NORTECH SYSTEMS INC — Interim / Quarterly Report 2002

May 14, 2002

10-Q 1 j3439_10q.htm 10-Q SECURITIES AND EXCHANGE COMMISSION

*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 March 31, 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 | (I.R.S. Employer |
| Incorporation or

organization) | 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

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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 April 30, 2002, there were 2,403,248 shares of the Company’s $.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 MARCH 31, 2002

*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 | | |

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| NORTECH

SYSTEMS INCORPORATED
CONSOLIDATED

BALANCE SHEETS | | | | |
| MARCH

31, 2002 AND DECEMBER 31, 2001 | | | | |
| | MARCH 31 | | DECEMBER 31 | |
| | 2002 | | 2001 | |
| | (UNAUDITED) | | (AUDITED) | |
| ASSETS | | | | |
| Current Assets | | | | |
| Cash and cash

equivalents | $ 367,156 | | $ 181,730 | |
| Accounts

receivable, net of allowance | 9,303,823 | | 9,110,730 | |
| Inventories: | | | | |
| Finished goods | 2,241,514 | | 1,698,373 | |
| Work in process | 1,546,277 | | 1,676,730 | |
| Raw materials | 8,189,618 | | 9,076,376 | |
| Total

Inventories | $ 11,977,409 | | $ 12,451,479 | |
| Prepaid expenses

and other | 256,634 | | 306,428 | |
| Deferred tax

assets | 1,446,000 | | 1,492,000 | |
| Total Current

Assets | $ 23,351,022 | | $ 23,542,367 | |
| Property and

Equipment | | | | |
| Land and

building/leaseholds | $ 4,578,672 | | $ 4,550,966 | |
| Manufacturing

equipment | 4,873,729 | | 4,878,954 | |
| Office and other

equipment | 2,514,209 | | 2,434,429 | |
| Total Property

and Equipment | $ 11,966,610 | | $ 11,864,349 | |
| Accumulated

depreciation | (6,291,053 | ) | (5,999,451 | ) |
| Net Property and

Equipment | $ 5,675,557 | | $ 5,864,898 | |
| Other Assets | | | | |
| Goodwill and

other intangible assets | 76,777 | | 83,478 | |
| Other assets

from discontinued operations | 15,050 | | 16,795 | |
| Total Other

Assets | $ 91,827 | | 100,273 | |
| Total Assets | $ 29,118,406 | | $ 29,507,538 | |
| See accompanying notes

to consolidated financial statements | | | | |

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31,

2001 | | | | |
| | MARCH 31 | | DECEMBER 31 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | 2002 | | 2001 | |
| | (UNAUDITED) | | (AUDITED) | |
| Current

Liabilities | | | | |
| Current

maturities of notes and capital lease payable | $ 570,184 | | $ 501,681 | |
| Accounts payable | 5,091,616 | | 4,866,442 | |
| Accrued payrolls

and commissions | 1,980,141 | | 2,171,124 | |
| Accured income

taxes | 341,388 | | 538,706 | |
| Other

liabilities | 760,471 | | 845,586 | |
| Net current

liabilities from discontinued operations | 100,694 | | 159,484 | |
| Total Current

Liabilities | $ 8,844,494 | | $ 9,083,023 | |
| Long-Term

Liabilities | | | | |
| Notes and

capital lease payable (net of current maturities) | $ 9,027,023 | | $ 9,791,722 | |
| Deferred tax

liability | 26,000 | | 61,000 | |
| Total Long-Term

Liabilities | $ 9,053,023 | | $ 9,852,722 | |
| Total

Liabilities | $ 17,897,517 | | $ 18,935,745 | |
| Shareholders’

Equity | | | | |
| Preferred Stock,

$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; 2,380,748 and 2,361,192 shares issued

and outstanding at March 31, 2002 and December 31, 2001, respectively | 23,807 | | 23,612 | |
| Additional

paid-in capital | 12,209,628 | | 12,179,399 | |
| Accumulated

deficit | (1,262,546 | ) | (1,881,218 | ) |
| Total

Shareholders’ Equity | $ 11,220,889 | | $ 10,571,793 | |
| Total

Liabilities & Shareholders’ Equity | $ 29,118,406 | | $ 29,507,538 | |
| See accompanying notes

to consolidated financial statements | | | | |

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| NORTECH

SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND MARCH 31, 2001
	MARCH 31		MARCH 31
	2002		2001
	(Unaudited)		(Unaudited)
Net Sales	$ 15,362,896		$ 14,845,304
Cost of Goods

Sold | 12,583,431 | | 12,152,032 | |
| Gross Profit | $ 2,779,465 | | $ 2,693,272 | |
| Selling Expenses | 714,066 | | 693,663 | |
| General and

Administrative Expenses | 939,535 | | 903,765 | |
| Interest Income | (1,414 | ) | (5,418 | ) |
| Miscellaneous

Expense | 12,822 | | 68,650 | |
| Interest Expense | 92,537 | | 241,506 | |
| Income from

Continuing Operations Before Income Taxes | $ 1,021,919 | | $ 791,106 | |
| Income Tax

Expense | 403,000 | | 297,000 | |
| Income from

Continuing Operations | $ 618,919 | | $ 494,106 | |
| Basic Income per

Share of Common Stock | $ 0.26 | | $ 0.21 | |
| Diluted Income

per Share of Common Stock | $ 0.25 | | $ 0.20 | |
| Weighted Average

Common Shares: | | | | |
| Basic | 2,370,970 | | 2,361,056 | |
| Diluted | 2,492,045 | | 2,480,917 | |
| See accompanying notes

to consolidated financial statements | | | | |

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH

FLOWS | | | | |
| FOR THE THREE MONTHS ENDED | | | | |
| MARCH 31, 2002 AND MARCH 31, 2001 | | | | |
| | MARCH 31 | | MARCH 31 | |
| | 2002 | | 2001 | |
| | (Unaudited) | | (Unaudited) | |
| Cash Flows from

Operating Activities | | | | |
| Net income from

continuing operations | $ 618,919 | | $ 494,106 | |
| Adjustments to

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

by continuing operations | | | | |
| Depreciation and

amortization | 298,303 | | 362,970 | |
| Deferred taxes | 11,000 | | 75,000 | |
| Changes in

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

receivable | (193,093 | ) | 22,948 | |
| Inventories | 474,070 | | (1,583,924 | ) |
| Prepaid expenses

and other | 49,794 | | (2,182 | ) |
| Accounts payable | 225,174 | | 197,201 | |
| Accrued payrolls

and commissions | (190,983 | ) | 385,979 | |
| Accured income

taxes | (197,318 | ) | (190,330 | ) |
| Other

liabilities | (85,115 | ) | (135,930 | ) |
| Net Cash

Provided (Used) by Continuing Operations | $ 1,010,751 | | $ (374,162 | ) |
| Net Cash

Provided (Used) by Discontinued Operations | (57,045 | ) | 45,245 | |
| Net Cash

Provided (Used) by Operating Activities | $ 953,706 | | $ (328,917 | ) |
| Cash Flows from

Investing Activities: | | | | |
| Acquistion of

equipment | $ (102,261 | ) | $ (298,446 | ) |
| Net Cash Used by

Investing Activity | $ (102,261 | ) | $ (298,446 | ) |
| Cash Flows from

Financing Activities: | | | | |
| Proceeds from

notes payables | $ 11,505,563 | | $ 2,325,000 | |
| Payments on

notes and capital lease payable | (12,202,006 | ) | (2,028,632 | ) |
| Issuance of

common stock | 30,424 | | 969 | |
| Net Cash

Provided (Used) by Financing Activities | $ (666,019 | ) | $ 297,337 | |
| Net Increase

(Decrease) in Cash and Cash Equivalents | $ 185,426 | | $ (330,026 | ) |
| Cash and Cash

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

Equivalents — Ending | $ 367,156 | | $ 197,972 | |
| 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 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 its wholly owned subsidiary. 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 Company’s 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 for the annual consolidated financial contained in the Company’s Annual Report Form 10K for the year ended December 31, 2001 as filed with the SEC. The Company’s results from continuing operations for the quarters ending March 31, 2002 and 2001 consist entirely of the Contract Manufacturing segment.

NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCMENTS

On July 1, 2001, the Company adopted Statement of Financial Accounting Standards No.141 “Business Combinations” (“SFAS 141”). The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations. The adoption of SFAS 141 did not have an impact on the Company’s consolidated financial statements.

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 Company’s 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 Company’s consolidated financial positions or results of operations.

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

(1.) Results of Operations for Quarter and Period Ended March 31, 2002

The Company had revenues of $15,362,896 compared to revenues of $14,845,304 for the quarters ended March 31, 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 March 31, 2002 was $618,919 or $.26 per share, compared to a net income of $494,106 or $.21 per share, for the three months ended March 31, 2001. The favorable variance in net income for the quarter ended March 31, 2002 compared to the prior year quarter was the result of higher revenue levels, changes in the mix of products manufactured, stable selling, general and administrative expenses, along with reduced interest costs resulting from lower carrying amounts of debt.

The Company’s 90 day order backlog was approximately $11,000,000 as of March 31, 2002, compared with approximately $10,840,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the second quarter of 2002 to be consistent with first quarter of 2002.

(2.) Liquidity and Capital Resources.

The Company’s working capital increased to $14,516,528 at the close of first quarter 2002, compared to $14,459,344 as of December 31, 2001. The Company believes that its financial stability will continue to improve during 2002 and would expect that its operating cash flow and available credit faculties 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 excess to the need for production, these values are estimates and may differ from actual results.

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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 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.

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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.

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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: May 10, 2002
By:	/s/ Michael J. Degen
	Michael J. Degen
	President

and Chief |
| | Executive Officer |
| By: | /s/ Garry M. Anderly |
| | Garry M. Anderly |
| | Principal Financial |
| | Officer and Principal |
| | Accounting Officer |

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