<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO APPLICATION OR REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 4, 1996
------------------------
NORTECH SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
Minnesota 0-13257 41-0681094
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification #)
641 East Lake Street - Wayzata, MN 55391
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(Address of executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 473-4102
------------------------
AMENDMENT NO. 1 TO FORM 8-K
The undersigned registrant hereby amends the following items, financial or other
portions of its Current Report on Form 8-K dated November 4, 1996.
A
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Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
Financial statements of Zercom as of December, 1995, and related
statements of earnings and retained earnings and cash for the
years then ended.
(b) Pro Forma Financial Information.
(i) Proforma balance sheets (unaudited) for registrant
and Zercom, for the 9-month period ended September 30, 1996;
(ii) Proforma statements of income (unaudited) for the 9-month
period ended September 30, 1996, and for the year ended
December 31, 1995.
SIGNATUARES
Pursuant to the requirements of the Securities Exchange Commission
of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, hereunto duly authorized.
NORTECH SYSTEMS INCORPORATED
By
----------------------------------
Quentin E. Finkelson, President,
Chairman and Chief Executive Officer
Dated _________, 1997
B
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NORTECH SYSTEMS INCORPORATED PRO FORMA
TABLE OF CONTENTS
PAGE
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8KA Amendment to Application or Report A-B
Table of Contents C
Independent Auditor's Report - Zercom Corporation
Title Page D-1
Table of Contents D-2
Auditor's Report & Financial Statements 1-14
Independent Auditor's Consent A-1
Unaudited Pro Forma Condensed Financial Statements
Pro Forma Introduction P-1
Pro Forma Balance Sheet (Unaudited) for Period Ended Sept 30, 1996 P-2
Pro Forma Statement of Income (Unaudited) for Period Ended Sept 30, 1996 P-3
Pro Forma Balance Sheet (Unaudited) Work Sheet for Sept 30, 1996 P-4
Pro Forma Statement of Income (Unaudited) Work Sheet for Sept 30, 1996 P-5
Pro Forma Statement of Income (Audited) for Year Ended Dec 31, 1995 P-6
Notes to the Pro Forma P-7
C
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ZERCOM CORPORATION
(A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.)
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1995 AND 1994
D-1
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TABLE OF CONTENTS
PAGE
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Independent Auditor's Report 1
Balance Sheets
December 31, 1995 and 1994 2 - 3
Statements of Operations and Retained Earnings
For the Years Ended December 31, 1995 and 1994 4
Statements of Cash Flows
For the Years Ended December 31, 1995 and 1994 5 - 6
Notes to Financial Statements 7 - 14
D-2
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Zercom Corporation
(A Subsidiary of Communication Systems, Inc.)
Merrifield, Minnesota
We have audited the accompanying balance sheets of Zercom Corporation (a
Subsidiary of Communication Systems, Inc.) ("CSI") as of December 31, 1995 and
1994, and the related statements of operations and retained earnings, and cash
flows for the years then ended. These financial statements are the
responsibility of the CSI's management. Our responsibility is to express an
opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Zercom Corporation (a Subsidiary of
Communication Systems, Inc.) as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
December 17, 1996
(1)
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ZERCOM CORPORATION
(A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 494,919 $ 83,706
Accounts Receivable - Trade (Less Allowance for
Doubtful Accounts of $56,700 - 1995;
$74,200 - 1994) 1,860,747 2,488,824
Inventories 4,054,429 4,861,363
Prepaid Expenses 55,774 50,384
Deferred Income Taxes 816,400 774,100
------------ ------------
Total Current Assets $ 7,282,269 $ 8,258,377
------------ ------------
PROPERTY AND EQUIPMENT (At Cost)
Furniture and Fixtures $ 135,307 $ 100,948
Machinery and Equipment 2,095,361 1,969,791
Buildings and Improvements 1,192,547 875,326
Land and Improvements 81,460 78,460
------------ ------------
Total $ 3,504,675 $ 3,024,525
Less: Accumulated Depreciation 1,209,858 799,401
------------ ------------
Total Property and Equipment
(At Depreciated Cost) $ 2,294,817 $ 2,225,124
------------ ------------
OTHER ASSETS
Account Receivable - ERT $ 512,797 $ -
Other Assets 59,000 79,000
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Total Other Assets $ 571,797 $ 79,000
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Total Assets $ 10,148,883 $ 10,562,501
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------------ ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(2)
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1995 1994
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 12,504 $ 12,504
Accounts Payable - Trade 845,351 2,374,642
Due to Parent Company 7,961,002 7,075,344
Accrued Expenses 420,816 597,859
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Total Current Liabilities $ 9,239,673 $ 10,060,349
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LONG-TERM LIABILITIES
Long-Term Debt (Net of Current Maturities
Shown Above) $ 67,704 $ 80,204
Deferred Income Taxes 116,400 94,100
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Total Long-Term Liabilities $ 184,104 $ 174,304
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Total Liabilities $ 9,423,777 $ 10,234,653
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STOCKHOLDERS' EQUITY
Common Stock - $1 Par Value; 25,000 Shares
Authorized; 10,000 Shares Issued and Outstanding $ 10,000 $ 10,000
Contributed Capital 40,000 40,000
Retained Earnings 675,106 277,848
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Total Stockholders' Equity $ 725,106 $ 327,848
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Total Liabilities and Stockholders'
Equity $ 10,148,883 $ 10,562,501
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------------ ------------
(3)
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ZERCOM CORPORATION
(A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
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SALES $ 19,951,343 $ 17,659,093
COST OF GOODS SOLD (17,127,802) (15,955,524)
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GROSS PROFIT $ 2,823,541 $ 1,703,569
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE (2,206,632) (2,078,908)
INTEREST INCOME 58,226 11,253
INTEREST EXPENSE (17,477) (8,949)
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INCOME (LOSS) BEFORE INCOME TAXES $ 657,658 $ (373,035)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 260,400 (147,700)
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NET INCOME (LOSS) $ 397,258 $ (225,335)
Retained Earnings - Beginning 277,848 503,183
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RETAINED EARNINGS - ENDING $ 675,106 $ 277,848
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(4)
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ZERCOM CORPORATION
(A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers $ 20,066,623 $ 17,106,481
Cash Paid to Suppliers, Employees and
Contractors (19,808,101) (18,743,100)
Interest Received 58,226 11,253
Interest Paid (17,477) (8,949)
Income Taxes Paid (280,400) (132,300)
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Net Cash Provided (Used) by
Operating Activities $ 18,871 $ (1,766,615)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Property and Equipment $ (480,816) $ (984,834)
Acquisition of Licensing Rights - (20,000)
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Net Cash Used by
Investing Activities $ (480,816) $ (1,004,834)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long-Term Debt $ (12,500) $ (7,292)
Net Increase in Due to Parent 885,658 2,770,001
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Net Cash Provided by
Financing Activities $ 873,158 $ 2,762,709
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NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 411,213 $ (8,740)
Cash and Cash Equivalents - Beginning 83,706 92,446
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CASH AND CASH EQUIVALENTS - ENDING $ 494,919 $ 83,706
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(5)
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ZERCOM CORPORATION
(A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
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RECONCILIATION OF NET INCOME (LOSS) TO
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 397,258 $ (225,335)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating
Activities:
Depreciation and Amortization 431,123 308,943
Deferred Income Taxes (20,000) (280,000)
(Increase) Decrease in Receivables 115,280 (552,612)
(Increase) Decrease in Inventories 806,934 (1,264,143)
Increase in Prepaid Expenses (5,390) (9,573)
Increase (Decrease) in Accounts Payable (1,529,291) 201,947
Increase (Decrease) in Other Accrued Expenses (177,043) 54,158
------------ -------------
Net Cash Provided (Used) by
Operating Activities $ 18,871 $ (1,766,615)
------------ -------------
------------ -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(6)
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Zercom Corporation (the "Company") is a subsidiary of Communication
Systems, Inc. ("CSI"). The Company is 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.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
Company as described above. These statements are presented as if the
Company had existed as a corporation separate from CSI during the
periods presented and include the assets, liabilities, sales and
expenses that are directly related to the Company's operations. These
financial statements include CSI corporate overhead allocations.
USE OF ESTIMATES
The presentation 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The Company's estimates consist principally of
reserves for doubtful accounts and inventory obsolescence.
ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts equal to
the estimated collection losses to be incurred. The estimated losses
are based on actual collection experience and management's opinion of
the current status of existing receivables.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Allowances
are made for obsolete inventory and for lower of cost or market
amounts.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives
of the assets.
(7)
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NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets consist of licensing rights purchased for the right to
manufacture and sell certain fish locator products. The licensing
rights are being amortized on a straight-line basis of a 5-year
period. Amortization expense was $20,000 and $17,000 in 1995 and
1994, respectively.
DUE TO PARENT COMPANY
Corporate allocated expenses and all intercompany transfers of cash
are recorded in the intercompany account entitled "Due to Parent
Company." The corporate expenses allocated to the Company are due to
various services that are provided by the corporate office of CSI.
The cost of such services not directly attributable to a specific
division or subsidiary, primarily insurance and corporate overhead,
are allocated to the separate divisions and subsidiaries on the basis
described below.
The corporate allocation is comprised of the following expenses and is
allocated based on a beginning of year budget using the following
methods:
Expense Allocation Method
---------------------------- ----------------------------------
Corporate Overhead Revenue/Total Revenue
Legal and Audit Revenue/Total Revenue
Group Health Insurance Actual Charges
Life Insurance Actual Charges
401(k) Plan Actual Charges
ESOP Plan Actual Charges
INCOME TAXES
Current income tax expense is recorded at the Company level as if the
Company were a separate taxable entity using the overall effective
rate of Communication Systems, Inc.
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.
(8)
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NOTE 2 INVENTORIES
The components of inventories are as follows:
1995 1994
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Finished Goods $ 1,343,468 $ 910,857
Raw and Processed Materials 4,185,961 4,975,506
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$ 5,529,429 $ 5,886,363
Less: Inventory Allowances 1,475,000 1,025,000
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Total $ 4,054,429 $ 4,861,363
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NOTE 3 LONG-TERM DEBT
Long-term debt consists of a note payable to Consolidated Telephone
Co. The non-interest bearing note is due in monthly installments of
$1,042 through June 2002.
Maturity requirements are as follows:
Years Ending December 31, Amount
------------------------- ----------
1996 $ 12,504
1997 12,504
1998 12,504
1999 12,504
2000 12,504
Thereafter 17,688
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Total $ 80,208
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----------
(9)
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NOTE 4 FEDERAL AND STATE INCOME TAXES
The components of income tax expense for the years ended December 31,
1995 and 1994, consisted of the following:
1995 1994
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Current
Federal $ 226,600 $ 96,200
State 53,800 36,100
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Total Current $ 280,400 $ 132,300
Deferred
Federal $ (15,800) $ (220,600)
State (4,200) (59,400)
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Total Deferred $ (20,000) $ (280,000)
----------- ------------
Income Tax Provision $ 260,400 $ (147,700)
----------- ------------
----------- ------------
The components of net deferred tax assets at December 31, 1995, are as
follows:
Deferred Tax Assets:
Inventories, Principally Due to Inventory Allowances
and Additional Costs Inventoried for Tax Purposes $ 778,700
Accounts Receivable, Principally Due to
Allowance for Doubtful Accounts 22,500
Accrued Expenses 15,200
----------
Deferred Tax Assets $ 816,400
----------
Deferred Tax Liabilities:
Property and Equipment, Principally Due to
Differences in Depreciation $ 116,400
----------
Net Deferred Tax Asset $ 700,000
----------
----------
The deferred income tax benefit for 1995 and 1994 results from changes
in the net deferred tax asset due to:
1995 1994
----------- -----------
Inventory Allowances $ 135,800 $ 294,400
Allowance for Doubtful Accounts (6,900) 2,100
Accrued Expenses (86,700) 16,900
Property and Equipment (22,200) (33,400)
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Total $ 20,000 $ 280,000
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(10)
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NOTE 4 FEDERAL AND STATE INCOME TAXES (CONTINUED)
The actual income tax expense for the years ended December 31, 1995
and 1994, differs from the "expected" amount (computed by applying the
statutory federal income tax rate of 34% to the earnings before income
taxes and cumulative effect of a change in accounting principle) as
follows:
1995 1994
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Computed "Expected" Tax Expense 34.0 % 34.0 %
Increase (Decrease) in Income
Taxes Resulting from State
Income Taxes, Net of Federal
Tax Benefit 5.6 5.6
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Total 39.6 % 39.6 %
---------- ----------
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NOTE 5 EMPLOYEE BENEFIT PLAN
CSI has an employee savings plan (401k) and matches a percentage of
employee contributions up to eight percent of compensation. Several
of the Company's employees are participants in the Plan. It is CSI's
policy to recognize Plan costs as they accrue and to allocate those
costs to the divisions. Costs associated with the Plan that were
allocated to the Company were $42,000 and $28,000 for 1995 and 1994,
respectively.
NOTE 6 LEASE COMMITMENTS
The Company leases equipment and building space under operating
leases. Operating lease rental payments approximated $74,000 and
$85,000 for the years ended December 31, 1995 and 1994, respectively.
At December 31, 1995, the Company was obligated under one operating
lease to make minimum annual future lease payments as follows:
Years Ending December 31, Amount
------------------------- ---------
1996 $ 51,975
1997 51,975
1998 51,975
1999 51,975
---------
Total $ 207,900
---------
---------
(11)
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NOTE 7 EMPLOYEE STOCK PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
During 1985, the Board of Directors adopted a leveraged employee stock
ownership plan (ESOP) and authorized CSI to advance the ESOP or
guarantee debt of up to $2,000,000 to enable the Plan to purchase
CSI's common stock in the open market. Advances to the Plan bear
interest at 85% of prime and are repaid over ten years through CSI
contributions to the Plan.
Contributions to the Plan are determined by the Board of Directors and
can be made in cash or shares of CSI's stock. Contributions by the
Company of $28,000, and $37,000 were made in the years ending December
31, 1995 and 1994, respectively. At December 31, 1995, the ESOP held
342,593 shares of CSI's common stock, all of which has been allocated
to the accounts of eligible employees. All eligible employees of CSI
participate in the Plan after completing one year of service.
Contributions are allocated to each participant based on compensation
and vest 30% after three years of service and incrementally
thereafter, with full vesting after seven years. All advances by CSI
to the ESOP were repaid at December 31, 1995.
EMPLOYEE STOCK PURCHASE PLAN
CSI maintains an Employee Stock Purchase Plan for which 200,000 common
shares have been reserved. Several of the Company's employees
participate in the Plan. Under the terms of the Plan, participating
employees may acquire shares of common stock through payroll
deductions of not more that 10% of compensation. The price at which
shares can be purchased is 85% of the lower of fair market value for
such shares on one of two specified dates in each Plan year. A
participant is limited to the acquisition in any Plan year to the
number of shares which their payroll deductions for the year would
purchase based on the market price on the first day of the year or
$25,000, whichever is less. Shares issued to employees under the Plan
were 23,567 and 15,408 for the Plan years ended August 31, 1995 and
1994, respectively. At December 31, 1995, employees had subscribed to
purchase an additional 15,600 shares in the current Plan cycle ending
August 31, 1996.
NOTE 8 RELATED PARTY
The Company is allocated a portion of CSI's expenses, which are
charged to cost of goods sold and selling, general and administrative
expenses based on various methods (see Note 1). During 1995 and 1994,
these allocated expenses were $79,812 and $50,295, respectively.
In 1991, the Company borrowed $100,000 under a financing arrangement
between CSI and First Bank. CSI charged the Company for monthly
principal and interest payments equal to those required by First Bank.
The amounts outstanding were $-0- and $177,500 at December 31, 1995
and 1994, respectively.
(12)
<PAGE>
NOTE 8 RELATED PARTY (CONTINUED)
Sales to affiliated companies totaled $428,842 and $343,081 for the
years ended December 31, 1995 and 1994, respectively.
NOTE 9 SALES TO MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Two customers accounted for approximately 38.5% and 14.3% of sales,
respectively, for the year ended December 31, 1995. One customer
accounts for approximately 36.8% of accounts receivable at December
31, 1995.
One customer accounted for approximately 51.2% of sales, and 32.6% of
accounts receivable for the year ended December 31, 1994.
A major customer during 1994 and 1995 reduced their orders with the
Company during 1996 by approximately $5,000,000.
NOTE 10 COMMITMENTS AND CONTINGENCIES
WATERSTRIKE AGREEMENT
During January, 1995 the Company entered into an agreement with
Waterstrike Incorporated (Waterstrike) to purchase certain assets and
license intellectual property rights related to manufacturing the
Polaris MFD product line. As part of the agreement, the Company is
obligated to pay Waterstrike $2.50 per unit for the first 80,000
Polaris MFD units shipped for a successive four year period beginning
January 1, 1996. Aggregate payments made under the agreement for the
four year period are not to exceed $200,000. In addition, the Company
has an obligation to pay Waterstrike 65% of the gross profit realized
on the sale of all Polaris MFD products covered under the agreement
for as long as Zercom continues to sell the products.
MARCUM AGREEMENT
During June, 1993 the Company entered into an agreement with Marcum
Enterprises, Inc. (Marcum) to purchase for $100,000 the exclusive
right to manufacture, promote and sell the single color and
multi-color electronic sonar units previously developed by Marcum. The
units are marketed under the "Zercom Marine" product line. As part of
the agreement, The Company is also obligated to pay Marcum license
fees of $10 for each of the first 5,000 single color and the first
5,000 multi-color sonar units sold, $7.50 for each of the second 5,000
single color and second 5,000 multi-color sonar units sold and $5.00
for each of the units sold in excess of 10,000 annually for the first
two years of the agreement. During the third year of the agreement
and each year thereafter, the licensing fee is equal to $7.00 for each
unit sold regardless of the number of such units. The agreement shall
remain in effect so long as Zercom continues to market and sell sonar
units licensed under the agreement and may be terminated by Zercom at
any time with 90 day written notice.
(13)
<PAGE>
NOTE 10 COMMITMENTS AND CONTINGENCIES
MARCUM AGREEMENT (CONTINUED)
In November, 1995, Zercom entered into an agreement with Emerging
Recreational Technologies, Inc. (ERT) to transfer to ERT the
responsibility for the marketing and sale of "Zercom Marine" product
line on an exclusive basis. Pursuant to the agreement ERT purchased
certain "Zercom Marine" inventory and accounts receivable from
previous "Zercom Marine" sales totaling $671,286 to be paid in
installments maturing on November 22, 1996. A balance of $512,797
remains due from ERT as of December 31, 1995. In addition, ERT
assumed the obligation to Marcum for licensing fees discussed in the
preceding paragraph. However, should ERT fail to pay such fees,
Zercom is liable for the payment. The agreement also provides for the
sale of inventory to ERT at agreed upon prices through July 1, 1996.
After that date, products shall be sold to ERT at prices reasonably
established based upon changes in labor and material costs and other
factors related to producing the sonar units.
The agreement also provides ERT the option, for a 30 day period
beginning June 30, 1997, to purchase all of the manufacturing assets
related to the manufacture of the sonar units at an amount equal to
10% of the aggregate sales of the sonar units during the twelve months
ended June 30, 1997. The purchase price however, is not to be less
than $300,000 nor to exceed $500,000. The agreement expires on August
1, 1997. However the agreement may be renewed automatically for four
successive one-year periods thereafter unless either party gives
notice not to renew 30 days prior to the renewal date.
NOTE 11 SUBSEQUENT EVENTS
On November 4, 1996, CSI sold the Property and Equipment and
Inventories of the Company to Nortech Systems, Inc. The purchase
price of approximately $6,300,000 was paid with $1,500,000 cash and
the remainder on a note payable to CSI. The note requires that a
minimum of $200,000 principal be paid semi-annually beginning May 1,
1997, for a period of 5 years at which time all remaining principal
and accrued interest is required to be paid in full. Each semi-annual
installment payment is to be applied first to accrued interest before
reducing principal. Interest accrues on the note at the prime or
reference rate as established by First Bank Minneapolis.
NOTE 12 RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the FASB) Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, will become effective for the Company in
1996. Currently, Statement No. 121 would have no impact on the
Company's financial position or results of operations.
(14)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated December 17, 1996 on the financial
statements of Zercom Corporation (a division of Communications Systems, Inc. and
Subsidiaries) appearing in this Form 8-K/A of Nortech Systems, Inc.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 6, 1997
A-1
<PAGE>
NORTECH SYSTEMS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The Unaudited Pro Forma Consolidated Balance Sheet is derived from the
unaudited balance sheets of Nortech Systems Incorporated and Zercom as of
September 30, 1996, included elsewhere herein, and assumes that the transaction
was consummated on September 30, 1996. The Unaudited Pro Forma Condensed
Statement of Income for the nine-month period ended September 30, 1996, is
derived from the unaudited combined Statements of Income of Nortech Systems
Incorporated and Zercom, included elsewhere herein, and assumes that the
transactions were consummated on January 1, 1996. The Unaudited Pro Forma
Condensed Statement of Income for the year ended December 31, 1995, is derived
from the audited consolidated Statements of Income of Nortech Systems
Incorporated and Zercom, included elsewhere herein, and assumes that the
transactions were consummated on January 1, 1995.
The Unaudited Pro Forma Consolidated Financial Statements do not purport to
represent what Nortech Systems Incorporated's results of operations or financial
condition would actually have been if the transactions had occurred on the dates
indicated, and do not project Nortech Systems Incorporated's results or
financial condition for or to any future period or date. The Unaudited Pro Forma
Consolidated Financial Statements are presented for comparative purposes only.
The pro forma adjustments, as discussed in "Notes" to the Pro Forma, are based
on available information and certain assumptions that management believes are
reasonable.
The acquisition will be accounted for using the purchase method of
accounting. The purchase price of the acquisition will be allocated to the
tangible assets and liabilities of Zercom, based upon management's preliminary
estimates of their fair value with the remainder allocated to goodwill. The
allocation of purchase price for the acquisition is subject to revision when
additional information concerning asset and liability valuations are obtained.
In the opinion of Nortech Systems Incorporated management, and assuming a stable
interest rate environment, the asset and liability valuations for the
acquisition will not be materially different from the Unaudited Pro Forma
Consolidated Financial Statements presented.
P-1
<PAGE>
NORTECH SYSTEMS INCORPORATED
PRO FORMA BALANCE SHEETS (UNAUDITED)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ZERCOM PRO FORMA OPENING PRO FORMA
ASSETS NORTECH ADJUSTED ADJUSTMENT A BALANCE CONDENSED
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 589,937 $ 842,512 $ (842,512) $ 0 $ 589,937
Accounts receivable, net 2,816,629 1,918,354 (1,918,354) 0 2,816,629
Total inventories $ 4,977,086 $ 3,825,741 $ (1,433,556) $ 2,392,185 $ 7,369,271
Prepaid expenses and other 532,478 (23,515) 23,515 0 532,478
Total current assets $ 8,916,130 $ 6,563,092 $ (4,170,907) $ 2,392,185 $ 11,308,315
PLANT, Property, and Equipment (at Cost)
Land and Building/leaseholds $ 2,129,647 $ 1,362,404 $ 25,505 $ 1,387,909 $ 3,517,556
Manufacturing Equipment 2,908,700 2,547,556 (4,593) 2,542,963 5,451,663
Office and other equipment 1,677,886 0 1,677,886
Total Fixed Assets 6,716,233 3,909,960 20,912 3,930,872 10,647,105
Less Accumulated Depreciation
and Amortization (2,663,651) (1,574,658) 1,574,658 0 (2,663,651)
Total Fixed Assets less Depreciation $ 4,052,582 $ 2,335,302 $ 1,595,570 $ 3,930,872 $ 7,983,454
Other Assets 2,013,910 744,000 (701,667) 42,333 2,056,243
TOTAL ASSETS $ 14,982,622 $ 9,642,394 $ (3,277,004) $ 6,365,390 $ 21,348,012
LIABILITIES & SHAREHOLDERS' EQUITY
Current Lialilities:
Current maturities of long-term debt $ 200,984 $ 12,504 $ 387,496 $ 400,000 $ 600,984
Accounts payable 1,286,653 547,983 (547,983) 0 1,286,653
Accrued payrolls and commissions 615,201 276,944 (229,348) 47,596 662,797
Other 387,711 7,989,992 (7,989,992) 0 387,711
Total Current Liabilities $ 2,490,549 $ 8,827,423 $ (8,379,827) $ 447,596 $ 2,938,145
Long-Term Debt
Notes Payable (net of current $ 4,813,556 $ 58,333 $ 5,859,461 $ 5,917,794 $ 10,731,350
maturities shown above)
Total Long Term Debt 4,813,556 58,333 5,859,461 5,917,794 10,731,350
Total Liabilities $ 7,304,105 $ 8,885,756 $ (2,520,366) $ 6,365,390 $ 13,669,495
Redeemable Stock $ 1,500,000 $ $ $ $ 1,500,000
Shareholders' Equity:
Preferred Stock $ 250,000 $ $ $ $ 250,000
Common Stock 22,009 10,000 (10,000) 0 22,009
Additional Paid-in Capital 11,242,672 40,000 (40,000) 0 11,242,672
Accumulated Deficit (5,336,164) 675,106 (675,106) 0 (5,336,164)
Total Shareholders' Equity $ 6,178,517 $ 725,106 $ (725,106) $ 0 $ 6,178,517
Current Year Earnings 31,532 (31,532)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 14,982,622 $ 9,642,394 $ (3,277,004) $ 6,365,390 $ 21,348,012
</TABLE>
P-2
<PAGE>
NORTECH SYSTEMS INCORPORATED
PRO FORMA STATEMENTS OF INCOME (UNAUDITED)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ZERCOM PRO FORMA PRO FORMA
NORTECH ADJUSTED ADJUSTMENT CONDENSED
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales $ 18,341,346 $ 11,950,789 $ $ 30,292,135
Cost of Sales 15,024,544 10,398,264 25,422,808
-------------- -------------- ------------- -------------
Gross Profit $ 3,316,802 $ 1,552,525 $ 0 $ 4,869,327
Selling, General and Admin. 1,895,551 1,569,100 (360,000) 13,104,651
Engineering/Reseach & Development 280,771 280,771
Misc. (Income) Expense, net (7,283) (23,367) 23,367 3 (7,283)
Interest (Income) Expense, net 251,649 (24,740) 369,000 2 595,909
-------------- -------------- ------------- -------------
Operating Expenses 2,420,688 1,520,993 32,367 3,974,048
-------------- -------------- ------------- -------------
Net Income (Loss) Before Tax Provision $ 896,114 $ 31,532 $ (32,367) $ 895,279
-------------- -------------- ------------- -------------
Income Tax (Benefit)/Expense 215,710 11,982 (15,127) 212,565
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
NET INCOME/(LOSS) $ 680,404 $ 19,550 $ (17,240) $ 682,714
Retained Earnings - Beginning
Retained Earnings - Ending 19,550
Net Income per Share of Common Stock $ 0.29 $ $ 0.29
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Weighted Average Number
of Shares Outstanding 2,362,263 2,362,263
</TABLE>
P-3
<PAGE>
NORTECH SYSTEMS INCORPORATED
PRO FORMA BALANCE SHEET (UNAUDITED) WORK SHEET
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ZERCOM
ASSETS ZERCOM ADJUSTMENT ADJUSTED ADJUSTMENT ADJUSTED
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 842,512 $ $ 842,512 $ $ 842,512
Accounts receivable, net 1,975,075 (56,721) 1,918,354 1,918,354
Total inventories $ 3,965,741 $ (640,000) $ 3,325,741 $ 500,000 $ 3,825,741
Prepaid expenses and other (23,515) (23,515) (23,515)
Total current assets $ 6,759,813 $ (696,721) $ 6,063,092 $ 500,000 $ 6,563,092
PLANT, Property, and Equipment
(at Cost)
Land and Building/leaseholds $ 1,362,404 $ $ 1,362,404 $ $ 1,362,404
Manufacturing Equipment 2,547,556 37,529 2,585,085 (37,529) 2,547,556
Office and other equipment
Total Fixed Assets 3,909,960 37,529 3,947,489 (37,529) 3,909,960
Less Accumulated Depreciation
and Amortization (1,574,658) (1,574,658) (1,574,658)
Total Fixed Assets less
Depreciation $ 2,335,302 $ 37,529 $ 2,372,831 $ (37,529) $ 2,335,302
Other Assets 44,000 700,000 744,000 744,000
TOTAL ASSETS $ 9,139,115 $ 40,808 $ 9,179,923 $ 462,471 $ 9,642,394
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Lialilities:
Current maturities of long-term
debt $ 12,500 $ 4 $ 12,504 $ $ 12,504
Accounts payable 662,826 (77,314) 585,512 (37,529) 547,983
Accrued payrolls and commissions 225,596 81,245 306,841 (29,897) 276,944
Other 7,560,054 429,938 7,989,992 7,989,992
Total Current Liabilities $ 8,460,976 $ 433,873 $ 8,894,849 $ (67,426) $ 8,827,423
Long-Term Debt
Notes Payable (net of current $ 58,333 $ $ 58,333 $ $ 58,333
maturities shown above)
Total Long Term Debt 58,333 0 58,333 0 58,333
Total Liabilities $ 8,519,309 $ 433,873 $ 8,953,182 $ (67,426) $ 8,885,756
Redeemable Stock $ $ $ $ $
Shareholders' Equity:
Preferred Stock $ $ $ $ $
Common Stock 10,000 10,000 10,000
Additional Paid-in Capital 40,000 40,000 40,000
Accumulated Deficit 1,068,171 (393,065) 675,106 675,106
Total Shareholders' Equity $ 1,118,171 $ (393,065) $ 725,106 $ 0 $ 725,106
Current Year Earnings (498,365) (498,365) 529,897 31,532
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 9,139,115 $ 40,808 $ 9,179,923 $ 462,471 $ 9,642,394
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
</TABLE>
P-4
<PAGE>
NORTECH SYSTEMS INCORPORATED
PRO FORMA STATEMENTS OF INCOME (UNAUDITED) WORK SHEET
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ADJUSTMENT ADJUSTMENT
Per 1995 Audit ZERCOM
ZERCOM Per 1995 Audit ADJUSTED Reversed in 1996 ADJUSTED
--------------
<S> <C> <C> <C> <C> <C>
Sales $ 11,950,789 $ $ 11,950,789 $ $ 11,950,789
Cost of Sales 10,928,161 (529,897) 10,398,264 10,398,264
--------------
Gross Profit $ 1,022,628 $ 529,897 $ 1,552,525 $ 0 $ 1,552,525
Selling, General and Admin. 1,569,100 1,569,100 1,569,100
Engineering/Reseach & Development
Misc. (Income) Expense, net (23,367) (23,367) (23,367)
Interest (Income) Expense, net (24,740) (24,740) (24,740)
--------------
Operating Expenses 1,520,993 0 1,520,9930 1,520,993
--------------
Net Income (Loss) Before Tax
Provision $ (498,365) $ 529,897 $ 31,532 $ 0 $ 31,532
--------------
Income Tax (Benefit)/Expense
--------------
--------------
Net Income/(Loss) $ (498,365) $ 529,897 $ 31,532 $ 0 $ 31,532
Retained Earnings - Beginning
--------------
Retained Earnings - Ending $ (498,365) $ 529,897 $ 31,532 $ 31,532
--------------
--------------
Net Income per Share of Common
Stock $ $ $ $ $
Weighted Average Number
of Shares Outstanding
</TABLE>
P-5
<PAGE>
NORTECH SYSTEMS INCORPORATED
PRO FORMA STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AUDITED AUDITED PRO FORMA PRO FORMA
NORTECH ZERCOM ADJUSTMENT CONDENSED
-------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Sales $ 18,305,928 $ 19,951,343 $ $ 38,257,271
Cost of Sales 14,541,088 17,127,802 31,668,890
-------------- -------------- ----------- --------------
Gross Profit $ 3,764,840 $ 2,823,541 $ 0 $ 6,588,381
Selling, General and Admin. 2,280,105 2,206,632 (480,000)(1) 14,006,737
Engineering/Reseach & Development 124,919 0 124,919
Misc. (Income) Expense, net (212,670) (212,670)
Interest Expense 240,562 17,477 492,000 (2) 2750,039
-------------- -------------- ----------- --------------
Operating Expenses 2,432,916 2,224,109 12,000 4,669,025
Net Income (Loss) Before Tax Provision $ 1,331,924 $ 657,658 $ (12,000) $ 1,977,582
-------------- -------------- ----------- --------------
Income Tax (Benefit)/Expense 251,200 (4,560) 246,640
-------------- -------------- ----------- --------------
-------------- -------------- ----------- --------------
Net Income/(Loss) $ 1,331,924 $ 406,458 $ (7,440) $ 1,730,942
-------------- -------------- ----------- --------------
-------------- -------------- ----------- --------------
Retained Earnings - Beginning
Retained Earnings - Ending
Net Income per Share of Common Stock $ 0.55 $ 0.72
-------------- --------------
-------------- --------------
Weighted Average Number
of Shares Outstanding 2,407,804 2,407,804
</TABLE>
P-6
<PAGE>
NOTES
TO THE PRO FORMA
A TO RECORD THE ACQUISITION OF ASSETS AND THE ALLOCATION
OF PURCHASE PRICE, ALSO ELIMINATING NON-PURCHASED
ASSETS INTERCOMPANY DEBT AND OTHER LIABILITIES
1 ELIMINATE DUPLICATE MANAGEMENT AND OPERATING EXPENSES
2 RECORD ADDITIONAL INTEREST EXPENSE FOR INCREASED DEBT
3 ELIMINATE INTEREST INCOME DUE TO REDUCED CASH LEVELS
NOTE: NO ADDITIONAL DEPRECIATION EXPENSE WAS RECORDED, FIXED
ASSET LEVEL REMAINS THE SAME ONLY THE LIFE OF THE ASSETS
WAS EXTENDED.
P-7
