NORTECH SYSTEMS INC — Interim / Quarterly Report 2003

Aug 14, 2003

10-Q 1 a03-2676_110q.htm 10-Q

*UNITED STATES SECURITIES AND EXCHANGE COMMISSION*

*Washington, D. C. 20549*

*FORM 10-Q*

*QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*

For the Quarterly Period Ended June 30, 2003

*NORTECH SYSTEMS INCORPORATED*

*Commission file number 0-13257*

State of Incorporation: *Minnesota*

IRS Employer Identification No. *41-1681094*

Executive Offices: *1120 Wayzata Blvd E., Suite 201, Wayzata, MN 55391*

Telephone number: *(952) 345-2277*

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 of file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý

Number of shares of $.01 par value common stock outstanding at July 21, 2003: *2,473,783*

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

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*TABLE OF CONTENTS*

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
	Consolidated Balance Sheets
	Consolidated
Statements of Income
	Consolidated
Statements of Comprehensive Income
	Consolidated
Statements of Cash Flows
	Notes
to Consolidated Financial Statements
Item 2 -	Management’s Discussion and Analysis of
Financial Condition And Results of Operations
Item 3 -	Quantitative and Qualitative Disclosures About
Market Risk
Item 4 -	Controls and Procedures
PART II -
OTHER INFORMATION
Item
4 -	Submission
of Matters to a Vote of Security Holders
Item 6 -	Exhibits and Reports on Form 8-K
Item 99 -	Certifications
SIGNATURES

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*PART 1*

*ITEM 1 . FINANCIAL STATEMENTS*

*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED BALANCE SHEETS*

*JUNE 30, 2003 AND DECEMBER 31, 2002*

	JUNE 30 2003 — (UNAUDITED)		DECEMBER 31 2002 — (AUDITED)
ASSETS
Current Assets
Cash and Cash
Equivalents	$ 723,175		$ 448,751
Accounts
Receivable, Less Allowance for Uncollectible Accounts	6,872,039		7,616,093
Inventories:
Finished Goods	2,488,161		2,172,379
Work In Process	1,512,289		1,859,000
Raw Materials	8,663,579		8,288,938
Total
Inventories	12,664,029		12,320,317
Prepaid Expenses	532,851		369,252
Income Taxes
Receivable	251,546		483,971
Deferred Tax
Assets	1,006,000		959,000
Total Current
Assets	22,049,640		22,197,384
Property and
Equipment
Land	151,800		151,800
Building and
Leasehold Improvements	4,685,029		4,671,905
Manufacturing
Equipment	5,942,550		5,466,567
Office and Other
Equipment	2,733,349		2,743,707
Total Property
and Equipment	13,512,728		13,033,979
Accumulated
Depreciation	(7,680,858	)	(7,084,565	)
Net Property and
Equipment	5,831,870		5,949,414
Other Assets
Deposits	23,719		11,012
Non-Compete, Net
of Accumulated Amortization	1,144,784		1,335,584
Goodwill	74,345		76,006
Deferred Tax
Assets	106,000		33,000
Total Other
Assets	1,348,848		1,455,602
Total Assets	$ 29,230,358		$ 29,602,400

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED BALANCE SHEETS*

*JUNE 30, 2003 AND DECEMBER 31, 2002*

	JUNE 30 2003 — (UNAUDITED)		DECEMBER 31 2002 — (AUDITED)
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current
Liabilities
Current
Maturities of Notes and Capital Lease Payable	$ 1,330,293		$ 1,642,179
Checks
Written in Excess of Cash	850,000		300,000
Accounts
Payable	2,929,723		3,298,474
Accrued
Payroll and Commissions	1,240,745		2,119,566
Accrued
Health and Dental Claims	244,743		277,864
Other
Accrued Liabilities	446,176		243,243
Net
Current Liabilities from Discontinued Operations	50,000		50,000
Total
Current Liabilities	7,091,680		7,931,326
Long-Term
Liabilities
Notes
and Capital Lease Payable (Net of Current Maturities)	8,418,622		8,580,944
Total
Long-Term Liabilities	8,418,622		8,580,944
Total
Liabilities	15,510,302		16,512,270
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: 2,473,783 and 2,441,946
Shares Issued and Outstanding at June 30, 2003 and December 31, 2002,
Respectively	24,738		24,419
Additional
Paid-In Capital	13,174,178		12,873,657
Accumulated
Other Comprehensive Loss	(19,225	)	—
Retained
Earnings (Accumulated Deficit)	290,365		(57,946	)
Total
Shareholders’ Equity	13,720,056		13,090,130
Total
Liabilities & Shareholders’ Equity	$ 29,230,358		$ 29,602,400

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE THREE MONTHS ENDED*

*JUNE 30, 2003 AND JUNE 30, 2002*

	JUNE 30 2003 — (Unaudited)		JUNE 30 2002 — (Unaudited)
Net Sales	$ 14,486,982		$ 15,243,680
Cost of Goods
Sold	12,752,247		12,406,029
Gross Profit	1,734,735		2,837,651
Operating
Expenses:
Selling Expenses	682,743		710,186
General and
Administrative Expenses	760,906		1,082,959
Total Operating
Expenses	1,443,649		1,793,145
Income From
Operations	291,086		1,044,506
Other Expense
Interest Income	1,231		6,048
Miscellaneous
Income (Expense)	55,059		(28,763	)
Interest Expense	(95,590	)	(139,522	)
Total Other
Expense	(39,300	)	(162,237	)
Income From
Operations Before
Income Taxes	251,786		882,269
Income Tax
Expense	25,000		348,000
Net Income	$ 226,786		$ 534,269
Earnings Per
Share:
Basic	$ 0.09		$ 0.22
Average Number
of Common Shares Outstanding Used for Basic Earnings Per Share	2,473,760		2,394,189
Diluted	$ 0.09		$ 0.21
Average Number
of Common Share Outstanding Plus Dilutive Common Stock Options	2,512,727		2,536,958

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED STATEMENTS OF INCOME*

*FOR THE SIX MONTHS ENDED*

*JUNE 30, 2003 AND JUNE 30, 2002*

	JUNE 30 2003 — (Unaudited)		JUNE 30 2002 — (Unaudited)
Net
Sales	$ 28,257,270		$ 30,606,576
Cost
of Goods Sold	24,873,035		25,241,295
Gross
Profit	3,384,235		5,365,281
Operating
Expenses:
Selling
Expenses	1,356,576		1,424,251
General
and Administrative Expenses	1,467,458		1,770,659
Total
Operating Expenses	2,824,034		3,194,910
Income
From Operations	560,201		2,170,371
Other
Expense
Interest
Income	1,944		7,462
Miscellaneous
Income (Expense)	72,784		(41,585	)
Interest
Expense	(184,618	)	(232,059	)
Total
Other Expense	(109,890	)	(266,182	)
Income
From Operations Before
Income
Taxes	450,311		1,904,189
Income
Tax Expense	102,000		751,000
Net
Income	$ 348,311		$ 1,153,189
Earnings
Per Share:
Basic	$ 0.14		$ 0.48
Average
Number of Common Shares Outstanding Used for Basic Earnings Per Share	2,465,122		2,383,190
Diluted	$ 0.14		$ 0.46
Average
Number of Common Share Outstanding Plus Dilutive Common Stock Options	2,511,915		2,515,112

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME*

*FOR THE THREE MONTHS ENDED*

*JUNE 30, 2003 AND JUNE 30, 2002*

	JUNE 30 2003	JUNE 30 2002
	(Unaudited)	(Unaudited)
Net
Income	$ 226,786	$ 534,269
Other
Comprehensive Income:
Cumulative
Translation Adjustment	7,461	—
Comprehensive
Income	$ 234,247	$ 534,269

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME*

*FOR THE SIX MONTHS ENDED*

*JUNE 30, 2003 AND JUNE 30, 2002*

	JUNE 30 2003 — (Unaudited)		JUNE 30 2002 — (Unaudited)
Net
Income	$ 348,311		$ 1,153,189
Other
Comprehensive Loss:
Cumulative
Translation Adjustment	(19,225	)	—
Comprehensive
Income	$ 329,086		$ 1,153,189

See accompanying Notes to Consolidated Financial Statements

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*NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY*

*CONSOLIDATED STATEMENTS OF CASH FLOWS*

*FOR THE SIX MONTHS ENDED*

*JUNE 30, 2003 AND JUNE 30, 2002*

	JUNE 30 2003 — (Unaudited)		JUNE 30 2002 — (Unaudited)
Cash
Flows From Operating Activities
Net
Income	$ 348,311		$ 1,153,189
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation
and Amortization	790,356		598,028
Deferred
Taxes	(120,000	)	(283,000	)
Foreign
Currency Transaction Gain	(4,031	)	—
Changes
in Current Operating Items:
Accounts
Receivable	743,077		1,271,883
Accrued
Income Taxes and Income Taxes Receivable	232,425		(557,932	)
Inventories	(343,714	)	1,102,526
Prepaid
Expenses	(176,640	)	(26,694	)
Accounts
Payable	(368,261	)	(199,528	)
Accrued
Payroll and Commissions	(878,697	)	(57,305	)
Other
Accrued Liabilities	171,811		(106,185	)
Net
Cash Provided by Operating Activities	394,637		2,894,982
Cash
Flows from Investing Activities:
Acquisition
of Equipment	(489,037	)	(565,472	)
Net Cash Used by Investing Activities	(489,037	)	(565,472	)
Cash
Flows from Financing Activities:
Net
Change in Line of Credit	47,677		(2,996,517	)
Proceeds
From Notes Payable	—		4,879,017
Payments
on Notes and Capital Lease Payable	(221,885	)	(3,825,642	)
Issuance
of Stock	840		93,665
Checks
in Excess of Cash in Bank	550,000		—
Net
Cash Provided (Used) by Financing Activities	376,632		(1,849,477	)
Effect
of Exchange Rate Changes on Cash	(7808	)	—
Net
Increase in Cash and Cash Equivalents	274,424		480,033
Cash
and Cash Equivalents - Beginning	448,751		181,730
Cash
and Cash Equivalents - Ending	$ 723,175		$ 661,763

Note: The Company has paid interest expense of $185,537 and income taxes of $37,361 for 2003 compared to interest expense of $201,904 and income tax expense of $1,469,236

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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. However, as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgements of certain amounts included in the financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by management could have a significant impact on the Company’s financial results. Actual results could differ from those estimates.

The operating results of the interim periods presented are not necessarily indicative of the results expected for the year ending December 31, 2003 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, 2002 included in the Company’s Annual Report Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission.

Certain reclassifications have been made to the financial statements for the periods presented from amounts previously reported to conform to classifications currently adopted. Such reclassifications had no effect on previously reported shareholders equity or net income.

NOTE 2. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Nortech Systems, Incorporated (the “Company”or “Nortech”) and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc. All significant intercompany accounts and transactions have been eliminated.

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NOTE 3. ACCOUNTING PRONOUNCMENTS

In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and a Rescission of FASB Interpretation No. 34”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Company adopted the disclosure provisions of FABS Interpretation No. 45 as of December 31, 2002. FASB Interpretation No. 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligations undertaken. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. In 2003, the Company adopted the initial recognition and initial measurement provisions of FASB Interpretation No. 45. The Company does not provide guarantees excluding product warranties. As a result, this interpretation has not impacted our financial position, results of operations or statement of cash flow.

In May 2003, the FASB issued SFAS 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material impact on our financial position, results of operations or cash flows.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. We do not anticipate that the adoption of FIN 46 will have a material impact on our financial position, results of operations or cash flows.

NOTE 4. LONG TERM DEBT

As described in the December 31, 2002 financial statements, repayment of SAE Assembly, LLC (“SAE”) debt will be made through semi-annual installments ending June 2004. Each installment on the note will be satisfied with the issue of 31,704 shares of Nortech stock. Should the average market price of the stock fail to reach or exceed $7.00 during a four-week period of time during each semi-annual period, the Company shall at the buyer’s discretion repurchase the shares in that installment within 30 days at a price of $7.00. The 31,704 shares required under the second installment were transferred to SAE on June 27, 2003, but were not considered outstanding at June 30, 2003 for purposes of calculating earnings per share, as the four-week period of time had not expired.

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NOTE 5. STOCK OPTIONS

As allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” the Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation cost is recognized in the Company’s net income for options granted with exercise prices that are equal to the market values of the underlying common stock on the dates of grant. Had compensation cost for the stock options been based on the estimated fair values at grant dates, the Company’s pro forma net income and net income per share would have been as follows:

Net income, as reported	Three Months Ended June 30, 2003 — $ 226,786		Three Months Ended June 30, 2002 — $ 534,269		Six Months Ended June 30, 2003 — $ 348,311		Six Months Ended June 30, 2002 — $ 1,153,189
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	(9,851	)	(17,132	)	(19,703	)	(34,264	)
Proforma net income	$ 216,935		$ 517,137		$ 328,608		$ 1,118,925
Earnings per share:
Basic – as reported	$ 0.09		$ 0.22		$ 0.14		$ 0.48
Basic – pro forma	$ 0.09		$ 0.22		$ 0.13		$ 0.47
Diluted – as reported	$ 0.09		$ 0.21		$ 0.14		$ 0.46
Diluted – pro forma	$ 0.09		$ 0.20		$ 0.13		$ 0.45

During the six-month period ended June 30, 2003, the Company granted 50,000 stock options to executives. There were no stock options granted during the six-month period ended June 30, 2002.

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NOTE 6. NET INCOME PER COMMON SHARE

The following is a reconciliation of the numerators and the denominators of the basic and diluted per common share computations.

	Three Months Ended June 30, 2003	Three Months Ended June 30, 2002	Six Months Ended June 30, 2003	Six Months Ended June 30, 2002
Basic Earnings Per Common Share
Net Income	$ 226,786	$ 534,269	$ 348,311	$ 1,153,189
Weighted average common shares outstanding	2,473,760	2,394,189	2,465,122	2,383,190
Basic earnings per common share	$ 0.09	$ 0.22	$ 0.14	$ 0.48
Diluted Earnings Per Share
Net Income	$ 226,786	$ 534,269	$ 348,311	$ 1,153,189
Weighted average common share outstanding	2,473,760	2,394,189	2,465,122	2,383,190
Stock options	38,968	142,769	46,793	131,932
Weighted average common shares for diluted earnings per common
share	2,512,728	2,536,958	2,511,915	2,515,122
Diluted earnings per common share	$ 0.09	$ 0.21	$ 0.14	$ 0.46

For the three and six month periods ended June 30, 2003, 9,195 shares were excluded from the computation of diluted earnings per share as shares were antidilutive. For the three and six month periods ended June 30, 2002, there were no antidilutive shares.

NOTE 7. FOREIGN CURRENCY TRANSLATION

Local currency is considered the functional currency for the operation outside the United States. Assets and liabilities are translated at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Cumulative translation adjustments, if significant, are recorded as a component of accumulated other comprehensive income in stockholders’ equity.

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

(1.) Results of Operations :

The following table presents statement of operations data as percentages of total revenues for the period indicated:

	Three Months Ended — June 30, 2003	June 30, 2002		Six Months Ended — June 30, 2003		June 30, 2002
Net Sales	100 %	100	%	100	%	100	%
Cost of Goods Sold	88 %	81	%	88	%	82	%
Gross Profit	12 %	19	%	12	%	18	%
Selling Expenses	5 %	5	%	5	%	5	%
General and Administrative Expenses	5 %	7	%	5	%	6	%
Income from Operations	2 %	7	%	2	%	7	%
Other Expenses, Net	0 %	(1	)%	(1	)%	(1	)%
Income Taxes Expense	0 %	2	%	0	%	2	%
Net Income	2 %	4	%	1	%	4	%

Net Sales:

The Company had net sales of $14,486,982 compared to net sales of $15,243,680 for the quarters ended June 30, 2003 and 2002, respectively. The decrease in net sales is due to order delays from a major customer, which is primarily in response to general economic softness. These conditions mainly affected the Company’s commercial wire harness and cable products, which is particularly vulnerable in the short run to customer push-outs and order delays.

For six months ended June 30, 2003 and 2002, the Company had net sales of $28,257,270 compared to net sales of $30,606,576, respectively. The decrease in net sales is due to order delays from a major customer, which is primarily in response to continued general economic softness. Again, these conditions mainly affected the Company’s commercial wire harness and cable products, which is particularly vulnerable in the short run to customer push-outs and order delays. As the economy improves the company expects these conditions to improve during the balance of the year.

Gross Profit:

The Company had gross profit of $1,734,735 or 12.0% compared to gross profit of $2,837,651 or 18.6% for the quarters ended June 30, 2003 and 2002, respectively. The Company had gross profit of $3,384,235 or 12.0% compared to $5,365,281 or 17.5% for the six-months ended June

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30, 2003 and 2002, respectively. These decreases reflect the reduced volume of business as stated above. Since the Company has elected to keep its overhead infrastructure intact, the Company’s margins are affected in the short term accordingly.

Selling Expense:

The Company’s selling expenses are $682,743 and $710,186 for the quarters ended June 30, 2003 and 2002, respectively. The Company’s selling expenses are $1,356,576 and $1,424,251 for the six months ended June 30, 2003 and 2002, respectively. Selling expense decreases are mainly the result of a smaller revenue base under which sales commissions are incurred.

General and Administrative Expense:

The Company’s general and administrative expenses are $760,906 and $1,082,959 for the quarter ended June 30, 2003 and 2002, respectively. The Company’s general and administrative expenses are $1,467,458 and $1,770,659 for the six-month periods ended June 30, 2003 and 2002, respectively. Reductions of general and administrative expenses are due to lower head-count and reduced employee benefit expenses.

Other Expense:

Other expenses are $39,300 for quarter ended June 30, 2003 compared to $162,237 for the quarter ended June 30, 2002. Other expense was $109,890 and $266,182 for the six months ended June 30, 2003 and 2002, respectively. The reductions in other expenses are primarily twofold. First, the Company is benefiting from more favorable lending rates on its variable interest rate borrowings. Second, the Company has miscellaneous commission income and the reversal of a previous bad debt expense.

Income Tax:

Income tax expense for the three months ended June 30, 2003 is $25,000, or 10% of income from operations compared to $348,000, or 39%, for the three months ended June 30, 2002. Income tax expense for the six months ended June 30, 2003 is $102,000, or 23%, compared to $751,000, or 39%, for the six months ended June 30,2002. During the second quarter of 2003, the Company recorded $65,000 of benefit for a refund claim relating to Minnesota research and development tax credits for years 1999,2000 and 2001. The resulting rate for the quarter of 10% is comprised of 36% from core operations and (26%) from the aforementioned benefit. The resulting rate for the six month period of 23% is comprised of 36% from core operations and (13%) from the aforementioned benefit.

Backlog:

The Company’s 90-day order backlog was approximately $10,800,000 as of June 30, 2003, compared with approximately $10,600,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the third quarter of 2003 to be slightly higher than second quarter of 2002.

(2.) Liquidity and Capital Resources

The Company’s working capital increased to $14,957,960 at the close of second quarter 2003, compared to $14,266,058 as of December 31, 2002. The Company believes that its financial liquidity will improve during 2003 and expects that its operating cash flow and available credit facilities will be sufficient to fund the expected growth in the next twelve months.

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(3.) Critical Accounting Policies

The Company believes its most critical accounting estimates relate to inventory reserves and long-lived and intangible asset impairment.

Inventory Reserves:

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. The Company has an evaluation process that is used to assess the value of the inventory that is slow moving, excess or obsolete. This process is reviewed on a quarterly basis.

Long-Lived and Intangible Asset Impairment:

The Company evaluates long-lived assets and intangible assets with definite lives for impairment, as well as the related amortization periods, to determine whether adjustments to these amounts or useful lives are required based on current events and circumstances. The evaluation is based on the Company’s projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge is recorded to reduce the carrying amount to equal estimated fair value.

The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The estimates associated with the asset impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows. Changes in these estimates may result in the recognition of an impairment loss.

Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that the Company’s consolidated financial statements provide a meaningful and fair perspective of the Company. This is not to suggest that other general risk factors, such as changes in worldwide economic conditions, fluctuations in foreign currency exchange rates, changes in materials costs, performance of acquired businesses and others, could not adversely impact the Company’s consolidated financial position, results of operations and cash flows in future periods.

(4.) 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:

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*•* 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 affect 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.

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, 2002.

*ITEM 4 . CONTROLS AND PROCEDURES.*

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2003. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders of Nortech Systems Incorporated (the “Company”) was at the Wayzata Country Club, 200 West Wayzata Boulevard, Wayzata, Minnesota, on May 8, 2003, at 4:00 p.m., for the following purposes:

1. To consider and act upon the Board of Directors’ recommendation to fix the number of directors of the Company at five;

2. To elect a Board of Directors to serve for a one-year term and until their successors are elected and qualify; To be elected: Michael J. Degen, Myron Kunin, Kenneth Larson, Richard W. Perkins and C. Trent Riley.

3. To consider and vote upon a proposal to approve the Company’s 2003 Stock Option Plan.

4. To transact such other business as may properly come before the meeting or any adjournment thereof.

Results of the Voting:

| Item # | Total
Votes | For | Against | Abstentions |
| --- | --- | --- | --- | --- |
| 1 | 2,230,362 | 2,220,868 | 4,304 | 5,190 |
| 2 | 2,225,642 | 2,171,698 | 53,944 | 0 |
| 3 | 1,698,622 | 1,555,508 | 138,344 | 4,770 |
| 4 | 2,230,362 | 2,098,788 | 110,273 | 21,301 |

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

(a) Exhibits

31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32.1 Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On April 24, 2003, we furnished a Current Report on Form 8-K dated April 24, 2003 under Item 9 containing a copy of our earnings release for the period ended March 31, 2003 pursuant to Item 12 (Results of Operations and Financial Condition).

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Signatures

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

Date: August 12, 2003	By	/s/ Michael J. Degen
	Michael
J. Degen
	President and Chief
	Executive Officer
Date: August 12, 2003	By	/s/ Garry M. Anderly
	Garry
M. Anderly
	Principal Financial
	Officer and Principal
	Accounting Officer

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