UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|
|
For the Quarter Ended March 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01 Per Share
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.
Shares of common stock outstanding at April 14, 2003: 2,479,990 shares of $.01 per share par value
(The remainder of this page was intentionally left blank.)
FORM 10-Q
INDEX
2
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
|
ASSETS |
|
MARCH 31 |
|
DECEMBER 31 |
|
||
|
|
|
(UNAUDITED) |
|
(AUDITED) |
|
||
|
|
|
|
|
|
|
||
|
Current Assets |
|
|
|
|
|
||
|
Cash and Cash Equivalents |
|
$ |
383,031 |
|
$ |
448,751 |
|
|
Accounts Receivable, Less Allowance for Uncollectible Accounts |
|
6,916,333 |
|
7,616,093 |
|
||
|
Inventories: |
|
|
|
|
|
||
|
Finished Goods |
|
2,568,679 |
|
2,172,379 |
|
||
|
Work In Process |
|
1,850,657 |
|
1,859,000 |
|
||
|
Raw Materials |
|
8,526,053 |
|
8,288,938 |
|
||
|
|
|
|
|
|
|
||
|
Total Inventories |
|
12,945,389 |
|
12,320,317 |
|
||
|
|
|
|
|
|
|
||
|
Prepaid Expenses |
|
386,781 |
|
369,252 |
|
||
|
Income Taxes Receivable |
|
413,518 |
|
483,971 |
|
||
|
Deferred Tax Assets |
|
969,000 |
|
959,000 |
|
||
|
|
|
|
|
|
|
||
|
Total Current Assets |
|
22,014,052 |
|
22,197,384 |
|
||
|
|
|
|
|
|
|
||
|
Property and Equipment |
|
|
|
|
|
||
|
Land |
|
151,800 |
|
151,800 |
|
||
|
Building and Leasehold Improvements |
|
4,668,467 |
|
4,671,905 |
|
||
|
Manufacturing Equipment |
|
5,651,723 |
|
5,466,567 |
|
||
|
Office and Other Equipment |
|
2,682,892 |
|
2,743,707 |
|
||
|
|
|
|
|
|
|
||
|
Total Property and Equipment |
|
13,154,882 |
|
13,033,979 |
|
||
|
|
|
|
|
|
|
||
|
Accumulated Depreciation |
|
(7,356,687 |
) |
(7,084,565 |
) |
||
|
|
|
|
|
|
|
||
|
Net Property and Equipment |
|
5,798,195 |
|
5,949,414 |
|
||
|
|
|
|
|
|
|
||
|
Other Assets |
|
|
|
|
|
||
|
Deposits |
|
11,012 |
|
11,012 |
|
||
|
Non-Compete, Net of Accumulated Amortization |
|
1,240,184 |
|
1,335,584 |
|
||
|
Goodwill |
|
76,006 |
|
76,006 |
|
||
|
Deferred Tax Assets |
|
53,000 |
|
33,000 |
|
||
|
|
|
|
|
|
|
||
|
Total Other Assets |
|
1,380,202 |
|
1,455,602 |
|
||
|
|
|
|
|
|
|
||
|
Total Assets |
|
$ |
29,192,449 |
|
$ |
29,602,400 |
|
See accompanying Notes to Consolidated Financial Statements
3
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
MARCH 31 |
|
DECEMBER 31 |
|
||
|
|
|
(UNAUDITED) |
|
(AUDITED) |
|
||
|
|
|
|
|
|
|
||
|
Current Liabilities |
|
|
|
|
|
||
|
Current Maturities of Notes and Capital Lease Payable |
|
$ |
1,335,553 |
|
$ |
1,642,179 |
|
|
Checks Written in Excess of Cash |
|
300,000 |
|
300,000 |
|
||
|
Accounts Payable |
|
3,405,203 |
|
3,298,474 |
|
||
|
Accrued Payroll and Commissions |
|
1,414,917 |
|
2,119,566 |
|
||
|
Accrued Health and Dental Claims |
|
273,791 |
|
277,864 |
|
||
|
Other Accrued Liabilities |
|
418,704 |
|
243,243 |
|
||
|
Net Current Liabilities from Discontinued Operations |
|
50,000 |
|
50,000 |
|
||
|
|
|
|
|
|
|
||
|
Total Current Liabilities |
|
7,198,168 |
|
7,931,326 |
|
||
|
|
|
|
|
|
|
||
|
Long-Term Liabilities |
|
|
|
|
|
||
|
Notes and Capital Lease Payable (Net of Current Maturities) |
|
8,509,313 |
|
8,580,944 |
|
||
|
Total Long-Term Liabilities |
|
8,509,313 |
|
8,580,944 |
|
||
|
Total Liabilities |
|
15,707,481 |
|
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: 2,473,650 and 2,441,946 Shares Issued and Outstanding at March 31, 2003 and December 31, 2002, Respectively |
|
24,736 |
|
24,419 |
|
||
|
Additional Paid-In Capital |
|
13,173,340 |
|
12,873,657 |
|
||
|
Accumulated Other Comprehensive Income |
|
(26,686 |
) |
— |
|
||
|
Retained Earnings (Accumulated Deficit) |
|
63,578 |
|
(57,946 |
) |
||
|
|
|
|
|
|
|
||
|
Total Shareholders’ Equity |
|
13,484,968 |
|
13,090,130 |
|
||
|
|
|
|
|
|
|
||
|
Total Liabilities & Shareholders’ Equity |
|
$ |
29,192,449 |
|
$ |
29,602,400 |
|
See accompanying Notes to Consolidated Financial Statements
4
NORTECH
SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
|
|
|
MARCH 31 |
|
MARCH 31 |
|
||
|
|
|
(Unaudited) |
|
(Unaudited) |
|
||
|
|
|
|
|
|
|
||
|
Net Sales |
|
$ |
13,770,288 |
|
$ |
15,362,896 |
|
|
|
|
|
|
|
|
||
|
Cost of Goods Sold |
|
12,120,788 |
|
12,583,431 |
|
||
|
|
|
|
|
|
|
||
|
Gross Profit |
|
1,649,500 |
|
2,779,465 |
|
||
|
|
|
|
|
|
|
||
|
Operating Expenses: |
|
|
|
|
|
||
|
Selling Expenses |
|
673,833 |
|
714,066 |
|
||
|
General and Administrative Expenses |
|
706,552 |
|
939,535 |
|
||
|
Total Operating Expenses |
|
1,380,385 |
|
1,653,601 |
|
||
|
|
|
|
|
|
|
||
|
Income From Operations |
|
269,115 |
|
1,125,864 |
|
||
|
|
|
|
|
|
|
||
|
Other Income (Expense) |
|
|
|
|
|
||
|
Interest Income |
|
713 |
|
1,414 |
|
||
|
Miscellaneous Income (Expense) |
|
17,725 |
|
(12,822 |
) |
||
|
Interest Expense |
|
(89,028 |
) |
(92,537 |
) |
||
|
Total Other (Expense) |
|
(70,591 |
) |
(103,945 |
) |
||
|
|
|
|
|
|
|
||
|
Income From Operations Before |
|
|
|
|
|
||
|
Income Taxes |
|
198,524 |
|
1,021,919 |
|
||
|
|
|
|
|
|
|
||
|
Income Tax Expense |
|
77,000 |
|
403,000 |
|
||
|
|
|
|
|
|
|
||
|
Net Income |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
|
|
|
|
|
|
||
|
Earnings Per Share: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Basic |
|
$ |
0.05 |
|
$ |
0.26 |
|
|
Average Number of Common Shares Outstanding Used for Basic Earnings Per Share |
|
2,456,389 |
|
2,370,970 |
|
||
|
|
|
|
|
|
|
||
|
Diluted |
|
$ |
0.05 |
|
$ |
0.25 |
|
|
Average Number of Common Share Outstanding Plus Dilutive Common Stock Options |
|
2,511,007 |
|
2,492,045 |
|
||
See accompanying Notes to Consolidated Financial Statements
5
NORTECH
SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
|
|
|
MARCH 31 |
|
MARCH 31 |
|
||
|
|
|
(Unaudited) |
|
(Unaudited) |
|
||
|
|
|
|
|
|
|
||
|
Net Income |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
|
|
|
|
|
|
||
|
Other Comprehensive Loss: |
|
|
|
|
|
||
|
Cumulative Translation Adjustment |
|
(26,686 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
Comprehensive Income |
|
$ |
94,836 |
|
$ |
618,919 |
|
6
NORTECH
SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
|
|
|
MARCH 31 |
|
MARCH 31 |
|
||
|
|
|
(Unaudited) |
|
(Unaudited) |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows From Operating Activities |
|
|
|
|
|
||
|
Net Income |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
||
|
Depreciation and Amortization |
|
369,869 |
|
298,303 |
|
||
|
Deferred Taxes |
|
(30,000 |
) |
11,000 |
|
||
|
Changes in Current Operating Items: |
|
|
|
|
|
||
|
Accounts Receivable |
|
697,983 |
|
(193,093 |
) |
||
|
Accrued Income Taxes and Income Taxes Receivable |
|
70,453 |
|
(197,318 |
) |
||
|
Inventories |
|
(625,072 |
) |
474,070 |
|
||
|
Prepaid Expenses |
|
(18,019 |
) |
49,794 |
|
||
|
Accounts Payable |
|
107,426 |
|
225,174 |
|
||
|
Accrued Payroll and Commissions |
|
(704,368 |
) |
(190,983 |
) |
||
|
Other Accrued Liabilities |
|
173,199 |
|
(142,160 |
) |
||
|
|
|
|
|
|
|
||
|
Net Cash Provided by Operating Activities |
|
162,995 |
|
953,706 |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows from Investing Activities: |
|
|
|
|
|
||
|
Acquisition of Equipment |
|
(136,731 |
) |
(102,261 |
) |
||
|
|
|
|
|
|
|
||
|
Net Cash Used by Investing Activities |
|
(136,731 |
) |
(102,261 |
) |
||
|
|
|
|
|
|
|
||
|
Cash Flows from Financing Activities: |
|
|
|
|
|
||
|
Net Change in Line of Credit |
|
61,844 |
|
(1,862,852 |
) |
||
|
Proceeds From Notes Payable |
|
— |
|
4,850,000 |
|
||
|
Payments on Notes and Capital Lease Payable |
|
(140,101 |
) |
(3,683,591 |
) |
||
|
Issuance of Stock |
|
— |
|
30,424 |
|
||
|
|
|
|
|
|
|
||
|
Net Cash Used by Financing Activities |
|
(78,257 |
) |
(666,019 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of Exhange Rate Changes on Cash |
|
(13,727 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
(65,720 |
) |
185,426 |
|
||
|
|
|
|
|
|
|
||
|
Cash and Cash Equivalents - Beginning |
|
448,751 |
|
181,730 |
|
||
|
|
|
|
|
|
|
||
|
Cash and Cash Equivalents - Ending |
|
$ |
383,031 |
|
$ |
367,156 |
|
See accompanying Notes to Consolidated Financial Statements
7
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 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 the Company and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc. All significant intercompany accounts and transactions have been eliminated.
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 provision 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. As a result, this interpretation has not impacted our financial statements.
In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires companies to recognize costs associated with exit or disposal activities when such costs are incurred rather than at the date of a commitment to
8
an exit or disposal plan. Previous accounting guidance was provided by the Emerging Issues Task Force (“EITF”) pursuant to Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). Statement No. 146 replaces EITF 94-3. The Company adopted this Statement on December 31, 2002 and will apply it prospectively based on future exit or disposal activity.
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 such shares within 30 days at a price of $7.00. The 31,704 shares required under the first installment were transferred to SAE on December 27, 2002, but were not considered outstanding at December 31, 2002 for purposes of calculating earnings per share, as the four-week period of time had not expired. During first quarter 2003, the market price of the Company’s stock met the $7.00 four-week requirement, at which time the shares issued to SAE became outstanding. Satisfaction of this obligation through issuance of stock resulted in a non-cash transaction of $300,000 during the three months ended March 31, 2003.
9
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 for the first quarters of 2003 and 2002 would have been as follows:
|
|
|
For the Three-Months Ended March 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Net income, as reported |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(6,639 |
) |
(17,132 |
) |
||
|
|
|
|
|
|
|
||
|
Proforma net income |
|
$ |
114,885 |
|
$ |
601,787 |
|
|
|
|
|
|
|
|
||
|
Earnings per share: |
|
|
|
|
|
||
|
Basic - as reported |
|
$ |
0.05 |
|
$ |
0.26 |
|
|
Basic - pro forma |
|
$ |
0.05 |
|
$ |
0.25 |
|
|
|
|
|
|
|
|
||
|
Diluted - as reported |
|
$ |
0.05 |
|
$ |
0.25 |
|
|
Diluted - pro forma |
|
$ |
0.05 |
|
$ |
0.24 |
|
There were no stock options granted during the three-month periods ended March 31, 2003 or 2002.
10
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.
|
|
|
For the Three Months Ended March 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Basic Earnings Per Common Share |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Net Income |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
|
|
|
|
|
|
||
|
Weighted average common share outstanding |
|
2,456,389 |
|
2,370,970 |
|
||
|
|
|
|
|
|
|
||
|
Basic earnings per common share * |
|
$ |
0.05 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings Per Common Share |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Net Income |
|
$ |
121,524 |
|
$ |
618,919 |
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding |
|
2,410,890 |
|
2,361,192 |
|
||
|
Stock options |
|
106,592 |
|
95,896 |
|
||
|
Weighted average common shares for diluted earnings per common share |
|
2,517,482 |
|
2,457,088 |
|
||
|
|
|
|
|
|
|
||
|
Diluted earnings per common share |
|
$ |
0.05 |
|
$ |
0.25 |
|
For each of the three months ended March 31, 2003 and 2002, there were no antidilutive shares. Thus, no antidilutive shares were excluded from the computation of diluted earnings per share.
Local currency is considered the functional currency for the operation outside the United States. Assets and liabilities are translated at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Cumulative translation adjustments, if significant, are recorded as a component of accumulated other comprehensive income in stockholders’ equity.
11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(1.) Results of Operations for Quarter Ended March 31, 2003
Net Sales:
The Company had net sales of $13,770,288 compared to net sales of $15,362,896 for the quarters ended March 31, 2003 and 2002, respectively. The decrease in net sales is due to order delays from major customer that reflects the general economic softness and the war in Iraq. This weakness primarily affected the Company’s commercial wire harness and cable business, which is particularly vulnerable in the short run to customer push-outs and order delays.
Gross Profit:
The Company had gross profit of $1,649,500 or 12.0% compared to gross profit of $2,779,465 or 18.1% for the quarters ended March 31, 2003 and 2002, respectively. The decrease reflects the reduced volume of business as stated above and the Company has elected to keep its infrastructure intact which affects the margin of the company in the short run.
Selling Expenses:
The Company’s selling expenses were $673,833 for quarter ended March 31, 2003 compared to $714,066 for the quarter ended March 31, 2002. Reduced selling expense was due to lower revenue levels.
General and Administrative Expense:
The Company’s general and administrative expenses were $706,552 for quarter ended March 31, 2003 compared to $939,535 for the quarter ended March 31, 2002. Reduction of expenses was due to lower head-count and reduced employee benefit expenses.
Other Income and Expense:
Other income and expense was $70,590 for quarter ended March 31, 2003 compared to $103,945 for the quarter ended March 31, 2002. The reduced expense relates to lower interest costs due to more favorable lending rates and miscellaneous income from the sale of tooling.
Net Income:
Net income for the three months ended March 31, 2003 was $121,524 or $0.05 per share compared to a net income of $618,919 or $0.26 per share for the three months ended March 31, 2002.
Income Tax:
Income tax expense for the three months ended March 31, 2003 was $77,000, compared to income expense of $403,000 for the three months ended March 31, 2002.
Backlog:
The Company’s 90-day order backlog was approximately $10,600,000 as of March 31, 2003, compared with approximately $10,400,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the second quarter of 2003 to be slightly higher than first quarter of 2003.
12
(2.) Liquidity and Capital Resources
The Company’s working capital increased to $14,815,884 at the close of first 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.
(3.) Critical Accounting Policies
The Company believes its most critical accounting estimates relate to inventory reserves, long-lived and intangible asset impairment, deferred tax balances, and self-insured health claim reserves.
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.
Income taxes:
Management’s estimate of the tax rates utilized in the calculation of the deferred tax balances is based on historical taxable income and expected future taxable income and corresponding rates. Further, management’s consideration of a valuation allowance for deferred tax assets is based upon estimates of taxable income in future periods. These are estimates and may differ from actual results.
Self-Insured Health Claim Reserves:
Management estimates its reserve for employee health claims based on health claims incurred, historical lag times and an analysis of claims activity during the period, while taking into consideration insurance limits and coverage.
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
13
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:
• Risks related to availability of labor;
• General economic, financial and business conditions that could effect the Company’s financial condition and results of operations.
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.
14
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures: The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiary would be made known to them by others within those entities.
(b) Changes in internal controls: There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date.
15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
None
16
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.
|
Nortech Systems, Inc. and Subsidiary |
||||
|
|
|
|
||
|
|
|
|
||
|
Date: May 13, 2003 |
|
By |
/s/ Michael J. Degen |
|
|
|
|
Michael J. Degen |
||
|
|
|
President and Chief
|
||
|
|
|
|
||
|
|
|
|
||
|
Date: May 13, 2003 |
|
By |
/s/ Garry M. Anderly |
|
|
|
|
Garry M. Anderly |
||
|
|
|
Principal Financial |
||
|
|
|
Officer and Principal |
||
17
Quarterly Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Degen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee or registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and Quarterly Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
18
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: May 13, 2003 |
/s/ |
Michael J. Degen |
|
|
|
|
Michael J. Degen |
|
|
|
|
President and Chief
|
|
19
I, Garry M. Anderly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
e) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee or registrant’s board of directors (or persons performing the equivalent function):
c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and Quarterly Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
20
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: May 13, 2003 |
|
/s/ |
Garry M. Anderly |
|
|
|
|
|
Garry M. Anderly |
|
|
|
|
|
Principal Financial |
|
|
|
|
|
Accounting Officer |
|
21