NORTECH SYSTEMS INC — Interim / Quarterly Report 1999

Nov 15, 1999

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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

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/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities exchange Act of 1934

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For the quarterly period ended September 30, 1999.

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/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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For the Transition period from to

Commission File Number 0-13257.

NORTECH SYSTEMS INCORPORATED

(Exact name of registrant as specified in its chapter)

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MINNESOTA (State of other jurisdiction of Incorporation or organization)	41-1681094 (I.R.S. Employer Identification No.)
641 EAST LAKE ST. SUITE 244, WAYZATA, MN (Address of principal executive offices)	55391 (Zip Code)

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(612) 473-4102 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 per share per value.

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

ZEQ.=1,SEQ=1,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=blank,FILE='DISK037:[99STP4.99STP2904]DA2904A.;6',USER='PREILLY',CD='12-NOV-1999;19:58'

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APPLICABLE ONLY TO CORPORATE REGISTRANTS;

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of latest practicable data.

As of October 31, 1999, there were 2,351,377 shares of the Company's $.01 per share par value common stock outstanding.

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NORTECH SYSTEMS INCORPORATED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999

INDEX

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PART I -	FINANCIAL INFORMATION		Page
	Item 1 -	Financial Statements	4-8
	Item 2 -	Management's Discussion and Analysis of Financial Condition	9
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	9
		Results of Operations	9
		Discontinued Operations	9
		Segment Reporting Information	10-11
PART II -	OTHER INFORMATION
	Item 2 -	Exhibits and Reports on Form 8-K	12
SIGNATURES			13

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ZEQ.=1,SEQ=3,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=3,FILE='DISK037:[99STP4.99STP2904]DG2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

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NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS FOR THE PERIOD NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

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	Sept. 30 1999 (Unaudited)
Assets
Current Assets
Cash and cash equivalents	$ 263,656	$	375,528
Accounts receivable, net	5,423,067		4,647,376
Inventories:
Finished goods	272,002		1,737,483
Work in process	1,038,954		1,386,502
Raw materials	6,329,113		4,681,384
Total inventories	$ 7,640,069	$	7,805,369
Prepaid expenses and other	803,613		941,728
Net Current Assets of Discontinued Operations	2,000,728		2,431,486
Total current assets	$ 16,131,133	$	16,201,487
PLANT, Property, and Equipment (at Cost)
Land and Building/leaseholds	$ 3,937,086	$	3,903,236
Manufacturing equipment	4,712,265		3,923,015
Office and other equipment	2,218,330		2,433,476
	$ 10,867,681	$	10,259,727
Less accumulated depreciation and amortization	(4,651,088	)	(3,968,837	)
Net Property and Equipment for Continuing Operations	$ 6,216,593	$	6,290,890
Net Property and Equipment for Discontinued Operations	373,004		474,181
Other Assets
Goodwill and other intangible assets	126,831		144,210
Deferred tax asset	475,000		475,000
Other assets	31,000		57,250
Total Other Assets from Continuing Operations	$ 632,831		676,460
Total Other Assets from Discontinued Operations	1,011,165		1,085,544
Total Assets	$ 24,364,726	$	24,728,562

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See notes to consolidated financials statements

ZEQ.=1,SEQ=4,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=4,FILE='DISK037:[99STP4.99STP2904]DH2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS LIABILITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

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	Sept. 30 1999 (Unaudited)
Liabilities and Shareholders' Equity
Current Liabilities:
Current maturities of long-term debt	$ 902,834	$	810,934
Accounts payable	2,356,800		3,232,593
Accrued payrolls and commissions	1,213,797		682,539
Other	4,077,711		491,388
Total Current Liabilities	$ 8,551,142	$	5,217,454
Long-Term Debt
Notes Payable (net of current maturities shown above)	$ 10,370,693	$	11,146,537
Shareholders' Equity:
Preferred Stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding	$ 250,000	$	250,000
Common Stock - $.01 par value; 9,000,000 shares authorized; 2,351,377 and 2,312,262 shares issued and outstanding	23,514		23,514
Additional paid-in capital	12,131,045		12,131,045
Accumulated deficit	(6,961,668	)	(4,039,988	)
Total Shareholders' Equity	$ 5,442,891	$	8,364,571
Total Liabilities & Shareholders' Equity	$ 24,364,726	$	24,728,562

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See notes to consolidated financials statements

ZEQ.=2,SEQ=5,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=5,FILE='DISK037:[99STP4.99STP2904]DH2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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Sales	Sept. 30 1999 (Unaudited) — $ 9,333,901		Sept. 30 1998 (Unaudited) — $ 8,322,743
Cost of Sales	7,786,654		6,889,561
Gross Profit	$ 1,547,247		$ 1,433,182
Selling, General and Admin.	1,017,290		880,216
Engineering/Reseach & Development	0		0
Misc. (Income) Expense, net	(35,920	)	334
Interest Expense	145,799		183,894
Net Income From Continuing Operations Before Income Tax	$ 420,078		$ 368,738
Income Tax-Continuing Operations	147,027		141,007
Net Income-Continuing Operations	$ 273,051		$ 227,731
Discontinued Operations, Net of Income Taxes
Net Income/(Loss )From Operations	0		(101,012	)
Estimated (Loss )on Sale of Operations	(1,725,187	)	0
Total Discontinued Operations, Net of Income Taxes	$ (1,725,187	)	$ (101,012	)
Net Income(Loss)	(1,452,136	)	126,719
Income/(Loss) per Share of Common Stock
From Continuing Operations	$ 0.11		$ 0.09
From Discontinued Operations	$ (0.72	)	$ (0.04	)
Total Income/(Loss) per Share of Common Stock	$ (0.61	)	$ 0.05
Weighted Average Number of Shares Outstanding	2,351,377		2,345,262

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See notes to consolidated financials statements

ZEQ.=1,SEQ=6,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=6,FILE='DISK037:[99STP4.99STP2904]DJ2904A.;6',USER='PREILLY',CD='12-NOV-1999;19:58'

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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Sales	Sept. 30 1999 (Unaudited) — $ 28,223,053		Sept. 30 1998 (Unaudited) — $ 25,926,372
Cost of Sales	23,341,626		21,617,404
Gross Profit	$ 4,881,428		$ 4,308,968
Selling, General and Admin.	3,075,903		2,619,700
Engineering/Reseach & Development	0		0
Misc. (Income) Expense, net	(23,536	)	(2,974	)
Interest Expense	438,919		492,126
Net Income From Continuing Operations Before Income Tax	$ 1,390,142		$ 1,200,116
Income Tax-Continuing Operations	486,549		470,212
Net Income-Continuing Operations	$ 903,593		$ 729,904
Discontinued Operations, Net of Income Taxes
Net Income/(Loss) From Operations	(361,299	)	(168,915	)
Estimated (Loss )on Sale of Operations	(2,905,187	)	0
Total Discontinued Operations, Net of Income Taxes	$ (3,266,486	)	$ (168,915	)
Net Income (Loss)	$ (2,362,893	)	$ 560,989
Income/(Loss) per Share of Common Stock
From Continuing Operations	0.38		0.31
From Discontinued Operations	-1.38		-0.07
Total Income/(Loss) per Share of Common Stock	$ -1.00		$ 0.24
Weighted Average Number of Shares Outstanding	2,351,377		2,345,262

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See notes to consolidated financials statements

ZEQ.=1,SEQ=7,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=7,FILE='DISK037:[99STP4.99STP2904]DK2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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	Sept. 30 1999 (Unaudited)
Cash Flows from Operating Activities
Net Income	$ 903,593	$	729,903
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization	682,251		568,962
Deferred Taxes
Loss on Sale of Discontinued operations	(2,905,187	)
Changes in Operating Assets and Liabilities:
Accounts receivable	(775,691	)	(218,530	)
Inventories	165,300		(984,820	)
Prepaid expenses	138,115		150,574
Other assets	43,629		6,114
Advances to discontinued operation	(651,170	)	(1,096,026	)
Accounts payable	(875,793	)	(47,297	)
Accrued payrolls	531,258		39,295
Other accruals	3,819,338		335,953
Net cash used by operating activity	1,075,643		(515,872	)
Cash Flows from Investing Activities:
Acquistion of equipment	(607,954	)	(86,111	)
Proceeds from sale of Assets	0		0
Payment of Pref. Stock Dividend	0		5,250
Net cash used by investing activity	(607,954	)	(80,861	)
Cash Flows from Financing Activities:
Net borrowing of Long Term debt	75,000		627,014
Payments of long term debt	(746,461	)	(545,782	)
Change in current debt	91,900		(151,693	)
Net cash provided by financing activities	(579,561	)	(70,461	)
Net Increase/(Decrease) in Cash	(111,872	)	(667,194	)
Cash at Beginning of Period	375,528		913,862
Cash at End of Period	$ 263,656	$	246,668

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See notes to consolidated financials statements

ZEQ.=1,SEQ=8,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=8,FILE='DISK037:[99STP4.99STP2904]DL2904A.;5',USER='PREILLY',CD='12-NOV-1999;19:58'

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations for Period Ended September 30, 1999

Note to Consolidated Financial Statements

(1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 1998.

Effective June 30, 1999, the Company made a decision to sell Imaging Technology Division (Display Product Segment) and Nortech Medical Services (Medical Management Segment). The following management discussion related only to the continuing operation of contract manufacturing. See below, the details of discontinued operations.

For the quarter ended September 30, 1999, the Company had revenues of $9,333,901 compared to revenues of $8,322,743 for the quarter ended September 30, 1998. The increase in revenues resulted primarily from the additional revenues generated from internal growth. The net income for the three months ended September 30, 1999 was $273,051 or $.11 per share, compared to a net income of $227,731 or $.09 per share, for the three months ended September 30, 1998. The net income for the quarter ended June 30, 1999 was primarily impacted by increased gross profit from the increased revenue offset by increased selling expenses.

Company's 90 day order backlog was $8,730,000 as of September 30, 1999, compared to $8,590,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the fourth quarter of 1999 to be about the same as the third quarter of 1999.

(2) DISCONTINUED OPERATION On June 30, 1999, The Company, decided to sell the Imaging Technologies operation (Display Product Segments) and Nortech Medical Services (Medical Management Segment). As of July 30, The Company has interested buyers that want to sign confidentiality agreements with The Company. Although it is difficult to predict, the Company expects to complete the sales in the fourth quarter of 1999. Display Products and Medical Management are reported as discontinued operations, and the consolidated financial statements have been reclassified to segregate the net assets and operating results of the business.

During the third quarter of 1999, after talks with several potential buyers, it became apparent that Imaging division does not command the sale price we were anticipating in the second quarter. Therefore, we have increased our estimated loss on sale of discontinued operations. The third quarter loss for discontinued operation was $1,725,187.

The estimated loss recorded year to date during 1999 on the sale of the discontinued operation, was $4,469,518, which included a reduction in asset value of $2,950,000 and a reduction for anticipated closing costs and operating losses until disposal, of $1,519,518. The loss was reported net of an income tax benefit of $1,564,331, for an after-tax loss of $2,905,187.

(3) SEGMENT REPORTING INFORMATION Nortech Systems, Inc manufactures and sells a variety of products used in the computer, medical, government and defense industries, primarily for the commercial industrial market. The Company's principal businesses are based upon the nature of the manufacturing operations of the respective location.

Nortech Systems Incorporated Business Segment Information for The Nine Months Ended September 30, 1999 and September 30, 1998

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	Sept. 30 1999 (Unaudited)		Sept. 30 1998 (Unaudited)
Business Segment Net Revenues
Contract Manufacturing	$ 28,223,053		$ 25,926,372
Display	1,763,414		3,458,450
Medical	319,082		314,797
Total	$ 30,305,549		$ 29,699,619
Business Segment Profit/(Loss)
Contract Manufacturing	$ 903,593		$ 729,904
Display	(3,090,859	)	(96,882	)
Medical Management	(175,627	)	(72,033	)
Total	$ (2,362,893	)	$ 560,989

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	Sept. 30 1999 (Unaudited)	December 31, 1998 (Audited)
Business Segment Assets
Contract Manufacturing	$ 20,979,828	$ 20,737,352
Display	3,214,927	3,846,402
Medical Management	169,971	144,808
Total	$ 24,364,726	$ 24,728,562

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Liquidity and Capital Resources.

The Company's working capital decreased to $7,579,991 during the third quarter of 1999, compared to $9,080,589 as of December 31, 1998. The main reason for the decrease, was the recording of the loss from discontinued operations. The Company believes that its financial stability will continue to improve during 1999 and would expect that its operating cash flow and available credit faculties will be sufficient to fund the expected growth in the near term. ZEQ.=2,SEQ=10,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=10,FILE='DISK037:[99STP4.99STP2904]DN2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

Update On Year 2000 Status

Nortech Systems, Inc recognizes the dangers of the "Year 2000 Problem". To ensure a minimum negative impact on business operations, Nortech has established a Y2K Initiative. The Y2K Initiative addresses the effect on the company, our vendors and our customers. We have completed the inventory and evaluation phase, and are nearing completion of the implementation phase. Testing is nearly completed on most systems. Monitoring and evaluation will continue throughout 1999 and into 2000 until we are sure all issues have been properly resolved. ZEQ.=3,SEQ=11,EFW="9927740",CP="NORTECH SYSTEMS INCORPORATED",DN="1",FOLIO=11,FILE='DISK037:[99STP4.99STP2904]DN2904A.;7',USER='PREILLY',CD='12-NOV-1999;19:58'

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PART II — OTHER INFORMATION

Item 2. Exhibits and Reports on Form 8-K.

None

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Dated: November 11, 1999
By:	/s/ QUENTIN E. FINKELSON Quentin E. Finkelson Its President and Chief Executive Officer
By:	/s/ GARRY M. ANDERLY Garry M. Anderly Principal Financial Officer and Principal Accounting Officer

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NORTECH SYSTEMS INCORPORATED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999 INDEX

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NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS FOR THE PERIOD NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS LIABILITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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NORTECH SYSTEMS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

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Nortech Systems Incorporated Business Segment Information for The Nine Months Ended September 30, 1999 and September 30, 1998

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PART II — OTHER INFORMATION

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SIGNATURES

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