NORTECH SYSTEMS INC - Quarter Report: 2001 June (Form 10-Q)

Prepared by MerrillDirect

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2001.
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Transition period from ___________ to ___________.

Commission File Number 0-13257.

NORTECH SYSTEMS INCORPORATED

(Exact name of registrant as specified in its chapter)

MINNESOTA						41-1681094

(State of other jurisdiction of Incorporation or organization)						(I.R.S. Employer
						Identification No.)

1120 Wayzata Blvd East Suite 201, Wayzata, MN						55391

(Address of principal executive offices)						(Zip Code)

(952) 473-4102

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

	YES	ý	NO	o

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 July 31, 2001, there were 2,361,192 shares of the Company's $.01
per share par value common stock outstanding.

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

NORTECH SYSTEMS INCORPORATED
FORM 10-Q
QUARTER ENDED JUNE 30, 2001

INDEX


PART I - FINANCIAL INFORMATION

	Item 1	-	Financial Statements

			Notes to Condensed Consolidated Financial Statements

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

PART II - OTHER INFORMATION

	Item 6	-	Exhibits and Reports on Form 8-K

SIGNATURES

NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 30, 2000

			JUNE 3			DECEMBER 31
		ASSETS	2001			2000
			(UNAUDITED)			(AUDITED)


Current Assets
	Cash and cash equivalents		$	316,608		$	527,998
	Accounts receivable, net of allowance		8,142,635			8,580,791
	Inventories:
		Finished goods	1,982,937			1,298,626
		Work in process	2,295,491			1,848,025
		Raw materials	8,811,805			8,448,484
	Prepaid expenses and other		158,907			47,462
	Deferred tax asset		1,329,000			1,422,000


		Total Current Assets	$	23,037,383		$	22,173,386


Property and Equipment
	Land and building/leaseholdsat Cost:		$	4,510,406		$	4,386,421
	Manufacturing equipment		4,910,758			4,594,607
	Office and other equipment		2,398,792			2,325,189


		Total	$	11,819,956		$	11,306,217
	Accumulated depreciation		(5,615,174		)	(4,987,805		)


	Net Property and Equipment		$	6,204,782		$	6,318,412


Other Assets
	Goodwill and other intangible assets		79,066			99,750
	Deferred tax asset		127,000			31,000
	Other assets from discontinued operations		24,563			30,401


		Total Other Assets	$	230,629		161,151


		Total Assets	$	29,472,794		$	28,652,949

See notes to consolidated financial statements

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000

				JUNE 30				DECEMBER 31
LIABILITIES AND SHAREHOLDERS' EQUITY				2001				2000
				(UNAUDITED)				(AUDITED)


Current Liabilities
		Current maturities of notes and capital lease payable		$		3,078,506		$		3,333,401
		Accounts payable		5,551,780				5,743,836
		Accrued payrolls and commissions		1,706,497				1,668,748
		Accrued income taxes		228,330				182,330
		Other liabilities		926,239				1,200,296
		Net current liabilities from discontinued operations		472,288				411,236


			Total Current Liabilities	$		11,963,640		$		12,539,847


Long-Term Debt
Notes and capital lease payable (net of current maturities)				$	8,268,165			$	7,665,536


Shareholders' 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 hares authorized; 2,361,192 and 2,361,055 shares issued and outstanding		23,612				23,611
		Additional paid-in capital		12,159,004				12,158,036
		Accumulated deficit		(3,191,627			)	(3,984,081			)


			Total Shareholders' Equity	$		9,240,989		$		8,447,566



		Total Liabilities & Shareholders' Equity		$		29,472,794		$		28,652,949

See notes to consolidated financial statements

   CONSOLIDATED STATEMENTS OF INCOME
             FOR THE THREE MONTHS ENDED
             JUNE 30, 2001 AND JUNE 30, 2000

		JUNE 30			JUNE 30
		2001			2000
		(Unaudited)			(Unaudited)


Sales		$	12,622,055		$	13,199,584

Cost of Sales		10,622,729			10,838,359


Gross Profit		$	1,999,326		$	2,361,225

Selling, General and Administrative Expenses		$	1,344,838		$	1,330,228
Interest Expense		187,328			276,464
Miscellaneous (Income) Expense		(15,880		)	37,719


Net Income Before Income Tax		$	483,040		$	716,814

Income Tax Expense		181,000			268,805


Net Income		$	302,040		$	448,009


Basic Income per Share of Common Stock		$	0.13		$	0.19


Diluted Income per Share of Common Stock		$	0.12		$	0.19


Weighted Average Common Shares:
	Basic	2,361,192			2,352,884

	Diluted	2,481,401			2,393,692

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JUNE 30, 2000

		JUNE 30		JUNE 30
		2001		2000
		(Unaudited)		(Unaudited)


Sales		$	27,467,359	$	25,768,565

Cost of Sales		22,774,761		21,194,319


Gross Profit		$	4,692,598	$	4,574,246


Selling, General and Administrative Expenses		$	2,942,266	$	2,653,127
Interest Expense		428,833		571,766
Miscellaneous (Income) Expense		47,352		(23,681		)


Net Income Before Income Tax		$	1,274,147	$	1,373,034


Income Tax Expense		478,000		514,805


Net Income		$	796,147	$	858,229


Basic Income per Share of Common Stock		$	0.34	$	0.36


Diluted Income per Share of Common Stock		$	0.32	$	0.36


Weighted Average Common Shares:
	Basic	2,361,146		2,352,884

	Diluted	2,481,147		2,379,609

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JUNE 30, 2000

					JUNE 30			JUNE 30
					2001			2000
					(UNAUDITED)			(UNAUDITED)


Cash Flows from Operating Activities
	Net income from continuing operations				$	796,147		$	858,229
	Adjustments to reconcile net income from continuing operations to net cash provided (used) by continuing operations
			Depreciation and amortization		648,053			512,291
			Deferred taxes		(3,000		)	515,000
Changes in Operating Assets and Liabilities:
				Accounts receivable	438,156			(2,539,675		)
				Inventories	(1,495,098		)	(1,309,412		)
				Prepaid expenses	(111,445		)	(61,956		)
				Other assets	-			18,920
				Accounts payable	(192,056		)	1,739,235
				Accrued payrolls & commissions	37,749			556,083
				Accrued income taxes	46,000			-
				Other liabilities	(274,057		)	9,206


		Net Cash Provided (Used) by Continuing Operations			$	(109,551	)	$	297,921
		Net Cash Provided by Discontinued Operations			66,890			218,463


		Net Cash Provided (Used) by Operating Activities			$	(42,661	)	$	516,384


Cash Flows from Investing Activities:
		Acquisition of equipment			(513,739		)	(486,257		)


		Net Cash Used by Investing Activities			$	(513,739	)	$	(486,257	)


Cash Flows from Financing Activities:
		Proceeds from notes payables			$	4,459,000		$	1,950,873
		Payments on notes and capital lease payable			(4,114,959		)	(2,088,292		)
		Issuance of common stock			969			3,493


		Net Cash Provided (Used) by Financing Activities			$	345,010		$	(133,926	)


Net Decrease in Cash and Cash Equivalents					$	(211,390	)	$	(103,799	)


Cash and Cash Equivalents - Beginning					527,998			453,500


Cash and Cash Equivalents - Ending					$	316,608		$	349,701

See notes to consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The operating results of the interim periods presented are not necessarily indicative of the results expected for the year ending December 31, 2001 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, 2000 included in the Company’s Annual Report Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission.

NOTE 2. NEW ACCOUNTING PRONOUNCMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets". The statement addresses accounting and reporting for (i) intangible assets at acquisition and (ii) for intangible assets and goodwill subsequent to their acquisition. As it relates to the Company's goodwill and intangible assets in existence at June 30, 2001, the statement requires that management reassess the useful lives and amortization period of such assets. For those with an indefinite useful life, periodic amortization is to be discontinued and an annual impairment test, beginning January 1, 2002, is to be established. The Company's Management does not feel as if this pronouncement will have material impact on its statement of financial condition or cash flows at the effective date and is currently assessing the impact that the pronouncement may have on its results of operations in fiscal 2002 and thereafter.

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 “Business Combinations”, which is required for all business combinations initiated after June 30, 2001. The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations. The Company does not expect that the new standard will have a material effect on the results of operations or cash flows.

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

(1.) Results of Operations for Quarter and Period Ended June 30, 2001
The Company had revenues of $12,622,055 compared to revenues of $13,199,584 for the quarters ended June 30, 2001 and 2000, respectively. The decrease in revenues resulted primarily from order delays and move-outs from several large customers. The net income for the three months ended June30, 2001 was $302,040 or $.13 per share, compared to a net income of $448,009 or $.19 per share, for the three months ended June 30, 2000. The unfavorable variance in net income for the quarter ended June 30, 2001 compared to the prior year quarter was the result of realizing lower margins on reduced revenue levels as well as changes in the mix of products manufactured.

The Company had revenues of $27,467,359, compared to revenues of $25,768,565, for the six-month periods ended June 30, 2001 and 2000, respectively. The increased revenues result primarily from additional revenues generated from internal growth. The net income for the six month period ended June 30, 2001, was $796,147 or $.34 per share, compared to net income of $858,229 or $.36 per share for the same period in 2000.

The year to date results reflects the effects of the downturn in the economy. To offset the effect in future quarters, the Company has taken aggressive cost-reduction measures across the corporation, including consolidation of plant operations and reassessment of personnel needs. In July, the Company opened a service and repair center in Baxter, Minn., to refurbish printed circuit board assemblies and higher-level assemblies. The company also recently signed a four-year service contract with a major medical OEM and expects this facility to contribute positively in future quarters.

The Company's 90 day order backlog was $10,750,000 as of June 30, 2001, compared with $10,550,000 at the beginning of the quarter. Based on the current conditions, the Company anticipates revenue levels in the third quarter of 2001 to be higher than second quarter of 2001.

(2.) Liquidity and Capital Resources.
The Company's working capital increased to $11,073,743 during the second quarter of 2001, compared to $9,633,539 as of December 31, 2000. The Company believes that its financial stability will continue to improve during 2001 and would expect that its operating cash flow and available credit faculties will be sufficient to fund the expected growth in the near term.

Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although Nortech Systems Inc. believes these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

•	Volatility in the marketplace which may affect market supply and demand for Nortech Systems Inc.’s products;
•	Increased competition;
•	Changes in the reliability and efficiency of the Company’s operating facilities or those of third parties;
•	Risks related to availability of labor;
•	General economic, financial and business conditions that could affect Nortech Systems Inc.’s financial condition and results of operations.

The factors identified above are believed to be important factors) but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by Nortech Systems Inc. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. The Company undertakes no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

PART II - OTHER INFORMATION

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

None

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

SIGNATURES

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

Dated: August 10, 2001 NORTECH SYSTEMS INCORPORATED

By:/s/	Quentin E. Finkelson


		Quentin E. Finkelson
		Its President and Chief
		Executive Officer

By:/s/	Garry M. Anderly


		Garry M. Anderly
		Principal Financial
		Officer and Principal
		Accounting Officer