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 March 31, 2002.
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)

 

 

 

	(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.

 

 

 

 

 

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 April 30, 2002, there were 2,403,248 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 MARCH 31, 2002

 

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

 

 

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
					MARCH 31			DECEMBER 31
					2002			2001
					(UNAUDITED)			(AUDITED)
ASSETS
Current Assets
Cash and cash equivalents					$	367,156		$	181,730
Accounts receivable, net of allowance					9,303,823			9,110,730
Inventories:
Finished goods					2,241,514			1,698,373
Work in process					1,546,277			1,676,730
Raw materials					8,189,618			9,076,376
Total Inventories					$	11,977,409		$	12,451,479
Prepaid expenses and other					256,634			306,428
Deferred tax assets					1,446,000			1,492,000
Total Current Assets					$	23,351,022		$	23,542,367
Property and Equipment
Land and building/leaseholds					$	4,578,672		$	4,550,966
Manufacturing equipment					4,873,729			4,878,954
Office and other equipment					2,514,209			2,434,429
Total Property and Equipment					$	11,966,610		$	11,864,349
Accumulated depreciation					(6,291,053		)	(5,999,451		)
Net Property and Equipment					$	5,675,557		$	5,864,898
Other Assets
Goodwill and other intangible assets					76,777			83,478
Other assets from discontinued operations					15,050			16,795
Total Other Assets					$	91,827		100,273
Total Assets					$	29,118,406		$	29,507,538
See accompanying notes to consolidated financial statements

 

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
		MARCH 31			DECEMBER 31
LIABILITIES AND SHAREHOLDERS’ EQUITY		2002			2001
		(UNAUDITED)			(AUDITED)
Current Liabilities
Current maturities of notes and capital lease payable		$	570,184		$	501,681
Accounts payable		5,091,616			4,866,442
Accrued payrolls and commissions		1,980,141			2,171,124
Accured income taxes		341,388			538,706
Other liabilities		760,471			845,586
Net current liabilities from discontinued operations		100,694			159,484
Total Current Liabilities		$	8,844,494		$	9,083,023
Long-Term Liabilities
Notes and capital lease payable (net of current maturities)		$	9,027,023		$	9,791,722
Deferred tax liability		26,000			61,000
Total Long-Term Liabilities		$	9,053,023		$	9,852,722
Total Liabilities		$	17,897,517		$	18,935,745
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; 2,380,748 and 2,361,192 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively		23,807			23,612
Additional paid-in capital		12,209,628			12,179,399
Accumulated deficit		(1,262,546		)	(1,881,218		)
Total Shareholders’ Equity		$	11,220,889		$	10,571,793
Total Liabilities & Shareholders’ Equity		$	29,118,406		$	29,507,538
See accompanying notes to consolidated financial statements

 

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND MARCH 31, 2001
		MARCH 31			MARCH 31
		2002			2001
		(Unaudited)			(Unaudited)
Net Sales		$	15,362,896		$	14,845,304
Cost of Goods Sold		12,583,431			12,152,032
Gross Profit		$	2,779,465		$	2,693,272
Selling Expenses		714,066			693,663
General and Administrative Expenses		939,535			903,765
Interest Income		(1,414		)	(5,418		)
Miscellaneous Expense		12,822			68,650
Interest Expense		92,537			241,506
Income from Continuing Operations Before Income Taxes		$	1,021,919		$	791,106
Income Tax Expense		403,000			297,000
Income from Continuing Operations		$	618,919		$	494,106
Basic Income per Share of Common Stock		$	0.26		$	0.21
Diluted Income per Share of Common Stock		$	0.25		$	0.20
Weighted Average Common Shares:
Basic		2,370,970			2,361,056
Diluted		2,492,045			2,480,917
See accompanying notes to consolidated financial statements

 

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NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND MARCH 31, 2001
		MARCH 31			MARCH 31
		2002			2001
		(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income from continuing operations		$	618,919		$	494,106
Adjustments to reconcile net income from continuing operations to net cash provided (used) by continuing operations
Depreciation and amortization		298,303			362,970
Deferred taxes		11,000			75,000
Changes in Operating Assets and Liabilities:
Accounts receivable		(193,093		)	22,948
Inventories		474,070			(1,583,924		)
Prepaid expenses and other		49,794			(2,182		)
Accounts payable		225,174			197,201
Accrued payrolls and commissions		(190,983		)	385,979
Accured income taxes		(197,318		)	(190,330		)
Other liabilities		(85,115		)	(135,930		)
Net Cash Provided (Used) by Continuing Operations		$	1,010,751		$	(374,162	)
Net Cash Provided (Used) by Discontinued Operations		(57,045		)	45,245
Net Cash Provided (Used) by Operating Activities		$	953,706		$	(328,917	)
Cash Flows from Investing Activities:
Acquistion of equipment		$	(102,261	)	$	(298,446	)
Net Cash Used by Investing Activity		$	(102,261	)	$	(298,446	)
Cash Flows from Financing Activities:
Proceeds from notes payables		$	11,505,563		$	2,325,000
Payments on notes and capital lease payable		(12,202,006		)	(2,028,632		)
Issuance of common stock		30,424			969
Net Cash Provided (Used) by Financing Activities		$	(666,019	)	$	297,337
Net Increase (Decrease) in Cash and Cash Equivalents		$	185,426		$	(330,026	)
Cash and Cash Equivalents — Beginning		181,730			527,998
Cash and Cash Equivalents — Ending		$	367,156		$	197,972
See accompanying notes to consolidated financial statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.  BUSINESS DESCRIPTION

 

Nortech Systems Incorporated (the Company) is a Minnesota corporation with headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota.  The Company has manufacturing facilities located in Bemidji, Fairmont, Merrifield and Baxter, Minnesota as well as 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 provides a full “turn-key” contract manufacturing service to its customers.  All products are built to the customers design specifications.  Products are sold to customers both domestically and internationally.  The Company also provides repair service on circuit boards used in machines in the medical industry.

 

NOTE 2.  USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

NOTE 3.  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.

 

NOTE 4.  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.  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, 2002 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, 2001 included in the Company’s Annual Report Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission.

 

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NOTE 5.  SEGMENT REPORTING INFORMATION

 

During 1999, the Company formally adopted a plan to dispose of two of its operating segments, including Display Products and Medical Management.  See additional disclosures regarding these discontinued operations in Note 9 for the annual consolidated financial contained in the Company’s Annual Report Form 10K for the year ended December 31, 2001 as filed with the SEC.  The Company’s results from continuing operations for the quarters ending March 31, 2002 and 2001 consist entirely of the Contract Manufacturing segment.

 

NOTE 6.  RECENTLY ISSUED ACCOUNTING PRONOUNCMENTS

 

On July 1, 2001, the Company adopted Statement of Financial Accounting Standards No.141 “Business Combinations” (“SFAS 141”).  The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations.  The adoption of SFAS 141 did not have an impact on the Company’s consolidated financial statements.

 

On January 1, 2002, the Company adopted 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. SFAS replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement  for an impairment test.  SFAS 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangibles assets upon adoption.  After transition, the impairment tests will be performed annually.  SFAS 142 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Impairment or Disposal of Long-Lived Assets” (“SFAS 144’).  The provisions of this statement require that all long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations.  The adoption of SFAS 144 did not materially impact the Company’s consolidated financial positions or results of operations.

 

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

 

(1.) Results of Operations for Quarter and Period Ended March 31, 2002

The Company had revenues of $15,362,896 compared to revenues of $14,845,304 for the quarters ended March 31, 2002 and 2001, respectively.  The increase in revenues resulted primarily from increased revenue from the current customer base.  The net income for the three months ended March 31, 2002 was $618,919 or $.26 per share, compared to a net income of $494,106 or $.21 per share, for the three months ended March 31, 2001.  The favorable variance in net income for the quarter ended March 31, 2002 compared to the prior year quarter was the result of higher revenue levels, changes in the mix of products manufactured, stable selling, general and administrative expenses, along with reduced interest costs resulting from lower carrying amounts of debt.

 

The Company’s 90 day order backlog was approximately $11,000,000 as of March 31, 2002, compared with approximately $10,840,000 at the beginning of the quarter.  Based on the current conditions, the Company anticipates revenue levels in the second quarter of 2002 to be consistent with first quarter of 2002.

 

 (2.) Liquidity and Capital Resources.

The Company’s working capital increased to $14,516,528 at the close of first quarter 2002, compared to $14,459,344 as of December 31, 2001.  The Company believes that its financial stability will continue to improve during 2002 and would expect that its operating cash flow and available credit faculties will be sufficient to fund the expected growth in the near term.

 

 (3) Critical Accounting Policies

 

Inventory Reserve

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or excess to the need for production, these values are estimates and may differ from actual results.

 

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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 the Company’s products;

•                  Increased competition;

•                  Changes in the reliability and efficiency of the Company’s operating facilities or those of third parties;

•                  Risks related to availability of labor;

•                  General economic, financial and business conditions that could the Company’s financial condition and results of operations.

 

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

 

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PART II  — OTHER INFORMATION

 

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

 

Form 8K was filed on May 14, 2002 to announce the appointment of Michael Degen as President and Chief Executive Office of the Company to succeed the late president Quentin Finkelson.

 

 

 

 

 

 

 

 

 

 

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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.

 

Dated:  May 10, 2002		NORTECH SYSTEMS INCORPORATED
		By:	/s/ Michael J. Degen
			Michael J. Degen
			President and Chief
			Executive Officer
		By:	/s/ Garry M. Anderly
			Garry M. Anderly
			Principal Financial
			Officer and Principal
			Accounting Officer

 

 

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