NORTECH SYSTEMS INC - Interim / Quarterly Report 2002

10-Q 1 j4511_10q.htm 10-Q

*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, 2002.*

*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.)r |
| 1120

Wayzata Blvd East Suite 201,Wayzata,

MN 55391 | |
| (Address of principal

executive offices)

(Zip Code) | |

| (952)

473-4102
(Registrants 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

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APPLICABLE ONLY TO CORPORATE REGISTRANTS

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

As of July 31, 2002, there were 2,413,236 shares of the Companys $.01 per share par value common stock outstanding.

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

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*NORTECH SYSTEMS INCORPORATED*

*FORM 10-Q*

QUARTER ENDED JUNE 30, 2002

*INDEX*

PART I		FINANCIAL INFORMATION — Item 1		Financial Statements
				Notes to Condensed Consolidated Financial Statements
		Item 2		Managements

Discussion and Analysis of Financial Condition |
| | | | | And

and Qualitative Disclosures About Market Risk |
| PART

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*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED BALANCE SHEETS*

*JUNE 30, 2002 AND DECEMBER 31, 2001*

| ASSETS | JUNE 30 — 2002 | | DECEMBER

31 — 2001 | |
| --- | --- | --- | --- | --- |
| | (UNAUDITED) | | (AUDITED) | |
| Current Assets | | | | |
| Cash and cash

equivalents | $ 661,763 | | $ 181,730 | |
| Accounts

receivable, net of allowance | 7,857,639 | | 9,110,730 | |
| Inventories: | | | | |
| Finished goods | 2,315,732 | | 1,698,373 | |
| Work in process | 1,375,205 | | 1,676,730 | |
| Raw materials | 7,702,629 | | 9,076,376 | |
| Total

Inventories | $ 11,393,566 | | $ 12,451,479 | |
| Prepaid expenses

and other | 392,847 | | 306,428 | |
| Deferred tax

assets | 1,690,000 | | 1,492,000 | |
| Total Current

Assets | $ 21,995,815 | | $ 23,542,367 | |
| Property and

building/leaseholds | $ 4,700,963 | | $ 4,550,966 | |
| Manufacturing

equipment | 5,366,137 | | 4,878,954 | |
| Office and other

equipment | 2,614,026 | | 2,434,429 | |
| Total Property

and Equipment | $ 12,681,126 | | $ 11,864,349 | |
| Accumulated

depreciation | (6,646,305 | ) | (5,999,451 | ) |
| Net Property and

other intangible assets | 1,764,144 | | 83,478 | |
| Other assets | 114,307 | | | |
| Other assets

from discontinued operations | 13,078 | | 16,795 | |
| Total Other

Assets | $ 1,891,529 | | 100,273 | |
| Total Assets | $ 29,922,165 | | $ 29,507,538 | |

See accompanying notes to consolidated financial statements

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*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED BALANCE SHEETS*

*JUNE 30, 2002 AND DECEMBER 31, 2001*

| LIABILITIES

AND SHAREHOLDERS EQUITY | JUNE 30 — 2002 | | DECEMBER

31 — 2001 | |
| --- | --- | --- | --- | --- |
| | (UNAUDITED) | | (AUDITED) | |
| Current

maturities of notes and capital lease payable | $ 869,918 | | $ 501,681 | |
| Accounts payable | 5,319,035 | | 4,866,442 | |
| Accrued payrolls

and commissions | 2,138,004 | | 2,171,124 | |
| Accured income

taxes | 172,572 | | 538,706 | |
| Other

liabilities | 739,401 | | 845,586 | |
| Net current

liabilities from discontinued operations | 67,264 | | 159,484 | |
| Total Current

Liabilities | $ 9,306,194 | | $ 9,083,023 | |
| Long-Term

capital lease payable (net of current maturities) | $ 8,651,324 | | $ 9,791,722 | |
| Deferred tax

liability | 146,000 | | 61,000 | |
| Total Long-Term

Liabilities | $ 8,797,324 | | $ 9,852,722 | |
| Total

Liabilities | $ 18,103,518 | | $ 18,935,745 | |
| Shareholders

$1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding | $ 250,000 | | $ 250,000 | |
| Common Stock -

$0.01 par value; 9,000,000 shares authorized; 2,407,629 and 2,361,192 shares

issued and outstanding at June 30, 2002 and December 31, 2001, respectively | 24,076 | | 23,612 | |
| Additional

paid-in capital | 12,333,174 | | 12,179,399 | |
| Accumulated

deficit | (788,603 | ) | (1,881,218 | ) |
| Total

Shareholders Equity | $ 11,818,647 | | $ 10,571,793 | |
| Total

Liabilities & Shareholders Equity | $ 29,922,165 | | $ 29,507,538 | |

See accompanying notes to consolidated financial statements

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*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE THREE MONTHES ENDED*

*JUNE 30, 2002 AND JUNE 30, 2001*

	JUNE 30 — 2002	JUNE 30 — 2001
	(Unaudited)	(Unaudited)
Net Sales	$ 15,243,680	$ 12,622,055
Cost of Goods

Sold | 12,332,378 | | 10,622,729 | |
| Gross Profit | $ 2,911,302 | | $ 1,999,326 | |
| Selling Expenses | 710,186 | | 567,427 | |
| General and

Administrative Expenses | 1,156,610 | | 777,411 | |
| Interest Income | (6,048 | ) | (5,067 | ) |
| Miscellaneous

(Income) Expense | 28,763 | | (10,813 | ) |
| Interest Expense | 139,522 | | 187,328 | |
| Income from

Taxes | $ 882,269 | | $ 483,040 | |
| Income Tax Expense | 348,000 | | 181,000 | |
| Income from

Continuing Operations | $ 534,269 | | $ 302,040 | |
| Basic Income per

Share of Common Stock | $ 0.22 | | $ 0.13 | |
| Diluted Income

per Share of Common Stock | $ 0.21 | | $ 0.12 | |
| Weighted Average

Common Shares: | | | | |
| Basic | 2,394,189 | | 2,361,192 | |
| Diluted | 2,536,958 | | 2,481,401 | |

See accompanying notes to consolidated financial statements

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*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE SIX MONTHS ENDED*

*JUNE 30, 2002 AND JUNE 30, 2001*

	JUNE 30 — 2002	JUNE 30 — 2001
	(Unaudited)	(Unaudited)
Net Sales	$ 30,606,576	$ 27,467,359
Cost of Goods

Sold | 24,915,809 | | 22,774,761 | |
| Gross Profit | $ 5,690,767 | | $ 4,692,598 | |
| Selling Expenses | 1,424,251 | | 1,261,090 | |
| General and

Administrative Expenses | 2,096,145 | | 1,681,176 | |
| Interest Income | (7,462 | ) | (10,486 | ) |
| Miscellaneous

Expense | 41,585 | | 57,838 | |
| Interest Expense | 232,059 | | 428,833 | |
| Income from

Taxes | $ 1,904,189 | | $ 1,274,147 | |
| Income Tax

Expense | 751,000 | | 478,000 | |
| Income from

Continuing Operations | $ 1,153,189 | | $ 796,147 | |
| Basic Income per

Share of Common Stock | $ 0.48 | | $ 0.34 | |
| Diluted Income

per Share of Common Stock | $ 0.46 | | $ 0.32 | |
| Weighted Average

Common Shares: | | | | |
| Basic | 2,383,190 | | 2,361,146 | |
| Diluted | 2,515,112 | | 2,481,147 | |

See accompanying notes to consolidated financial statements

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*NORTECH SYSTEMS INCORPORATED*

*CONSOLIDATED STATEMENTS OF CASH FLOWS*

*FOR THE SIX MONTHS ENDED*

*JUNE 30, 2002 AND JUNE 30, 2001*

	JUNE 30 — 2002		JUNE 30 — 2001
	(Unaudited)		(Unaudited)
Cash Flows from

continuing operations | $ 1,153,189 | | $ 796,147 | |
| Adjustments to

reconcile net income from continuing operations to net cash provided (used)

amortization | 598,028 | | 648,053 | |
| Deferred taxes | (283,000 | ) | (3,000 | ) |
| Changes in

receivable | 1,271,883 | | 438,156 | |
| Inventories | 1,102,526 | | (1,495,098 | ) |
| Prepaid expenses

and other | (26,694 | ) | (111,445 | ) |
| Other assets | (103,295 | ) | | |
| Accounts payable | (199,528 | ) | (192,056 | ) |
| Accrued payrolls

and commissions | (57,305 | ) | 37,749 | |
| Accured income

taxes | (366,134 | ) | 46,000 | |
| Other liabilities | (106,185 | ) | (274,057 | ) |
| Net Cash

Provided (Used) by Continuing Operations | $ 2,983,485 | | $ (109,551 | ) |
| Net Cash

Provided (Used) by Discontinued Operations | (88,503 | ) | 66,890 | |
| Net Cash

Provided (Used) by Operating Activities | $ 2,894,982 | | $ (42,661 | ) |
| Cash Flows from

equipment | $ (565,472 | ) | $ (513,739 | ) |
| Net Cash Used by

Investing Activity | $ (565,472 | ) | $ (513,739 | ) |
| Cash Flows from

line of credit | $ (2,996,517 | ) | $ 475,000 | |
| Proceeds from

notes payable | 4,879,017 | | 234,000 | |
| Payments on

notes and capital lease payable | (3,825,642 | ) | (364,959 | ) |
| Issuance of

common stock | 93,665 | | 969 | |
| Net Cash

Provided (Used) by Financing Activities | $ (1,849,477 | ) | $ 345,010 | |
| Net Increase

(Decrease) in Cash and Cash Equivalents | $ 480,033 | | $ (211,390 | ) |
| Cash and Cash

Equivalents - Beginning | 181,730 | | 527,998 | |
| Cash and Cash

Equivalents - Ending | $ 661,763 | | $ 316,608 | |
| During 2002, the Company incurred

accounts payable and issued a long-term note payable in in the

amount of $1,820,983 as part of the purchase price for certain assets of

See accompanying notes to consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BUSINESS DESCRIPTION

Nortech Systems Incorporated (the Company) is a Minnesota corporation with headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company has manufacturing facilities located in Bemidji, Fairmont, Merrifield and Baxter, Minnesota as well as Augusta, Wisconsin. The Company now operates from its newly acquired location in Monterrey, Mexico as described in Note 7.

The Company manufactures wire harnesses, cables and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and defense industries. The Company provides a full turn-key contract manufacturing service to its customers. All products are built to the customers design specifications. Products are sold to customers both domestically and internationally. The Company also provides repair service on circuit boards used in machines in the medical industry.

NOTE 2. USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

NOTE 3. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and it's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

NOTE 4. 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, 2002 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, 2001 included in the Companys Annual Report Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission.

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NOTE 5. SEGMENT REPORTING INFORMATION

During 1999, the Company formally adopted a plan to dispose of two of its operating segments, including Display Products and Medical Management. See additional disclosures regarding these discontinued operations in Note 9 of the annual consolidated financial statement contained in the Companys Annual Report Form 10K for the year ended December 31, 2001 as filed with the SEC. The Companys results from continuing operations for the quarters ending June 30, 2002 and 2001 consist entirely of the Contract Manufacturing segment.

NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCMENTS

On January 1, 2002, the Company adopted 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. SFAS replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangibles assets upon adoption. After transition, the impairment tests will be performed annually. SFAS 142 did not have a material impact on the Companys consolidated financial position or results of operations.

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Impairment or Disposal of Long-Lived Assets (SFAS 144). The provisions of this statement require that all long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations. The adoption of SFAS 144 did not materially impact the Companys consolidated financial positions or results of operations.

NOTE 7. ACQUISITION

On June 27, 2002, the Company acquired 100 percent of the outstanding common shares of Manufacturing Assembly Solutions of Monterrey, Inc. (MAS), a Mexican corporation, located in Monterrey, Mexico. The results of operations since this acquisition have been included in the consolidated financial statements. The primary reason for the acquisition was to enhance the Companys manufacturing capabilities in a low cost country.

The aggregate purchase price was $1,850,000, including $650,000 to be paid in cash on July 2, 2002 and a $1,200,000 Promissory Note. (See Note 8)

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NOTE 7. ACQUISITION (CONTINUED)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Current assets	$
Net property and

equipment | 186,761 | |
| Other assets | 11,012 | |
| Goodwill | 1,270,000 | |
| Intangible

assets | 426,384 | |
| Total assets

acquired | 2,046,305 | |
| Current

liabilities | (26,305 | ) |
| Long-term

liabilities | (170,000 | ) |
| Total

liabilities assumed | (196,305 | ) |
| Net assets

acquired | $ 1,850,000 | |

The intangible assets acquired include customer lists and relationships, a favorable lease, company name and logo and non-compete agreements. These assets will be amortized over their average useful lives which range from 2-5 years.

The amount assigned to goodwill is not deductible for tax purposes.

NOTE 8. DEBT

As payment for the acquisition described in Note 7, the Company will pay $650,000 in cash on July 2, 2002 and has signed a $1,200,000 Promissory Note for the balance. The note bears interest at 6% and is payable in four semiannual installments beginning December 27, 2002. Each installment on the note may be satisfied with the issue of 31,704 shares of Nortech stock. If the market price of the stock should fail to reach or exceed $7.00 during a four-week period of time during each semi-annual period, the company shall repurchase such shares within 30 days at a price of $7.00. The Promissory Note is collateralized by an assignment of 126,815 shares of Nortech stock.

NOTE 9. LEASES

As part of the acquisition described in Note 7, Nortech assumed a three-year lease on the 15,000 square foot manufacturing facility located in Monterrey, Mexico. The lease matures during 2004 and allows the Company the option of two three-year renewals. Annual lease payments due over the next three years are as follows:

2002	$
2003	94,431
2004	39,346
Total	$ 180,992

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ITEM 2 . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(1.) Results of Operations for Quarter and Period Ended June 30, 2002

The Company had revenues of $15,243,680 compared to revenues of $12,622,055 for the quarters ended June 30, 2002 and 2001, respectively. The increase in revenues resulted primarily from increased revenue from the current customer base. The net income for the three months ended June 30, 2002 was $534,269 or $.22 per share, compared to a net income of $302,040 or $.13 per share, for the three months ended June 30, 2001. The favorable variance in net income for the quarter ended June 30, 2002 compared to the prior year quarter was the result of higher revenue levels, changes in the mix of products manufactured, offset by higher selling, general and administrative expenses, along with reduced interest costs resulting from lower carrying amounts of debt.

The Companys 90 day order backlog was approximately $9,216,000 as of June 30, 2002, compared with approximately $11,000,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the third quarter of 2002 to be slightly less than second quarter of 2002.

(2.) Liquidity and Capital Resources.

The Companys working capital decreased to $12,689,621 at the close of second quarter 2002, compared to $14,516,528 as of March 31, 2002. The Company believes that its financial liquidity will improve during 2002 and would expect that its operating cash flow and available credit facilities will be sufficient to fund the expected growth in the near term.

(3.) Critical Accounting Policies

Inventory Reserve

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or in excess of production needs. These values are estimates and may differ from actual results.

(4.) Acquisition

On June 27, 2002, the Company acquired 100 percent of the stock of Manufacturing Assembly Solutions of Monterrey, Inc., A Mexican corporation, located in Monterrey, Mexico. The primary reason for the acquisition was to enhance the Companys manufacturing capabilities in a low cost country. (Please refer to Note 7 to the Consolidated Financial Statements for more detail)

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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 Companys products;

Increased competition;

Changes in the reliability and efficiency of the Companys operating facilities or those of third parties;

Risks related to availability of labor;

General economic, financial and business conditions that could effect the Companys 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.

ITEM 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from what was reported on Form 10-K for the year ended December 31, 2001.

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PART II - OTHER INFORMATION

Item 6 . Exhibits and Reports on Form 8-K .

Form 8K was filed on May 14, 2002 to announce the appointment of Michael Degen as President and Chief Executive Office of the Company to succeed the late president Quentin Finkelson.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Degen, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nortech Systems Incorporated on Form 10-Q for the fiscal quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nortech Systems Incorporated.

By
Michael J. Degen
Chief Executive Officer
Nortech Systems Incorporated

I, Garry M. Anderly, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nortech Systems Incorporated on Form 10-Q for the fiscal quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nortech Systems Incorporated.

By
Garry M. Anderly
Principal Financial Officer and Principal Accounting

Officer |
| Nortech Systems Incorporated |

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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 12, 2002
By:/s/	Michael J. Degen
	Michael J. Degen
	President

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NORTECH SYSTEMS INC Interim / Quarterly Report 2002

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NORTECH SYSTEMS INC — Interim / Quarterly Report 2002

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