TOROTEL INC, 10KSB40, 2000-07-27

TOROTEL INC
10KSB40, 2000-07-27
ELECTRONIC COILS, TRANSFORMERS & OTHER INDUCTORS

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<PAGE>

U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 2000

Commission File No. 1-8125

TOROTEL, INC.
(Name of small business issuer in its charter)

MISSOURI 44-0610086
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

13402 SOUTH 71 HIGHWAY, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (816) 761-6314

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------

Common Stock, $.01 par value NONE

Securities registered under Section 12(g) of the Exchange Act:

NONE

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months and (2) has been
subject to such filing requirements for the past 12 months and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
----- -----

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this Form 10-KSB, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----

The issuer's revenues for the most recent fiscal year were $3,324,000.

The aggregate market value of the voting stock held by non-affiliates, based on
the closing sale price of the over-the-counter market on July 11, 2000, was
$470,000. As of July 11, 2000, there were 2,811,590 shares of Common Stock, $.01
Par Value, outstanding.

<PAGE>

TOROTEL, INC.

FORM 10-KSB

Fiscal Year Ended April 30, 2000

TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4

PART II
Item 5. Market for Common Equity and Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis or Plan of Operation 6
Item 7. Financial Statements and Supplementary Data 10
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 10

PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the
Exchange Act 28
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management 30
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits and Reports on Form 8-K 32

SIGNATURES 33
</TABLE>

<PAGE>

PART I

ITEM 1. Business

Torotel, Inc. ("Torotel") conducts business through one wholly-owned
subsidiary, Torotel Products, Inc. ("Torotel Products"). 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, who use them in products such as aircraft
navigational equipment, digital control devices, voice and data secure
communications, medical equipment, telephone and avionics equipment, and
conventional missile guidance systems.

On April 19, 1999, Torotel, Inc. sold substantially all of the assets
of East Coast Holdings, Inc. ("ECH"), a wholly-owned subsidiary formerly named
OPT Industries, Inc., to SIGMA Associates, LLC ("SIGMA"), an investor group led
by Peter B. Caloyeras, for approximately $2.7 million (see Note P of Notes to
Consolidated Financial Statements). The assets sold included the land,
buildings, equipment, inventories, order backlog and intellectual property, such
as company name, patents, and product designs. The Caloyeras investor group
presently controls and operates other companies in the magnetic component and
power conversion industry. Mr. Caloyeras is the beneficial owner, as defined in
Rule 13d-3(a) under the Securities Exchange Act of 1934, of 198,900 shares of
Torotel Common Stock. Mr. Caloyeras also served as Torotel's Chief Executive
Officer for a short time in February and March, 1999, until such time as a
contemplated merger with Mr. Caloyeras' company, Electronika, Inc., was
terminated. Since the name "OPT Industries" was part of the assets sold to
SIGMA, Torotel changed the subsidiary's corporate name to East Coast Holdings,
Inc.

Torotel was incorporated under the laws of the State of Missouri in
1956. Its offices are located at 13402 South 71 Highway, Grandview, Missouri,
and its telephone number is (816) 761-6314. The term "Company" as used herein
includes Torotel, Inc. and its subsidiaries, unless the context otherwise
requires.

TOROTEL PRODUCTS

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

1
<PAGE>

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 systems, voice
and data secure communications, medical equipment, telephone and avionics
equipment, and conventional missile guidance systems.

Marketing and Customers

Historically, nearly all sales have been to the military market;
however, now approximately 46% of the annual sales come from select commercial
markets, such as aerospace, medical, and telecommunications. While efforts to
diversify have been successful, Torotel Products' primary market remains the
military. As a result, the business of Torotel Products is subject to various
risks including, without limitation, dependence on government appropriations and
program allocations, and the competition for available military business.
Torotel Products' sales do not represent a significant portion of any particular
market.

Torotel Products markets its components primarily through a direct
sales force and independent manufacturers' representatives paid on a commission
basis. In addition, Torotel Products is an approved source on numerous
applications, and generally 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. Although all existing orders are subject to schedule
changes or cancellation, adequate financial compensation is usually provided in
such instances to protect from suffering a loss on a contract.

Torotel Products has a primary base of 40 customers that provide over
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. In the fiscal year ended April 30, 2000, sales to
one major customer amounted to 13% of the net sales of Torotel Products.

Competition

The markets in which Torotel Products' competes are highly competitive.
A substantial number of companies 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 ability of Torotel Products to compete depends, among other things,
upon its on-time delivery performance, customized product engineering and
technical support, marketing capabilities, quality assurance and manufacturing
efficiency. While magnetic components are not susceptible to rapid technological
change, Torotel Products' market share is susceptible to decline given the
highly competitive nature of the market.

2
<PAGE>

Manufacturing

A major portion of Torotel Products' sales consist of electronic
components manufactured to customers' specifications. Consequently, 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 components are manually assembled with numerous employees and
subcontractors contributing to the completion of the components.

Essential materials used by Torotel Products in the manufacturing
process include magnetic materials, copper wire, and plastic housings. These
materials are available from many sources. Major suppliers include Magnetics,
Inc., Electrical Insulation Suppliers, Inc., and Mod & Fab. Torotel Products has
not experienced any significant curtailment of production because of material
shortages, but long lead times for certain magnetic cores could have an impact
on sales bookings.

Engineering, Research and Development

Torotel Products does not engage in significant research and
development activities, but does incur engineering expense in designing products
to meet customer specifications.

Environmental Laws

In fiscal 2000, Torotel Products incurred training costs of
approximately $18,000 for to help 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,
2001.

Employees

Torotel Products presently employs approximately 50 full-time
employees. An adequate supply of qualified personnel is available in the
facility's immediate vicinity. Torotel Products' production employees are
represented by the International Association of Machinists and Aerospace
Workers, AFL-CIO, Lodge No. 778. The current labor contract expires on May 31,
2001. There have been no interruptions of production as a result of labor
disputes.

ITEM 2. Properties

The company owns a two-building complex with approximately 29,000
square feet located in Grandview, Missouri. This facility is occupied by Torotel
Products, and also serves as the Company's executive offices. As of April 30,
2000, this property was subject to a first deed of trust securing indebtedness
in the amount of $415,000.

3
<PAGE>

The Company believes that its existing facilities and equipment are
well maintained and in good operating condition. Present utilization of the
existing facilities is less than 50% of maximum capacity.

ITEM 3. Legal Proceedings

On May 6, 1997, Torotel Products, Inc. was accepted into the Voluntary
Disclosure Program of the United States Department of Defense, resulting from
its failure to perform some required "thermal shock" testing as frequently as
required, and inaccurately certifying that all required testing had been
performed. As a result of its investigation into the thermal shock deficiencies,
the Company recorded an estimated charge of $486,000 against earnings. The
Company's investigation included a review of historical sales and pricing data,
labor bid sheets, and interviews with past and present employees, to arrive at a
best estimate of the cost impact to the government. On June 27, 2000, Torotel
Products entered into a Release and Settlement Agreement with the United States
of America. Pursuant to the agreement, Torotel Products will make an initial
payment of $10,000, followed by eighteen monthly installments of $5,000, for an
aggregate total of $100,000 (see Notes D and M of Notes to Consolidated
Financial Statements). As a result of the settlement, the Company recorded a
credit to earnings of $386,000 in the fourth quarter of its fiscal year ended
April 30, 2000.

The Company believes that certain of its former officers may have been
responsible for the misconduct related to the test failures, and are evaluating
ways of recovering the costs and damages. The Company has suspended all
principal and interest payments due under a note payable to a former officer
(see Note K of Notes to Consolidated Financial Statements) since February 1997.
As a result, as of April 30, 2000, the aggregate amount due of $520,000, which
consists of the outstanding principal of $384,000 plus the accrued interest of
$136,000, has been classified as a long-term liability in the accompanying
consolidated balance sheet.

The legal fees associated with the DOD investigation have amounted to
$8,000 during the current fiscal year, $1,000 in fiscal 1999, and $280,000 in
aggregate since the investigation started in the third quarter of the fiscal
year ended April 30, 1997.

The remaining liabilities related to the discontinued operations of ECH
include trade accounts payable of $458,000 (see Note P of Notes to Consolidated
Financial Statements). Several claims have been filed by ECH vendors for
collection of amounts due, and more are expected to be filed. Since ECH's
remaining assets have been assigned as collateral for the remaining bank debt
and the $100,000 debt owed to the United States (see Note M of Notes to
Consolidated Financial Statements), and all remaining proceeds are targeted for
unpaid payroll taxes, ECH has no other source of income to satisfy its trade
debt obligations. This trade debt remains the sole responsibility of ECH.
Neither Torotel, Inc. or Torotel Products, Inc. has assumed these obligations.
While the claims by ECH vendors may result in judgments against ECH, neither
Torotel, Inc. or Torotel Products, Inc. intends to provide any funds to satisfy
the judgments.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

4
<PAGE>

PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters

(a) Market Information

Torotel no longer fully satisfied all of the continued listing
guidelines of the American Stock Exchange (AMEX) and, as a result, the Company
consented to the removal of its common stock from the AMEX effective the close
of trading on March 12, 1999. Trading in the Company's common stock is now
conducted on the over-the-counter "bulletin board" market under the symbol
"TTLO".

PRICE RANGE OF COMMON STOCK

The following table sets forth the high and low sales prices of the
Company's common stock as obtained from the Internet site www.stockpoint.com.
These prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

<TABLE>
<CAPTION>
2000 1999
------------------------- ------------------------
Fiscal Period High Low High Low
------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
First Quarter 0.219 0.020 1.125 0.625
Second Quarter 0.250 0.030 1.750 1.250
Third Quarter 0.150 0.080 2.063 1.188
Fourth Quarter 0.375 0.080 1.375 0.125
</TABLE>

(b) Approximate Number of Equity Security Holders

<TABLE>
<CAPTION>
Approximate Number of
Record Holders
Title of Class as of April 30, 2000
------------------------------------------ ------------------------
<S> <C>
Common Stock, $.01 par value 1,500 (1)
</TABLE>

(1) Included in the number of stockholders of record are shares
held in "nominee" or "street" name.

The Company has never paid a cash dividend on its common stock and has
no present intention of paying cash dividends in the foreseeable future. The
Company's present borrowing agreements prohibit the payment of cash dividends
without the prior consent of the lender.

(d) Dividend Policy

Future dividends, if any, will be determined by the Board of Directors
in light of the circumstances then existing, including the Company's earnings,
financial requirements, general business conditions and credit agreement
restrictions.

5
<PAGE>

ITEM 6. Management's Discussion and Analysis or Plan of Operation

The following management comments regarding the Company's results of
operations and outlook should be read in conjunction with the Consolidated
Financial Statements included pursuant to Item 7 of this Annual Report.

Due to the sale of substantially all of the assets of ECH (see Note P
of Notes to Consolidated Financial Statements), the discussion and analysis of
the results of operations includes only the continuing operations of Torotel,
Inc. and Torotel Products, Inc.

2000 Compared to 1999

Net sales decreased 27% from $4,553,000 to $3,324,000 due to an
$861,000 decrease in sales of the potted coil assembly for the Hellfire II
missile system and a $368,000 decrease in overall sales for magnetics products.
The lower sales of magnetics products were attributable to certain military
programs which are being phased out or replaced, and a cyclical decline in the
aerospace industry. Future sales of the potted coil assembly will be limited to
the number of Hellfire II missiles sold to foreign countries by the prime
contractor(s). While net sales declined 27% compared to last year, sales
bookings increased 23% for the fiscal year and nearly 55% in the fourth quarter.
As a result, management anticipates a slight increase in sales in fiscal year
2001.

Gross profit as a percentage of net sales increased 25% due to lower
material costs associated with the product mix, a $424,000 write-down of
inventories last year, improved labor productivity resulting from better
training efforts, plus greater emphasis on cycle time reduction.

Engineering expenses decreased 23% from $236,000 to $181,000 due
primarily to lower payroll costs associated with a reduction in personnel.
Management anticipates a slight decrease in engineering expenses in fiscal year
2001.

Selling, general and administrative (SG&A) expenses decreased nearly
46%. The SG&A expenses of Torotel, Inc. decreased 73% from $455,000 to $121,000
due to a $236,000 decrease in professional fees associated with last year's
terminated merger with Electronika, Inc., a $50,000 decrease in
accounting/auditing fees, a $16,000 decrease in real estate taxes, an $11,000
decrease in directors fees, an $8,000 decrease in AMEX fees, a $7,000 decrease
in investor relations costs, and a $6,000 decrease in travel costs. The SG&A
expenses of Torotel Products decreased 32% from $944,000 to $641,000 due to a
concerted effort to reduce costs and preserve cash. Major spending changes
include an $114,000 decrease in payroll costs due to a reduction in personnel, a
$39,000 decrease in advertising costs, a $35,000 decrease in workers'
compensation insurance costs due to a surplus distributed by the insurance fund,
a $25,000 decrease in utilities costs, a $13,000 decrease in professional fees
due to the settlement of the litigation that was ongoing in the prior year, and
an $11,000 decrease in building maintenance costs. Other reductions include a
$28,000 decrease in depreciation expense, a $10,000 decrease in sales
commissions due to lower sales volume, a $10,000 decrease in copier costs, a
$9,000 decrease in educational costs, and a $9,000 decrease in insurance costs.
Management anticipates a slight decrease in SG&A expenses in fiscal year 2001.

6
<PAGE>

Interest expense increased 27%. The interest expense of Torotel, Inc.
increased 61% from $41,000 to $66,000 due to the interest incurred on the
guaranteed note with PNBT. The interest expense of Torotel Products decreased
slightly from $48,000 to $47,000 due to a lower aggregate borrowing level.

Interest income increased $36,000 due to the interest earned on the
note receivable from SIGMA Associates, L.L.C. which was part of the
consideration received from the sale of substantially all the assets of East
Coast Holdings, Inc. (formerly named OPT Industries, Inc.).

Sundry non-operating items decreased due to two special items. The
first was a $386,000 credit in fiscal 2000 for the final resolution of the
penalty discussed in Note M of Notes to Consolidated Financial Statements; the
second item was a special charge of $107,000 in fiscal 1999 for a loss on
disposition and discontinuance of certain equipment.

For the reasons discussed above, the consolidated pretax earnings
increased from a loss of $1,592,000 to a profit of $375,000. The pretax loss of
Torotel, Inc. decreased from $496,000 to $151,000. The pretax earnings of
Torotel Products increased from a loss of $1,096,000 to a profit of $526,000.

1999 Compared to 1998

Net sales decreased 25% from $6,059,000 to $4,553,000 due to lower
sales of the potted coil assembly for the Hellfire II missile system and lower
overall magnetics sales. In previous years, sales of the potted coil assembly
accounted for about 25% of Torotel Products' total sales. At the end of fiscal
1999, it was uncertain as to whether any additional orders would be received for
this product. The lower magnetic sales were attributable to certain military
programs which are being phased out or replaced. As a result of these factors,
lower sales were expected in fiscal 2000.

Gross profit as a percentage of net sales decreased 21% due primarily
to a $424,000 write-down of slow moving, obsolete and discontinued inventory,
negative labor variances from established standards, and a product mix yielding
lower margins. Management attempted to improve the direct labor performance by
implementing more training and by segregating its manufacturing operation into
two segments. The first group specializes in outsourced products while the
second group handles the more complex products, which are built internally.

Engineering expenses decreased 12% from $269,000 to $236,000 due
primarily to a $23,000 decrease in payroll costs due to a reduction in
personnel, a $7,000 decrease in equipment rental costs due to the purchase of
the equipment, and a $3,000 decrease in education costs associated with a
tuition reimbursement benefit. Management anticipated a further reduction in
engineering expenses during the first few months of fiscal 2000.

Selling, general and administrative (SG&A) expenses increased 3%. The
SG&A expenses of Torotel, Inc. increased 100% from $227,000 to $455,000 due
primarily to higher professional fees associated with the terminated definitive
merger agreement with Electronika, Inc. The SG&A expenses of Torotel Products
decreased 17% from $1,135,000 to $944,000 due primarily to a $141,000 decrease
in professional fees due to the settlement of the litigation that was ongoing in
the prior year, a $30,000 decrease in payroll costs due to a reduction in
personnel, a $16,000 decrease in computer maintenance costs due to completing
the conversion to the ECH computer system, and a $4,000 decrease in utilities
due to discontinued use of part of the facility. Management anticipated a
reduction in SG&A expenses during the first few months of fiscal 2000.

7
<PAGE>

Interest expense increased slightly. The interest expense of Torotel,
Inc. remained unchanged at $41,000. The interest expense of Torotel Products
increased slightly from $47,000 to $48,000.

Sundry non-operating expense decreased due to two special charges in
fiscal 1998. The first was a $276,000 charge for a settlement that ended a class
action alleging racial discrimination in hiring by Torotel Products; the second
was a $70,000 charge for an estimated penalty as discussed in Note M of Notes to
Consolidated Financial Statements. This decrease was offset partially by a
special charge of $107,000 for a loss on disposition and discontinuance of
certain equipment.

For the reasons discussed above, the consolidated pretax loss increased
from $477,000 to $1,592,000. The pretax loss of Torotel, Inc. increased from
$268,000 to $496,000. The pretax loss of Torotel Products increased from
$209,000 to $1,096,000.

Liquidity and Capital Resources

The Company has been without a revolving credit line since December
1998. Since then, the Company has relied on funds generated internally to meet
its normal operating requirements and to service bank indebtedness. While
continuing operations have provided cash in the last three years, the
uncertainty surrounding the outstanding liabilities associated with (i) the
terminated merger in fiscal 1999 with Electronika, Inc.; (ii) the trade debt
from the discontinued operations of ECH (see Note P of Notes to Consolidated
Financial Statements); and (iii) the note and interest payable to a former
officer (see Notes K and M of Notes to Consolidated Financial Statements),
raises doubt about the Company's ability to continue as a going concern. While
there is no immediate plan to secure any new financing, management continues to
evaluate ways of improving the Company's liquidity position.

The annual meeting of shareholders was held on Monday, January 17,
2000. Shareholders approved lowering the par value of Torotel's Common Stock
from 50 cents per share to 1 cent per share. Management encouraged shareholders
to vote for this change to give Torotel the flexibility to pursue various
options for raising additional capital to payoff debt and finance growth.

During the year ended April 30, 2000, the Company's continuing
operations provided $244,000 in cash flow due primarily to a lower level of
inventories.

Investing activities used $2,000 in cash flow for capital expenditures.
The Company anticipates a slightly higher level of investments for capital
expenditures in fiscal 2001.

Financing activities used $198,000 in cash flow due to decreases in
long-term debt.

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

Year 2000 Update

Torotel did not experience any Year 2000 difficulties as of January 1,
2000, nor from that date through the filing date of this report. Management had
determined that Torotel's hardware and software applications were Year 2000
compliant based on extensive testing and vendor certifications. In addition,
management had polled its significant suppliers and customers and, based on
these responses, had determined that its operation did not appear to be
vulnerable to a third parties' failure to remediate their

8
<PAGE>

own Year 2000 issues. Management also tested various equipment items to verify
their Year 2000 functionality.

Torotel did not incur any external costs for its Year 2000 readiness
reviews and assessments. Internal costs were not tracked separately; however,
these costs were minimal, and were limited to the related payroll costs for
certain internal employees and postage for the mailing of questionnaires to
suppliers and customers.

Other

Except for historical information contained herein, certain of the
matters discussed above are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act. These statements are based on assumptions about a
number of important factors and involve risks and uncertainties that could cause
actual results to be different from what is stated here. These risk factors
include: decreased demand for products, delays in developing new products,
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.

9
<PAGE>

ITEM 7. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants 11

Consolidated Balance Sheet as of April 30, 2000 12

Consolidated Statements of Operations for the years ended
April 30, 2000 and 1999 13

Consolidated Statement of Changes in Stockholders' Deficit for the
period May 1, 1998 through April 30, 2000 14

Consolidated Statements of Cash Flows for the years ended
April 30, 2000 and 1999 15

Notes to Consolidated Financial Statements 16
</TABLE>

ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

<PAGE>

REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Torotel, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Torotel, Inc. and
Subsidiaries as of April 30, 2000, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended April 30,
2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Torotel, Inc. and
Subsidiaries as of April 30, 2000 and the consolidated results of their
operations and their consolidated cash flows for the years ended April 30, 2000
and 1999 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note B to the consolidated financial statements, the Company has
uncertainties surrounding the outstanding liabilities with a terminated
merger in 1999, the trade debt of a discontinued subsidiary, and the note and
interest payable to a former officer. Because of these factors, substantial
doubts are raised about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Kansas City, Missouri
June 9, 2000

11
<PAGE>

CONSOLIDATED BALANCE SHEET
As of April 30, 2000

<TABLE>
<S> <C>
ASSETS

Current assets:
Cash $ 95,000
Trade and other receivables, less allowance for doubtful accounts
of $38,000 (Notes A, D and P) 414,000
Current maturity of note receivable (Note D and P) 135,000
Inventories (Notes A, C, and P) 200,000
Prepaid expenses and other current assets 4,000
------------
848,000

Property, plant and equipment (Notes A and D):
Land 189,000
Buildings and improvements 567,000
Equipment 1,216,000
------------
1,972,000
Less accumulated depreciation and amortization 1,575,000
------------
397,000

Note receivable, less current maturity (Notes D and P) 306,000

Other assets 6,000
------------

$ 1,557,000
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Current maturities of long-term debt (Notes D, M and P) $ 443,000
Trade accounts payable (Note P) 846,000
Accrued liabilities (Notes J and P) 293,000
------------
1,582,000

Long-term debt, less current maturities (Notes D, M and P) 443,000

Note and interest payable to former officer (Notes K and M) 520,000

Commitments and contingencies (Note F) --

Stockholders' deficit (Notes D, G, H, I, L and R):
Common stock, $.01 par value; 6,000,000 shares authorized;
2,882,795 shares issued 29,000
Capital in excess of par value 10,085,000
Accumulated deficit (10,897,000)
------------
(783,000)
Less cost of treasury stock, 71,205 shares 205,000
------------
(988,000)
------------

$ 1,557,000
============
</TABLE>

The accompanying notes are an integral part of this statement.

12
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 3,324,000 $ 4,553,000
Cost of goods sold (Note N) 2,315,000 4,314,000
----------- -----------

Gross profit 1,009,000 239,000

Operating expenses:
Engineering 181,000 236,000
Selling, general and administrative (Note N) 762,000 1,399,000
----------- -----------
943,000 1,635,000
----------- -----------

Earnings (loss) from operations 66,000 (1,396,000)

Other expense (income):
Interest expense 113,000 89,000
Interest income (36,000) -
Other, net (Notes M and N) (386,000) 107,000
----------- -----------
(309,000) 196,000
----------- -----------

Earnings (loss) from continuing operations
before provision for income taxes 375,000 (1,592,000)

Provision for income taxes (Note E) - -
----------- -----------

Earnings (loss) from continuing operations 375,000 (1,592,000)

Discontinued operations (Notes O and P):
Loss from operations of discontinued subsidiary - (1,894,000)
Gain on sale of product line - 984,000
Gain on disposal of subsidiary, net of provision of $210,000
for operating losses during phase-out period - 104,000
----------- -----------
- (806,000)
----------- -----------

Net earnings (loss) $ 375,000 $(2,398,000)
=========== ===========

Basic earnings (loss) per share (Notes H and I):
Continuing operations $ .13 $ (.56)
Discontinued operations .00 (.29)
------- -------
$ .13 $ (.85)
======= =======

Diluted earnings (loss) per share (Notes H and I):
Continuing operations $ .13 $ (.56)
Discontinued operations .00 (.29)
------- -------
$ .13 $ (.85)
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Capital in Treasury Total
Common Excess of Accumulated Stock, Stockholders'
Shares Stock Par Value Deficit at cost Deficit
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 1, 1998 2,880,569 $ 1,441,000 $ 8,672,000 $ (8,874,000) $ (205,000) $ 1,034,000

Net loss - - - (2,398,000) - (2,398,000)
Issuance of common stock to
employee stock purchase
plan (Note G) 2,226 1,000 - - - 1,000
------------ ------------ ------------ ------------ ------------ ------------

Balance, April 30, 1999 2,882,795 $ 1,442,000 $ 8,672,000 $(11,272,000) $ (205,000) $ (1,363,000)

Net earnings - - - 375,000 - 375,000
Change in par value - (1,413,000) 1,413,000 - - -
------------ ------------ ------------ ------------ ------------ ------------

Balance, April 30, 2000 2,882,795 $ 29,000 $ 10,085,000 $(10,897,000) $ (205,000) $ (988,000)
============ ============ ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of this statement.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,

<TABLE>
<CAPTION>
2000 1999
----------------------------------
<S> <C> <C>
Cash flows from continuing operating activities:
Net earnings (loss) $ 375,000 $(2,398,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by continuing operations:
Loss from operations of discontinued subsidiary - 1,894,000
Gain on sale of product line - (984,000)
Gain on disposition of discontinued subsidiary - (104,000)
Loss on disposition of fixed assets - 107,000
Gain on settlement of government penalty (386,000) -
Depreciation and amortization 111,000 153,000
Increase (decrease) in cash flows from continuing operations
resulting from changes in:
Trade and other receivables 23,000 1,127,000
Inventories 222,000 932,000
Prepaid expenses and other assets 10,000 59,000
Trade accounts payable (139,000) 289,000
Accrued liabilities 28,000 (176,000)
----------- -----------
Net cash provided by continuing operations 244,000 899,000
----------- -----------

Cash flows from investing activities:
Capital expenditures (2,000) (46,000)
Proceeds from sale of product line - 1,250,000
Proceeds from disposition of subsidiary's assets - 2,253,000
----------- -----------
Net cash provided by (used in) investing activities (2,000) 3,457,000
----------- -----------

Cash flows from financing activities:
Borrowings against credit line - 2,189,000
Payments against credit line - (3,750,000)
Principal payments on long-term debt (228,000) (677,000)
Payments on capital lease obligations (11,000) (18,000)
Note and interest payable to former officer 41,000 41,000
Proceeds from issuance of common stock - 1,000
----------- -----------
Net cash used in financing activities (198,000) (2,214,000)
----------- -----------

Net cash used in discontinued operations - (2,137,000)
----------- -----------

Net increase in cash 44,000 5,000
Cash at beginning of year 51,000 46,000
----------- -----------

Cash at end of year $ 95,000 $ 51,000
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 71,000 $ 289,000
Income taxes $ - $ -
Non-cash investing and financing activities:
Note receivable received in sale of assets of subsidiary $ - $ 441,000
Settlement of litigation paid with asset held for sale $ - $ 76,000
</TABLE>

The accompanying notes are an integral part of these statements.

15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. Approximately 91% of Torotel's sales are
derived from domestic customers. 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. and East Coast
Holdings, Inc. (formerly named OPT Industries, Inc.) All significant
inter-company accounts and transactions have been eliminated.

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Fair Value of Financial Instruments

Cost approximates market for all financial instruments as of April 30,
2000 and 1999.

Revenue Recognition

Revenue is recognized on contracts and orders in the period in which
the units are shipped (unit-of-delivery method). Both historically and
currently, less than 5% of the Company's annual consolidated sales arise from
contracts which are performed over a period of more than one year.

Inventories

Inventories are stated at the lower of cost or market. Cost is
determined using a moving average cost method of valuation which currently and
historically approximates the first-in, first-out method.

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 property and equipment, and
ten to twenty years for buildings and improvements.

16
<PAGE>

Cash Flows

For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.

Employee Stock Option Plan

The employee stock option plan is accounted for under Accounting
Principles Board (APB) Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for
continuing operations for the years ended April 30, 2000 and 1999 were $4,000
and $43,000, respectively.

NOTE B - REALIZATION OF ASSETS

The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. While the Company's
profitability improved during the fiscal year ending April 30, 2000, the affect
of the substantial operating losses incurred in the fiscal years ended April 30,
1999, 1998 and 1997, continues to cloud the Company's outlook. While continuing
operations have provided cash in the last three years, the uncertainty
surrounding the outstanding liabilities associated with (i) the terminated
merger in fiscal 1999 with Electronika, Inc.; (ii) the trade debt from the
discontinued operations of ECH (see Note P of Notes to Consolidated Financial
Statements); and (iii) the note and interest payable to a former officer (see
Notes K and M of Notes to Consolidated Financial Statements), raises doubt about
the Company's ability to continue as a going concern. While there is no
immediate plan to secure any new financing, management continues to evaluate
ways of improving the Company's liquidity position.

In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements on a continuing basis, to maintain present financing,
and to succeed in its future operations. The consolidated financial statements
do not include any adjustment relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.

NOTE C - INVENTORIES

The following table summarizes the components of inventories:

<TABLE>
<S> <C>
Raw materials $ 16,000
Work in process 137,000
Finished goods 47,000
------------

$ 200,000
============
</TABLE>

17
<PAGE>

NOTE D - FINANCING AGREEMENTS

Torotel Products has a $451,000 note with Phillipsburg National Bank &
Trust Company (PNBT) dated December 23, 1997. Under the terms of the note, the
outstanding balance bears interest at a fixed rate of 9-1/4% per annum through
March 18, 2001, thereafter the rate will be adjusted annually and will fluctuate
at 1/2% over the bank's base lending rate. The note requires monthly principal
and interest payments of $4,678. The note, which is guaranteed by Torotel, Inc.,
has a maturity date of December 19, 2012, and is collateralized by a first
mortgage on the land and buildings in Grandview, Missouri. As of April 30, 2000,
the outstanding balance was $415,000.

On April 19, 1999, Torotel, as guarantor of the bank debt of its
discontinued ECH subsidiary, executed a Modification Agreement to an existing
ECH loan with PNBT with a principal balance of $495,000. The loan is
collateralized by the trade accounts receivable, inventories and equipment of
Torotel Products, and the note receivable from SIGMA (see Note P of Notes to
Consolidated Statements). Under the terms of the loan, the outstanding balance
bears interest at a fixed rate of 8.0% per annum and has a maturity date of
April 1, 2003. During the first year, the loan required monthly interest only
payments starting May 1, 1999. Starting May 1, 2000, the loan requires monthly
payments of principal and interest in equal amounts necessary to pay off the
balance owed in 36 monthly payments. As of April 30, 2000, the outstanding
balance was $269,000. The Company is required to comply with certain covenants
including restrictions on the payment of cash dividends. As of April 30, 2000,
the Company was not in compliance with a maximum leverage ratio, a quick ratio
and a current ratio covenant. However, PNBT will be resetting these financial
ratio covenants based on the revised corporate structure subsequent to the sale
of ECH assets and the settlement discussed in Note M of Notes to Consolidated
Financial Statements. For reporting purposes, the outstanding balance of
$269,000 is classified as a current maturity of long-term debt in the
accompanying consolidated balance sheet.

Pursuant to a settlement of the Voluntary Disclosure of its failure to
perform some required testing as frequently as required, the Company entered
into an interest-free promissory note with the United States of America for
$100,000 (see Note M of Notes to Consolidated Financial Statements). The terms
of the note require an initial payment of $10,000 followed by eighteen monthly
installments of $5,000. The note is collateralized by the trade accounts
receivable, inventories and equipment of Torotel Products, and the note
receivable from SIGMA. This collateral position is junior to the security
interest of PNBT.

Pursuant to a settlement that ended a class action alleging racial
discrimination in hiring by Torotel Products, Inc., the Company entered into an
unsecured promissory note for $200,000. The terms of the note require eight
quarterly installments of $25,000, the first six of which were to be
interest-free. As of April 30, 2000, Torotel had paid four of the installments
plus $18,000 toward the fifth installment. In an effort to preserve cash,
Torotel reached an agreement with the Torotel Settlement Fund to defer
installment payments presently due in the amount of $32,000 in return for
bi-monthly interest payments at an annual rate of 4.6% on the deferred portion.
Per the agreement, Torotel shall pay the deferred amount as its cash flow
permits, but no later than May 4, 2003, which is the maturity date of the note.
The final two quarterly installments will be due when the Company has earned a
profit in three consecutive quarters, or May 4, 2003, whichever comes first. As
of April 30, 2000, the last two installments have been deferred due to lack of
profitability. Pursuant to the terms of the note, interest will accrue on the
deferred amount at the rate of 9% per annum. As of April 30, 2000, the
outstanding balance on the note was $82,000.

Information concerning the Company's long-term indebtedness is as
follows:

18
<PAGE>

<TABLE>
<S> <C>
Note payable to PNBT, maturing December 2012 $ 415,000
Term loan payable to PNBT, maturing April 2003 269,000
Note payable to United States of America, maturing December 2001 100,000
Note payable to Settlement Fund, maturing February 2000 82,000
Installment contract payable 6,000
Capitalized lease obligation (Note F) 14,000
-----------
886,000
Less: Current maturities 443,000
-----------
$ 443,000
===========
</TABLE>

The amount of long-term debt maturing in each of the next five years is
as follows:

<TABLE>
<CAPTION>
April 30, Amount
--------- -----------
<S> <C>
2001 $ 443,000
2002 68,000
2003 22,000
2004 24,000
2005 27,000
Thereafter 302,000
-----------
$ 886,000
===========
</TABLE>

NOTE E - 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:

<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Computed tax expense at statutory rates $ 116,000 $ -
Utilization of net operating loss carryforwards (116,000) -
(Increase) decrease in deferred tax assets 127,000 (279,000)
Increase (decrease) in valuation allowance (127,000) 279,000
---------- ---------
$ - $ -
========== ==========
</TABLE>

The Company has available as benefits to reduce future income taxes,
subject to applicable limitations, the following estimated net operating loss
("NOL") carryforwards:

<TABLE>
<CAPTION>
Year of NOL
Expiration Carryforward
---------- -------------
<S> <C>
2001 $ 1,420,000
2003 1,416,000
2007 340,000
2009 495,000
2010 694,000
2011 319,000
2012 889,000
2013 801,000
2014 2,932,000
-------------
$ 9,306,000
=============
</TABLE>
19
<PAGE>

The difference between the financial and tax bases of assets and liabilities is
determined annually. 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
effect taxable income. Valuation allowances are established, if necessary, to
reduce the deferred 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 deferred tax assets or liabilities.

The following table summarizes the components of the net deferred tax
asset:

<TABLE>
<S> <C>
Net operating loss carryforwards $ 2,901,000
Inventory valuation reserve 201,000
Tax credit carryforwards 58,000
Other 42,000
-----------
3,202,000
Less valuation allowance 3,202,000
-----------
$ -
===========
</TABLE>

NOTE F - COMMITMENTS AND CONTINGENCIES

The Company is party to six non-cancelable operating leases used in the
performance of its business. In addition, in fiscal 1998, Torotel Products
entered into a lease financing arrangement for a phone system. The initial
capitalized cost of this equipment was $39,000 with a discount rate of 15%
implicit in the lease agreement. This lease is presented in the financial
statements as a capital lease.

Future minimum lease payments subsequent to April 30, 2000, are as
follows:

<TABLE>
<CAPTION>
Capital Operating
April 30, Lease Leases
--------- ----------- -----------
<S> <C> <C>
2001 $ 10,000 $ 28,000
2002 5,000 28,000
2003 - 20,000
2004 - 12,000
2005 - -
----------- -----------
$ 15,000 $ 88,000
=========== ===========
</TABLE>

The future minimum capital lease payments of $15,000 include amounts
representing interest of $1,000 which results in a present value of $14,000 for
net minimum capital lease payments (see Note D of Notes to Consolidated
Financial Statements). Equipment recorded under capital leases amounted to
$21,000, net of accumulated depreciation of $18,000 as of April 30, 2000.

Total rent expense for all operating leases for continuing operations
for the years ended April 30, 2000 and 1999 was $21,000 and $27,000,
respectively.

NOTE G - EMPLOYEE INCENTIVE PLANS

Incentive Compensation Plan

On September 19, 1994, the shareholders approved the Incentive
Compensation Plan. All key employees are eligible to participate in the Plan.
The Plan provides for participants to receive incentive

20
<PAGE>

payments in cash and/or Torotel common stock based on targeted pretax earnings,
as defined in the Plan. There were no awards under the Plan during the years
ended April 30, 2000 and 1999.

Employee Stock Option Plans

In accordance with the 1982 Incentive Compensation Plan, the Company
reserved 630,000 common shares for issuance to key employees pursuant to the
exercise of incentive and non-qualified stock options granted prior to May 20,
1992. At April 30, 2000, no options were available for future grants, but
options to purchase 3,357 shares were exercisable. Stock option transactions
under the 1982 Incentive Compensation Plan for each period are summarized as
follows:

<TABLE>
<CAPTION>
Shares Under Option Price
Option Per Share
------------ ------------
<S> <C> <C>
Balance, May 1, 1998 3,357 $1.70
Exercised - -
Forfeited - -
------------
Balance, April 30, 1999 3,357 $1.70
Exercised - -
Forfeited - -
------------
Balance, April 30, 2000 3,357 $1.70
============
</TABLE>

In accordance with the Incentive Compensation Plan approved on
September 19, 1994, the Company reserved 400,000 common shares for issuance to
key employees pursuant to the exercise of incentive and non-qualified stock
options granted prior to June 20, 2004. The options are accounted for under APB
Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for this Plan. The incentive stock options have a
term of five years when issued and vest 50% per year at the end of each of the
first two years. The non-qualified stock options have a term of ten years when
issued and vest 25% per year at the end of each of the first four years. The
exercise price of each option equals the market price of the Company's common
stock on the date of grant. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plan been determined
based on the fair value of the options at the grant dates consistent with the
method of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company's operating results would have been
reduced to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
2000 1999
----------- -------------
<S> <C> <C> <C>
Earnings (loss) from continuing operations As Reported $ 375,000 $ (1,592,000)
Pro Forma $ 375,000 $ (1,627,000)

Basic earnings (loss) per share from
continuing operations As Reported $ .13 $ (.56)
Pro Forma $ .13 $ (.58)

Diluted earnings (loss) per share from
continuing operations As Reported $ .13 $ (.56)
Pro Forma $ .13 $ (.58)
</TABLE>

The fair values of the options granted were estimated on the date of grant using
the Black-Scholes options-pricing model. The fair value of the incentive stock
options was determined using the following

21
<PAGE>

weighted average assumptions: no dividend payments over the life of the options;
expected volatility of 106.1%; risk-free interest rate of 6.94%; and expected
life of five years. The fair value of the non-qualified stock options was
determined using the following weighted average assumptions: no dividend
payments over the life of the options; expected volatility of 106.1%; risk-free
interest rate of 6.6%; and expected life of ten years.

Stock option transactions under the 1994 Incentive Compensation Plan
for each period are summarized as follows:

<TABLE>
<CAPTION>
2000 1999
----------------------------- --------------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 7,500 $1.00 150,000 $1.00
Granted - - - -
Exercised - - - -
Forfeited (7,500) $1.00 (142,500) $1.00
-------- -------
Outstanding at end of year - - 7,500 $1.00
======== =======
</TABLE>

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan which allows employees
to purchase Torotel common stock at a formula price which approximates market
value. The Plan enables employees to purchase stock through payroll deductions
of up to 10% of their compensation. The Company matches one-half of the
employee's contribution. Stock purchased under the Plan is restricted from
transfer for one year after the date of issuance. There were no expenses under
the Plan for continuing operations during the years ended April 30, 2000 and
1999.

401(k) Retirement Plans

The Company has a separate 401(k) Retirement Plan for Torotel Products'
union and non-union employees. Employer contributions to either Plan are at the
discretion of the Board of Directors. Employer contributions to the union Plan
were $1,000 in each of the years ended April 30, 2000 and 1999. Employer
contributions to the non-union Plan were $3,000 and $2,000 for the years ended
April 30, 2000 and 1999, respectively.

NOTE H - EARNINGS PER SHARE

Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS
PER SHARE, requires dual presentation of basic and diluted EPS on the face of
the statement of earnings regardless of whether basic and diluted EPS are the
same; and requires 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 is computed
similarly to fully diluted EPS pursuant to APB Opinion 15. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were

22
<PAGE>

exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Pursuant to SFAS
No. 128, the basic and diluted loss per common share were computed as follows:

<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Net earnings (loss) $ 375,000 $ (2,398,000)
Weighted average common shares outstanding 2,811,590 2,811,438
Incremental shares - -

Basic earnings (loss) per share $ .13 $ (.85)
Diluted earnings (loss) per share $ .13 $ (.85)
</TABLE>

No incremental shares are included in the EPS calculations for fiscal 2000 due
to the market price of the Company's common stock being lower than the exercise
price of the stock options under contract. No incremental shares are included in
the EPS calculations for fiscal 1999 due to the net loss.

NOTE I - STOCK WARRANTS

In connection with the acquisition of ECH in fiscal 1994, warrants to
purchase 66,667 shares of the Company's common stock at $1.50 per share were
issued to Chemical Bank New Jersey N.A. The warrants expire on September 1,
2003.

Pursuant to a settlement that ended a class action alleging racial
discrimination in hiring by Torotel Products, Inc., the company agreed to issue
a warrant certificate to the Torotel Settlement Fund to purchase 100,000 shares
of Torotel, Inc. common stock at $.75 per share. The warrant is 100% vested upon
issuance and cannot be exercised until the market price of the company's common
stock reaches $2.00 per share. The warrant expires on May 4, 2003.

The $33,000 fair value of the warrant was estimated on the date of
grant using the Black-Scholes options-pricing model using the following weighted
average assumptions: no dividend payments over the life of the warrant; expected
volatility of 75.9%; risk-free interest rate of 5.8%; and expected life of two
years.

Stock warrant transactions for each period are summarized as follows:

<TABLE>
<CAPTION>
2000 1999
--------------------------- -------------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Warrant Price Warrant Price
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 100,000 $ .75 - -
Granted - - 100,000 $ .75
Exercised - - - -
Forfeited - - - -
--------- ---------
Outstanding at end of year 100,000 $ .75 100,000 $ .75
========= =========

Warrants exercisable at year-end - - - -
Weighted average fair value of
warrants granted during the year - $ .33
</TABLE>

23
<PAGE>

The following information applies to warrants outstanding at April 30, 2000:

<TABLE>
<S> <C>
Number outstanding 100,000
Range of exercise prices $ .75
Weighted average exercise price $ .75
Weighted average remaining contractual life 3.0 years
</TABLE>

NOTE J - ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<S> <C>
Employee related expenses $ 158,000
Other, including interest 135,000
----------
$ 293,000
==========
</TABLE>

NOTE K - NOTE PAYABLE TO FORMER OFFICER

The Company has a $429,000 promissory note with Alfred F. Marsh, former
President of Torotel, Inc., dated July 10, 1996. The amount of this note
consists of the principal sum of $250,000 from a note executed in April 1986,
plus $179,000 of accrued unpaid interest. For the year ended April 30, 2000, the
Company accrued $41,000 in interest on the note. The outstanding balance of this
unsecured note bears interest at a fixed rate of 10% per annum. The note
requires monthly principal and interest payments of $10,881, and matures on July
1, 2000. Under the terms of the note, no payments shall be made to Mr. Marsh as
long as any default condition exists under the terms of the loan with PNBT,
unless the bank has waived the default condition prior to any payment. As of
April 30, 2000, the aggregate amount due under the note is $520,000, which
consists of the outstanding principal balance of $384,000 plus accrued interest
of $136,000. The Company has suspended all payments under the note due to the
reasons discussed in Note M of Notes to Consolidated Financial Statements.

NOTE L - DIVIDEND RESTRICTIONS

The Company's loan agreement prohibits the payment of cash dividends
without the prior consent of PNBT.

NOTE M - GOVERNMENT PENALTY

24
<PAGE>

quarter of its fiscal year ended April 30, 1997. Because the investigation was
ongoing, the Company subsequently determined that there also were some
deficiencies in performing some required electrical testing as frequently as
required. As a result, the Company recorded an additional estimated charge of
$70,000 against earnings in the first quarter of its fiscal year ended April 30,
1998. The Company's investigation included a review of historical sales and
pricing data, labor bid sheets, and interviews with past and present employees,
to arrive at a best estimate of the cost impact to the government.

On June 27, 2000, Torotel Products entered into a Release and
Settlement Agreement with the United States of America. Pursuant to the
agreement, Torotel Products will make an initial payment of $10,000 followed by
eighteen monthly installments of $5,000, for an aggregate total of $100,000 (see
Note D of Notes to Consolidated Financial Statements). As a result of this
settlement, the Company recorded a credit to earnings of $386,000 in the fourth
quarter of its fiscal year ended April 30, 2000.

NOTE N - SPECIAL CHARGES AND CREDITS

For the year ended April 30, 2000, selling, general and administrative
expenses as presented in the accompanying consolidated statements of operations
included special charges of $8,000 for legal fees associated with the DOD
investigation discussed in Note M of Notes to Consolidated Financial Statements;
other income as presented in the accompanying consolidated statements of
operations included a special credit of $386,000 for the reduced penalty
discussed in Note M of Notes to Consolidated Financial Statements.

For the year ended April 30, 1999, cost of goods sold as presented in
the accompanying consolidated statements of operations included a special charge
of $424,000 for the write-down of slow-moving, discontinued and obsolete
inventory; selling, general and administrative expenses as presented in the
accompanying consolidated statements of operations included special charges of
$236,000 for expenses associated with a terminated definitive merger agreement
with Electronika, Inc.; other expense as presented in the accompanying
consolidated statements of operations included a special charge of $107,000 for
a loss on disposition and discontinuance of certain equipment.

NOTE O - PRODUCT LINE SALE

On September 18, 1998, Torotel's wholly-owned subsidiary, East Coast
Holdings, Inc., completed the sale of its ultra-miniature transformer and
inductor product line to Pico Electronics, Inc. of Pelham, New York. Pursuant to
the Asset Purchase Agreement, the Company received cash proceeds of

25
<PAGE>

$1,250,000 in return for all assets related to the product line including
inventory, raw materials, work in process, finished goods, backlog, fixed
assets, intellectual property, goodwill, contracts and rights, whether tangible
and intangible of every kind and description.

As part of the Agreement, the Company agreed that neither it nor any
related entity shall re-establish any of the product line sold to Pico, nor
shall the Company nor any related entity modify any of its existing products to
render the same mechanically and/or electrically interchangeable or
substantially interchangeable with any of the products sold to Pico. The sale of
the product line resulted in a gain of $984,000.

NOTE P - DISPOSITION OF ASSETS

On April 13, 1999, Torotel's wholly-owned subsidiary, East Coast
Holdings, Inc. (formerly named OPT Industries, Inc.), provided official notice,
pursuant to federal law, to the union representing its production employees that
the subsidiary had made the decision to sell its assets to a third party. In
addition, Torotel had received a notice of default from PNBT with respect to the
Company's line of credit.

On April 19, 1999, a transaction was completed whereby Torotel sold
substantially all of the assets of ECH to SIGMA Associates, LLC, an investor
group led by Peter B. Caloyeras, for approximately $2.7 million. The assets sold
included the land, buildings, equipment, inventories, order backlog and
intellectual property, such as company name, patents, and product designs. The
Caloyeras investor group presently controls and operates other companies in the
magnetic component and power conversion field. Mr. Caloyeras is the beneficial
owner, as defined in Rule 13d-3(a) under the Securities Exchange Act of 1934, of
198,900 shares of Torotel Common Stock. Mr. Caloyeras also served as Torotel's
Chief Executive Officer for a short time in February and March, 1999, until such
time as a contemplated merger with Mr. Caloyeras' company, Electronika, Inc.,
was terminated. Since the name "OPT Industries" was part of the assets sold to
SIGMA, Torotel changed the subsidiary`s corporate name to East Coast Holdings,
Inc. The purchase price consisted of:

<TABLE>
<S> <C>
Cash $ 2,200,000
Note receivable 441,000
Assumption of liabilities 53,000
-----------
$ 2,694,000
===========
</TABLE>

The cash proceeds were used to payoff most of Torotel's bank borrowings with
PNBT, which enabled the Company to cure the default with PNBT. The $441,000 note
receivable accrues interest at a fixed rate of 8% per annum and has a maturity
date of April 19, 2003. During the first year, the note required monthly
interest only payments starting May 19, 1999. Starting May 19, 2000, the note
requires monthly payments of principal and interest in equal amounts necessary
to pay off the full balance owed in 36 monthly payments.

ECH's losses from operations are shown separately as discontinued
operations in the accompanying consolidated statements of operations. The
remaining assets and liabilities related to ECH as of April 30, 2000, are
included in the accompanying consolidated balance sheet under the following
captions and in the amounts shown:

26
<PAGE>

<TABLE>
<S> <C>
Current maturity of note receivable $ 135,000
Note receivable, less current maturity $ 306,000
Trade accounts payable $ 458,000
Accrued liabilities $ 178,000
Long-term debt $ 269,000
</TABLE>

ECH's net sales for the year ended April 30, 1999 were $2,872,000.

NOTE Q - INFORMATION ABOUT MAJOR CUSTOMERS

For the year ended April 30, 2000, sales to one major customer amounted
to 13% of consolidated net sales. For the year ended April 30, 1999, sales to
four major customers amounted to 17%, 12%, 11% and 11% of consolidated net
sales.

NOTE R - REDUCTION IN PAR VALUE AND STATED CAPITAL

On January 17, 2000, shareholders approved a proposal to reduce the par
value of Torotel's Common Stock from $.50 per share to $.01 per share and to
reduce the stated capital of Torotel pursuant to Missouri law. A Certificate of
Amendment to Torotel's Articles of Incorporation and Statement of Reduction of
Capital was filed with the Secretary of State of Missouri on February 4, 2000.
The accompanying consolidated balance sheet reflects the reduction in par value
and stated capital. The affect of the change was to decrease the balance sheet
caption "Common stock, at par value" and to increase the caption "Capital in
excess of par value" in the amount of $1,413,000.

27
<PAGE>

PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act

As of the date of this Annual Report, based solely upon a review of
copies of Forms 3, 4 and 5 and amendments thereto furnished to the Company
during its most recent fiscal year, the Company believes that all directors and
officers are in compliance with the reporting requirements of Section 16(a) of
the Securities Exchange Act of 1934. Biographical summaries concerning
individuals serving on the Board of Directors, the Company's executive officers
and significant employees, are shown below. Dale H. Sizemore, Jr., both a
Director and executive officer, and Richard A. Sizemore, a Director, are
brothers.

Dale H. Sizemore, Jr., age 48
Chairman of the Board, President
and Chief Executive Officer of Torotel, Inc.
President of Torotel Products, Inc.

Mr. Sizemore became a Director of the Company in 1984. He has
served as Chairman since 1995, and served as President from
1995 to 1996, and recently assumed the title President again
in April 1999. Mr. Sizemore was President of Kansas
Communications, Inc., located in Lenexa, Kansas, from 1983 to
1995, and was Chairman of the Board and Treasurer from 1995 to
1998. Mr. Sizemore is currently self employed.

Richard A. Sizemore, age 40
President of Interactive Design, Inc.

Mr. Sizemore became a Director of the Company in 1995. He has
been owner and President of Interactive Design, Inc. in
Lenexa, Kansas, since 1987. He holds a B.S. degree in
electrical engineering and an M.B.A. from the University of
Kansas.

H. James Serrone, age 45
Vice President of Finance, Chief Financial Officer, and
Secretary of Torotel, Inc.
Vice President of Finance and General Manager of Torotel Products, Inc.

Mr. Serrone was appointed a Director of the Company in May
1999. He joined Torotel in 1979, became Controller in 1982,
and was named Vice President in 1993. Mr. Serrone has served
as Vice President of Torotel Products, Inc. since 1992. He has
been General Manager of Torotel Products, Inc. since August
1996.

ITEM 10. Executive Compensation

The following table sets forth the compensation of the named executive
officers for each of the Company's last three completed fiscal years.

<PAGE>

<TABLE>
<CAPTION>
Summary Compensation Table

Long-Term
Annual Compensation Compensation
-------------------------------------- ------------
Name and Options All Other
Principal Position Year Salary Bonus Awarded Compensation
------------------------- ------ --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Dale H. Sizemore, Jr. (a) 2000 $ -0- $ -0- -0- $ -0-
President and 1999 $ -0- $ -0- -0- $ 1,500
Chief Executive Officer 1998 $ -0- $ -0- -0- $ 10,200

Christian T. Hughes (b) 1999 $125,000 $ -0- -0- $ -0-
President and 1998 $124,216 $ -0- -0- $ 700
Chief Operating Officer

Peter B. Caloyeras (c) 1999 $ -0- $ -0- -0- $ -0-
Chief Executive Officer
</TABLE>

(a) Dale H. Sizemore, Jr. became President effective April 20, 1999.

(b) Christian T. Hughes was terminated effective April 20, 1999.

(c) Peter B. Caloyeras served as Chief Executive Officer from February 8,
1999 until March 15, 1999, at which time the contemplated merger with
Mr. Caloyeras' company, Electronika, Inc., was terminated.

Option Grants

There were no grants of stock options made to any executive officers
during the Company's last completed fiscal year.

Aggregate Option Exercises and Fiscal Year-End Option Value

There were no stock option exercises made during the last completed
fiscal year and the executive officers identified above did not have any
unexercised stock options as of April 30, 2000.

Compensation of Directors

During the fiscal year ended April 30, 2000, Dale H. Sizemore, Jr. and
Richard A. Sizemore received no compensation, but $10,500 remains due and
payable to both individuals as of April 30, 2000. This amount consists of $6,000
from the fiscal year ended April 30, 2000, and $4,500 from the fiscal year ended
April 30, 1999.

<PAGE>

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

Certain Beneficial Owners

The following persons beneficially own more than 5% of the outstanding
Common Stock of Torotel, Inc. as of June 28, 2000:

<TABLE>
<CAPTION>
Name and Address Amount Beneficially Percent
of Beneficial Owner Owned of Class
------------------- ------------------- --------
<S> <C> <C>
Richard A. Sizemore 214,868 (a) 7.6%
Linda V. Sizemore
8356 Hallet
Lenexa, KS 66215

Gregory M. Sizemore 203,852 (b) 7.3%
Julie Sizemore
12735 Mohawk Circle
Leawood, KS 66209

Dale H. Sizemore, Jr. 179,003 (c) 6.4%
Carol J. Sizemore
2705 W. 121st Terrace
Leawood, KS 66209

Paulette A. Durso 124,625 (d) 4.4%
James T. Durso
3917 N.E. 59th St.
Kansas City, MO 64119

Sizemore Enterprises 200,506 (e) 7.1%
2705 W. 121st Terrace
Leawood, KS 66209

Caloyeras Family Partnership, L.P. 207,900 (f) 7.4%
2041 W. 139th Street
Gardena, CA 90249

Thomas E. Foster 142,100 5.1%
5506 Brite Drive
Bethesda, MD 20817
</TABLE>

(a) Richard A. Sizemore and Linda V. Sizemore are husband and wife. Mr. and
Mrs. Sizemore's individual direct ownership is 140,226 and 15,666
shares, respectively. Mr. Sizemore's indirect ownership includes 58,976
shares which are owned by Mr. Sizemore as trustee for his children.

(b) Gregory M. Sizemore and Julie Sizemore are husband and wife. Mr. and
Mrs. Sizemore's individual direct ownership is 137,654 and 15,666
shares, respectively. Mr. Sizemore's indirect ownership includes 50,532
shares which are owned by Mr. Sizemore as trustee for his children.

30
<PAGE>

(c) Dale H. Sizemore, Jr. and Carol J. Sizemore are husband and wife Mr.
and Mrs. Sizemore's individual direct ownership is 130,964 and 14,351
shares, respectively. Mr. Sizemore's indirect ownership includes 33,688
shares which are owned by Mr. Sizemore as trustee for his children.

(d) James T. Durso and Paulette A. Durso are husband and wife. Mr. and Mrs.
Durso's individual direct ownership is 9,000 and 103,149 shares,
respectively. Mrs. Durso's indirect ownership includes 12,476 shares
which are owned by Ms. Durso as trustee for her children.

(e) Sizemore Enterprises is a general partnership. The general partners,
who are brothers and sister, are Dale H Sizemore, Jr., Paulette Durso,
Gregory M. Sizemore and Richard A. Sizemore.

(f) The Caloyeras Family Partnership L.P., is a limited partnership in
which PBC, Inc., a California corporation, is the sole general partner.
Peter B. Caloyeras is the sole shareholder, sole director and president
of PBC, Inc. The limited partners of the Caloyeras Family Partnership
include the sons and daughter of Peter B. Caloyeras. The number of
shares indicated as owned by the Caloyeras Family Partnership L.P. also
includes 3,000 shares owned individually by each of the sons and
daughter of Peter B. Caloyeras.

Management

The following table sets forth the individuals serving on the Board of
Directors, the Company's executive officers and significant employees, and
information with respect to the number of shares of the Company's common stock
beneficially owned by each of them directly or indirectly, as of June 28, 2000.
The number of shares beneficially owned includes shares, if any, held in the
name of the spouse, minor children, or other relative of the individual living
in his home, as well as shares, if any, held in the name of another person under
an arrangement whereby the individual enjoys the right to vote or the use of the
income, or whereby the individual can vest or revest title in himself at once or
at some future time. The business address of each person listed below is 13402
South 71 Highway, Grandview, Missouri 64030. Dale H. Sizemore, Jr., both a
Director and executive officer, and Richard A. Sizemore, a Director, are
brothers.

<TABLE>
<CAPTION>
Name and Position Amount Beneficially Percent
of Beneficial Owner Owned of Class
----------------------- ------------------- --------
<S> <C> <C>
Dale H. Sizemore, Jr. 229,130 (a) 8.1%
Chairman of the Board,
President and
Chief Executive Officer

Richard A. Sizemore 264,995 (b) 9.4%
Director

H. James Serrone 10,273 (c) 0.4%
Vice President and
Chief Financial Officer

Directors and Executive 504,398 (d) 17.9%
Officers as a Group
(3 persons)
</TABLE>

<PAGE>

(a) Dale H. Sizemore, Jr.'s beneficial ownership includes 50,127 shares
which is equivalent to 25% of the 200,506 shares owned by Sizemore
Enterprises, a General Partnership in which Mr. Sizemore is a general
partner.

(b) Richard A. Sizemore's beneficial ownership includes 50,127 shares which
is equivalent to 25% of the 200,506 shares owned by Sizemore
Enterprises, a General Partnership in which Mr. Sizemore is a general
partner.

(c) H. James Serrone's beneficial ownership includes 3,357 shares which are
acquirable within 60 days pursuant to the exercise of outstanding stock
options.

(d) The beneficial ownership of all directors and executive officers as a
group includes 3,357 shares which are acquirable within 60 days
pursuant to the exercise of outstanding stock options.

ITEM 12. Certain Relationships and Related Transactions

Indebtedness to Former Officer

The Company has a $429,000 promissory note with Alfred F. Marsh, former
President of Torotel, Inc., dated July 10, 1996. The amount of this note
consists of the principal sum of $250,000 from a note executed in April 1986,
plus $179,000 of accrued unpaid interest. For the year ended April 30, 2000, the
Company incurred $41,000 in interest on the note. The outstanding balance of
this unsecured note bears interest at a fixed rate of 10% per annum. The note
requires monthly principal and interest payments of $10,881, and matures on July
1, 2000. Under the terms of the note, no payments shall be made to Mr. Marsh as
long as any default condition exists under the terms of the loan with PNBT,
unless the bank has waived the default condition prior to any payment. As of
April 30, 2000, the aggregate amount due under the note is $520,000, which
consists of the outstanding principal balance of $384,000 plus accrued interest
of $136,000. The Company has suspended all payments under the note due to the
reasons discussed in Note M of Notes to Consolidated Financial Statements.

ITEM 13. Exhibits and Reports on Form 8-K

(a) Exhibits (Electronic Filing Only)

Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Independent Certified Public Accountants
Exhibit 27 Financial Data Schedule
Exhibit 99 Undertakings

(b) Reports on Form 8-K

There were no reports filed on Form 8-K during the fourth
quarter of the year ended April 30, 2000.

32
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Torotel, Inc.
(Registrant)

By: /s/ H. James Serrone
--------------------------------
H. James Serrone
Vice President of Finance and
Chief Financial Officer

Date: July 24, 2000
-----------------------

In accordance with the Exchange Act, 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

Date: July 24, 2000
-----------------------

By:: /s/ Richard A. Sizemore
--------------------------------
Richard A. Sizemore
Director

Date: July 24, 2000
-----------------------

By:: /s/ H. James Serrone
--------------------------------
H. James Serrone
Vice President of Finance,
Chief Financial Officer,
and Secretary

Date: July 24, 2000
-----------------------