STOCK APPRECIATION RIGHTS

The Board approved the Directors Stock Appreciation Rights Plan (the "Plan") for non-employee directors in September 2004. The Plan was amended effective December 6, 2013, to permit directors to exercise fully vested stock appreciation rights ("SARS") after five years from the grant date. The Amended and Restated Directors Stock Appreciation Rights Plan (the "Amended Plan") was filed as Exhibit 10.12 to Torotel's current report on Form 8-K filed with the SEC on December 11, 2013.

As under the prior version of the Plan, under the Amended Plan each SAR granted as a part of the Amended Plan may be exercised to the extent that the grantee is vested in such SAR and unvested SARS will be forfeited. The SARS will vest according to the following schedule:



Number of Years the Grantee has remained a Torotel director following the Date of Grant	Shares represented by a SAR in which a Grantee is Vested
Under one	—	%
At least one but less than two	33	%
At least two but less than three	67	%
Three or more	100	%

In accordance with ASC 718, compensation expense is recognized over the vesting period based upon the estimated fair value of the SARS pursuant to the terms of the Amended Plan using the Black-Scholes options-pricing model as of the end of each financial reporting period. The stock volatility rate was determined using the historical volatility rates of our common stock based on the weekly closing price of our stock. The expected life represents the actual life as well as the use of the simplified method prescribed by the SEC, which uses the average of the vesting period and expiration period of each group of SARS. The interest rates used were the government Treasury bill rate on the date of valuation. Dividend yield was based on the historical policy that we have not issued any form of dividend since 1985.

On January 24, 2014, the Board terminated the Amended Plan by unanimous written consent of the members of the Board. The Amended Plan was terminated as part of Torotel’s plans to move toward different long-term performance-based awards, which are still under consideration. The Board consent authorizing the termination provides for vested SARS to be exercised within 75 days following the effective date of the termination as well as a one-time cash award equal to the cumulative and aggregate fair market value on the date of grant of any and all unvested SARS held by a grantee under the Plan. All payments related to the exercise of vested SARS and the one-time cash award for unvested SARS occurred on May 15, 2014 and amounted to $250,000.

SARs transactions for the six month period through October 31, 2013 is summarized as follows:



	2013
	SARs Under Option	Weighted Average Grant Price
Outstanding at beginning of period	320,000	$	0.409
Granted	40,000	$	0.410
Exercised	—	$	—
Terminated	—	$	—
Outstanding at end of period	360,000	$	0.409
SARs exercisable at end of period	280,000	$	0.415
Weighted average fair value of SARs granted during the period		$	0.410

The following information applies to SARS vested and outstanding for the six month period through October 31, 2013:



	2013
Number outstanding	360,000
Range of grant prices, upper limit	$	0.695
Range of grant prices, lower limit	$	0.208
Weighted average grant price	$	0.409
Weighted average contractual life remaining (in years)	4.91
10-day average market price	$	1.200
Weighted average stock volatility	137.52		%
Weighted average expected life	4.42
Weighted average risk free rate	1.10		%
Weighted average dividend yield	—		%
Weighted average fair value price	$	1.143
Aggregate fair value	$	290,000
Aggregate intrinsic value	$	220,000
Total compensation expense (credit) for three months ended October 31	$	124,000
Total compensation expense (credit) for six months ended October 31	$	217,000
Unrecognized compensation expense related to non-vested SARs granted	$	68,000
Expected period to recognize compensation expense related to non-vested SARs granted (in years)	1.94
Total liability for SARs on consolidated balance sheets	$	313,000