B-INVENTORIES
The following table summarizes the components of inventories, net, as of April 30 of each year:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C-FINANCING AGREEMENTS
On June 1, 2009, Torotel Products refinanced its mortgage debt with the Bank of Blue Valley. Under the terms of the refinancing, the outstanding balance bears interest at a fixed rate of 6.5% per annum and requires monthly principal and interest payments of $9,543. The note, which is guaranteed by Torotel, Inc. and Electronika, Inc., has a maturity date of May 25, 2014, may be prepaid without penalty and is collateralized by substantially all assets of Torotel.
On September 30, 2009, Torotel Products renewed its $500,000 revolving credit agreement with Bank of Blue Valley. Advances under the credit line are limited to 75% of eligible billed receivables. The revolving line is collateralized by the land and buildings in Olathe, Kansas. Under the terms of the agreement, the outstanding balance of the revolving line bears interest at 1.00% over the bank's corporate base rate with an interest rate floor of 6.00% and has a maturity date of September 30, 2010. As of April 30, 2010, the effective borrowing rate was 6.00% and the entire credit line was available. Management expects to renew the line of credit on similar terms.
On June 1, 2009, Torotel Products entered into an equipment loan with the Bank of Blue Valley. Under the terms of the loan, the $22,000 principal bears interest at a fixed rate of 6%, requires monthly payments of $627, and matures on June 1, 2012. Proceeds from this loan were used to finance the purchase of an epoxy mixing machine.
Information concerning Torotel's long-term indebtedness as of April 30 of each year is as follows:
The amount of long-term debt maturing in each of the next five years is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D-INCOME TAXES
The provision for income taxes reflected in the consolidated statements of operations differs from the amounts computed at the federal statutory tax rates. The principal differences between the statutory income tax expense and the effective provision for income taxes are summarized as follows:
Certain fiscal 2009 items in the table above have been reclassified to conform to the 2010 presentation.
Torotel has available as benefits to reduce future income taxes, subject to applicable limitations, the following estimated net operating loss ("NOL") carryforwards:
The difference between the financial and tax bases of assets and liabilities are determined quarterly. Deferred income taxes and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred income tax asset to the amount that will, more likely than not, be realized. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D-INCOME TAXES (Continued)
deferred income tax assets or liabilities. The following table summarizes the components of the net deferred income tax asset:
As of April 30, 2010, the federal tax returns for the fiscal years ended 2006 through 2010 are open to audit until the statute of limitations closes for the years in which the net operating losses are utilized. Torotel would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. As of April 30, 2010, Torotel recorded no accrued interest or penalties related to uncertain tax positions. Management expects no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.
NOTE E-COMMITMENTS AND CONTINGENCIES
Torotel is a party to three operating leases, which include a single lease for a digital copier and a digital color copier with a fax and two leases for automobiles. In June 2008, Torotel entered into a lease financing arrangement for a 9-inch gear head toroidal winding machine. The aggregate initial capitalized cost of this equipment was $27,000 with an interest rate of 8.93% implicit in the lease agreement. This lease is presented in the accompanying consolidated financial statements as long-term debt. In April 2010, Torotel entered into a lease financing arrangement for new office computer hardware. The aggregate initial capitalized cost of this equipment was $17,000 with an interest rate of 6.00% based on the incremental borrowing rate of Torotel. This lease is presented in the accompanying consolidated financial statements as long-term debt. All five leases are non-cancellable. Future minimum lease payments are as follows:
The future minimum capital lease payments of $30,000 include amounts representing interest of $2,000 which results in a present value of $28,000 for net minimum capital lease payments (see Note C of Notes to Consolidated Financial Statements). The equipment recorded under the capital lease amounted to $37,000, net of accumulated depreciation of $10,000 as of April 30, 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E-COMMITMENTS AND CONTINGENCIES (Continued)
Total rent expense for all operating leases for the years ended April 30, 2010 and 2009, was $33,000 and $34,000, respectively.
NOTE F-EMPLOYEE INCENTIVE PLANS
Short-term Cash Incentive Plan
The Short-term Cash Incentive Plan ("STIP") became effective for fiscal year 2008. The purpose of the STIP is to promote the long-term financial performance of Torotel by providing all key employees with the opportunity to earn cash awards for accomplishing annual goals for Return on Capital Employed ("ROCE") as defined in the Plan, which was filed as Exhibit 10.8 of Form 10-KSB for the fiscal year ended April 30, 2007, and is herein incorporated by reference. There were no awards for the years ended April 30, 2010 and 2009.
Long-term Incentive Plans
The Long-term Incentive Plans ("LTIPs"), which consist of a Stock Award Plan and a Long-term Cash Incentive Plan, also became effective for fiscal year 2008. The purpose of the LTIPs is to provide incentives that will attract and retain highly competent persons as key employees to promote the long-term financial performance of Torotel by providing key employees an opportunity to earn stock and cash awards for accomplishing long-range goals for sales growth, earnings growth, ROCE and debt to equity, as defined and measured in the Stock Award Plan and the Long-term Cash Incentive Plan, which were filed as Exhibits 10.9 and 10.10 of Form 10-KSB for the fiscal year ended April 30, 2007, and is herein incorporated by reference.
Stock Award Plan
The Stock Award Plan ("SAP"), which did not require shareholder approval, provides key employees the opportunity to acquire common stock of Torotel pursuant to awards earned for accomplishing goals that promote the long-term financial performance of Torotel. Under the terms of the SAP, stock awards are in the form of restricted stock having a five (5) year restriction period, which shall lapse, based on certain conditions as outlined in the SAP. All stock awards are represented by a Restricted Stock Agreement, which afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the Date of Award.
Long-term Cash Incentive Plan
The Long-term Cash Incentive Plan ("LTCIP") provides key employees with the opportunity to earn cash awards for accomplishing annual goals based on predetermined targets for average annual sales and earnings growth, ROCE and debt to equity. Under the terms of the LTCIP, awards will not be paid if Torotel's performance on any LTCIP metric is less than the threshold level of performance defined for that LTCIP metric. There were no awards for the years ended April 30, 2010 and 2009.
401(k) Retirement Plan
Torotel has a 401(k) Retirement Plan for Torotel Products' employees. Employer contributions to the Plan are at the discretion of the Board of Directors. Employer contributions to the Plan for the years ended April 30, 2010 and 2009 were $5,000 and $6,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G-RESTRICTED STOCK AGREEMENTS
Restricted Stock Agreements are authorized by the Compensation and Nominating Committee ("Committee") and the Board of Directors of Torotel. The Committee and the Board have determined that the interests of Torotel and its stockholders will be promoted by hiring talented individuals and, to induce such individuals to accept employment with Torotel, the Committee and the Board believe a key component of such individuals' compensation should be granting equity ownership opportunities based upon the acceptance of employment and the continuing employment of such individual, subject to certain conditions and restrictions. The Restricted Stock Agreements afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the Date of Award. Under the terms of each agreement, the non-vested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having been released, Torotel undergoes a change in control, then all of the restricted shares shall be released and no longer subject to restrictions under the agreements. Upon issuance of the restricted stock, the aggregate number of shares issued is credited to common stock at $.01 par value per share and the excess of the market price of the common stock on the date of issuance over the par value is credited to capital in excess of par value. The restricted shares are treated as non-vested stock; accordingly, the fair value of the restricted stock at the date of award is offset against capital in excess of par value in the accompanying consolidated balance sheets under stockholders' equity.
The Restricted Stock Agreements with Benjamin E. Ames, Jr. were terminated in April 2009 and the unearned cost of $54,000 was recognized in fiscal 2009. These agreements, dated July 31, 2006 and August 7, 2007, represented 190,000 non-vested common shares of Torotel. Pursuant to the terms of the agreement dated July 31, 2006, 40,000 shares were released from the restrictions on transfer on July 31, 2007 and 2008. Mr. Ames is now employed by Torotel Products under a new compensation arrangement and with different job responsibilities.
Torotel has Restricted Stock Agreements dated August 7, 2007, with eight (8) key employees pursuant to the Stock Award Plan ("SAP"). The SAP provides key employees the opportunity to acquire common stock of Torotel pursuant to awards earned for accomplishing goals that promote the long-term financial performance of Torotel. Under the terms of the SAP, which was filed as Exhibit 10.9 of Form 10-KSB for the fiscal year ended April 30, 2007, the restricted stock awards have a five (5) year restriction period, which shall lapse based on certain conditions as outlined in the SAP. As of April 30, 2010, the aggregate amount of the existing restricted stock awards was 357,350 shares. Stock compensation cost of $9,000 for the existing restricted stock awards will be recorded per quarter during the remaining five-year vesting period provided the financial performance metrics as outlined in the SAP are likely to be attained.
On September 2, 2009, Torotel entered into Restricted Stock Agreements with two (2) key employees (Messrs. Sizemore and Serrone) pursuant to the SAP. The aggregate amount of the restricted stock awards was 250,000 shares of common stock, $.01 par value per share. Based on the market price of $.27 for Torotel's common stock as of September 2, 2009, the fair value of the restricted stock at the date of award was $67,500. Stock compensation cost of $3,000 will be recorded per quarter during the five-year vesting period provided the financial performance metrics as outlined in the SAP are likely to be attained.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G-RESTRICTED STOCK AGREEMENTS (Continued)
Total stock compensation cost for the years ended April 30, 2010 and 2009 was $70,000 and $122,000, respectively. Restricted stock activity for each period through April 30 is summarized as follows:
NOTE H-STOCKHOLDERS' EQUITY
The components of stockholders' equity as of April 30 of each year are summarized as follows:
Torotel has 6,000,000 shares of common stock, $.01 par value, authorized and 5,873,100 shares issued and outstanding. The changes in shares of common stock outstanding as of April 30 of each year are summarized as follows:
NOTE I-EARNINGS PER SHARE
Torotel utilizes a dual presentation of basic and diluted earnings per share ("EPS") on the face of the consolidated statements of operations and provides a reconciliation of the numerator and denominator used in computing basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The 607,350 shares issued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I-EARNINGS PER SHARE (Continued)
and outstanding at April 30, 2010 pursuant to the Restricted Stock Agreements (see Note G of Notes to Consolidated Financial Statements) meet the definition of contingently issuable shares; as a result, these shares will not be included in the basic EPS calculation until the performance measurements have been satisfied. The restricted shares will be treated as a common stock equivalent for the diluted EPS calculation.
The basic and diluted earnings per common share were computed as follows:
No incremental shares are included in the 2010 EPS calculations for the 607,350 shares of restricted common stock since the effect would be anti-dilutive.
NOTE J-ACCRUED LIABILITIES
Accrued liabilities as of April 30 of each year consist of the following:
NOTE K-INFORMATION ABOUT MAJOR CUSTOMERS
For the year ended April 30, 2010, sales to two major customers accounted for 43% and 8% of consolidated net sales. For the year ended April 30, 2009, sales to two major customers accounted for 28% and 11% of consolidated net sales.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L-STOCK APPRECIATION RIGHTS
The board of directors of Torotel approved the Directors Stock Appreciation Rights Plan (the "Plan") for non-employee directors in September 2004. Each stock appreciation right ("SAR") is equal to one share of common stock of Torotel, and the aggregate number of SARs that may be granted under the Plan shall not exceed 500,000. The effective date of the Plan is October 1, 2004, and the Plan has a term of ten (10) years. The SARs are now accounted for under ASC 505-50, "Equity-Based Payments to Non-Employees."
Pursuant to the Plan, 20,000 SARs were granted on the effective date to each of the three current non-employee directors serving at that time. The initial price at which each SAR was granted was $.35, which equaled the market price of Torotel's common stock on the date of grant. Accordingly, no compensation cost was recognized at the time of grant in accordance with APB Opinion No. 25, prior to the adoption of ASC 505-50.
SARs shall automatically be granted in the future as follows: (1) each person who is elected as a director, who was not a director on the effective date of the Plan, shall be granted 10,000 SARs on the date such person is elected a director; and (2) on each May 1 following the effective date during the term of the Plan, each person serving as a director on such date shall be granted 10,000 SARs. After the initial grant, the price at which each SAR is granted shall be the average of the closing price of Torotel's common stock for the ten consecutive days immediately preceding the date of grant. Upon exercise of a SAR, Torotel will pay the grantee an amount (the "Spread") equal to the excess of the Exercise Price over the SAR grant price multiplied by the number of shares being exercised. The Exercise Price shall be the average of the closing price of Torotel's common stock for the ten consecutive days immediately preceding the notice of exercise. For any payments that exceed $10,000, Torotel has the option to make quarterly payments over three years with interest payable quarterly at the prime rate of Torotel's primary bank.
Each SAR granted hereunder may be exercised to the extent that the Grantee is vested in such SAR. The SARs will vest according to the following schedule:
A Grantee shall become fully (100%) vested in each of his or her SARs under the following circumstances: (i) upon termination of the Grantee's service as a director of Torotel for reasons of death, disability or retirement; (ii) if the Compensation and Nominating Committee (the "Committee"), in its sole discretion, determines that acceleration of the SAR vesting schedule would be desirable for Torotel; or (iii) if Torotel shall, pursuant to action by its Board of Directors, at any time propose to merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to another corporation, and provision is not made pursuant to the terms of such transaction for the assumption by the surviving, resulting or acquiring corporation of outstanding SARs or for substitution of new SARs therefore, the Committee shall cause written notice of the proposed transaction to be given to each Grantee not less than twenty days prior to the anticipated effective date of the proposed transaction, and his or her SARs shall become fully (100%) vested and, prior to a date specified in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L-STOCK APPRECIATION RIGHTS (Continued)
such notice, which shall be not more than ten 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 ASC 505-50, compensation expense is recognized over the vesting period based upon the estimated fair value of the SARs pursuant to the terms of the Plan using the Black-Scholes options-pricing model as of the end of each financial reporting period. As of April 30, 2010, the fair value of the SARs was determined using the following assumptions: no dividend payments over the life of the SARs since Torotel has not issued any form of dividend since 1985; an expected volatility of 103.4% based on Torotel's historical volatility using the weekly closing price over the past 3.00 years; a risk-free interest rate of 2.60%; and an expected life of 3.00 years based on the length of service estimated to be served. As of April 30, 2009, the fair value of the SARs was determined using the following assumptions: no dividend payments over the life of the SARs since Torotel has not issued any form of dividend since 1985; an expected volatility of 130.6% based on Torotel's historical volatility using the weekly closing price over the past 3.00 years; a risk-free interest rate of 2.00%; and an expected life of 3.00 years based on the length of service estimated to be served. Based on these assumptions, the fair value prices per share of the outstanding SARs as of April 30, 2010, are summarized as follows:
The vested portion represents 160,000 SARs. As of April 30, 2010, the total aggregate intrinsic value of these exercisable SARs was zero.
SARs transactions for each period though April 30 are summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L-STOCK APPRECIATION RIGHTS (Continued)
The following information applies to SARs outstanding for each year through April 30:
Total compensation expense for the outstanding SARs for the years ended April 30, 2010 and 2009, was an expense of $11,000 and a credit of $29,000, respectively. As of April 30, 2010, there was $10,000 of total unrecognized compensation expense related to non-vested SARs granted under the Plan. This cost is expected to be recognized over a weighted average period of .60 years. The liability for SARs on the consolidated balance sheets as of April 30, 2010 and 2009 was $28,000 and $17,000, respectively.
NOTE M-AGREEMENTS WITH RELATED PARTY
Electronika's requirements for the ballast transformers 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 raw material, labor, testing, packaging and related services required to complete the manufacture, delivery and sale of the ballast transformers, and Electronika is obligated to order all of its ballast transformer requirements exclusively from Magnetika. Electronika retains ownership of all designs, drawings, specifications and intellectual property rights associated with the ballast transformers. In exchange for the services provided to Electronika under the Manufacturing Agreement, Magnetika receives 40 percent of the net sales price of all ballast transformers sold by Electronika, plus a $2,500 per month management fee for processing all quotations and orders. Effective with the beginning of fiscal 2008, per the terms of the Manufacturing Agreement, the monthly management fee has been eliminated because of Electronika's lower sales volume. The Manufacturing Agreement continues in effect until April 1, 2012. In the fiscal year ended April 30, 2010, Electronika incurred costs of $6,000 for goods purchased on trade terms of net 20 days pursuant to the Manufacturing Agreement. Of the amount purchased, $6,000 was due and payable as of April 30, 2010. In the fiscal year ended April 30, 2009, Electronika incurred costs of $52,000 for goods purchased on trade terms of net 20 days pursuant to the Manufacturing Agreement. Of the amount purchased, $3,000 was due and payable as of April 30, 2009.
NOTE N-CUSTOMER DEPOSITS
The new contract for the potted coil assembly in fiscal year 2010 provides for milestone payments in the aggregate amount of $1,148,000 to be paid by the customer prior to the commencement of product deliveries in April 2010. This aggregate amount will be used to procure raw materials and to establish a 500-piece finished goods buffer as requested by the customer. As of April 30, 2010, Torotel had received milestone payments of $1,148,000. These milestone payments will be applied to invoices ratably over the course of the contract as product is delivered. In accordance with its revenue recognition policy, Torotel will recognize revenue on this contract upon monthly shipment of the product. As of April 30, 2010, the customer deposit liability was $978,000. This net amount is reflected as a customer deposit under current liabilities in the accompanying consolidated balance sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE O-RETENTION BONUS
The compensation committee approved executive retention incentive agreements for Dale H. Sizemore, Jr., Chief Executive Officer of Torotel, and H. James Serrone, Chief Financial Officer of Torotel. These agreements provided compensation of $25,000 and $15,000 for Messrs. Sizemore and Serrone, respectively, as a retention incentive for fiscal year 2010. This amount is reflected in the selling, general, and administrative expenses in the accompanying consolidated statement of operations.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference to Torotel's 2010 Proxy Statement under the sections titled "Voting Securities and Principal Holders Thereof" and "Proposal One-Election to the Board of Directors", to be filed with the SEC no later than 120 days after the end of our most recent fiscal year.
Code of Business Conduct and Ethics
Torotel has adopted a Code of Business Conduct and Ethics (the "Code") for directors, executive officers, and significant employees. A copy of the Code is posted on Torotel's Internet website at www.torotelproducts.com. If an amendment is made to, or a waiver granted of, a provision of the Code that applies to Torotel's principal executive officer or principal financial officer where such amendment or waiver is required to be disclosed under applicable SEC rules, Torotel intends to disclose such amendment or waiver and the reasons therefore on its Internet website at www.torotelproducts.com within four business days following any such amendment or waiver and will keep the information available on the website for at least twelve months. Following the twelve-month posting period, the information will be retained for a minimum of five years.
ITEM 11.
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to Torotel's 2010 Proxy Statement under the section titled "Executive Officer Compensation", to be filed with the SEC no later than 120 days after the end of our most recent fiscal year.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to Torotel's 2010 Proxy Statement under the sections titled "Voting Securities and Principal Holders Thereof" and "Proposal One-Election to the Board of Directors", to be filed with the SEC no later than 120 days after the end of our most recent fiscal year.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to Torotel's 2010 Proxy Statement under the section titled "Certain Relationships and Legal Proceedings", to be filed with the SEC no later than 120 days after the end of our most recent fiscal year.
ITEM 14.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to Torotel's 2010 Proxy Statement under the section titled "Fees Paid to the Independent Accountants", to be filed with the SEC no later than 120 days after the end of our most recent fiscal year.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules
(a) Exhibits (Electronic Filing Only)
Exhibit 3.1
Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of Form 8-K filed with the SEC on September 25, 2009)
Exhibit 3.2
By-laws (incorporated by reference to Exhibit 3.1 of Form 8-K filed with the SEC on July 7, 2006)
Exhibit 10.1
Form of Amended and Restated Employment Agreement (incorporated by reference to Exhibit 10.1 of Form 8-K filed with the SEC on July 7, 2006)
Exhibit 10.2
Manufacturing Agreement with Magnetika, Inc. (incorporated by Reference to Exhibit 8.4 of Form 8-K filed with the SEC on April 15, 2002)
Exhibit 10.5
Short-term Cash Incentive Plan (incorporated by reference to Exhibit 10.8 of Form 10-KSB filed with the SEC on July 30, 2007)
Exhibit 10.6
Stock Award Plan (incorporated by reference to Exhibit 10.8 of Form 10-KSB filed with the SEC on July 30, 2007)
Exhibit 10.7
Long-term Cash Incentive Plan (incorporated by reference to Exhibit 10.8 of Form 10-KSB filed with the SEC on July 30, 2007)
Exhibit 14
Code of Ethics for Directors, Executive Officers, Significant Employees (incorporated by reference to Exhibit 14 of Form 10-KSB filed with the SEC on February 16, 2005)
Exhibit 21
Subsidiaries of the Registrant
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Torotel, Inc.
(registrant)
By:
/s/ DALE H. SIZEMORE, JR.
Dale H. Sizemore, Jr.
Chief Executive Officer
By:
/s/ H. JAMES SERRONE
H. James Serrone
Chief Financial Officer
Date: July 15, 2010
Date: July 15, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ DALE H. SIZEMORE, JR.
Dale H. Sizemore, Jr.
Chairman of the Board, President,
Chief Executive Officer and Director
By:
/s/ ANTHONY L. LEWIS
Anthony L. Lewis
Director
Date: July 15, 2010
Date: July 15, 2010
By:
/s/ RICHARD A. SIZEMORE
Richard A. Sizemore
Director
By:
/s/ STEPHEN K. SWINSON
Stephen K. Swinson
Director
Date: July 15, 2010
Date: July 15, 2010
By:
/s/ H. JAMES SERRONE
H. James Serrone
Vice President of Finance,
Chief Financial Officer, Secretary and Director
By:
/s/ S. KIRK LAMBRIGHT, JR.
S. Kirk Lambright, Jr.
Director
Date: July 15, 2010
Date: July 15, 2010