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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
( ) 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
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NORTECH SYSTEMS INCORPORATED
-------------------------------
(Exact name of registrant as specified in its chapter)
Minnesota 41-16810894
-------------------------------- ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
641 East Lake St., Suite 244 Wayzata, MN 55391
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(Address of principal executive offices) (Zip code)
Registrant's telephone No., including area code: (612) 473-4102
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 per share par 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 of file such reports), and (2) has been subject to
such filing requirements for the
past 90 days.
YES X NO
-------- ---------
1
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 byreference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Based upon the $4.875 per share average of the closing bid and asked prices,
respectively, on February 28, 1997 for the shares of common stock of the
Company, the aggregate market value of the Company's common stock held by non-
affiliates as of such date was $6,297,847.
As of February 28, 1997 there were 2,362,262 shares of the Company's $.01 per
share par value common stock outstanding.
(The remainder of this page was intentionally left blank.)
2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts indicated of
the Annual Report on Form 10-K:
Parts of Annual Report Documents Incorporated
on Form 10-K by Reference
Part III
Item 10 Reference is made to the
11 Registrant's proxy statements
12 to be used in connection with
the 1996 Annual Shareholders'
meeting and filed with the
Securities and Exchange
Commission no later than April
30,1997.
Part IV
Item 14 Reference is made to the Asset
Purchase Agreement used in the
acquisition of the Zercom
Division. The agreement was
filed with Form 8-K report
date November 4, 1996 and
filed November 12, 1996.
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3
NORTECH SYSTEMS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
PAGE
PART I
Item 1. Business 5-9
Item 2. Properties 9-10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10-11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 8. Consolidated Financial Statements 16-38
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K 40-42
Signatures 43
4
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Nortech Systems Incorporated (the "Company") is a Minnesota corporation
organized in December 1990. Prior to December 1990, the Company operated as DSC
Nortech, Inc. , which filed a petition for reorganization under Chapter 11 of
the United States Bankruptcy Code during 1990. The business and assets of DSC
Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990.
The Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis,
Minnesota. The Company's maintains various manufacturing facilities in
Minnesota locations of Bemidji, Fairmont, Plymouth, Aitkin, and Merrifield as
well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables,
electronic sub-assemblies and components as well as large-screen, high
resolution video monitors for radar, document and medical imaging. The Company
provides a full "turnkey" contract manufacturing service to its customers. A
majority of revenue is derived from products which are built to the customer's
design specifications. Nortech Medical Services, Inc., its wholly owned
subsidiary, provides service bureau and office management services to physicians
and clinics throughout Minnesota.
The Company believes it provides a high degree of manufacturing sophistication.
This includes the use of statistical process control to insure product quality,
state-of-the-art materials, management techniques allowing just-in-time (JIT)
delivery of products, and the systems necessary to effectively manage the
business. This level of sophistication enables the Company to attract major
original equipment manufacturers (OEM).
The strategy of the Company in that regard has been to expand its customer base,
and has added several new customers from various industries; including
Companies engaged in the production of medical products, super computers, mid-
size and micro computer business systems, defense industry product and
industrial products. The Company strategy is to develop a customer base
spanning several industry segments to avoid the affects of fluctuations within a
given industry. Some of the Company's major customers are Cray Research, G.E.
Medical Systems, Hughes Defense, and SPX Corporation.
The Company believes that contract manufacturing will continue to grow and
expand in the United States because contract manufacturing provides OEMs with
the domestic equivalent of off-shore sourcing without the associated logistical
problems. The contract manufacturer can provide an OEM with a quality product
at a price well below that available in the OEM's own facility. This is due
primarily to the specialization available through the contract manufacturer and
the significantly lower overhead costs.
5
In 1991, the Company acquired all of the common stock of SMR Computer Services,
Inc. The Company, through its subsidiary (currently named Nortech Medical
Services, Inc.), also provides service bureau and office management services to
physicians.
In March 1995, the Company acquired all of the assets of Monitor Technology
Corporation. The Company has continued the business of Monitor Technology
Corporation which is the manufacturing of large-screen, high resolution video
monitors for radar, document and medical imaging. In addition, this division
provides repair services on internally and externally produced monitors.
In August 1995, the Company acquired all the assets of the Aerospace Division of
Communication Cable, Inc. The Company has continued the business formally
conducted by Aerospace which involves the manufacturing of custom designed,
high-technology electronic cable assemblies for various applications.
In November 1996, the Company acquired the inventory and fixed assets of Zercom
Corporation, a subsidiary of Communication Systems, Inc. The Company has been,
and continues to be a contract manufacturer of electronic sub-assemblies and
components. Zercom Corporation also manufactures a line of proprietary products
for sport fishermen, including the Clearwater Classic and Clearwater Pro fish
locators.
Since the Company's inception, substantially all revenues generated have been
directly related to the contract manufacturing industry. Therefore, segmented
financial information is not included in this report.
MARKETING AND SALES
BUSINESS STRATEGY.
The Company believes the electronic manufacturing sub-contracting business is
emerging from a small job shop oriented business into a dynamic, high technology
electronics industry. The first market segment the Company has entered is the
wire harness and cable assemblies market. The Company intends to expand from
this market segment into complete electromechanical assemblies using the
resources acquired from the recent addition of Zercom Corporation. Many
companies no longer perform this type of work on a captive, in-house basis, as
they are finding that independent subcontractors can more cost effectively
perform this specialized work.
As part of the Company's commitment to quality, the Bemidji location became ISO
9002 Certified in July 1995 and has actively maintained this certification. The
Company believes this certification will benefit its current customer base as
well as attract new business opportunities.
6
The Company will continue it's commitment to quality, cost effectiveness and
responsiveness to customer requirements. To achieve these objectives, the
Company will provide complete manufacturing services to customers, from the
procurement of materials to the manufacturing, testing and shipping of products.
The Company will continue its efforts to diversify its customer base and expand
into other segments of the electronic manufacturing subcontract business.
MARKETING.
The Company is continuing to concentrate its marketing activities in the
medical, industrial and military manufacturing industries. The emphasis
continues to be on mature companies which require a contract manufacturer with a
high degree of manufacturing and quality sophistication, including statistical
process control (SPC) and statistical quality control (SQC). The Company has
initiated efforts to expand its markets beyond the Upper Midwest area, which
presently extends east to the Ohio/Michigan area, south to Missouri, and west to
Colorado. New market opportunities are continuously being pursued. The Company
markets its products and services primarily through manufacturers'
representatives. The Company's marketing strategy emphasizes the sophistication
of its manufacturing services. The basic systems, procedures, and disciplines
normally associated with a mature corporate environment are in place. All the
Company's employees are well trained in SPC and SQC.
SOURCES AND AVAILABILITY OF MATERIALS
The Company is not dependent on any one supplier for materials for products sold
to customers. Components utilized in the assembly of wire harnesses, cable
assemblies and printed circuit assemblies are purchased directly from the
component manufacturers or from their distributors. On occasion some components
may be placed on a stringent allocation basis; however, due to the excess
manufacturing capacity currently available at most component manufacturers, the
Company does not anticipate any major material purchasing or availability
problems occurring in the foreseeable future.
PATENTS AND LICENSES
The Company is not presently dependent on a proprietary product requiring
licensing, patent, copyright or trademark protection. There are no revenues
derived from a service-related business for which patents, licenses, copyrights
and trademark protection are necessary for successful operations. However, the
Company does own the rights to manufacture certain patented products. For the
year ending December 31, 1996, revenues related to this production were not
material to the financial results.
7
COMPETITION
The contract manufacturing industry is characterized by competition among a
variety of sources, including small closely-held companies, larger full-service
manufacturers, company-owned facilities and foreign competitors. The Company
does not believe that the smaller operations are significant competitors as they
do not seem to have the capabilities required by target customers of the
Company. The Company also believes that foreign competitors do not provide a
substantial competitive threat because the cable and wire harness industry
involves a high weight-to-cost ratio. Consequently, shipping and transportation
costs decrease the ability of foreign manufacturers to compete in this
market segment. Further, off-shore production cannot effectively meet the
requirements of just-in-time inventory management techniques presently being
implemented by many major target customers. Therefore, the Company's principal
competitors are larger full-service manufacturers, many of which have
substantially far greater assets and capital resources than are available to the
Company and are better financed than the Company.
The Company will continue to pursue marketing opportunities in the Upper
Midwest. Although there presently are no dominant contract manufacturers in the
wire harness and cable assembly business in the Upper Midwest, there are several
established competitors. The Company expects its major competition to come from
Americable, Technical Services, Inc. and Waters Instruments, Inc., all of which
are located on Minnesota. Each of these companies specializes in molded cables
or wire assemblies and has sufficient manufacturing capabilities to offer a
significant competitive challenge to the Company's operations. The principal
competitive factors in the contract manufacturing industry are price, quality
and responsive service. The Company believes that it can compete favorably in
the market segments to which it sells.
BACKLOG
Historically, the Company's backlog has been running 60 to 90 days, depending on
the customer. However, because of the increased emphasis on just-in-time
manufacturing (JIT), many of the Company's major customers are taking advantage
of the Company's ability to service them adequately under the JIT concept.
Additionally, because of the Company's quality history with customers, many
products now go directly from the Company's shipping dock to the customer's
production line.
The Company's 90 day order backlog was approximately $4,513,000 on December 31,
1995 and approximately $6,127,000 on December 31, 1996.
MAJOR CUSTOMERS
The Company sells its products to companies in the computer, medical,
governmental and various other industries. Historically, the Company has not
experienced significant
8
losses related to the receivables from customers in any particular industry or
geographic area.
Two customers, G.E. Medical Systems, and Cray Research, Inc. accounted for
approximately 17.5%, and 11.3% of sales, respectively for the year ended
December 31, 1996.
RESEARCH AND DEVELOPMENT
The Company expended $273,697 in 1996 and $124,919 in 1995 on Company-sponsored
research and development. This research is related to the development of large-
screen, high resolution video monitors for the imaging division. In 1994, no
funds were expended on Company-sponsored research.
COMPLIANCE WITH ENVIRONMENTAL PROVISIONS
Management believes that its manufacturing facilities are currently operating
under compliance with local, state, and federal environmental laws. Any
environmental-oriented equipment is capitalized and depreciated over a seven-
year period. The annualized depreciation expense for this type of environmental
equipment on a Company-wide basis is insignificant.
EMPLOYEES
The Company has 438 full-time and 99 part-time employees as of February 15,
1997, consisting of 502 employees in manufacturing, manufacturing product
support and medical support services and 35 in general administration.
ITEM 2. PROPERTIES
The Company's headquarters consist of approximately 1,500 square feet located in
Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Company
has a lease for a five year term that expires in October 2001. The Company owns
its Bemidji, Minnesota facility consisting of eight acres of land and 60,000
square feet of office and manufacturing space and leases another 8000 square
feet of manufacturing and office space in Augusta, Wisconsin.
The Company's imaging division operates from a facility located in Plymouth,
Minnesota. The building contains approximately 22,800 square feet and is
leased for a term that terminates on May 31, 2000. The Company has an option to
extend the lease for an additional five-year term.
9
The Company also owns three buildings which contain approximately 46,900 square
feet and are located in Fairmont, Minnesota, which are used for the
manufacturing of the Company's custom designed, high-technology electronic cable
assemblies.
In connection with the Zercom acquisition, the Company acquired the building
with approximately 45,800 square feet in Merrifield, Minnesota. This facility
is used for the building of surface mount printed circuit board assemblies and
electro-mechanical assemblies. A leased building in Aitkin, Minnesota provides
10,750 square feet for video cable assembly and is leased for a term that
terminates December 1, 2005.
The Company believes that each of these locations is adequate and will be
adequate in the foreseeable future for their manufacturing needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol NSYS. Prior to October 11, 1995, the stock was traded on the NASDAQ
Small Cap Market.
The high and low bid quotations for the Company's Common Stock for each
quarterly period within the two most recent years were as follows:
Quarter Ended: Low High
------------- --- ----
March 31, 1995 $3.000 $4.000
June 30, 1995 $3.000 $4.250
September 30, 1995 $3.250 $6.000
December 31, 1995 $4.750 $8.500
March 31, 1996 $6.000 $9.000
June 30, 1996 $6.000 $8.000
September 30, 1996 $5.000 $7.250
December 31, 1996 $5.250 $6.750
10
The low and high quotations set forth above are as reported by NASDAQ. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.
As of March 1, 1997, there were approximately 1,419 holders of shares of the
Company's Common Stock. The Company has never paid a cash dividend on shares of
its Common Stock and does not intend to pay cash dividends in the foreseeable
future.
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11
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED:
- -----------------------------------------------------------------------------------------------------
* **
Dec. 31, 1996 Dec. 31, 1995 Dec.31, 1994 Dec.31,1993 Dec.31, 1992
------------- ------------- ------------ ----------- ------------
Sales 26,182,821 18,305,928 12,820,709 11,705,833 7,299.916
Income (Loss) Form
Continuing Operations 446,029 1,331,924 1,183,406 1,042,556 636,723
Income (Loss) Per
Common Share from
Continuing Operations .19 .55 .54 .47 .28
Total Assets 22,152,629 13,223,064 6,647,897 6,553,291 5,284,001
Total Long-Term 10,910,757 3,768,685 746,755 858,437 977,635
Debit
* Company acquired the assets of Zercom Corporation in November, 1996.
** Company acquired the assets of Monitor Technology in March, 1995, and of
Aerospace Systems in August, 1995.
NOTE: For additional selected Financial Data (Past two years by quarter
information)
See note 12 of the Consolidated Financial Statement.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
REVENUES.
For the years ended December 31, 1996, and 1995 the Company had sales of
$26,182,821 and $18,305,928, respectively. The increase of $7,876,893, or 43%
resulted primarily from additional revenues generated by the acquisitions which
were completed in 1995 and 1996. For the year ended December 31, 1994 the
Company had sales of $12,820,709. The approximate 42.8% increase in sales in
1995 was attributable primarily to increased sales in the medical and automotive
industries offset by the reduced sales to the mid-sized computer industries as
well as revenues from the newly acquired divisions.
GROSS PROFIT.
The Company had gross profit of $5,184,198 (before one time write offs) in 1996,
$3,764,840 in 1995, and $2,598,569 in 1994. Gross profits as a percentage of
gross sales were 19.8% in 1996 (before one time write-offs), 20.6% in 1995, and
20.3% in 1994. In 1996, the Company experienced certain items which are
considered unusual events for their operations. Due to evolving customer
requirements, the Company wrote off certain inventories from two of the
divisions. A total of $544,000 in inventories was written off from the Bemidji
and Imaging balance sheets. The customer marketplace is complex and ever
changing, but with the current inventory and production mix, the Company
believes they are well poised to address the needs of their current customers as
they continue to pursue additional growth markets. After the one time write-
offs, gross profit margin for 1996 was 17.7%.
The decrease in gross profit percent from 1995 to 1996 is due to an increase in
materials as a percent of total cost of goods sold.
SELLING, GENERAL, AND ADMINISTRATIVE.
Selling, general, and administrative expenses were $3,306,311 in 1996,
$2,280,105 in 1995, and $1,647,797 in 1994. The increases in each year reflects
additional selling, general and administrative expenses associated with the
acquisitions.
MISCELLANEOUS INCOME.
Miscellaneous income was $32,064 in 1996, $177,967 in 1995, and $86,307 in 1994.
The miscellaneous income resulted primarily from charges for miscellaneous
services.
INTEREST EXPENSE.
Interest expense was $475,057 in 1996, $240,562 in 1995, and $117,835 in 1994.
The increased expense for 1996 and 1995 is due to the increased debt from
acquired operations.
13
INCOME TAXES.
Income tax expense for 1996 was $192,000. Tax expense was not recorded in 1995
because of additional net operating loss carryforwards (NOL's) of approximately
$2,504,000 which were recognized because of final tax regulations. The
regulations clarified that tax carryforwards attributes in a Chapter 11
bankruptcy prior to December 31, 1993 where stock was issued for debt, need not
be reduced by cancellation income. The tax benefit of approximately $851,000
created by additional NOL's was partially offset by a $300,000 increase in the
deferred tax valuation allowance.
Realization of the deferred tax asset is dependent upon the Company generating
sufficient taxable earnings in future periods. In determining that realization
of the deferred tax asset is more likely than not, the Company gave
consideration to recent earnings history, its expectation for taxable earnings
in the future and the expiration dates associated with tax carryforwards.
Tax benefits of $245,794 were recorded in 1994 due to the reduction in the
deferred tax valuation allowance of $600,000 due to the realization of net
operating loss carryforwards.
NET INCOME.
The Company's net income in 1996 was $446,029 or $.19 per common share. The
Company's net income in 1995 was $1,331,924 or $.55 per common share. The
Company's net income in 1994 was $1,183,406 or $.54 per common share. The
Company believes that the effect of inflation on past operations has not been
significant and anticipates that inflation will not have a significant impact on
future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital rose from $5,279,509 as of December 31, 1995 to
$8,498,531 on December 31, 1996. Stockholders equity increased from $6,036,166
as of December 31, 1995 to $7,151,192 on December 31, 1996 due to the Company's
1996 net income and the reclassification to equity of $668,400 of redeemable
stock. This reclassification occurred because the put option on 111,400 shares
was not exercised. The Company's liquidity and capital resources have improved
substantially, and the Company believes that its' future financial requirements
can be met with funds generated from the operating activities and from the
Company's operating line of credit.
In March 1995, the Company completed the net asset purchase of Monitor
Technology Corporation. This division of the Company designs and builds high
and ultra-high resolution CRT monitors for radar, document and medical imaging.
In addition, they provide repair services on internally and externally produced
monitors.
14
In August 1995, the Company acquired all the assets of the Aerospace Division of
Communication Cable, Inc. The Company has continued the business formally
conducted by Aerospace which involves the manufacturing of custom-designed,
high-technology electronic cable assemblies for various applications.
In November 1996, the Company acquired the inventory and fixed assets of Zercom
Corporation, a subsidiary of Communication Systems, Inc. The Company has been,
and continues to be a contract manufacturer of electronic sub-assemblies and
components. Zercom Corporation also manufactures a line of proprietary products
for sport fishermen, including the Clearwater Classic and Clearwater Pro fish
locators.
These acquisitions are expected to positively impact future operations and
enhance the financial condition of the Company over time. However, there are no
guarantees of future performance.
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15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE
----
Independent Auditors' Report of :
Larson, Allen, Weishair & Co., LLP 17
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995. 18
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994. 19
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and1994. 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. 21-22
Notes to Consolidated Financial Statements 23-38
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16
INDEPENDENT AUDITORS' REPORT
Board of Directors
Nortech Systems Incorporated and Subsidiary
Bemidji, Minnesota
We have audited the accompanying consolidated balance sheets of Nortech Systems
Incorporated and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nortech Systems
Incorporated and Subsidiary as of December 31, 1996, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 13, 1997
17
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents (Including Interest Bearing Cash
of $1,069,369 and $906,111 at December 31, 1996 and 1995) $ 1,235,127 $ 924,590
Accounts Receivable, Less Allowance for Uncollectible
Accounts (1996 - $22,301; 1995 - $6,053) 3,695,763 1,856,219
Inventories 6,729,500 3,855,212
Prepaid Expenses and Other 88,821 131,701
Deferred Tax Asset 540,000 430,000
------------ ------------
Total Current Assets $ 12,289,211 $ 7,197,722
------------ ------------
PROPERTY AND EQUIPMENT (At Cost)
Land $ 136,300 $ 108,300
Building and Leasehold Improvements 3,559,155 1,897,559
Manufacturing Equipment 4,588,955 2,389,201
Office and Other Equipment 2,461,997 1,701,640
------------ ------------
Total $ 10,746,407 $ 6,096,700
Accumulated Depreciation (2,875,702) (2,256,862)
------------ ------------
Total Property and Equipment (At Depreciated Cost) $ 7,870,705 $ 3,839,838
------------ ------------
OTHER ASSETS
Goodwill and Other Intangible Assets $ 1,025,463 $ 998,254
Deferred Tax Asset 910,000 1,130,000
Other Assets 57,250 57,250
------------ ------------
Total Other Assets $ 1,992,713 $ 2,185,504
------------ ------------
Total Assets $ 22,152,629 $ 13,223,064
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 500,000 $ -
Current Maturities of Long-Term Debt 731,080 283,100
Accounts Payable 1,596,326 1,054,880
Accrued Payroll 673,303 407,016
Other Liabilities 289,971 173,217
------------ ------------
Total Current Liabilities $ 3,790,680 $ 1,918,213
------------ ------------
LONG-TERM DEBT
Notes Payable (Net of Current Maturities Shown Above) $ 10,910,757 $ 3,768,685
------------ ------------
REDEEMABLE COMMON STOCK
$.01 Par Value; 50,000 and 250,000 Shares Issued and
Outstanding at December 31, 1996 and 1995, Respectively
Redeemable at $6 Per Share $ 300,000 $ 1,500,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 Par Value; 1,000,000 Shares
Authorized; 250,000 Shares Issued and Outstanding $ 250,000 $ 250,000
Common Stock $.01 Par Value; 9,000,000 Shares
Authorized; 2,312,362 and 2,200,863 Shares Issued and
Outstanding, Net of Redeemable Shares Reported Above,
at December 31, 1996 and 1995, Respectively 23,124 22,009
Additional Paid-In Capital 11,910,554 11,242,672
Accumulated Deficit (5,032,486) (5,478,515)
------------ ------------
Total Stockholders' Equity $ 7,151,192 $ 6,036,166
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,152,629 $ 13,223,064
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
SALES $ 26,182,821 $ 18,305,928 $ 12,820,709
COST OF SALES (21,555,459) (14,541,088) (10,222,140)
------------- ------------- -------------
GROSS PROFIT $ 4,627,362 $ 3,764,840 $ 2,598,569
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (3,306,311) (2,280,105) (1,647,797)
RESEARCH AND DEVELOPMENT COSTS (273,697) (124,919) -
INTEREST INCOME 33,668 34,703 18,368
MISCELLANEOUS INCOME 32,064 177,967 86,307
INTEREST EXPENSE (475,057) (240,562) (117,835)
------------- ------------- -------------
INCOME BEFORE INCOME TAX PROVISION $ 638,029 $ 1,331,924 $ 937,612
INCOME TAX BENEFIT (EXPENSE) (192,000) - 245,794
------------- ------------- -------------
NET INCOME $ 446,029 $ 1,331,924 $ 1,183,406
------------- ------------- -------------
------------- ------------- -------------
INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock $ 0.19 $ 0.55 $ 0.54
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,384,512 2,407,804 2,194,021
------------- ------------- -------------
------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Additional Total
Preferred Common Paid-In Accumulated Stockholders'
Stock Stock Capital Deficit Equity
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1993 $ 250,000 $21,937 $11,226,761 $ (7,948,965) $ 3,549,733
1994 Net Income - - - 1,183,406 1,183,406
Issuance of Stock - 6 2,304 - 2,310
Dividends Paid - - - (14,946) (14,946)
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1994 $ 250,000 $21,943 $11,229,065 $ (6,780,505) $ 4,720,503
1995 Net Income - - - 1,331,924 1,331,924
Issuance of Stock -
Stock Options - 50 8,700 - 8,750
Issuance of Stock -
Other - 16 4,907 - 4,923
Dividends Paid - - - (29,934) (29,934)
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1995 $ 250,000 $22,009 $11,242,672 $ (5,478,515) $ 6,036,166
1996 Net Income - - - 446,029 446,029
Issuance of Stock -
Other - 1,115 667,882 - 668,997
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1996 $ 250,000 $23,124 $11,910,554 $ (5,032,486) $ 7,151,192
--------- ------- ----------- ------------ -------------
--------- ------- ----------- ------------ -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers $ 24,375,341 $ 18,114,515 $ 13,307,176
Interest Income Received 33,668 34,703 18,368
Cash Paid to Suppliers and Employees (23,904,901) (17,379,766) (11,794,879)
Interest Expense Paid (403,003) (239,809) (117,927)
Income Taxes Paid (205,900) (19,016) (34,206)
-------------- ------------- --------------
Net Cash Provided (Used) by
Operating Activities $ (104,795) $ 510,627 $ 1,378,532
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Businesses $ (1,559,492) $ (2,930,696) $ -
Acquisition of Property and Equipment (718,835) (458,359) (224,096)
Acquisition of Intangible Assets - (82,059) -
Purchase of Investments - (56,250) -
-------------- ------------- --------------
Net Cash Used by
Investing Activities $ (2,278,327) $ (3,527,364) $ (224,096)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds (Payments) Under
Line of Credit $ 500,000 $ - $ (266,533)
Payments on Long-Term Debt (431,453) (289,294) (963,178)
Proceeds from Long-Term Debt 3,156,115 3,405,180 531,000
Proceeds from Sale of Stock 597 13,673 2,310
Purchase of Redeemable Stock (531,600) - -
Payment of Dividends - (29,934) (14,946)
-------------- ------------- --------------
Net Cash Provided (Used) by
Financing Activities $ 2,693,659 $ 3,099,625 $ (711,347)
-------------- ------------- --------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS $ 310,537 $ 82,888 $ 443,089
Cash and Cash Equivalents - Beginning 924,590 841,702 398,613
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS - ENDING $ 1,235,127 $ 924,590 $ 841,702
-------------- ------------- --------------
-------------- ------------- --------------
NON-CASH TRANSACTIONS
During 1995 the Company issued $1,500,000 of redeemable Common Stock as
part of the purchase of another corporation's net assets.
During 1996 the Company issued a long-term note payable in the amount of
$4,865,390 as part of the purchase price for certain assets of another
corporation.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income $ 446,029 $ 1,331,924 $ 1,183,406
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 693,456 444,636 245,847
Deferred Taxes 110,000 (100,000) (280,000)
(Increase) Decrease in Accounts Receivable (1,839,544) (369,380) 365,160
Decrease in Accounts
Receivable - Stockholder - - 35,000
(Increase) Decrease in Inventory (482,103) (407,932) 173,065
(Increase) Decrease in Prepaid Assets 42,880 (79,751) 33,507
Increase (Decrease) in Accounts Payable 541,446 207,835 (391,788)
Increase (Decrease) in Accrued Payroll 266,287 (17,852) 6,077
Increase (Decrease) in Accrued Liabilities 116,754 (498,853) 8,258
------------- ------------- -------------
Net Cash Provided (Used) by
Operating Activities $ (104,795) $ 510,627 $ 1,378,532
------------- ------------- -------------
------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Nortech Systems Incorporated (the "Company") is a Minnesota corporation
with headquarters in Wayzata, Minnesota, a suburb of Minneapolis,
Minnesota. The Company's main manufacturing facility is located in
Bemidji, Minnesota, with additional manufacturing and engineering
support locations in Fairmont, Plymouth, Merrifield and Aitkin,
Minnesota and 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 also
manufactures and markets high performance display monitors for medical
imaging, radar document imaging and industrial applications. The
Company provides a full "turnkey" contract manufacturing service to its
customers. All products are built to the customer's design
specifications.
In addition, the Company also manufactures a line of proprietory
products for sport fishermen. Nortech Medical Services, Inc., its
wholly owned subsidiary, provides service bureau and office management
services to physicians and clinics throughout Minnesota.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market (based on the lower of replacement cost or net
realizable value).
PROPERTY AND EQUIPMENT
The Company capitalizes the cost of purchased software, equipment, and
leasehold improvements. Expenditures for maintenance and repairs and
minor renewals and betterments which do not improve or extend the life
of the respective assets are expensed. The assets and related
depreciation accounts are adjusted for property retirements and
disposals with the resulting gain or loss included in results of
operations. Fully depreciated assets remain in the accounts until
retired from service.
23
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Property and equipment are depreciated by the straight-line and
accelerated methods of depreciation. Accelerated depreciation did not
materially exceed straight-line depreciation for the years ended
December 31, 1996, 1995 and 1994. Depreciation was calculated over
estimated useful lives as follows:
Building and Improvements 31 Years
Manufacturing Equipment 5 - 7 Years
Office and Other Equipment 5 - 7 Years
REVENUE RECOGNITION
Sales are recorded by the Company when products are shipped to the
customer.
GOODWILL
Goodwill representing the excess of the purchase price over the fair
value of the net assets of the acquired entities (see Note 2), is being
amortized on a straight-line basis over the period of expected benefit
of fifteen years. Total amortization of goodwill recorded for fiscal
years 1996, 1995 and 1994 was $54,614, $30,724 and $-0-, respectively.
The carrying value of goodwill will be reviewed periodically based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period. Should this review indicate that goodwill will
not be recoverable, the Company's carrying value of the goodwill will
be reduced by the estimated shortfall of undiscounted cash flows.
INTANGIBLE ASSETS
The Company acquired other intangible assets including purchased
technology and certification costs in the amount of $42,333 and $82,059
during 1996 and 1995, respectively. These assets are being amortized
over a period of 3 to 7 years. The related amortization expense for
1996 and 1995 was $13,152 and $1,096, respectively.
CASH AND CASH EQUIVALENTS
The Company considers its investments with an original maturity of
three months or less to be cash equivalents. At December 31, 1996 and
1995, the Company had invested excess funds of $266,000 and $285,000,
respectively, in repurchase agreements collateralized by government
backed securities. Due to the short-term nature of the agreements, the
Company does not take possession of the securities, which are instead
held at the Company's principal bank from which it purchases the
securities.
24
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, short-term investments, receivables,
accounts payable and accrued liabilities approximate fair value because
of the short maturity of these instruments. The fair value of long-
term debt approximates its carrying value and is based on current rates
at which the Company could borrow funds with similar remaining
maturities.
USE OF ESTIMATES
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 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.
ADVERTISING
Advertising costs are charged to operations as incurred. Total amounts
charged to expense were $65,234, $17,994 and $16,694 for the years
ended December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES
The Company has adopted FASB Statement No. 109, ACCOUNTING FOR INCOME
TAXES, which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
Investment credits are accounted for by using the "flow-through" method
whereby the benefit is reflected as a reduction of income taxes in the
year utilized.
25
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Primary earnings per share of common stock is computed by dividing net
income by the weighted average number of common shares outstanding
during the period.
The impact of outstanding options was not material and was not included
in the calculation of primary earnings per share.
Preferred stock issued is noncumulative and nonconvertible.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock Based Compensation," establishes a new fair value based
accounting method for stock-based compensation plans. As permitted by
the statement, the Company continues to apply the accounting provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," in determining net income.
NOTE 2 ACQUISITIONS
In 1996 and 1995 the Company acquired the three businesses described
below, which have been accounted for by the purchase method of
accounting. The results of the operations of the acquired Companies
are included in the Company's consolidated statement of income from the
dates of the acquisitions.
ZERCOM CORPORATION
On November 4, 1996, the Company acquired substantially all of the
assets of Zercom Corporation (Zercom). Zercom is a contract
manufacturer of electronic sub-assemblies and components. Zercom also
manufactures a line of proprietary products for sport fishermen.
The purchase price was $6,424,882, consisting of a cash payment of
$1,500,000, issuance of promissory notes totalling $4,865,390, and
acquisition costs of $59,492.
The excess of the purchase price over the estimated fair value of the
net assets acquired is being amortized on a straight line basis over 15
years.
26
NOTE 2 ACQUISITIONS (CONTINUED)
ZERCOM CORPORATION (CONTINUED)
A summary of the purchase price allocation for the 1996 acquisition of
Zercom is as follows:
Net Working Capital Items $ 2,392,185
Property, Plant and Equipment 3,930,872
Other Assets 42,333
Excess of Cost Over Fair Value of Net Assets
of Purchased Business 59,492
------------
Total $ 6,424,882
------------
------------
MONITOR TECHNOLOGY CORPORATION
On March 28, 1995, the Company acquired substantially all of the assets
and assumed certain liabilities of Monitor Technology Corporation
(MTC). Monitor Technology Corporation designs and builds high and
ultra-high resolution CRT monitors for computer applications throughout
the United States. In addition, they provide repair services on
internally and externally produced monitors.
The purchase price of $2,232,667, which includes the assumption of
liabilities of $707,887 and acquisition costs of $24,780, was paid with
cash and by issuing 250,000 shares of the Company's common stock. The
common stock was valued at $6, which is the redeemable price based on a
repurchase agreement issued to the seller at closing. The excess of
the purchase price over the estimated fair value of assets acquired is
being amortized on a straight-line basis over 15 years.
In 1996, 88,600 shares were put back to the Company at $6 per share and
the put option was not exercised on 111,400 shares. The Company
remains contingently liable to repurchase the remaining 50,000 shares,
which are in dispute. The Company's obligation under the repurchase
agreement is guaranteed by a director of the Company.
27
NOTE 2 ACQUISITIONS (CONTINUED)
AEROSPACE
On August 23, 1995, the Company acquired the Aerospace Division of
Communication Cable, Inc. The Aerospace Division manufactures and
sells multi-conductor electrical cable assemblies to customer
specifications for the aerospace industry throughout the United States.
The purchase price was $2,950,517 consisting of a cash payment of
$2,845,506, the assumption of liabilities of $44,601, and acquisition
costs of $60,410.
A summary of the purchase price allocation for the 1995 acquisitions of
MTC and Aerospace is as follows:
Net Working Capital Items $ 1,984,359
Property, Plant and Equipment 2,250,810
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses 948,015
------------
Total $ 5,183,184
------------
------------
The following proforma unaudited consolidated statements of income for
the Company are presented as though the acquisition of Zercom
Corporation had occurred on January 1, 1996 and 1995 and the
acquisitions of Monitor Technology Corporation and the Aerospace
Division of Communication Cable, Inc. had occurred on January 1, 1995.
(Unaudited) 1996 1995
----------------------------------------- ------------- -------------
Revenues $ 39,702,215 $ 42,283,397
------------- -------------
------------- -------------
Net Income $ 230,045 $ 1,887,304
------------- -------------
------------- -------------
Net Income Per Share of Common Stock $ 0.10 $ 0.78
------------- -------------
------------- -------------
The proforma financial information is presented for information
purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisitions been consummated
as of the above dates, nor are they necessarily indicative of future
operating results.
28
NOTE 3 INVENTORIES
Inventories consist of the following:
1996 1995
------------- -------------
Raw Materials $ 3,626,665 $ 1,972,384
Work in Process 1,837,247 1,676,949
Finished Goods 1,265,588 205,879
------------- -------------
Total $ 6,729,500 $ 3,855,212
------------- -------------
------------- -------------
NOTE 4 SHORT-TERM LINE OF CREDIT
The Company has a revolving line of credit available at December 31,
1996, for $500,000. The line of credit is with Northern National Bank,
accrues interest at the prime rate, matures February 10, 1997, and is
secured by accounts receivable, equipment, inventory, general
intangibles and a personal guarantee by a shareholder. The interest
rate was 8.25% at December 31, 1996. The maximum and average amounts
outstanding on short-term lines of credit during 1996, were $500,000
and $266,066, respectively. There was no balance outstanding as of
December 31, 1995.
NOTE 5 LONG-TERM DEBT
Description 1996 1995
------------------------------------------------ ------------ -------------
Note Payable - Northern National Bank,
Revolving Line of Credit, Borrowing Limit of
$3,000,000, Interest at LIBOR Index Plus 2 1/2%,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory and General
Intangibles $ 2,736,179 $ 2,161,179
Note Payable - Northern National Bank,
Revolving Line of Credit, Borrowing Limit of
$1,500,000, Interest at LIBOR Index Plus 2 1/2%,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory, General
Intangibles and Personal Guarantee and Stock
Pledged by a Shareholder 680,760 0
29
NOTE 5 LONG-TERM DEBT (CONTINUED)
Note Payable - Northern National Bank,
Line of Credit, Borrowing Limit of $400,000,
Interest at Bank's Prime, Monthly Payments of
$7,500 Including Interest, Due December 1998;
Secured by Accounts Receivable, Equipment,
inventory and General Intangibles 200,000 0
Note Payable - Northern National Bank,
Interest at LIBOR Index Plus 2 1/2%, Interest
Only Payments Beginning February 1997,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory, General
Intangibles and Personal Guarantee and Stock
Pledged by a Shareholder 1,500,000 0
Notes Payable - Communications Systems, Inc,
Interest at Prime as Established by First Bank
Minneapolis, Semi-Annual Principal Payments
of $200,000 Beginning May 1997, Due
November 2001 4,865,390 0
Note Payable - City of Augusta, Interest at
Prime, Five Annual Payments Beginning
August 1996, Due August 2000; Secured
By Leasehold Improvements 20,802 40,000
Note Payable - Northern States Power Company,
Interest at 6%, Monthly Payments of $483
Including Interest, Due December 1998;
Secured by Equipment 10,476 15,483
Note Payable - Northern National Bank,
Interest at Bank's Prime Plus 2%, Monthly
Payments of $1,200 Including Interest,
Due April 2000; Secured by Real Estate 116,447 120,754
Note Payable - Midwest Minnesota Community,
Development Corporation, Interest at 9%,
Monthly Payments of $2,802 Including Interest,
Due March 2000; Secured by Real Estate
and Equipment 91,288 115,297
30
NOTE 5 LONG-TERM DEBT (CONTINUED)
Note Payable - Midwest Minnesota Community,
Development Corporation, Interest at 8%,
Monthly Payments of $1,654 Including Interest,
Due March 2009; Secured by
Real Estate and Equipment 133,858 142,185
Note Payable - Northern National Bank,
Interest at 7.5%, Monthly Payments of $5,270
Including Interest, Due May 1999; Secured by
Inventory, Equipment, Accounts Receivable
and General Intangibles 187,577 230,608
Note Payable - Northern National Bank, Interest
at LIBOR Index Plus 2 1/2%, Monthly Payments
of $13,060 Including Interest, Due January
2001; Secured by Equipment, Accounts
Receivable and Inventory and General
Intangibles 542,017 640,000
Note Payable - Northern National Bank, Interest
at LIBOR Index Plus 2 1/2%, Monthly Payments
of $5,000 Including Interest, Due January 2001;
Secured by Equipment, Accounts Receivable,
Inventory, General Intangibles and Real Estate 493,533 510,000
Note Payable - Joint Economic Development
Commission, Inc., Interest at 8.25%, Monthly
Payments of $1,652 Including Interest, Due
August 2000; Secured by Building and Land 63,510 76,279
------------- ------------
Total Long-Term Debt $ 11,641,837 $ 4,051,785
Current Maturities 731,080 283,100
------------- ------------
Long-Term Debt - Net of
Current Maturities $ 10,910,757 $ 3,768,685
------------- ------------
------------- ------------
31
NOTE 5 LONG-TERM DEBT (CONTINUED)
Maturity requirements by year on long-term debt are as follows:
Years Ending December 31, Amount
------------------------- ------
1997 $ 731,080
1998 5,714,488
1999 715,625
2000 1,122,880
2001 3,278,477
Later Years 79,287
-------------
Total $ 11,641,837
-------------
-------------
The maximum and average amounts outstanding on the Company's long-term
lines of credit were $3,716,939 and $2,596,711 during 1996,
respectively, and $2,161,179 and $400,000 during 1995, respectively.
NOTE 6 LEASE OBLIGATION
The Company has entered into various operating leases for equipment and
office space. Rent expense for the years ended December 31, 1996, 1995
and 1994, was $451,659, $290,799 and $118,672, respectively. The
future minimum lease payments are as follows:
Years Ending December 31, Amount
--------------------------- --------
1997 $ 337,214
1998 327,675
1999 327,675
2000 190,650
2001 82,575
-------------
Total $ 1,265,789
-------------
-------------
32
NOTE 7 RELATED PARTY TRANSACTIONS
Ceridian Corporation is one of the Company's stockholders at December
31, 1996, 1995 and 1994. Transactions and balances with Ceridian
Corporation are as follows:
CONTRACT FOR DEED - CERIDIAN CORPORATION
During 1991 the Company entered into a contract for deed with Ceridian
Corporation for the purchase of the building and land. The original
purchase price was $840,000. The contract was paid off in 1994.
SALES
In 1996, 1995 and 1994, sales to Ceridian Corporation represented
approximately 1% of total sales in each year.
NOTE 8 INCOME TAXES
The provision for income taxes for each of the three years in the
period ended December 31, 1996, consists of the following:
1996 1995 1993
---------- --------- ------------
Current Taxes - Federal $ 10,000 $ 37,000 $ 17,183
Current Taxes - State 72,000 63,000 17,023
Deferred Taxes 110,000 (100,000) (280,000)
---------- --------- ------------
Total Expense (Benefit) $ 192,000 $ 0 $ (245,794)
---------- --------- ------------
---------- --------- ------------
Deferred tax assets at December 31, 1996 and 1995, consist of the
following:
1996 1995
------------ ------------
Net Operating Loss (NOL) Carryforwards $ 1,415,000 $ 1,635,000
Tax Credit Carryforwards 235,000 295,000
Other 40,000 30,000
Valuation Allowance (240,000) (400,000)
------------ ------------
Total $ 1,450,000 $ 1,560,000
------------ ------------
------------ ------------
33
NOTE 8 INCOME TAXES (CONTINUED)
The statutory rate reconciliation for each of the three years in the
period ended December 31, is as follows:
1996 1995 1994
----------- ------------ -----------
Statutory Tax Provision $ 217,000 $ 453,000 $ 319,000
State Income Taxes 78,000 80,000 50,000
Additional NOL
Carryforwards 0 (851,000) 0
Increase (Reduction) in
Deferred Tax Valuation
Allowance (Net of
Expired Tax Credit
Carryforwards) (100,000) 300,000 (600,000)
Other (3,000) 18,000 (14,794)
----------- ----------- -----------
Income Tax
Provision
(Benefit)
Expense $ 192,000 $ 0 $ (245,794)
----------- ----------- -----------
----------- ----------- -----------
The Company has available for Federal income tax purposes, operating
loss carryforwards, unused investment credits, and unused research and
development credits which may provide future tax benefits, expiring as
follows:
Investment Research and
Operating Loss Tax Credit Development Tax
Year of Expiration Carryforward Carryforward Credit Carryforward
------------------ -------------- ------------ -------------------
1997 $ 0 $ 4,064 $ 43,051
1998 0 50,888 97,643
1999 3,035,800 39,965 0
2001 767,300 0 0
2002 253,200 0 0
2003 109,700 0 0
-------------- ------------- -------------
Totals $ 4,166,000 $ 94,917 $ 140,694
-------------- ------------- -------------
-------------- ------------- -------------
During 1995 the Company identified an additional $2,503,778 of net
operating loss carryforwards related to final tax regulations. The
regulations clarified that tax carryforward attributes in a Title 11
bankruptcy prior to December 31, 1993, where stock was issued for debt,
need not be reduced by debt cancellation income. As a result of the
increase in net operating loss carryforwards, which must be utilized
prior to taking the benefit in tax credit carryovers, the Company has
increased its valuation allowance accordingly.
In 1996 the Company utilized operating loss carryforwards of $642,000
to offset federal taxable income.
34
NOTE 8 INCOME TAXES (CONTINUED)
In 1995 the Company utilized operating loss carryforwards of $1,450,000
to offset federal taxable income and $46,000 of research and
development credits to offset state tax.
In 1994 the Company utilized operating loss carryforwards of $932,000
to offset federal taxable income and $126,100 to offset state taxable
income. The Company also utilized $33,900 of research and development
tax credits to offset state tax.
NOTE 9 PREFERRED STOCK TRANSACTIONS
The holders of the preferred stock are entitled to a noncumulative
dividend of 12% when and as declared. In liquidation, holders of
preferred stock have preference to the extent of $1.00 per share plus
dividends accrued but unpaid. Preferred stock dividends of $-0-,
$29,934 and $14,946 were paid during the year-ended December 31, 1996,
1995 and 1994, respectively.
NOTE 10 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company sells its products to companies in the computer, medical,
governmental and various other industries. Historically, the Company
has not experienced significant losses related to receivables from
customers in any particular industry or geographic area.
The Company maintains its excess cash balances in checking and money
market accounts at three financial institutions. These balances exceed
the federally insured limit by $775,000 and $520,000 at December 31,
1996 and 1995, respectively. The Company has not experienced any
losses in any of the short-term investment instruments it has used for
excess cash balances.
Two customers accounted for approximately 11.3% and 17.5% of sales,
respectively, for the year ended December 31, 1996.
Three customers accounted for approximately 24.1%, 16.6% and 11.8% of
sales, respectively, for the year ended December 31, 1995. One
customer accounts for approximately 10.4% of accounts receivable at
December 31, 1995.
Three customers accounted for approximately 26.8%, 24.5% and 20.2% of
sales, respectively, for the year ended December 31, 1994. Three
customers accounted for approximately 29.8%, 20.5% and 11.3% of
accounts receivable, respectively, at December 31, 1994.
35
NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS
In 1992, the Company approved the adoption of a fixed stock based
compensation plan. The purpose of the Plan is to promote the interests
of the Company and its shareholders by providing officers, directors
and other key employees with additional incentive and the opportunity,
through stock ownership, to increase their proprietary interest in the
Company and their personal interest in its continued success. The
Company has authorized 200,000 shares for issuance under this Plan.
Stock options may be granted for the purchase of common stock at a
price not less than the fair market value on the date of the grant.
Options are generally exercisable after one or more years and expire no
later than 10 years from the date of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its fixed stock based compensation plan.
Accordingly, no compensation cost has been recognized for this Plan in
1996, 1995 or 1994. Had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, "Accounting for Stock Based
Compensation," net income and earnings per share would not differ
materially from amounts reported under APB Opinion No. 25.
Since the proforma disclosures of results under SFAS No. 123 are only
required to consider grants awarded in 1995 and 1996, the proforma
effects of applying SFAS No. 123 during this initial phase-in period
may not be representative of the effects on reported results for future
years.
Following is a summary of the Plan's transactions:
Option Price
Shares (Per Share)
--------- ------------
Balance as of December 31, 1992 22,500 $1.75
Granted January 21, 1993 15,000 $1.625
---------
Balance as of December 31, 1993 37,500 $1.625 - $1.75
Granted January 24, 1994 10,000 $3.625
---------
Balance as of December 31, 1994 47,500 $1.625 - $3.625
Granted December 1, 1995 95,000 $5.25
Exercised (5,000) $1.75
---------
Balance as of December 31, 1995 137,500 $1.625 - $5.25
Granted December 1, 1996 - -
Exercised - -
---------
Balance as of December 31, 1996 137,500 $1.625 - $5.25
---------
---------
36
NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED)
A summary of the status of fixed options outstanding at December 31,
1996, is as follows:
Outstanding Exercisable Average Remaining
Exercise Price Options Options Contractural Life
-------------- ----------- ----------- -----------------
1.625 15,000 15,000 6 Years
1.75 17,500 17,500 5 Years
3.625 10,000 10,000 7 Years
5.25 95,000 19,000 9 Years
During 1993, the Company adopted a gain sharing plan. The purpose of
the Plan is to provide a bonus for increased output, improved quality
and productivity and reduced costs. The Company has authorized 50,000
shares to be available under this Plan.
In accordance with the terms of the Plan, employees can acquire newly
issued shares of common stock for 90% of the current market value.
5,168 shares have been issued under this Plan through December 31,
1996.
37
NOTE 12 SUPPLEMENTARY FINANCIAL INFORMATION
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total
3/31/96 6/30/96 9/30/96 12/31/96 1996
-------------- -------------- -------------- -------------- ---------------
NET SALES $ 5,574,986 $ 6,622,903 $ 6,143,457 $ 7,841,475 $ 26,182,821
GROSS PROFIT 1,006,356 1,214,275 1,096,171 1,310,560 4,627,362
NET INCOME 189,894 288,552 201,958 (234,375) 446,029
INCOME PER SHARE
OF COMMON STOCK 0.08 0.12 0.09 (0.10) 0.19
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total
3/31/95 6/30/95 9/30/95 12/31/95 1995
-------------- -------------- -------------- -------------- ---------------
NET SALES $ 3,625,264 $ 4,374,899 $ 5,449,175 $ 4,856,590 $ 18,305,928
GROSS PROFIT 673,905 964,800 966,969 1,159,166 3,764,840
NET INCOME 244,003 244,049 212,588 631,284 1,331,924
INCOME PER SHARE
OF COMMON STOCK 0.11 0.10 0.10 0.25 0.55
In the 4th quarter of 1995, the Company reduced previous quarter's tax
expense of $206,388, which increased 4th quarter net income by .08 per
share due to recognition of additional net operating loss
carryforwards.
In the 4th quarter of 1996, the Company wrote off $544,000 of
inventories due to evolving customer requirements. This reduced
4th quarter net income by .15 per share.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the directors and executive officers of the Registrant
will be included in the Registrant's 1996 proxy statement to be filed with the
Securities and Exchange Commission not later than April 30, 1997 and said
portions of the proxy statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Registrant will be included
in the Registrant's 1996 proxy statements to be filed with the Securities and
Exchange Commission not later than April 30, 1997 and said portions of the proxy
statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management of the Registrant will be included in the Registrant's 1996 proxy
statements to be filed with the Securities and Exchange Commission not later
than April 30, 1997 and said portions of the proxy statements are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(See note 7 of Consolidated Financial Statements)
(The remainder of this page was intentionally left blank.)
39
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND
REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements - Consolidated Financial Statements
and related Notes are included in Part II, Item 8, and are identified
in the Index on
Page 16.
(a) 2. Consolidated Financial Schedule - The following Consolidated
Financial Statement Schedule supporting the Consolidated Financial
Statements and the accountant's report thereon are included in this
Annual Report on Form 10-K:
PAGE
----
Independent Auditors' Report on Supplementary Information
Larson, Allen, Weishair & Co. , LLP 44
Consolidated Financial Statement Schedule for the years
ended December 31, 1996, 1995 and 1994
VIII Valuation and Qualifying Accounts 45
All other schedules are omitted since they are not applicable, not
required, or the required information is included in the financial statements or
notes thereto.
(a) 3. THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT:
10.1 Promissory Note for acquisition of division between Company and
Northern National Bank dated December 31, 1996.
10.2 Revolving Note for working capital line of credit between
Company and Northern National Bank dated December 31, 1996.
10.3 Promissory Note for equipment purchases between Company and
Northern National Bank dated December 31, 1996.
10.4 Revolving Note for the working capital line of credit between
Company and Northern National Bank dated December 31, 1996.
10.5 Revolving Note for repurchase of stock between Company and
Northern National Bank dated May 10, 1996.
10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3
10.4 and 10.5.
40
10.7 Promissory Note for acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
10.8 Promissory Note for the acquisition of division between Company
and Communications Systems, Inc. dated November 4, 1996.
23.1 Letter of Consent from Larson, Allen, Weishair & Company in
reference to the S-8 Forms filed June 21 1994 and June 30, 1993.
The following exhibits are incorporated by reference to exhibits 10.2, 10.3,
10.4, 10.5, 10.6 and 23.1, respectfully, to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.2 Promissory Note for purchase of facility in Fairmont, Minnesota
between Company and Northern National Bank dated December 29,
1995.
10.3 Promissory Note for purchase of capital equipment located at
Fairmont, Minnesota facility between Company and Northern
National Bank dated December 29, 1995.
10.4 Security Agreement covering Promissory Notes in Exhibits 10.1,
10.2 and 10.3.
10.5 Asset Purchase Agreement for the purchase of assets of Monitor
Technology Corporation dated February 24, 1995.
10.6 Asset Purchase Agreement for the purchase of Aerospace Division
of Communication Cable, Inc. dated August 23, 1995.
The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and
10.5, respectfully, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.2 Promissory Note and Loan Agreement for capital equipment line of
credit between the Company and Northern National Bank dated April
29, 1994.
10.3 Loan Agreement for Real Estate between the Company and Northern
National Bank dated March 18, 1994.
10.5 Promissory Notes and Loan Agreement for Real Estate between the
Company and MMCDC and MMCDC/NNC dated March 18, 1994.
41
The following exhibits are incorporated by reference to Exhibits 10.3 and 10.4,
respectfully, to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.3 Promissory Notes for capital equipment between the Company and
City of Augusta, Wisconsin dated August 17, 1993.
10.4 Promissory Notes and Loan Agreement for capital equipment
between the Company and Northern States Power Company dated
November 15, 1993.
The following exhibits are incorporated by reference to Exhibits 3.1, 3.2, 10.1
and 10.3 respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
3.1 Articles of Incorporation (SMR) dated August 9,1991
3.2 Bylaws (SMR)
10.3 Promissory Note and Mortgage between the Company and Joint
Economic
Development Commission, Inc. dated June 28, 1991.
The following exhibit is incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.
3.1 Articles of Incorporation dated October 30, 1990.
The following exhibit is incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K for the year ended December 31, 1984:
3.2 Bylaws
(b) Reports on Form 8-K.
Form 8-K report date November 4, 1996 and filed November 12, 1996 for
purchase of assets of Zercom Corporation.
Form 8-K/A 1 filed on March 3, 1997. This Form 8-K/A was an amendment
to Form 8-K report date November 4, 1996 and filed November 12, 1996.
42
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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.
NORTECH SYSTEMS INCORPORATED
March 27, 1997 By:/s/
----------------------------------
Quentin E. Finkelson
Its President and
Chief Executive Officer
March 27, 1997 By:/s/
----------------------------
Garry M. Anderly
Principal Financial Officer
and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 27, 1997 /s/
----------------------------------
Quentin E. Finkelson,
President, Chief Executive
Officer and Director
March 27, 1997 /s/
----------------------------------
Myron Kunin, Director
March 27, 1997 /s/
----------------------------------
Richard W. Perkins, Director
43
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
Board of Directors
Nortech Systems Incorporated And Subsidiary
Bemidji, Minnesota
Our report on the basic consolidated financial statements of Nortech Systems
Incorporated and Subsidiary for 1996, 1995 and 1994 precedes the consolidated
financial statements. The audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule on the following page is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 13, 1997
44
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column E Column F
- ---------------------------------- ------------- ------------ --------------- --------------
Additions
Balance at Charged Balance at
Beginning to Costs End of
Classification Of Period And Expenses Add (Deduct) Period
- ---------------------------------- ------------- ------------ --------------- --------------
Year Ended December 31, 1996:
Allowance for Doubtful Accounts $ 6,053 $ 16,248 $ - $ 22,301
Deferred Tax Valuation Allowance 400,000 - (160,000) 240,000
------------- ------------ --------------- -------------
$ 406,053 $ 16,248 $ (160,000) $ 262,301
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Year Ended December 31, 1995:
Allowance for Doubtful Accounts $ 4,343 $ 1,710 $ - $ 6,053
Deferred Tax Valuation Allowance 100,000 - 300,000 400,000
------------- ------------ --------------- -------------
$ 104,343 $ 1,710 $ 300,000 $ 406,053
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Year Ended December 31, 1994:
Allowance for Doubtful Accounts $ - $ 4,343 $ - $ 4,343
Deferred Tax Valuation Allowance 700,000 - (600,000) 100,000
------------- ------------ --------------- -------------
$ 700,000 $ 4,343 $ (600,000) $ 104,343
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
45
INDEX TO EXHIBITS
DESCRIPTIONS OF EXHIBITS
- ------------------------
10.1 Promissory Note for acquisition of division between Company and
Northern National Bank dated December 31, 1996.
10.2 Revolving Note for working capital line of credit between Company and
Northern National Bank dated December 31, 1996.
10.3 Promissory Note for equipment purchases between Company and Northern
National Bank dated December 31, 1996.
10.4 Revolving Note for the working capital line of credit between Company
and Northern National Bank dated December 31, 1996.
10.5 Revolving Note for repurchase of stock between Company and Northern
National Bank dated May 10, 1996.
10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3 10.4
and 10.5.
10.7 Promissory Note for acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
10.8 Promissory Note for the acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference
to the S-8 Forms filed June 21 1994 and June 30, 1993.
46