NOTE 4—FINANCING AGREEMENTS

Torotel Products had a financing agreement (the “previous financing agreement”) with Commerce Bank, N.A. that provided for a revolving line of credit, a guidance line of credit, and a real estate term loan. Torotel was the guarantor to all promissory notes under the previous financing agreement. On October 19, 2018, the debt that was outstanding under the previous financing agreement was fully repaid and extinguished, with an aggregate payoff amount of approximately $1,625,000 and an immaterial early prepayment fee.

On October 19, 2018, Torotel entered into three new business loan agreements (the “financing agreements”) with Cornerstone Bank (the “Bank”). The financing agreements provide for an asset-backed revolving line of credit, a guidance line of credit, and a real estate term loan. A summary of the notes issued under the financing agreements and debt outstanding as of April 30, 2018 and April 30, 2019 is provided below:


		2019		2018
6.25% asset-based revolving line of credit with a maturity date of October 19, 2019	$	975,000	$	-
6.25% guidance line of credit with a maturity date of October 19, 2019		54,000		-
5.35% mortgage note payable in monthly installments of $5,573, including interest, with final payment of $690,829 due October 19, 2023		795,000		-
Capital lease obligations (see Note 6)		98,000		170,000
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
4.00% working capital line of credit with a maturity date of October 20, 2018*		-		751,000
4.00% building line of credit with a maturity date of October 20, 2018*		-		465,000
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
4.05% note payable in monthly installments of $3,680, including interest, with final payment due January 10, 2020*		-		75,000
Total long-term debt		1,922,000		1,836,000
Less current installments		1,121,000		1,706,000
Long-term debt, excluding current installments	$	801,000	$	130,000

* Represents amounts previously due under the previous financing agreement that were repaid in full in October 2018.

The asset-based revolving line of credit is intended to be used for working capital purposes and has a capacity of $1,250,000. The asset-based revolving line of credit is renewable annually upon mutual agreement of Torotel and the Bank. The associated interest rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (6.25% as of April 30, 2019) or a floor of 5%. Monthly repayments of interest only are required under the asset-based revolving line of credit promissory note with the principal due at maturity. The borrowing base of the revolving line of credit is limited to 80% of eligible accounts receivable, plus 50% of eligible inventory, plus 80% of eligible equipment. This asset-based revolving line of credit is cross collateralized and cross defaulted with all other financing agreements of Torotel with the Bank. Pursuant to a Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financing agreements, the asset-based revolving line of credit is secured by a first lien on all business assets of Torotel. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base.

The equipment note is a guidance line of credit to be used for equipment purchases and has a capacity of $250,000 with a 12-month term that is renewable annually upon mutual agreement of Torotel and the Bank. Monthly repayments of interest are required, with principal due at maturity. The associated advance rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (currently 6.25%) or a floor of 5% (as listed above). Monthly repayments of interest only are required, with the principal due at maturity. This note is cross collateralized and cross defaulted with all other financing agreements of Torotel 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. Upon execution of the agreement, Torotel received initial advances of $54,000 under the guidance line of credit.

The real estate term loan is in the principal amount of $815,000 and has a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023. The associated interest rate is fixed at 5.35%. Monthly repayments of approximately $5,573, consisting of both interest and principal, are required. The final payment of approximately $690,829 is due on the maturity date. This real estate term loan is cross collateralized and cross defaulted with the other financing agreements. The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement.

The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions. Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants. Prepayments are allowed without penalty under all of the financing agreements.

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


Year Ending April 30,	Amount
2020	$	1,121,000
2021		47,000
2022		23,000
2023		25,000
2024		706,000
	$	1,922,000

Irrevocable Standby Letter of Credit

Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas (see Note 6), Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. 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		-