NORTECH SYSTEMS INC — Interim / Quarterly Report 2001

Nov 14, 2001

10-Q 1 j1987_10q.htm 10-Q Prepared by MERRILL CORPORATION

*SECURITIES AND EXCHANGE COMMISSION*

*WASHINGTON, D.C. 20549*

*FORM 10-Q*

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

*For the quarterly period ended September 30, 2001.*

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

*For the Transition period from __ to __.*

*Commission File Number 0-13257.*

*NORTECH SYSTEMS INCORPORATED*

(Exact name of registrant as specified in its chapter)

MINNESOTA	41-1681094
(State of other

jurisdiction of Incorporation or organization) | (I.R.S. Employer

Identification No.) |
| 1120

Wayzata Blvd East Suite 201, Wayzata, MN 55391 | |
| (Address of principal

executive offices) (Zip Code) | |
| (952)

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 ý NO o

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, 2001, there were 2,361,192 shares of the Company's $.01 per share par value common stock outstanding.

(The remainder of this page was intentionally left blank.)

*NORTECH SYSTEMS INCORPORATED*

*FORM 10-Q*

QUARTER ENDED SEPTEMBER 30, 2001

*INDEX*

| PART I

- FINANCIAL INFORMATION
Item 1 - Financial

Statement s Notes

to Condensed Consolidated Financial Statements |
| Item

2 - Management's Discussion and Analysis of Financial Condition And Results

of Operations |
| PART II -

OTHER INFORMATION |
| Item 6 -

Exhibits and Reports on Form 8-K |
| SIGNATURES |

*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED BALANCE SHEETS*

*SEPTEMBER 30, 2001 AND DECEMBER 30, 2000*

| ASSETS | SEPTEMBER 30 — 2001 | | DECEMBER

31 — 2000 | |
| --- | --- | --- | --- | --- |
| | (UNAUDITED) | | (AUDITED) | |
| Current Assets | | | | |
| Cash and cash

equivalents | $ 150,135 | | $ 527,998 | |
| Accounts receivable,

net of allowance | 8,370,403 | | 8,580,791 | |
| Inventories: | | | | |
| Finished goods | 1,824,592 | | 1,298,626 | |
| Work in process | 1,993,004 | | 1,848,025 | |
| Raw materials | 9,803,726 | | 8,448,484 | |
| Prepaid expenses and

other | 354,415 | | 47,462 | |
| Deferred tax asset | 1,359,000 | | 1,422,000 | |
| Total Current

Assets | $ 23,855,275 | | $ 22,173,386 | |
| Property and

Equipment | | | | |
| Land and

building/leaseholds | $ 4,544,933 | | $ 4,386,421 | |
| Manufacturing equipment | 4,974,208 | | 4,594,607 | |
| Office and other

equipment | 2,414,042 | | 2,325,189 | |
| Total | $ 11,933,183 | | $ 11,306,217 | |
| Accumulated

depreciation | (5,902,407 | ) | (4,987,805 | ) |
| Net Property and

Equipment | $ 6,030,776 | | $ 6,318,412 | |
| Other Assets | | | | |
| Goodwill and other

intangible assets | 77,034 | | 99,750 | |
| Deferred tax asset | 112,000 | | 31,000 | |
| Other assets from

discontinued operations | 21,179 | | 30,401 | |
| Total Other Assets | $ 210,213 | | $ 161,151 | |
| Total Assets | $ 30,096,264 | | $ 28,652,949 | |

See accompanying notes to consolidated financial statements

*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED BALANCE SHEETS*

*SEPTEMBER 30, 2001 AND DECEMBER 30, 2000*

| LIABILITIES

AND SHAREHOLDERS' EQUITY | SEPTEMBER

30 — 2001 | | DECEMBER

31 — 2000 | |
| --- | --- | --- | --- | --- |
| | (UNAUDITED) | | (AUDITED) | |
| Current

Liabilities | | | | |
| Current

maturities of notes and capital lease payable | $ 3,079,050 | | $ 3,333,401 | |
| Accounts payable | 5,444,884 | | 5,743,836 | |
| Accrued payrolls

and commissions | 2,088,080 | | 1,668,748 | |
| Accrued income

taxes | 127,330 | | 182,330 | |
| Other

liabilities | 1,143,029 | | 1,200,296 | |
| Net current

liabilities from discontinued operations | 376,316 | | 411,236 | |
| Total Current

Liabilities | $ 12,258,689 | | $ 12,539,847 | |
| Long-Term Debt | | | | |
| Notes and

capital lease payable (net of current maturities) | $ 8,231,610 | | $ 7,665,536 | |
| 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; 2,361,192 and 2,361,055 shares issued

and outstanding at September 30, 2001 and December 31, 2000, respectively | 23,612 | | 23,611 | |
| Additional

paid-in capital | 12,159,004 | | 12,158,036 | |
| Accumulated

deficit | (2,826,651 | ) | (3,984,081 | ) |
| Total

Shareholders' Equity | $ 9,605,965 | | $ 8,447,566 | |
| Total

Liabilities & Shareholders' Equity | $ 30,096,264 | | $ 28,652,949 | |

See accompanying notes to consolidated financial statements

*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE THREE MONTHS ENDED*

*SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000*

| | SEPTEMBER

30 — 2001 | SEPTEMBER

30 — 2000 | |
| --- | --- | --- | --- |
| | (Unaudited) | (Unaudited) | |
| Sales | $ 13,706,447 | $ 13,724,356 | |
| Cost of Sales | 11,380,106 | 11,011,441 | |
| Gross Profit | $ 2,326,341 | $ 2,712,915 | |
| Selling, General

and Administrative Expenses | $ 1,471,102 | $ 1,586,008 | |
| Interest Expense | 158,931 | 314,448 | |
| Miscellaneous

(Income) Expense | 118,059 | (4,067 | ) |
| Net Income

Before Income Tax | $ 578,249 | $ 816,526 | |
| Income Tax

Expense | 217,000 | 269,910 | |
| Net Income | $ 361,249 | $ 546,616 | |
| Basic Income per

Share of Common Stock | $ 0.15 | $ 0.23 | |
| Diluted Income

per Share of Common Stock | $ 0.15 | $ 0.22 | |
| Weighted Average

Common Shares: | | | |
| Basic | 2,361,192 | 2,361,056 | |
| Diluted | 2,450,438 | 2,517,393 | |

See accompanying notes to consolidated financial statements

*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE NINE MONTHS ENDED*

*SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000*

| | SEPTEMBER 30 — 2001 | SEPTEMBER

30 — 2000 | |
| --- | --- | --- | --- |
| | (Unaudited) | (Unaudited) | |
| Sales | $ 41,173,806 | $ 39,492,921 | |
| Cost of Sales | 34,154,867 | 32,205,760 | |
| Gross Profit | $ 7,018,939 | $ 7,287,161 | |
| Selling, General

and Administrative Expenses | $ 4,413,368 | $ 4,239,135 | |
| Interest Expense | 587,764 | 886,214 | |
| Miscellaneous

(Income) Expense | 165,411 | (27,748 | ) |
| Net Income

Before Income Tax | $ 1,852,396 | $ 2,189,560 | |
| Income Tax

Expense | 695,000 | 784,715 | |
| Net Income | $ 1,157,396 | $ 1,404,845 | |
| Basic Income per

Share of Common Stock | $ 0.49 | $ 0.59 | |
| Diluted Income

per Share of Common Stock | $ 0.47 | $ 0.58 | |
| Weighted Average

Common Shares: | | | |
| Basic | 2,361,158 | 2,355,106 | |
| Diluted | 2,470,907 | 2,424,884 | |

See accompanying notes to consolidated financial statements

*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF CASH FLOWS*

*FOR THE NINE MONTHS ENDED*

*SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000*

| | SEPTEMBER 30 — 2001 | | SEPTEMBER

30 — 2000 | |
| --- | --- | --- | --- | --- |
| | (UNAUDITED) | | (UNAUDITED) | |
| Cash Flows from

Operating Activities | | | | |
| Net income from

continuing operations | $ 1,157,396 | | $ 1,404,845 | |
| Adjustments to

reconcile net income from | | | | |
| continuing

operations to net cash provided | | | | |
| (used) by

continuing operations | | | | |
| Depreciation and

amortization | 937,318 | | 789,172 | |
| Deferred taxes | (18,000 | ) | 785,000 | |
| Changes in

Operating Assets and Liabilities: | | | | |
| Accounts

receivable | 210,388 | | (2,027,748 | ) |
| Inventories | (2,026,187 | ) | (1,973,047 | ) |
| Prepaid expenses | (306,953 | ) | (64,134 | ) |
| Other assets | - | | 19,958 | |
| Accounts payable | (298,952 | ) | 637,019 | |
| Accrued payrolls

& commissions | 419,332 | | 1,035,698 | |
| Accrued income

taxes | (55,000 | ) | - | |
| Other

liabilities | (57,267 | ) | 350,127 | |
| Net Cash Provided

(Used) by Continuing Operations | $ (37,925 | ) | $ 956,890 | |
| Net Cash Provided

(Used) by Discontinued Operations | (25,698 | ) | 218,463 | |
| Net Cash Provided

(Used) by Operating Activities | $ (63,623 | ) | $ 1,175,353 | |
| Cash Flows from

Investing Activities: | | | | |
| Acquisition of

equipment | (626,966 | ) | (669,397 | ) |
| Net Cash Used by

Investing Activities | $ (626,966 | ) | $ (669,397 | ) |
| Cash Flows from

Financing Activities: | | | | |
| Proceeds from notes

payables | $ 7,600,261 | | $ 3,000,873 | |
| Payments on notes and

capital lease payable | (7,288,503 | ) | (3,748,978 | ) |
| Issuance of common

stock | 968 | | 3,493 | |
| Net Cash Provided

(Used) by Financing Activities | $ 312,725 | | $ (744,612 | ) |
| Net Decrease in

Cash and Cash Equivalents | $ (377,864 | ) | $ (238,656 | ) |
| Cash and Cash

Equivalents - Beginning | 527,998 | | 453,500 | |
| Cash and Cash

Equivalents - Ending | $ 150,135 | | $ 214,844 | |

See accompanying notes to consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The operating results of the interim periods presented are not necessarily indicative of the results expected for the year ending December 31, 2001 or for any other interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2000 included in the Company’s Annual Report Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission.

NOTE 2. NEW ACCOUNTING PRONOUNCMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.141 “Business Combinations”, which is required for all business combinations initiated after June 30, 2001. The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations. The Company does not expect that the new standard will have a material effect on the results of operations or cash flows.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.142 (SFAS 142) "Goodwill and Other Intangible Assets". The statement addresses accounting and reporting for (i) intangible assets at acquisition and (ii) for intangible assets and goodwill subsequent to their acquisition. As it relates to the Company's goodwill and intangible assets in existence at June 30, 2001, the statement requires that management reassess the useful lives and amortization period of such assets. For those with an indefinite useful life, periodic amortization is to be discontinued and an annual impairment test, beginning January 1, 2002, is to be established. The Company's Management does not feel as if this pronouncement will have material impact on its statement of financial condition or cash flows at the effective date and is currently assessing the impact that the pronouncement may have on its results of operations in fiscal 2002 and thereafter.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Impairment or Disposal of Long-Lived Assets” (SFAS 144), which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The provisions of this statement provide a single accounting model for impairment of long-lived assets. The Company is in the process of determining the impact, if any, of adopting SFAS 144.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(1.) Results of Operations for Quarter and Period Ended September 30, 2001

The Company had revenues of $13,706,447 compared to revenues of $13,724,356 for the quarters ended September 30, 2001 and 2000, respectively. The decrease in revenues resulted primarily from order delays and postponements from several large customers. The net income for the three months ended September 30, 2001 was $361,249 or $.15 per share, compared to a net income of $546,616 or $.23 per share, for the three months ended September 30, 2000. The unfavorable variance in net income for the quarter ended September 30, 2001 compared to the prior year quarter was the result of realizing lower margins on reduced revenue levels as well as changes in the mix of products manufactured.

The Company had revenues of $41,173,806, compared to revenues of $39,492,921, for the nine-month periods ended September 30, 2001 and 2000, respectively. The increased revenues result primarily from additional revenues generated from internal customer sales growth. The net income for the nine- month period ended September 30, 2001, was $1,157,396 or $.49 per share, compared to net income of $1,404,845 or $.59 per share for the same period in 2000. The year to date results reflects the effect of the product mix change from high margin product to low margin product due to the downturn in the economy. To offset the effect in future quarters, the Company has taken aggressive cost-reduction measures across the corporation, including consolidation of plant operations and reassessment of personnel needs.

The Company's 90 day order backlog was $11,500,000 as of September 30, 2001, compared with $10,750,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the fourth quarter of 2001 to be higher than third quarter of 2001.

(2.) Liquidity and Capital Resources.

The Company's working capital increased to $11,596,586 at the close of third quarter 2001, compared to $9,633,539 as of December 31, 2000. The Company believes that its financial stability will continue to improve during 2001 and would expect that its operating cash flow and available credit faculties will be sufficient to fund the expected growth in the near term.

Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although Nortech Systems, Inc. believes these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

• Volatility in the marketplace which may affect market supply and demand the Company’s products;

• Increased competition;

• Changes in the reliability and efficiency of the Company’s operating facilities or those of third parties;

• Risks related to availability of labor;

• General economic, financial and business conditions that could the Company’s financial condition and results of operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by the Company. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. The Company undertakes no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

*PART II - OTHER INFORMATION*

Item 6. 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.

| Dated: November 6, 2001 | NORTECH

SYSTEMS INCORPORATED |
| --- | --- |
| By: | /s/ Quentin E. Finkelson |
| | Quentin E. Finkelson |
| | President and Chief |
| | Executive Officer |
| By: | /s/ Garry M. Anderly |
| | Garry M. Anderly |
| | Principal Financial |
| | Officer and Principal |
| | Accounting Officer |