NOTE 3—FINANCING AGREEMENTS

On September 27, 2010, Torotel Products entered into a financing agreement (the “agreement”) with Commerce Bank, N.A (the “Bank”). The agreement provides for a revolving line of credit, a guidance line of credit, and a real estate term loan. Torotel serves as an additional guarantor to all notes described below. A summary of the notes issued under the agreement are provided below:


		2018		2017
4.05% mortgage note payable in monthly installments of $4,873, including interest, with final payment of $349,000 due January 27, 2019	$	373,000	$	415,000
4.00% working capital line of credit with a maturity date of October 20, 2018		751,000		465,000
4.00% building line of credit with a maturity date of October 20, 2018		465,000		-
Capital lease obligations (see Note 5)		170,000		-
Borrowings under an equipment financing line of credit:
4.75% note payable in monthly installments of $2,269, including interest, with final payment made on May 27, 2018		2,000		28,000
3.75% note payable in monthly installments of $2,112, including interest, with final payment made on April 10, 2018		-		25,000
4.05% note payable in monthly installments of $3,680, including interest, with final payment due January 10, 2020		75,000		115,000
Total long-term debt		1,836,000		1,048,000
Less current installments		1,706,000		603,000
Long-term debt, excluding current installments	$	130,000	$	445,000

Under the financing agreement with the Bank, prepayment of the mortgage note up to $100,000 per year is allowed without penalty so long as these funds are generated through internal cash flow and not borrowed from a separate financial institution. The mortgage note is cross collateralized and cross defaulted with all other credit facilities of Torotel Products and is secured by a first real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas.

Two separate promissory notes have been delivered by Torotel Products under the working capital line of credit, and amounts under this working capital revolving line of credit are available for working capital purposes. As of April 30, 2018, Torotel Products has only drawn upon the promissory note that matures on October 20, 2018 and no amounts were outstanding under the promissory note that matured on April 30, 2018. The working capital revolving line of credit is renewable annually. The associated interest rate of both promissory notes is equal to the greater of the floating Commerce Bank Prime Rate (4.75% as of April 30, 2018) or a floor of 4% (as listed above). Monthly repayments of interest only are required under both promissory notes with the principal due at maturity. The maximum borrowing of this line of credit is $1,250,000. This revolving line of credit is cross collateralized and cross defaulted with all other credit facilities and arrangements of Torotel Products with the Bank and is secured by a first lien on all business assets of Torotel Products. This working capital line of credit is scheduled to mature on October 20, 2018, and Torotel Products expects to negotiate an extension of that maturity date on similar terms.

On March 31, 2017, Torotel Products entered into a $500,000 building revolving line of credit, which is available for working capital purposes and is renewable annually. The associated interest rate is equal to the greater of the floating Commerce Bank Prime Rate (4.75% as of April 30, 2018) or a floor of 4% (as listed above). Monthly repayments of interest only are required with the principal due at maturity. The maximum borrowing of this line of credit is $500,000. This facility is cross collateralized and cross defaulted with all other facilities and is secured by a first lien on the building located at 620 North Lindenwood Drive in Olathe, Kansas. This revolving line of credit is scheduled to mature on October 20, 2018, and Torotel Products expects to negotiate an extension of that maturity date on similar terms.

The equipment note is a guidance line of credit to be used for equipment purchases. Monthly repayments consisting of both interest and principal are required. This note is cross collateralized and cross defaulted with all other facilities of Torotel Products and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel Products. The maximum borrowing of this line of credit is $500,000.

Torotel Products is required to comply with specified financial covenants of the financing agreement with Commerce Bank. As of April 30, 2018, Torotel Products was not in compliance with the covenants in such financing agreement that require a ratio of EBITDA (as defined in the financing agreement) to fixed charge coverage (as defined in the financing agreement) in excess of 1.100 to 1.000, and that Torotel maintain a minimum Tangible Net Worth (as defined in the financing agreement) of $4,500,000. A waiver for non-compliance with these covenants was received from Commerce Bank for the period ending April 30, 2018.

The amount of long-term debt maturities by year is as follows:


Year Ending April 30,	Amount
2019	$	1,706,000
2020		100,000
2021		30,000
	$	1,836,000

Irrevocable Standby Letter of Credit

Under the terms of a lease amendment for its building located at 520 N. Rogers Road in Olathe, Kansas (see Note 5), Torotel initially provided the landlord an irrevocable standby letter of credit in the amount of $350,000 as additional security, with the letter of credit requirement being reduced to $300,000 in accordance with the third amendment to the lease entered into on August 30, 2017 (the “Third Amendment”), The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon:


Date of Reduction		Amount of Reduction		Balance of Letter of Credit

January 1, 2020	$	75,000	$	225,000
January 1, 2021		75,000		150,000
January 1, 2022		75,000		75,000
January 1, 2023		75,000		-