NORTECH SYSTEMS INC — Interim / Quarterly Report 2001

Aug 13, 2001

10-Q 1 j1431_10q.htm 10-Q Prepared by MerrillDirect

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 June 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 July 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 JUNE 30, 2001

INDEX

| PART
I -
FINANCIAL INFORMATION — Item 1 | - | Financial Statements |
| --- | --- | --- |
| | | 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 JUNE 30, 2001 AND DECEMBER 30, 2000

ASSETS	JUNE 3 — 2001		DECEMBER 31 — 2000
	(UNAUDITED)		(AUDITED )
Current Assets
Cash
and cash equivalents	$ 316,608		$ 527,998
Accounts
receivable, net of allowance	8,142,635		8,580,791
Inventories:
Finished
goods	1,982,937		1,298,626
Work
in process	2,295,491		1,848,025
Raw
materials	8,811,805		8,448,484
Prepaid
expenses and other	158,907		47,462
Deferred
tax asset	1,329,000		1,422,000
Total
Current Assets	$ 23,037,383		$ 22,173,386
Property and Equipment
Land
and building/leaseholdsat Cost:	$ 4,510,406		$ 4,386,421
Manufacturing
equipment	4,910,758		4,594,607
Office
and other equipment	2,398,792		2,325,189
Total	$ 11,819,956		$ 11,306,217
Accumulated
depreciation	(5,615,174	)	(4,987,805	)
Net
Property and Equipment	$ 6,204,782		$ 6,318,412
Other Assets
Goodwill
and other intangible assets	79,066		99,750
Deferred
tax asset	127,000		31,000
Other
assets from discontinued operations	24,563		30,401
Total
Other Assets	$ 230,629		161,151
Total
Assets	$ 29,472,794		$ 28,652,949

See notes to consolidated financial statements

CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000

LIABILITIES AND SHAREHOLDERS' EQUITY	JUNE 30 — 2001		DECEMBER 31 — 2000
	(UNAUDITED)		(AUDITED )
Current Liabilities
Current
maturities of notes and capital lease payable	$ 3,078,506		$ 3,333,401
Accounts payable	5,551,780		5,743,836
Accrued
payrolls and commissions	1,706,497		1,668,748
Accrued
income taxes	228,330		182,330
Other
liabilities	926,239		1,200,296
Net
current liabilities from discontinued operations	472,288		411,236
Total
Current Liabilities	$ 11,963,640		$ 12,539,847
Long-Term Debt
Notes
and capital lease payable (net of current maturities)	$ 8,268,165		$ 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 hares authorized; 2,361,192 and 2,361,055 shares issued and outstanding	23,612		23,611
Additional
paid-in capital	12,159,004		12,158,036
Accumulated
deficit	(3,191,627	)	(3,984,081	)
Total
Shareholders' Equity	$ 9,240,989		$ 8,447,566
Total
Liabilities & Shareholders' Equity	$ 29,472,794		$ 28,652,949

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

	JUNE 30 — 2001		JUNE 30 — 2000
	(Unaudited)		(Unaudited )
Sales	$ 12,622,055		$ 13,199,584
Cost of Sales	10,622,729		10,838,359
Gross Profit	$ 1,999,326		$ 2,361,225
Selling, General and
Administrative Expenses	$ 1,344,838		$ 1,330,228
Interest Expense	187,328		276,464
Miscellaneous (Income)
Expense	(15,880	)	37,719
Net Income Before
Income Tax	$ 483,040		$ 716,814
Income Tax Expense	181,000		268,805
Net Income	$ 302,040		$ 448,009
Basic Income per Share
of Common Stock	$ 0.13		$ 0.19
Diluted Income per
Share of Common Stock	$ 0.12		$ 0.19
Weighted Average
Common Shares:
Basic	2,361,192		2,352,884
Diluted	2,481,401		2,393,692

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

	JUNE 30 — 2001	JUNE 30 — 2000
	(Unaudited)	(Unaudited )
Sales	$ 27,467,359	$ 25,768,565
Cost of Sales	22,774,761	21,194,319
Gross Profit	$ 4,692,598	$ 4,574,246
Selling, General and
Administrative Expenses	$ 2,942,266	$ 2,653,127
Interest Expense	428,833	571,766
Miscellaneous (Income)
Expense	47,352	(23,681	)
Net Income Before
Income Tax	$ 1,274,147	$ 1,373,034
Income Tax Expense	478,000	514,805
Net Income	$ 796,147	$ 858,229
Basic Income per Share
of Common Stock	$ 0.34	$ 0.36
Diluted Income per
Share of Common Stock	$ 0.32	$ 0.36
Weighted Average
Common Shares:
Basic	2,361,146	2,352,884
Diluted	2,481,147	2,379,609

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

	JUNE 30 — 2001		JUNE 30 — 2000
	(UNAUDITED)		(UNAUDITED )
Cash Flows from
Operating Activities
Net
income from continuing operations	$ 796,147		$ 858,229
Adjustments
to reconcile net income from continuing operations to net cash provided (used) by continuing operations
Depreciation
and amortization	648,053		512,291
Deferred
taxes	(3,000	)	515,000
Changes in Operating Assets and
Liabilities:
Accounts
receivable	438,156		(2,539,675	)
Inventories	(1,495,098	)	(1,309,412	)
Prepaid
expenses	(111,445	)	(61,956	)
Other
assets	-		18,920
Accounts
payable	(192,056	)	1,739,235
Accrued
payrolls & commissions	37,749		556,083
Accrued
income taxes	46,000		-
Other
liabilities	(274,057	)	9,206
Net
Cash Provided (Used) by Continuing Operations	$ (109,551	)	$ 297,921
Net
Cash Provided by Discontinued Operations	66,890		218,463
Net
Cash Provided (Used) by Operating Activities	$ (42,661	)	$ 516,384
Cash Flows from
Investing Activities:
Acquisition
of equipment	(513,739	)	(486,257	)
Net
Cash Used by Investing Activities	$ (513,739	)	$ (486,257	)
Cash Flows from
Financing Activities:
Proceeds
from notes payables	$ 4,459,000		$ 1,950,873
Payments
on notes and capital lease payable	(4,114,959	)	(2,088,292	)
Issuance
of common stock	969		3,493
Net
Cash Provided (Used) by Financing Activities	$ 345,010		$ (133,926	)
Net Decrease in Cash
and Cash Equivalents	$ (211,390	)	$ (103,799	)
Cash and Cash
Equivalents - Beginning	527,998		453,500
Cash and Cash Equivalents
- Ending	$ 316,608		$ 349,701

See 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 generally accepted accounting principles 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 generally accepted accounting principles 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 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 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.

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

(1.) Results of Operations for Quarter and Period Ended June 30, 2001 The Company had revenues of $12,622,055 compared to revenues of $13,199,584 for the quarters ended June 30, 2001 and 2000, respectively. The decrease in revenues resulted primarily from order delays and move-outs from several large customers. The net income for the three months ended June30, 2001 was $302,040 or $.13 per share, compared to a net income of $448,009 or $.19 per share, for the three months ended June 30, 2000. The unfavorable variance in net income for the quarter ended June 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 $27,467,359, compared to revenues of $25,768,565, for the six-month periods ended June 30, 2001 and 2000, respectively. The increased revenues result primarily from additional revenues generated from internal growth. The net income for the six month period ended June 30, 2001, was $796,147 or $.34 per share, compared to net income of $858,229 or $.36 per share for the same period in 2000.

The year to date results reflects the effects of 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. In July, the Company opened a service and repair center in Baxter, Minn., to refurbish printed circuit board assemblies and higher-level assemblies. The company also recently signed a four-year service contract with a major medical OEM and expects this facility to contribute positively in future quarters.

The Company's 90 day order backlog was $10,750,000 as of June 30, 2001, compared with $10,550,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the third quarter of 2001 to be higher than second quarter of 2001.

(2.) Liquidity and Capital Resources. The Company's working capital increased to $11,073,743 during the second quarter of 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 for Nortech
Systems Inc.’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 affect Nortech Systems
Inc.’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 Nortech Systems Inc. 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: August 10, 2001 NORTECH SYSTEMS INCORPORATED

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