Torotel Inc (TTLO) SEC Annual Report (10-K) for 2010

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TABLE OF CONTENTS
ITEM 8. Financial Statements and Supplementary Data

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. 1-8125

TOROTEL, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (913) 747-6111

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o     No  ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 registrant was required to submit and post such files). Yes  o     No  o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o     No  ý

         The aggregate market value of the voting stock held by non-affiliates, computed based on the closing sale price of the over-the-counter market on October 31, 2009, was $391,671. As of July 15, 2010, there were 5,873,100 shares of Common Stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders on September 20, 2010, are incorporated by reference into Part III.

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TOROTEL, INC.

FORM 10-K

Fiscal Year Ended April 30, 2010

TABLE OF CONTENTS

Table of Contents

Forward-Looking Information

This report, as well as our other reports filed with the Securities and Exchange Commission ("SEC"), and in press releases and other public communications throughout the year, contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities 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-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, budgets and management's plans and objectives. Accordingly, these forward-looking statements are based on assumptions about 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 to be different from what appear here. These risk factors include: without limitation: our incurrence of a net loss for the fiscal year ended April 30, 2010, declining sales by our Electronika subsidiary, our relatively limited customer base, risks in fulfilling military subcontracts, our ability to finance operations, continued government production of the Hellfire II missile system for which we supply parts, the ability to adequately pass through to customers unanticipated future increases in raw material costs, decreased demand for products, delays in developing new products, markets for new products and the cost of developing new markets, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate. Accordingly, our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

PART I

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.

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        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.

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        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.

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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.

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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.

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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.    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.    Legal Proceedings

        None.

ITEM 4.    (Removed and Reserved)

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PART II

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.

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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.    Selected Financial Data

        Information not required.

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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 of this Annual Report.

        This discussion and analysis of the results of operations include the operations of Torotel, Inc. and its subsidiaries, Torotel Products, Torotel Manufacturing Corporation, and Electronika. The results of Torotel Products, and Torotel Manufacturing Corporation have been combined for discussion purposes. While each company's results are included in the following discussion, segment reporting is not applicable because the products offered are similar in form and function, and target similar markets.

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2010 Compared to 2009

        For the reasons discussed below, the consolidated pretax earnings decreased from a profit of $303,000 to a pretax loss of $27,000, the pretax loss of Torotel, Inc. increased from $249,000 to $335,000, the pretax earnings of Torotel Products decreased from $475,000 to $300,000, and the pretax earnings of Electronika decreased from $77,000 to $8,000.

        Consolidated net sales decreased 2%. However, the net sales of Torotel Products remained virtually unchanged from the prior year at $7,076,000. This sustained revenue level is primarily attributable to higher demand for the potted coil assembly. The offsetting decrease was attributable to lower demand for magnetic components, molded coils and lower shipments of various assemblies. The net sales of Electronika decreased 89% from $129,000 to $14,000. This decline was anticipated and we expect Electronika's sales to maintain a downward trend as the demand for replacement parts for DC-8 and DC-9 aircraft continues to shrink.

        Gross profit as a percentage of net sales decreased 1%. The gross profit percentage of Torotel Products decreased 1% because of higher fixed production costs due to the hiring of a chief operating officer and director of operational excellence. Electronika's gross profit as a percentage of net sales remained unchanged.

        Engineering expenses, applicable only to Torotel Products, decreased 11% from $331,000 to $293,000 because of a $32,000 decrease in payroll costs associated with the resignation of an engineer and a $16,000 decrease in training costs. These decreases were partially offset by increases of $6,000 for travel and $4,000 for software subscriptions. We anticipate a significant increase in the present level of engineering expenses due to hiring at least one additional engineer.

        Consolidated selling, general and administrative ("SG&A") expenses increased 13%. The SG&A expenses of Torotel, Inc. increased 35% from $249,000 to $335,000 primarily because of a $39,000 change in the fair value of stock appreciation rights, a $22,000 increase in professional fees, a $10,000 increase in auditing fees, a $9,000 increase in consulting fees, and a $6,000 increase in directors fees. The SG&A expenses of Torotel Products increased 10% from $1,621,000 to $1,780,000 primarily because of a $93,000 increase in recruiting costs, $82,000 increase in payroll costs, a $40,000 increase in retention bonus expense, a $17,000 increase in training costs, a $14,000 increase in building and equipment maintenance, and a $9,000 increase in travel costs. These increases were offset partially by a $51,000 decrease in stock compensation costs, a $34,000 decrease in commissions, and an $11,000 decrease in advertising costs. Electronika did not incur any SG&A expenses in either period. Management does not anticipate any significant increase in the present level of SG&A expenses.

        Interest expense, entirely attributable to Torotel Products, decreased nearly 23% because of the mortgage refinancing effective June 1, 2009, and a lower debt level.

2009 Compared to 2008

        For the reasons discussed below, the consolidated pretax earnings increased from $165,000 to $303,000, the pretax loss of Torotel, Inc. decreased from $344,000 to $249,000, the pretax earnings of Torotel Products decreased from $488,000 to $475,000, and the pretax earnings of Electronika increased from $21,000 to $77,000.

        Consolidated net sales increased 19%. The net sales of Torotel Products increased nearly 18% from $6,021,000 to $7,076,000. This increase is primarily attributable to sales of the new ballast assemblies for a major industrial application, a new assembly for a military application, higher sales of the capacitor assemblies, higher demand for the potted coil assembly and higher demand for molded coils used in down-hole drilling applications. The net sales of Electronika increased 279% from $34,000 to $129,000. This increase is the result of product shipments that were previously delayed awaiting Boeing's approval of a replacement for an encapsulating material that had become obsolete.

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        Gross profit as a percentage of net sales decreased 2%. The gross profit percentage of Torotel Products decreased 2% because of higher material and labor costs associated with the product mix and higher fixed production costs. These higher costs were offset partially by the effect of the higher sales volume. Electronika's gross profit as a percentage of net sales remained unchanged.

        Engineering expenses, applicable only to Torotel Products, increased 24% from $267,000 to $331,000 because of a $44,000 increase in payroll costs primarily associated with engineering college interns, a $13,000 increase in training costs and a $7,000 increase in travel costs.

        Consolidated selling, general and administrative ("SG&A") expenses increased 6%. The SG&A expenses of Torotel, Inc. decreased 28% from $344,000 to $249,000 primarily because of a $60,000 decrease in professional fees, a $50,000 decrease in the fair value of stock appreciation rights and a $4,000 decrease in directors fees. These decreases were offset partially by a $10,000 increase in auditing fees and a $9,000 increase for additional insurance coverage. The SG&A expenses of Torotel Products increased 14% from $1,424,000 to $1,621,000 primarily because of a $139,000 increase in payroll costs, a $37,000 increase in sales commissions, a $35,000 increase in stock compensation costs, a $25,000 increase in building and equipment maintenance and supplies, a $17,000 increase in consulting costs, a $16,000 increase in IT costs, a $13,000 increase in utilities costs, a $12,000 increase in recruiting costs and a $7,000 increase in equipment rental costs. These increases were offset partially by a $104,000 decrease in training costs. Electronika did not incur any SG&A expenses in either period.

        Interest expense, entirely attributable to Torotel Products, decreased nearly 7% because of a lower debt level.

Liquidity and Capital Resources

        As of April 30, 2010, Torotel had $1,030,000 in cash and cash equivalents, compared to $656,000 as of April 30, 2009. We do not anticipate any significant changes in the amount of cash flow from operations for fiscal 2011.

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

        Net cash provided by operating activities fluctuates between periods primarily as a result of differences in operating earnings, the timing of shipments and the collection of accounts receivable, changes in inventory, level of sales and payment of accounts payable. The $84,000 of cash used in investing activities was the result of capital expenditures. We anticipate a higher level of capital expenditures during fiscal 2011 as a result of the implementation of a new enterprise resource planning system and additional production equipment. The $67,000 of cash used in financing activities in fiscal 2010 is the net effect of long-term debt payments on the mortgage and installment and capital lease obligations less proceeds from a new equipment loan. We believe that the projected cash flow from operations, combined with existing cash balances, will be sufficient to meet our funding requirements for the foreseeable future. Torotel does have a $500,000 bank line of credit available through September 30, 2010, which could be utilized to help fund any working capital requirements, subject to the adequacy of our borrowing base and other conditions.

        We believe that inflation will have only a minimal effect on future operations since such effects should be offset by sales price increases, which are not expected to have a significant effect upon demand.

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        Return on Capital Employed ("ROCE") is the primary benchmark used by management to evaluate Torotel's performance. ROCE measures how effectively and efficiently net operating assets (NOA) are used to generate income before interest and taxes (EBIT). For these purposes, NOA, or Capital Employed, is defined as "accounts receivable + inventory + net fixed assets + miscellaneous operating assets - accounts payable - miscellaneous operating liabilities". The performance of Torotel's management and the majority of its decisions will be measured by whether Torotel's ROCE improves. For the fiscal years ended April 30, 2010 and 2009, Torotel's ROCE was 1.13% and 18.19%, respectively. This decline in ROCE for fiscal year 2010 is largely attributed to the operating loss incurred in fiscal year 2010. We believe that ROCE should improve over the next few quarters due to the reasons discussed above.

Critical Accounting Policies

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 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

        Effective May 1, 2009, 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:

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.

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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 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 purchased with original maturity dates of three months or less to be cash equivalents.

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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.

        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.

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        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.

ITEM 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

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

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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.    Other Information

        None.

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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

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CONSOLIDATED BALANCE SHEETS
As of April 30,

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of this statement.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended April 30,

The accompanying notes are an integral part of these statements.

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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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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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.

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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:

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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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)