NORTECH SYSTEMS INC - Quarter Report: 1999 September (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 1999.

For the Transition period from                to                

Commission File Number 0-13257.

NORTECH SYSTEMS INCORPORATED

(Exact name of registrant as specified in its chapter)

(612) 473-4102
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 per share per value.

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

APPLICABLE ONLY TO CORPORATE REGISTRANTS;

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

As of October 31, 1999, there were 2,351,377 shares of the Company's $.01 per share par value common stock outstanding.

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NORTECH SYSTEMS INCORPORATED
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999

INDEX

NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS ASSETS
FOR THE PERIOD NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

See notes to consolidated financials statements

NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS LIABILITIES
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

See notes to consolidated financials statements

NORTECH SYSTEMS INCORPORATED
STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

See notes to consolidated financials statements

NORTECH SYSTEMS INCORPORATED
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

See notes to consolidated financials statements

NORTECH SYSTEMS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

See notes to consolidated financials statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations for Period Ended September 30, 1999

Note to Consolidated Financial Statements

    (1)  BASIS OF PRESENTATION  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 1998.

    Effective June 30, 1999, the Company made a decision to sell Imaging Technology Division (Display Product Segment) and Nortech Medical Services (Medical Management Segment). The following management discussion related only to the continuing operation of contract manufacturing. See below, the details of discontinued operations.

    For the quarter ended September 30, 1999, the Company had revenues of $9,333,901 compared to revenues of $8,322,743 for the quarter ended September 30, 1998. The increase in revenues resulted primarily from the additional revenues generated from internal growth. The net income for the three months ended September 30, 1999 was $273,051 or $.11 per share, compared to a net income of $227,731 or $.09 per share, for the three months ended September 30, 1998. The net income for the quarter ended June 30, 1999 was primarily impacted by increased gross profit from the increased revenue offset by increased selling expenses.

    Company's 90 day order backlog was $8,730,000 as of September 30, 1999, compared to $8,590,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the fourth quarter of 1999 to be about the same as the third quarter of 1999.

    (2) DISCONTINUED OPERATION  On June 30, 1999, The Company, decided to sell the Imaging Technologies operation (Display Product Segments) and Nortech Medical Services (Medical Management Segment). As of July 30, The Company has interested buyers that want to sign confidentiality agreements with The Company. Although it is difficult to predict, the Company expects to complete the sales in the fourth quarter of 1999. Display Products and Medical Management are reported as discontinued operations, and the consolidated financial statements have been reclassified to segregate the net assets and operating results of the business.

    During the third quarter of 1999, after talks with several potential buyers, it became apparent that Imaging division does not command the sale price we were anticipating in the second quarter. Therefore, we have increased our estimated loss on sale of discontinued operations. The third quarter loss for discontinued operation was $1,725,187.

    The estimated loss recorded year to date during 1999 on the sale of the discontinued operation, was $4,469,518, which included a reduction in asset value of $2,950,000 and a reduction for anticipated closing costs and operating losses until disposal, of $1,519,518. The loss was reported net of an income tax benefit of $1,564,331, for an after-tax loss of $2,905,187.

    (3) SEGMENT REPORTING INFORMATION  Nortech Systems, Inc manufactures and sells a variety of products used in the computer, medical, government and defense industries, primarily for the commercial industrial market. The Company's principal businesses are based upon the nature of the manufacturing operations of the respective location.

1.

Contract Manufacturing—Includes the manufacture of wire harnesses, cable and electromechanical assemblies, printed circuit board assemblies, and higher-level assemblies, all of which are manufactured under contract specifications. These products are sold primarily to the commercial and defense industries.



2.

Display Products—Includes the design, manufacture, and marketing of high performance display monitors. The products are sold primarily to the medical, industrial, and service industries. Segment discontinued as of June 30, 1999.



3.

Medical Management—Provides service bureau and office management services to physicians and clinics. Segment discontinued as of June 30, 1999. Each of these is a business segment, with its respective financial performance detailed in this report for the nine months ended September 30, 1999 and September 30, 1998.

Nortech Systems Incorporated
Business Segment Information
for The Nine Months Ended
September 30, 1999 and September 30, 1998

Liquidity and Capital Resources.

    The Company's working capital decreased to $7,579,991 during the third quarter of 1999, compared to $9,080,589 as of December 31, 1998. The main reason for the decrease, was the recording of the loss from discontinued operations. The Company believes that its financial stability will continue to improve during 1999 and would expect that its operating cash flow and available credit faculties will be sufficient to fund the expected growth in the near term.

Update On Year 2000 Status

    Nortech Systems, Inc recognizes the dangers of the "Year 2000 Problem". To ensure a minimum negative impact on business operations, Nortech has established a Y2K Initiative. The Y2K Initiative addresses the effect on the company, our vendors and our customers. We have completed the inventory and evaluation phase, and are nearing completion of the implementation phase. Testing is nearly completed on most systems. Monitoring and evaluation will continue throughout 1999 and into 2000 until we are sure all issues have been properly resolved.

PART II — OTHER INFORMATION

Item 2. Exhibits and Reports on Form 8-K.

    None

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SIGNATURES

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

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NORTECH SYSTEMS INCORPORATED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999
INDEX

NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS FOR THE PERIOD NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
NORTECH SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS LIABILITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

NORTECH SYSTEMS INCORPORATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

NORTECH SYSTEMS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations for Period Ended September 30, 1999
Note to Consolidated Financial Statements

Liquidity and Capital Resources.
Update On Year 2000 Status

PART II — OTHER INFORMATION

Item 2. Exhibits and Reports on Form 8-K.

SIGNATURES